TARGET PORTFOLIO TRUST, 497, 1996-05-03

TARGET PORTFOLIO TRUST
497, 1996-05-03

Previous: SEPARATE ACCOUNT VA-2L OF TRANSAMERICA OCCIDENTAL LIFE INS C, 497J, 1996-05-03

Next: DREYFUS BALANCED FUND INC, N-30D, 1996-05-03

<PAGE> 1

(TARGET LOGO)

TARGET:
PERSONALIZED INVESTING FOR THOSE
FOCUSED ON SUCCESS

THIS MATERIAL CONSISTS OF A DESCRIPTION OF THE PRUDENTIAL SECURITIES TARGET
PROGRAM AND A PROSPECTUS OF THE TARGET PORTFOLIO TRUST. A TABLE LISTING THE
COSTS AND EXPENSES ASSOCIATED WITH AN INVESTMENT IN THE FUND APPEARS ON PAGE 6
OF THE PROSPECTUS. READ THE DESCRIPTION AND THE PROSPECTUS CAREFULLY BEFORE
INVESTING.

April 30, 1996

<TABLE>
<S> <C>
THIS BROCHURE INCLUDES A PROSPECTUS WHICH
DESCRIBES IN DETAIL THE FUND'S OBJECTIVES,
INVESTMENT POLICIES, RISKS, SALES CHARGES, FEES
AND OTHER MATTERS OF INTEREST. PLEASE READ THE
PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND
MONEY.
</TABLE>
<PAGE> 2

"Tis the part of a wise man to keep himself today for tomorrow, and not
venture all his eggs in one basket."
--Miguel de Cervantes, Don Quixote, 1605

Diversification. True then. True today. After nearly 400 years, this
principle remains a hallmark of prudent financial management. It is also often
an integral part of a successful investment program.

The Prudential Securities TARGET program seeks to apply today's "modern"
investment techniques and history's tried and true principles. We invite you to
read more about this exciting opportunity.

WELCOME TO TARGET

Having the proper investment program based on your personal financial goals
is more important than ever. To retire comfortably, purchase a home, or build a
nest egg, investors no longer can rely solely on traditional savings vehicles.
Instead, they must look to other investments, and that's how TARGET can help.

IT IS EASY TO DEVELOP YOUR PROGRAM

TARGET is a comprehensive investment program that provides personalized
asset allocation, money management, and performance reporting services. Offered
only by Prudential Securities, TARGET is convenient and designed to help you
achieve your investment goals more easily.

Developing a rational and effective investment program is not difficult if
you receive the proper guidance. With TARGET, you benefit from the services of
your Financial Advisor and those of independent investment advisers (commonly
called "money managers") who manage the portfolios that underlie the TARGET
program. The services of many of these advisers are normally available only to
institutional investors such as pension funds, endowments and Fortune 500
companies. Few other investment programs provide this level of service as
conveniently as TARGET.

As with any investment program, the TARGET program and the underlying
portfolios entail certain risks. Certain risks inherent in the portfolios are
described in the accompanying prospectus. There can be no assurances that an
investor's participation in TARGET will achieve the intended investment result
or that the value of an investor's investment in TARGET will appreciate.

TARGET USES A FOUR STEP PROCESS

TARGET helps you manage your money and plan for your future. You and your
Financial Advisor should revisit the following process regularly:

I) DEFINE YOUR GOALS

You and your Financial Advisor will discuss your investment objectives,
time horizon, income requirements and risk tolerance. Together, you will attempt
to paint a clear picture of your financial goals and expectations.

II) DEVELOP YOUR PLAN

A personalized investment plan will be developed for you. It will recommend
that you diversify your assets by investing in a precise blend of stock, bond
and money market mutual fund portfolios.

THIS BROCHURE IS NOT PART OF THE PROSPECTUS

ii
<PAGE> 3

You may adopt this blend, called your "recommended allocation," or choose your
own. TARGET is non-discretionary, so all investment decisions ultimately remain
with you.

III) MANAGE YOUR MONEY

TARGET provides you with an opportunity to invest with advisers whose
account minimums in some cases exceed $5 million. Each adviser manages a
portfolio (or a portion of a portfolio) that focuses on a specific market sector
like small company stocks, bonds, and foreign securities.

IV) MONITOR YOUR PROGRESS

You'll receive a personal review called your "Quarterly Account Monitor."
It will show your portfolios' performance and include commentaries from the
advisers and sections on transactions, distributions and taxes.

1) DEFINE YOUR GOALS

A personally tailored investment program should account for each investor's
unique situation. Investing is a very personal process since no two investors
have exactly the same goals and tolerance for risk. TARGET attempts to recommend
the right investment program based upon your unique situation through its
Questionnaire.

TARGET STARTS WITH YOU

Without a thorough understanding of an investor's goals and specific
situation, no program truly can be personalized. As a result, there is a higher
chance that an investor will not as easily achieve his or her investment goals.

Your responses to the Questionnaire provide TARGET with your investment
profile. You will be asked about your financial goals, current investments,
attitudes towards risk, investment amount, and time frame. Each question will
have a direct bearing on the allocation of mutual fund portfolios that TARGET
recommends for you. This will help you and your Financial Advisor keep up to
date with your personal situation and remain focused on helping you attempt to
achieve your goals.

2) DEVELOP YOUR PLAN

TARGET considers several factors before developing your personal investment
plan. These factors include the historical returns of different investments and
asset allocation strategies.

YOUR ALLOCATION IS DESIGNED SPECIFICALLY FOR YOU

There are risks to all investments, including TARGET. Your goal, however,
should not be to avoid risk, but to manage it.

You can reduce most risk by investing in safe, short-term securities, such
as U.S. Treasury-bills. Your return, though, may be limited. By contrast, if you
take some risk, history has shown that over time, you may be rewarded. One way
you can attempt to manage risk is to diversify your assets both within security
type by using mutual funds, and among types (by using stocks, bonds and
short-term investments).

TARGET helps you diversify by using several mutual fund portfolios. Each
one focuses on a particular type of investment. This approach may help reduce
the chance that poor performance by one investment type (stocks or bonds or
money market securities), sector (industry or geographic) as well as any
particular security, will have a major impact on your overall TARGET account.

THIS BROCHURE IS NOT PART OF THE PROSPECTUS

iii
<PAGE> 4

Different types of investments perform relatively better at different
times. For example, the returns of stocks historically beat those of bonds over
the long-term, but not every year. Advising you on how the returns of different
investments relate to each other is an integral element of TARGET. Your
recommended allocation will suggest that you invest specific amounts in several
TARGET portfolios. Each allocation has unique potential risk and return
characteristics and TARGET recommends one that appears right for you based on
the information in your Questionnaire. Complex studies of long-term investment
returns are among the factors used to construct the allocation. As a result,
TARGET seeks to provide you with a rational financial foundation to help keep
your investments consistent with your goals.

TARGET'S PORTFOLIOS

<TABLE>
<CAPTION>
STOCK BOND
<S> <C>
Large Cap Growth Portfolio International Bond Portfolio
Large Cap Value Portfolio Total Return Portfolio
Small Cap Growth Portfolio Intermediate-Term Portfolio
Small Cap Value Portfolio Mortgage Backed Portfolio
International Equity Portfolio US Gov't Money Market Portfolio
</TABLE>

The portfolios are described in greater detail in the accompanying
prospectus. Portfolios may be added to or removed from TARGET from time to time
pursuant to applicable regulations.

3) MANAGE YOUR MONEY

Managing your money can be an overwhelming job for an individual, so many
people look to mutual funds for help. Their efforts may often be frustrated,
however, because there are more than 7,000 funds to choose from. TARGET is a
solution to this dilemma.

EVERY INVESTMENT ADVISER IS UNIQUE

Each TARGET adviser, also known as a "sub-adviser," specializes in a
certain sector. Prudential Securities initially conducted a six-month search to
identify advisers for TARGET. Risk-adjusted performance, adherence to investment
style, continuity of personnel, and other factors, were considered. Of course,
an adviser's past investment record is no guarantee of future results.

Though the advisers are independent of Prudential Securities, they have
been selected and are monitored by Prudential Mutual Fund Management, Inc. and
the Trustees of the TARGET Portfolio Trust. TARGET provides you with access to
these independent advisers in one convenient program.

4) MONITOR YOUR PROGRESS

TARGET has been structured as a personalized, ongoing program. Thus, you
should monitor your progress and, when necessary, make adjustments. As always,
your Financial Advisor will attempt to provide solid guidance.

YOU WILL RECEIVE QUARTERLY REPORTS

You'll receive quarterly reports that describe how your portfolios
performed and how they are being managed. This is a service that supplements
your Prudential Securities account statement and TARGET'S semi-annual reports.
The QUARTERLY ACCOUNT MONITOR provides a comprehensive

THIS BROCHURE IS NOT PART OF THE PROSPECTUS

iv
<PAGE> 5

review of your investment performance. It also includes market commentaries from
the TARGET advisers and sections on dividends, distributions, and portfolio
transactions.

The COST BASIS REPORT in the Monitor should lessen your paperwork when it
comes time to file your tax returns. It calculates your per-share cost basis and
realized gains and losses.

YOU CAN FINE-TUNE TARGET ALONG THE WAY

As time passes, your goals may change, as will the financial markets. You
can fine-tune TARGET and your Financial Advisor will assist you in this
"rebalancing."

Rebalancing can be done easily by directing assets from one portfolio to
another. Rebalancing may be necessary because your portfolios will perform
differently, causing their relative values to differ from your recommended
allocation percentages. You can change your recommended percentages as your
goals or circumstances change or as a result of the addition of a new portfolio
to, or removal of an existing portfolio from, the Trust. Also there may be
differences between your TARGET portfolio holdings and the Prudential Securities
recommended allocation as a result of your decision to select an allocation
different from Prudential Securities' recommended allocation. As always you can
revise the percentages at any time due to changing market conditions.

GETTING STARTED IS EASY

Designing an allocation to achieve your goals more easily is the objective
of the TARGET program. Few other programs can provide you, as conveniently, with
this level of personalized investment service. Here's how it works:

Schedule a meeting with a Prudential Securities Financial Advisor who will
assist you in completing the TARGET Questionnaire. Alternatively, you can
complete the Questionnaire on your own and mail it back to your Financial
Advisor.

Prudential Securities will analyze your responses to the Questionnaire and
then provide you and your Financial Advisor with an Evaluation. An important
part of the Evaluation is the personalized asset allocation recommendation. This
recommendation will suggest that you invest specific amounts in several TARGET
portfolios. Normally, between five and nine portfolios are recommended. Ibbotson
Associates, of Chicago, assists in constructing the recommended allocations.
Ibbotson is an investment consulting, data, and software products company that
specializes in applying investment theories and empirical findings to current
business practice. You and your Financial Advisor will review the recommended
allocation and, since TARGET is a non-discretionary program, you may accept the
recommendation, or adopt your own.

When you receive the Evaluation, your Financial Advisor also will provide
you with a TARGET Investment Advisory Agreement. This document requires your
signature and describes important aspects of participating in the TARGET
program. You also will receive other materials, such as a Disclosure Statement
(which details more information about TARGET and Prudential Securities) and,
depending on the type of account, other documents. Once you review the material,
sign the Investment Advisory Agreement and agree upon an asset allocation, your
money will be invested in TARGET and you'll be on your way. Of course, you will
receive trade confirmations.

THIS BROCHURE IS NOT PART OF THE PROSPECTUS

v
<PAGE> 6

Adding or withdrawing money also is easy. Shares of portfolios can be
purchased, redeemed or exchanged daily at the net asset value next determined
without imposition of any sales or redemption charge.

As described below, participation in TARGET is subject to the payment of a
quarterly advisory fee.

FEES, AND INVESTMENT MINIMUMS AND OTHER TERMS

ANNUAL FEE

For all accounts, other than Individual Retirement Accounts (IRA's) and
qualified employee benefit plans (collectively, the Plans), the quarterly
advisory fee is charged at the maximum annual rate of 1.5% of assets held in a
TARGET Program account invested in equity portfolios and 1.0% of assets held in
a TARGET Program account invested in income portfolios. For Plan accounts, the
quarterly advisory fee is charged at the maximum rate of 1.25% and 1.35%,
respectively. The fee may be subject to negotiation under certain circumstances.
Financial Advisors receive a portion of the advisory fee paid by TARGET Program
clients. As the quarterly fee paid by non-Plan investors for investments in an
equity portfolio is greater than the fee paid for investments in an income
portfolio, Prudential Securities, when making asset allocation recommendations
for non-Plan TARGET Program clients will be presented with a conflict of
interest as to the specific portfolios recommended for investment. As a
shareholder in the portfolios, you will also bear a proportionate share of the
portfolios' fees and expenses, which are described in detail in the accompanying
prospectus.

The initial fee for non-Plan accounts is payable within one business day
after the settlement date for the initial investment in TARGET and is
automatically debited from your securities account. Plan accounts may have their
fee automatically debited from their securities account or billed to them
quarterly. For plan accounts that are billed, the initial fee is payable by
check within forty-five calendar days after the trade date. The initial fee is
based on the value of your shares and the mix of TARGET portfolios on the
initial trade date. The initial fee covers the period from the initial trade
date through the last day of the calendar quarter, and is pro-rated accordingly.
Thereafter, quarterly fees cover the current calendar quarter. The quarterly fee
is payable on the sixth business day of the current quarter or, for Plan
accounts that are billed quarterly, forty-five calendar days after the end of
the previous calendar quarter, by check.

The Quarterly Account Monitor sent to you will indicate the amount of the
TARGET Program annual fee. You should consult with your Financial Advisor to
estimate the amount of the annual fee and ensure that, if the fee is paid by a
debit from your securities account, there are sufficient funds in the account to
cover the debit. If there are insufficient funds, the fee will be paid by an
automatic redemption by Prudential Securities of an appropriate number of shares
(i) for non-Plan accounts, from your largest TARGET portfolio and (ii) for Plan
accounts, from all of your TARGET portfolios on a pro-rata basis. If you choose
to maintain a cash balance in your securities account or pay by check, any idle
funds in your account may be invested in shares of a Prudential Securities money
market fund designated by you until the specified payment date.

If you add assets to your TARGET Program account during a calendar quarter,
the applicable fee will be payable one business day after settlement date (or on
the forty-fifth calendar day after the trade date for Plan accounts that elect
to be billed for their TARGET Program fee), after the day that

THIS BROCHURE IS NOT PART OF THE PROSPECTUS

vi
<PAGE> 7

these investments aggregate $10,000 or more and will be based on the proportion
of the current quarter then remaining. If the fee is paid by a debit from your
securities account and if there are insufficient funds in your securities
account, the fee will be paid by an automatic redemption, by Prudential
Securities, of an appropriate number of shares (1) for non-Plan accounts, from
your largest TARGET portfolio and (2) for Plan accounts, from all of your TARGET
portfolios on a pro-rata basis.

Trustees of the TARGET Trust, employees of Prudential Securities and
Prudential Mutual Fund Management, Inc. and their subsidiaries, and members of
the families of such persons who maintain an "employee related" account at
Prudential Securities may participate in the TARGET Program without the
imposition of the annual program fee. In addition, the annual program fee may be
waived in whole or in part for certain banks, trust companies or unaffiliated
investment advisers who maintain securities accounts with Prudential Securities
as well as personal trusts which are part of The Prudential Bank Personal Trust
Program administered by Prudential Bank & Trust (as trustee) or affiliate
thereof.

MINIMUM INITIAL INVESTMENT

The minimum initial investment for non-Plan accounts is $25,000 and for
Plan accounts, $10,000. The minimum initial investment is $10,000 for custodial
accounts established under the Uniform Gift to Minors Act and for Trustees of
the TARGET Trust. The minimum initial investment may be waived, in whole or in
part, for certain start-up qualified employee benefit plans and for a transfer
of assets from an asset allocation program of investments in registered
investment companies. From time to time, the minimum initial investment
requirement may otherwise be reduced for Plan and non-Plan accounts in the
discretion of Prudential Securities.

TERMINATION

You may terminate your participation in the TARGET Program at any time upon
five business days notice. Prudential Securities reserves the right to reject
any investor's participation in the TARGET Program.

Termination of the TARGET Program account must be accompanied by a
redemption order for all portfolio shares held in the account. The TARGET Trust
may redeem shares when their aggregate value falls below $10,000 by reason other
than fluctuations in the portfolios' net asset values or redemptions to pay
TARGET Program fees if the investor does not restore the share value to in
excess of that amount within 30 days after written notice by the Trust. Proceeds
of any involuntary redemption will be credited to your securities account or
paid by check mailed to you if you so instruct. You should be aware that
involuntary redemptions may result in the liquidation of portfolio holdings at a
time when the value of these holdings is higher or lower than your cost,
resulting in a realized taxable gain or loss, respectively.

THIS BROCHURE IS NOT PART OF THE PROSPECTUS

vii
<PAGE> 8

THE TARGET PORTFOLIO TRUST(SM)

PROSPECTUS DATED APRIL 30, 1996
- --------------------------------------------------------------------------------

The Target Portfolio Trust(SM) (the Trust), is an open-end, management
investment company currently composed of ten separate investment portfolios (the
Portfolios) professionally managed by Prudential Mutual Fund Management, Inc.
(PMF or the Manager). Each Portfolio benefits from discretionary advisory
services provided by one or more investment advisers (each, an Adviser,
collectively, the Advisers) identified, retained, supervised and compensated by
the Manager. The Trust consists of the following Portfolios:

Equity Portfolios
- Large Capitalization Growth Portfolio
- Large Capitalization Value Portfolio
- Small Capitalization Growth Portfolio
- Small Capitalization Value Portfolio
- International Equity Portfolio
Income Portfolios
- International Bond Portfolio
- Total Return Bond Portfolio
- Intermediate-Term Bond Portfolio
- Mortgage Backed Securities Portfolio
- U.S. Government Money Market Portfolio

The U.S. Government Money Market Portfolio seeks to maintain a stable net
asset value of $1.00 per share. Shares of the U.S. Government Money Market
Portfolio are not guaranteed or insured by the U.S. Government. There can be no
assurance that the U.S. Government Money Market Portfolio will be able to
maintain a stable net asset value of $1.00 per share.

Shares of the Portfolios are offered to participants in the Prudential
Securities Target Program (the Target Program), an investment advisory service
that provides to investors asset allocation recommendations with respect to the
Portfolios based on an evaluation of an investor's investment objectives and
risk tolerances. The Target Program or shares of the Trust are also available
(without participation in the Target Program) to banks, trust companies and
other investment advisory services which maintain securities accounts with
Prudential Securities and to certain asset allocation programs of investments in
registered investment companies sponsored by Prudential Securities.
Participation in the Target Program is subject to payment of a separate
investment advisory or program fee. For all accounts other than Individual
Retirement Accounts (IRAs) and qualified employee benefit plans (collectively,
Plans) the quarterly advisory fee is charged at a maximum annual rate of 1.5% of
assets invested in equity portfolios and 1.0% of assets invested in income
portfolios. For Plan accounts, the quarterly advisory fee is charged at the
maximum annual rate of 1.25% of assets invested in equity portfolios and 1.35%
of assets invested in income portfolios. Certain clients may be eligible for a
reduction or waiver of the advisory fee. See "Purchase and Redemption of
Shares." The operating expenses of the Portfolios, when combined with any
investment advisory fees separately paid, will involve greater fees and expenses
than other investment companies whose shares are purchased without the benefit
of professional asset allocation recommendations.

PROSPECTIVE INVESTORS SHOULD NOTE THAT THE MORTGAGE BACKED SECURITIES
PORTFOLIO MAY SELL A SECURITY THAT IT DOES NOT OWN (I.E., ENGAGE IN SHORT
SALES). ALL OF THE PORTFOLIOS RESERVE THE RIGHT TO BORROW MONEY FOR TEMPORARY
AND EXTRAORDINARY PURPOSES WHILE THE MORTGAGE BACKED SECURITIES PORTFOLIO, THE
INTERMEDIATE-TERM BOND PORTFOLIO, THE TOTAL RETURN BOND PORTFOLIO AND THE
INTERNATIONAL BOND PORTFOLIO MAY ALSO BORROW FOR INVESTMENT PURPOSES WHICH MAY
ENTAIL ADDITIONAL RISK TO THOSE PORTFOLIOS. ALL OF THE PORTFOLIOS MAY INVEST IN
EXCESS OF 5% OF THEIR ASSETS IN RESTRICTED SECURITIES. THESE TECHNIQUES MAY BE
CONSIDERED SPECULATIVE AND MAY INVOLVE A GREATER RISK OF LOSS TO THOSE
PORTFOLIOS THAT UTILIZE THESE TECHNIQUES. THE INTERNATIONAL BOND PORTFOLIO MAY
INVEST MORE THAN 5% OF ITS TOTAL ASSETS IN NON-INVESTMENT GRADE SECURITIES,
WHICH MAY ENTAIL ADDITIONAL RISKS. ADDITIONALLY, THE PORTFOLIOS MAY EXPERIENCE
HIGH ANNUAL PORTFOLIO TURNOVER WHICH MAY INVOLVE CORRESPONDINGLY GREATER
BROKERAGE COMMISSIONS AND OTHER TRANSACTION COSTS. See "Description of the
Portfolios--Investment Objectives and Policies" and "Description of the
Portfolios--Other Investments and Policies."

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

This Prospectus sets forth concisely the information about the Trust that a
prospective investor ought to know before investing. Additional information
about the Trust has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated April 30, 1996, which information is
incorporated herein by reference and is available without charge upon request to
the Trust 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> 9

SUMMARY

The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus.

THE TRUST. The Trust is a management investment company providing a
convenient means of investing in separate professionally managed Portfolios. The
assets of each of the Portfolios are managed on a discretionary basis by one or
more separate Advisers. See "Management of the Trust." The Trust is a series
company currently consisting of ten Portfolios. Except for the International
Bond Portfolio, each of these Portfolios is a diversified portfolio within the
meaning of the Investment Company Act of 1940, as amended (the Investment
Company Act). There are certain risks associated with an investment in a
non-diversified portfolio. See "Description of the Portfolios--International
Bond Portfolio."

EQUITY PORTFOLIOS

LARGE CAPITALIZATION GROWTH PORTFOLIO -- seeks to achieve long-term capital
appreciation by investing primarily in a portfolio of common stocks of companies
that, in the Adviser's opinion, are characterized by a growth of earnings at a
rate faster than that of the Standard & Poor's 500 Composite Stock Price Index
(S&P 500). Dividend income is an incidental consideration in the selection of
investments. The Portfolio may also invest in money market instruments and
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities and may engage in repurchase agreement transactions. See
"Description of the Portfolios--Other Investments and Policies." The stocks of
the companies in which the Portfolio may invest are subject to industry,
economic and market risks and therefore may not perform as the Adviser expects.
The Advisers to the Portfolio are Columbus Circle Investors, a subpartnership of
PIMCO Advisors L.P., and Oak Associates, Ltd.

LARGE CAPITALIZATION VALUE PORTFOLIO -- seeks to achieve total return
consisting of capital appreciation and dividend income by investing primarily in
a portfolio of common stocks that, in the Adviser's opinion, have above average
price appreciation potential at the time of purchase. The Portfolio may also
invest in other equity securities, including preferred stock, corporate and
other debt obligations and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. See "Description of the
Portfolios--Other Investments and Policies." The stocks of the companies in
which the Portfolio may invest are subject to industry, economic and market
risks and therefore may not perform as the Adviser expects. The Advisers to the
Portfolio are INVESCO Capital Management, Inc. and Hotchkis and Wiley.

SMALL CAPITALIZATION GROWTH PORTFOLIO -- seeks to achieve maximum capital
appreciation by investing primarily in a portfolio of common stocks of "emerging
growth" companies. The securities of the companies in which the Portfolio will
invest may have limited marketability and may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the markets in general. The Portfolio may also invest in preferred stock,
obligations issued or guaranteed by the U.S. Government and money market
instruments. See "Description of the Portfolios--Other Investments and
Policies." The Advisers to the Portfolio are Nicholas-Applegate Capital
Management and Investment Advisers, Inc.

SMALL CAPITALIZATION VALUE PORTFOLIO -- seeks to achieve above average
capital appreciation by investing primarily in a portfolio of common stocks of
companies with a total market capitalization of less than $1.5 billion that, in
the Adviser's opinion, are undervalued or overlooked in the marketplace at the
time of purchase. The Portfolio may also invest in securities convertible into
common stock,

2
<PAGE> 10

preferred stock, debt obligations with capital appreciation potential and money
market instruments. See "Description of the Portfolios--Other Investments and
Policies." The securities of the companies in which the Portfolio will invest
may have limited marketability and may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or the
markets in general. The Advisers to the Portfolio are Lazard Freres Asset
Management, a division of Lazard Freres & Co., and Wood, Struthers & Winthrop
Management Corp., a subsidiary of Donaldson, Lufkin & Jenrette Securities
Corporation.

INTERNATIONAL EQUITY PORTFOLIO -- seeks to achieve capital appreciation by
investing primarily in a portfolio of equity securities of companies domiciled
outside the United States. The Portfolio will invest in companies in developed
as well as developing countries. Investing in international equity securities
involves risks not associated with investment in the securities of U.S.
companies, including exposure to less diverse and mature economies, greater
market volatility and changes in currency exchange rates. Investments in
developing countries involve additional risks. See "Description of the
Portfolios--International Equity Portfolio." The Portfolio may engage in forward
currency transactions, purchase and write put and call options on foreign
currencies and trade currency futures contracts and options thereon. The
Portfolio may also invest in closed-end country or regional funds and money
market instruments. See "Description of the Portfolios--Other Investments and
Policies." The Adviser to the Portfolio is Lazard Freres Asset Management, a
division of Lazard Freres & Co.

INCOME PORTFOLIOS

INTERNATIONAL BOND PORTFOLIO -- seeks to achieve high total return by
investing primarily in high quality foreign debt securities denominated
primarily in foreign currencies. The Portfolio may invest in debt obligations
issued or guaranteed by foreign governments, their agencies and
instrumentalities, by supranational organizations and entities and by foreign
corporations or financial institutions. Under normal market circumstances, the
Portfolio will invest at least 65% of its total assets in high quality debt
securities denominated in foreign currencies of issuers located in at least
three countries outside the United States. The Portfolio may also invest in debt
obligations issued or guaranteed by the United States Government and its
agencies and instrumentalities and in corporations and financial institutions
domiciled in the United States. The Portfolio may also invest in debt securities
denominated in the European Currency Unit (ECU), a multinational currency unit
which represents specified amounts of currencies of certain member states of the
European Economic Community. Under normal circumstances, the Portfolio will
invest at least 75% of its assets in debt securities rated A or better by
Standard & Poor's Ratings Services (S&P) or Moody's Investors Service, Inc.
(Moody's), or if unrated, determined by the Adviser to be of comparable quality.
Under normal circumstances, up to 25% of the Portfolio's total assets may be
invested in debt securities rated below investment grade but rated at least B by
S&P or Moody's or, if unrated, determined by the Adviser to be of comparable
quality. See "Description of the Portfolios--Other Investments and Policies."
The Portfolio is non-diversified and may be subject to greater risks than a
portfolio that is diversified. See "Description of the Portfolios--International
Bond Portfolio." The Adviser to the Portfolio is Fiduciary International, Inc.

TOTAL RETURN BOND PORTFOLIO -- seeks to achieve total return consisting of
current income and appreciation of capital by investing primarily in a portfolio
of fixed-income securities of varying maturities with a dollar-weighted average
portfolio maturity of more than four years but not more than fifteen years. The
Portfolio may invest in obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, corporate and other debt obligations,
convertible

3
<PAGE> 11

securities, mortgage-backed securities, asset backed securities, obligations of
foreign governments or their subdivisions, agencies or instrumentalities,
obligations of supranational and quasi-governmental entities, commercial paper,
certificates of deposit, money market instruments and foreign currency
exchange-related securities. All of the securities in the Portfolio will be
investment grade or determined by the Adviser to be of comparable quality,
except the Portfolio may invest up to 10% of its total assets in securities
rated below investment grade but rated at least B by Moody's or S&P, or
determined by the Adviser to be of comparable quality. See "Other Investments
and Policies--Medium and Lower Rated Securities." The Portfolio may also invest
in repurchase agreements and reverse repurchase agreements and purchase and
write put and call options, purchase and sell futures contracts, purchase
securities on a when-issued or delayed-delivery basis, engage in interest rate
swap transactions and lend its portfolio securities. Investing in bonds involves
risks related to interest rate changes, the ability of the issuer to repay its
obligations, and in the case of medium and lower-rated securities, greater price
volatility and the risk of default. The Adviser to the Portfolio is Pacific
Investment Management Company, a general partnership whose partners are PIMCO
Advisors L.P. and PIMCO Management Inc., a wholly-owned subsidiary of PIMCO
Advisors.

INTERMEDIATE-TERM BOND PORTFOLIO -- seeks to achieve current income and
reasonable stability of principal by investing primarily in a portfolio of high
quality fixed-income securities of varying maturities with a dollar-weighted
average portfolio maturity of more than three years but not more than ten years.
The Portfolio may invest in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, corporate and other debt
obligations, convertible securities, mortgage-backed securities, asset backed
securities, obligations of foreign governments or their subdivisions, agencies
or instrumentalities, obligations of supranational and quasi-governmental
entities, commercial paper, certificates of deposit, money market instruments
and foreign currency exchange-related securities. All of the securities in the
Portfolio will be investment grade or determined by the Adviser to be of
comparable quality, except the Portfolio may invest up to 10% of its total
assets in securities rated below investment grade but rated at least B by
Moody's or S&P, or determined by the Adviser to be of comparable quality. See
"Other Investments and Policies--Medium and Lower Rated Securities." The
Portfolio may also invest in repurchase agreements and reverse repurchase
agreements and purchase and write put and call options, purchase and sell
futures contracts, purchase securities on a when-issued or delayed-delivery
basis, engage in interest rate swap transactions and lend its portfolio
securities. Investing in bonds involves risks related to interest rate changes,
the ability of the issuer to repay its obligations, and in the case of medium
and lower-rated securities, greater price volatility and the risk of default.
The Adviser to the Portfolio is Pacific Investment Management Company, a general
partnership whose partners are PIMCO Advisors L.P. and PIMCO Management Inc., a
wholly-owned subsidiary of PIMCO Advisors.

MORTGAGE BACKED SECURITIES PORTFOLIO -- seeks to achieve high current
income as its primary objective with a secondary objective of capital
appreciation, each to the extent consistent with the protection of capital. The
Portfolio seeks to achieve these objectives by investing, under normal
circumstances, at least 65% of its assets in mortgage related securities. The
Portfolio may also invest in non-mortgage related securities, including
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, corporate and other debt obligations, asset-backed
securities, money market instruments and repurchase and reverse repurchase
agreements. In addition, the Portfolio may purchase and write put and call
options, purchase and sell futures contracts, purchase securities on a
when-issued or delayed-delivery basis, engage in interest rate swap
transactions, make short sales of securities and lend its portfolio securities.
See "Description of the Portfolios--Other Investments and Policies." Investing
in mortgage backed securities

4
<PAGE> 12

involves risks related to interest rate movements, prepayment of principal
faster or slower than expected and the liquidity and creditworthiness of the
various mortgage related securities purchased by the Portfolio. The Adviser to
the Portfolio is Wellington Management Company.

U.S. GOVERNMENT MONEY MARKET PORTFOLIO -- seeks to achieve maximum current
income consistent with the maintenance of liquidity and the preservation of
capital. The Portfolio invests exclusively in short-term securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (U.S.
Government securities) and repurchase agreements with respect to those
securities. The Portfolio may also purchase securities on a when-issued or
delayed-delivery basis. While the U.S. Government Money Market Portfolio seeks
to maintain a stable net asset value of $1.00 per share, there is no assurance
that it will be able to do so on a continuing basis. See "Description of the
Portfolios--Other Investments and Policies." The Adviser to the Portfolio is
Wellington Management Company.

MANAGEMENT. Prudential Mutual Fund Management, Inc. acts as the
Portfolios' Manager. Each Portfolio is advised by one or more Advisers
identified, retained, supervised and compensated by the Manager. Investors
should be aware that the Manager will be subject to a conflict of interest when
making decisions regarding the retention and compensation of particular
Advisers. However, the Manager's decisions, including the identity of an Adviser
and the specific amount of the Manager's compensation to be paid to the Adviser,
are subject to review and approval by a majority of the Trustees including a
majority of the Trustees who are not "interested" persons as defined in the
Investment Company Act. The Manager receives a fee from each Portfolio, and
retains a portion of the fee that varies based on the Portfolio involved. See
"Management of the Trust."

PURCHASE AND REDEMPTION OF SHARES. Shares of the Portfolios are offered for
purchase and redemption at their respective next determined net asset values.
Investors purchasing shares through participation in the Target Program will pay
a quarterly advisory fee. For all non-Plan accounts, the quarterly advisory fee
is charged at the maximum annual rate of 1.5% of assets held in a Target Program
account invested in equity portfolios and 1.0% of assets held in a Target
Program account invested in income portfolios. For Plan accounts, the quarterly
advisory fee is charged at the maximum annual rate of 1.25% of assets held in a
Target Program account invested in equity portfolios and 1.35% of assets held in
a Target Program account invested in income portfolios. The fee may be subject
to negotiation when assets in the Target Program exceed $100,000, based on a
number of factors including, but not limited to, the size of the account and
other accounts with Prudential Securities. The minimum initial investment in the
Target Program for non-Plan accounts is $25,000 and for Plan accounts is
$10,000. Certain accounts may be aggregated for purposes of satisfying the
minimum initial investment requirement. The minimum initial investment
requirement may be reduced or waived in certain instances and the advisory fee
may be waived or reduced for certain clients. See "Purchase and Redemption of
Shares."

5
<PAGE> 13

- --------------------------------------------------------------------------------
TRUST EXPENSES
- --------------------------------------------------------------------------------

The following table lists the costs and expenses, including the Target
Program advisory fee paid separately, that an investor will incur directly and
indirectly as a shareholder of each of the Portfolios based on the Portfolio's
projected annual operating expenses. The operating expenses of the Portfolios,
when combined with any investment advisory fees separately paid, will involve
greater fees and expenses than other investment companies whose shares are
purchased without the benefit of professional asset allocation recommendations.
<TABLE>
<CAPTION>
LARGE LARGE SMALL SMALL INTER-
CAPITALI- CAPITALI- CAPITALI- CAPITALI- INTER- INTER- TOTAL MEDIATE-
ZATION ZATION ZATION ZATION NATIONAL NATIONAL RETURN TERM
GROWTH VALUE GROWTH VALUE EQUITY BOND BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES...... None None None None None None None None
Maximum Annual Target Program Fee
applicable to non Plan investors (as
a percentage of average daily value
of Portfolio shares held)*........... 1.50% 1.50% 1.50% 1.50% 1.50% 1.00% 1.00% 1.00%
========= ========= ========= ========= ========= ========= ========= =========
ANNUAL PORTFOLIO OPERATING EXPENSES**
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees...................... 0.60% 0.60% 0.60% 0.60% 0.70% 0.50% 0.45% 0.45%
12b-1 Fees........................... None None None None None None None None
Other Expenses....................... .18% .16% .25% .40% .32% .65% .59% .34%
--------- --------- --------- --------- --------- --------- --------- ---------
Total Portfolio Operating Expenses... .78% .76% .85% 1.00% 1.02% 1.15% 1.04% .79%
========= ========= ========= ========= ========= ========= ========= =========
Total Portfolio Operating Expenses
(After Reduction)+................. N/A N/A N/A N/A N/A N/A 0.95% N/A

<CAPTION>
U.S.
GOVERN-
MORTGAGE MENT
BACKED MONEY
SECURITIES MARKET
PORTFOLIO PORTFOLIO
---------- ---------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES...... None None
Maximum Annual Target Program Fee
applicable to non Plan investors (as
a percentage of average daily value
of Portfolio shares held)*........... 1.00% 1.00%
=========== =========
ANNUAL PORTFOLIO OPERATING EXPENSES**
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees...................... 0.45% 0.25%
12b-1 Fees........................... None None
Other Expenses....................... .47% .55%
----- ---------
Total Portfolio Operating Expenses... .92% .80%
=========== =========
Total Portfolio Operating Expenses
(After Reduction)+................. N/A N/A
</TABLE>

EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(i) a 5% annual return and (ii) redemption at the end of each time period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Large Capitalization Growth Portfolio................................................. $ 23 $73 $ 127 $282
Large Capitalization Value Portfolio.................................................. 23 72 126 280
Small Capitalization Growth Portfolio................................................. 24 75 130 290
Small Capitalization Value Portfolio.................................................. 26 80 138 306
International Equity Portfolio........................................................ 26 80 139 308
International Bond Portfolio.......................................................... 22 68 118 261
Total Return Bond Portfolio........................................................... 21 65 113 249
Intermediate-Term Bond Portfolio...................................................... 18 57 99 222
Mortgage Backed Securities Portfolio.................................................. 20 61 106 236
U.S. Government Money Market Portfolio................................................ 18 57 100 223
</TABLE>

The above example is based on data for the Trust's fiscal year ended
December 31, 1995, without taking into account any expense caps that were in
effect in such year; provided that the data for the Total Return Bond Portfolio,
which will be subject to an annual expense cap of .95% for the fiscal year
ending December 31, 1996, reflects such expense cap. The above example includes
the fees for the Target Program applicable to non-Plan investors. 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 costs and expenses that an
investor in a Portfolio will bear, whether directly or indirectly. For more
complete descriptions of the various costs and expenses, see "Management of the
Trust." "Other Expenses" includes an estimate of operating expenses of each
Portfolio, such as trustees' and professional fees, registration fees, reports
to shareholders and transfer agency ($35 per Target Program participant) and
custodian fees (foreign and domestic). In addition, the Trust may pay fees for
recordkeeping services in respect of certain eligible defined benefit plan
investors. See "Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants" in the Statement of Additional Information.
- ---------------

footnotes on next page

6
<PAGE> 14

- ---------------
* Plan investors are subject to a maximum Annual Target Program fee (as a
percentage of average daily value of Portfolio shares held) of 1.25% for
assets invested in Equity Portfolios and 1.35% for assets invested in Income
Portfolios.

** Not including the Target Program fee.

+ PMF may, from time to time, agree to waive all or a portion of its management
fee and subsidize certain operating expenses with respect to each Portfolio.
Fee waivers and expense subsidies lower the overall expenses of a Portfolio.
For the year ending December 31, 1996, PMF has agreed to cap Total Portfolio
Operating Expenses for the Total Return Bond Portfolio at .95%. See
"Management of the Trust--Manager."

7
<PAGE> 15

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT 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
following 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
"General Information -- Performance Information."
<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION
GROWTH PORTFOLIO(e) VALUE PORTFOLIO(e)
------------------------------------------ ----------------------------
JANUARY 5,
YEAR ENDED 1993(a) YEAR ENDED
DECEMBER 31, THROUGH DECEMBER 31,
--------------------------- DECEMBER ----------------
1995 1994 31, 1993 1995 1994
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 9.74 $ 9.91 $ 10.00 $ 10.02 $ 10.11
=========== =========== =========== =========== ===========
Income from investment operations
Net investment income (loss)....... .10 .10 .07(c) .33 .26
Net realized and unrealized gains
(losses) on investment
transactions...................... 2.41 (.16) (.12) 2.89 (.04)
----------- ------------ ----------- ------------ ------------
Total from investment
operations..................... 2.51 (.06) (.05) 3.22 .22
----------- ------------ ----------- ------------ ------------
Less distributions
Dividends from net investment
income............................ (.10) (.10) (.04) (.30) (.25)
Distributions in excess of net
investment income................. (.01) (.01) -- -- --
Distributions from net realized
gains............................. (.01) -- -- (.37) (.06)
Distributions in excess of net
realized gains.................... -- -- -- -- --
----------- ------------ ----------- ------------ ------------
Total distributions............. (.12) (.11) (.04) (.67) (.31)
----------- ------------ ----------- ------------ ------------
Net asset value, end of period..... $ 12.13 $ 9.74 $ 9.91 $ 12.57 $ 10.02
=========== =========== =========== =========== ===========
TOTAL RETURN(d):................... 25.76% (.68)% (0.46)% 32.08% 2.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $ 180,077 $ 142,072 $ 98,089 $ 187,596 $ 142,219
Average net assets (000)........... $ 162,982 $ 129,687 $ 48,033 $ 163,124 $ 128,865
Ratios to average net assets
Expenses.......................... .78% .81% 1.05%(b)(c) .76% .81%
Net investment income (loss)...... .88% 1.08% .84%(b)(c) 2.83% 2.66%
Portfolio turnover rate............ 154% 24% 4% 59% 6%
Average commission rate paid per
share............................. $ .0578 N/A N/A $ .0514 N/A

<CAPTION>
SMALL CAPITALIZATION
GROWTH PORTFOLIO(e)
------------------------------------------
JANUARY 5, JANUARY 5,
1993(a) YEAR ENDED 1993(a)
THROUGH DECEMBER 31, THROUGH
DECEMBER --------------------------- DECEMBER
31, 1993 1995 1994 31, 1993
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.00 $ 11.59 $ 11.86 $ 10.00
========== =========== ========== ===========
Income from investment operations
Net investment income (loss)....... .21(c) .02 .01 .01(c)
Net realized and unrealized gains
(losses) on investment
transactions...................... .02 2.84 (.27) 1.86
----------- ------------ ----------- -----------
Total from investment
operations..................... .23 2.86 (.26) 1.87
----------- ------------ ----------- -----------
Less distributions
Dividends from net investment
income............................ (.11) (.02) (.01) (.01)
Distributions in excess of net
investment income................. -- -- -- --
Distributions from net realized
gains............................. (.01) (.28) -- --
Distributions in excess of net
realized gains.................... -- -- -- --
----------- ------------ ----------- -----------
Total distributions............. (.12) (.30) (.01) (.01)
----------- ------------ ----------- -----------
Net asset value, end of period..... $ 10.11 $ 14.15 $ 11.59 $ 11.86
========== =========== ========== ===========
TOTAL RETURN(d):................... 2.29% 24.62% (2.19)% 18.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $ 96,074 $ 121,533 $ 96,462 $ 63,917
Average net assets (000)........... $ 46,623 $ 107,649 $ 87,403 $ 29,313
Ratios to average net assets
Expenses.......................... 1.05%(b)(c) .85% .93% 1.05%(b)(c)
Net investment income (loss)...... 2.12%(b)(c) .12% .10% .11%(b)(c)
Portfolio turnover rate............ 3% 120% 97% 72%
Average commission rate paid per
share............................. N/A $ .0586 N/A N/A
</TABLE>

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

(a) Commencement of investment operations.

(b) Annualized.

(c) Net of expense subsidies. For the period January 5, 1993 through December
31, 1993, had the Manager not reimbursed expenses for the Portfolios, net
investment income (loss) per share and the ratios of expenses and net
investment income (loss) to average net assets would have been $.06, 1.10%
and .79% for the Large Capitalization Growth Portfolio, $.20, 1.16% and
2.01% for the Large Capitalization Value Portfolio and ($.03), 1.46% and
(.30%) for the Small Capitalization Growth Portfolio, respectively.

(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.

(e) Calculated based upon average shares outstanding during the period.

8
<PAGE> 16

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT 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
following 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
"General Information -- Performance Information."
<TABLE>
<CAPTION>
SMALL CAPITALIZATION
VALUE PORTFOLIO(e)
-----------------------------------------
JANUARY 5,
YEAR ENDED 1993(a)
DECEMBER 31, THROUGH
--------------- DECEMBER
1995 1994 31, 1993
----------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................................... $ 11.07 $ 12.72 $ 10.00
========== ========== ===========
Income from investment operations
Net investment income (loss)................................................. .14 .11 (.01)(c)
Net realized and unrealized gains (losses) on investment transactions........ 2.00 (1.49) 3.19
----------- ----------- -----------
Total from investment
operations............................................................... 2.14 (1.38) 3.18
----------- ----------- -----------
Less distributions
Dividends from net investment
income...................................................................... (.14) -- --
Distributions in excess of net investment income............................. -- -- --
Distributions from net realized gains........................................ -- (.27) (.46)
Distributions in excess of net realized gains................................ -- -- --
----------- ----------- -----------
Total distributions....................................................... (.14) (.27) (.46)
----------- ----------- -----------
Net asset value, end of period............................................... $ 13.07 $ 11.07 $ 12.72
========== ========== ===========
TOTAL RETURN(d):............................................................. 19.21% (11.03)% 31.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................................. $ 97,594 $ 84,163 $ 64,430
Average net assets (000)..................................................... $ 88,085 $ 83,891 $ 29,039
Ratios to average net assets
Expenses.................................................................... 1.00% .93% 1.05%(b)(c)
Net investment income (loss)................................................ 1.14% .88% (.11)%(b)(c)
Portfolio turnover rate...................................................... 110% 97% 112%
Average commission rate paid per share....................................... $ .0561 N/A N/A

<CAPTION>
INTERNATIONAL EQUITY
PORTFOLIO(e)
--------------------------------------------
JANUARY 5,
YEAR ENDED 1993(a)
DECEMBER 31, THROUGH
---------------- DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................................... $ 11.95 $ 13.09 $ 10.00
=========== =========== ============
Income from investment operations
Net investment income (loss)................................................. .17 .06 .07
Net realized and unrealized gains (losses) on investment transactions........ 1.67 (.01) 3.16
------------ ------------ ------------
Total from investment
operations............................................................... 1.84 .05 3.23
------------ ------------ ------------
Less distributions
Dividends from net investment
income...................................................................... (.11) (.01) (.01)
Distributions in excess of net investment income............................. -- --
Distributions from net realized gains........................................ (.04) (1.07) (.05)
Distributions in excess of net realized gains................................ (.11) (.08)
------------ ------------ ------------
Total distributions....................................................... (.15) (1.19) (.14)
------------ ------------ ------------
Net asset value, end of period............................................... $ 13.64 $ 11.95 $ 13.09
=========== =========== ============
TOTAL RETURN(d):............................................................. 15.38% .18% 32.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................................. $ 191,598 $ 188,025 $ 127,121
Average net assets (000)..................................................... $ 183,414 $ 179,614 $ 49,769
Ratios to average net assets
Expenses.................................................................... 1.02% 1.07% 1.40%(b)
Net investment income (loss)................................................ 1.32% .47% .64%(b)
Portfolio turnover rate...................................................... 76% 116% 65%
Average commission rate paid per share....................................... $ .0250 N/A N/A
</TABLE>

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

(a) Commencement of investment operations.

(b) Annualized.

(e) Calculated based upon average shares outstanding during the period.

9
<PAGE> 17

<TABLE>
<CAPTION>
INTERNATIONAL BOND PORTFOLIO TOTAL RETURN BOND PORTFOLIO
------------------------------- -------------------------------------------------
MAY 17, YEAR ENDED JANUARY 5,
1994(a) DECEMBER 31, 1993(a)
YEAR ENDED THROUGH 1995 THROUGH
DECEMBER 31, DECEMBER 31, ------------------------------- DECEMBER 31,
1995 1994 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.57 $ 10.00 $ 9.48 $ 10.28 $ 10.00
=============== =============== =============== =============== ===============
Income from investment operations
Net investment income................... .57(c) .27(c) .62(c) .47(c) .44(c)
Net realized and unrealized gains
(losses) on investment transactions.... .82 (.19) 1.18 (.82) .56
------------- ------------- ------------- ------------- -------------
Total from investment operations..... 1.39 .08 1.80 (.35) 1.00
------------- ------------- ------------- ------------- -------------
Less distributions
Dividends from net investment income.... (.57) (.27) (.58) (.45) (.44)
Distributions in excess of net
investment income...................... -- (.24) -- -- (.02)
Distributions from net realized gains... (.20) -- (.08) -- (.19)
Distributions in excess of net realized
gains.................................. -- -- -- -- (.07)
------------- ------------- ------------- ------------- -------------
Total distributions.................. (.77) (.51) (.66) (.45) (.72)
------------- ------------- ------------- ------------- -------------
Net asset value, end of period.......... $ 10.19 $ 9.57 $ 10.62 $ 9.48 $ 10.28
=============== =============== =============== =============== ===============
TOTAL RETURN(d):........................ 14.66% .71% 19.63% (3.54)% 10.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 34,660 $ 21,447 $ 45,118 $ 31,191 $ 25,917
Average net assets (000)................ $ 29,510 $ 15,366 $ 37,023 $ 31,141 $ 12,594
Ratios to average net assets
Expenses............................... 1.00%(c) 1.00%(b)(c) .85%(c) .85%(c) .85%(b)(c)
Net investment income.................. 5.56%(c) 4.84%(b)(c) 6.21%(c) 4.90%(c) 3.87%(b)(c)
Portfolio turnover rate................. 456% 361% 156% 121% 171%
</TABLE>

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

(a) Commencement of investment operations.

(b) Annualized.

(c) Net of expense subsidies. For the period January 5, 1993 through December
31, 1993, had the Manager not reimbursed expenses for the Portfolios, net
investment income per share and the ratios of expenses and net investment
income to average net assets would have been $.38, 2.04% and 2.68% for the
Total Return Bond Portfolio. For the year ended December 31, 1994, had the
Manager not reimbursed expenses for the Portfolios, net investment income
per share and the ratios of expenses and net investment income to average
net assets would have been $1.44, 1.18% and 4.57% for the Total Return Bond
Portfolio. For the period May 17, 1994 through December 31, 1994, had the
Manager not reimbursed expenses for the International Bond Portfolio, net
investment income per share and the ratios of expenses and net investment
income to average net assets would have been $.21, 1.90% and 3.94%,
respectively. For the year ended December 31, 1995, had the Manager not
reimbursed expenses for the Portfolios, net investment income per share and
the ratios of expenses and net investment income to average net assets would
have been $.55, 1.15% and 5.4% for the International Bond Portfolio and
$.60, 1.04% and 6.02%, for the Total Return Bond Portfolio, respectively.

10
<PAGE> 18

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
following 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
"General Information -- Performance Information."
<TABLE>
<CAPTION>
INTERMEDIATE-TERM MORTGAGE BACKED
BOND PORTFOLIO SECURITIES PORTFOLIO
------------------------------------------ ----------------------------
JANUARY 5,
YEAR ENDED 1993(a) YEAR ENDED
DECEMBER 31, THROUGH DECEMBER 31,
--------------------------- DECEMBER 31, ----------------------------
1995 1994 1993 1995 1994
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 9.56 $ 10.26 $ 10.00 $ 9.51 $ 10.18
=========== =========== ============ =========== ===========
Income from investment operations
Net investment income............... .63 .49 .46(c) .68(c) .61(c)
Net realized and unrealized gains
(losses) on investment
transactions....................... .94 (.71) .46 .83 (.66)
----------- ------ ------ ------ ------
Total from investment
operations...................... 1.57 (.22) .92 1.51 (.05)
----------- ------ ------ ------ ------
Less distributions
Dividends from net investment
income............................. (.60) (.48) (.45) (.68) (.61)
Distributions in excess of net
investment income.................. -- -- -- (.03) (.01)
Distributions from net realized
gains.............................. (.02) -- (.18) -- --
Distributions in excess of net
realized gains..................... -- -- (.03) -- --
----------- ------ ------ ------ ------
Total distributions.............. (.62) (.48) (.66) (.71) (.62)
----------- ------ ------ ------ ------
Net asset value, end of period...... $ 10.51 $ 9.56 $ 10.26 $ 10.31 $ 9.51
=========== =========== ============ =========== ===========
TOTAL RETURN(d)..................... 16.87% (2.23)% 9.33% 16.18% (.51)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $ 77,125 $ 62,924 $ 60,651 $ 69,759 $ 61,971
Average net assets (000)............ $ 68,628 $ 69,602 $ 32,441 $ 65,149 $ 66,276
Ratios to average net assets
Expenses........................... .79% .80% .85%(b)(c) .85%(c) .85%(c)
Net investment income.............. 6.09% 5.06% 4.27%(b)(c) 6.79%(c) 6.19%(c)
Portfolio turnover rate............. 93% 77% 129% 154% 380%

<CAPTION>
U.S. GOVERNMENT
MONEY MARKET PORTFOLIO
------------------------------------------
JANUARY 5, JANUARY 5,
1993(a) YEAR ENDED 1993(a)
THROUGH DECEMBER 31, THROUGH
DECEMBER --------------------------- DECEMBER 31,
31, 1993 1995 1994 1993
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 10.00 $ 1.00 $ 1.00 $ 1.00
=========== =========== ========== ============
Income from investment operations
Net investment income............... .57(c) .051(c) .037(c) .025(c)
Net realized and unrealized gains
(losses) on investment
transactions....................... .28 -- -- --
----------- ------ ----------- ------
Total from investment
operations...................... .85 .051 .037 .025
----------- ------ ----------- ------
Less distributions
Dividends from net investment
income............................. (.57) (.051) (.037) (.025)
Distributions in excess of net
investment income.................. (.02) -- -- --
Distributions from net realized
gains.............................. (.08) -- -- --
Distributions in excess of net
realized gains..................... -- -- -- --
----------- ------ ----------- ------
Total distributions.............. (.67) (.051) (.037) (.025)
----------- ------ ----------- ------
Net asset value, end of period...... $ 10.18 $ 1.00 $ 1.00 $ 1.00
=========== =========== ========== ============
TOTAL RETURN(d)..................... 8.56% 5.25% 3.79% 2.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $ 60,100 $ 18,855 $ 21,438 $ 2,997
Average net assets (000)............ $ 29,710 $ 20,173 $ 15,048 $ 1,407
Ratios to average net assets
Expenses........................... .85%(b)(c) .75%(c) .50%(c) .50%(b)(c)
Net investment income.............. 5.30%(b)(c) 5.18%(c) 4.03%(c) 2.51%(b)(c)
Portfolio turnover rate............. 134% -- -- --
</TABLE>

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

(a) Commencement of investment operations.

(b) Annualized.

(c) Net of expense subsidies. For the period January 5, 1993 through December
31, 1993, had the Manager not reimbursed expenses for the Portfolios, net
investment income per share and the ratios of expenses and net investment
income to average net assets would have been $.44, 1.10% and 4.02% for the
Intermediate-Term Bond Portfolio, $.54, 1.45% and 4.70% for the Mortgage
Backed Securities Portfolio and ($.079), 10.94% and (7.93%) for the U.S.
Government Money Market Portfolio, respectively. For the year ended December
31, 1994, had the Manager not reimbursed expenses for the Portfolios, net
investment income per share and the ratios of expenses and net investment
income to average net assets would have been $.60, .99% and 6.05% for the
Mortgage Backed Securities Portfolio and $.031, 1.14% and 3.39% for the U.S.
Government Money Market Portfolio, respectively. For the year ended December
31, 1995, had the Manager not reimbursed expenses for the Portfolios, net
investment income per share and the ratios of expenses and net investment
income to average net assets would have been $.67, .92% and 6.72% for the
Mortgage Backed Securities Portfolio and $.050, .80% and 5.13% for the U.S.
Government Money Market Portfolio, respectively.

11
<PAGE> 19

- --------------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
- --------------------------------------------------------------------------------

INVESTMENT OBJECTIVES AND POLICIES

Set forth below is a description of the investment objectives and policies
of each Portfolio. There can be no assurance that a Portfolio will achieve its
investment objectives. The Portfolios' investment objectives are fundamental and
may be changed only with the approval of the holders of a majority of a
Portfolio's outstanding voting securities. Further information about the
investment policies of each Portfolio appears in the Statement of Additional
Information.

EQUITY PORTFOLIOS

LARGE CAPITALIZATION GROWTH PORTFOLIO

The Large Capitalization Growth Portfolio is advised by Columbus Circle
Investors, a subpartnership of PIMCO Advisors, L.P., and Oak Associates, Ltd.
The Portfolio's investment objective is long-term capital appreciation. The
Portfolio seeks to achieve its investment objective by investing primarily in a
diversified portfolio of common stocks of companies with total market
capitalization of $1.5 billion or greater that, in each Adviser's opinion, are
characterized by a growth of earnings at a rate faster than that of the S&P 500.
Dividend income is an incidental consideration in the selection of investments.
The securities held by the Portfolio can be expected to experience greater
volatility than those of the Large Capitalization Value Portfolio. In selecting
securities for the Portfolio, the Advisers evaluate factors believed to be
favorable to long-term growth of capital, such as the business outlook for the
issuer's industry and the issuer's position in that industry, as well as the
issuer's background, historical profit margins on equity and experience and
qualifications of the issuer's management. Under normal conditions, at least 80%
of the Portfolio's total assets will be invested in common stocks and at least
65% of the Portfolio's total assets will be invested in common stocks of
companies with total market capitalization of $1.5 billion or greater at the
time of purchase. The Portfolio may also invest in money market instruments and
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities and may engage in repurchase agreement transactions. When
market or economic conditions indicate, in the view of an Adviser, that a
temporary defensive investment strategy is appropriate or pending investment in
portfolio securities, the Adviser may invest its portion of the Portfolio
without limit in money market instruments and obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities and may engage in
repurchase agreement transactions. See "Other Investments and Policies."

LARGE CAPITALIZATION VALUE PORTFOLIO

The Large Capitalization Value Portfolio is advised by INVESCO Capital
Management, Inc. and Hotchkis and Wiley. The Portfolio's investment objective is
total return consisting of capital appreciation and dividend income. The
Portfolio seeks to achieve its investment objective by investing primarily in a
diversified portfolio of common stocks of companies with total market
capitalization of $1.5 billion or greater that, in each Adviser's opinion, have
above average price appreciation potential at the time of purchase. In general,
these securities are characterized as having above average dividend yields and
below average price earnings ratios relative to the stock

12
<PAGE> 20

market in general, as measured by the S&P 500. Under normal conditions, at least
80% of the Portfolio's total assets will be invested in common stocks and
securities convertible into common stocks and at least 65% of the Portfolio's
total assets will be invested in common stocks that, at the time of investment,
will be expected to pay regular dividends. At least 65% of the Portfolio's total
assets will be invested in common stocks of companies with total market
capitalization of $1.5 billion or greater at the time of purchase. The Portfolio
may also invest in other equity securities including securities convertible into
common stock and preferred stock, corporate and other debt obligations and
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. When market or economic conditions indicate, in the view of
an Adviser, that a temporary defensive investment strategy is appropriate, the
Adviser may invest its portion of the Portfolio without limit in obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
corporate and other debt obligations and high quality money market instruments.
See "Other Investments and Policies."

SMALL CAPITALIZATION GROWTH PORTFOLIO

The Small Capitalization Growth Portfolio is advised by Nicholas-Applegate
Capital Management and Investment Advisers, Inc. The Portfolio's investment
objective is maximum capital appreciation. The Portfolio seeks to achieve its
investment objective by investing primarily in the common stock of "emerging
growth" companies with total market capitalization of less than $1.5 billion.
Under normal conditions, at least 65% of the Portfolio's total assets will be
invested in common stocks of issuers with total market capitalization of less
than $1.5 billion. Dividend income is not a consideration in the selection of
investments. In selecting investments for the Portfolio, the Advisers seek small
capitalization companies that they believe are undervalued in the marketplace,
or have earnings that may be expected to grow faster than the U.S. economy in
general. These companies typically possess a relatively high rate of return on
invested capital so that future growth can be financed from internal sources.
The Portfolio may also invest in companies that offer the possibility of
accelerating earnings growth because of management changes, new products or
structural changes in the economy. Companies in which the Portfolio is likely to
invest may have limited product lines, markets or financial resources and may
lack management depth. The securities of these companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. The Portfolio may also invest in preferred stock, obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities and money
market instruments. When market or economic conditions indicate, in the view of
an Adviser, that a temporary defensive investment strategy is appropriate or
pending investment in portfolio securities, the Adviser may invest its portion
of the Portfolio without limit in money market instruments and obligations
issued or guaranteed by the U.S. Government, its agencies and instrumentalities.
See "Other Investments and Policies."

SMALL CAPITALIZATION VALUE PORTFOLIO

The Small Capitalization Value Portfolio is advised by Lazard Freres Asset
Management, a division of Lazard Freres & Co. LLC, and Wood, Struthers &
Winthrop Management Corp., a subsidiary of Donaldson, Lufkin & Jenrette
Securities Corporation. The Portfolio's investment objective is above average
capital appreciation. The Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of common stocks of companies
with total market capitalization of less than $1.5 billion that, in an Adviser's
opinion, are undervalued or

13
<PAGE> 21

overlooked in the marketplace at the time of purchase. In general, these
securities are characterized as having below average price earnings ratios and a
smaller number of shares outstanding relative to the stock market in general and
enjoy little industry analyst coverage. The securities may also (i) be
undervalued relative to their cash flow, and/or asset values; (ii) have an
attractive price/value relationship, i.e., have high returns on equity and/or
assets with correspondingly low price-to-book and/or price-to-asset value as
compared to the market generally or the companies' industry groups in
particular, with expectations that some catalyst will cause the perception of
value to change within a 24-month time horizon; (iii) have experienced
significant relative underperformance and are out of favor due to a set of
circumstances which are unlikely to harm a company's franchise or earnings power
over the longer term; (iv) have low projected price-to-earnings or
price-to-cash-flow multiples relative to their industry peer group and/or the
market in general; (v) have the prospect, or the industry in which the company
operates has the prospect, to allow it to become a larger factor in the business
and receive a higher valuation as such; (vi) have significant financial leverage
but have high levels of free cash flow used to reduce leverage and enhance
shareholder value; and (vii) have a relatively short corporate history with the
expectation that the business may grow to generate meaningful cash flow and
earnings over a reasonable investment horizon. Other factors, such as earnings
and dividend growth prospects as well as industry outlook and market share, also
are considered. Current dividend income is only an incidental consideration in
the selection of investments. Under normal conditions, at least 80% of the
Portfolio's total assets will be invested in common stock, and at least 65% of
the Portfolio's total assets will be invested in common stocks of issuers with
total market capitalization of less than $1.5 billion. The Portfolio may also
invest in securities convertible into common stock, preferred stock, debt
obligations with capital appreciation potential and money market instruments.
When market or economic conditions indicate, in the view of an Adviser, that a
temporary defensive investment strategy is appropriate, the Adviser may invest
its portion of the Portfolio without limit in obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, corporate and other
debt obligations and high quality money market instruments. See "Other
Investments and Policies."

INTERNATIONAL EQUITY PORTFOLIO

The International Equity Portfolio is advised by Lazard Freres Asset
Management. The Portfolio's investment objective is capital appreciation. The
Portfolio seeks to achieve its objective by investment in equity securities of
companies domiciled outside the U.S. Under normal market conditions, at least
65% of the Portfolio's total assets will be invested in securities of issuers
domiciled in at least three foreign countries, not including the United States.
Investments may be made in companies in developed as well as developing
countries. Investing in the equity markets of developing countries involves
exposure to economies that are generally less diverse and mature, and to
political systems that can be expected to have less stability than those of
developed countries. The Adviser attempts to limit exposure to investments in
developing countries where both liquidity and sovereign risks are high. Although
there is no established definition, a developing country is generally considered
to be a country that is in the initial stages of its industrialization cycle
with per capita gross national product of less than $5,000. Historical
experience indicates that the markets of developing countries have been more
volatile than the markets of developed countries, although securities traded in
the markets of developing countries have provided higher rates of

14
<PAGE> 22

return to investors. For a discussion of the risks associated with investing in
foreign securities, see "Other Investments and Policies--Foreign Securities."

The Portfolio intends to invest in non-U.S. companies whose securities are
traded on exchanges located in the countries in which the issuers are
principally based. The Portfolio may invest in securities of foreign issuers in
the form of American Depositary Receipts (ADRs), which are U.S.
dollar-denominated receipts typically issued by domestic banks or trust
companies that represent the deposit with those entities of securities of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in the
United States. Global Depositary Receipts (GDRs) may also be purchased by the
Portfolios. GDRs are generally issued by foreign banks and evidence ownership of
either foreign or domestic securities.

The Portfolio may invest in shares of closed-end investment companies
organized in the United States or outside the United States which are "country"
or "regional" funds. Investment in closed-end country or regional funds is
subject to limitations under the Investment Company Act and market availability
and may involve the payment of substantial premiums above the value of such
funds' portfolio securities. In addition, investment in shares of other
investment companies will result in the payment of duplicate management fees and
expenses.

The Portfolio may attempt to hedge against unfavorable changes in currency
exchange rates by engaging in forward currency transactions, purchasing and
writing put and call options on foreign currencies and trading currency futures
contracts and options thereon. When market or economic conditions indicate, in
the view of the Adviser, that a temporary defensive investment strategy is
appropriate or pending investment in portfolio securities, the Portfolio may
invest without limit in money market instruments and obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. See
"Other Investments and Policies." The Portfolios may or may not employ any of
the hedging techniques described above and there can be no assurance that any
techniques or strategy will be successful. The use of these techniques and
strategies entails certain risks. See "Other Investments and Policies--Special
Risks of Hedging and Income Enhancement Strategies" and "Other Investments and
Policies--Foreign Securities."

INCOME PORTFOLIOS

INTERNATIONAL BOND PORTFOLIO

The International Bond Portfolio is advised by Fiduciary International,
Inc. The Portfolio's investment objective is high total return. The Portfolio
seeks to achieve its objective through investment in high quality debt
securities denominated primarily in foreign currencies. Under normal conditions,
at least 65% of the Portfolio's total assets will be invested in high quality
debt securities denominated in foreign currencies of issuers located in at least
three countries outside the United States.

The Portfolio is non-diversified. Investment in a non-diversified portfolio
involves greater risk than investment in a diversified portfolio because the
higher percent of assets invested among fewer issuers may result in greater
fluctuations in the market value of the Portfolio. Any economic, political or
regulatory development affecting the value of the securities in the Portfolio
will have a greater impact on the total value of the Portfolio than would be the
case if the Portfolio were diversified among more issuers.

15
<PAGE> 23

Under normal circumstances, the Portfolio will invest at least 75% of
its total assets in debt securities rated A or better by S&P or Moody's or the
equivalent by another nationally recognized statistical ratings organization
(NRSRO) or, if unrated, in debt securities determined to be of comparable
quality by the Adviser. Under normal circumstances, up to 25% of the
Portfolio's total assets may be invested in debt securities rated below
investment grade but rated at least B by S&P or Moody's or the equivalent by
another NRSRO or, if unrated, determined by the Adviser to be of comparable
quality. Securities rated Baa or lower by Moody's or BBB or lower by S&P have
speculative characteristics and are subject to greater risks. See "Other
Investments and Policies--Medium and Lower Rated Securities" below and Appendix
A--"Description of S&P and Moody's Ratings."

The Portfolio may invest in issuers in developed as well as developing
countries. Investing in the markets of developing countries involves exposure to
economies that are generally less diverse and mature, and to political systems
that can be expected to have less stability than those of developed countries.
The Adviser attempts to limit exposure to investments in developing countries
where both liquidity and sovereign risk are high. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of developed countries. For a discussion of the risks associated
with investing in foreign securities, see "Other Investments and
Policies--Foreign Securities."

The foreign government securities in which the Portfolio may invest
generally consist of debt obligations or mortgage-related securities supported
by the full faith and credit of national, state, or provincial governments or
other political subdivisions. The Portfolio may also invest in debt obligations
of supranational entities, including international organizations supported by
governmental entities to promote economic development, international banking
institutions and related governmental entities such as the International Bank
for Reconstruction and Development (World Bank), the Asian Development Bank and
the InterAmerican Development Bank. The Portfolio may also invest in the debt
obligations of national, state or "quasi-governmental agencies" which are not
supported by the full faith and credit or general taxing power of such entities.

The Portfolio's may also invest in cash deposits or certificates of deposit
issued by banks of high credit quality or in commercial paper rated at least
A1/P1 by S&P or Moody's or the equivalent by another NRSRO or in repurchase
agreements. The instruments may be denominated in either the US dollar or in
foreign currencies. The Portfolio may also invest in both exchange-traded and
over-the-counter options.

The Portfolio will attempt to hedge against unfavorable changes in
currency, exchange and other rates by engaging in foreign currency exchange
contracts, purchasing and writing put and call options on foreign currencies and
trading currencies futures contracts and options thereon and in other hedging
techniques. The Portfolio may or may not employ any of the hedging techniques
described above and there can be no assurance that any technique or strategy
will be successful. The use of these techniques and strategies entails certain
risks. See "Other Investments and Policies--Special Risks of Hedging and Income
Enhancement Strategies" and "--Foreign Securities."

16
<PAGE> 24

TOTAL RETURN BOND PORTFOLIO

The Total Return Bond Portfolio is advised by Pacific Investment Management
Company, a general partnership whose partners are PIMCO Advisors, L.P. and PIMCO
Management Inc., a wholly-owned subsidiary of PIMCO Advisors. The Portfolio's
investment objective is total return consisting of current income and capital
appreciation. The Portfolio seeks to achieve its investment objective by
investing primarily in a diversified portfolio of fixed-income securities of
varying maturities with a dollar-weighted average portfolio maturity of more
than four years but not more than fifteen years. Under normal circumstances, the
Portfolio will invest at least 65% of its total assets in bonds.

The fixed income securities in which the Portfolio may invest include
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, corporate and other debt obligations, convertible securities,
mortgage-backed securities, asset backed securities, obligations of foreign
governments or their subdivisions, agencies or instrumentalities, obligations of
supranational and quasi-governmental entities, commercial paper, certificates of
deposit, money market instruments, foreign currency exchange-related securities
and loan participations. The Portfolio may invest up to 20% of its assets in
foreign securities and up to 25% of its assets in privately issued mortgage
related securities. All of the securities in the Portfolio will be investment
grade (rated at least Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO, or determined by the Adviser to be of comparable quality), except that
the Portfolio may invest up to 10% of its total assets in securities rated below
investment grade but rated at least B by Moody's or S&P or the equivalent by
another NRSRO, or determined by the Adviser to be of comparable quality.
Securities rated Baa or lower by Moody's or BBB or lower by S&P or the
equivalent by another NRSRO have speculative characteristics and are subject to
greater risks. See "Other Investments and Policies--Medium and Lower Rated
Securities" below and Appendix A--"Description of S&P and Moody's Ratings."

The Portfolio may purchase and write (i.e., sell) put and call options on
debt securities, on U.S. Government securities, on aggregates of debt
securities, on financial indices and on foreign currencies that are traded on
national securities exchanges or in the over-the-counter market. The Portfolio
may also purchase and sell futures contracts on interest rates, on debt
securities, on financial indices, on U.S. Government securities, on Eurodollars,
on foreign currencies and on related options which are traded on a commodities
exchange or board of trade for certain bona fide hedging, return enhancement and
risk management purposes. In addition, the Portfolio may enter into repurchase
agreements and reverse repurchase agreements, lend its portfolio securities,
engage in interest rate swap transactions, purchase securities on a when-issued
or delayed-delivery basis and borrow money. See "Description of the
Portfolios--Other Investments and Policies."

When market or economic conditions indicate, in the view of the Adviser,
that a temporary defensive investment strategy is appropriate, the Portfolio may
invest without limit in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and high quality money market instruments.

17
<PAGE> 25

securities or other instruments resulting from market fluctuations or other
changes in the Portfolio's total assets will not require the Portfolio to
dispose of an investment unless the Adviser determines that it is practicable to
sell or close out the investment without undue market or tax consequences to the
Portfolio. In the event that ratings services assign different ratings to the
same security, the Adviser will determine which rating it believes best reflects
the security's quality and risk at that time, which may be the higher of the
several assigned ratings.

INTERMEDIATE-TERM BOND PORTFOLIO

The Intermediate-Term Bond Portfolio is advised by Pacific Investment
Management Company, a general partnership whose partners are PIMCO Advisors L.P.
and PIMCO Management Inc., a wholly-owned subsidiary of PIMCO Advisors. The
Portfolio's investment objective is current income and reasonable stability of
principal. The Portfolio seeks to achieve its investment objective by investing
primarily in a diversified portfolio of fixed-income securities of varying
maturities with a dollar-weighted average portfolio maturity of more than three
years but not more than ten years. Under normal circumstances, the Portfolio
will invest at least 65% of its total assets in bonds.

The fixed income securities in which the Portfolio may invest include
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, corporate and other debt obligations, convertible securities,
mortgage-backed securities, asset backed securities, obligations of foreign
governments or their subdivisions, agencies or instrumentalities, obligations of
supranational and quasi-governmental entities, commercial paper, certificates of
deposit, money market instruments, foreign currency exchange-related securities
and loan participations. The Portfolio may invest up to 20% of its assets in
foreign securities and up to 25% of its assets in privately issued mortgage
related securities. All of the securities in the Portfolio will be investment
grade (rated at least Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO, or determined by the Adviser to be of comparable quality) except that the
Portfolio may invest up to 10% of its assets in securities rated below
investment grade but rated at least B by Moody's or S&P or the equivalent by
another NRSRO, or determined by the Adviser to be of comparable quality.
Securities rated Baa or lower by Moody's or BBB or lower by S&P or the
equivalent by another NRSRO have speculative characteristics and are subject to
greater risks. See "Other Investments and Policies--Medium and Lower Rated
Securities" below and Appendix A--"Description of S&P and Moody's Ratings."

When market or economic conditions indicate, in the view of the Adviser,
that a temporary defensive investment strategy is appropriate, the Portfolio may
invest without limit in obligations

18
<PAGE> 26

issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and high quality money market instruments.

Percentage and quality limitations applicable to the Portfolio's
investments are generally measured at the time a transaction is entered into.
Any subsequent change in a rating assigned by any rating service to a security,
or change in the percentage of Portfolio assets invested in certain securities
or other instruments resulting from market fluctuations or other changes in the
Portfolio's total assets will not require the Portfolio to dispose of an
investment unless the Adviser determines that it is practicable to sell or close
out the investment without undue market or tax consequences to the Portfolio. In
the event that ratings services assign different ratings to the same security,
the Adviser will determine which rating it believes best reflects the security's
quality and risk at that time, which may be the higher of the several assigned
ratings.

MORTGAGE BACKED SECURITIES PORTFOLIO

The Mortgage Backed Securities Portfolio is advised by Wellington
Management Company. The Portfolio's primary investment objective is high current
income and its secondary investment objective is capital appreciation, each to
the extent consistent with the protection of capital. The Portfolio seeks to
achieve its investment objectives by investing in mortgage related securities.
Under normal conditions, at least 65% of the Portfolio's total assets will be
invested in mortgage related securities. The Portfolio may also invest in
non-mortgage related securities, including obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities, corporate and other
debt obligations, asset backed securities, money market instruments and
repurchase agreements. The Portfolio may also engage in reverse repurchase
agreements.

The mortgage related securities in which the Portfolio invests represent
pools of mortgage loans assembled for sale to investors by various U.S.
Government agencies, such as the Government National Mortgage Association
(GNMA), and government related organizations, such as the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC) as well as by private issuers, such as commercial banks, savings and
loan institutions, mortgage bankers and private mortgage insurance companies.
The Portfolio may also invest in stripped mortgage related securities issued and
guaranteed by GNMA, FNMA or FHLMC and collateralized mortgage obligations
(CMOs), which are obligations collateralized by mortgage loans or mortgage
pass-through certificates. Under current market conditions, the Portfolio's
holdings of mortgage related securities may be expected to consist primarily of
securities issued by GNMA, FNMA and FHLMC. However, the composition of the
Portfolio's assets will vary from time to time based upon a determination by the
Adviser of how best to achieve the Portfolio's investment objectives taking into
account such factors as the liquidity, yield and creditworthiness of various
mortgage related securities. Mortgage related securities held by the Portfolio
will generally be rated no lower than A by Moody's or S&P or the equivalent by
another NRSRO or, if unrated, will be of equivalent investment quality as
determined by the Adviser.

In order to enhance current income, the Portfolio may enter into forward
roll transactions with respect to mortgage related securities issued by GNMA,
FNMA and FHLMC. The Portfolio will not invest more than 25% of its assets in
privately issued mortgage related securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis, engage in interest rate
swap transactions, make short sales of securities and lend its portfolio
securities. The Portfolio may

19
<PAGE> 27

purchase and write (i.e., sell) put and call options on debt securities, on U.S.
Government securities, on aggregates of debt securities and on financial indices
that are traded on national securities exchanges or in the over-the-counter
market. The Portfolio may also purchase and sell futures contracts on interest
rates, on debt securities, on financial indices, on U.S. Government securities,
on Eurodollars and on related options which are traded on a commodities exchange
or board of trade for certain bona fide hedging, return enhancement and risk
management purposes.

U.S. GOVERNMENT MONEY MARKET PORTFOLIO

The U.S. Government Money Market Portfolio is advised by Wellington
Management Company. The Portfolio's investment objective is maximum current
income consistent with the maintenance of liquidity and the preservation of
capital. The Portfolio seeks to achieve its investment objective by investing
exclusively in U.S. Government securities and repurchase agreements with respect
to those securities. See "Other Investments and Policies--U.S. Government
Securities." Under normal circumstances, the Portfolio will invest only in
securities that are purchased with and payable in U.S. dollars and that have
remaining maturities of 397 days or less at the time of purchase. The Portfolio
maintains a dollar-weighted average portfolio maturity of 90 days or less. All
securities purchased by the Portfolio, including repurchase agreements, will
present minimal credit risks in the opinion of the Adviser acting under the
supervision of the Trustees. The Portfolio follows these policies in order to
attempt to maintain a constant net asset value of $1.00 per share, although
there can be no assurance it can do so on a continuing basis. The yield and
value of Portfolio shares and the yield and value of portfolio securities are
also not guaranteed or insured by the Federal Government. The yield attained by
the Portfolio usually will not be as high as that of other funds that invest in
lower-quality or longer-term securities. The Portfolio may purchase securities
on a when-issued or delayed-delivery basis.

OTHER INVESTMENTS AND POLICIES

MONEY MARKET INSTRUMENTS

Each Portfolio (other than the U.S. Government Money Market Portfolio) may
invest in high-quality money market instruments, including commercial paper of a
U.S. or foreign company or foreign government 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 generally U.S. dollar denominated, except with respect
to the International Bond Portfolio where these instruments may also be
denominated in foreign currencies. Commercial paper will be rated, at the time
of purchase, at least "A-2" by S&P or "Prime-2" by Moody's, or the equivalent by
another NRSRO or, if not rated, issued by an entity having an outstanding
unsecured debt issue rated at least "A" or "A-2" by S&P or "A" or "Prime-2" by
Moody's or the equivalent by another NRSRO. The International Bond Portfolio
will only invest in commercial paper rated at least A1/P1 by S&P or Moody's or
the equivalent by another NRSRO.

20
<PAGE> 28

U.S. GOVERNMENT SECURITIES

Each Portfolio may invest in U.S. Government securities.

U.S. TREASURY SECURITIES. U.S. Treasury securities include Bills, Notes,
Bonds and other debt securities issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.

SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. Securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government include, but are not limited to, GNMA,
FNMA and FHLMC securities. Obligations of GNMA, the Federal Housing
Administration, Farmers Home Administration and the Export-Import Bank are
backed by the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United States, the
Trust must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments. Such securities include obligations issued by the Student Loan
Marketing Association (SLMA), FNMA and FHLMC, each of which may borrow from the
U.S. Treasury to meet its obligations, although the U.S. Treasury is under no
obligation to lend to such entities. GNMA, FNMA and FHLMC may also issue
collateralized mortgage obligations. See "Mortgage Backed
Securities--Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities" below.

STRIPPED U.S. GOVERNMENT SECURITIES. A Portfolio may invest in component
parts of U.S. Government securities, namely either the corpus (principal) of
such obligations or one of the interest payments scheduled to be paid on such
obligations. These obligations may take the form of (i) obligations from which
the interest coupons have been stripped; (ii) the interest coupons that are
stripped; and (iii) book-entries at a Federal Reserve member bank representing
ownership of obligation components.

MORTGAGE RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A Portfolio may invest in mortgage backed
securities and other derivative mortgage products, including those representing
an undivided ownership interest in a pool of mortgages, e.g., GNMA, FNMA and
FHLMC certificates where the U.S. Government or its agencies or
instrumentalities guarantees the payment of interest and principal of these
securities. See "Mortgage Backed Securities" below. However, these guarantees do
not extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates, nor do these guarantees extend to the yield
or value of a Portfolio's shares. See "Objectives and Policies of the
Portfolios--U.S. Government Securities" in the Statement of Additional
Information. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal payments
from the mortgages underlying the certificate, net of certain fees. See
"Mortgage Backed Securities" below.

In addition to GNMA, FNMA or FHLMC certificates through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, a Portfolio may also invest in mortgage pass-through
securities issued by the U.S. Government or its agencies and instrumentalities,
commonly referred to as mortgage-backed security strips or MBS strips. MBS
strips are usually structured with two classes that receive different
proportions of the interest and

21
<PAGE> 29

principal distributions on a pool of mortgage assets. A common type of stripped
mortgage security will have one class receiving some of the interest and most of
the principal from the mortgage assets, while the other class will receive most
of the interest and the remainder of the principal. In the most extreme case,
one class will receive all of the interest (the interest-only or "IO" class),
while the other class will receive all of the principal (the principal-only or
"PO" class). The yields to maturity on IOs and POs are sensitive to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and principal payments may have a material effect on yield to maturity.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Portfolio may not fully recoup its initial
investment in IOs. Conversely, if the underlying mortgage assets experience less
than anticipated prepayments of principal, the yield on POs could be materially
adversely affected.

ZERO COUPON SECURITIES. Zero coupon U.S. Government securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon U.S. Government securities do not require the
periodic payment of interest. These investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of cash. These investments
may experience greater volatility in market value than U.S. Government
securities that make regular payments of interest. A Portfolio accrues income on
these investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations, in which case the Portfolio will forego the purchase
of additional income producing assets with these funds. Zero coupon U.S.
Government securities include STRIPS and CUBES, which are issued by the U.S.
Treasury as component parts of U.S. Treasury bonds and represent scheduled
interest and principal payments on the bonds.

CORPORATE AND OTHER DEBT OBLIGATIONS

The Large Capitalization Value Portfolio, Small Capitalization Value
Portfolio, International Equity Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in corporate and other debt obligations. Except
where otherwise indicated, each Portfolio will invest in securities rated A or
better or determined by the Adviser to be of comparable quality. These debt
securities may have adjustable or fixed rates of interest and in certain
instances may be secured by assets of the issuer. Adjustable rate corporate debt
securities may have features similar to those of adjustable rate mortgage backed
securities, but corporate debt securities, unlike mortgage backed securities,
are not subject to prepayment risk other than through contractual call
provisions which generally impose a penalty for prepayment. Fixed-rate debt
securities may also be subject to call provisions.

The market value of fixed-income obligations of the Portfolios will be
affected by general changes in interest rates which will result in increases or
decreases in the value of the obligations held by the Portfolios. The market
value of the obligations held by a Portfolio can be expected to vary inversely
to changes in prevailing interest rates. Investors also should recognize that,
in periods of declining interest rates, a Portfolio's yield will tend to be
somewhat higher than prevailing

22
<PAGE> 30

market rates and, in periods of rising interest rates, a Portfolio's yield will
tend to be somewhat lower. Also, when interest rates are falling, the inflow of
net new money to a Portfolio from the continuous sale of its shares will tend to
be invested in instruments producing lower yields than the balance of its
portfolio, thereby reducing the Portfolio's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Portfolio may invest may not yield as high a level of current income
as might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.

Ratings made available by S&P and Moody's are relative and subjective and
are not absolute standards of quality. Although these ratings are initial
criteria for selection of portfolio investments, each Adviser will also make its
own evaluation of these securities on behalf of the Portfolio. Among the factors
that will be considered are the long-term ability of the issuers to pay
principal and interest and general economic trends.

MEDIUM AND LOWER-RATED SECURITIES. The Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each invest in
medium (i.e., rated Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO) and lower-rated securities (i.e., rated lower than Baa by Moody's or
lower than BBB by S&P or the equivalent by another NRSRO). However, no Portfolio
will purchase a security rated lower than B by Moody's or S&P or the equivalent
by another NRSRO. Securities rated Baa by Moody's or BBB by S&P or the
equivalent by another NRSRO, although considered investment grade, possess
speculative characteristics, and changes in economic or other conditions are
more likely to impair the ability of issuers of these securities to make
interest and principal payments than is the case with respect to issuers of
higher-grade bonds.

Generally, medium or lower-rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds" (i.e., securities
rated lower than Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO) offer a higher current yield than is offered by higher-rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality bonds. In addition, medium and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
The risk of loss due to default by these issuers is significantly greater
because medium and lower-rated securities and unrated securities of comparable
quality generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Advisers, under the supervision of the
Manager and the Trustees, in evaluating the creditworthiness of an issue whether
rated or unrated, take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters.

In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for each Portfolio to obtain accurate market
quotations for

23
<PAGE> 31

purposes of valuing its portfolio and calculating its net asset value. Moreover,
the lack of a liquid trading market may restrict the availability of securities
for a Portfolio to purchase and may also have the effect of limiting the ability
of a Portfolio to sell securities at their fair value either to meet redemption
requests or to respond to changes in the economy or the financial markets.

Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Portfolio may decline
proportionately more than a portfolio consisting of higher-rated securities. If
a Portfolio 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 Portfolio and increasing the exposure of the Portfolio to
the risks of lower-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.

Subsequent to its purchase by a Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event will require sale of these securities by the
Portfolio, but the Adviser will consider this event in its determination of
whether the Portfolio should continue to hold the securities.

During the fiscal year ended December 31, 1995, the monthly dollar-weighted
average ratings of the debt obligations held by International Bond Portfolio,
the Total Return Bond Portfolio and the Intermediate-Term Bond Portfolio,
expressed as a percentage of the Fund's total investments, were as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
INVESTMENTS
-------------------------------------
INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM
RATINGS BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
- ----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
AAA/Aaa 62.3% 75% 69%
AA/Aa 3.6 1 2
A/A 2.5 4 3
BBB/Baa -- 14 18
BB/Ba -- 6 8
B/B -- -- --
CCC/Caa -- -- --
CC/Ca -- -- --
C/C -- -- --
Unrated 31.5 -- --
</TABLE>

NON-PUBLICLY TRADED SECURITIES. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in non-publicly traded securities, which may be
less liquid than publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolios. In addition,
companies whose securities are not publicly traded are not subject to the
disclosure and other investor protection requirements that may be applicable if
their securities were publicly traded.

24
<PAGE> 32

MORTGAGE BACKED SECURITIES

The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each invest in
mortgage backed securities. Mortgage backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. There are currently three
basic types of mortgage backed securities: (i) those issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities, such as GNMA, FNMA
and FHLMC, described under "U.S. Government Securities" above; (ii) those issued
by private issuers that represent an interest in or are collateralized by
mortgage backed securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (iii) those issued by private issuers
that represent an interest in or are collateralized by whole mortgage loans or
mortgage backed securities without a government guarantee but usually having
some form of private credit enhancement. In addition, the International Bond
Portfolio may invest in mortgage related securities issued or guaranteed by
foreign, national, state or provincial governmental instrumentalities, including
quasi-governmental agencies.

ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
(ARMs), are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.

ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for such
an instrument exceeds the sum of the interest accrued at the applicable mortgage
interest rate and the principal payment required at such point to amortize the
outstanding principal balance over the remaining term of the loan, the excess is
utilized to reduce the then outstanding principal balance of the ARM.

PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed-rate or adjustable rate
mortgage loans. Since private mortgage pass-through securities typically are not
guaranteed by an entity having the credit status of GNMA, FNMA and FHLMC, such
securities generally are structured with one or more types of credit
enhancement. Types of credit enhancements are described under "Types of Credit
Enhancement" below.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically,

25
<PAGE> 33

CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed of
Mortgage Assets. Payments of principal of and interest on the Mortgage Assets,
and any reinvestment income thereon, provide the funds to pay debt service on
the CMOs or make scheduled distributions on the multiclass pass-through
securities. 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). All future
references to CMOs shall also be deemed to include REMICs.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, 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 Mortgage 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 Mortgage
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 relative to
prevailing market yields on mortgage-backed securities.

A Portfolio also may invest in, among other things, parallel pay 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 rules and interpretations of the Securities and Exchange
Commission (SEC), a Portfolio's investments in certain qualifying CMOs and
REMICs are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Additional Investment
Information-Collateralized Mortgage Obligations" in the Statement of Additional
Information.

STRIPPED MORTGAGE BACKED SECURITIES. Stripped mortgage backed securities or
MBS strips are derivative multiclass mortgage securities. In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, a
Portfolio may purchase MBS strips issued by private originators of, or investors
in, mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. See
"Mortgage Related Securities Issued or Guaranteed by U.S. Government Agencies
and Instrumentalities" above.

26
<PAGE> 34

ASSET-BACKED SECURITIES

The Large Capitalization Value Portfolio, Small Capitalization Value
Portfolio, Mortgage Backed Securities Portfolio, Intermediate-Term Bond
Portfolio, Total Return Bond Portfolio and International Bond Portfolio may each
invest in asset-backed securities. Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables and home equity loans, have been securitized in pass-through
structures similar to the mortgage pass-through structures or in a pay-through
structure similar to the CMO structure. A Portfolio may invest in these and
other types of asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by mortgage
backed securities. Primarily, these securities do not have the benefit of 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.
In general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments.

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 seek to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from default seeks to ensure 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
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquencies or losses in excess of those anticipated could
adversely affect the return on an investment in a security. A Portfolio will not
pay any additional fees for credit support, although the existence of credit
support may increase the price of a security.

RISK FACTORS RELATING TO INVESTING IN MORTGAGE BACKED AND ASSET-BACKED
SECURITIES

The yield characteristics of mortgage backed and asset-backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if a
Portfolio 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 a Portfolio purchases these securities at a

27
<PAGE> 35

discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. A Portfolio may invest a
portion of its assets in derivative mortgage backed securities such as MBS
Strips which are highly sensitive to changes in prepayment and interest rates.
Each Adviser will seek to manage these risks (and potential benefits) by
diversifying its investments in such securities and, in certain circumstances,
through hedging techniques.

In addition, mortgage backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage backed securities. See "Additional Investment Information" in the
Statement of Additional Information. See "Asset-Backed Securities."

Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-backed
securities, although less likely to experience the same prepayment rates as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage backed securities and asset-backed securities may decrease
in value as a result of increases in interest rates and may benefit less than
other fixed-income securities from declining interest rates because of the risk
of prepayment.

ADJUSTABLE RATE SECURITIES

The Large Capitalization Value Portfolio, Mortgage Backed Securities
Portfolio, Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and
International Bond Portfolio may each invest in adjustable rate securities.
Adjustable rate securities are debt securities having interest rates which are
adjusted or reset at periodic intervals ranging from one month to three years.
The interest rate of an adjustable rate security typically responds to changes
in general market levels of interest. The interest paid on any particular
adjustable rate security is a function of the index upon which the interest rate
of that security is based.

The adjustable rate feature of the securities in which a Portfolio may
invest will tend to reduce sharp changes in a Portfolio's net asset value in
response to normal interest rate fluctuations. As the coupon rates of a
Portfolio's adjustable rate securities are reset periodically, yields of these
portfolio securities will reflect changes in market rates and should cause the
net asset value of a Portfolio's shares to fluctuate less dramatically than that
of a fund invested in long-term fixed-rate securities. However, while the
adjustable rate feature of such securities will tend to limit sharp swings in a
Portfolio's net asset value in response to movements in general market interest
rates, it is anticipated that during periods of fluctuations in interest rates,
the net asset value of a Portfolio will fluctuate.

CUSTODIAL RECEIPTS

Each Portfolio may invest in receipts evidencing the component parts
(corpus or coupons) of U.S. Government obligations that have not actually been
stripped. Such receipts evidence owner-

28
<PAGE> 36

ship of component parts of U.S. Government obligations (corpus or coupons)
purchased by a third party (typically an investment banking firm) and held on
behalf of the third party in physical or book entry form by a major commercial
bank or trust company pursuant to a custody agreement with the third party.
Custodial receipts held by a third party are not issued or guaranteed by the
United States Government and are not considered U.S. Government securities. Each
Portfolio other than the U.S. Government Money Market Portfolio may also invest
in such custodial receipts. See "Other Investments" in the Statement of
Additional Information.

CONVERTIBLE SECURITIES

Each Portfolio, other than the U.S. Government Money Market Portfolio, may
invest in convertible securities. A convertible security is a fixed-income
security (a bond or preferred stock) which may be converted at a stated price
within a specified period of time into a certain quantity of the common stock of
the same or a different issuer. 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 attendant 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
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.

HEDGING AND RETURN ENHANCEMENT STRATEGIES

The International Equity Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each engage in various portfolio strategies to reduce certain
risks of its investments and to attempt to enhance return. These strategies
include the use of forward exchange contracts, options and futures contracts and
options thereon. The Portfolio's ability to use these strategies may be limited
by market conditions, regulatory limits and tax considerations and there can be
no assurance that any of these strategies will succeed. See "Investment
Objective and Policies--Additional Investment Policies" in the Statement of
Additional Information. New financial products and risk management techniques
continue to be developed and each Portfolio may use these new investments and
techniques to the extent consistent with its investment objectives and policies.

OPTIONS TRANSACTIONS. A Portfolio may purchase and write (i.e., sell) put
and call options on securities and financial indices that are traded on national
securities exchanges or in the over-the-

29
<PAGE> 37

counter market to attempt to enhance return or to hedge its portfolio. These
options will be on debt securities, aggregates of debt securities, financial
indices (e.g., S&P 500) and U.S. Government securities. The International Bond
Portfolio and International Equity Portfolio may also purchase and write put and
call options on foreign currencies and foreign currency futures. A portfolio may
write covered put and call options to attempt to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of a security that it owns against a decline in market value and
purchase call options in an effort to protect against an increase in price of
securities or currencies it intends to purchase. A Portfolio may also purchase
put and call options to offset previously written put and call options of the
same series. See "Investment Objectives and Policies--Options on Securities" in
the Statement of Additional Information.

A call option gives the purchaser, in exchange for a premium paid, the
right for a specified period of time to purchase the securities subject to the
option at a specified price (the "exercise price" or "strike price"). The writer
of a call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When a Portfolio writes a call option, the
Portfolio gives up the potential for gain on the underlying securities 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 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
Portfolio might, therefore, be obligated to purchase the underlying securities
for more than their current market price.

A Portfolio will write only "covered" options. An option is covered if, so
long as the Portfolio is obligated under the option, it owns an offsetting
position in the underlying security or maintains cash, U.S. Government
securities or other liquid high-grade debt obligations with a value sufficient
at all times to cover its obligations. See "Investment Objective and
Policies--Additional Investment Policies" in the Statement of Additional
Information. There is no limitation on the amount of call options a Portfolio
may write. A Portfolio may only write covered put options to the extent that
cover for such options does not exceed 25% of the Portfolio's net assets. A
Portfolio will not purchase an option if, as a result of such purchase, more
than 20% of its total assets would be invested in premiums for options and
options on futures.

OVER-THE-COUNTER OPTIONS. A Portfolio may also purchase and write (i.e.,
sell) put and call options on equity and debt securities and on stock indexes in
the over-the-counter market (OTC options). Unlike exchange-traded options, OTC
options are contracts between the Portfolio and its counterparty without the
interposition of any clearing organization. Thus, the value of an OTC option is
particularly dependent on the financial viability of the OTC counterparty. The
Portfolio's ability to purchase and write OTC options may be limited by market
conditions, regulatory limits and tax considerations. There are certain risks
associated with investments in OTC options. See "Invest-

30
<PAGE> 38

ment Objectives and Policies--Additional Risks--Options Transactions and Related
Risks" in the Statement of Additional Information.

FORWARD CURRENCY EXCHANGE CONTRACTS. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each enter into forward foreign currency exchange contracts
to protect the value of its portfolio against future changes in the level of
currency exchange rates. A Portfolio may enter into such contracts on a spot,
i.e., cash, basis at the rate then prevailing in the currency exchange market or
on a forward basis, by entering into a forward contract to 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.

A Portfolio's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Portfolio generally arising in connection with
the purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Portfolio expenses. Position hedging is (1) the sale of
a foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a currency bearing a substantial correlation to
the value of that currency (cross hedge) or (2) the purchase of a foreign
currency when the Adviser believes that the U.S. Dollar may decline against that
foreign currency. Although there are no limits on the number of forward
contracts which a Portfolio may enter into, a Portfolio may not position hedge
with respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any purchase or sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
currently convertible into, such currency or a currency bearing a substantial
correlation to the value of such currency. The Adviser will use foreign currency
hedging techniques, including "cross-currency hedges" to attempt to protect
against declines in the U.S. dollar value of income available for distribution
to shareholders and declines in the net asset value of a Portfolio's shares
resulting from adverse changes in currency exchange rates. For example, the
return available from securities denominated in a particular foreign currency
would diminish in the event the value of the U.S. dollar increased against such
currency. Such a decline could be partially or completely offset by an increase
in value of a position hedge involving a forward exchange contract to (A) sell
the currency in which the position being hedged is denominated, or a currency
bearing a substantial correlation to the value of such currency, or (B) purchase
either the U.S. Dollar or a foreign currency expected to perform better than the
currency being sold. Position hedges may, therefore, provide protection of net
asset value in the event of a general rise in the U.S. dollar against foreign
currencies. However, a cross-currency hedge cannot protect against exchange
rates risks perfectly, and if the Adviser is incorrect in its judgment of future
exchange rate relationships, the Portfolio could be in a less advantageous
position than if such a hedge had not been established.

If a Portfolio enters into a position hedging transaction, the transaction
will be "covered" by the position being hedged or the Trust's custodian or
subcustodian will place cash, U.S. Government securities or other high-grade
debt obligations in a segregated account of the Portfolio in an amount equal to
the value of the Portfolio's total assets committed to the consummation of the
given forward

31
<PAGE> 39

contract (less the value of the "covering" positions, if any). If the value of
the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will,
at all times, equal the amount of the Portfolio's net commitment with respect to
the forward contract.

INDEXED COMMERCIAL PAPER. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in commercial paper which is indexed to certain
specific foreign currency exchange rates. The terms of such commercial paper
provide that its principal amount is adjusted upwards or downwards (but not
below zero) at maturity to reflect changes in the exchange rate between two
currencies while the obligation is outstanding. A Portfolio will purchase such
commercial paper with the currency in which it is denominated and, at maturity,
will receive interest and principal payments thereon in that currency, but the
amount of principal payable by the issuer at maturity will change in proportion
to the change (if any) in the exchange rate between the two specified currencies
between the date the instrument is issued and the date the instrument matures. A
Portfolio will establish a segregated account with respect to its investments in
this type of commercial paper and maintain in such account cash or liquid
high-grade debt obligations having a value at least equal to the aggregate
principal amount of outstanding commercial paper of this type. While such
commercial paper entails the risk of loss of principal, the potential for
realizing gains as a result of changes in foreign currency exchange rates
enables the Portfolio to hedge (or cross-hedge) against a decline in the U.S.
dollar value of investments denominated in foreign currencies while providing an
attractive money market rate of return. See "Investment Objectives and Policies
of the Portfolios--Forward Currency Exchange Contracts" in the Statement of
Additional Information.

FUTURES CONTRACTS AND OPTIONS THEREON. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Mortgage Backed Securities Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each purchase and
sell financial futures contracts and options thereon which are traded on a
commodities exchange or board of trade for hedging purposes, to reduce certain
risks of its investments, and risk management purposes and to attempt to enhance
return in accordance with regulations of the Commodity Futures Trading
Commission. These futures contracts and related options will be on debt
securities, aggregates of debt securities, currencies, financial indices and
U.S. Government securities and include futures contracts and options thereon
which are linked to the London Interbank Offered Rate (LIBOR).

A Portfolio'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 price of the securities
being hedged is imperfect and there is a risk that the value of the securities
being hedged may increase or decrease at a greater rate than a specified futures
contract resulting in losses to a Portfolio.

A Portfolio's ability to enter into futures contracts and options thereon
may also 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. See "Investment Objective and Policies-- Additional Investment
Policies--Futures Contracts--Options on Futures Contracts" and "Taxes" in the
Statement of Additional Information.

32
<PAGE> 40

Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator", subject to compliance with certain conditions. The
exemption is conditioned on a Portfolio purchasing and selling futures contracts
and options therein for bona fide hedging transactions, except that the
Portfolio may purchase and sell futures contracts and options thereon for any
other purposes to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the liquidation value of the Portfolio's total
assets.

SPECIAL RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES. Participation
in the options or futures markets involves investment risks and transaction
costs to which a Portfolio would not be subject absent the use of these
strategies. If an Adviser's prediction of movements in the direction of the
securities and interest rate markets is inaccurate, the adverse consequences to
a Portfolio may leave the Portfolio in a worse position than if such strategies
were not used. Risks inherent in the use of options and futures contracts and
options on futures contracts include (1) dependence on the Adviser's ability to
predict correctly movements in the direction of interest rates and securities
prices; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities
being hedged; (3) the fact that 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 a Portfolio to
purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for a Portfolio to sell a
portfolio security at a disadvantageous time, due to the need for a Portfolio to
maintain "cover" or to segregate securities in connection with hedging
transactions. See "Taxes" in the Statement of Additional Information.

FOREIGN SECURITIES

The International Equity Portfolio, Intermediate-Term Bond Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each invest in
foreign equity and debt securities, including securities of foreign
corporations, obligations of foreign branches of U.S. banks and securities
issued by foreign governments.

Investing in securities issued by foreign companies involves considerations
and potential risks not typically associated with investing in obligations
issued by domestic corporations. Less information may be available about foreign
companies than about domestic companies and foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic companies.

A Portfolio's investments in foreign government securities may include debt
securities issued or guaranteed, as to payment of principal and interest, by
governments, quasi-governmental entities, governmental agencies, supranational
entities and other governmental entities (collectively, the Government Entities)
of countries considered stable by the Adviser. A "supranational entity" is an
entity constituted by the national governments of several countries to promote
economic development. Examples of such supranational entities include, among
others, the World Bank, the European

33
<PAGE> 41

Investment Bank and the Asian Development Bank. Debt securities of
"quasi-governmental entities" are issued by entities owned by a national, state,
or equivalent government or are obligations of a political unit that are not
backed by the national government's "full faith and credit" and general taxing
powers. Examples of quasi-government issuers include, among others, the Province
of Ontario and the City of Stockholm. "Foreign Government Securities" shall also
include debt securities of Government Entities denominated in European Currency
Units. A European Currency Unit represents specified amounts of the currencies
of certain of the twelve member states of the European Community. Foreign
Government Securities shall also include mortgage-backed securities issued by
Foreign Government Entities including quasi-governmental entities.

The values of foreign investments are affected by changes in currency rates
or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.

CURRENCY RISKS

Because the majority of the debt securities purchased by the International
Bond Portfolio are denominated in currencies other than the U.S. dollar, changes
in foreign currency exchange rates will affect the Portfolio's net asset value;
the value of interest earned; gains and losses realized on the sale of
securities; and net investment income and capital gain, if any, to be
distributed to shareholders by the Portfolio. If the value of a foreign currency
rises against the U.S. dollar, the value of the Portfolio assets denominated in
that currency will increase; correspondingly, if the value of a foreign currency
declines against the U.S. dollar, the value of Portfolio assets denominated in
that currency will decrease. Under the Internal Revenue Code, the Portfolio is
required to separately account for the foreign currency component of gains or
losses, which will usually be viewed under the Internal Revenue Code as items of
ordinary and distributable income or loss, thus affecting the Portfolio's
distributable income.

The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental interpretation, speculation and
other economic and political conditions. Although the Portfolio values its
assets daily in U.S. dollars, the Portfolio will not convert its holdings of
foreign currencies to U.S. dollars daily. When the Portfolio converts its
holdings to another currency, it may incur conversion costs. Foreign exchange
dealers may realize a profit on the difference between the price at which they
buy and sell currencies.

34
<PAGE> 42

REPURCHASE AGREEMENTS

Each Portfolio may enter into repurchase agreements, wherein the seller
agrees to repurchase a security from a Portfolio at a mutually agreed-upon time
and price. The period of maturity is usually quite short, possibly overnight or
a few days, although it may extend over a number of months. The resale price is
in excess of the purchase price, reflecting an agreed-upon rate of return
effective for the period of time a Portfolio's money is invested in the
repurchase agreement. A Portfolio's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of instruments
declines, a Portfolio will require additional collateral. In the event of a
default, insolvency or bankruptcy by a seller, the Portfolio will promptly seek
to liquidate the collateral. In such circumstances, the Portfolio could
experience a delay or be prevented from disposing of 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 Portfolio will
suffer a loss. See "Investment Objectives and Policies--Repurchase Agreements"
in the Statement of Additional Information.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS

The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio
and Total Return Bond Portfolio may each enter into reverse repurchase
agreements and dollar rolls. The proceeds from such transactions will be used
for the clearance of transactions or to take advantage of investment
opportunities.

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

Dollar rolls involve sales by a Portfolio of securities for delivery in the
current month and a simultaneous contract to repurchase substantially similar
(same type and coupon) securities on a specified future date from the same
party. During the roll period, a Portfolio forgoes principal and interest paid
on the securities. A Portfolio is compensated by the difference between the
current sales price and the forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar roll
for which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction.

A Portfolio will establish a segregated account with its custodian in which
it will maintain cash, U.S. Government securities or other liquid high-grade
debt obligations equal in value to its obligations in respect of reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar
rolls involve the risk that the market value of the securities retained by a
Portfolio may decline below the price of the securities a Portfolio has sold but
is obligated to repurchase under the agreement. In the event the buyer of
securities under a reverse repurchase agreement or dollar roll files for
bankruptcy or becomes insolvent, a Portfolio'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 a Portfolio's obligation to repurchase
the securities.

35
<PAGE> 43

Reverse repurchase agreements and dollar rolls, including covered dollar
rolls, are speculative techniques involving leverage and are considered
borrowings by a Portfolio for purposes of the percentage limitations applicable
to borrowings. See "Borrowing" below.

SECURITIES LENDING

The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each lend
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 a Portfolio in an amount equal to at least 100% of the market value of the
securities loaned. During the time portfolio securities are on loan, the
borrower will pay a Portfolio an amount equivalent to any dividend or interest
paid on such securities and a Portfolio 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, a
Portfolio cannot lend more than 33 1/3% of the value of its total assets. See
"Investment Objectives and Policies--Lending of Securities" in the Statement of
Additional Information.

INTEREST RATE SWAP TRANSACTIONS

The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
International Bond Portfolio and Total Return Bond Portfolio may each enter into
interest rate swaps. Interest rate swaps involve the exchange by a Portfolio
with another party of their respective commitments to pay or receive interest,
for example, an exchange of floating rate payments for fixed-rate payments. A
Portfolio expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities a Portfolio anticipates
purchasing at a later date. A Portfolio intends to use these transactions as a
hedge and not as a speculative investment. See "Investment Objectives and
Policies--Interest Rate Swaps" in the Statement of Additional Information. The
risk of loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Portfolio is contractually obligated to make and will
not exceed 5% of a Portfolio's net assets. The use of interest rate swaps may
involve investment techniques and risks different from those associated with
ordinary portfolio transactions. If the Adviser is incorrect in its forecast of
market values, interest rates and other applicable factors, the investment
performance of the Portfolio would diminish compared to what it would have been
if this investment technique was never used.

ILLIQUID SECURITIES

36
<PAGE> 44

securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933 and privately placed commercial paper that have a readily available market
are not considered illiquid for purposes of this limitation. The Portfolios'
investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing Rule 144A securities. The Portfolios intend to
comply with any applicable state blue sky laws restricting their investments in
illiquid securities. See "Investment Restrictions" in the Statement of
Additional Information. The Manager and the Advisers will monitor the liquidity
of such restricted securities under the supervision of the Trustees. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable 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.
However, with respect to U.S. Government securities, a Portfolio may treat the
securities it uses as "cover" for written OTC options on U.S. Government
securities as liquid provided it follows a specified procedure. A Portfolio may
sell such OTC options only to qualified dealers who agree that a Portfolio may
repurchase any options it writes for a maximum price to be calculated by a
predetermined formula. In such cases, OTC options would be considered liquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option. See "Investment Objectives and
Policies--Illiquid Securities" in the Statement of Additional Information.

When a Portfolio enters into interest rate swaps on other than a net basis,
the entire amount of the Portfolio's obligations, if any, with respect to such
interest rate swaps will be treated as illiquid. To the extent that a Portfolio
enters into interest rate swaps on a net basis, the net amount of the excess, if
any, of the Portfolio's obligations over its entitlements with respect to each
interest rate swap will be treated as illiquid. The Portfolios will also treat
non-U.S. Government POs and IOs as illiquid securities so long as the staff of
the SEC maintains its position that such securities are illiquid.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES

Each Portfolio may purchase or sell securities on a when-issued or
delayed-delivery basis. When-issued or delayed-delivery transactions arise when
securities are purchased or sold by a Portfolio with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to a Portfolio at the time of entering into the transaction.
While a Portfolio will only purchase securities on a when-issued or
delayed-delivery basis with the intention of acquiring the securities, a
Portfolio may sell the securities before the settlement date, if it is deemed
advisable. At the time a Portfolio makes the commitment to purchase securities
on a when-issued or delayed-delivery basis, the Portfolio will record the
transaction and thereafter reflect the value, each day, of such security in
determining the net asset value of the Portfolio. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Trust's
Custodian will maintain, in a segregated account of a Portfolio, cash, U.S.
Government securities or other liquid high-grade debt obligations having a value
equal to or greater than a Portfolio's purchase commitments.

One form of when-issued or delayed-delivery security that the Mortgage
Backed Securities Portfolio may purchase is a "to be announced" mortgage-backed
security. A "to be announced"

37
<PAGE> 45

mortgage-backed security transaction arises when a mortgage-backed security,
such as a GNMA pass-through security, is purchased or sold with the specific
pools that will constitute that GNMA pass-through security to be announced on a
future settlement date.

SHORT SALES

The Mortgage Backed Securities Portfolio may sell a security it does not
own in anticipation of a decline in the market value of that security (i.e.,
make short sales). Generally, to complete the transaction, the Portfolio will
borrow the security to make delivery to the buyer. The Portfolio is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Portfolio. Until the security is
replaced, the Portfolio is required to pay to the lender any interest which
accrues during the period of the loan. To borrow the security, the Portfolio may
be required to pay a premium which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until the Portfolio replaces the borrowed security, it will (a) maintain in a
segregated account with its custodian cash or U.S. Government securities at such
a level that the amount deposited in the account plus the amount deposited with
the broker as collateral will equal the current market value of the security
sold short and will not be less than the market value of the security at the
time it was sold short or (b) otherwise cover its short position.

The Portfolio will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. The Portfolio will realize a
gain if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
will be increased, by the amount of any premium or interest paid in connection
with the short sale. No more than 5% of the Portfolio's net assets will be, when
added together: (i) deposited as collateral for the obligation to replace
securities borrowed to effect short sales and (ii) allocated to segregated
accounts in connection with short sales.

The Mortgage Backed Securities Portfolio may also make short sales
against-the-box for the purpose of deferring realization of gain or loss for
federal income tax purposes. A short sale against-the-box is a short sale in
which the Portfolio owns an equal amount of the securities sold short or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short.

BORROWING

The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each borrow
from banks or through dollar rolls or reverse repurchase agreements an amount
equal to no more than 33 1/3% of the value of its total assets (computed at the
time the loan is made) for temporary, extraordinary or emergency purposes, for
the clearance of transactions or to take advantage of investment opportunities.
A Portfolio may pledge up to 33 1/3% of its total assets to secure these
borrowings.

38
<PAGE> 46

The other Portfolios may each borrow from banks or through dollar rolls or
reverse repurchase agreements an amount equal to no more than 20% of the value
of its total assets (computed at the time the loan is made) for temporary,
extraordinary or emergency purposes, or for the clearance of transactions. Each
of these Portfolios may pledge up to 20% of its total assets to secure these
borrowings.

If a Portfolio borrows to invest in securities, or if a Portfolio purchases
securities at a time when borrowings exceed 5% of its total assets, any
investment gains made on the securities in excess of interest paid on the
borrowing will cause the net asset value of the shares to rise faster than would
otherwise be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to a Portfolio, the net asset value of the
Portfolio's shares will decrease faster than would otherwise be the case. This
is the speculative characteristic known as "leverage." See "Reverse Repurchase
Agreements and Dollar Rolls" above.

If any Portfolio's asset coverage for borrowings falls below 300%, such
Portfolio will take prompt action to reduce its borrowings.

PORTFOLIO TURNOVER

The Portfolio turnover rate for each of the Portfolios may exceed 100%,
although the rate is not expected to exceed 200%. Due to market volatility, the
International Bond Portfolio's portfolio turnover was 456% and 361%,
respectively, for the years ended December 31, 1995 and 1994 and the Mortgage
Backed Securities Portfolio's portfolio turnover was 380% for the year ended
December 31, 1994. High portfolio turnover may involve correspondingly greater
brokerage commissions and other transaction costs, which will be borne directly
by each Portfolio. See "Portfolio Transactions and Brokerage" in the Statement
of Additional Information. In addition, high portfolio turnover may result in
increased short-term capital gains, which when distributed to shareholders, are
treated as ordinary income. See "Taxes, Dividends, and Distributions."

INVESTMENT RESTRICTIONS

The Portfolios are subject to certain investment restrictions which
constitute fundamental policies. Fundamental policies may not be changed with
respect to any Portfolio without the approval of a majority of the outstanding
voting securities of that Portfolio, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.

MANAGEMENT OF THE TRUST

The Trustees, in addition to reviewing the actions of the Trust's Manager
and Advisers, as set forth below, decide upon matters of general policy. The
Trust's Manager conducts and supervises the daily business operations of the
Trust. For the year ended December 31, 1995 the total

39
<PAGE> 47

annualized expenses, net of management fee waiver and including expense
subsidies paid by the Manager, as a percentage of average daily net assets for
each Portfolio's shares were as follows:

<TABLE>
<CAPTION>
TOTAL ANNUALIZED
EXPENSES AS A
PERCENTAGE OF
AVERAGE DAILY
PORTFOLIO NET ASSETS
--------------------------------------------------------- -------------------
<S> <C>
Large Capitalization Growth Portfolio.................... 0.78%
Large Capitalization Value Portfolio..................... 0.76%
Small Capitalization Growth Portfolio.................... 0.85%
Small Capitalization Value Portfolio..................... 1.00%
International Equity Portfolio........................... 1.02%
International Bond Portfolio............................. 1.00%
Total Return Bond Portfolio.............................. 0.85%
Intermediate-Term Bond Portfolio......................... 0.79%
Mortgage Backed Securities Portfolio..................... 0.85%
U.S. Government Money Market Portfolio................... 0.75%
</TABLE>

MANAGER

Prudential Mutual Fund Management, Inc. (PMF or the Manager), One Seaport
Plaza, New York, New York 10292, is the Manager of the Trust. PMF was
incorporated in May 1987 under the laws of the State of Delaware. It is an
indirect, wholly-owned subsidiary of The Prudential Insurance Company of
America, a major diversified insurance and financial services company.

For the year ended December 31, 1995, PMF waived certain of its management
fees and subsidized certain operating expenses of some of the Portfolios to the
extent necessary to cap the Total Fund operating expenses of each Portfolio as
described in "Trust Expenses" in the Prospectus and "Manager" in the Statement
of Additional Information. See also "Fee Waivers and Subsidy" below. For the
year ended December 31, 1995, PMF received the following management fees from
each of the Portfolios, net of fee waivers and expense subsidies.

<TABLE>
<CAPTION>
ANNUALIZED
PERCENTAGE
OF
AVERAGE
NET
PORTFOLIO ASSETS AMOUNT
---------------------------------------------- ---- -----------
<S> <C> <C>
Large Capitalization Growth Portfolio......... 0.60% $ 977,893
Large Capitalization Value Portfolio.......... 0.60% 978,742
Small Capitalization Growth Portfolio......... 0.60% 645,895
Small Capitalization Value Portfolio.......... 0.60% 528,572
International Equity Portfolio................ 0.70% 1,283,896
International Bond Portfolio.................. 0.35% 102,710
Total Return Bond Portfolio................... 0.26% 97,987
Intermediate-Term Bond Portfolio.............. 0.45% 308,827
Mortgage Backed Securities Portfolio.......... 0.38% 245,215
U.S. Government Money Market Portfolio........ 0.20% 41,031
</TABLE>

40
<PAGE> 48

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

Pursuant to a Management Agreement (Management Agreement) with the Trust,
PMF manages the investment operations of the Trust, administers the Trust's
affairs and is responsible for the selection, subject to review and approval of
the Trustees, of Advisers for each of the Portfolios and the review of their
continued performance. See "Manager" in the Statement of Additional Information.

Pursuant to separate Sub-Advisory Agreements (the Advisory Agreements)
between PMF and the Advisers, the Advisers furnish investment advisory services
in connection with the management of the Trust. Each Adviser is paid a fee for
its services by the Manager out of the fee it collects from the Portfolio based
upon the portion of assets the Adviser manages. PMF continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the Advisers' performance of such services.

Subject to the supervision and direction of the Trustees, the Manager
provides to the Trust investment management evaluation services principally by
performing initial review on prospective Advisers for each Portfolio and
thereafter monitoring Adviser performance. In evaluating prospective Advisers,
the Manager considers, among other factors, each Adviser's level of expertise,
relative performance, consistency of performance, and investment discipline or
philosophy. The Manager has responsibility for communicating performance
expectations and evaluations to the Advisers and ultimately recommending to the
Trustees whether the Advisers' contracts should be renewed, modified or
terminated. The Manager provides reports to the Trustees regarding the results
of its evaluation and monitoring functions. The Manager is also responsible for
conducting all operations of the Trust except those operations contracted to the
Advisers, custodian and transfer agent. Each Portfolio pays the Manager a fee
for its services that is computed daily and paid monthly at the annual rate
specified below based on the value of the average net assets of the Portfolio.
The Manager pays each Adviser a fee that is computed daily and paid monthly at
the annual rate specified below based on the value of the Portfolio's average
daily net assets managed by that Adviser:

<TABLE>
<CAPTION>
PORTION PAID
BY THE MANAGER
PORTFOLIO MANAGER'S FEE TO THE ADVISER
---------------------------------------------- ------------- --------------
<S> <C> <C>
Large Capitalization Growth Portfolio......... 0.60% 0.30%
Large Capitalization Value Portfolio.......... 0.60% 0.30%
Small Capitalization Growth Portfolio......... 0.60% 0.30%
Small Capitalization Value Portfolio.......... 0.60% 0.30%
International Equity Portfolio................ 0.70% 0.40%
International Bond Portfolio.................. 0.50% 0.30%
Total Return Bond Portfolio................... 0.45% 0.25%
Intermediate-Term Bond Portfolio.............. 0.45% 0.25%
Mortgage Backed Securities Portfolio.......... 0.45% 0.25%
U.S. Government Money Market Portfolio........ 0.25% 0.125%
</TABLE>

41
<PAGE> 49

ADVISERS

The Advisers have agreed to the foregoing fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment adviser, and perform various administrative functions associated with
serving in that capacity in recognition of the reduced administrative
responsibilities they have undertaken with respect to the Portfolios. Subject to
the supervision and direction of the Manager and, ultimately, the Trustees, each
Adviser's responsibilities are limited to managing the securities held in the
Portfolio, or portion thereof, it manages in accordance with the Portfolio's
stated investment objective and policies, making investment decisions for such
Portfolio, or portion thereof, and placing orders to purchase and sell
securities on behalf of such Portfolio, or portion thereof. The Advisers furnish
investment advisory services in connection with the management of the Portfolios
and are paid their fees by PMF, not the Trust.

Each of the two Advisers of the domestic equity Portfolios--the Large
Capitalization Growth Portfolio, Large Capitalization Value Portfolio, Small
Capitalization Growth Portfolio and Small Capitalization Value
Portfolio--manages approximately 50% of the assets of the respective Portfolio.
In general, in order to maintain an approximately equal division of assets
between the two Advisers, all daily cash inflows (i.e., subscriptions and
reinvested distributions) and outflows (i.e., redemptions and expenses items)
will be divided between the two Advisers as the Manager deems it appropriate. In
addition, there will be a periodic rebalancing of each Portfolio's assets to
take account of market fluctuations in order to maintain the approximately equal
allocation. As a consequence, each Portfolio will allocate assets from the
better performing of the two Advisers to the other. By using two Advisers for
these Portfolios, and by periodically balancing a Portfolio for an approximately
equal allocation, each Portfolio seeks long-term benefits from a balance of
different investment disciplines, which is intended to achieve a certain
continuity in the Portfolio's performance. Reallocations may result in
additional transaction costs to the extent that sales of securities as part of
such reallocations result in higher portfolio turnover. In addition, if one
Adviser buys a security as the other Adviser sells it, the net position of the
Portfolio in the security may be approximately the same as it would have been
with a single Adviser and no such sale and purchase, but the Portfolio will have
incurred additional transaction costs and other expenses. The Manager will
consider these costs in determining the allocation and reallocation of assets.

The following sets forth certain information about each of the Advisers:

LARGE CAPITALIZATION GROWTH PORTFOLIO

Columbus Circle Investors (CCI), Metro Center, One Station Place, 8th
Floor, Stamford, Connecticut 06902 and Oak Associates, Ltd. (Oak), 3875 Embassy
Parkway, Suite 250, Akron, Ohio 44333, serve as the Advisers to the Large
Capitalization Growth Portfolio. CCI and Oak are paid a fee by PMF, not the
Trust, at an annual rate of .30 of 1% of the average daily net assets of the
portion of the Portfolio's assets managed by each of them.

CCI, a Delaware partnership and a subpartnership of PIMCO Advisors L.P., is
the successor firm to a leading institutional equity investment firm and, as of
December 31, 1995, had approximately $12.6 billion in assets under management
for corporate, nonprofit, government, union, and mutual fund clients.

42
<PAGE> 50

CCI generally uses a team approach although Clifford G. Fox is primarily
responsible for the day-to-day investment management of the portion of the
assets CCI manages for the Large Capitalization Growth Portfolio. Mr. Fox has
been a Vice President and Portfolio Manager of CCI since October, 1992. Prior to
joining CCI, he was Vice President of Equity Investments at General Reinsurance
Corporation. Mr. Fox is a Chartered Financial Analyst and a member of the New
York Society of Security Analysts.

Oak was founded in April 1985 and has specialized in the large cap market
since inception. It provides investment management services to both individual
and institutional clients and as of December 31, 1995, had more then $3 billion
in assets under management. Oak is a limited liability company organized under
the laws of the State of Ohio. James D. Oelschlager owns a controlling interest
(99%) of Oak.

With respect to portfolio management, Oak makes its securities selections
based upon interest rate and inflation expectations, the company's growth rate
and its price to earnings ratio, among other factors. James D. Oelschlager is
the portfolio manager of the portion of the Portfolio managed by Oak which he
manages with the assistance of Donna Barton, Margaret Ballinger and Douglas
MacKay as assistant portfolio managers. Mr. Oelschager has been President of Oak
since 1985. Ms. Barton and Ms. Ballinger have been employed as a trader and
client service manager, respectively, for Oak since 1985. Mr. MacKay has been a
research analyst for Oak since 1990. Oak also manages two series of The
Advisers' Inner Circle Fund, White Oak Growth Stock Fund and Pin Oak Aggressive
Stock Fund.

LARGE CAPITALIZATION VALUE PORTFOLIO

INVESCO Capital Management, Inc. (INVESCO), 1315 Peachtree Street, Suite
500, Atlanta, Georgia 30309 and Hotchkis and Wiley, 800 West Sixth Street, Fifth
Floor, Los Angeles, California 90017 serve as the Advisers to the Large
Capitalization Value Portfolio. INVESCO and Hotchkis and Wiley are paid a fee by
PMF, not the Trust, at an annual rate of .30 of 1% of the average daily net
assets of the portion of the Portfolio's assets managed by them.

INVESCO is a Delaware corporation and member of INVESCO PLC, a global firm
specializing in the management of institutional portfolios. As of December 31,
1995, INVESCO had approximately $39 billion, and INVESCO PLC had approximately
$80 billion, of assets under management for clients located throughout the U.S.,
Europe and Japan.

Neilson Brown, a Vice President of INVESCO, has been responsible for the
day-to-day management of the portion of the assets INVESCO manages for the
Portfolio and previously managed all of the Portfolio's assets since its
inception. Mr. Brown has served as a portfolio manager for INVESCO since 1989
and prior to 1989, served as a portfolio manager for Dreman Value Management and
Brown Brothers Harriman & Co. Mr. Brown is a Chartered Financial Analyst and a
member of the Atlanta Society of Financial Analysts.

Hotchkis and Wiley, a California limited partnership, was established in
1980 and, as of December 31, 1995, had approximately $9.0 billion in assets
under management for corporate, public, endowment and foundation, and mutual
fund clients. Hotchkis and Wiley manages the American AAdvantage Funds and the
Hotchkis and Wiley Funds.

43
<PAGE> 51

Roger DeBard is primarily responsible for the day-to-day management of the
portion of assets Hotchkis and Wiley manages for the Large Capitalization Value
Portfolio. Dr. DeBard is a Managing Director at Hotchkis and Wiley. He also
serves as an Executive Vice President of the Hotchkis and Wiley Funds. Dr.
DeBard was formerly with Crocker Investment Management, Scudder, Stevens & Clark
and the investment consulting firm of A.G. Becker & Co. Dr. DeBard is a member
of the Los Angeles Society of Financial Analysts and a frequent guest on
financial news programs. He has served as a director of the Los Angeles Bond
Club and as an expert witness for the President's Commission on Pension Policy.
Dr. DeBard is also a Chartered Financial Analyst.

SMALL CAPITALIZATION GROWTH PORTFOLIO

Nicholas-Applegate Capital Management (Nicholas-Applegate), 600 West
Broadway, 29th Floor, San Diego, California 92101 and Investment Advisers, Inc.
(IAI), 3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440 serve
as the Advisers to the Small Capitalization Growth Portfolio. Nicholas-Applegate
and IAI are paid a fee by PMF, not the Trust, at an annual rate of .30 of 1% of
the average daily net assets of the portion of the Portfolio's assets managed by
them.

Nicholas-Applegate was organized in 1984 as a California limited
partnership. Its general partner is Nicholas-Applegate Capital Management
Holdings, L.P., a California limited partnership controlled by Arthur E.
Nicholas. Mr. Nicholas founded Nicholas-Applegate in 1984 and has been a
principal of the firm since its founding. Mr. Nicholas and fourteen other
partners manage a staff of approximately 300 employees. As of December 31, 1995,
the firm managed a total of approximately $29 billion of assets for a wide
variety of clients, including employee benefit plans of corporations, public
retirement systems and unions, university endowments, foundations and other
institutional investors.

The portion of the Portfolio's assets for which Nicholas-Applegate is the
Advisor is managed by a team of professionals at Nicholas-Applegate, which is
overseen by Arthur E. Nicholas, Chief Investment Officer of the Firm.

IAI was established in 1947 and provides investment advice to corporate,
public, jointly-trusteed, endowment and foundation and mutual fund clients. As
of December 31, 1995, it managed approximately $15 billion in assets.

Noel P. Rahn, Chief Investment Officer of IAI, has general supervisory
responsibility for the investment activities of all mutual funds managed by IAI.
The day-to-day management of the Fund is the responsibility of Suzanne F. Zak.
Ms. Zak is a Senior Vice President and has served as a portfolio manager of IAI
since 1992. Prior to such time, Ms. Zak served as a Managing Director of J&W
Seligman.

SMALL CAPITALIZATION VALUE PORTFOLIO

Lazard Freres Asset Management (LFAM), 30 Rockefeller Plaza, New York, New
York 10020 and Wood, Struthers & Winthrop Management Corp. (WSW), 277 Park
Avenue, New York, New York 10172, serve as the Advisers to the Small
Capitalization Value Portfolio. LFAM and WSW are paid a fee by PMF, not the
Trust, at an annual rate of .30 of 1% of the average daily net assets of the
portion of the Portfolio's assets managed by them.

44
<PAGE> 52

Lazard Freres Asset Management (LFAM) is a division of Lazard Freres & Co.
LLC (Lazard Freres), a New York limited liability company. LFAM provides
investment management services to both individual and institutional clients and
as of December 31, 1995, had more than $30 billion in assets under management.
In addition to portfolio management, Lazard Freres provides a wide variety of
investment banking and related services. LFAM is also the Adviser of the
International Equity Portfolio of the Trust.

Herbert W. Gullquist and Eileen D. Alexanderson, CFA, are primarily
responsible for the day-to-day management of the portion of the assets LFAM
manages for the Small Capitalization Value Portfolio. Mr. Gullquist is a
managing director of Lazard Freres, is the chief investment officer of LFAM and
has been employed there since 1982. Ms. Alexanderson is a portfolio
manager/analyst. Ms. Alexanderson joined LFAM in 1982 and has 14 years of
investment experience. She is a Chartered Financial Analyst.

WSW was founded in 1871 and has specialized in the small-cap market since
1967. It provides investment management services to both individual and
institutional clients and, as of December 31, 1995, had more than $3.5 billion
in assets under management. WSW is a subsidiary of Donaldson, Lufkin & Jenrette
Securities Corporation (DLJSC), 277 Park Avenue, New York, New York 10172. DLJSC
is a wholly owned subsidiary of Donaldson Lufkin & Jenrette Inc (DLJ Inc), 36.1%
of which is owned by The Equitable Life Assurance Society of the United States
(LIFE), 787 Seventh Avenue, New York, New York 10019, a wholly owned subsidiary
of The Equitable Companies Incorporated (Equitable), 787 Seventh Avenue, New
York, New York 10019. Equitable owns directly an additional 44.1% of DLJ Inc.
Approximately 60.6% of the outstanding voting common stock as well as certain
convertible preferred stock of Equitable is beneficially owned by AXA, a French
insurance holding company. A group of five French mutual insurance companies,
Uni Europe Assurance Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha
Assurances Vie Mutuelle, AXA Assurances Vie Mutuelle, and AXA Assurances
I.A.R.D. Mutuelle (the "Mutuelles"), owned directly and indirectly through two
French holding companies, Finaxa and Midi Participations, shares representing
over 50% of the voting shares of AXA. The Mutuelles are owned by approximately
1.5 million policyholders.

James A. Engle and Roger W. Vogel are the co-managers of the portion of the
Portfolio managed by WSW. Mr. Engle is Chief Investment Officer of WSW since
1988. Mr. Vogel is Director of Equity Research of WSW since 1993. He was
previously Vice President and Portfolio Manager at Chemical Bank since 1978.
Messrs. Engle and Vogel also manage the Winthrop Aggressive Growth, Growth and
Growth & Income Funds.

INTERNATIONAL EQUITY PORTFOLIO

Lazard Freres Asset Management (LFAM), 30 Rockefeller Plaza, New York, New
York 10020, serves as the Adviser to the International Equity Portfolio. LFAM is
paid a fee by PMF, not the Trust, at an annual rate of .40 of 1% of the
Portfolio's average daily net assets.

Herbert W. Gullquist and John R. Reinsberg are primarily responsible for
the day-to-day management of the Portfolio. Mr. Gullquist is a managing director
of Lazard Freres, is the chief investment officer of LFAM and has been employed
with both since 1982. Mr. Reinsberg is a managing director of LFAM and has been
employed there since 1992. Prior thereto, he was Executive Vice President of
General Electric Investment Company.

45
<PAGE> 53

INTERNATIONAL BOND PORTFOLIO

Fiduciary International, Inc. (FII), 2 World Trade Center, 90th Floor, New
York, New York 10048-0772, serves as the Adviser to the International Bond
Portfolio. FII is paid a fee by PMF, not the Trust, at an annual rate of .30 of
1% of the Portfolio's average daily net assets. FII is a wholly-owned subsidiary
of Fiduciary Investment Corporation, which, in turn, is a wholly-owned
subsidiary of Fiduciary Trust Company International (FTCI). FTCI is a New York
State chartered bank specializing in investment and administration of assets for
pensions and other institutional accounts as well as individuals and families.
FII has access to all of FTCI's investment infrastructure. FTCI began investing
globally in the 1960's and serves its worldwide investment management and
custody clients from offices in New York, Los Angeles, Miami, Washington, D.C.,
London, Geneva and Hong Kong. FTCI has over 60 investment professionals. FTCI
has over 30 years of experience in international management with over $12.1
billion in the international and global bond discipline. As of December 31,
1995, total assets under management by FII, its parent organization FTCI and
FTCI affiliates, on behalf of all clients, amounted to approximately $36
billion.

The portfolio is managed by a team of two portfolio managers. Stuart
Hochberger is responsible for the day-to-day management of the Portfolio and has
been serving in such capacity since the inception of the Portfolio in May 1994.
Stuart Hochberger is the chief global fixed income strategist of FTCI and has
been with FTCI since 1981 and is currently an Executive Vice President and
Director of Fixed Income, which includes international fixed income. Anthony
Gould assists Mr. Hochberger in the management of the Portfolio, Mr. Gould is a
Vice President and Manager of global and international fixed income portfolios
and has been with FTCI since March 1995. Prior thereto, he was employed in BZW
Investment Management, the asset management subsidiary of the Barclays Group.
Mr. Gould is a Chartered Financial Analyst.

INTERMEDIATE-TERM BOND PORTFOLIO AND TOTAL RETURN BOND PORTFOLIO

Pacific Investment Management Company (PIMCO), 840 Newport Center Drive,
Newport Beach, California 92658, serves as the Adviser to the Intermediate-Term
Bond Portfolio and the Total Return Bond Portfolio. PIMCO furnishes investment
advisory services in connection with the management of each of these Portfolios
and is paid a fee by PMF, not the Trust, at an annual rate of .25 of 1% of each
Portfolio's average daily net assets. John L. Hague, a Managing Director of
PIMCO, has been responsible for the day-to-day management of the Trust's
Portfolio since its inception. Mr. Hague has been a fixed income manager of
PIMCO and its predecessor since 1989.

PIMCO is a general partnership whose partners are PIMCO Advisors L.P. and
PIMCO Management, Inc., a wholly owned subsidiary of PIMCO Advisors L.P. The
general partner of PIMCO Advisors L.P. is PIMCO Partners G.P., a general
partnership between Pacific Financial Asset Management Corporation, an indirect
wholly-owned subsidiary of Pacific Mutual Life Insurance Company, and PIMCO
Partners L.P., a limited partnership controlled by the PIMCO Managing Directors.
As of December 31, 1995, PIMCO had approximately $76.4 billion of assets under
management.

U.S. GOVERNMENT MONEY MARKET PORTFOLIO AND MORTGAGE BACKED SECURITIES PORTFOLIO

Wellington Management Company (WMC), 75 State Street, Boston, Massachusetts
02109, serves as the Adviser to the U.S. Government Money Market Portfolio and
the Mortgage Backed

46
<PAGE> 54

Securities Portfolio. WMC is paid a fee by PMF, not the Trust, at the annual
rates of .125 of 1% and .25 of 1% of each Portfolio's average daily net assets,
respectively.

WMC is a Massachusetts general partnership of which the following persons
are managing partners: Robert W. Doran, Duncan M. McFarland and John R. Ryan.
WMC is a professional investment counseling firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of December 31, 1995, WMC
had approximately $109.2 billion of assets under management.

Thomas L. Pappas, Senior Vice President of WMC, has served as portfolio
manager to the Mortgage Backed Securities Portfolio since the Portfolio's
inception. Mr. Pappas has been an investment professional with WMC since 1987.
John C. Keogh, Senior Vice President of WMC, has served as portfolio manager to
the U.S. Government Money Market Portfolio since the Portfolio's inception. Mr.
Keogh has been an investment professional with WMC since 1983.

FEE WAIVERS AND SUBSIDIES

For the fiscal year ended December 31, 1995, PMF waived all or a portion of
its management fee and subsidized certain operating expenses of the Portfolios
to maintain the total expense ratios of the Portfolios at the following levels:

<TABLE>
<CAPTION>
EXPENSE CAP AS A PERCENTAGE
NAME OF PORTFOLIO OF AVERAGE DAILY NET ASSETS
-------------------------------------------------- ---------------------------
<S> <C>
Large Capitalization Growth Portfolio............. 1.05%
Large Capitalization Value Portfolio.............. 1.05%
Small Capitalization Growth Portfolio............. 1.05%
Small Capitalization Value Portfolio.............. 1.05%
International Equity Portfolio.................... 1.50%
International Bond Portfolio...................... 1.00%
Total Return Bond Portfolio....................... .85%
Intermediate Term Bond Portfolio.................. .85%
Mortgage Backed Securities Portfolio.............. .85%
U.S. Government Money Market Portfolio............ .85%
</TABLE>

For the year ending December 31, 1996, PMF has agreed to cap Total Operating
Expenses of the Total Return Bond Portfolio at .95%. See "Trust Expenses." The
Trust is not required to reimburse PMF for such management fee waiver or expense
subsidy. PMF may from time to time agree to waive all or a portion of its
management fee and subsidize certain operating expenses of the Trust. Fee
waivers and expense subsidies will increase a Portfolio's yield or total return.
See "Performance Information."

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
Trust. It is an indirect, wholly-owned subsidiary of The Prudential Insurance
Company of America.

47
<PAGE> 55

On October 21, 1993, PSI entered into an omnibus settlement with the
Securities and Exchange Commission (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 a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of $500,000
per jurisdiction. PSI has agreed to provide additional funds, if necessary, for
the purpose of the settlement fund. 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 Trust 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 Trust's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.

PORTFOLIO TRANSACTIONS

Prudential Securities, one of the Advisers or an affiliate thereof (an
affiliated broker), may each act as a broker or futures commission merchant for
a Portfolio. In order for an affiliated broker to effect any portfolio
transactions for a Portfolio on an exchange or board of trade, the commissions,
fees or other remuneration received by the affiliated broker must be reasonable
and fair compared to the commissions, fees or other remuneration paid to other
brokers or futures commission merchants in connection with comparable
transactions involving similar securities being purchased

48
<PAGE> 56

or sold on an exchange or board of trade during a comparable period of time.
This standard would allow an affiliated broker to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.

NET ASSET VALUE

The net asset value per share is determined by subtracting from the value
of the assets of each Portfolio the amount of its liabilities, and dividing the
remainder by the number of outstanding shares of the Portfolio. The Trustees
have fixed the specific time of day for the computation of each Portfolio's net
asset value to be as of 4:15 p.m., New York time, except that the U.S.
Government Money Market Portfolio will compute its net asset value at 4:30 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 Trustees. See "Net Asset Value" in the Statement of
Additional Information.

The Trust will compute its net asset value 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 Trust or days on which
changes in the value of portfolio securities do not affect the net asset value
of a Portfolio. 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.

The U.S. Government Money Market Portfolio determines the value of its
portfolio securities by the amortized cost method. This method involves valuing
an instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Portfolio
would receive if it sold the instrument. During these periods, the yield to a
shareholder may differ somewhat from that which could be obtained from a similar
fund which marks its portfolio securities to the market each day. For example,
during periods of declining interest rates, if the use of the amortized cost
method resulted in a lower value of the Portfolio's securities holdings on a
given day, a prospective investor in the Portfolio would be able to obtain a
somewhat higher yield and existing shareholders would receive correspondingly
less income. The converse would apply during periods of rising interest rates.
The Trustees have established procedures designed to stabilize, to the extent
reasonably possible, the net asset value of the shares of the Portfolio at $1.00
per share. See "Net Asset Value" in the Statement of Additional Information.

PURCHASE AND REDEMPTION OF SHARES

HOW TO PURCHASE SHARES

Purchases of shares of a Portfolio by a Target Program participant must be
made through a securities account maintained with Prudential Securities. Payment
for Portfolio shares must be

49
<PAGE> 57

made by check made payable to Prudential Securities or to a broker that clears
securities transactions through Prudential Securities on a fully disclosed basis
(an Introducing Broker). Clients of Prudential Securities may also make payment
for portfolio shares using free credit cash balances held in their securities
account including a cash payment by the participant into his or her securities
account or through the redemption of shares of money market funds held in the
account.

For non-Plan accounts, the minimum initial investment requirement is
$25,000. For Plan accounts, the minimum initial investment requirement is
$10,000. The minimum initial investment requirement is reduced to $10,000 for
non-Plan accounts for custodial accounts established under the Uniform Gift to
Minors Act and for Trustees of the Trust (except that the minimum initial
investment requirement is waived entirely for Trustees who receive their fees
pursuant to a deferred fee agreement with the Trust), 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. For
purposes of determining the minimum initial investment requirement, fiduciary
accounts having a common trustee (unaffiliated with Prudential Securities) may
be aggregated provided that such accounts, in the aggregate, have at least
$250,000 in assets in the Target Program. Such accounts may also be aggregated
for purposes of determining when the Target Program fee may be subject to
negotiation. In addition, the minimum initial investment requirement may be
reduced or waived for certain start-up qualified employee benefit plans which
have been in existence for less than one year and for certain transfers of
assets from asset allocation programs of investments in registered investment
companies. From time to time, the minimum initial investment requirement may
otherwise be reduced for Plan and non-Plan accounts in the discretion of
Prudential Securities. Please contact a Prudential Securities Financial Advisor
for details. Prudential Securities must be notified, prior to the opening of any
Target Program account of any factors under which an account would be eligible
for a waiver or reduction of the minimum investment or Target Program fee. The
aggregation of accounts or reduction or waiver of the Target Program fee will be
permitted subject to confirmation of the account's entitlement.

Shares of the Portfolios are available to participants in the Target
Program and to banks, trust companies and other investment advisory services who
maintain securities accounts with Prudential Securities (with or without
participation in the Target Program) and to certain other asset allocation
programs of investments in registered investment companies sponsored by
Prudential Securities. The Target Program and the Trust are designed to help
investors devise an asset allocation strategy to meet their individual needs as
well as selecting individual investments within each asset category among the
choices available.

Shares of the Portfolios may be redeemed at any time for cash at the net
asset value per share next determined after the redemption request is received.
Investors wishing to redeem their shares in a Portfolio should contact their
Prudential Securities financial advisor. Payment for shares presented for
redemption will be made by check within seven days after receipt by Prudential
Securities of a redemption request. 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 a Portfolio of securities owned by it is not reasonably practicable
or it is not reasonably practicable for a Portfolio 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

50
<PAGE> 58

rules and regulations of the SEC shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist. If a Target Program account is terminated,
including a termination of such an account by Prudential Securities, all shares
of the Portfolios held in that account will be redeemed.

THE TARGET PROGRAM. Prudential Securities, through the Target Program,
provides advisory services in connection with investments among the Portfolios
by identifying the investor's investment objectives, preferences and risk
tolerances through evaluation of a Questionnaire; identifying and recommending
in writing an appropriate allocation of assets among the Portfolios that conform
to those objectives, preferences and risk tolerances in an Evaluation; and
providing a quarterly account statement (Quarterly Account Monitor). Prudential
Securities will not have any investment discretion over the investor's Target
Program account; all investment decisions ultimately rest with the investor.

Under the Target Program, financial advisors of Prudential Securities
provide services to the investor by assisting the investor in identifying his or
her financial characteristics and completing the investor Questionnaire.
Prudential Securities has contracted with Ibbotson Associates, Inc., Chicago, an
investment consulting, data and software firm, to develop an investment profile
matrix and asset allocation methodology to assist it in translating investor
needs, preferences and attitudes identified from the Questionnaire into
suggested portfolio allocations. Financial advisors may also review the
Evaluation and Quarterly Account Monitor with the investor, monitor identified
changes in the investor's financial characteristics, assist the investor in
preparing a revised Questionnaire, and communicate any changes to Prudential
Securities for reevaluation.

Prudential Securities is paid a quarterly fee for the services comprising
the Target Program. For non-Plan accounts, the quarterly advisory fee is charged
at the maximum annual rate of 1.5% of assets held in a Target Program account
invested in equity portfolios and 1.0% of assets held in a Target Program
account invested in income portfolios. For Plan accounts, the quarterly advisory
fee is charged at the maximum annual rate of 1.25% of assets held in a Target
Program account invested in equity portfolios and 1.35% of assets held in a
Target Program account invested in income portfolios. The advisory fees may be
modified or changed by Prudential Securities upon notice to account holders. For
non-Plan accounts the quarterly fee will be charged to the client's securities
account. Plan accounts may elect to have their Target Program fee either
automatically charged to their securities account as described above or billed
to them quarterly. For Plan accounts that elect to be billed, the quarterly fee
is payable by check. The advisory fee is subject to negotiation when assets in
the Target Program exceed $100,000 based on a number of factors including, but
not limited to, the size of the account and other accounts with Prudential
Securities. An independent plan fiduciary should consider, in a prudent manner,
the relationship of the fees to be paid by its Plan along with the level of
services provided by Prudential Securities.

Trustees of the Trust, 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 may participate in the
Target Program without the imposition of the Target Program fee. In addition,
the Target Program fee may be waived in whole or in part for certain banks,
trust companies or unaffiliated investment advisers who maintain securities
accounts with Prudential Securities as well as personal trusts which are part of
The Prudential Bank Personal Trust Program administered by Prudential Bank &
Trust (as trustee) or an affiliate thereof. Banks, trust companies and
investment advisers interested in utilizing the Portfolios should contact the
Trust or Prudential Securities.

51
<PAGE> 59

Financial advisors receive a portion of any fee paid by Target Program
clients for participation in the Target Program. As the quarterly fee paid by
non-Plan investors for investments in an equity portfolio is greater than the
quarterly fee paid by non-Plan investors for investments in an income portfolio,
Prudential Securities will receive greater compensation if a non-Plan Target
Program client invests in equity portfolios rather than income portfolios.
Consequently, Prudential Securities, when making asset allocation
recommendations for non-Plan Target Program clients will be presented with a
conflict of interest as to the specific Portfolios recommended for investment.

For participants in the Target Program, shares of the Portfolios may be
purchased directly through Prudential Securities only after the completion and
processing of the Client's Target Program investment advisory agreement. The
offering price is the net asset value per share next determined following
receipt of an order by Prudential Securities. Shareholders will not receive
share certificates, as the Trust does not issue share certificates.

SHAREHOLDER SERVICES

EXCHANGE PRIVILEGE. Shares of a Portfolio may be exchanged without payment
of any exchange fee for shares of another Portfolio at their respective net
asset values. There are no exchange privileges between the Portfolios and other
Prudential Mutual Funds.

An exchange of shares is treated for federal income tax purposes as a
redemption (sale) of shares in exchange by the shareholder, and an exchanging
shareholder may, therefore, realize a taxable gain or loss in connection with
the exchange.

For further information regarding the exchange privilege, investors should
contact their Prudential Securities financial advisor. Prudential Securities
reserves the right to reject any exchange request and the exchange privilege may
be modified or terminated after 60 days' written notice.

TAXES, DIVIDENDS AND DISTRIBUTIONS

Each Portfolio intends to continue to qualify and elect to be treated as a
regulated investment company under the Internal Revenue Code. Accordingly, each
Portfolio will not be subject to federal income taxes on its net investment
income and capital gains, if any, that it distributes to its shareholders. All
dividends out of net investment income, together with distributions of
short-term capital gains, will be taxable as ordinary income to the shareholders
whether or not reinvested. To the extent a Portfolio's income is derived from
certain dividends received from domestic corporations, a portion of the
dividends paid to corporate shareholders of the Portfolio will be eligible for
the 70% dividends received deduction. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholders, whether
or not reinvested and regardless of the length of time a shareholder has owned
his or her shares. The maximum long-term capital gains rate for individuals
currently is 28%. The maximum long-term capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary income.

Dividends attributable to the net investment income of the U.S. Government
Money Market Portfolio, Intermediate-Term Bond Portfolio, Mortgage Backed
Securities Portfolio, Total Return Bond Portfolio and International Bond
Portfolio will be declared daily and paid monthly. Shareholders of those
Portfolios receive dividends from the day following the purchase up to and
including the date of redemption. Dividends attributable to the net investment
income of the Large Capitalization

52
<PAGE> 60

Value Portfolio, Large Capitalization Growth Portfolio, Small Capitalization
Value Portfolio, Small Capitalization Growth Portfolio and International Equity
Portfolio will be declared and paid annually. Distributions of any net realized
long-term and short-term capital gains earned by a Portfolio will be made at
least annually.

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, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder of shares that are held for six months or less. Additionally, a
capital loss realized upon a sale or redemption of shares in a Portfolio will be
deferred under the "wash sale" rules of the Internal Revenue Code if the
shareholder acquires shares in such Portfolio during the 61-day period beginning
30 days before and ending 30 days after the sale which gave rise to the loss.

Net investment income or capital gains earned by a Portfolio from 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 Portfolios 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 of the Portfolio's assets to be invested
within various countries is not known. The Portfolios intend to operate so as to
qualify for treaty-reduced rates of tax where applicable. Furthermore, if a
Portfolio qualifies as a regulated investment company, if certain distribution
requirements are satisfied, and if more than 50% of the value of the Portfolio's
assets at the close of the taxable year consists of stocks or securities of
foreign corporations, the Portfolio may elect, for U.S. federal income tax
purposes, to treat foreign income taxes paid by the Portfolio that can be
treated as income taxes under U.S. income tax principles as paid by its
shareholders. If the Portfolio were to make an election, an amount equal to the
foreign income taxes paid by the Portfolio would be included in the income of
its shareholders and the shareholders would be entitled to credit their portions
of this amount against their U.S. tax liabilities, if any, or to deduct such
portions from their U.S. taxable income, if any. Shortly after any year for
which it makes an election, the Portfolio will report to its shareholders, in
writing, the amount per share of foreign tax that must be included in each
shareholder's gross income and the amount which will be available for deduction
or credit. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Certain limitations will be imposed on the extent
to which the credit for foreign taxes may be claimed. Except in the case of the
International Equity Portfolio and the International Bond Portfolio, it is not
anticipated that any Portfolio will satisfy the requirements for making the
election to treat shareholders as having paid foreign taxes paid by a Portfolio.

A Portfolio may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, a Portfolio's investments
in PFICs may subject the Portfolio to federal income taxes on certain gains
realized by the Portfolio.

53
<PAGE> 61

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 also are
treated as ordinary gain or loss. These gains or losses increase or decrease the
amount of a Portfolio's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Portfolio's net capital gain. If currency
fluctuation losses exceed other investment company taxable income during a
taxable year, distributions made by the Portfolio during the year would be
characterized as a return of capital to shareholders, reducing the shareholder's
basis in their Portfolio shares.

For most non-Plan investors who are individuals and for Plans which pay the
Target Program fee by check, the Target Program fee may be treated as a
"miscellaneous itemized deduction" for federal income tax purposes. Under
current federal income tax law, an individual's miscellaneous itemized
deductions for any taxable year shall be allowed as a deduction only, to the
extent that the aggregate of these deductions exceeds 2% of adjusted gross
income.

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

As a result of the allocation and any reallocation of assets between the
two Advisers of each of the four domestic equity Portfolios of the Fund, with
respect to those Portfolios, there may be tax ramifications relating to the sale
of assets in the form of increased short term or long term capital gains. As
described above, short term capital gains derived by a Portfolio are taxed as
ordinary income. In order to maintain its tax status as a regulated investment
company under Subchapter M of the Internal Revenue Code, each Portfolio must
derive less than 30% of its gross income from the sale or other disposition of
stock and certain other securities held by the Portfolio for less than three
months. Such Portfolios may also be subject to the "wash sale" rules of the
Internal Revenue Code as described above.

Any dividends out of net investment income and short-term capital gains
paid to a foreign shareholder will generally be subject to U.S. withholding tax
of 30% (or lower treaty rate if applicable).

Dividends and distributions will be paid in additional Portfolio shares, at
net asset value computed on the payment date and record date, respectively, 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
the Trust or the investor's financial advisor. Each Portfolio will notify each
shareholder after the close of each Portfolio's taxable year both of the per
share amount and the taxable status of that year's dividends and distributions.
The foregoing is a general summary of the tax consequences investing in a
Portfolio. Shareholders are advised to consult their own tax advisers regarding

54
<PAGE> 62

specific questions as to federal, state or local taxes. See "Taxation" in the
Statement of Additional Information.

GENERAL INFORMATION

PERFORMANCE INFORMATION

U.S. GOVERNMENT MONEY MARKET PORTFOLIO

From time to time the U.S. Government Money Market Portfolio may advertise
its "current yield" based on the net change, exclusive of realized and
unrealized gains or losses, in the value of a hypothetical account over a seven
calendar day base period. The U.S. Government Money Market Portfolio also
calculates its "effective annual yield," assuming weekly compounding, and its
tax-equivalent yield. Tax-equivalent yield shows the taxable yield an investor
would have to earn from a fully taxable investment in order to equal an after
taxes yield equivalent to the Portfolio's tax-free yield and is calculated by
dividing the Portfolio's current or effective yield by the result of one minus a
certain state tax rate. The yield will fluctuate from time to time and is not
intended to indicate and is not necessarily representative of future
performance.

OTHER PORTFOLIOS

FROM TIME TO TIME THE TRUST MAY ADVERTISE THE TOTAL RETURN OF A PORTFOLIO
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN, "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 a Portfolio of the Trust would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Portfolio) assuming that all distributions and dividends
paid by the Portfolio were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects actual
performance over a stated period of time. "Average annual" total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance.
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 Trust may also from time to time advertise the 30-day yield of a Portfolio.
See "Performance Information" in the Statement of Additional Information. The
"yield" refers to the income generated by an investment in a Portfolio over a
one-month or 30-day period. This income is then "annualized," that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Trust may
also include comparative performance information for its Portfolios in
advertising or marketing the Trust's shares. Such performance information may
include data from Lipper Analytical Services, Inc., Morningstar Publications,
Inc., other industry publications, business periodicals, and market indices. See
"Performance Information" in the Statement of Additional Information. Further
performance information is contained in the Trust's annual report to
shareholders which may be obtained without charge.

55
<PAGE> 63

DESCRIPTION OF SHARES

The Trust, organized as an unincorporated business trust in 1992 under the
laws of Delaware, is a trust fund of the type commonly known as a "business
trust."

The shareholders of the Portfolios are each entitled to a full vote for
each full share of beneficial interest (par value $.001 per share) held (and
fractional votes for fractional shares). Shares of each Portfolio are entitled
to vote as a class only to the extent required by the provisions of the
Investment Company Act or as otherwise permitted by the Trustees in their sole
discretion. Pursuant to the Investment Company Act, shareholders of each
Portfolio have to approve the adoption of any investment advisory agreement
relating to such Portfolio and of any changes in certain investment policies
related thereto.

It is the intention of the Trust not to hold Annual Meetings of
Shareholders. The Trustees may call Special Meetings of Shareholders for action
by shareholder vote as may be required by the Investment Company Act or the
Declaration of Trust. Shareholders have certain rights, including the right to
call a meeting upon a vote of 10% of the Trust's outstanding shares for the
purpose of voting on the removal of one or more Trustees. The Trust may from
time to time, in its discretion and pursuant to applicable regulations, add
additional Portfolios to the Trust or, with the approval of the Shareholders of
an existing Portfolio, if necessary, terminate one or more of the Portfolios.

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 Trust's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Trust. Its mailing address is P.O.
Box 9131, Boston, Massachusetts 02105.

Prudential Mutual Fund Services, Inc., 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 Trust. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.

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 Trust with the Securities
and Exchange Commission under the Securities Act of 1933. Copies of the
Registration Statement may be obtained at a reasonable charge from the SEC or
may be examined, without charge, at the office of the SEC in Washington, D.C.

56
<PAGE> 64

APPENDIX A

DESCRIPTION OF S&P AND MOODY'S RATINGS

DESCRIPTION OF S&P CORPORATE BOND RATINGS:

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

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

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

BB and B -- Debt rated BB and B is 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 a lower degree of
speculation than B. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.

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

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

Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically

A-1
<PAGE> 65

unreliable over any great length of time. Such bonds lack outstanding Investment
characteristics and in fact have speculative characteristics as well.

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

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

Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. 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.

DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:

An S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.

Commercial paper rated 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.

DESCRIPTION OF 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.

A-2
<PAGE> 66

APPENDIX B

GLOSSARY OF INDICES

U.S. LARGE CAP STOCKS (S&P 500) -- The S&P 500 is a capital weighted index
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The S&P 500 is an unmanaged
index.

U.S. SMALL CAP STOCKS (RUSSELL 2000) -- The Russell 2000 Index is a stock market
index comprised of the 2000 smallest U.S. domiciled publicly traded common
stocks that are included in the Russell 3000 Index. These common stocks
represent approximately 11% of the U.S. equity market.

INTERNATIONAL STOCKS (MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA,
FAR EAST (EAFE) INDEX) -- The MSCI EAFE Index is an arithmetical average
weighted by market value of the performance of 1023 non-U.S. companies
representing 18 stock markets in Europe, Australia, New Zealand and the Far
East. The EAFE Index is an unmanaged index.

U.S. BONDS (LEHMAN BROTHERS AGGREGATE BOND INDEX) -- The index is composed of
securities from the Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and Asset Backed Securities Index. Total
return comprises price appreciation/depreciation and income as a percentage of
the original investment.

INTERNATIONAL BONDS (SALOMON NON U.S.) -- Based on the Salomon Brothers World
Bond Index excluding issues denominated in U.S. dollars. This index measures the
total return of high-quality securities in major sectors of the international
bond market. The index covers approximately 600 bonds across 10 currencies.

U.S. TREASURY BILLS (SALOMON BROTHERS 90 DAY INDEX) -- This index is constructed
by purchasing equal dollar amounts of three-month Treasury bills at the
beginning of three consecutive months. As each bill matures, all proceeds are
rolled over or reinvested in a new three-month bill. The income used to
calculate the monthly return is derived by subtracting the original amount
invested from the maturity value.

SALOMON BROTHERS MORTGAGES INDEX (SALOMON MORTGAGE) -- This index is comprised
of mortgage-backed pass-through securities consisting of 70% pass-through
securities issued by the Government National Mortgage Association, 23% by the
Federal Home Loan Mortgage Corporation, 5% by the Federal National Mortgage
Association and the balance a mixture of conventional and Federal Housing
Administration project mortgage pools.

INFLATION (CPI) -- The Consumer Price Index for all urban consumers, not
seasonally adjusted, is used to measure the rate of change of consumer prices.
This measures inflation and is constructed by the U.S. Department of Labor,
Bureau of Labor Statistics, Washington D.C.

LARGE CAP GROWTH INDEX (RUSSELL 1000 GROWTH) -- Contains those Russell 1000
securities with a "growth" orientation. Securities in this index tend to exhibit
higher price-to-book and price-to-earnings ratios, lower dividend yields, and
higher forecasted growth rates than those in the Value universe.

B-1
<PAGE> 67

LARGE CAP VALUE INDEX (RUSSELL 1000 VALUE) -- Contains those Russell 1000
securities with a "value" orientation. Securities in this index tend to exhibit
lower price-to-book and price-to-earnings ratios, higher dividend yields, and
lower forecasted growth rates than those in the Growth universe.

SMALL CAP GROWTH INDEX (PSI SMALL CAP GROWTH INDEX) -- This index is created by
screening the twentieth through forty-fifth percentiles of market value in the
Compustat universe for companies with growth characteristics. Growth stocks have
historical sales growth rates that are greater than 10%, rank in the top half of
the Institutional Brokers Estimate System (I/B/E/S) universe based on forecasted
growth rate, and have low payouts and debt/capital ratios.

SMALL CAP VALUE INDEX (PSI SMALL CAP VALUE) -- This index is created by
screening the twentieth through forty-fifth percentiles of market value in the
Compustat universe for companies with value characteristics. Value stocks rank
in the bottom 50% of the universe based on a normalized P/E ratio. Companies
must have sustainable dividend rates.

LIPPER INTERNATIONAL EQUITY FUND AVERAGE -- Contains international equity funds
that report to Lipper Analytical Services. The funds are given equal weight in
constructing performance which prevents any one fund from having a greater
impact on the overall calculation. Each fund contained in the average has stated
that their objective matches that of the group. Single country funds are not
included in this group.

LIPPER CORPORATE BOND FUND AVERAGE -- Contains corporate bond funds that report
to Lipper Analytical Services. The funds have an average credit quality rating
of least an "A". The average maturity is greater than 10 years. The funds are
equally weighted to assure that no one fund has more of an impact on the
performance calculation than any other fund.

LIPPER INTERMEDIATE TERM BOND FUND AVERAGE -- Contains intermediate term bond
funds that report to Lipper Analytical Services. The funds invest mainly in
investment grade debt instruments and have an average credit rating of "A". The
average maturity is between 5 to 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.

LIPPER MORTGAGE FUND AVERAGE -- Contains mortgage funds that report to Lipper
Analytical Services. The funds contain primarily U.S. mortgage obligations. The
average maturity is greater than 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.

LIPPER GOVERNMENT MONEY MARKET AVERAGE -- Contains Government money market funds
that report to Lipper Analytical Services. The funds invest in short-term U.S.
Government obligations. The funds are equally weighted to assure that no one
fund has more of an impact on the performance calculation than any other fund.

LIPPER WORLD INCOME FUND AVERAGE -- Contains world income funds that report to
Lipper Analytical Services. The funds are able to invest in debt instruments in
any country. The funds are equally weighted to assure that no one fund has more
of an impact on the performance calculation than any other fund.

B-2
<PAGE> 68

MORNINGSTAR LARGE CAP GROWTH AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.

MORNINGSTAR LARGE CAP VALUE AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.

MORNINGSTAR SMALL CAP GROWTH AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.

MORNINGSTAR SMALL CAP VALUE AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.

B-3
<PAGE> 69

APPENDIX C

The following is the text of the proposed and final exemptions from the
Department of Labor from certain provisions of the Employee Retirement Income
Security Act of 1974 relating to the purchase of shares and participation in
TARGET by certain retirement plans.

PROPOSED EXEMPTION

FEDERAL REGISTER
VOL. 58, No. 131
Monday, July 12, 1993
Notices

DEPARTMENT OF LABOR (DOL)
Pension and Welfare Benefits Administration (PWBA)
. . .

Prudential Mutual Fund Management, Inc. (PMF) Located in New York, NY

[Application No. D-9217]
PROPOSED EXEMPTION

SECTION I. COVERED TRANSACTIONS

The Department is considering granting an exemption under the authority of
section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance
with the procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, the restrictions of section
406(a) of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code,
shall not apply to the purchase or redemption of shares by an employee benefit
plan, an individual retirement account (the IRA) or a retirement plan for a
self-employed individual (the Keogh Plan; collectively, the Plans) in the Target
Portfolio Trust (the Trust) established in connection with such Plans'
participation in the Target Personal Investment Advisory Service (the Target
Program). In addition, the restrictions of section 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(E) and (F) of the Code, shall not apply to the provision,
by Prudential Securities Incorporated (Prudential Securities), of investment
advisory services to an independent fiduciary of a participating Plan (the
Independent Plan Fiduciary) which may result in such fiduciary's selection of
portfolios of the Trust (the Portfolios) in the Target Program for the
investment of Plan assets.

This exemption is subject to the following conditions that are set forth
below in Section II.

SECTION II. GENERAL CONDITIONS

(1) The participation of Plans in the Target Program is approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of Prudential Securities and/or its affiliates covered by an
IRA not subject to Title I of the Act will be considered an Independent Plan
Fiduciary with respect to such IRA.

(2) The total fees paid to Prudential Securities and its affiliates
constitute no more than reasonable compensation.

(3) No Plan pays a fee or commission by reason of the acquisition or
redemption of shares in the Trust.

(4) The terms of each purchase or redemption of Trust shares remain at least
as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.

(5) Prudential Securities provides written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.

(6) Any recommendation or evaluation made by Prudential Securities to an
Independent Plan Fiduciary are implemented only at the express direction of such
independent fiduciary.

C-1
<PAGE> 70

(7) Prudential Securities provides investment advice in writing to an
Independent Plan Fiduciary with respect to all available Portfolios.

(8) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio is independent of Prudential Securities
and its affiliates.

(9) The quarterly investment advisory fee that is paid by a Plan to
Prudential Securities for investment advisory services rendered to such Plan is
offset by such amount as is necessary to assure that PMF retains no more than 20
basis points from any Portfolio (with the exception of the U.S. Government Money
Market Portfolio for which PMF retains an investment management fee of 12.5
basis points) containing investments attributable to the Plan investor.

(10) With respect to its participation in the Target Program prior to
purchasing Trust shares,

(a) Each Plan receives the following written or oral disclosures or
questionnaires from Prudential Securities or the Trust:

(1) A copy of the prospectus (the Prospectus) for the Trust discussing
the investment objectives of the Portfolios comprising the Trust, the
policies employed to achieve these objectives, the corporate affiliation
existing between Prudential Securities, PMF and its subsidiaries, the
compensation paid to such entities and additional information explaining
the risks attendant to investing in the Trust.

(2) Upon written or oral request to Prudential Securities, the
Independent Plan Fiduciary will be given a Statement of Additional
Information supplementing the Prospectus which describes the types of
securities and other instruments in which the Portfolios may invest, the
investment policies and strategies that the Portfolios may utilize,
including a description of the risks.

(3) As applicable, an Investor Profile Questionnaire given to the
Independent Plan Fiduciary or eligible participant of a Plan providing
for participant-directed investments (the section 404(c) Plan).

(4) As applicable, a written analysis of Prudential Securities' asset
allocation decision and recommendation of specific Portfolios given to
the Independent Plan Fiduciary or the participant in a section 404(c)
Plan.

(5) A copy of the investment advisory agreement between Prudential
Securities and such Plan relating to participation in the Target Program.

(6) Upon written request to the Trust, a copy of the respective
investment advisory agreement between Prudential Securities and the
Sub-Advisers.

(7) As applicable, an explanation by a Prudential Securities Financial
Advisor (the Financial Advisor) to section 404(c) Plan participants or
the Independent Plan Fiduciary of the services offered under the Target
Program and the operation and objectives of the Portfolios.

(8) Copies of the proposed exemption and grant notice describing the
exemptive relief provided herein.

(b) If accepted as an investor in the Target Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing to Prudential Securities, prior to purchasing Trust shares that such
fiduciary has received copies of the documents described in subparagraph
10(a) of this section.

(c) With respect to a section 404(c) Plan, written acknowledgment of the
receipt of such documents is provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, or, in some instances, the Plan participant).
Such Independent Plan Fiduciary will be required to represent in writing to
PMF that such fiduciary is (1) independent of PMF and its affiliates and (2)
knowledgeable with respect to the Plan in administrative matters and funding
matters related thereto, and able to make an informed decision concerning
participation in the Target Program.

(d) With respect to a Plan that is covered under title I of the Act,
where investment decisions are made by a trustee, investment manager or a
named fiduciary, such Independent Plan Fiduciary is required to acknowledge,
in writing, receipt of such documents and represent to PMF that such
fiduciary is (1) independent of PMF and its affiliates, (2) capable of
making an independent decision regarding the investment of Plan assets and
(3) knowledgeable with

C-2
<PAGE> 71

respect to the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision
concerning participation in the Target Program.

(11) Subsequent to its participation in the Target Program, each Plan
receives the following written or oral disclosures with respect to its ongoing
participation:

(a) Written confirmations of each purchase or redemption transaction by
the Plan with respect to a Portfolio.

(b) Telephone quotations from Prudential Securities of such Plan's
account balance.

(c) A monthly statement of account from Prudential Securities specifying
the net asset value of the Plan's investment in such account to the extent
there are transactions by the Plan.

(d) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees paid by
each Portfolio.

(e) A written quarterly monitoring report (the Quarterly Account
Monitor) containing a record of the performance of the Plan's assets
invested in the Target Program, the rates of return received by the Plan
with respect to such investments, the Plan's actual portfolio with a
breakdown of investments made in each Portfolio, year to date and cumulative
realized gains and losses and income received from each Portfolio, a summary
of purchase, sale and exchange activity, dividends and interest received or
reinvested and market commentary. The Quarterly Account Monitor will also
contain an analysis and an evaluation of a Plan investor's account to
ascertain whether the Plan's investment objectives have been met and
recommending, if required, changes in Portfolio allocations.

(1) In the case of a section 404(c) Plan where the Independent Plan
Fiduciary has established an omnibus account in the name of the Plan (the
Undisclosed Account) with Prudential Securities, the Quarterly Account
Monitor will be provided to the Independent Plan Fiduciary.

(2) In the case of a section 404(c) Plan where the Independent Plan
Fiduciary opens an account for each Plan participant (the Disclosed
Account), the Quarterly Account Monitor will be furnished to each
participant and will set forth information pertaining to the
participant's individual account.

(f) Written disclosures to the Independent Plan Fiduciary, on a
quarterly and annual basis, of the (1) percentage of each Portfolio's
brokerage commissions that are paid to Prudential Securities and (2) the
average brokerage commission per share paid by each Portfolio to Prudential
Securities, as compared to the average brokerage commission per share paid
by the Trust to brokers other than Prudential Securities, both expressed as
cents per share.

(g) Periodic meetings with Financial Advisors, Independent Plan
Fiduciaries or if applicable, participants of Section 404(c) Plans, to
discuss the Quarterly Account Monitor or other questions that may arise.

(12) PMF maintains, for a period of six years, the records necessary to
enable the persons described in paragraph (13) of this section to determine
whether the conditions of this exemption have been met, except that (a) a
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of PMF and/or its affiliates, the records are
lost or destroyed prior to the end of the six year period, and (b) no party in
interest other than PMF shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (13) below.

(13)(a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section 504 of
the Act, the records referred to in paragraph (14) of this section are
unconditionally available at their customary location during normal business
hours by:

(1) Any duly authorized employee or representative of the Department or
the Internal Revenue Service (the Service);

(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;

(3) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and

C-3
<PAGE> 72

(4) Any participant or beneficiary of any participating Plan, or any
duly authorized representative of such participant or beneficiary.

(b) None of the persons described above in subparagraphs (2)-(4) of this
paragraph (13) are authorized to examine the trade secrets of PMF or
commercial or financial information which is privileged or confidential.

SECTION III. DEFINITIONS

For purposes of this exemption:

(1) An "affiliate" of Prudential Securities includes --

(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control with
Prudential Securities. (For purposes of this subsection, the term "control"
means the power to exercise a controlling influence over the management or
policies of a person other than an individual.)

(b) Any officer, director or partner in such person, and

(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is
independent of Prudential Securities and its affiliates and is either

(a) A Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares of a Section 404(c) Plan,

(b) A participant in a Keogh Plan,

(d) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a title I Plan that does not permit
individual direction as contemplated by section 404(c) of the Act.

Effective date: If granted, this proposed exemption will be effective
March 15, 1993.

SUMMARY OF FACTS AND REPRESENTATIONS

1. The parties to the transactions are as follows:

a. Prudential Securities, located in New York, New York, is an indirect,
wholly owned subsidiary of the Prudential Insurance Company of America
(Prudential), the largest insurance company in the United States and the
second largest insurance company in the world. Prudential Securities offers
a broad spectrum of financial services to both individual and institutional
investors including cash management services, retirement and financial
planning services, mutual funds, investment management services and
insurance and annuity services. Among these services are a variety of asset
allocation programs. The investment management and financial services that
comprise Prudential Securities are involved with the management of more than
$50 billion in assets. Prudential Securities assists investors in selecting
Portfolios for investment in the Trust. In addition, Prudential Securities
serves as the distributor of Trust shares and provides investment allocation
advice to investors.

b. PMF, which is located in New York, New York, is an indirect wholly
owned subsidiary of Prudential. PMF is a registered investment adviser under
the Investment Advisers Act of 1940, as amended (the 1940 Act). PMF was
incorporated in May 1987 under the laws of the State of Delaware.

Currently, PMF is the investment manager to 35 open-end investment
companies, constituting all of the Prudential mutual funds. In addition, PMF
serves as investment manager or administrator to 19 closed-end investment
companies. These companies collectively have total assets of approximately
$41 billion. PMF serves as the investment manager of the Trust and the
underlying Portfolios.

C-4
<PAGE> 73

c. Prudential Mutual Fund Services, Inc. (PMFS) of Edison, New Jersey is
a wholly owned subsidiary of PMF. PMFS will serve as Transfer Agent and
Dividend Disbursing Agent for the Trust. In these capacities, PMFS maintains
certain books and records for the Trust.

d. Ibbotson Associates, Inc. (Ibbotson) of Chicago, Illinois, is an
investment consulting, data and software products firm that specializes in
applying investment theories and empirical findings to current business
practice. Ibbotson is not related to Prudential or its affiliates. Ibbotson
has developed software for the Target Program (described herein) which
involve investment profile matrices and asset allocation methodologies.
These matrices and methodologies translate investor needs, preferences and
attitudes into suggested portfolio allocations. Ibbotson will maintain and
update the software package from time to time as deemed appropriate by
Prudential Securities.

2. On July 31, 1992, Prudential Securities formed the Trust, a no load,
open-end, diversified management investment company registered under the
Investment Company Act of 1940, as amended. The Trust is organized as a Delaware
business trust and it has an indefinite duration. As of September 22, 1992, the
Trust had no assets.

The Trust consists of nine different portfolios which range from the U.S.
Government Money Market Portfolio to the International Equity Portfolio and
which pay monthly or annual dividends to investors. The composition of the
Portfolios covers a spectrum of investments which include U.S.
Government-related securities or equity or debt securities issued by foreign or
domestic corporations. The Portfolios are further categorized under two major
groupings-Equity and Income. No Portfolio of the Trust is permitted to invest
any of its assets in securities issued by Prudential Securities or companies
which are directly or indirectly controlled by, or under common control with
Prudential Securities. Further, no Portfolio of the Trust may engage in
principal transactions with Prudential Securities or its affiliates.

3. Shares in the Trust are being offered by Prudential Securities, as
distributor, to participants in the Target Program. The Target Program is an
investment advisory service pursuant to which the Asset Management Group of
Prudential Securities, in its capacity as investment adviser to participants in
the Target Program, in conjunction with Ibbotson, directly provides to investors
asset allocation recommendations and related services with respect to the
Portfolios based on an evaluation of an investor's investment objectives and
risk tolerances.

The Target Program is designed for mid-sized investors with assets of
$10,000 - $1 million. To participate in the Trust, each investor must open a
brokerage account with Prudential Securities by making a current, minimum
initial investment of $10,000. (3)

Although PMF anticipates that investors in the Trust will consist of
institutions and individuals, it is proposed that prospective investors include
Plans for which PMF may or may not currently maintain investment accounts. A
majority of these Plans may be IRAs or Keogh Plans. In addition, it is proposed
that Plans for which PMF or an affiliate serves as a prototype sponsor and/or a
nondiscretionary trustee or custodian be permitted to invest in the Trust. (4)

The applicants represent that the initial purchase of shares in the Trust by
a Plan may give rise to a prohibited transaction where PMF or an affiliate has a
party in interest relationship with the Plan. PMF also acknowledges that a
prohibited

- ---------------
(3) Shares in the Trust are not certificated for reasons of economy and
convenience. PMFS, the Trust's transfer agent, however, maintains a record
of each investor's ownership of shares. Although Trust shares are
transferable and accord voting rights to their owners, they do not confer
pre-emptive rights (i.e., the privilege of a shareholder to maintain a
proportionate share of ownership of a company by purchasing a proportionate
share of any new stock issues). PMF represents that in the context of an
open-end investment company that continuously issues and redeems shares, a
pre- emptive right would make the normal operations of the Trust
impossible.

As for the voting rights, PMF states that they are accorded to
recordholders of Trust shares. PMF notes that a recordholder of Trust
shares may determine to seek the submission of proxies by Plan participants
and vote Trust shares accordingly. In the case of individual account plans
such as Section 404(c) Plans, PMF believes that most Plans will
pass-through the vote to participants on a pro-rata basis.

(4) The Department notes that the general standards of fiduciary conduct
promulgated under the Act would apply to the participation in the Target
Program by an Independent Plan Fiduciary. Section 404 of the Act requires
that a fiduciary discharge his duties respecting a plan solely in the
interest of the plan's participants and beneficiaries and in a prudent
fashion. Accordingly, an Independent Plan Fiduciary must act prudently with
respect to the decision to enter into the Target Program with Prudential
Securities as well as with respect to the negotiation of services that will
be performed thereunder and the compensation that will be paid to
Prudential Securities and its affiliates. The Department expects that an
Independent Plan Fiduciary, prior to entering into the Target Program, to
understand fully all aspects of such arrangement following disclosure by
Prudential Securities of all relevant information.

C-5
<PAGE> 74

transaction could arise upon a subsequent purchase or redemption of shares in
the Trust by a participating Plan inasmuch as the party in interest relationship
between PMF and the Plan may have been established at that point.

Accordingly, the applicants have requested retroactive exemptive relief from
the Department with respect to the purchase and redemption from Prudential
Securities of shares in the Trust by a participating Plan where Prudential
Securities does not (a) sponsor the Plan (other than serving as a prototype
sponsor) or (b) exercise discretionary authority over such Plan's assets. (5) No
commissions or fees are being paid by a Plan with respect to the sale and
redemption transactions or a Plan's exchange of shares in a Portfolio for shares
of another Portfolio. If granted, the applicants request that the exemption be
made effective as of March 15, 1993.

4. Overall responsibility for the management and supervision of the Trust
and the Portfolios rests with the Trust's Board of Trustees (the Trustees) which
will initially be comprised of seven members. The Trustees approve all
significant agreements involving the Trust and the persons and companies that
provide services to the Trust and the Portfolios. Three of the Trustees and all
of the Trust's executive officers are affiliated with PMF and/or its affiliates.
The four remaining Trustees are not affiliated with PMF.

5. Under its management agreement entered into with the Trust, PMF, as
investment manager, manages the investment operations of the Trust, administers
the Trust's affairs and is responsible for the selection, subject to the review
and approval of the Trustees, of the Sub-Advisers of each Portfolio. (6)

Through the Target Program, Prudential Securities provides a Plan investor
with non-binding, asset allocation recommendations with respect to such
investor's investments in the Portfolios. In order to make these evaluations,
Prudential Securities will furnish copies of an Investor Profile Questionnaire,
designed to elicit information about the specific investment needs, objectives
and expectations of the investor, to the Independent Plan Fiduciary or
participant of a Title I Plan, as provided below, or to an IRA or a Keogh Plan.
In the case of a Plan where the Independent Plan Fiduciary has established a
Disclosed Account in the name of each Plan participant (such as in a section
404(c) Plan), Prudential Securities will furnish copies of the Investor Profile
Questionnaire to each of the Plan participants for response. However, if the
Independent Plan fiduciary establishes an Undisclosed Account with Prudential
Securities in the name of the Plan, Prudential Securities will provide the
Independent Plan Fiduciary, upon oral or written request and at no additional
cost, with sufficient copies of the Investor Profile Questionnaire so that the
Independent Plan Fiduciary may distribute such questionnaire to Plan
participants. Prudential Securities, if requested, will also perform, at no
additional cost, the asset allocation analyses for each of these participants.

6. Based upon data obtained from the Investor Profile Questionnaire,
Prudential Securities evaluates the investor's risk tolerances and financial
goals. Prudential Securities then provides investment advice as to the
appropriate mix of investment Portfolios of the Trust that are designed to
balance the investor's goals, objectives and risk tolerances as part of a
long-term investment strategy.

The applicants represent that Prudential Securities does not have any
discretionary authority or control with respect to the allocation of an
investor's assets among the Portfolios. In the case of an IRA or Keogh Plan, the
applicants represent that all of Prudential Securities' recommendations and
evaluations are presented to the Independent Plan Fiduciary and are implemented
only if accepted an acted upon by such Independent Plan Fiduciary. However, in
the case of a Plan such as a section 404(c) Plan, PMF represents that
Independent Plan Fiduciaries or participants in such Plan are presented with

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

(5) PMF represents that to the extent employee benefit plans that are
maintained by PMF purchase or redeem shares in the Trust, such transactions
will meet the provisions of Prohibited Transaction Exemption (PTE) 77-3 (42
FR 18734, April 8, 1977). The applicants further represent that, although
the exemptive relief proposed above would not permit PMF or an affiliate
(while serving as a Plan fiduciary with discretionary authority over the
management of a Plan's assets) to invest those assets over which it
exercises discretionary authority in Trust shares, a purchase or redemption
of Trust shares under such circumstances would be permissible if made in
compliance with the terms and conditions of PTE 77-4 (42 FR 18732, April 8,
1977). The Department expresses no opinion herein as to whether such
transactions will comply with the terms and conditions of PTEs 77-3 and
77-4.

(6) Subject to the supervision and direction of the Trustees, PMF provides
to the Trust investment management evaluation services principally by
performing initial review on prospective Sub-Advisers for each Portfolio
and thereafter monitoring each Sub-Adviser's performance. In evaluating
prospective Sub-Advisers, PMF considers, among other factors, each Sub-
Adviser's level of expertise, consistency of performance and investment
discipline or philosophy. PMF has the responsibility for communicating
performance expectations and evaluations to the Sub-Advisers and ultimately
recommending to the Trustees whether the Sub-Advisers' contracts should be
renewed.

C-6
<PAGE> 75

Prudential Securities' recommendations and evaluations depending upon the type
of account the Independent Plan Fiduciary has established with Prudential
Securities.

7. With respect to an Undisclosed Account, the applicants represent that
Prudential Securities' recommendations will be presented to the Independent Plan
Fiduciary and such fiduciary will advise Prudential Securities of the investment
to be made for the Plan. However, with respect to a Disclosed Account, the
applicants note that Prudential Securities' recommendations will be presented to
the participants who will be responsible for acting upon that recommendation.

8. The applicants note that not all of the services described above will be
provided to every Plan. The services provided to each Plan or to each Plan
participant will depend on what is decided upon by the Independent Plan
Fiduciary. The applicants represent that an Independent Plan Fiduciary may
decide for its own reasons to establish an Undisclosed Account with Prudential
Securities under which Prudential Securities is not required to provide
investment allocation services to each Plan participant. The applicants state
that an Independent Plan Fiduciary may already have an established relationship
with a recordkeeper which, depending on the recordkeeper's accounting system,
makes it administratively desirable for the Independent Plan Fiduciary to invest
a Plan's assets on an undisclosed basis instead of on a disclosed basis. The
recordkeeper would be responsible for making allocations to each participant's
account in the Plan.

However, if the Independent Plan Fiduciary requests a reduction in the level
of services, there will be no corresponding reduction in the fee that the
fiduciary pays Prudential Securities if the investment in the Target Program is
$100,000 or less. Only investments in excess of $100,000 in the Target Program
can result in the payment to Prudential Securities of a quarterly investment
allocation fee that is lower than 1.35 percent. (See Representation 17.) (7)

9. Based upon the investment advice and recommendations, which may or may
not be adopted, the Independent Plan Fiduciary, with respect to an Undisclosed
Account, the Plan participant, with respect to a Disclosed Account, or the IRA
or Keogh Plan participant, as applicable, selects the specific Portfolios.
Prudential Securities will continue to render Portfolio selection advice to
Plans or Plan fiduciaries relating to asset allocations among the selected
Portfolios.

10. As stated above, PMF is responsible, subject to the supervision and
direction of the Trustees, for selecting the Sub-Advisers which will provide
discretionary advisory services with respect to the investment of the assets of
the individual Portfolios on the basis of their performance in their respective
areas of expertise in asset management. PMF represents that there are presently
seven Sub-Advisers, all of which are independent of, and will remain independent
of, PMF and/or its affiliates (8). The Sub-Advisers are registered investment
advisers under the 1940 Act. They maintain their principal executive offices in
various regions of the United States.

11. Aside from the Investor Profile Questionnaire described above, in order
for a Plan to participate in the Target Program, Prudential Securities will
provide an Independent Plan Fiduciary with a copy of the Trust Prospectus. This
document discusses the investment objectives of the Portfolios comprising the
Trust, the policies employed to achieve these objectives, the corporate
affiliation existing between Prudential Securities, PMF and its subsidiaries,
the compensation paid to such entities and information explaining the risks
attendant to investing in the Trust. In addition, upon written or oral request
to Prudential Securities, the Independent Plan Fiduciary will be given a
Statement of Additional Information supplementing the Prospectus which describes
the types of securities and other instruments in which the Portfolios may
invest, the investment policies and strategies that the Portfolios may utilize
including a description of the risks. (9) Further, each

- ---------------
(7) In this regard, the Department emphasizes that it expects the
Independent Plan Fiduciary to prudently consider the relationship of the
fees to be paid by the Plan to the level of services to be provided by
Prudential Securities. In light of the relatively fixed nature of the fees,
Independent Plan Fiduciaries should consider the appropriateness of this
arrangement in the context of a section 404(c) Plan where asset allocation
advice is not provided directly or indirectly to Plan participants. In
response to the Department's concern over this matter, Prudential
Securities represents that it will amend the Trust Prospectus and
Investment Advisory Agreement to include the following statement: "The
Independent Plan Fiduciary [has] [should] consider, in a prudent manner,
the relationship of the fees to be paid by the Plan along with the level of
services provided by Prudential Securities."

(8) Although there are presently nine Portfolios comprising the Trust,
there are only seven Sub-Advisers because two of the Sub-Advisers manage
two Portfolios.

(9) In the case of a section 404(c) Plan, Prudential Securities represents
that the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, will make available the Trust Prospectus to
section 404(c) Plan participants. If requested by such Plan administrator,
trustee or named fiduciary, the Prudential Securities will make available
to such Independent Plan Fiduciaries sufficient quantities of Prospectuses
for distribution to Plan participants, as well as provide Statements of
Additional Information to any parties upon request.

C-7
<PAGE> 76

Independent Plan Fiduciary or if, applicable, Plan participant, will be
given a copy of the investment advisory agreement between Prudential Securities
and such Plan relating to participation in the Target Program including copies
of the notice of proposed exemption and grant notice for the exemptive relief
provided herein. Upon written request to the Trust, Prudential Securities will
also provide an Independent Plan Fiduciary or if applicable, Plan participant,
with a copy of the respective investment advisory agreement between PMF and the
Sub-Advisers. (Independent Plan Fiduciaries or Plan participants will be
apprised by Prudential Securities that they may receive the aforementioned
information in sales and marketing material and/or in communications made by
brokers.)

With respect to a section 404(c) Plan, Financial Advisors affiliated with
Prudential Securities will also explain the services offered under the Target
Program as well as the operation and objectives of the Portfolios to either the
Independent Plan Fiduciary or to eligible section 404(c) Plan participants
depending upon the type of account the Independent Plan Fiduciary establishes
with Prudential Securities. (10)

If accepted as a Trust investor, an Independent Plan Fiduciary will be
required by Prudential Securities to acknowledge, in writing, prior to
purchasing Trust shares, that such fiduciary has received copies of the
aforementioned documents. With respect to a Plan that is covered by title I of
the Act (e.g., a defined contribution plan), where investment decisions will be
made by a trustee, investment manager or a named fiduciary, Prudential
Securities will require that such Independent Plan Fiduciary acknowledge in
writing receipt of such documents and represent to Prudential Securities that
such fiduciary is (a) independent of Prudential Securities and its affiliates,
(b) capable of making an independent decision regarding the investment of Plan
assets and (c) knowledgeable with respect to the Plan in administrative matters
and funding matters related thereto, and able to make an informed decision
concerning participation in the Target Program. With respect to a section 404(c)
Plan, written acknowledgment of the receipt of such documents will be provided
by the Independent Plan Fiduciary (i.e., the Plan administrator, trustee or
named fiduciary, as the recordholder of Trust shares, or in some instances, the
Plan participant). Such Independent Plan Fiduciary will be required to
represent, in writing, to Prudential Securities that such fiduciary is (a)
independent of Prudential Securities and its affiliates and (b) knowledgeable
with respect to the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision concerning participation in the
Target Program.

12. Prudential Securities will provide all parties that execute the
investment advisory agreement and in whose name the Target Program account is
registered with written confirmations of each purchase and redemption of shares
of a Portfolio, telephone quotations of such investor's account balance, a
monthly statement of account specifying the net asset value of a Plan's assets
that are invested in such account (to the extent there are transactions
involving the account), and a written quarterly Target Program account
statement. The Quarterly Account Monitor is designed to include a record of the
performance of the client's assets and rates of return as compared to several
appropriate market indices (illustrated in a manner that reflects the effect of
any fees for participation in the Target Program actually incurred during the
period), the client's actual portfolio with a breakdown of investments made in
each Portfolio, year to date and cumulative realized gains and losses and income
received from each Portfolio, a summary of purchase, sale and exchange activity
and dividends and interest received or reinvested as well as a market
commentary. In addition, the Quarterly Account Monitor will contain an analysis
and an evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations. The Quarterly Account Monitor is described in the summary
of the Target Program attached to the front of the Trust's Prospectus.

If an Independent Plan Fiduciary of a section 404(c) Plan opens a Disclosed
Account for each Plan participant, such participant will receive a Quarterly
Account Monitor reflecting information that pertains to the participant's
individual account. However, if an Independent Plan Fiduciary elects to
establish an Undisclosed Account with Prudential Securities, then Prudential
Securities will provide the Quarterly Account Monitor to the Independent Plan
Fiduciary. Such report will contain information relative to the Plan's account.

In addition, on both a quarterly and annual basis, commencing with the first
quarterly report due after this notice of proposed exemption is issued,
Prudential Securities will provide, as applicable, an Independent Plan Fiduciary
or a section 404(c) Plan participant with written disclosures of (a) the
percentage of each Portfolio's aggregate brokerage

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

(10) The Department is expressing no opinion as to whether the information
provided under the Target Program is sufficient to enable a participant to
exercise independent control over assets in his or her account as
contemplated by section 404(c) of the Act.

C-8
<PAGE> 77

commissions that are paid to Prudential Securities and (b) the average brokerage
commission per share paid by each Portfolio to Prudential Securities, as
compared to the average brokerage commission per share paid by each Portfolio to
brokers other than Prudential Securities, both expressed as cents per share.
With respect to a Disclosed Account established for a section 404(c) Plan
participant, Prudential Securities will provide the brokerage report to the
participant and not to the Independent Plan Fiduciary.

Further, the Independent Plan Fiduciary or section 404(c) Plan participant,
as applicable, will have access to a Financial Advisor for the discussion of any
questions that may arise.

13. A Plan wishing to redeem Trust shares must communicate such request in
writing or by telephone to Prudential Securities. Redemption requests received
in proper form prior to the close of trading on the New York Stock Exchange (the
NYSE) will be effected at the net asset value per share determined on that day.
Redemption requests received after the close of regular trading on the NYSE will
be effected at the net asset value at the close of business of the next day,
except on weekends or holidays when the NYSE is closed. A Portfolio is required
to transmit redemption proceeds for credit to an investor's account with PMF or
to an "introducing" broker (11) within 5 business days after receipt of the
redemption request. Prudential Securities will place redemption proceeds in the
client's brokerage account and will, in the absence of receiving investment
instructions, place all such assets in a money market fund (other than the
Trust's U.S. Government Money Market Portfolio) which may be affiliated with
Prudential Securities. (12)

Due to the high costs of maintaining small accounts, the Trust may also
redeem an account where the current value is $10,000 or less, provided the Plan
has been given at least 30 days' advance written notice in which to increase the
account balance to more than the $10,000 amount. The proceeds of such redemption
will be deposited in the investor's brokerage account unless Prudential
Securities is otherwise instructed. (13)

14. Shares of a Portfolio may be exchanged by an investor, without the
payment of any fees, for shares of another Portfolio at their respective net
asset values. However, Portfolio shares are not exchangeable with shares of
other Prudential Mutual Funds.

15. With respect to brokerage transactions that are entered into under the
Target Program for a Portfolio, such transactions may be executed through
Prudential Securities, if in the judgment of the Sub-Adviser, the use of such
broker-dealer is likely to result in price and execution at least as favorable,
and at a commission charge at least as comparable to those of other qualified
broker-dealers. In addition, Prudential Securities may not execute transactions
for a Portfolio on the floor of any national securities exchange but it may
effect transactions by transmitting orders to other brokers for execution. In
this regard, Prudential Securities is required to pay fees charged by those
persons performing the floor brokerage elements out of the brokerage
compensation it receives from a Portfolio.

16. Each Portfolio bears its own expenses, which generally include all costs
that are not specifically borne by PMF, Prudential Securities, the Sub-Advisers
or PMFS. Included among a Portfolio's expenses are costs incurred in connection
with the Portfolio's organization, investment management and administration
fees, fees for necessary professional and brokerage services, fees for any
pricing service, the costs of regulatory compliance and costs associated with
maintaining the Trust's legal existence and shareholder relations. No Portfolio,
however, will impose sales charges on purchases, reinvested dividends, deferred
sales charges, redemption fees, nor will any Portfolio incur distribution
expenses.

17. The total fees that are paid to Prudential Securities and its affiliates
will constitute no more than reasonable compensation. In this regard, for its
asset allocation and related services, Prudential Securities will charge an
investor a

- ---------------
(11) Prudential Securities provides clearance, settlement and other back
office services to other broker-dealers. Prudential Securities may also
provide confirmations and account statements to clients of brokers who
have "introduced" clients to Prudential Securities. If a Plan uses an
introducing broker, the arrangement between the Plan and that broker will
define whether the broker is authorized by the Plan to accept redemption
proceeds.

(12) The applicants are not requesting, nor is the Department proposing,
exemptive relief with respect to the investment, by Prudential Securities,
of redemption proceeds in an affiliated money market fund where the Plan
investor has not given investment instructions. The applicants represent
that to the extent Prudential Securities is considered a fiduciary, such
investments will comply with the terms and conditions of PTE 77-4.
However, the Department expresses no opinion herein on whether such
transactions are covered by this class exemption.

(13) The 30 day limit does not restrict a Plan's ability to redeem its
interest in the Trust. The 30 day notice period is provided to give a Plan
an opportunity to increase the value of the assets in its Plan account
with Prudential Securities to an amount in excess of $10,000. If desired,
the Plan may still follow the redemption guidelines described in
Representation 13 above.

C-9
<PAGE> 78

quarterly investment advisory fee. The "outside fee," which is computed
quarterly, ranges annually from .50 percent up to a maximum of 1.35 percent of
the average annual net assets held in a Target Program account invested by the
Plans in the Equity and Income Portfolios. The outside fee will be charged
directly to an investor and it will not be affected by the allocation of assets
among the Equity or the Income Portfolios nor by whether an investor follows or
ignores Prudential Securities' advice. (14) The outside fee can be negotiated to
below the 1.35 percent maximum only if the Plan invests an aggregate amount of
$100,000 or greater in the Target Program. In the case of Plans, the outside fee
may be paid by the Plan or by the Plan sponsor or, in the case of IRAs only, the
fee may be paid by the IRA beneficiary directly.

For Plan investors, the outside fee will be payable in full within 6
business days after the trade date for the initial investment in the Portfolios
and will be based on the value of assets in the Target Program on the trade date
of the initial investment. The initial fee payment will cover the period from
the initial investment trade date through the last calendar day of the calendar
quarter, and the fee will be pro-rated accordingly. Thereafter, the quarterly
fee will cover the period from the first calendar day through the last calendar
day of the current calendar quarter. The quarterly fee is based on the value of
assets in the Target Program measured as of the last calendar day of the
previous quarter and is payable on the fifth business day of the current
quarter. (15)

18. Each time that additional funds aggregating $10,000 or more are invested
in the Portfolios during any one quarter, the applicable fee, pro-rated for the
number of calendar days then remaining in the quarter and covering the amount of
such additional funds, shall be charged and be payable 6 business days later. In
the case of redemptions aggregating $10,000 or more during a quarter, the fee
will be reduced accordingly, pro-rated for the number of calendar days then
remaining in the quarter.

In addition, for investment management and related services provided to the
Trust, PMF is paid, from each Portfolio, a management fee which is computed
daily and paid monthly at an annual rate ranging from .25 percent to .70 percent
of the value of the Portfolio's average daily net assets depending upon the
Portfolio's objective. From these management fees, PMF compensates the
Sub-Advisers. This "inside fee," which is the difference between the individual
Portfolio's total management fee and the fee paid by PMF to the Sub-Adviser,
varies from 12.5 to 30 basis points depending on the Portfolio. In addition,
pursuant to a Transfer Agency and Service Agreement with the Trust, PMFS will be
paid an annual fee of $35 per Target Program participant out of the operating
expenses of the Portfolios. (16)

- ---------------
(14) Prudential Securities represents that the outside fee is not imposed on
the accounts of employees of Prudential and its subsidiaries, including
PMF, the accounts of their immediate families, IRAs and certain employee
pension benefit plans for these persons. With respect to employee benefit
plans maintained by PMF or its affiliates for their employees, the
applicants assert that such waiver would be required by PTE 77-3.

(15) The applicants represent that an Independent Plan Fiduciary or Plan
participant may change Portfolio allocations on any business day and there
are no limitations as to how frequently Portfolio allocations can be made.
The applicants also state that assets which are subsequently added to a
Target Program account after the beginning of any calendar quarter (and
are allocated in accordance with the Independent Plan Fiduciary's or
participant's asset allocation decision) will not be subject to the
outside fee for that quarter until such additional investments "aggregate"
(i.e., new money invested during the quarter) $10,000 or more. When this
occurs, the applicants explain that the outside fee will be assessed on
such additional assets and will be payable six business days thereafter
(pro-rated based on the length of time remaining in the current calendar
quarter). If the additional investments have not reached the $10,000 level
by the last day of the calendar quarter, the applicants state that such
investments will start being subject to the outside fee as of the first
business day of the next calendar quarter.

(16) The applicants represent that if an Undisclosed Account is established
by an Independent Plan Fiduciary only one $35 fee will be levied.

C-10
<PAGE> 79

19. The management fees that are paid at the Portfolio level to PMF and the
Sub-Advisers are set forth in the table below. As noted in the table, the sum of
the management fees paid by a Portfolio to PMF and the Sub-Advisers (S-A) and
retained by such entities equals the total management fee paid by the Portfolio.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TOT. MGT. S-A RET. PMF RET.
PORTFOLIO FEE (%) FEE (%) FEE (%)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity:
Large capitalization value portfolio.................... .60 .30 .30
Large capitalization growth portfolio................... .60 .30 .30
Small capitalization value portfolio.................... .60 .30 .30
Small capitalization growth portfolio................... .60 .30 .30
International equity portfolio.......................... .70 .40 .30
Income:
U.S. Government Money Market portfolio.................. .25 .125 .125
Mortgage backed securities portfolio.................... .45 .25 .20
Intermediate-term bond portfolio........................ .45 .25 .20
Total return bond portfolio............................. .45 .25 .20
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

20. PMF proposes to offset, quarterly, against the outside fee that will be
paid to Prudential Securities such amount as is necessary to assure that PMF
retains no more than 20 basis points (the Reduction Factor) from any Portfolio
on investment of assets attributable to any Plan. (17)

Under the proposed fee offset, a Reduction Factor of .10 percent will be
applied against Prudential Securities' quarterly outside fee with respect to the
value of the Plan assets that have been invested in the Equity Portfolios only.
As noted above, the Income Portfolios do not involve a Reduction Factor because
the fee retained by PMF for these Portfolios does not exceed 20 basis points.

The Department, in conjunction with the applicants, has developed the
following example to demonstrate how the fee offset mechanism will work and
determine the aggregate fee that a hypothetical Plan investor might expect to
pay to both Prudential Securities and PMF in a given calendar quarter or year:

Assume that as of March 31, 1993, the average daily value of Trust shares
held by a Plan investor was $1,000. Investment assets attributable to the Plan
were distributed among five Portfolios: (1) U.S. Government Money Market
Portfolio in which the Plan made a $50 investment and from which PMF would not
retain, after payment of the sub-advisory fee to the Sub-Adviser, an inside fee
of .125 percent; (2) Total Return Bond Portfolio in which the Plan made a $200
investment and from which PMF would retain, after payment of the sub-advisory
fee to the Sub-Adviser, an inside fee of .20 percent; (3) Small Capitalization
Growth Portfolio in which the Plan made a $250 investment and from which PMF
would be entitled to retain, after payment of the sub-advisory fee to the
Sub-Adviser, an inside fee of .30 percent; (4) Large Capitalization Growth
Portfolio in which the Plan made a $250 investment and from which PMF would be
entitled to retain, after payment of the sub-advisory fee to the Sub-Adviser, an
inside fee of .30 percent and (5) International Equity Portfolio in which the
Plan made a $250 investment and from which PMF would be entitled to retain,
after payment of the sub-advisory fee to the Sub-Adviser, an inside fee of .30
percent.

- ---------------
(17) Prudential Securities asserts that it chose 20 basis points as the
maximum net fee retained for management services rendered to the Portfolios
because this amount represents the lowest percentage management fee charged
by PMF among the Portfolios (except that the fee paid by the U.S.
Government Money Market Portfolio to PMF is equal to 12.5 basis points).

C-11
<PAGE> 80

Assume that the Plan investor pays the maximum annual outside fee of 1.35
percent on the Portfolios so that the total outside fee for the calendar quarter
April 1 through June 30, 1993, prior to the offset, would be:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
OUTSIDE
AMOUNT MAX. OUTSIDE FEE FOR
PORTFOLIO INVESTED QUART. FEE QUART.
---------------
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Money Market portfolio...... $ 50 1.35%(.25) $0.1688
Total return bond portfolio................. 200 1.35%(.25) .6750
Small capitalization growth portfolio....... 250 1.35%(.25) .8438
Large capitalization growth portfolio....... 250 1.35%(.25) .8438
International equity portfolio.............. 250 1.35%(.25) .8438
------ -------
Total....................................... 1,000 $3.3752
--------------------------------------------------------------------------------------------------
</TABLE>

Under the proposed fee offset, the outside fee charged to the Plan must be
reduced by the Reduction Factor to ensure that PMF retains an inside fee of no
more than .20% from each of the Portfolios on investment assets attributable to
the Plan. The following table shows the Reduction Factor as applied to each of
the Portfolios comprising the Trust:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
PMF. RET. RED. FACT. PMF RET. FEE
PORTFOLIO FEE (%) (%) AFTER RED. FACT.
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity:
Large capitalization value portfolio........ 0.30 0.10 0.20
Large capitalization growth portfolio .30 0.10 .20
Small capitalization value portfolio........ .30 0.10 .20
Small capitalization growth portfolio....... .30 0.10 .20
International equity portfolio.............. .30 0.10 .20
Income:
U.S. Government Money Market portfolio...... .125 -- .125
Mortgage backed securities portfolio........ .20 -- .20
Intermediate-term bond portfolio............ .20 -- .20
Total return bond portfolio................. .20 -- .20
--------------------------------------------------------------------------------------------------
</TABLE>

Under the proposed fee offset, the quarterly outside fee will be reduced
with respect to Plan assets in the example that have been invested in the Small
Capitalization Growth Portfolio, the Large Capitalization Growth Portfolio and
the International Equity Portfolio only (i.e., the Equity portfolios). In the
example above, the U.S. Government Money Market Portfolio and the Total Return
Bond Portfolio do not require a reduction of the outside fee because the fee
retained by PMF for these Portfolios does not exceed 20 basis points. Therefore,
the quarterly offset for the Plan investor is computed as follows:

(.25)[($250)(.10%) + ($250)(.10%) + ($250)(.10%)] = $.1875.

In the foregoing example, the Plan investor, like all other investors in the
Target Program, would receive a statement for its Target Program account during
the fourth week of April 1993. This statement would include a debit notice for
the outside fee for the calendar quarter April 1 through June 30, as adjusted by
subtracting the quarterly offset from the quarterly outside fee as determined
above. The net quarterly outside fee that would be paid to Prudential Securities
would be determined as follows:

$3.3752 - $.1875 = $3.1877.

The account of the Plan investor (as with other investors) would be debited
on or about April 8, 1993 (i.e., the sixth business day of the calendar quarter)
for the amount of the net quarterly outside fee (pursuant to the authorization
contained in the Target Program investment advisory agreement, and as described
in the Target Program description attached to the cover of the Trust's
Prospectus). (18)

- ---------------
(18) The foregoing example illustrates that fact that the outside fee and the
fee offset are computed contemporaneously and that Plan investors will get the
benefit of the fee offset contemporaneously upon the payment of the outside fee.
Because the inside fee is paid monthly and the fee offset is computed quarterly,
the applicants represent that PMF will not receive the benefit of a "float" as a
result of such calculations because the fee offset will always be realized no
later than the time that the outside fee is paid (i.e., on or about the sixth
business day of the first month of the calendar quarter). Since the inside fee
is paid at the end of each calendar month, Plan investors will realize the full
benefit of the offset before the time that the inside fee is paid for the second
and third months of the calendar quarter.

C-12
<PAGE> 81

Assuming the Plan investor wishes to gain a more realistic perspective of
the aggregate quarterly and annual fees that would be paid to both Prudential
Securities and PMF at both the Plan level and the Portfolio level, the investor
would include within the computation on the net quarterly outside fee, the
quarterly inside fee that such investor would be paying to PMF.

The quarterly, aggregate fee calculation would be computed as follows:

$3.1877, representing the quarterly net outside fee paid to Prudential
Securities + (.25) [(.125%)($50) + (.20%)($200) + (.30)($250 + $250 + $250)] or
$.6781, representing the quarterly inside fee paid to PMF = $3.8658, which
represents the quarterly fee that would be paid to Prudential Securities and
PMF for services provided to the Plan investor.

The total annual fee that the Plan investor would pay to both Prudential
Securities and PMF would be equal to (4)[$3.1877 (net outside fee) + $.6781
(inside fee)] or $15.4632 per $1,000 investment, or a total fee percentage of
1.55%.

21. Because PMF will retain an inside fee of 12.5 basis points with respect
to assets invested in the U.S. Government Money Market Portfolio, the applicants
note that a potential conflict may exist by reason of the variance in net inside
fees among the U.S. Government Money Market Portfolio and the other Portfolios.
The applicants also recognize that this factor could result in the
recommendation by Prudential Securities of a higher fee-generating Portfolio to
an investing Plan. To help address this potential conflict, Prudential
Securities will disclose to all participants in the Target Program the fee
differentials of the various Portfolios.

22. The books of the Trust will be audited annually by independent,
certified public accountants selected by the Trustees and approved by the
investors. All investors will receive copies of an audited financial report no
later than 60 days after the close of each Trust fiscal year. The books and
financial records of the Trust will be open for inspection by any investor,
including the Department, the Service and the Securities and Exchange
Commission, at all times during regular business hours.

23. In summary, it is represented that the transactions satisfy the
statutory criteria for an exemption under section 408(a) of the Act because: (a)
The investment of a Plan's assets in the Target Program will be made and
approved by a Plan fiduciary which is independent of Prudential Securities and
its affiliates such that Independent Plan Fiduciaries will maintain complete
discretion with respect to participating in the Target Program; (b) Independent
Plan Fiduciaries will have an opportunity to redeem their shares in the Trust in
such fiduciaries' individual discretion; (c) no Plan will pay a fee or
commission by reason of the acquisition or redemption of shares in the Trust;
(d) prior to making an investment in the Trust, each Independent Plan Fiduciary
will receive offering materials and disclosures from either PMF or Prudential
Securities which disclose all material facts concerning the purpose, fees,
structure, operation, risks and participation in the Target Program; (e)
Prudential Securities will provide written documentation to an Independent Plan
Fiduciary of its recommendations or evaluations based upon objective criteria;
(f) any Sub-Adviser that is appointed by Prudential Securities to exercise
investment discretion over a Portfolio will always be independent of Prudential
Securities and its affiliates; (g) the annual investment advisory fee that is
paid by a Plan to Prudential Securities for investment advisory services
rendered to such Plan will be offset by such amount as is necessary to assure
that PMF retains no more than 20 basis points from any Portfolio on investment
assets attributable to the Plan investor; (h) each Plan will receive copies of
the Trust's semi-annual and annual report which will include financial
statements for the Trust and investment management fees paid by each Portfolio;
and (i) on a quarterly and annual basis, Prudential Securities will provide
written disclosures to Independent Plan Fiduciaries with respect to (1) the
percentage of each Trust Portfolio's brokerage commissions that are paid to
Prudential Securities and its affiliates and (2) the average brokerage
commission per share paid by each Portfolio to Prudential Securities as compared
to the average brokerage commission per share paid by each Portfolio to brokers
other than Prudential Securities and its affiliates, both expressed as cents per
share.

For Further Information Contact: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)

C-13
<PAGE> 82

FINAL EXEMPTION

FEDERAL REGISTER
VOL. 58, NO. 172
WEDNESDAY, SEPTEMBER 8, 1993
NOTICES

DEPARTMENT OF LABOR (DOL)
Pension and Welfare Benefits Administration (PWBA)

. . .

Prudential Mutual Fund Management, Inc. (PMF) Located in New York, NY

[Prohibited Transaction Exemption 93-59; Exemption Application No. D-9217]

EXEMPTION
SECTION I. COVERED TRANSACTIONS

The restrictions of section 406(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1) (A) through (D) of the Code, shall not apply to the purchase or
redemption of shares by an employee benefit plan, an individual retirement
account (the IRA) or a retirement plan for a self-employed individual (the Keogh
Plan; collectively, the Plans) in the Target Portfolio Trust (the Trust)
established in connection with such Plans' participation in the Target Personal
Investment Advisory Service (the Target Program). In addition, the restrictions
of section 406(b) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1) (E) and (F) of the
Code, shall not apply to the provision, by Prudential Securities Incorporated
(Prudential Securities), of investment advisory services to an independent
fiduciary of a participating Plan (the Independent Plan Fiduciary) which may
result in such fiduciary's selection of portfolios of the Trust (the Portfolios)
in the Target Program for the investment of Plan assets.

This exemption is subject to the following conditions that are set forth
below in Section II.

SECTION II. GENERAL CONDITIONS

(1) The participation of Plans in the Target Program is approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of Prudential Securities and/or its affiliates covered by an
IRA not subject to title I of the Act will be considered an Independent Plan
Fiduciary with respect to such IRA.

(2) The total fees paid to Prudential Securities and its affiliates
constitute no more than reasonable compensation.

(3) No Plan pays a fee or commission by reason of the acquisition or
redemption of shares in the Trust.

(4) The terms of each purchase or redemption of Trust shares remain at least
as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.

(5) Prudential Securities provides written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.

(6) Any recommendation or evaluation made by Prudential Securities to an
Independent Plan Fiduciary are implemented only at the express direction of such
independent fiduciary.

(7) Prudential Securities provides investment advice in writing to an
Independent Plan Fiduciary with respect to all available Portfolios.

(8) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio is independent of Prudential Securities
and its affiliates.

C-14
<PAGE> 83

(10) With respect to its participation in the Target Program prior to
purchasing Trust shares,

(a) Each Plan receives the following written or oral disclosures or
questionnaires from Prudential Securities or the Trust:

(5) A copy of the investment advisory agreement between Prudential
Securities and such Plan relating to participation in the Target Program.

(6) Upon written request to the Trust, a copy of the respective
investment advisory agreement between Prudential Securities and the
Sub-Advisers.

(8) Copies of the proposed exemption and grant notice describing the
exemptive relief provided herein.

(c) With respect to a section 404(c) Plan, written acknowledgment of the
receipt of such documents is provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, or, in some instances, the Plan participant).
Such Independent Plan Fiduciary will be required to represent in writing to
PMF that such fiduciary is (1) Independent of PMF and its affiliates and (2)
knowledgeable with respect to the Plan in administrative matters and funding
matters related thereto, and able to make an informed decision concerning
participation in the Target Program.

(d) With respect to a Plan that is covered under title I of the Act,
where investment decisions are made by a trustee, investment manager or a
named fiduciary, such Independent Plan Fiduciary is required to acknowledge,
in writing, receipt of such documents and represent to PMF that such
fiduciary is (1) Independent of PMF and its affiliates, (2) capable of
making an independent decision regarding the investment of Plan assets, and
(3) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the Target Program.

(11) Subsequent to its participation in the Target Program, each Plan
receives the following written or oral disclosures with respect to its ongoing
participation:

(a) Written confirmations of each purchase or redemption transaction by
the Plan with respect to a Portfolio.

(b) Telephone quotations from Prudential Securities of such Plan's
account balance.

(c) A monthly statement of account from Prudential Securities specifying
the net asset value of the Plan's investment in such account to the extent
there are transactions by the Plan.

C-15
<PAGE> 84

(d) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees paid by
each Portfolio.

(e) A written quarterly monitoring report (the Quarterly Account
Monitor) containing a record of the performance of the Plan's assets
invested in the Target Program, the rates of return received by the Plan
with respect to such investments, the Plan's actual portfolio with a
breakdown of investments made in each Portfolio, year to date and cumulative
realized gains and losses and income received from each Portfolio, a summary
of purchase, sale and exchange activity, dividends and interest received or
reinvested and market commentary. The Quarterly Account Monitor will also
contain an analysis and an evaluation of a Plan investor's account to assist
the Independent Plan Fiduciary or section 404(c) Plan participant in
ascertaining whether the investment objectives for a Plan or an individual
account have been met and recommending, if required, changes in Portfolio
allocations.

(1) In the case of a section 404(c) Plan where the Independent Plan
Fiduciary has established an omnibus account in the name of the Plan with
Prudential Securities, the Quarterly Account Monitor will be provided to
the Independent Plan Fiduciary.

(2) In the case of a section 404(c) Plan where the Independent Plan
Fiduciary opens an account for each Plan participant, the Quarterly
Account Monitor will be furnished to each participant and will set forth
information pertaining to the participant's individual account.

(f) Written disclosures to the Independent Plan Fiduciary, on a
quarterly and annual basis, of the (1) Percentage of each Portfolio's
brokerage commissions that are paid to Prudential Securities and (2) the
average brokerage commission per share paid by each Portfolio to Prudential
Securities, as compared to the average brokerage commission per share paid
by the Trust to brokers other than Prudential Securities, both expressed as
cents per share.

(g) Notification that periodic meetings will be held, upon the request
of Plan investors, with Financial Advisors, Independent Plan Fiduciaries or,
if applicable, participants of section 404(c) Plans, to discuss the
Quarterly Account Monitor or other questions that may arise.

(12) PMF maintains, for a period of six years, the records necessary to
enable the persons described in paragraph (13) of this section to determine
whether the conditions of this exemption have been met, except that (a) A
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of PMF and/or its affiliates, the records are
lost or destroyed prior to the end of the six-year period, and (b) no party in
interest other than PMF shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (13) below.

(1) Any duly authorized employee or representative of the Department or
the Internal Revenue Service (the Service);

(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;

(3) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and

(4) Any participant or beneficiary of any participating Plan, or any
duly authorized representative of such participant or beneficiary.

(b) None of the persons described above in subparagraphs (2)-(4) of this
paragraph (13) are authorized to examine the trade secrets of PMF or commercial
or financial information which is privileged or confidential.

C-16
<PAGE> 85

SECTION III. DEFINITIONS

For purposes of this exemption:

(1) An "affiliate" of Prudential Securities includes --

(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control with
Prudential Securities. (For purposes of this subsection, the term
"control" means the power to exercise a controlling influence over the
management or policies of a person other than an individual.)

(b) Any officer, director or partner in such person, and

(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is
independent of Prudential Securities and its affiliates and is either:

(a) A Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares of a section 404(c) Plan,

(b) A participant in a Keogh Plan,

For a more complete statement of the facts and representations supporting
the Department's decision to grant this exemption, refer to the notice of
proposed exemption (the Notice) published on July 12, 1993 at 58 FR 37514.

EFFECTIVE DATE: This exemption is effective March 15, 1993.

WRITTEN COMMENTS

The Department received one written comment with respect to the Notice and
no requests for a public hearing. The comment letter was submitted by PMF,
Prudential Securities and their affiliates (hereinafter, the Applicants) and it
suggested certain clarifications to the General Conditions and the Summary of
Facts and Representations of the Notice. Discussed below are the changes
suggested by the Applicants and the Department's responses to these amendments.

With respect to the General Conditions of the Notice that are set forth in
Section II, the Applicants suggest that the last sentence of paragraph (e) be
clarified to read as follows:

The Quarterly Account Monitor will also contain an evaluation of a
Plan investor's account to assist the Plan ascertaining whether its
investment objectives have been met and recommending, if required,
changes in Portfolio allocations.

However, after considering this comment, the Department has decided that further
revisions of Condition 11(e) are warranted to reflect the fact that it is the
Independent Plan Fiduciary or section 404(c) Plan participant rather than the
Plan who makes determinations about the prudence of continuing a Plan or account
investment in the Target Program. Therefore, the Department has modified the
last sentence of Condition 11(e)as follows:

The Quarterly Account Monitor will also contain an analysis and an
evaluation of a Plan investor's account to assist the Independent
Plan Fiduciary or section 404(c) Plan participant in ascertaining
whether the investment objectives for a Plan or an individual account
have been met and recommending, if required, changes in Portfolio
allocations.

C-17
<PAGE> 86

The Applicants also suggest that Condition 11(g) of the Notice, which
addresses ongoing oral and written disclosures that will be provided by
Prudential Securities to Plan investors, be modified to read as follows:

(g) Periodic meetings will be held at the request of Plan investors
with Financial Advisors, Independent Plan Fiduciaries or, if
applicable, participants of section 404(c) Plans, to discuss the
Quarterly Account Monitor or other questions that may arise.

Although generally agreeing with this comment, the Department believes it would
be more comprehensible if the words "Notification that" were inserted at the
beginning of this clause to emphasize the fact that Prudential Securities will
inform Plan investors of meetings with its Financial Advisors. Therefore, the
Department has modified Condition 11(g) as follows:

(g) Notification that periodic meetings will be held, upon the
request of Plan investors, with Financial Advisors, Independent Plan
Fiduciaries or, if applicable, participants of section 404(c) Plans,
to discuss the Quarterly Account Monitor or other questions that may
arise.

With respect to modifications to the Summary of Facts and Representations of
the Notice, the Applicants suggest that the last sentence of the second
paragraph of Representation 8 be revised to reflect the fact that, in certain
circumstances, the quarterly investment allocation fee can be lower than 1.35
percent. In response to this comment, the Department has revised Representation
8 to read as follows:

The quarterly allocation fee of 1.35 percent per annum may be
lowered in connection with (a) investments of $100,000 or more in the
Target Program or (b) the fee offset described in Representation 20.

The Applicants also request that the Department revise the first sentence of
Footnote 9 in which Prudential Securities states that a Plan administrator,
trustee or named fiduciary, as the recordholder of Trust share, will make
available the Trust Prospectus to section 404(c) Plan participants. The
Applicants explain that Prudential Securities is not in a position to make any
statements with respect to actions undertaken by Plan administrators, trustees
or named fiduciaries. Therefore, they recommend that the first sentence of
Footnote 9 be deleted.

The Department does not concur entirely with the suggested modification.
Rather than deleting the first sentence of the footnote, the Department believes
the sentence can be clarified to read as follows:

In the case of a section 404(c) Plan, Prudential Securities
represents that the Plan administrator, trustee or named fiduciary,
as the recordholder of Trust shares, has agreed to make the Trust
Prospectus available to section 404(c) Plan participants.

With respect to Representation 17 of the Notice, the Applicants state that
it is possible that the outside fee can be negotiated to a level below .50
percent. However, the Applicants anticipate that this fee will generally be no
lower than .50 percent. Therefore, they suggest that the Department revise the
third sentence of Representation 17 to reflect that the fee will generally range
from .50 percent to a maximum of 1.35 percent. The Department concurs with this
change and has revised sentence three of Representation 17 as follows:

The "outside fee," which is computed quarterly, generally ranges on
an annual basis from .50 percent up to a maximum of 1.35 percent of
the average annual net assets held in a Target Program account
invested by the Plans in the Equity and Income Portfolios.

The Applicants note that a Plan may be given the option of being separately
invoiced for the outside fee and paying such fee by check or having the outside
fee deducted from the Plan's account with Prudential Securities. In the event
the Plan elects to be invoiced separately for the outside fee, the Applicants
state that the fee is payable 45 days after the end of each calendar quarter or,
for additional investments, after such investments aggregate $10,000. Therefore,
the Applicants suggest that relevant portions of Representations 17, 18 and 20
of the Notice be revised as well as Footnote 18.

In response to this change, the Department has revised Representation 17 of
the Notice by changing the initial clause of the second paragraph to read "For
some Plan investors" instead of "For Plan investors" and adding a new third
paragraph which should be inserted at the end of the text of this
representation. The new paragraph would read as follows:

Plan investors will be given the option of either being separately
invoiced for the outside fee and paying such fee by check or having
the outside fee deducted from their Prudential Securities account. In
the event the Plan elects to be invoiced separately for the outside
fee, the fee is payable 45 calendar days after the end of the

C-18
<PAGE> 87

quarter. However, if the Plan elects to have the outside fee deducted
from its Plan account with Prudential Securities, such outside fee would
be payable within 6 business days of the trade date for an initial
investment or within 6 business days of the current calendar quarter.

The Department also wishes to clarify that the term "applicable fee" referred to
in the initial sentence of Representation 18 means the "outside fee" which will
be paid after a Plan's additional investments in the Trust total $10,000 or
more. Therefore, the Department has revised this sentence by placing the term
outside fee in parentheticals. The revised sentence reads as follows:

Each time that additional funds aggregating $10,000 or more are
invested in the Portfolios during any one quarter, the applicable fee
(i.e., the outside fee), pro-rated for the number of calendar days
then remaining in the quarter and covering the amount of such
additional funds, shall be charged and be payable 6 business days
later.

To reflect the dual billing procedure that Prudential Securities has
established for Plans investing in the Trust, the Department has revised
paragraph 5 of the hypothetical example contained in Representation 20 of the
Notice. The amended paragraph now reads as follows:

The account of the Plan investor (as with other investors) would be
debited on or about April 8, 1993 (i.e., the sixth business day of
the calendar quarter) for the amount of the net quarterly outside fee
(pursuant to the authorization contained in the Target Program
investment advisory agreement, and as described in the Target Program
description attached to the cover of the Trust's Prospectus. However,
if the Plan investor is separately invoiced by Prudential Securities,
the outside fee would be payable 45 calendar days after the end of
the calendar quarter.

The Department has also amended Footnote 18 by adding new language to that
contained in the parenthetical so as to reflect the two payment schedules for
the outside fee:

* * * i.e., on or about the sixth business day of the first month
of the calendar quarter or within 45 calendar days after the end of
the calendar quarter.

Finally, with respect to the example contained in Representation 20, the
Applicants point out that in Clause (1) of the first paragraph of the example
(id at 37520) inadvertently includes the word "not" prior to the word "retain."
The Department concurs with this change and has deleted the word "not" so that
Clause (1) will read as follows:

* * * (1) U.S. Government Money Market Portfolio in which the Plan
made a $50 investment and from which PMF would retain, after payment
of the subadvisory fee to the Sub-Adviser, an inside fee of .125
percent;

Upon a review of the entire record, including the written comment received,
the Department has determined to grant the exemption subject to the
modifications described above.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)

C-19
<PAGE> 88

(This Page Intentionally Left Blank)
<PAGE> 89

(This Page Intentionally Left Blank)
<PAGE> 90

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 information or representations must not be relied upon as having been
authorized by the Trust or the Distributor. This Prospectus does not constitute
an offer by the Trust or by the Distributor to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer in such jurisdiction.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................... 2
Trust Expenses............................. 6
Financial Highlights....................... 8
Description of the Portfolios.............. 12
Investment Objectives and Policies....... 12
Other Investments and Policies........... 20
Investment Restrictions.................. 39
Management of the Trust.................... 39
Manager.................................. 40
Advisers................................. 42
Distributor.............................. 47
Portfolio Transactions................... 48
Net Asset Value............................ 49
Purchase and Redemption of Shares.......... 49
Shareholder Services..................... 52
Taxes, Dividends and Distributions......... 52
General Information........................ 55
Performance Information.................. 55
Description of Shares.................... 56
Custodian and Transfer and Dividend
Disbursing Agent....................... 56
Additional Information................... 56
Appendix A................................. A-1
Appendix B................................. B-1
Appendix C................................. C-1
</TABLE>

------------------------
TMF 158 A

CUSIP NOS.:

Large Capitalization Growth 875921 20 7
Large Capitalization Value 875921 10 8
Small Capitalization Growth 875921 40 5
Small Capitalization Value 875921 30 6
International Equity 875921 50 4
International Bond 875921 87 6
Total Return Bond 875921 88 4
Intermediate-Term Bond 875921 80 1
Mortgage Backed Securities 875921 70 2
U.S. Government Money Market 875921 60 3

(TARGET LOGO)

THE TARGET

PORTFOLIO TRUST(SM)

PROSPECTUS

APRIL 30, 1996
<PAGE> 91
THE TARGET PORTFOLIO TRUST(SM)

Statement of Additional Information
April 30, 1996

The Target Portfolio Trust(SM) (the Trust), is an open-end, management
investment company currently composed of ten separate investment portfolios
(the Portfolios) professionally managed by Prudential Mutual Fund Management,
Inc. (PMF or the Manager). Each Portfolio benefits from discretionary advisory
services provided by an investment adviser (each, an Adviser, collectively, the
Advisers) identified, retained, supervised and compensated by the Manager. The
Trust consists of the following ten Portfolios:

Equity Portfolios
Large Capitalization Growth Portfolio
Large Capitalization Value Portfolio
Small Capitalization Growth Portfolio
Small Capitalization Value Portfolio
International Equity Portfolio

Income Portfolios

International Bond Portfolio
Total Return Bond Portfolio
Intermediate-Term Bond Portfolio
Mortgage Backed Securities Portfolio
U.S. Government Money Market Portfolio

Shares of the Portfolios are offered to participants in the Prudential
Securities Target Program(SM) (the Target Program), an investment advisory
service that provides to investors asset allocation recommendations with
respect to the Portfolios based on an evaluation of an investor's investment
objectives, preferences and risk tolerances. The Target Program or shares of
the Trust are also available to banks, trust companies and other investment
advisory services.

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

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Trust's Prospectus dated April 30, 1996, a copy of
which may be obtained from the Trust upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Cross-reference
to page in
Page Prospectus
---- ----------------
<S> <C> <C>
Investment Objectives and Policies.......................................... B-2 12
Additional Investment Information........................................... B-2 20
Investment Restrictions..................................................... B-15 39
Trustees and Officers....................................................... B-17 40
Manager..................................................................... B-19 40
Advisers.................................................................... B-22 42
Distributor................................................................. B-24 47
Portfolio Transactions and Brokerage........................................ B-25 48
Purchase and Redemption of Shares........................................... B-26 49
Shareholder Investment Account.............................................. B-27 52
Net Asset Value............................................................. B-28 49
Taxes, Dividends and Distributions.......................................... B-29 52
Performance Information..................................................... B-31 55
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants............................................................... B-34 56
Financial Statements........................................................ B-35 --
Independent Auditors' Report................................................ B-81 --
Appendix A--Historical Performance Data..................................... A-1
Appendix B--General Investment Information.................................. A-5
Appendix C--Information Relating to The Prudential.......................... A-6
- -------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE> 92

INVESTMENT OBJECTIVES AND POLICIES

ADDITIONAL INVESTMENT INFORMATION

U.S. GOVERNMENT SECURITIES

Each Portfolio may invest in U.S. Government securities.

MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A Portfolio may purchase mortgage-related
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including GNMA, FNMA and FHLMC Certificates. See "Mortgage
Backed Securities" below. Mortgages backing the securities which may be
purchased by a Portfolio include conventional thirty-year fixed-rate mortgages,
graduated payment mortgages, fifteen-year mortgages, adjustable rate mortgages
and balloon payment mortgages. A balloon payment mortgage backed security is an
amortized mortgage security with installments of principal and interest, the
last installment of which is predominantly principal. All of these mortgages
can be used to create pass-through securities. A pass-through security is
formed when mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an undivided mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. The remaining expected average life of a pool
of mortgage loans underlying a mortgage backed security is a prediction of when
the mortgage loans will be repaid and is based upon a variety of factors, such
as the demographic and geographic characteristics of the borrowers and the
mortgaged properties, the length of time that each of the mortgage loans has
been outstanding, the interest rates payable on the mortgage loans and the
current interest rate environment.

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

SPECIAL CONSIDERATIONS. Fixed-income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in
value in response to changes in interest rates generally will be more
pronounced. During periods of falling interest rates, the values of
outstanding long-term fixed-rate U.S. Government securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. The magnitude of these fluctuations will
generally be greater for securities with longer maturities. Although changes in
the value of U.S. Government securities will not affect investment income from
those securities, they may affect the net asset value of a Portfolio.

At a time when a Portfolio has written call options on a portion of its
U.S. Government securities, its ability to profit from declining interest rates
will be limited. Any appreciation in the value of the securities held in the
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by a Portfolio. The termination of
option positions under these conditions would generally result in the
realization of capital losses, which would reduce a Portfolio's capital gains
distribution. Accordingly, a Portfolio would generally seek to realize capital
gains to offset realized losses by selling portfolio securities. In such
circumstances, however, it is likely that the proceeds of such sales would be
reinvested in lower yielding securities. See "Additional Risks--Options
Transactions and Related Risks."

MORTGAGE BACKED SECURITIES

As discussed in the Prospectus, the mortgage-backed securities purchased
by the Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio evidence an
interest in a specific pool of mortgages. Such securities are issued by GNMA,
FNMA and FHLMC.

GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities which evidence
an undivided interest in a pool or pools of mortgages. GNMA Certificates that
the Portfolios purchase are the "modified pass-through" type, which entitle
the holder to receive timely payment of all interest and principal payments due
on the mortgage pool, net of fees paid to the "issuer" and GNMA, regardless
of whether or not the mortgagor actually makes the payment. The GNMA
Certificates will represent a pro rata interest in one or more pools of the
following types of mortgage loans: (i) fixed rate level payment mortgage loans;
(ii) fixed rate graduated payment mortgage loans; (iii) fixed rate growing
equity mortgage loans; (iv) fixed rate

B-2

<PAGE> 93

mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on
multifamily residential properties under construction; (vi) mortgage loans on
completed multifamily projects; (vii) fixed rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (viii) mortgage
loans that provide for adjustments in payments based on periodic changes in
interest rates or in other payment terms of the mortgage loans; and (ix)
mortgage-backed serial notes. All of these mortgage loans will be FHA Loans or
VA Loans and, except as otherwise specified above, will be fully-amortizing
loans secured by first liens on one-to-four family housing units.

FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA provides funds to the mortgage market primarily
by purchasing home mortgage loans from local lenders, thereby replenishing
their funds for additional lending. FNMA acquires funds to purchase home
mortgage loans from many capital market investors that may not ordinarily
invest in mortgage loans directly.

Each FNMA Certificate will entitle the registered holder thereof to
receive amounts, representing such holder's pro rata interest in scheduled
principal payments and interest payments (at such FNMA Certificate's
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans), and any principal prepayments on the mortgage loans
in the pool represented by such FNMA Certificate and such holder's
proportionate interest in the full principal amount of any foreclosed or
otherwise finally liquidated mortgage loan. The full and timely payment of
principal and interest on each FNMA Certificate will be guaranteed by FNMA,
which guarantee is not backed by the full faith and credit of the U.S.
Government.

Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.

FHLMC SECURITIES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the FHLMC Act). Its purpose is to promote development of a nationwide
secondary market in conventional residential mortgages. The principal activity
of FHLMC consists of the purchase of first lien, conventional, residential
mortgage loans and participation interests in such mortgage loans and the
resale of the mortgage loans so purchased in the form of mortgage securities,
primarily FHLMC Certificates.

The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owned on the underlying pool. The
FHMLC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.

GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year
in guaranteed minimum payments. The expected average life of these securities
is approximately ten years.

FHLMC CERTIFICATES. FHLMC guarantees to each registered holder of the
FHLMC Certificate the timely payment of interest at the rate provided for by
such FHLMC Certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC Certificate ultimate collection of all principal
on the related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. FHLMC may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than 30 days
following (i) foreclosure sale, (ii) payment of a claim by any mortgage insurer
or (iii) the expiration of any right of redemption, whichever occurs later, but
in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. The obligations of FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by the full
faith and credit of the U.S. Government.

FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one-to four-family
residential properties or multifamily projects. Each mortgage loan must meet
the applicable standards set forth in the FHLMC Act. An FHLMC Certificate group
may include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC
Certificate group.

The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if
such mortgage securities are purchased at a discount, an

B-3

<PAGE> 94

unscheduled prepayment of principal will increase current and total returns and
will accelerate the recognition of income which when distributed to
shareholders will be taxable as ordinary income.

ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
(ARMs) are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. Generally, ARMs have a specified maturity
date and amortize principal over their life. In periods of declining interest
rates, there is a reasonable likelihood that ARMs will experience increased
rates of prepayment of principal. However, the major difference between ARMs
and fixed rate mortgage securities is that the interest rate and the rate of
amortization of principal of ARMs can and do change in accordance with
movements in a particular, pre-specified, published interest rate index.

The amount of interest on an ARM is calculated by adding a specified
amount, the "margin," to the index, subject to limitations on the maximum and
minimum interest that can be charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. Because the interest rate on ARMs generally moves in the same direction
as market interest rates, the market value of ARMs tends to be more stable than
that of long-term fixed rate securities.

There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month
London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of Funds index (often
related to ARMs issued by FNMA), tend to lag changes in market rate levels and
tend to be somewhat less volatile.

COLLATERALIZED MORTGAGE OBLIGATIONS. In reliance on a Securities and
Exchange Commission (the SEC) interpretation, a Portfolio's investments in
certain qualifying collateralized mortgage obligations (CMOs), including CMOs
that have elected to be treated as Real Estate Mortgage Investment Conduits
(REMICs), are not subject to the Investment Company Act's limitation on
acquiring interests in other Investment companies. In order to be able to rely
on the SEC's interpretation, the CMOs and REMICs must be unmanaged, fixed-asset
issuers, that (a) invest primarily in mortgage-backed securities, (b) do not
issue redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (d) are
not registered or regulated under the Investment Company Act as investment
companies. To the extent that a Portfolio selects CMOs or REMICs that do not
meet the above requirements, the Portfolio may not invest more than 10% of its
assets in all such entities and may not acquire more than 3% of the voting
securities of any single such entity.

OTHER INVESTMENTS

CUSTODIAL RECEIPTS. Each Portfolio may purchase obligations issued or
guaranteed as to principal and interest by the U.S. Government in the form of
custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain U.S. Treasury notes or bonds. Such notes
and bonds are held in custody by a bank on behalf of the owners. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investment Growth Receipts" (TIGRs) and "Certificates of Accrual
on Treasury Securities" (CATS). Each Portfolio will not invest more than 5% of
its net assets in such custodial receipts.

LOAN PARTICIPATIONS. The Intermediate-Term Bond Portfolio and Total Return
Bond Portfolio may invest up to 5% of net assets in high quality participation
interests having remaining maturities not exceeding one year in loans extended
by banks to United States and foreign companies. In a typical corporate loan
syndication, a number of lenders, usually banks (co-lenders), lend a corporate
borrower a specified sum pursuant to the terms and conditions of a loan
agreement. One of the co-lenders usually agrees to act as the agent bank with
respect to the loan. The loan agreement among the corporate borrower and the
co-lenders identifies the agent bank as well as sets forth the rights and
duties of the parties. The agreement often (but not always) provides for the
collateralization of the corporate borrower's obligations thereunder and
includes various types of restrictive covenants which must be met by the
borrower.

The participation interests acquired by a Portfolio may, depending on the
transaction, take the form of a direct or co-lending relationship with the
corporate borrower, an assignment of an interest in the loan by a co-lender or
another participant, or a participation in the seller's share of the loan.
Typically, the Portfolio will look to the agent bank to collect principal of
and interest on a participation interest, to monitor compliance with loan
covenants, to enforce all credit remedies, such as foreclosures on collateral,
and to notify co-lenders of any adverse changes in the borrower's financial
condition or declarations of insolvency. The agent bank in such cases will be
qualified to serve as a custodian for a registered investment company such as
the Trust. The agent bank is compensated for these services by the borrower
pursuant to the terms of the loan agreement.

When a Portfolio acts as co-lender in connection with a participation
interest or when the Portfolio acquires a participation interest the terms of
which provide that the Portfolio will be in privity with the corporate
borrower, the Portfolio will have direct recourse against

B-4

<PAGE> 95

the borrower in the event the borrower fails to pay scheduled principal and
interest. In cases where the Portfolio lacks such direct recourse, the
Portfolio will look to the agent bank to enforce appropriate credit remedies
against the borrower.

The Portfolios believe that the principal credit risk associated with
acquiring participation interests from a co-lender or another participant is
the credit risk associated with the underlying corporate borrower. A Portfolio
may incur additional credit risk, however, when a Portfolio is in the position
of participant rather than a co-lender because the Portfolio must assume the
risk of insolvency of the co-lender from which the participation interest was
acquired and that of any person interpositioned between the Portfolio and the
co-lender. However, in acquiring participation interests, the Portfolio will
conduct analysis and evaluation of the financial condition of each such
co-lender and participant to ensure that the participation interest meets the
Portfolio's high quality standard and will continue to do so as long as it
holds a participation. For purposes of a Portfolio's requirement to maintain
diversification for tax purposes, the issuer of a loan participation will be
the underlying borrower. In cases where a Portfolio does not have recourse
directly against the borrower, both the borrower and each agent bank and
co-lender interposed between the Portfolio and the borrower will be deemed
issuers of the loan participation for tax diversification purposes.

For purposes of each Portfolio's fundamental investment restriction
against investing 25% or more of its total assets in any one industry, a
Portfolio will consider all relevant factors in determining who is the issuer
of a loan participation including the credit quality of the underlying
borrower, the amount and quality of the collateral, the terms of the loan
participation agreement and other relevant agreements (including any
intercreditor agreements), the degree to which the credit of such intermediary
was deemed material to the decision to purchase the loan participation, the
interest environment, and general economic conditions applicable to the
borrower and such intermediary.

COMMERCIAL PAPER. Each Portfolio may invest in commercial paper.
Commercial paper consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. A variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving periodically
fluctuating rates of interest under a letter agreement between a commercial
paper issuer and an institutional lender pursuant to which the lender may
determine to invest varying amounts.

ADDITIONAL RISKS

OPTIONS TRANSACTIONS AND RELATED RISKS

The International Equity Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each purchase put and call options and sell covered put and
call options which are traded on national securities exchanges and may also
engage in over-the-counter options transactions with recognized United States
securities dealers (OTC Options).

OPTIONS ON SECURITIES. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities subject to the option at a
specified price (the exercise price or strike price). By writing a call option,
the Portfolio becomes obligated during the term of the option, upon exercise of
the option, to deliver the underlying securities or a specified amount of cash
to the purchaser against receipt of the exercise price. When a Portfolio writes
a call option, the Portfolio loses the potential for gain on the underlying
securities in excess of the exercise price of the option during the period that
the option is open.

The purchaser of a put option has 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. By writing a put option, the Portfolio becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The
Portfolio might, therefore, be obligated to purchase the underlying securities
for more than their current market price.

The writer of an option retains the amount of the premium, although this
amount may be offset or exceeded, in the case of a covered call option, by a
decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.

A Portfolio may wish to protect certain portfolio securities against a
decline in market value at a time when put options on those particular
securities are not available for purchase. The Portfolio may therefore purchase
a put option on other carefully selected securities, the values of which the
Adviser expects will have a high degree of positive correlation to the values
of such portfolio securities. If the Adviser's judgment is correct, changes in
the value of the put options should generally offset changes in the value of
the portfolio securities being hedged. If the Adviser's judgment is not
correct, the value of the securities underlying the put option may decrease
less than the value of the Portfolio's investments and therefore the put option
may not provide complete protection against a decline in the value of the
Portfolio's investments below the level sought to be protected by the put
option.

A Portfolio may similarly wish to hedge against appreciation in the value
of debt securities that it intends to acquire at a time when call options on
such securities are not available. The Portfolio may, therefore, purchase call
options on other carefully selected debt

B-5

<PAGE> 96

securities the values of which the Investment Adviser expects will have a high
degree of positive correlation to the values of the debt securities that the
Portfolio intends to acquire. In such circumstances the Portfolio will be
subject to risks analogous to those summarized above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Portfolio is not as close as
anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the
Portfolio.

A Portfolio may write options on securities in connection with
buy-and-write transactions; that is, the Portfolio may purchase a security and
concurrently write a call option against that security. If the call option is
exercised, the Portfolio's maximum gain will be the premium it received for
writing the option, adjusted upwards or downwards by the difference between the
Portfolio's purchase price of the security and the exercise price of the
option. If the option is not exercised and the price of the underlying
security declines, the amount of the decline will be offset in part, or
entirely, by the premium received.

The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. Buy-and-write transactions using at-the-money call options may be used
when it is expected that the price of the underlying security will remain fixed
or advance moderately during the option period. A buy-and-write transaction
using an out-of-the-money call option may be used when it is expected that the
premium received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone. If
the call option is exercised in such a transaction, the Portfolio's maximum
gain will be the premium received by it for writing the option, adjusted
upwards or downwards by the difference between the Portfolio's purchase price
of the security and the exercise price of the option. If the option is not
exercised and the price of the underlying security declines, the amount of the
decline will be offset in part, or entirely, by the premium received.

Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a
position by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected.

Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Portfolio and its counter-party with no clearing
organization guarantee. Thus, when the Portfolio purchases an OTC option, it
relies on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do
so would result in the loss of the premium paid by the Portfolio as well as the
loss of the expected benefit of the transaction. The Trustees will approve a
list of dealers with which the Portfolios may engage in OTC options.

When a Portfolio writes an OTC option, it generally will be able to close
out the OTC options prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Portfolio originally wrote
the OTC option. While the Portfolio will enter into OTC options only with
dealers which agree to, and which are expected to be capable of, entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate an OTC option at a favorable price at any
time prior to expiration. Until the Portfolio is able to effect a closing
purchase transaction in a covered OTC call option the Portfolio has written, it
will not be able to liquidate securities used as cover until the option expires
or is exercised or different cover is substituted. In the event of insolvency
of the counter party, the Portfolio may be unable to liquidate an OTC option.

OTC options purchased by a Portfolio will be treated as illiquid
securities subject to any applicable limitation on such securities. Similarly,
the assets used to "cover" OTC options written by the Portfolio will be
treated as illiquid unless the OTC options are sold to qualified dealers who
agree that the Portfolio may repurchase any OTC options it writes for a maximum
price to be calculated by a formula set forth in the option agreement. The
"cover" for an OTC option written subject to this procedure would be
considered illiquid only to the extent that the maximum repurchase price under
the formula exceeds the intrinsic value of the option.

Each Portfolio may write only "covered" options. This means that so long
as the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option or an option to purchase the same
underlying securities, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and maintain with
its Custodian for the term of the option a segregated account consisting of
cash, U.S. Government securities or other liquid high-grade debt obligations
having a value equal to or greater than the exercise price of the option. In
the case of a straddle written by the Portfolio, the amount maintained in the
segregated account will equal the amount, if any, by which the put is
"in-the-money."

B-6

<PAGE> 97

OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not
currently traded on any exchange. However, the Mortgage Backed Securities
Portfolio, Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and
International Bond Portfolio may each purchase and write such options should
they commence trading on any exchange and may purchase or write OTC Options on
GNMA certificates.

Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Portfolio, as a writer of a covered
GNMA call holding GNMA Certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA Certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Portfolio will enter into a closing
purchase transaction or will purchase additional GNMA Certificates from the
same pool (if obtainable) or replacement GNMA Certificates in the cash market
in order to remain covered.

A GNMA Certificate held by a Portfolio to cover an option position in any
but the nearest expiration month may cease to represent cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are
originated under the FHA/VA loan ceiling in effect at any given time. Should
this occur, the Portfolio will no longer be covered, and the Portfolio will
either enter into a closing purchase transaction or replace the GNMA
Certificate with a GNMA Certificate which represents cover. When the Portfolio
closes its position or replaces the GNMA Certificate, it may realize an
unanticipated loss and incur transaction costs.

RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. Although the Portfolio will generally purchase or write
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option at any particular time, and for some exchange-traded
options, no secondary market on an exchange may exist. In such event, it might
not be possible to effect closing transactions in particular options, with the
result that the Portfolio would have to exercise its exchange-traded options in
order to realize any profit and may incur transaction costs in connection
therewith. If the Portfolio as a covered call option writer is unable to
effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying security until the option expires or it delivers
the underlying security upon exercise.

Reasons for the absence of a liquid secondary market on an exchange
include the following: (a) insufficient trading interest in certain options;
(b) restrictions or transactions imposed by an exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an exchange; (e) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (f) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the OCC as a result of trades
on that exchange would generally continue to be exercisable in accordance with
their terms.

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

The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the option markets.

OPTIONS ON SECURITIES INDICES. The International Equity Portfolio,
Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio, Total
Return Bond Portfolio and International Bond Portfolio each may purchase and
write call and put options on securities indices in an attempt to hedge against
market conditions affecting the value of securities that the Portfolio owns or
intends to purchase, and not for speculation. Through the writing or purchase
of index options, the Portfolio can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the
exercise price of the option. The writer of the option is obligated, in return
for the premium received, to make delivery of this amount. Unlike security
options, all settlements are in cash and gain or loss depends upon price
movements in the market generally (or in a particular industry or segment of
the market), rather than upon price movements in individual securities. Price
movements in securities that the Portfolio owns or intends to purchase will
probably not correlate perfectly with movements in the level of an index and,
therefore, the Portfolio bears the risk that a loss on an index option would
not be completely offset by movements in the price of such securities.

B-7

<PAGE> 98

When a Portfolio writes an option on a securities index, it will be
required to deposit with its custodian, and mark-to-market, eligible securities
equal in value to 100% of the exercise price in the case of a put, or the
contract value in the case of a call. In addition, where the Portfolio writes a
call option on a securities index at a time when the contract value exceeds the
exercise price, the Portfolio will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to
such excess.

Options on a securities index involve risks similar to those risks
relating to transactions in financial futures contracts described below. Also,
an option purchased by the Portfolio may expire worthless, in which case the
Portfolio would lose the premium paid therefor.

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

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

The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. A
Portfolio will not purchase or sell any index option contract unless and until,
in the Adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is not
substantially greater than the risk in connection with options on securities in
the index.

SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercise of index
options are settled in cash, a call writer such as a Portfolio cannot determine
the amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Portfolio will write call options on indices only under the
circumstances described below under "Limitations on Purchase and Sale of Stock
Options and Options on Stock Indices, Foreign Currencies and Futures Contracts
on Foreign Currencies."

Price movements in a Portfolio's security holdings probably will not
correlate precisely with movements in the level of the index and, therefore,
the Portfolio bears the risk that the price of the securities held by the
Portfolio may not increase as much as the index. In such event, the Portfolio
would bear a loss on the call which is not completely offset by movements in
the price of the Portfolio's security holdings. It is also possible that the
index may rise when the Portfolio's stocks do not rise. If this occurred, the
Portfolio would experience a loss on the call which is not offset by an
increase in the value of its portfolio and might also experience a loss in its
portfolio. However, because the value of a diversified portfolio will, over
time, tend to move in the same direction as the market, movements in the value
of the Portfolio in the opposite direction as the market would be likely to
occur for only a short period or to a small degree.

Unless a Portfolio has other liquid assets which are sufficient to satisfy
the exercise of a call, the Portfolio would be required to liquidate portfolio
securities in order to satisfy the exercise. Because an exercise must be
settled within hours after receiving the notice of exercise, if the Portfolio
fails to anticipate an exercise, it may have to borrow from a bank (in amounts
not exceeding 33 1/3% of the Portfolio's total assets) pending settlement of
the sale of securities in its portfolio and would incur interest charges
thereon.

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

If the Portfolio holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that
the level of the underlying index may change before closing. If such a change
causes the exercised option to fall out-of-the-money, the Portfolio 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.
Although the Portfolio may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may

B-8

<PAGE> 99

not be possible to eliminate this risk entirely because the cutoff times for
index options may be earlier than those fixed for other types of options and
may occur before definitive closing index values are announced.

FUTURES CONTRACTS

The International Equity Portfolio, Intermediate-Term Bond Portfolio,
Mortgage Backed Securities Portfolio, Total Return Bond Portfolio and
International Bond Portfolio may each enter into futures contracts. As a
purchaser of a futures contract (futures contract), a Portfolio incurs an
obligation to take delivery of a specified amount of the obligation underlying
the futures contract at a specified time in the future for a specified price.
As a seller of a futures contract, the Portfolio incurs an obligation to
deliver the specified amount of the underlying obligation at a specified time
in return for an agreed upon price. A Portfolio may purchase futures contracts
on debt securities, aggregates of debt securities, financial indices and U.S.
Government securities including futures contracts or options linked to LIBOR.
Eurodollar futures contracts are currently traded on the Chicago Mercantile
Exchange. They enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. A Portfolio would use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps are linked. See the discussion of
"Risks of Options Transactions."

A Portfolio will purchase or sell futures contracts for the purpose of
hedging its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the investment adviser anticipates that interest
rates may rise and, concomitantly, the price of the Portfolio's securities
holdings may fall, the Portfolio may sell a futures contract. If declining
interest rates are anticipated, the Portfolio may purchase a futures contract
to protect against a potential increase in the price of securities the
Portfolio intends to purchase. Subsequently, appropriate securities may be
purchased by the Portfolio in an orderly fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of
contracts. In addition, futures contracts will be bought or sold in order to
close out a short or long position in a corresponding futures contract.

Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of security and the same delivery date. If the sale price exceeds
the offsetting purchase price, the seller would be paid the difference and
would realize a gain. If the offsetting purchase price exceeds the sale price,
the seller would pay the difference and would realize a loss. Similarly, a
futures contract purchase is closed out by effecting a futures contract sale
for the same aggregate amount of the specific type of security and the same
delivery date. If the offsetting sale price exceeds the purchase price, the
purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no
assurance that the Portfolio will be able to enter into a closing transaction.

When a Portfolio enters into a futures contract it is initially required
to deposit with its Custodian, in a segregated account in the name of the
broker performing the transaction an "initial margin" of cash or U.S.
Government securities equal to approximately 2-3% of the contract amount.
Initial margin requirements are established by the exchanges on which futures
contracts trade and may, from time to time, change. In addition, brokers may
establish margin deposit requirements in excess of those required by the
exchanges.

Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Portfolio upon the proper termination of
the futures contract. The margin deposits made are marked-to-market daily and
the Portfolio may be required to make subsequent deposits into the segregated
account, maintained at its Custodian for that purpose, or cash or U.S.
Government securities, called "variation margin", in the name of the broker,
which are reflective of price fluctuations in the futures contract.

OPTIONS ON FUTURES CONTRACTS. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Mortgage Backed Securities Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each purchase call
and put options on futures contracts which are traded on an exchange and enter
into closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid), and the writer the obligation, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put) at a specified exercise price at any
time during the term of the option. Upon exercise of the option, the assumption
of an offsetting futures position by the writer and holder of the option will
be accompanied by delivery of the accumulated cash balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract at exercise exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract.

A Portfolio may only write "covered" put and call options on futures
contracts. A Portfolio will be considered "covered" with respect to a call
option it writes on a futures contract if the Portfolio owns the assets which
are deliverable under the futures contract or an option to purchase that
futures contract having a strike price equal to or less than the strike price
of the "covered" option and having an expiration date not earlier than the
expiration date of the "covered" option, or if it segregates and maintains
with its Custodian for the term of the option cash, U.S. Government securities
or other liquid high-grade debt obligations equal to the fluctuating value of
the optioned future. The Portfolio will be considered "covered" with respect
to a put option it writes on a futures contract if it owns an option

B-9

<PAGE> 100

to sell that futures contract having a strike price equal to or greater than
the strike price of the "covered" option, or if it segregates and maintains
with its Custodian for the term of the option cash, U.S. Government securities
or liquid high-grade debt obligations at all times equal in value to the
exercise price of the put (less any initial margin deposited by the Portfolio
with its Custodian with respect to such option). There is no limitation on the
amount of the Portfolio's assets which can be placed in the segregated account.

A Portfolio will purchase options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the Adviser
wished to protect against an increase in interest rates and the resulting
negative impact on the value of a portion of its U.S. Government securities
holdings, it might purchase a put option on an interest rate futures contract,
the underlying security which correlates with the portion of the securities
holdings the Adviser seeks to hedge.

LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. A Portfolio may
purchase or sell futures contracts or purchase related options thereon for bona
fide hedging transactions without limit. In addition, the Portfolios may use
futures contracts and options thereon for any other purpose to the extent that
the aggregate initial margin and option premium does not exceed 5% of the
liquidation value of the Portfolios. There is no overall limitation on the
percentage of the Portfolio's assets which may be subject to a hedge position.
In addition, in accordance with the regulations of the Commodity Futures
Trading Commission (CFTC) the Portfolio is exempt from registration as a
commodity pool operator.

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A
Portfolio may sell a futures contract to protect against the decline in the
value of securities held by the Portfolio. However, it is possible that the
futures market may advance and the value of securities held in the Portfolio's
portfolio may decline. If this were to occur, the Portfolio would lose money on
the futures contracts and also experience a decline in value in its portfolio
securities.

If a Portfolio purchases a futures contract to hedge against the increase
in value of securities it intends to buy, and the value of such securities
decreases, then the Portfolio may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.

In order to assure that the Portfolio is entering into transactions in
futures contracts for hedging purposes as such term is defined by the
Commodities Futures Trading Commission, either: (1) a substantial majority
(i.e., approximately 75%) of all anticipatory hedge transactions (transactions
in which the Portfolio does not own at the time of the transaction, but expects
to acquire, the securities underlying the relevant futures contract) involving
the purchase of futures contracts will be completed by the purchase of
securities which are the subject of the hedge, or (2) the underlying value of
all long positions in futures contracts will not exceed the total value of (a)
all short-term debt obligations held by the Portfolio; (b) cash held by the
Portfolio; (c) cash proceeds due to the Portfolio on investments within thirty
days; (d) the margin deposited on the contracts; and (e) any unrealized
appreciation in the value of the contracts.

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

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

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

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

B-10
<PAGE> 101

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

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

Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss
to the Portfolio notwithstanding that the purchase or sale of a futures
contract would not result in a loss, as in the instance where there is no
movement in the prices of the futures contracts or underlying U.S. Government
securities.

OPTIONS ON CURRENCIES

Instead of purchasing or selling futures, options on futures or forward
currency exchange contracts, the International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each attempt to accomplish similar objectives by purchasing
put or call options on currencies either on exchanges or in over-the-counter
markets or by writing put options or covered call options on currencies. A put
option gives the Portfolio the right to sell a currency at the exercise price
until the option expires. A call option gives the Portfolio the right to
purchase a currency at the exercise price until the option expires. Both
options serve to insure against adverse currency price movements in the
underlying portfolio assets designated in a given currency.

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

FORWARD CURRENCY EXCHANGE CONTRACTS

The International Equity Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each enter
into forward foreign currency exchange contracts in several circumstances. When
a Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when a Portfolio anticipates the receipt
in a foreign currency of dividends or interest payments on a security which it
holds, the Portfolio may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, a Portfolio may be able to protect itself against
a possible loss resulting from an adverse change in the relationship between
the U.S. dollar and the 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 an Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Portfolio may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
the Portfolio's securities holdings denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
forward contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. A Portfolio
does not intend to enter into such forward

B-11

<PAGE> 102

contracts to protect the value of its portfolio securities on a regular or
continuous basis. A Portfolio does not intend to enter into such forward
contracts or maintain a net exposure to such contracts where the consummation
of the contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the Portfolio's securities holdings or other
assets denominated in that currency. However, the Portfolios believe that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will thereby be served.

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

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

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

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

Although the Portfolio values its assets daily in terms of U.S. dollars,
it does not intend physically to convert its holdings of foreign currencies
into U.S. dollars on a daily basis. It will do so from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the spread) between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.

LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK INDICES,
FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES

A Portfolio may write put and call options on stocks only if they are
covered, and such options must remain covered so long as the Portfolio is
obligated as a writer. A Portfolio will write put options on stock indices and
foreign currencies and futures contracts on foreign currencies only if they are
covered by segregating with the Portfolio's Custodian an amount of cash, U.S.
Government securities, or liquid assets equal to the aggregate exercise price
of the puts. Each Portfolio that invests in options and futures has undertaken
with certain state securities commissions that, so long as shares of the
Portfolio are registered in those states, it will not (a) write puts having
aggregate exercise prices greater than 25% of total net assets; or (b) purchase
(i) put options on stocks not held in the Portfolio's securities holdings, (ii)
put options on stock indices, foreign currencies or futures contracts on
foreign currencies or (iii) call options on stocks, stock indices or foreign
currencies if, after any such purchase, the aggregate premiums paid for such
options would exceed 10% of the Portfolio's total net assets; provided,
however, that the Portfolio may purchase put options on stocks held by the
Portfolio if after such purchase the aggregate premiums paid for such options
do not exceed 20% of the Portfolio's total assets. In addition, the Portfolio
may use futures contracts or related options for any other purposes to the
extent that aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Portfolio's assets. The Portfolio does not intend
to purchase options on equity securities or securities indices if the aggregate
premiums paid for such outstanding options would exceed 10% of the Portfolio's
total assets.

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

B-12
<PAGE> 103

If a Portfolio has written an option on an industry or market segment
index, it will segregate or put into escrow with its Custodian, or pledge to a
broker as collateral for the option, at least ten "qualified securities," all
of which are stocks of issuers in such industry or market segment, with a
market value at the time the option is written of not less than 100% of the
current index value times the multiplier times the number of contracts. Such
stocks will include stocks which represent at least 50% of the weighting of the
industry or market segment index and will represent at least 50% of the
Portfolio's holdings in that industry or market segment. No individual security
will represent more than 15% of the amount so segregated, pledged or escrowed
in the case of broadly-based stock market index options or 25% of such amount
in the case of industry or market segment index options. If at the close of
business on any day the market value of such qualified securities so
segregated, escrowed or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will so segregate,
escrow or pledge an amount in cash, U.S. Government securities or other
high-grade short-term debt obligations equal in value to the difference. In
addition, when a Portfolio writes a call on an index which is in-the-money at
the time the call is written, the Portfolio will segregate with its Custodian
or pledge to the broker as collateral cash, U.S. Government securities or other
high-grade short-term debt obligations equal in value to the amount by which
the call is in-the-money times the multiplier times the number of contracts.
Any amount segregated pursuant to the foregoing sentence may be applied to the
Portfolio's obligation to segregate additional amounts in the event that the
market value of the qualified securities falls below 100% of the current index
value times the multiplier times the number of contracts. A "qualified
security" is an equity security which is listed on a national securities
exchange or listed on NASDAQ against which a Portfolio has not written a stock
call option and which has not been hedged by the Portfolio by the sale of stock
index futures. However, if the Portfolio holds a call on the same index as the
call written where the exercise price of the call held is equal to or less than
the exercise price of the call written or greater than the exercise price of
the call written if the difference is maintained by the Portfolio in cash,
Treasury bills or other high-grade short-term obligations in a segregated
account with its Custodian, it will not be subject to the requirements
described in this paragraph.

A Portfolio may engage in futures contracts and options on futures
transactions as a hedge against changes, resulting from market or political
conditions, in the value of the currencies to which the Portfolio is subject or
to which the Portfolio expects to be subject in connection with future
purchases. A Portfolio may engage in such transactions when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Portfolio. A Portfolio may write options on futures contracts
to realize through the receipt of premium income a greater return than would be
realized in the Portfolio's securities holdings alone.

REPURCHASE AGREEMENTS

Each Portfolio may each enter into repurchase transactions with parties
meeting creditworthiness standards approved by the Trustees. Each Adviser will
monitor the creditworthiness of such parties, under the general supervision of
the Manager and the Trustees. In the event of a default or bankruptcy by a
seller, the Portfolio 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 Portfolio will
suffer a loss.

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, the Mortgage Backed
Securities Portfolio, Intermediate-Term Bond Portfolio, Total Return Bond
Portfolio and International Bond Portfolio may each lend portfolio securities
to brokers, dealers and other financial institutions, provided that such loans
are callable at any time by a Portfolio, and are at all times secured by cash
or cash equivalents, which are maintained in a segregated account pursuant to
applicable regulations that are equal to at least the market value, determined
daily, of the loaned securities. The advantage of such loans is that a
Portfolio continues to receive the income on the loaned securities while at the
same time earning interest on the cash amounts deposited as collateral, which
will be invested in short-term obligations.

A loan may be terminated by the borrower on one business day's notice, or
by a Portfolio on two business days' notice. If the borrower fails to deliver
the loaned securities within two days after receipt of notice, a Portfolio
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities
fail financially. However, these loans of portfolio securities will only be
made to firms deemed by a Portfolio's Adviser to be creditworthy and when the
income which can be earned from such loans justifies the attendant risks. Upon
termination of the loan, the borrower is required to return the securities to a
Portfolio. Any gain or loss in the market price during the loan period would
inure to a Portfolio. The creditworthiness of firms to which a Portfolio lends
its portfolio securities will be monitored on an ongoing basis by the Adviser
pursuant to procedures adopted and reviewed, on an ongoing basis, by the
Trustees.

When voting or consent rights which accompany loaned securities pass to
the borrower, a Portfolio will follow the policy of calling the loaned
securities, to be delivered within one day after notice, to permit the exercise
of such rights if the matters involved would have a material effect on a
Portfolio's investment in such loaned securities. A Portfolio may pay
reasonable finders', administrative and custodial fees in connection with a
loan of its securities.

B-13

<PAGE> 104

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

From time to time, in the ordinary course of business, each Portfolio may
purchase securities on a when-issued or delayed delivery basis, i.e., delivery
and payment can take place a month or more after the date of the transactions.
The securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. While a Portfolio will only
purchase securities on a when-issued, delayed delivery or forward commitment
basis with the intention of acquiring the securities, a Portfolio may sell the
securities before the settlement date, if it is deemed advisable. At the time a
Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, a Portfolio will record the transaction and thereafter
reflect the value, each day, of such security in determining the net asset
value of a Portfolio. At the time of delivery of the securities, the value may
be more or less than the purchase price. A Portfolio will also establish a
segregated account with a Portfolio's custodian bank in which it will
continuously maintain cash, U.S. Government securities or other liquid
high-grade debt portfolio securities equal in value to commitments for such
when-issued or delayed delivery securities; subject to this requirement, a
Portfolio may purchase securities on such basis without limit. An increase in
the percentage of a Portfolio's assets committed to the purchase of securities
on a when-issued or delayed delivery basis may increase the volatility of a
Portfolio's net asset value. The Adviser does not believe that a Portfolio's
net asset value or income will be adversely affected by a Portfolio's purchase
of securities on such basis.

INTEREST RATE SWAP TRANSACTIONS

The Mortgage Backed Securities Portfolio, Intermediate-Term Bond
Portfolio, Total Return Bond Portfolio and International Bond Portfolio may
each enter into either asset-based interest rate swaps or liability-based
interest rate swaps, depending on whether it is hedging its assets or its
liabilities. The Portfolio will usually enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted out, with a Portfolio receiving
or paying, as the case may be, only the net amount of the two payments. Since
these hedging transactions are entered into for good faith hedging purposes and
a segregated account has been established, the Manager and the Advisers believe
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to the borrowing restrictions applicable to each
Portfolio. The net amount of the excess, if any, of a Portfolio's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis and an amount of cash or liquid high-grade debt securities
having an aggregate net asset value at least equal to the accrued excess will
be maintained in a segregated account by a custodian that satisfies the
requirements of the Investment Company Act. To the extent that a Portfolio
enters into interest rate swaps on other than a net basis, the amount
maintained in a segregated account will be the full amount of a Portfolio's
obligations, if any, with respect to such interest rate swaps, accrued on a
daily basis. The Portfolios will not enter into any interest rate swaps unless
the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in the highest rating category of at least one nationally
recognized rating organization at the time of entering into such transaction.
If there is a default by the other party to such a transaction, a Portfolio
will have contractual remedies pursuant to the agreement related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid.

The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If incorrect in its forecast of
market values, interest rates and other applicable factors, the investment
performance of a Portfolio would diminish compared to what it would have been
if this investment technique was never used.

A Portfolio may only enter into interest rate swaps to hedge its
portfolio. Interest rate swaps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rates swaps is limited to the net amount of interest
payments that a Portfolio is contractually obligated to make. If the other
party to an interest rate swap defaults, a Portfolio's risk of loss consists of
the net amount of interest payments that a Portfolio is contractually entitled
to receive. Since interest rate swaps are individually negotiated, a Portfolio
expects to achieve an acceptable degree of correlation between its rights to
receive interest on its portfolio securities and its rights and obligations to
receive and pay interest pursuant to interest rate swaps.

ILLIQUID SECURITIES

The Large Capitalization Value Portfolio, Large Capitalization Growth
Portfolio, Small Capitalization Value Portfolio, Small Capitalization Growth
Portfolio, International Equity Portfolio and U.S. Government Money Market
Portfolio may each hold up to 10% of its net assets in illiquid securities. The
Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each hold up to 15%
of its 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
B-14

<PAGE> 105

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 Adviser anticipates that the market for
certain restricted securities such as institutional commercial paper,
convertible securities and foreign securities will expand further as a result
of this regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the NASD.

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act are not deemed to be illiquid. The Adviser will monitor the
liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to 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 the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (i.e., without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.

INVESTMENT RESTRICTIONS

The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of a Portfolio's outstanding voting securities. A "majority of the
outstanding voting securities" of a Portfolio when used in this Statement of
Additional Information, means the lesser of (i) 67% of the 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.

A Portfolio may not:

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

2. Make short sales of securities, or maintain a short position if, when
added together, more than 25% of the value of the Portfolio's net assets would
be (i) deposited as collateral for the obligation to replace securities
borrowed to effect short sales and (ii) allocated to segregated accounts in
connection with short sales. Short sales "against-the-box" are not subject to
this limitation.

3. Issue senior securities, borrow money or pledge its assets, except that
the Portfolio may borrow from banks or through dollar rolls or reverse
repurchase agreements up to 33 1/3% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes, to take advantage of investment opportunities or for the clearance of
transactions and may pledge up to 33 1/3% 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 and the purchase
and sale of futures contracts are not deemed to be a pledge of assets and
neither such arrangements nor the purchase or sale of futures contracts nor the
purchase and sale of related options, nor obligations of the Portfolio to
Trustees pursuant to deferred compensation arrangements are deemed to be the
issuance of a senior security.

4. Purchase any security (other than obligations of the U.S. Government,
its agencies and instrumentalities) if as a result: (i) except with respect to
the International Bond Portfolio, with respect to 75% of its total assets, more
than 5% of the Portfolio's total assets (determined at the time of investment)
would then be invested in securities of a single issuer or (ii) 25% or more of
the Portfolio's total assets (determined at the time of investment) would be
invested in one or more issuers having their principal business activities in
the same industry.

B-15
<PAGE> 106

5. Invest more than 5% of its total assets in securities of any issuer
having a record, together with predecessors, of less than three years of
continuous operations. This restriction shall not apply to mortgage-backed
securities, asset-backed securities or obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.

6. Buy or sell real estate or interests in real estate, except that the
Portfolio may purchase and sell mortgaged-backed securities, securities
collateralized by mortgages, securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts.

7. 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 Portfolios may purchase restricted
securities without limit.

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

9. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which the Portfolio will not hold more than 3% of the outstanding
voting securities of any one investment company, will not have invested more
than 5% of its total assets in any one investment company and will not have
invested more than 10% of its total assets (determined at the time of
investment) in such securities or one or more investment company's, or except
as part of a merger, consolidation or other acquisition.

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

11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the value of the Portfolio's total
assets.

12. Purchase more than 10% of all outstanding voting securities of any one
issuer.

13. Buy or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell financial futures contracts and options
thereon.

The foregoing restrictions are fundamental policies that may not be
changed without the approval of a majority of the Portfolio's voting
securities.

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

1. Invest in oil, gas and mineral leases.

2. Invest in securities of any issuer if any officer or trustee of the
Portfolio or the Portfolio's Manager or Adviser owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and trustees who own
more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.

3. Purchase warrants if as a result the Portfolio would then have more
than 5% of its assets (determined at the time of investment) invested in
warrants. Warrants will be valued at the lower of cost or market and
investment in warrants which are not listed on the New York Stock Exchange or
American Stock Exchange or a major foreign exchange will be limited to 2% of
the Portfolio's net assets (determined at the time of investment). For purposes
of this limitation, warrants acquired in units or attached to securities are
deemed to be without value.

4. Except with respect to short sales against the box, short sales will
only be made in those securities that are listed on a national securities
exchange and the value of the short sales of the securities of any one issuer
shall not exceed the lesser of 2% of the value of the Portfolio's net assets,
or 2% of the securities of any one issuer.

5. Buy or sell interests in real estate limited partnerships.

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

As a matter of non-fundamental operating policy, a portfolio will not
purchase rights if as a result the Portfolio would then have more than 5% of
its assets (determined at the time of investment) invested in rights.

B-16

<PAGE> 107

TRUSTEES AND OFFICERS

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE TRUST DURING PAST FIVE YEARS
- ------------------------------- -------------------- ----------------------------------------------------
<S> <C> <C>
Eugene C. Dorsey (69) Trustee Retired President, Chief Executive Officer and
c/o Prudential Mutual Fund Trustee of the Gannett Foundation (now Freedom
Management Forum); former Publisher of four Gannett
One Seaport Plaza newspapers and Vice President of Gannett Company;
New York, NY 10292 past Chairman, Independent Sector, Washington,
D.C. (largest national coalition of philanthropic
organizations) (since October 1989); former
Chairman of the American Council for the Arts;
Director of the advisory board of Chase Manhattan
Bank of Rochester, and The High Yield Income Fund,
Inc.
Donald D. Lennox (77) Trustee Chairman (since February 1990) and Director (since
c/o Prudential Mutual Fund April 1989) of International Imaging Materials,
Management Inc.; Retired Chairman, Chief Executive Officer
One Seaport Plaza and Director of Schlegel Corporation (industrial
New York, NY 10292 manufacturing) (March 1987-February 1989);
Director of Gleason Corporation, Personal Sound
Technologies, Inc. and The High Yield Income Fund,
Inc.
*Richard A. Redeker (52) Trustee President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993); Prudential Mutual Fund
New York, New York Management, Inc. (PMF); Director and Member of the
Operating Committee (since October 1993),
Prudential Securities Incorporated (Prudential
Securities); Director (since October 1993) of
Prudential Securities Group, Inc. (PSG); Executive
Vice President, The Prudential Investment
Corporation (since January 1994); Director (since
January 1994); Prudential Mutual Fund
Distributors, Inc. (PMFD); Director (since January
1994), Prudential Mutual Fund Services, Inc.
(PMFS); Formerly Senior Executive Vice President
and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); President and
Director of The High Yield Income Fund, Inc.
Stanley E. Shirk (79) Trustee Certified Public Accountant and a former senior
c/o Prudential Mutual Fund partner of the accounting firm of KPMG Peat
Management Marwick; former Management and Accounting
One Seaport Plaza Consultant for the Association of Bank Holding
New York, NY 10292 Companies, Washington, D.C. and the Bank
Administration Institute, Chicago, IL.; Director
of The High Yield Income Fund, Inc.
Robin B. Smith (56) Trustee President (since September 1981) and Chief Executive
c/o Prudential Mutual Fund Officer (since January 1988) of Publishers
Management Clearing House; Director of BellSouth Corporation,
One Seaport Plaza The Omnicom Group, Inc., Springs Industries, Inc.,
New York, NY 10292 Texaco Inc., First Financial Fund, Inc., The High
Yield Income Fund, Inc. and The High Yield Plus
Fund, Inc.
Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990),
One Seaport Plaza Director (since January 1989) and Executive Vice
New York, NY 10292 President, Treasurer and Chief Financial Officer
(since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities;
Executive Vice President, Treasurer, Controller
and Director (since March 1991), PMFD; Director
(since June 1987), PMFS; Vice President and
Director (since May 1989) of The Asia Pacific
Fund, Inc.
S. Jane Rose (50) Secretary Senior Vice President (since January 1991) and
One Seaport Plaza Senior Counsel (since June 1987) of PMF; Senior
New York, NY 10292 Vice President and Senior Counsel (since July
1992) of Prudential Securities; formerly Vice
President and Associate General Counsel of
Prudential Securities.
Grace C. Torres (37) Treasurer First Vice President (since March 1994) of PMF;
One Seaport Plaza First Vice President (since March 1994) of
New York, NY 10292 Prudential Securities; prior thereto, Vice
President of Bankers Trust Corporation.
</TABLE>

B-17

<PAGE> 108

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE TRUST DURING PAST FIVE YEARS
- ------------------------------- -------------------- ----------------------------------------------------
<S> <C> <C>
Marguerite E.H. Morrison (40) Assistant Secretary Vice President (since July 1991) and Associate
One Seaport Plaza General Counsel of PMF; Vice President and
New York, NY 10292 Associate General Counsel of Prudential
Securities.
Stephen M. Ungerman (42) Assistant Secretary First Vice President of PMF (since February 1993);
Prior thereto, Senior Tax Manager of Price
Waterhouse (1981-January 1993).
</TABLE>

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

Trustees and officers of the Trust are also directors, trustees and
officers of some or all of the other investment companies distributed by
Prudential Securities or Prudential Mutual Fund Distributors, Inc. (PMFD).

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

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

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

The Trust pays each of its Trustees who is not an affiliated person of the
Manager or a Portfolio's Adviser annual compensation of $10,000, in addition to
certain out-of-pocket expenses.

Trustees may receive their Trustee's fees pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of Trustee's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an SEC exemptive
order, at the daily rate of return of a Target Portfolio selected by the
Trustee (the Fund rate). The minimum initial investment requirement is waived
for Trustees who receive their fees pursuant to a deferred fee agreement.
Payment of the interest so accrued is also deferred and accruals become payable
at the option of the Trustee. The Trust's obligation to make payments of
deferred Trustees' fees, together with interest thereon, is a general
obligation of the Trust. As of December 31, 1995, Mr. Dorsey and Ms. Smith have
elected to receive their Trustee's fees pursuant to the deferred fee agreement.

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

The following table sets forth the aggregate compensation paid by the
Trust to the Trustees who are not affiliated with the Manager for the fiscal
year ended December 31, 1995 and the aggregate compensation paid to such
Trustees for service on the Trust's Board and that of all other funds managed
by Prudential Mutual Fund Management, Inc. (Fund Complex) for the calendar year
ended December 31, 1995.

B-18

<PAGE> 109
<TABLE>
<CAPTION>
COMPENSATION TABLE

APPROXIMATE
PENSION OR COMPENSATION
RETIREMENT FROM TRUST
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF TRUST BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM TRUST EXPENSES RETIREMENT TO TRUSTEES
- ------------------------------------------ ------------ ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Eugene C. Dorsey*
Trustee $ 10,000 None N/A $77,375(10/34)**
Donald D. Lennox
Trustee $ 10,000 None N/A $86,250(10/22)**
Stanley E. Shirk
Trustee $ 10,000 None N/A $79,000(10/19)**
Robin B. Smith*
Trustee $ 10,000 None N/A $91,875(10/19)**
- ------------------
</TABLE>

* All compensation from the Trust for the fiscal year ended December 31, 1995
represents deferred compensation. Aggregate compensation from the Trust and
the Fund Complex for the fiscal year ended December 31, 1995, including
accrued interest, amounted to approximately $11,355 and $10,770 for the
Trust and $85,783 and $100,741 for the Fund Complex for each of Mr. Dorsey
and Ms. Smith, respectively.

** Indicates number of funds/portfolios in Fund Complex (including the Trust)
to which aggregate compensation relates.

As of February 2, 1996, the Trustees and officers of the Trust, as a
group, owned less than 1% of the outstanding of beneficial interest of the
Portfolios.

As of February 2, 1996, Prudential Securities was record holder for other
beneficial owners of the following shares of beneficial interest outstanding
and entitled to vote in each Portfolio, $.001 par value per share:

<TABLE>
<CAPTION>
NUMBER OF
PORTFOLIO SHARES
-----------
<S> <C>
Large Capitalization Growth Portfolio.................................................. 14,806,942
Large Capitalization Value Portfolio................................................... 14,916,244
Small Capitalization Growth Portfolio.................................................. 8,541,914
Small Capitalization Value Portfolio................................................... 7,463,249
International Equity Portfolio......................................................... 14,261,415
International Bond Portfolio........................................................... 3,452,837
Intermediate-Term Bond Portfolio....................................................... 4,336,370
Total Return Bond Portfolio............................................................ 7,412,661
Mortgage Backed Securities Portfolio................................................... 6,843,985
U.S. Government Money Market Portfolio................................................. 19,533,842
</TABLE>

MANAGER

The Manager of the Trust is Prudential Mutual Fund Management, Inc. (PMF
or the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as
manager of all of the other open-end management investment companies that
comprise the Prudential Mutual Funds. See "Management of the Trust" in the
Prospectus. As of January 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 December 31,
1995, the Prudential Mutual Funds were the 13th largest family of mutual funds
in the United States.

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

Pursuant to the Management Agreement with the Trust (the Management
Agreement), PMF, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations
of the Trust and the composition of the Trust's Portfolios, including the
purchase, retention and disposition thereof. The Manager is authorized to enter
into subadvisory agreements for investment advisory services in connection with
the management of the Trust and each Portfolio thereof. The Manager will
continue to have responsibility for all investment advisory services furnished
pursuant to any such investment advisory agreements.

B-19

<PAGE> 110

The Manager will review the performance of all subadvisers, and make
recommendations to the Trustees with respect to the retention and renewal of
contracts. In connection therewith, PMF is obligated to keep certain books and
records of the Trust. PMF also administers the Trust's business affairs and, in
connection therewith, furnishes the Trust with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Trust's custodian and PMFS, the
Trust's transfer and dividend disbursing agent. The management services of PMF
for the Trust are not exclusive under the terms of the Management Agreement and
PMF is free to, and does, render management services to others.

The following table sets forth the annual management fee rates currently
paid by each Portfolio to PMF pursuant to the Management Agreement, and the
amount of such fees returned by PMF, each expressed as a percentage of the
Portfolio's average daily net assets:

<TABLE>
<CAPTION>
TOTAL AMOUNT RETAINED
PORTFOLIO MANAGEMENT FEE BY MANAGER
- -------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Large Capitalization Growth Portfolio............................... 0.60% 0.30%
Large Capitalization Value Portfolio................................ 0.60% 0.30%
Small Capitalization Growth Portfolio............................... 0.60% 0.30%
Small Capitalization Value Portfolio................................ 0.60% 0.30%
International Equity Portfolio...................................... 0.70% 0.30%
International Bond Portfolio........................................ 0.50% 0.20%
Total Return Bond Portfolio......................................... 0.45% 0.20%
Intermediate-Term Bond Portfolio.................................... 0.45% 0.20%
Mortgage Backed Securities Portfolio................................ 0.45% 0.20%
U.S. Government Money Market Portfolio.............................. 0.25% 0.125%
</TABLE>

The fee is computed daily and payable monthly. The Management Agreement
also provides that, in the event the expenses of the Trust (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 Trust'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 Trust'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 Trust. Currently,
the Trust believes that the most restrictive expense limitation of state
securities commissions is 2 1/2% of the Trust's average daily net assets up to
$30 million, 2% of the next $70 million of such assets and 1 1/2% of such
assets in excess of $100 million.

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

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

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

(c) the fees payable to each Adviser pursuant to the subadvisory
agreements between PMF and each Adviser (the Subadvisory Agreement).

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

The Management Agreement provides that PMF will not be liable for any
error of judgment or for any loss suffered by the Trust in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith,
B-20

<PAGE> 111

gross negligence or reckless disregard of duty. 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 Trust, including a majority
of the Trustees who are not parties to the contract or interested persons of
any such party as defined in the Investment Company Act (non-interested
Trustees) on April 11, 1995 and by PMF, as sole shareholder of the Trust, on
October 14, 1992, and with respect to the International Bond Portfolio, on
January 11, 1994.

For the fiscal year ended December 31, 1995, PMF waived all or a portion
of its management fees for each Portfolio in the amounts shown below and
subsidized certain operating expenses of the Portfolios to the extent necessary
to cap the Total Fund operating expenses of each Portfolio as described in
"Trust Expenses".

<TABLE>
<CAPTION>
MANAGEMENT FEE PAID MANAGEMENT FEE WAIVED
------------------------------------------------------------- ------------------------------------------------------

ANNUALIZED PERCENTAGE ANNUALIZED PERCENTAGE
OF AVERAGE NET ASSETS AMOUNT OF AVERAGE NET ASSETS AMOUNT
--------------------- ------------------------------------ --------------------- -----------------------------
PORTFOLIO 1995 1994 1993 1995 1994 1993 1995 1994 1993 1995 1994 1993
- ----- ---- ---- ----- ---------- ---------- -------- ---- ---- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large
Capitalization
Growth
Portfolio... 0.60% 0.60% 0.55% $ 977,893 $ 778,122 $259,955 -- -- 0.05% -- -- $ 25,087
Large
Capitalization
Value
Portfolio... 0.60% 0.60% 0.49% 978,742 773,190 228,003 -- -- 0.11% -- -- 48,667
Small
Capitalization
Growth
Portfolio... 0.60% 0.60% 0.19% 645,895 524,420 53,725 -- -- 0.41% -- -- 120,224
Small
Capitalization
Value
Portfolio... 0.60% 0.60% 0.32% 528,512 503,348 91,316 -- -- 0.28% -- -- 81,012
International
Equity
Portfolio... 0.70% 0.70% 0.70% 1,283,896 1,257,301 344,565 -- -- -- -- -- --
International
Bond
Portfolio... 0.35% -- N/A 102,710 -- N/A 0.15% 0.50% N/A $44,839 $ 48,202 N/A
Total Return
Bond
Portfolio... 0.26% 0.12% -- 97,987 37,151 -- 0.19% 0.33% 0.45% 68,615 102,984 56,053
Intermediate-
Term
Bond
Portfolio... 0.45% 0.45% 0.20% 308,827 140,135 64,333 -- -- 0.25% -- -- 79,343
Mortgage
Backed
Securities
Portfolio.. 0.38% 0.31% -- 245,215 204,074 -- 0.07% 0.14% 0.45% 47,957 94,170 132,230
U.S.
Government
Money Market
Portfolio... 0.20% -- -- 41,031 -- -- 0.05% 0.25% 0.25% 9,401 37,619 3,478
</TABLE>

As noted in the Prospectus, subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Adviser manages the securities held
by the portion of the Portfolio it serves in accordance with the Portfolio's
stated investment objectives and policies, makes investment decisions for the
portion of the Portfolio and places orders to purchase and sell securities on
behalf of the portion of the Portfolio it manages. Generally each Adviser does
not accept retention as investment adviser, investment manager or similar
service provider during the pendency of its Advisory Agreement, and for the
period of one year after the termination of the Advisory Agreement, with or for
the benefit of any investment company registered under the Investment Company
Act that seeks as a primary market for its shares asset allocation programs
similar in nature or market to the Target Program. This limitation does not
apply to the continuation of any contractual relationship to which the Adviser
is a party that is in effect on the date of its Advisory Agreement.

The Advisory Agreements were last approved by the Trustees including a
majority of the Trustees who are not parties to such contract or interested
persons of any such party as defined in the Investment Company Act, on April
11, 1995 and were approved by the sole shareholder of the Trust on October 14,
1992 for all of the Portfolios, except the International Bond Portfolio which
was approved by the sole shareholder of the Portfolio, on January 11, 1994. On
October 27, 1994, the shareholders of the Large Capitalization Growth
Portfolio, Large Capitalization Value Portfolio, Small Capitalization Growth
Portfolio and Small Capitalization Value Portfolio approved new subadvisory
agreements in order to have two Advisers, instead of one for each Portfolio. On
that same date, the shareholders of the Intermediate-Term Bond Portfolio and
the Total Return Bond Portfolio approved a successor subadvisory agreement with
Pacific Investment Management Company (PIMCO) in connection with a
reorganization in which PIMCO, four other investment management subsidiaries of
Pacific Financial Asset Management Corporation and Thomson Advisory Group L.P.
became subsidiary partnerships of a limited partnership known as PIMCO Advisors
L.P. Its subsidiary partnership PIMCO is the Adviser for the two Portfolios. On
August 8, 1995, shareholders of the Small Capitalization Value Portfolio
approved a new subadvisory agreement with Wood Struthers & Winthrop Management
Corp. in the place of Oak Hall Capital Advisors, Inc. On March 12, 1996,
shareholders of the Large Capitalization Growth Portfolio approved a new
subadvisory agreement with Oak Associates in the place of Roger Engemann
Management Co., Inc.

B-21

<PAGE> 112

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 Trust, PMF or the Adviser upon not more than 60 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.

The Manager is a subsidiary 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, 1994.
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 nearly 100,000
persons worldwide, and maintains a sales force of approximately 19,000 agents,
3,400 insurance brokers and 6,000 financial advisors. It insures or provides
other financial services to more than 50 million people worldwide. 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. For the year ended December 31, 1994, Prudential through
its subsidiaries provided financial services to more than 50 million people
worldwide--more than one of every five people in the United States. As of
December 31, 1994, Prudential through its subsidiaries provided automobile
insurance for more than 1.8 million cars and insured more than 1.5 million
homes. For the year ended December 31, 1994, The Prudential Bank, a subsidiary
of Prudential, served 940,000 customers in 50 states providing credit card
services and loans totaling more than $1.2 billion. Assets held by Prudential
Securities Incorporated (PSI) for its clients totaled approximately $150
billion at December 31, 1994. During 1994, over 28,000 new customer accounts
were opened each month at PSI. 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.

Based on data for the period from January 1, 1995 to September 30, 1995
for the Prudential Mutual Funds, on an average day, there are approximately $80
million in common stock transactions, over $150 million in bond transactions
and over $3.1 billion in money market transactions. In 1994, the Prudential
Mutual Funds effected more than 40,000 trades in money market securities and
held on average $20 billion of money market securities. Based on complex-wide
data for the period from January 1, 1995 to September 30, 1995, on an average
day, over 7,000 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.

From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager 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.

ADVISERS

The Advisers have agreed to the following fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment adviser.

<TABLE>
<CAPTION>
ANNUAL FEE PAID
BY THE MANAGER
TO THE ADVISER ANNUAL FEE
AS % OF AVERAGE AMOUNT AS OF DECEMBER 31,
TOTAL DAILY NET --------------------------------------------
PORTFOLIO MANAGEMENT FEE ASSETS 1995 1994 1993
- ------------------------------- -------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Large Capitalization Growth 0.60% 0.30% $488,947 $389,061 $142,521
Portfolio......................
Large Capitalization Value 0.60% 0.30% 489,371 386,595 138,365
Portfolio......................
Small Capitalization Growth 0.60% 0.30% 322,948 262,210 86,975
Portfolio......................
Small Capitalization Value 0.60% 0.30% 264,256 251,674 86,164
Portfolio......................
International Equity 0.70% 0.40% 733,655 718,458 196,894
Portfolio......................
International Bond Portfolio... 0.50% 0.30% 88,529 28,921 N/A
Total Return Bond Portfolio.... 0.45% 0.25% 92,557 77,853 80,205
Intermediate-Term Bond 0.45% 0.25% 171,571 174,005 31,141
Portfolio......................
Mortgage Backed Securities 0.45% 0.25% 162,873 165,691 73,461
Portfolio......................
U.S. Government Money Market 0.25% 0.125% 25,216 18,810 1,739
Portfolio......................
</TABLE>

The Advisers perform all administrative functions associated with serving
as Adviser to a Portfolio. Subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Adviser's responsibilities are
limited to managing the securities held by the

B-22

<PAGE> 113

portion of the Portfolio it serves in accordance with the Portfolio's stated
investment objective and policies, making investment decisions for that portion
of the Portfolio and placing orders to purchase and sell securities on behalf
of the portion of the Portfolio it manages.

The following sets forth certain information about each of the Advisers:

LARGE CAPITALIZATION GROWTH PORTFOLIO

Columbus Circle Investors, Metro Center, One Station Place, 8th Floor,
Stamford, Connecticut 06902, serves as one of two Advisers to the Large
Capitalization Growth Portfolio. Columbus Circle Investors (CCI), a Delaware
partnership and a subpartnership of PIMCO Advisors L.P., is a leading
institutional equity investment firm and, as of December 31, 1995, had
approximately $12.6 billion in assets under management for corporate,
nonprofit, government, union, and mutual fund clients.

Oak Associates, Ltd. (Oak), 3875 Embassy Parkway, Suite 250, Akron, Ohio
44333 serves as the other Adviser to the Large Capitalization Growth Portfolio.
It began managing its portion of the Portfolio effective November 22, 1995. Oak
was founded in April 1985 and has specialized in the large cap market since
inception. It provides investment management services to both individual and
institutional clients and, as of December 31, 1995, had more than $3 billion in
assets under management. Oak is registered as an investment adviser under the
Investment Advisers Act of 1940. It is a limited liability company organized
under the laws of the State of Ohio. James D. Oelschlager owns a controlling
interest (99%) of Oak.

LARGE CAPITALIZATION VALUE PORTFOLIO

INVESCO Capital Management, Inc. (INVESCO), 1315 Peachtree Street, Suite
500, Atlanta, Georgia 30309, serves as one of two Advisers to the Large
Capitalization Value Portfolio of the Trust. INVESCO, a Delaware corporation
and member of INVESCO PLC, a global firm specializing in the management of
institutional portfolios. As of December 31, 1995, the Adviser had
approximately $39 billion, and INVESCO PLC had approximately $80 billion, of
assets under management for clients located throughout the U.S., Europe and
Japan.

Hotchkis and Wiley, 800 West Sixth Street, Fifth Floor, Los Angeles,
California 90017, was established in 1980 and is a California limited
partnership. As of December 31, 1995, Hotchkis and Wiley had approximately $9.0
billion in assets under management for corporate, public, endowment and
foundation, and mutual fund clients. Hotchkis and Wiley manages the American
AAdvantage Funds and the Hotchkis and Wiley Funds.

SMALL CAPITALIZATION GROWTH PORTFOLIO

Nicholas-Applegate Capital Management (Nicholas-Applegate), 600 West
Broadway, 29th floor, San Diego, California 92101 serves as one of two Advisers
to the Small Capitalization Growth Portfolio of the Trust. Nicholas-Applegate
was organized in 1984 as a California limited partnership. Its general partner
is Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership controlled by Arthur E. Nicholas. Mr. Nicholas and fourteen other
partners manage a staff of approximately 300 employees. As of December 31, 1995
the firm managed a total of approximately $29 billion of assets for a wide
variety of clients, including employee benefit plans of corporations, public
retirement systems and unions, university endowments, foundations and other
institutional investors.

Investment Advisers, Inc. (IAI), 3700 First Bank Place, P.O. Box 357,
Minneapolis, Minnesota 55440 serves as the second Adviser in addition to
Nicholas-Applegate. IAI was established in 1947 and provides investment advice
to corporate, public, jointly-trusteed, endowment and foundation and mutual
fund clients. As of December 31, 1995, it managed approximately $15 billion in
assets.

SMALL CAPITALIZATION VALUE PORTFOLIO

Lazard Freres Asset Management (LFAM), 30 Rockefeller Plaza, New York, New
York 10020, serves as one of two Advisers to the Small Capitalization Value
Portfolio of the Trust. LFAM is a division of Lazard Freres & Co. LLC, a New
York limited liability company. LFAM provides investment management services to
both individual and institutional clients and as of December 31, 1994, had more
than $30 billion of assets under management. In addition to portfolio
management, Lazard Freres provides a wide variety of investment banking and
related services.

Wood, Struthers & Winthrop Management Corp. (WSW), 277 Park Avenue, New
York, New York 10172, serves as the other Adviser to the Small Capitalization
Value Portfolio. It began managing its portion of the Portfolio effective April
12, 1995. WSW was founded in 1871 and has specialized in the small-cap market
since 1967. It provides investment management services to both individual and
institutional clients and, as of December 31, 1995, had more than $3.5 billion
in assets under management. WSW is a subsidiary of Donaldson, Lufkin & Jenrette
Securities Corporation.
B-23

<PAGE> 114

INTERNATIONAL EQUITY PORTFOLIO

LFAM serves as the Adviser to the International Equity Portfolio of the
Trust and is more fully described immediately above under "Small
Capitalization Value Portfolio."

INTERNATIONAL BOND PORTFOLIO

Fiduciary International, Inc. (Fiduciary), Two World Trade Center, New
York, NY 10048, serves as the Adviser to the International Bond Portfolio.
Fiduciary is a wholly-owned subsidiary of Fiduciary Investment Corporation
which is a wholly-owned subsidiary of Fiduciary Trust Company International
(Fiduciary Trust). Fiduciary Trust was founded in 1931 and provides investment
management and related services to institutions and individuals around the
world. As of December 31, 1995, Fiduciary Trust had $36 billion of assets under
management.

INTERMEDIATE-TERM BOND PORTFOLIO AND TOTAL RETURN BOND PORTFOLIO

Pacific Investment Management Company (PIMCO), 840 Newport Center Drive,
Newport Beach, California 92658, serves as the Adviser to the Intermediate-Term
Bond Portfolio and the Total Return Bond Portfolio of the Trust. PIMCO is a
subsidiary Partnership of PIMCO Advisors, L.P., a California partnership. As of
December 31, 1995, PIMCO had approximately $76.4 billion of assets under
management.

U.S. GOVERNMENT MONEY MARKET PORTFOLIO AND MORTGAGE BACKED
SECURITIES PORTFOLIO

Wellington Management Company (WMC), 75 State Street, Boston,
Massachusetts 02109, serves as the Adviser to the U.S. Government Money Market
Portfolio and the Mortgage Backed Securities Portfolio of the Trust. WMC is a
Massachusetts general partnership of which the following persons are managing
partners: Robert W. Doran, Duncan M. McFarland and John R. Ryan. WMC is a
professional investment counseling firm which provides investment services to
investment companies, employee benefit plans, endowment funds, foundations and
other institutions and individuals. As of December 31, 1995, WMC had
approximately $109.2 billion of assets under management.

DISTRIBUTOR

Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Trust.

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

On January 18, 1994, PSI agreed to the entry of a Final Consent Order and
a Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December 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 the creation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Dallas office to new customers during a period of twenty
consecutive business days, and agreed that its other Texas offices would be
subject to the same restrictions for a period of five consecutive business
days. PSI also agreed to institute training programs for its securities
salesmen in Texas.

B-24

<PAGE> 115

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 will also serve 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 will
submit compliance reports which shall identify all such allegations or
instances of criminal conduct and material improprieties every three months for
a three-year period.

PORTFOLIO TRANSACTIONS AND BROKERAGE

INCOME PORTFOLIOS

Each Adviser is responsible for decisions to buy and sell securities,
futures contracts and options thereon for the Portfolios, the selection of
brokers, dealers and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. Brokers, dealers or
futures commission merchants may receive brokerage commissions on portfolio
transactions, including options, futures, and options on futures transactions
and the purchase and sale of underlying securities upon the exercise of
options. Orders may be directed to any broker, dealer or futures commission
merchant, including to the extent and in the manner permitted by applicable
law. The Income Portfolios do not normally incur any brokerage commission
expense on portfolio transactions. The securities purchased by the Portfolios
are generally traded on a "net" basis, with dealers acting as principal for
their own accounts without a stated commission, although the price of the
security usually includes a profit to the dealer. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts
are paid.

EQUITY PORTFOLIOS

Broker-dealers may receive negotiated brokerage commissions on
transactions in portfolio securities, including options and the purchase and
sale of underlying securities upon the exercise of options. On foreign
securities exchanges, commissions may be fixed. Orders may be directed to any
broker, dealer or futures commission merchant including, to the extent and in
the manner permitted by applicable law, Prudential Securities, one of the
Advisers or an affiliate thereof (an affiliated broker).

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

In placing orders for securities for the Portfolios of the Trust, each
Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that an Adviser will seek
to execute each transaction at a price and commission, if any, which provide
the most favorable total cost or proceeds reasonably attainable under the
circumstances. While an Adviser generally seeks reasonably competitive spreads
or commissions, the Trust will not necessarily be paying the lowest spread or
commission available. Within the framework of this policy, an Adviser may
consider research and investment services provided by brokers,dealers or
futures commission merchant who effect or are parties to portfolio transactions
of the Trust, an Adviser or an Adviser's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by an
Adviser in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for an
Adviser may be used in managing other investment accounts. Conversely, brokers,
dealers or futures commission merchants furnishing such services may be
selected for the execution of transactions for such other accounts, whose
aggregate assets are far larger than the Trust's, and the services furnished by
such brokers, dealers or futures commission merchants may be used by an Adviser
in providing investment management for the Trust. Commission rates are
established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker or futures commission merchant in the light of generally
prevailing rates. Each Adviser's policy is to pay brokers, dealers and futures
commission merchants, other than to an affiliated broker, higher commissions
for particular transactions than might be charged if a different broker

B-25

<PAGE> 116

had been selected, on occasions when, in an Adviser's opinion, this policy
furthers the objective of obtaining best price and execution. In addition, each
Adviser is authorized to pay higher commissions on brokerage transactions for
the Trust to brokers, dealers and futures commission merchants, other than to
an affiliated broker, in order to secure research and investment services
described above, subject to review by the Trustees from time to time as to the
extent and continuation of this practice. The allocation of orders among
brokers, dealers and futures commission merchants and the commission rates paid
are reviewed periodically by the Trustees. While such services are useful and
important in supplementing its own research and facilities, the Advisers
believe that the value of such services is not determinable and does not
significantly reduce expenses.

Subject to the above considerations, an affiliated broker may act as a
securities broker, dealer or futures commission merchant for the Trust. In
order for an affiliate of an Adviser or Prudential Securities to effect any
portfolio transactions for the Trust, the commissions, fees or other
remuneration received by an affiliated broker must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers
in connection with comparable transactions involving similar securities being
purchased or sold during a comparable period of time. This standard would allow
an affiliated broker 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. Furthermore, the Trustees, including a majority of
the Trustees who are not "interested" persons, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to an affiliated broker are consistent with the foregoing
standard.

In accordance with Section 11(a) under the Securities Exchange Act of
1934, an affiliated broker may not retain compensation for effecting
transactions on a national securities exchange for the Trust unless the Trust
has expressly authorized the retention of such compensation. Section 11(a)
provides that an affiliated broker must furnish to the Trust at least annually
a statement setting forth the total amount of all compensation retained by such
affiliated broker for transactions effected by the Trust during the applicable
period. Brokerage transactions with an affiliated broker are also subject to
such fiduciary standards as may be imposed by applicable law.

The table below presents certain information regarding the payment of
commissions by the Trust, including the amount of such commissions paid to
Prudential Securities or any affiliate of the Trust or the Advisers for the
years ended December 31, 1995 and 1994 and the period from January 5, 1993
(commencement of operations) through December 31, 1993. The Large
Capitalization Growth Portfolio, Small Capitalization Value Portfolio,
International Equity Portfolio of the Trust did not pay commissions to
Prudential Securities or any affiliate of the Trust or the Adviser for the
years ended December 31, 1995 and 1994. For the years ended December 31, 1994
and 1995 and the period from January 5, 1993 (commencement of operations)
through December 31, 1993, the Intermediate-Term Bond Portfolio, Total Return
Bond Portfolio, Mortgage Backed Securities Portfolio and the U.S. Government
Money Market Portfolio paid no brokerage commissions. The International Bond
Portfolio was offered for sale as of May 17, 1994 and paid no brokerage
commissions for the year ended December 31, 1995 and the period from May 17,
1994 through December 31, 1994.

<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO
-------------------- ------------------------------------------ -----------------------------------

PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1995 1994 1993 1995 1993
-------------------- ------------ ------------ ------------ ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Total brokerage
commissions paid by the
Trust.................... $116,474 $231,159 $88,180 $140,771 $446,917 $111,407
Total brokerage
commissions paid to
Prudential Securities or
affiliates of the Trust
or the Advisers.......... $ 900 $ 28,400 $22,878 $ 40,594 $ 20,058 $ 2,592
Percentage of total
brokerage commissions
paid to Prudential
Securities or affiliates
of the Trust or the
Advisers................. 0.8% 12.2% 25.9% 28.8% 4.5% 2.3%
Percentage of the
aggregate dollar amount
of portfolio transactions
involving the payment of
commissions through
Prudential Securities or
affiliates of the Trust
or the Advisers.......... 0.8% 12.8% 25.6% 27.5% 7.0% 1.7%
</TABLE>

SMALL CAPITALIZATION INTERNATIONAL
VALUE PORTFOLIO EQUITY PORTFOLIO
-------------------- ----------------

PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1993 1993
-------------------- ----------------
<S> <C> <C>
Total brokerage
commissions paid by the
Trust.................... $405,334 $440,886
Total brokerage
commissions paid to
Prudential Securities or
affiliates of the Trust
or the Advisers.......... $19,418 $7,982
Percentage of total
brokerage commissions
paid to Prudential
Securities or affiliates
of the Trust or the
Advisers................. 4.8% 1.8%
Percentage of the
aggregate dollar amount
of portfolio transactions
involving the payment of
commissions through
Prudential Securities or
affiliates of the Trust
or the Advisers.......... 3.5% 3.3%
</TABLE>

Of the total brokerage commissions paid during the year ended December 31,
1995, the Large Capitalization Value Portfolio and the Small Capitalization
Growth Portfolio paid $28,400 (12.2%) and $20,058 (4.5%), respectively, to
firms which provided research, statistical or other services to the Advisers.
The Advisers have not separately identified a portion of such brokerage
commissions as applicable to the provision of such research, statistical or
other services.

PURCHASE AND REDEMPTION OF SHARES

Shares of the Portfolio may be purchased at a price equal to the next
determined net asset value per share.

B-26
<PAGE> 117

SPECIMEN PRICE MAKE-UP

Using the net asset value of each portfolio at December 31, 1995, the
maximum offering price of the Portfolios' shares are as follows:
<TABLE>
<CAPTION>
LARGE LARGE SMALL SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL INTERNATIONAL
GROWTH VALUE GROWTH VALUE EQUITY BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
offering price
and redemption
price............ $12.13 $12.57 $ 14.15 $ 13.07 $ 13.64 $10.19
------ ------ ------- ------- ------- ------
------ ------ ------- ------- ------- ------
</TABLE>

<TABLE>
<CAPTION>
MORTGAGE U.S. GOV'T
TOTAL INTERMEDIATE BACKED MONEY
RETURN BOND TERM BOND SECURITIES MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net asset value,
offering price
and redemption
price............ $10.62 $10.51 $10.31 $ 1.00
------ ------ ------ ------
------ ------ ------ ------
</TABLE>

SHAREHOLDER INVESTMENT ACCOUNT

The Trust makes available to its shareholders the following privileges and
plans:

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of each of the
Portfolios at net asset value per share on the payment date, unless the
Trustees determine otherwise. An investor may direct Prudential Securities in
writing not less than five full business days prior to the payment date to have
subsequent dividends and/or distributions paid in cash rather than reinvested.
Any shareholder who receives a cash payment representing a dividend or
distribution may reinvest such distribution at net asset value by returning the
check or the proceeds to Prudential Securities 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 Prudential Securities.

DOLLAR COST AVERAGING

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

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

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

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

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

1Source 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.

2The 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 the Fund. The
investment return and principal value of an investment will fluctuate so that
an investor's shares when redeemed may be worth more or less than their
original cost.

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

B-27
<PAGE> 118

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 COMPOUNDING1

<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- --------- --------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692

</TABLE>

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

1The chart is for illustrative purposes only and does not represent the
performance of the Trust 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.

SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders of the Trust through Prudential Securities. Pursuant to the
withdrawal plan, a shareholder may receive monthly or quarterly checks in any
amount up to the value of his or her shares in the Trust.

The shareholder must instruct Prudential Securities of the amount which he
or she wishes to withdraw under the Plan, whether such withdrawal should occur
monthly or quarterly, and which Target Portfolios should be redeemed in order
to satisfy the request. Prudential Securities will then redeem, monthly or
quarterly as applicable, sufficient full and fractional shares of the
applicable Target Portfolios to provide for the amount of the periodic
withdrawal payment. The 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
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. Each
shareholder should consult his or her tax adviser with regard to the tax
consequences of the systematic withdrawal plan, particularly if used in
connection with a retirement plan. Retirement plan shareholders should also
consult with their plan sponsor to determine if their retirement plan would
permit the shareholder to participate in the systematic withdrawal plan.

NET ASSET VALUE

Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of each Portfolio. In
accordance with procedures adopted by the Trustees, the value of securities for
which the primary market is on an exchange shall be valued at the last sales
prices on that exchange on the day of valuation or, if there was no sale on
such day, the average of readily available closing bid and asked prices on such
day. Should an extraordinary event, which is likely to affect the value of the
security, occur after the close of an exchange on which a portfolio security is
traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Trustees. The value of U.S.
Government security for which quotations are available shall be valued at a
price provided by an independent broker/dealer or pricing service. Pricing
services consider such factors as security prices, yields, maturities, call
features, ratings and developments relating to specific securities in arriving
at securities valuations.

Securities that are actively traded in the over-the-counter market
including listed securities for which the primary market is believed by the
Manager in consultation with the appropriate Adviser 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. Securities issued in private placements are valued
at the mean between the bid and asked prices provided by primary market
dealers. Private placement securities for which no bid and asked prices are
available and other securities or other assets for which market quotations are
not readily available are valued at their fair value as determined in good
faith by the investment adviser under procedures described above. Short-term
debt securities are valued at cost, with interest accrued or discount amortized
to the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Trustees not to represent fair value. Short-term
securities with remaining maturities of 60 days or more, for which market
quotations are readily available, are valued at their current market quotations
as provided by an independent broker/dealer or pricing service. Options on
securities that are listed on an exchange and futures contracts and options
thereon traded on a commodities exchange or board of trade shall be valued at
the last sale price at the close of trading of the applicable exchange or board
of trade or, if there was no sale on the applicable exchange or board of trade,
at the average of quoted bid and asked prices as of the close of such exchange
or board of trade. Over-the-counter options are valued at the mean between bid
and asked prices provided by a dealer.
B-28

<PAGE> 119

Quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents at the current rate obtained by a recognized bank or dealer.
Forward currency exchange contracts are valued at the current cost of covering
or offsetting such contracts.

Each Portfolio other than the U.S. Government Money Market Portfolio will
compute its net asset value at 4:15 P.M., New York time on each day the New
York Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Portfolio shares have been received or days on which
changes in the value of the Portfolio's securities holdings do not affect net
asset value. The U.S. Government Money Market Portfolio will compute its net
asset value at 4:30 P.M., New York time on such days. In the event the New York
Stock Exchange closes early on any business day, the net asset value of the
Fund's shares shall be determined at a time between such closing and 4:15 P.M.,
New York time.

The U.S. Government Money Market Portfolio uses the amortized cost method
to determine the value of its portfolio securities. The amortized cost method
involved valuing a security at its cost and amortizing any discount or premium
over the period until maturity. The method does not take into account
unrealized capital gains and losses which may result from the effect of
fluctuating interest rates on the market value of the security.

The U.S. Government Money Market Portfolio maintains a dollar-weighted
average portfolio maturity of 90 days or less, purchases instruments having
remaining maturities of thirteen months or less and invests only in securities
determined by the investment adviser under the supervision of the Trustees to
present minimal credit risks and to be of "eligible quality" in accordance
with regulations of the Securities and Exchange Commission. The Trustees have
established procedures designed to stabilize, to the extent reasonably
possible, the Portfolio's price per share as computed for the purpose of sales
and redemptions at $1.00. Such procedures include review of the Portfolio's
securities holdings by the Trustees, at such intervals as it may deem
appropriate, to determine whether the Portfolio's net asset value calculated by
using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation will be examined by the Trustees.
If such deviation exceeds 1/2 of 1%, the Trustees will promptly consider what
action, if any, will be initiated. In the event the Trustees determine that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, the Trustees will take such corrective
action which they regard as necessary and appropriate, including the sale of
portfolio instruments prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity, the withholding of dividends,
redemptions of shares in kind, or the use of available market quotations to
establish a net asset value per share.

TAXES, DIVIDENDS AND DISTRIBUTIONS

GENERAL

Each Portfolio intends to continue to elect to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code for each taxable year. Accordingly, each Portfolio must, among
other things, (a) derive at least 90% of its gross income (without offset for
losses from the sale or other disposition of securities or foreign currencies)
from dividends, interest, proceeds from loans of securities and gains from the
sale or other disposition of securities or foreign currencies, including, but
not limited to, gains derived from options and futures on such securities or
foreign currencies; (b) derive less than 30% of its gross income from gains
(without offset for losses) from the sale or other disposition of certain
securities or options thereon held less than three months; and (c) diversify
its holdings so that, at the end of each fiscal quarter, (i) 50% of the market
value of a Portfolio's assets is represented by cash, U.S. Government
securities and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the Portfolio's assets and no more than 10% of
the outstanding voting securities of any such issuer, and (ii) not more than
25% of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities). These requirements may limit a
Portfolio's ability to engage in transactions involving options on securities,
interest rate futures and options thereon.

As a regulated investment company, each Portfolio will not be subject to
federal income tax on its net investment income and capital gains, if any, that
it distributes to its shareholders, provided that it distributes at least 90%
of its net investment income and short-term capital gains earned in each year.
Distributions of net investment income and net short-term capital gains will be
taxable to the shareholder at ordinary income rates regardless of whether the
shareholder receives such distributions in additional shares or in cash. To the
extent a Portfolio's income is derived from certain dividends received from
domestic corporations, a portion of the dividends paid to corporate
shareholders of the Portfolio will be eligible for the 70% dividends received
deduction. Distributions of net long-term capital gains, if any, are taxable
as long-term capital gains regardless of how long the investor has held his or
her shares. However, if a shareholder holds shares in a Portfolio for not more
than six months, then any loss recognized on the sale of such shares will be
treated as long-term capital loss to the extent any distribution on the shares
was treated as long-term capital gain. Shareholders will be notified annually
by the Trust as to the federal tax status of distributions made by a Portfolio
of the Trust. A 4% nondeductible excise tax will be imposed on a Portfolio of
the Trust to the extent a Portfolio does not meet certain distribution
requirements by the end of each calendar year. Distributions may be subject to
additional state and local taxes. Any distributions of net investment income or
short-term capital gains made to a foreign shareholder will be subject to U.S.
withholding tax of 30% (or a lower treaty rate if applicable to such
shareholder). See "Taxes, Dividends and Distributions" in the Prospectus.

B-29
<PAGE> 120

ORIGINAL ISSUE DISCOUNT

A Portfolio may purchase debt securities that contain original issue
discount. Original issue discount that accrues in a taxable year is treated as
income earned by the Portfolio and therefore is subject to the distribution
requirements of the Internal Revenue Code. Because the original issue discount
income earned by the Portfolio in a taxable year may not be represented by cash
income, the Portfolio may have to dispose of other securities and use the
proceeds to make distributions to satisfy the Internal Revenue Code's
distribution requirements.

OPTIONS AND FUTURES TRANSACTIONS

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 a Portfolio will be required to
be "marked-to-market" for federal income tax purposes; that is, treated as
having been sold at market value. Sixty percent of any gain or loss recognized
on these "deemed sales" and on actual dispositions may be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss.

CURRENCY FLUCTUATIONS

Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Portfolio accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the Portfolio actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
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 also are treated as
ordinary gain or loss. These gains or losses increase or decrease the amount of
the Portfolio's investment company taxable income available to be distributed
to shareholders as ordinary income, rather than increasing or decreasing the
amount of the Portfolio's net capital gain. If currency fluctuation losses
exceed other investment company taxable income during a taxable year,
distributions made by the Portfolio during the year would be characterized as a
return of capital to shareholders, reducing each shareholder's basis in their
shares.

FOREIGN WITHHOLDING

Income received by a Portfolio from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Income tax
treaties may reduce or eliminate such taxes. It is impossible to determine in
advance the effective rate of foreign tax to which the Portfolio will be
subject, since the amount of the Portfolio's assets to be invested in various
countries is not known. Except in the case of the International Equity
Portfolio and the International Bond Portfolio, it is not anticipated that any
Portfolio will qualify to pass-through to the shareholders the ability to claim
as a foreign tax credit the foreign taxes paid by a Portfolio.

BACKUP WITHHOLDING

With limited exceptions, each Portfolio is required to withhold federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Trust with their correct taxpayer
identification number or to make required certification or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Any amounts withheld may be credited against a shareholder's
federal income tax liability.

OTHER TAXATION

Distributions may also be subject to state, local and foreign taxes
depending on each shareholder's particular situation. Shareholders are advised
to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Trust.

B-30
<PAGE> 121

PERFORMANCE INFORMATION

U.S. GOVERNMENT MONEY MARKET PORTFOLIO

CURRENT YIELD AND EFFECTIVE YIELD

The Trust may from time to time advertise the current yield and effective
annual yield of the U.S. Government Money Market Portfolio calculated over a
7-day period. The yield quoted will be the simple annualized yield for an
identified seven calendar day period. The yield calculation will be based on a
hypothetical account having a balance of exactly one share at the beginning of
the seven-day period. The base period return will be the change in the value of
the hypothetical account during the seven-day period, including dividends
declared on any shares purchased with dividends on the shares but excluding any
capital changes divided by the value of the account at the beginning of the
base period. The yield will vary as interest rates and other conditions
affecting money market instruments change. Yield also depends on the quality,
length of maturity and type of instruments in the portfolio, and its operating
expenses. The Portfolio may also prepare an effective annual yield computed by
compounding the unannualized seven-day period return as follows: by adding 1 to
the unannualized 7-day period return, raising the sum to a power equal to 365
divided by 7, and subtracting 1 from the result. The seven-day yield and
effective yield for the U.S. Government Money Market Portfolio as of December
31, 1995 were 4.89% and 5.01%, respectively.

Effective Yield = [(base period return +1)365/ 7 ] -1]

OTHER PORTFOLIOS

YIELD

The Trust may from time to time advertise the yield of a Portfolio as
calculated over a 30-day period. This yield will be computed by dividing a
Portfolio's net investment income per share earned during this 30-day period by
the maximum offering price per share on the last day of this period. The
average number of shares used in determining the net investment income per
share will be the average daily number of shares outstanding during the 30-day
period that were eligible to receive dividends. In accordance with regulations
of the Securities and Exchange Commission, income will be computed by totaling
the interest earned on all debt obligations during the 30-day period and
subtracting from that amount the total of all expenses incurred during the
period, which include management and distribution fees. The 30-day yield is
then annualized on a bond-equivalent basis assuming semi-annual reinvestment
and compounding of net investment income, as described in the Prospectus. Yield
is calculated according to the following formula:

YIELD = 2 [ ( a - b +1)6 - 1]
-----
cd

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

The yield for the 30 day period ended December 31, 1995 for each of the
International Bond, Total Return Bond, Intermediate-Term Bond and Mortgage
Backed Securities Portfolios was 5.31%, 5.90%, 6.17%, and 6.81%, respectively.
The same yields adjusted for expense subsidies for the International Bond,
Total Return Bond and Mortgage Backed Securities portfolios were 5.46%, 5.87%
and 6.85%, respectively.

A Portfolio's yield fluctuates, and an annualized yield quotation is not a
representation by a Portfolio as to what an investment in the Portfolio will
actually yield for any given period. Yields for a Portfolio will vary based on
a number of factors including changes in net asset value, market conditions,
the level of interest rates and the level of income and expenses.

B-31
<PAGE> 122

AVERAGE ANNUAL TOTAL RETURN

The Trust may from time to time advertise the average annual total return
of a Portfolio. Average annual total return is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:

P (1 + T)n = ERV

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

The average annual total returns for the one year period ended December
31, 1995 and the period since inception (January 5, 1993 for each Portfolio,
except the International Bond Portfolio which commenced operation May 17, 1994)
are set forth below:

<TABLE>
<CAPTION>
ONE YEAR ENDED DECEMBER 31, 1995 SINCE INCEPTION
---------------------------------- ----------------------------------
SUBSIDY ADJUSTED SUBSIDY ADJUSTED
AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL
PORTFOLIO TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN
- ----------------------------------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Large Capitalization Growth Portfolio.... 23.88% 23.88% 5.98% 5.98%
Large Capitalization Value Portfolio..... 30.11% 30.11% 9.77% 9.77%
Small Capitalization Growth Portfolio.... 22.76% 22.76% 11.47% 11.50%
Small Capitalization Value Portfolio..... 17.43% 17.43% 10.22% 10.25%
International Equity Portfolio........... 13.66% 13.66% 13.63% 13.63%
International Bond Portfolio............. 13.41% 13.52% 7.94% 8.20%
Total Return Bond Portfolio.............. 18.23% 18.45% 7.05% 7.32%
Intermediate-Term Bond Portfolio......... 15.72% 15.72% 6.66% 6.69%
Mortgage Backed Securities Portfolio..... 14.92% 15.03% 6.77% 6.94%
</TABLE>

AGGREGATE TOTAL RETURN

The Trust may from time to time advertise the aggregate total return of a
Portfolio. A Portfolio's aggregate total return figures represent the
cumulative change in the value of an investment in the Portfolio for the
specified period and are computed by the following formula:

ERV - P
-------
P

Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.

The aggregate total returns for each portfolio for the one year period
ended December 31, 1995 and the period since inception (January 5, 1993 for
each Portfolio, except the International Bond Portfolio which commenced
operation May 17, 1994) are set forth below:

<TABLE>
<CAPTION>
ONE YEAR ENDED DECEMBER 31, 1995 SINCE INCEPTION
----------------------------------- ------------------------------------
SUBSIDY ADJUSTED SUBSIDY ADJUSTED
AGGREGATE TOTAL AGGREGATE TOTAL AGGREGATE AGGREGATE TOTAL
PORTFOLIO RETURN RETURN TOTAL RETURN RETURN
- ----------------------------------------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Large Capitalization Growth Portfolio.... 25.76% 25.76% 24.33% 24.33%
Large Capitalization Value Portfolio..... 32.08% 32.08% 38.05% 38.05%
Small Capitalization Growth Portfolio.... 24.62% 24.62% 44.64% 44.61%
Small Capitalization Value Portfolio..... 19.21% 19.21% 39.85% 39.81%
International Equity Portfolio........... 15.38% 15.38% 53.01% 53.01%
International Bond Portfolio............. 14.66% 14.55% 15.48% 15.20%
Total Return Bond Portfolio.............. 19.64% 19.41% 27.16% 26.84%
Intermediate-Term Bond Portfolio......... 16.88% 16.88% 24.94% 24.90%
Mortgage Backed Securities Portfolio..... 16.18% 16.07% 25.82% 25.62%
</TABLE>

B-32

<PAGE> 123

Comparative performance information may be used from time to time in
advertising or marketing the Portfolio shares, including data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., Donoghue's Money
Fund Report, The Bank Rate Monitor, other industry publications, business
periodicals and market indices.

The following charts reflect the effect of taxes and inflation on an
investment in cash equivalent securities during the period 1987 to 1991 and the
average annual return for certain types of investments over varying holding
periods.

<TABLE>
<CAPTION>
SAVING IS NO LONGER ENOUGH:
THE COMBINED EFFECTS OF INFLATION AND TAXES
EROSION OF A $10,000 INVESTMENT OVER 5 YEARS.
<S> <C>
Initial Investment................................... $10,000
Invest for 5 years (1987-1991) in Cash
Equivalents. Average return-6.7%..................... +3.838
-----------
13,838
Income tax paid on interest.......................... -1,427
12,411
-----------
Adjust for inflation: 5-year average-4.5%............ -2,464
-----------
$9,947
===========
</TABLE>
THIS INVESTOR RECEIVED A REAL AFTER-TAX RETURN OF -0.1%
Source: Ibbotson Associates, Inc., Chicago

TIME IS ON YOUR SIDE: REDUCTION OF RISK OVER TIME

[Chart]

EACH BAR SHOWS THE RANGE OF COMPOUND AVERAGE ANNUAL RETURNS FOR THE SPECIFIED
HOLDING PERIOD FOR EACH TYPE OF INVESTMENT.

Past performance is not indicative of future results.
Ibbotson Associates, Inc., Chicago
B-33

<PAGE> 124

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 Trust's portfolio securities
and cash, and in that capacity maintains certain financial and accounting books
and records pursuant to an agreement with the Trust.

Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Trust. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Trust, 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. PMFS is also reimbursed for its out-of-pocket expenses, including but
not limited to postage, stationery, printing, allocable communications and
other costs. In addition, the Trust may pay fees for recordkeeping services in
respect of certain eligible defined benefit plan investors. For the fiscal year
ended December 31, 1995, the Fund incurred the following fees for the services
of PMFS.

<TABLE>
<CAPTION>
PORTFOLIO
<S> <C>
Large Capitalization Growth Portfolio.................................................... $85,200
Large Capitalization Value Portfolio..................................................... 85,200
Small Capitalization Growth Portfolio.................................................... 84,900
Small Capitalization Value Portfolio..................................................... 81,200
International Equity Portfolio........................................................... 87,300
International Bond Portfolio............................................................. 23,200
Total Return Bond Portfolio.............................................................. 33,400
Intermediate-Term Bond Portfolio......................................................... 36,200
Mortgage Backed Securities Portfolio..................................................... 48,000
U.S. Government Money Market Portfolio................................................... 7,200
</TABLE>

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

B-34
<PAGE> 125

THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION GROWTH PORTFOLIO
Portfolio of Investments December 31, 1995

<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS--93.2%

COMMON STOCKS--93.2%

APPAREL & TEXTILES--0.5%
12,900 NIKE, Inc.................. $ 898,163
------------
BANKS--4.0%
27,100 Bank of New York Co., 1,321,125
Inc......................
29,300 Chemical Banking Corp...... 1,721,375
27,000 Citicorp................... 1,815,750
35,000 NationsBank Corp........... 2,436,875
------------
7,295,125
------------
BROADCASTING--1.1%
43,700 Viacom Inc.*............... 2,070,287
------------
BUSINESS SERVICES--1.5%
35,900 General Motors Corp........ 1,866,800
12,500 Stratacom Inc.*............ 918,750
------------
2,785,550
------------
CHEMICALS--0.7%
17,300 Potash Corp................ 1,226,138
------------
COMPUTERS & BUSINESS
EQUIPMENT--15.1%
121,300 3 Com Corp.*............... 5,655,612
75,000 Bay Networks*.............. 3,084,375
27,700 Boeing Co.................. 2,170,988
89,000 Cisco Systems, Inc.*....... 6,641,625
71,000 Compaq Computer Corp.*..... 3,408,000
21,100 Hewlett-Packard Co......... 1,767,125
100,000 Sun Microsystems, Inc.*.... 4,562,500
------------
27,290,225
------------
CONSTRUCTION & MINING
EQUIPMENT--1.5%
45,000 Caterpillar Inc............ 2,643,750
------------
DOMESTIC OIL--0.5%
18,200 Amerada Hess Corp.......... 964,600
------------
DRUGS & HEALTHCARE--19.6%
45,000 American Home Products
Corp.................... $ 4,365,000
50,100 AMGEN Inc.*............... 2,974,687
89,500 Columbia Healthcare Corp.. 4,542,125
65,600 Johnson & Johnson Co...... 5,617,000
39,500 Medtronic, Inc............ 2,207,063
118,600 Merck & Co., Inc.......... 7,797,950
69,000 Pfizer Inc................ 4,347,000
33,900 Smith Kline Beecham PLC
(ADR)................... 1,881,450
23,000 United Healthcare Corp.... 1,506,500
-----------
35,238,775
-----------
ELECTRONICS--12.7%
96,300 Ericsson (L.M.) Telephone
Co., Inc. B-free
(ADR)................... 1,877,850
41,800 General Motors Corp., 2,053,425
Class H.................
73,000 Intel Corp................ 4,142,750
15,300 KLA Instruments Corp.*.... 398,756
85,000 Linear Technology Corp.... 3,336,250
27,300 LSI Logic Corp.*.......... 894,075
80,000 Maxim Integrated Products, 3,080,000
Inc.*...................
65,000 Motorola, Inc............. 3,705,000
110,000 Xilinx Inc.*.............. 3,355,000
-----------
22,843,106
-----------
FINANCIAL SERVICES--3.1%
41,300 American Express Co....... 1,708,788
43,892 First Data Corp........... 2,935,277
21,700 Fleet Financial Group,
Inc..................... 884,275
-----------
5,528,340
-----------
FOOD & BEVERAGES--1.8%
56,600 PepsiCo Inc............... 3,162,525
-----------
INDUSTRIAL & MACHINERY--2.6%
117,400 Applied Materials, 4,622,625
Inc.*...................
-----------
INSURANCE--8.2%
22,800 Aetna Life & Casualty 1,578,900
Co......................
68,700 American International 6,354,750
Group, Inc..............
18,100 CIGNA Corp................ 1,868,825
24,000 General Reinsurance 3,720,000
Corp....................
22,300 MGIC Investment Corp...... 1,209,775
-----------
14,732,250
-----------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-35
<PAGE> 126
THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION GROWTH PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
LEISURE TIME--0.9%
26,600 Walt Disney Co............. $ 1,569,400
------------
MISCELLANEOUS--1.5%
120,000 Atmel Corp.*............... 2,685,000
------------
PAPER--2.0%
43,100 Kimberly-Clark Corp........ 3,566,525
------------
PETROLEUM SERVICES--1.1%
10,890 British Petroleum Co.,
PLC...................... 1,112,141
13,600 Schlumberger Ltd........... 941,800
------------
2,053,941
------------
RETAIL GROCERY--1.2%
42,300 Safeway Inc.*.............. 2,178,450
------------
RETAIL TRADE--1.7%
45,700 Federated Department
Stores, Inc.*............ 1,256,750
20,000 Home Depot, Inc............ 957,500
42,200 Office Depot, Inc.*........ 833,450
------------
3,047,700
------------
SOFTWARE--7.1%
55,000 Adobe Systems, Inc......... 3,410,000
38,600 Computer Associates
International, Inc....... 2,195,375
30,000 Informix Corp.*............ 900,000
54,800 Microsoft Corp.*........... 4,808,700
35,600 Oracle Systems Corp.*...... 1,508,550
------------
12,822,625
------------
TELECOMMUNICATION--1.8%
85,000 DSC Communications
Corp.*................... 3,134,375
2,300 United States Robotics *... 201,825
------------
3,336,200
------------
TELEPHONE--3.0%
40,200 American Telephone &
Telegragh Co............. $ 2,602,950
72,400 MCI Communications
Corp..................... 1,891,450
33,100 Telecommunications,
Inc.*.................... 889,562
------------
5,383,962
------------
Total common stocks
(cost $148,354,333)...... 167,945,262
------------

SHORT-TERM INVESTMENTS--8.3%
PRINCIPAL
AMOUNT
(000) COMMERCIAL PAPER--4.4%
- ----------
Commerzbank Ag, New York
branch
1,500 5.79%, 1/11/96............. 1,497,587
Deutsche Bank Finance Inc.
2,000 5.72%, 1/8/96.............. 1,997,776
Siemens Corp.
2,000 5.57%, 1/22/96............. 1,993,502
U.S. Central Credit Union
2,500 5.60%, 1/18/96............. 2,493,389
------------
Total commercial paper
(cost $7,982,254)........ 7,982,254
------------
REPURCHASE AGREEMENT--3.9%
State Street Bank and
Trust Co., 4.25%, dated
12/29/95, due 1/2/96 in
the amount of $6,918,265
(cost $6,915,000; value
of collateral including
accrued
6,915 interest--$7,119,816).... 6,915,000
------------
Total short-term
investments
(cost $14,897,254)....... 14,897,254
------------
Total Investments--101.5%
(cost $163,251,587)........ 182,842,516
Liabilities in excess of
other assets--(1.5%)..... (2,765,276)
------------
Net Assets--100%........... $180,077,240
============
</TABLE>

- ---------------
ADR--American Depository Receipts.
* Non-income producing securities.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-36
<PAGE> 127
LARGE CAPITALIZATION VALUE PORTFOLIO
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
LONG TERM INVESTMENTS--97.5%

Common Stocks--97.5%

AEROSPACE--3.8%
22,000 Boeing Co.................. $ 1,724,250
24,450 Lockheed Martin Corp....... 1,931,550
30,100 Rockwell International
Corp..................... 1,591,537
20,000 United Technologies
Corp..................... 1,897,500
------------
7,144,837
------------
ALUMINUM--1.4%
40,000 Aluminum Company of
America.................. 2,115,000
8,000 Reynolds Metals Co......... 453,000
------------
2,568,000
------------
AGRICULTURE MACHINERY--1.4%
76,500 Deere & Co................. 2,696,625
------------
APPAREL & TEXTILES--3.0%
75,000 Liz Claiborne, Inc......... 2,081,250
45,000 Russell Corp............... 1,248,750
115,000 Shaw Industries, Inc....... 1,696,250
25,000 Unifi, Inc................. 553,125
------------
5,579,375
------------
ASSET MANAGEMENT--0.8%
19,000 Morgan Stanley Group,
Inc...................... 1,531,875
------------
AUTOMOBILES--3.4%
153,000 Ford Motor Co.............. 4,437,000
37,000 General Motors Corp........ 1,956,375
------------
6,393,375
------------
AUTO PARTS--1.1%
42,500 Arvin Industries Inc....... 701,250
46,200 Dana Corp.................. 1,351,350
------------
2,052,600
------------
BANKS--7.7%
81,600 Ahmanson (H.F.) & Co....... $ 2,162,400
20,600 BankAmerica Corp........... 1,333,850
40,000 Boatmen's Bancshares....... 1,635,000
15,500 Chase Manhattan Corp....... 939,688
1,700 Chemical Banking Corp...... 99,875
22,500 First America Bank
Corp..................... 998,437
35,000 First Chicago Nbd
Corporation.............. 1,382,500
41,600 Great Western Financial
Corp..................... 1,060,800
25,000 Keycorp.................... 906,250
25,000 National City Corp......... 828,125
20,300 NationsBank Corp........... 1,413,387
35,000 Wachovia Corp.............. 1,601,250
------------
14,361,562
------------
BUSINESS SERVICES--0.5%
22,000 Donnelley (R.R.) & Sons,
Co....................... 866,250
------------
CHEMICALS--3.8%
46,000 Dow Chemical Co............ 3,237,250
20,000 Du Pont (E.I.) de Nemours
& Co..................... 1,397,500
4,100 Monsanto Co................ 502,250
40,000 Nalco Chemical Co.......... 1,205,000
10,600 Olin Corp.................. 787,050
------------
7,129,050
------------
COMPUTERS & BUSINESS
EQUIPMENT--2.1%
20,000 Compaq Computer Corp.*..... 960,000
18,000 Hewlett-Packard Co......... 1,507,500
30,000 Pitney Bowes, Inc.......... 1,410,000
------------
3,877,500
------------
CONGLOMERATES--3.3%
39,800 American Brands Inc........ 1,776,075
183,000 Hanson PLC (ADR)........... 2,790,750
25,000 Textron, Inc............... 1,687,500
------------
6,254,325
------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-37
<PAGE> 128
THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
<S> <C> <C>
DOMESTIC OIL--2.4%
16,000 Atlantic Richfield Co...... $ 1,772,000
36,000 Tenneco Inc................ 1,786,500
5,000 Ultramar Corporation....... 128,750
46,200 USX Marathon Corp.......... 900,900
------------
4,588,150
------------
DRUGS & HEALTHCARE--8.9%
32,500 Abbott Laboratories........ 1,356,875
29,000 American Home Products 2,813,000
Corp.....................
31,500 Baxter International 1,319,062
Inc......................
45,000 Bristol Myers Squibb Co.... 3,864,375
35,000 Columbia Healthcare 1,776,250
Corp.....................
34,000 Lilly (Eli) & Co........... 1,912,500
32,000 Merck & Co., Inc........... 2,104,000
30,000 Schering Plough Corp....... 1,642,500
------------
16,788,562
------------
ELECTRIC UTILITIES--7.6%
60,000 Cinergy Corp............... 1,837,500
60,200 CMS Energy Corporation..... 1,798,475
12,000 Entergy Corporation........ 351,000
20,000 General Public Utilities 680,000
Corporation..............
53,500 New York State Electric &
Gas Corp................. 1,384,312
109,300 Niagara Mohawk Power 1,052,013
Corp.....................
30,000 PECO Energy Co............. 903,750
37,000 Public Service Enterprise 1,133,125
Inc......................
137,000 SCE Corp................... 2,431,750
80,000 Unicom Corp................ 2,620,000
------------
14,191,925
------------
ELECTRICAL EQUIPMENT--1.4%
20,000 Emerson Electric Co........ 1,635,000
15,000 General Electric Co........ 1,080,000
------------
2,715,000
------------
ELECTRONICS--1.0%
40,000 Raytheon Co................ 1,890,000
------------
FINANCIAL SERVICES--2.2%
29,900 Beneficial Corp........... $ 1,394,088
Federal National Mortgage
10,400 Association............. 1,290,900
25,200 Household International, 1,489,950
Inc.....................
-----------
4,174,938
-----------
FOOD & BEVERAGES--3.5%
52,500 Heinz (H.J.) Co........... 1,739,062
35,000 PepsiCo Inc............... 1,955,625
21,000 Ralston Purina Co......... 1,309,875
60,000 Tyson Foods, Inc.......... 1,567,500
-----------
6,572,062
-----------
FOREST PRODUCTS--0.8%
34,400 Weyerhaeuser Co........... 1,487,800
-----------
GAS & PIPELINE UTILITIES--0.5%
25,000 Eastern Enterprises....... 881,250
-----------
HOUSEHOLD APPLIANCES & HOME
FURNISHINGS--0.8%
70,000 Maytag Corp............... 1,417,500
-----------
INSURANCE--7.8%
12,700 Aetna Life & Casualty 879,475
Co......................
55,000 American General Corp..... 1,918,125
25,700 Aon Corp.................. 1,281,787
10,000 General Reinsurance 1,550,000
Corp....................
30,000 Jefferson-Pilot Corp...... 1,395,000
20,200 Lincoln National Corp..... 1,085,750
19,000 Marsh & McLennan Cos...... 1,686,250
80,600 SAFECO Corp............... 2,780,700
19,838 The Allstate Corp......... 815,838
17,500 Transamerica Corp......... 1,275,313
1,400 USLIFE Corp............... 41,825
-----------
14,710,063
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-38
<PAGE> 129
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
INTERNATIONAL OIL--5.1%
25,000 Amoco Corp................. $ 1,796,875
30,000 Chevron Corp............... 1,575,000
31,000 Exxon Corp................. 2,483,875
50,000 Repsol S.A. (ADR).......... 1,643,750
15,000 Royal Dutch Petroleum 2,116,875
Co.......................
------------
9,616,375
------------
LIQUOR--1.8%
49,300 Anheuser Busch Cos., 3,296,938
Inc......................
------------
MINING--1.4%
27,000 Minnesota Mining &
Manufacturing Co......... 1,788,750
15,000 Phelps Dodge Corp.......... 933,750
------------
2,722,500
------------
PAPER--2.4%
7,000 Federal Paper Board Co., 363,125
Inc......................
42,000 International Paper Co..... 1,590,750
31,600 Union Camp Corp............ 1,504,950
37,500 Westvaco Corp.............. 1,040,625
------------
4,499,450
------------
PETROLEUM SERVICES--0.6%
31,700 Ashland Incorporated....... 1,113,463
------------
POLLUTION CONTROL--1.1%
32,000 Browning Ferris Industries, 944,000
Inc......................
40,000 WMX Technologies, Inc...... 1,195,000
------------
2,139,000
------------
PUBLISHING--0.6%
16,000 Dun & Bradstreet Corp...... 1,036,000
------------
RAILROADS & EQUIPMENT--1.0%
28,000 Conrail, Inc............... 1,960,000
------------
RESTAURANTS--1.0%
40,000 McDonald's Corp............ $ 1,805,000
------------
RETAIL GROCERY--0.5%
30,000 Giant Foods. Inc........... 945,000
------------
RETAIL TRADE--4.1%
172,000 Kmart Corp................. 1,247,000
55,000 Melville Corp.............. 1,691,250
30,000 Penney (J.C.) Co., Inc..... 1,428,750
31,400 Sears Roebuck & Co......... 1,224,600
6,500 Supervalue, Inc............ 204,750
38,400 May Department Stores Co... 1,622,400
22,500 Woolworth Corp............. 292,500
------------
7,711,250
------------
STEEL--0.7%
40,000 USX-U.S. Steel Group, Inc.. 1,230,000
------------
TIRES & RUBBER--0.9%
65,000 Cooper Tire & Rubber Co.... 1,600,625
------------
TELEPHONE--2.4%
48,000 Pacific Telesis Group...... 1,614,000
Southern New England
Telecommunications,
40,000 Corp..................... 1,590,000
40,000 Telefonos de Mexico, S.A 1,275,000
(ADR)....................
3,000 US West, Inc.*............. 107,250
------------
4,586,250
------------
TOBACCO--3.5%
52,000 Philip Morris Cos., Inc.... 4,706,000
55,000 UST, Inc................... 1,835,625
------------
6,541,625
------------
TRUCKING & FREIGHT
FORWARDING--1.2%
80,000 Hunt J.B.Transport 1,340,000
Services, Inc............
35,000 Ryder System, Inc.......... 866,250
------------
2,206,250
------------
TOTAL COMMON STOCKS
(cost $149,416,627)........ 182,882,350
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-39
<PAGE> 130
THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT/SHARES VALUE
(000) DESCRIPTION (NOTE 1)
- ------------- ----------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS--2.6%

U. S. GOVERNMENT SECURITIES--1.4%
United States Treasury Bill
$ 2,700 5.29%, 5/2/96
(cost $2,651,597).......... $ 2,651,597
------------
OTHER--1.2%
2,174 Seven Seas Series
Government Fund,
(cost $2,174,371).......... 2,174,371
------------
Total short-term
investments
(cost $4,825,968).......... 4,825,968
------------
TOTAL INVESTMENTS--100.1%
(cost $154,242,595; Note
4)....................... 187,708,318
Liabilities in excess of
other
assets--(0.1%)............. (112,115)
------------
NET ASSETS--100%........... $187,596,203
============

</TABLE>
- ---------------
*Non-income producing securities.
ADR--American Depository Receipts.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-40
<PAGE> 131

SMALL CAPITALIZATION GROWTH PORTFOLIO
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS--94.5%
Common Stocks--94.5%
AEROSPACE--0.6%
16,300 Watkins Johnson Co......... $ 713,125
------------
ALUMINUM--0.3%
6,700 Reynolds Metals Co......... 379,388
------------
APPAREL & TEXTILES--4.3%
48,100 G & K Services............. 1,226,550
7,300 Jones Apparel Group,
Inc...................... 287,438
31,350 Nautica Enterprises,
Inc.*.................... 1,371,562
30,800 Reebok International,
Ltd...................... 870,100
35,600 Unifi, Inc................. 787,650
27,200 Warnaco Group, Inc......... 680,000
------------
5,223,300
------------
AIRLINES--1.2%
19,400 Continental Airlines,
Inc.*.................... 843,900
3,300 UAL Corp.*................. 589,050
------------
1,432,950
------------
ASSET MANAGEMENT--1.0%
12,200 Alex, Brown Inc............ 512,400
26,750 Waterhouse Investor
Services Inc............. 662,063
------------
1,174,463
------------
AUTOMOBILES--1.1%
61,100 Wabash National Corp....... 1,359,475
------------
BANKS--0.5%
23,300 North Fork Bancorporation,
Inc...................... 588,325
------------
BROADCASTING--0.9%
27,000 Heritage Media Corp........ 691,875
25,000 Sinclair Broadcast Group
Inc...................... 431,250
------------
1,123,125
------------
BUSINESS SERVICES--6.0%
22,500 Acclaim Entertainment, $ 278,438
Inc.*....................
35,350 CUC International Inc.*.... 1,206,319
33,600 Fiserv, Inc................ 1,008,000
21,400 GTECH Holdings Corp........ 556,400
55,200 National Media Corp.*...... 1,159,200
35,600 Pinkertons, Inc.*.......... 694,200
13,400 Robert Half International, 561,125
Inc.*....................
38,700 Rollins, Inc............... 856,237
26,200 Stewart Enterprises,
Inc...................... 969,400
------------
7,289,319
------------
CONTAINERS & GLASS--0.4%
20,400 Bemis Co., Inc............. 522,750
------------
CHEMICALS--3.3%
12,200 Eastman Chemical Co*....... 764,025
74,700 Minerals Technologies,
Inc...................... 2,726,550
25,000 Schulman (A.), Inc......... 562,500
------------
4,053,075
------------
COMMUNICATION--1.4%
14,000 Pairgain Technologies
Inc.*.................... 766,500
56,900 Valassis Communications,
Inc...................... 995,750
------------
1,762,250
------------
COMPUTERS & BUSINESS
EQUIPMENT--5.8%
18,600 Ascend Communications
Inc.*.................... 1,508,925
32,600 Conner Peripherals,
Inc.*.................... 684,600
28,000 DST Systems Inc............ 798,000
11,100 Komag Inc.*................ 511,987
9,800 Medic Computer Systems,
Inc.*.................... 592,900
18,000 Safeguard Scientifics
Inc...................... 891,000
23,200 Sun Microsystems, Inc.*.... 1,058,500
30,900 Tech Data Corp............. 463,500
21,800 Trident Microsystems
Inc.*.................... 512,300
3,000 U.S. Data Corp............. 43,500
------------
7,065,212
------------
CONSTRUCTION & MINING
EQUIPMENT--0.6%
24,200 JLG Industries, Inc........ 719,950
------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-41
<PAGE> 132

THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION GROWTH PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
CONSTRUCTION MATERIALS
1,100 Granite Construction $ 33,825
Inc......................
------------
DOMESTIC OIL
400 Louisiana Land & 17,150
Exploration Co...........
------------
DRUGS & HEALTHCARE--7.2%
22,000 Cephalon, Inc.*............ 896,500
21,100 Community Health Systems 751,688
Inc......................
47,900 COR Therapeutics, Inc.*.... 401,163
30,000 Healthdyne, Inc............ 345,000
38,800 Jones Med Inds Inc......... 936,050
14,200 Lincare Holdings Inc.*..... 355,000
4,000 Medeva PLC. (ADR).......... 67,740
39,700 Neurogen Corp.*............ 1,066,937
49,700 Orthologic Corp.*.......... 720,650
45,900 Scherer (R.P.) Corp........ 2,254,837
42,000 Syncor International 283,500
Corp.*...................
15,000 Watson Pharmaceuticals
Inc.*.................... 735,000
------------
8,814,065
------------
ELECTRICAL EQUIPMENT--2.0%
14,700 Alliance Semiconductor*.... 170,888
15,800 Boston Scientific Corp.*... 774,200
51,000 Cellpro, Inc.*............. 816,000
34,800 Nu Horizons Electrs 617,700
Corp.*...................
------------
2,378,788
------------
ELECTRONICS--7.9%
17,800 Burr-Brown Corp.*.......... 453,900
16,700 Electro Scientific 488,475
Industries, Inc.*........
18,400 Electroglas Inc.*.......... 450,800
33,700 Empi Inc.*................. 859,350
44,400 Integrated Circuit Systems
Inc.*.................... 549,450
32,900 Integrated Device 423,588
Technology, Inc.*........
22,500 Kulicke & Soffa Inds 523,125
Inc.*....................
16,600 Maxim Integrated Products, 639,100
Inc.*....................
12,100 Micron Technology Inc.*.... 479,462
32,100 Photronics, Inc.*.......... 858,675
35,600 S3 Inc.*................... 627,450

25,200 Scientific Games Holdings $ 951,300
Corp.*..................
56,400 Sensormatic Electronics 979,950
Corp....................
19,300 Teradyne, Inc.*........... 482,500
13,700 Wyle Electronics.......... 481,212
13,500 Xilinx Inc.*.............. 411,750
-----------
9,660,087
-----------
FINANCIAL SERVICES--2.9%
18,800 Bear Stearns Cos., Inc.... 373,650
12,800 Commercial Federal 483,200
Corp.*..................
15,000 First Merchants Acceptance 277,500
Corp....................
12,200 First USA, Inc............ 541,375
Lehman Brothers Holdings
25,000 Inc..................... 531,250
37,600 Olympic Financial Ltd.*... 611,000
22,400 Penncorp Financial Group, 658,000
Inc.....................
-----------
3,475,975
-----------
FOOD & BEVERAGES--0.3%
30,000 Barefoot, Inc............. 315,000
-----------
GAS EXPLORATION--2.5%
18,200 Anadarko Petroleum 985,075
Corp....................
80,000 Forcenergy Gas Expl Inc... 880,000
13,700 Newfield Exploration 369,900
Co......................
17,100 Sonat Offshore Drilling 765,225
Inc.....................
-----------
3,000,200
-----------
HOMEBUILDERS--1.6%
43,800 Champion Enterprises, 1,352,325
Inc.*...................
25,500 Lennar Corp............... 640,688
-----------
1,993,013
-----------
HOTELS & RESTAURANTS--3.8%
61,200 Boston Chicken............ 1,966,050
24,200 HFS Inc................... 1,978,350
30,000 Trump Hotels & Casino 645,000
Resorts.................
-----------
4,589,400
-----------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-42
<PAGE> 133

<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
HOUSEHOLD APPLIANCES & HOME
FURNISHINGS--1.0%
21,600 American Homestar Corp..... $ 445,500
28,000 Newell Co.................. 724,500
------------
1,170,000
------------
INDUSTRIAL & MACHINERY--5.6%
7,300 Acme Cleveland Corp........ 136,875
14,600 Applied Materials, Inc.*... 574,875
22,600 Cognex Corp.*.............. 785,350
94,200 Danka Business Systems 3,485,400
PLC......................
14,100 Esterline Technologies 333,112
Corp.*...................
27,400 Synalloy Corp.............. 578,825
15,000 TriMas Corp................ 283,125
16,200 Tyco Laboratories, Inc..... 577,125
------------
6,754,687
------------
INSURANCE--2.8%
22,800 American Financial Group 698,250
Inc......................
20,600 Fremont General Corp....... 757,050
24,000 Progressive Corp........... 1,173,000
25,500 TIG Holdings, Inc.......... 726,750
------------
3,355,050
------------
LEISURE TIME--2.2%
24,000 Grand Casinos, Inc.*....... 558,000
122,800 Hammons (John Q.) Hotels 1,135,900
Inc......................
9,900 King World Productions, 384,862
Inc.*....................
30,100 Seattle Filmworks Inc.*.... 624,575
------------
2,703,337
------------
MINING--0.5%
10,400 Phelps Dodge Corp.......... 647,400
------------
MISCELLANEOUS--6.3%
12,700 Advanced Semiconductor 625,475
Matls*...................
50,000 Amerin Corp................ 1,337,500
31,800 Atmel Corp.*............... 711,525
63,200 Atrium Inc.*............... 1,264,000
30,100 Camco Inc.................. 842,800
9,500 Cellstar Corp.*............ 247,000
18,000 Credence Systems Corp.*... $ 411,750
12,000 Loewen Group, Inc......... 303,750
11,400 Madge N.V.*............... 510,150
20,250 McAffee Associates, 888,469
Inc.*...................
30,000 Stone Energy Corp......... 461,250
-----------
7,603,669
-----------
NON-FERROUS METALS--0.6%
22,200 ASARCO, Inc............... 710,400
-----------
PAPER--4.4%
48,900 Alco Standard Corp........ 2,231,062
23,000 Bowater Inc............... 816,500
10,200 Consolidated Papers 572,475
Inc.....................
14,040 Kimberly-Clark Corp....... 1,161,810
16,000 Rayonier Timberlands, 534,000
L.P.....................
-----------
5,315,847
-----------
PETROLEUM SERVICES--2.7%
74,900 Petroleum Geo-Services A/S 1,872,500
(ADR)...................
57,000 Reading & Bates Corp.*.... 855,000
25,300 Valero Energy Corp........ 619,850
-----------
3,347,350
-----------
POLLUTION CONTROL--0.3%
17,600 FSI International, 356,400
Inc.*...................
-----------
PUBLISHING--1.0%
11,500 American Greetings 317,688
Corp....................
16,100 Devon Group, Inc.*........ 467,906
9,300 Houghton Mifflin Co....... 399,900
-----------
1,185,494
-----------
RETAIL GROCERY--0.2%
11,085 Heartland Express Inc..... 218,929
-----------
RETAIL TRADE--4.0%
27,200 Barnes & Noble, Inc.*..... 788,800
47,800 Harcourt General, Inc..... 2,001,625
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-43
<PAGE> 134
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION GROWTH PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
RETAIL TRADE (cont'd)
15,000 Heilig Meyers Co........... $ 275,625
39,500 Ross Stores Inc............ 755,437
13,900 Scholastic Corp............ 1,080,725
------------
4,902,212
------------
SOFTWARE--2.3%
40,700 Cheyenne Software, Inc..... 1,063,287
11,700 Computer Associates
International, Inc....... 665,438
28,500 Henry Jack & Associates 705,375
Inc......................
15,185 Read-Rite Corp.*........... 353,051
------------
2,787,151
------------
STEEL--1.1%
25,900 Castle A M Co.............. 728,438
23,000 Mueller Inds Inc.*......... 672,750
------------
1,401,188
------------
TIRES & RUBBER--0.3%
12,800 Cooper Tire & Rubber Co.... 315,200
------------
TELECOMMUNICATION--0.6%
8,600 United States Robotics 754,650
Corp.*...................
------------
TELEPHONE--1.9%
15,100 Century Telephone 479,425
Enterprises, Inc.........
88,200 LCI International, Inc..... 1,808,100
------------
2,287,525
------------
TRUCKING & FREIGHT FORWARDING--1.1%
23,700 American President Cos., 545,100
Ltd......................
25,000 Tidewater Inc.............. 787,500
------------
1,332,600
------------
Total long-term investments
(common stocks)
(cost $93,744,854)....... 114,833,299
------------
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT/SHARES VALUE
(000) DESCRIPTION (NOTE 1)
------------- ----------- --------
<S> <C> <C>
SHORT TERM INVESTMENTS--5.3%
COMMERCIAL PAPER--1.8%
$ 2,231 Philip Morris Capital Corp.
5.80%, 1/2/96
(cost $2,230,641)........ $ 2,230,641
------------
OTHER--3.5%
4,139 Seven Seas Series 4,139,172
Government Fund..........
61 Seven Seas Money Market 61,180
Fund.....................
------------
Total investment company
(cost $4,200,352)........ 4,200,352
------------
Total short-term
investments
(cost $6,430,993)........ 6,430,993
------------
TOTAL INVESTMENTS--99.8%
(cost $100,175,847)........ 121,264,292
Other assets in excess of
liabilities--0.2%........ 268,430
------------
NET ASSETS--100%........... $121,532,722
------------
------------
</TABLE>
- ------------------
ADR--American Depository Receipt.
* Non-income producing securities.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-44
<PAGE> 135
SMALL CAPITALIZATION VALUE PORTFOLIO
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
LONG TERM INVESTMENTS--97.8%

COMMON STOCKS--97.7%

AEROSPACE--2.6%
5,000 Alliant Techsystems, $ 253,125
Inc.*....................
52,000 Coltec Industries, Inc.*... 604,500
43,700 Talley Industries, Inc.*... 376,913
18,800 Teleflex, Inc.............. 770,800
23,900 Whittaker Corp.*........... 519,825
------------
2,525,163
------------
APPAREL & TEXTILES--2.7%
3,900 Interface, Inc............. 66,300
31,500 Jones Apparel Group, 1,240,312
Inc.*....................
19,200 Unitog Co. (New)........... 463,200
34,400 Warnaco Group, Inc......... 860,000
800 Westpoint Stevens, Inc..... 16,050
------------
2,645,862
------------
ASSET MANAGEMENT--0.4%
63,600 Noel Group, Inc.*.......... 413,400
------------
AUTO PARTS--1.8%
18,800 Lear Seating Corp.*........ 545,200
44,900 Standard Motor Products,
Inc., Class A............ 673,500
59,000 TBC Corp.*................. 508,875
------------
1,727,575
------------
AUTO RELATED--3.1%
32,000 Amcast Industrial Corp..... 584,000
27,000 Armor All Products,
Corp..................... 489,375
11,900 First Brands Corp.......... 566,738
16,200 Modine Manufacturing Co.... 388,800
29,480 Myers Industries, Inc...... 482,735
15,300 Smith A O Corp............. 317,475
13,900 Thomson PBE, Inc.*......... 194,600
------------
3,023,723
------------
BANKS--5.1%
20,000 Bay View Capital Corp...... $ 570,000
8,600 BayBanks, Inc.............. 844,950
36,400 First American Corp........ 1,724,450
20,800 First Commerce Corp.
(L.A.)................... 665,600
18,500 Firstmerit Corp............ 555,000
27,400 Signet Banking Corp........ 650,750
------------
5,010,750
------------
BUILDING & CONSTRUCTION--5.7%
20,600 Applied Power, Inc......... 618,000
18,200 Carlisle Co., Inc.......... 734,825
26,650 Clarcor, Inc............... 542,993
38,000 Commercial Intertech
Corp..................... 688,750
27,800 Donaldson Co., Inc......... 698,475
40,500 Lydall, Inc.*.............. 921,375
26,450 Osmonics, Inc.*............ 538,919
36,000 Regal Beloit Corp.......... 783,000
------------
5,526,337
------------
BUSINESS SERVICES--0.6%
28,500 Bowne & Company, Inc....... 570,000
------------
CHEMICALS--5.2%
39,800 Arcadian Corp.............. 771,125
76,900 Crompton & Knowles
Corp..................... 1,018,925
21,700 Fuller (H.B.) Company...... 754,075
2,700 Furon Co................... 54,000
30,800 Hanna (M. A.) Co........... 862,400
24,300 Learonal, Inc.............. 558,900
4,300 O Sullivan Corp............ 44,612
41,250 RPM, Inc., Ohio............ 680,625
21,900 Rock-Tenn Co., Class A..... 355,875
------------
5,100,537
------------
COMMUNICATION--1.0%
24,400 Associated Group, Inc.,
Class A*................. 460,550
30,800 Bell Cablemedia PLC.
(ADR)*................... 492,800
------------
953,350
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-45
<PAGE> 136
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
COMPUTERS & BUSINESS EQUIPMENT--2.6%
73,200 Intelligent Electronics,
Inc...................... $ 439,200
16,900 Lexmark International
Group, Inc.*............. 308,425
26,700 Stratus Computer, Inc.*.... 924,487
54,500 Wang Laboratories, Inc.*... 906,063
------------
2,578,175
------------
COSMETICS & TOILETRIES--0.8%
1,700 Alberto Culver Co.......... 51,850
19,000 Maybelline, Inc............ 688,750
------------
740,600
------------
DIVERSIFIED INDUSTRIALS--0.7%
23,700 Brady (W. H.) Co........... 639,900
------------
DOMESTIC OIL--1.4%
40,000 Cross Timbers Oil Co....... 705,000
25,400 Ultramar Corp.............. 654,050
------------
1,359,050
------------
DRUGS & HEALTHCARE--2.2%
30,400 Amerisource Health
Corp.*................... 1,003,200
10,500 FHP International Corp.*... 299,250
7,400 McKesson Corp.............. 374,625
18,500 West Co. Inc............... 434,750
------------
2,111,825
------------
ENERGY--0.5%
10,000 Addington Resources,
Inc.*.................... 146,250
17,200 California Energy, Inc.*... 335,400
------------
481,650
------------
ELECTRICAL EQUIPMENT--3.9%
6,800 AptarGroup, Inc............ 254,150
19,950 Bearings, Inc.............. 583,537
46,200 Belden Helminway Co.,
Inc...................... 1,189,650
16,400 Core Industries, Inc....... 211,150
25,000 EG & G, Inc................ 606,250
41,100 Oak Industries, Inc.*...... 770,625
16,000 Woodhead Industries,
Inc...................... 228,000
------------
3,843,362
------------
ELECTRONICS--2.2%
33,500 Amphenol Corp.*........... $ 812,375
22,500 Augat, Inc................ 385,313
39,750 Methode Eletronics,
Inc..................... 566,437
30,400 Pioneer Standard
Electronics, Inc........ 402,800
-----------
2,166,925
-----------
ENTERTAINMENT--0.7%
25,700 GTECH Holdings Corp.*..... 668,200
-----------
FINANCIAL SERVICES--2.0%
22,000 Allied Capital Lending
Corp.................... 291,500
11,000 CMAC Investment Corp...... 484,000
48,700 Rollins Truck Leasing
Corp.................... 541,788
28,800 SEI Corp.................. 626,400
-----------
1,943,688
-----------
FOODS--1.0%
42,900 Flowers Industries,
Inc..................... 520,163
1,600 Lancaster Colony Corp..... 59,600
9,400 Universal Foods Corp...... 377,175
-----------
956,938
-----------
FOOD-SERVICE / LODGING--2.5%
32,600 Bob Evans Farms, Inc...... 619,400
28,800 Marcus Corp............... 788,400
47,600 Sbarro, Inc............... 1,023,400
-----------
2,431,200
-----------
HOSPITAL SUPPLIES & SERVICE--2.8%
22,800 Beckman Instruments,
Inc..................... 806,550
43,600 Sierra Health Services,
Inc.*................... 1,384,300
17,300 SpaceLabs Medical,
Inc.*................... 497,375
-----------
2,688,225
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-46
<PAGE> 137
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
HOUSEHOLD APPLIANCES & HOME
FURNISHINGS--4.7%
4,400 Bush Industries, Inc....... $ 86,350
20,300 Chromcraft Revington,
Inc.*.................... 540,488
19,700 Crown Crafts, Inc.......... 226,550
65,000 Ekco Group, Inc............ 381,875
32,600 Ethan Allen Interiors,
Inc.*.................... 664,225
11,400 Hon Industries, Inc........ 265,050
30,100 Miller (Herman), Inc....... 903,000
39,500 Rival Co................... 873,937
21,900 Stanhome, Inc.............. 637,837
------------
4,579,312
------------
INDUSTRIAL & MACHINERY--5.2%
26,400 Alltrista Corp.*........... 475,200
24,000 Briggs & Stratton Corp..... 1,041,000
32,100 BWIP Holding, Inc.......... 529,650
30,100 Crane Co................... 1,109,937
43,260 Mark IV Industries, Inc.... 854,385
33,100 Measurex Corp.............. 935,075
6,400 Medar, Inc.*............... 50,400
2,400 Watts Industries, Inc...... 55,800
------------
5,051,447
------------
INSURANCE--6.4%
24,600 20th Century Industries*... 488,925
17,900 Alexander & Alexander
Services, Inc............ 340,100
8,800 Berkley (W. R.) Corp....... 473,000
20,500 Equitable of Iowa Cos...... 658,563
14,900 Hartford Steam Boiler
Inspection &
Insurance Co............. 745,000
21,400 HCC Insurance Holdings,
Inc.*.................... 791,800
20,200 Horace Mann Educators
Corp..................... 631,250
6,700 NAC Re Corp................ 241,200
18,400 Poe & Associate, Inc....... 457,700
42,900 Western National Corp...... 691,762
62,200 Willis Corroon Group PLC.
(ADR).................... 723,075
------------
6,242,375
------------
LEISURE RELATED--0.9%
36,500 Anthony Industries, Inc.... 839,500
------------
MANUFACTURING--1.5%
15,700 Pentair, Inc.............. $ 781,075
22,600 Trinova Corp.............. 646,925
------------
1,428,000
------------
MISCELLANEOUS--0.2%
24,600 Big B, Inc................ 246,000
------------
OIL & GAS--1.2%
21,400 Devon Energy Corp......... 545,700
20,000 Helmerich & Payne, Inc.... 595,000
------------
1,140,700
------------
OIL-SUPPLIES & CONSTRUCTION--1.9%
7,400 BJ Services Co.*.......... 214,600
5,400 Input/Output, Inc.*....... 311,850
49,400 Lone Star Technologies,
Inc.*................... 543,400
25,500 Tidewater, Inc............ 803,250
------------
1,873,100
------------
OFFICE EQUIPMENT & SERVICES--1.8%
8,300 Data Research Associates,
Inc.*................... 155,625
38,500 Hunt Manufacturing Co..... 668,938
3,000 Wallace Computer Services,
Inc..................... 163,875
46,200 Zero Corp................. 820,050
------------
1,808,488
------------
PAPER--0.4%
21,000 Caraustar Industries,
Inc..................... 420,000
------------
PRINTING & PUBLISHING--3.8%
28,600 ADVO System, Inc.......... 743,600
32,550 American Business
Products, Inc........... 927,675
31,900 Banta Corp................ 1,403,600
28,400 Lee Enterprises, Inc...... 653,200
------------
3,728,075
------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-47
<PAGE> 138
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
PROFESSIONAL SERVICES--2.3%
30,700 CDI Corp.*................. $ 552,600
16,200 Interim Services, Inc.*.... 562,950
18,800 Jacobs Engineering Group,
Inc.*.................... 470,000
20,000 Rollins, Inc............... 442,500
8,000 US Facilities Corp......... 171,000
------------
2,199,050
------------
PUBLISHING--0.8%
17,900 Houghton Mifflin Co........ 769,700
------------
REAL ESTATE--3.9%
12,700 Allied Capital Commercial
Corp..................... 250,825
18,000 Avalon Properties, Inc..... 387,000
16,600 Crescent Real Estate
Equities................. 566,475
8,792 HGI Realty, Inc............ 201,117
24,000 Irvine Apartment
Communities, Inc......... 462,000
20,700 Liberty Property........... 429,525
7,500 Prime Retail, Inc.......... 89,063
30,000 RFS Hotel Investors,
Inc...................... 461,250
39,783 Security Capital Industrial
Trust.................... 696,202
9,000 Sun Communities, Inc....... 237,375
------------
3,780,832
------------
RECREATION--0.6%
21,000 Polaris Industries, Inc.... 616,875
------------
RETAILING--2.8%
53,300 Carson Pirie Scott &
Co.*..................... 1,059,337
22,100 Heilig Meyers Co........... 406,088
21,900 Meyer (Fred), Inc.*........ 492,750
27,800 Revco DS, Inc.............. 785,350
------------
2,743,525
------------
RETAIL-FOOD & DRUGS--1.5%
25,000 Hannaford Bros. Co......... 615,625
21,500 Luby's Cafeterias, Inc..... 478,375
29,200 Ruddick Corp............... 335,800
------------
1,429,800
------------
RETAIL TRADE--0.4%
19,950 Arbor Drugs, Inc.......... $ 418,950
------------
STEEL--1.5%
40,300 J & L Specialty Steel,
Inc..................... 755,625
26,400 Lukens, Inc............... 759,000
------------
1,514,625
------------
TELECOMMUNICATION--0.4%
29,800 Metromedia International
Group, Inc.*............ 417,200
------------
TELEPHONE--0.5%
Cellular Communications
19,400 Puerto Rico, Inc.*...... 538,350
------------
TRUCKING & FREIGHT FORWARDING--1.9%
22,300 Landstar Systems, Inc.*... 596,525
29,400 Pittston Services Group... 922,425
14,400 TNT Freightways Corp...... 289,800
------------
1,808,750
------------
TRUCKING & SHIPPING--1.0%
30,200 American Freightways
Corp.*.................. 313,325
32,800 Werner Enterprises,
Inc..................... 664,200
------------
977,525
------------
UTILITIES--0.4%
12,800 Wicor, Inc................ 412,800
------------
WINE--0.2%
6,900 Canandaigua Wine Co.,
Inc.*................... 225,113
------------
Total common stocks
(cost $85,600,901)...... 95,316,527
------------
PREFERRED STOCKS--0.1%
8,000 Prime Retail, Inc.
(cost $139,000)......... 142,000
------------
Total long-term
investments
(cost $85,739,901)...... 95,458,527
------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-48
<PAGE> 139
<TABLE>
<CAPTION>

PRINCIPAL
AMOUNT/SHARES VALUE
(000) DESCRIPTION (NOTE 1)
- --------------- ----------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS--2.3%

OTHER--1.1%
$ 1,022 Seven Seas Money Market
Fund
(cost $1,022,014).......... $ 1,022,014
------------
U. S. GOVERNMENT SECURITIES--1.2%
1,045 Federal National Mortgage
Association
5.45%, 1/3/96............ 1,044,684
United States Treasury
bills
95 4.50%, 1/11/96............. 94,881
75 4.65%, 1/11/96............. 74,903
------------
Total U.S. Government
Securities
(cost $1,214,468)........ 1,214,468
------------
Total short-term
investments
(cost $2,236,482)........ 2,236,482
------------
TOTAL INVESTMENTS--100.1%
(cost $87,976,383; Note
4)....................... 97,695,009
Liabilities in excess of
other assets--(0.1%)..... (100,530)
------------
NET ASSETS--100%........... $ 97,594,479
============
</TABLE>
- ---------------
ADR--American Depository Receipts.
* Non-income producing securities.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-49

<PAGE> 140
THE TARGET PORTFOLIO TRUST
INTERNATIONAL EQUITY PORTFOLIO
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
- --------- ----------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS--97.0%

COMMON STOCKS--95.7%

AUSTRALIA--3.9%
205,300 News Corp. Ltd. (ADR) .... $ 3,952,025
(Publishing)
795,900 Westpac Bank Corp. ....... 3,525,765
(Banking) ------------
7,477,790
------------
DENMARK--1.1%
40,200 Unidanmark A.S. .......... 1,990,995
(Banking) ------------

FINLAND--1.6%
117,200 Kymmene Corp. ............ 3,098,818
(Forest Products) ------------

FRANCE--12.2%
12,125 Accor .................... 1,569,788
(Consumer Services)
68,300 Alcatel Alsthom Compagnie
Generale d' Electricite.... 5,888,556
(Energy)
69,560 BQE National Paris ....... 3,137,800
(Banking)
29,600 Cie De St Gobain ......... 3,227,772
(Manufacturing)
35,500 Eaux Cie Generale ........ 3,544,201
(Utilities)
37,850 Roussel Uclaf (ADR) ...... 3,207,627
(Consumer Goods)
42,332 Total Francaise Petroleum,
Ltd. ................... 2,856,999
(Oil & Gas-Domestic) ------------
23,432,743
------------
GERMANY--8.3%
15,600 Hoechst A.G. ............. 4,230,324
(Steel)
11,200 Mannesmann A.G. (ADR) .... 3,573,759
(Industrials)
7,300 Siemens Aktiengesellschaft $ 3,994,772
(Industrials)
97,600 VEBA A.G. ................ 4,143,492
(Utilities) ------------
15,942,347
------------
HONG KONG--2.1%
212,999 HSBC Holdings PLC ....... 3,222,875
(Banking)
587,000 Peregrine Investments ... 759,134
(Financial Services) ------------
3,982,009
------------
JAPAN--26.2%
480 DDI Corp. ............... 3,719,128
(Consumer Goods)
256,000 Hitachi, Ltd. ........... 2,578,596
(Capital Goods)
232,000 Matsushita Electric....... 3,774,915
Industrial Co., Ltd. .
(Electrical Equipment)
682,000 Mazda Motor Corp.* ...... 2,899,738
(Automobiles)
542,000 Mitsubishi Heavy Inds..... 4,320,252
(Electrical Equipment)
34,000 Nintendo Co., Ltd. ...... 2,584,988
(Software)
133,000 Omron Corp. ............. 3,065,763
(Manufacturing)
77,000 Orix Corp. .............. 3,169,491
(Leasing)
38,400 Promise Co., Ltd. ....... 1,848,407
(Financial Services)
89,000 Ricoh Corp., Ltd. ....... 974,044
(Office Equipment &
Supplies)
75,000 Rohm Co., Ltd. .......... 4,234,867
(Technology)
259,000 Sekisui Chemical Corp..... 3,812,881
(Chemicals)
71,000 Sony Corp. .............. 4,256,562
(Consumer Durable Goods)
305,000 Sumitomo Trust & Banking.. 4,312,833
(Banking)
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-50
<PAGE> 141
<TABLE>
<CAPTION>
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
JAPAN--(CONT'D)
221,000 Toyota Motor Corp. ....... $ 4,687,554
(Automobiles) ------------
50,240,019
------------
KOREA
1 Samsung Electronics, GDR... 59
(Technology) ------------

NETHERLANDS--7.6%
25,000 Heineken N.V. ............ 4,435,408
(Food & Beverage)
65,105 Internationale-Nederlanden 4,349,259
Group N.V.
(Financial Services)
61,600 Nedlloyd Groep N.V. ...... 1,397,295
(Transportation)
30,700 Royal Dutch Petroleum Co... 4,332,538
(Energy) ------------
14,514,500
------------
NEW ZEALAND--1.8%
797,200 Fletcher Challenge, Ltd.... 1,839,773
(Forest & Paper)
693,400 Lion Nathan Ltd. ......... 1,654,622
(Consumer Goods) ------------
3,494,395
------------
NORWAY--1.1%
172,400 Aker A.S. Class B ........ 2,095,767
(Industrials) ------------

SPAIN--2.6%
42,100 Banco Santander Sa ....... 2,113,677
(Banking)
50,600 Empresa Nac Electricid ... 2,865,804
(Energy) ------------
4,979,481
------------
SWEDEN--3.9%
90,800 Astra B Free ............. 3,596,608
(Health & Personal Care)
41,600 Electrolux AB ........... $ 1,707,306
(Consumer Durable Goods)
109,500 Volvo AB ................ 2,242,873
(Automobiles) -------------
7,546,787
-------------
SWITZERLAND--8.0%
1,040 Baloise Hldgs. .......... 2,163,849
(Financial Services)
5,460 Ciba-Geigy Ltd. ......... 4,804,421
(Pharmaceuticals)
3,710 Nestle S.A. ............. 4,103,997
(Consumer Goods)
2,087 Societe Generale
Surveillance
Holding S.A............... 4,143,242
(Business & Public
Services)
-------------
15,215,509
-------------
UNITED KINGDOM--15.3%
236,800 Allied-Lyons PLC ........ 1,927,057
(Food & Beverage)
335,057 British Aerospace PLC ... 4,141,055
(Aerospace/Defense)
23,155 British Aerospace PLC
(Warrants)* ............ 112,557
(Aerospace/Defense)
489,396 Cadbury Schweppes, PLC.... 4,039,664
(Food & Beverage)
272,600 Lloyds Abbey Life PLC*.... 1,905,109
(Insurance)
202,500 Midlands Electricity PLC.. 2,390,123
(Utilities)
668,200 Mirror Group PLC ........ 1,826,420
(Publishing)
163,822 National Grid Group PLC... 506,299
(Utilities)
175,500 National Power PLC (Ord.). 1,225,148
(Utilities)
236,000 National Power PLCD ...... 564,435
(Utilities)
527,550 Rank Organization PLC ... 3,817,958
(Technology)
1,905,500 Sears PLC ............... 3,077,683
(Retail)
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-51
<PAGE> 142
THE TARGET PORTFOLIO TRUST
INTERNATIONAL EQUITY PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
------ ----------- --------
<S> <C> <C>
UNITED KINGDOM--(CONT'D)
160,000 Thorn EMI PLC ............ $ 3,768,287
(Entertainment) ------------
29,301,795
------------
Total common stocks
(cost $162,537,084)...... 183,313,014
------------
PREFERRED STOCKS--1.3%

ITALY--1.3%
1,374,400 Fiat Spa
(Automobiles)
(cost $3,729,704)........ 2,509,727
------------
Total long-term investments
(cost $166,266,788)...... 185,822,741
------------
<CAPTION>
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
-------- ----------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS--3.3%
U. S. GOVERNMENT SECURITIES--3.3%
Federal Home Loan Mortgage
Discount Notes
$ 5,135 5.60%, 1/2/96............ $ 5,134,201
Federal National Mortgage
Association, Discount
Notes
1,145 Zero Coupon, 1/16/96..... 1,142,400
------------
Total U. S. Government
Securities
(cost $6,276,601)........ 6,276,601
------------
TOTAL INVESTMENTS--100.3%
(cost $172,543,389; Note
4)....................... 192,099,342
Liabilities in excess of
other assets--(0.3%)..... (501,776)
------------
NET ASSETS--100%........... $191,597,566
============
</TABLE>
- ------------------
ADR--American Depository Receipt.
GDR--Global Depository Receipt.

* Non-income producing securities.
D Partially Paid Security

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-52
<PAGE> 143
INTERNATIONAL BOND PORTFOLIO
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
--------- ----------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS--77.8%

AUSTRALIA--1.1%
Australian Gov't. Bonds,
A$ 490 9.00%, 9/15/04........... $ 383,747
----------
AUSTRIA--1.1%
Austrian Gov't. Bonds,
ATS 3,660 7.00%, 2/14/00........... 387,299
----------
BELGIUM--1.5%
Belgium Gov't. Bonds,
BF 14,700 8.00%, 12/24/12.......... 523,616
----------
CANADA--3.6%
Canadian Gov't. Bonds,
C$ 21 6.50%, 6/1/04............ 14,899
Province of Ontario,
Provincial Bond,
1,500 9.00%, 9/15/04........... 1,221,487
----------
1,236,386
----------
DENMARK--3.5%
Danish Gov't. Bonds,
DKr 6,737 7.00%, 12/15/04.......... 1,208,474
----------
FRANCE--12.6%
Credit Foncier de France,
Corporate Bond,
3,750 8.625%, 2/20/02.......... 823,208
French Gov't. Bonds,
FF 8,640# 7.25%, 8/12/97........... 1,822,393
3,970 7.00%, 11/12/99.......... 847,587
2,650 8.50%, 11/25/02.......... 605,923
8,590 Zero Coupon, 10/25/19.... 287,678
----------
4,386,789
----------
GERMANY--13.4%
Deutsche Bundespost,
DM 2,000# 7.50%, 12/2/02........... 1,520,390
German Gov't. Bonds,
150 6.50%, 7/15/03........... 108,916
1,420 6.25%, 1/4/24............ 922,084
German Unity Bonds,
830 8.00%, 1/21/02........... 652,081
Treuhandanstalt,
DM1,900# 7.125%, 1/29/03.......... $1,430,596
----------
4,634,067
----------
ITALY--8.3%
Italian Gov't. Bonds,
L 2,990,000# 10.50%, 4/15/98.......... 1,896,844
1,560,000 10.50%, 4/1/05........... 976,298
----------
2,873,142
----------
JAPAN--13.7%
Japanese Gov't. Bonds,
Y 86,000 6.50%, 3/20/01........... 1,011,510
245,700# 4.60%, 3/20/03........... 2,650,467
107,700 3.70%, 3/22/04........... 1,096,610
----------
4,758,587
----------
NEW ZEALAND--1.4%
New Zealand Gov't. Bonds,
NZ$ 700 10.00%, 7/15/97.......... 470,587
----------
SPAIN--12.0%
Spanish Gov't. Bonds,
Pts 454,710# 10.25%, 11/30/98......... 3,835,233
36,200 12.25%, 3/25/00.......... 326,251
----------
4,161,484
----------
UNITED KINGDOM--5.6%
European Investment Bank
Bonds,
BP 200 8.00%, 6/10/03........... 320,011
United Kingdom Treasury
Bonds,
120 8.00%, 12/7/00........... 195,508
200 9.75%, 8/27/02........... 352,927
600 7.75%, 9/8/06............ 950,167
80 8.75%, 8/25/17........... 137,366
----------
1,955,979
----------
Total long-term investments
(cost US$26,196,445)..... 26,980,157
----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-53
<PAGE> 144
THE TARGET PORTFOLIO TRUST
INTERNATIONAL BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- ------------ ----------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS--19.2%

U.S. GOVERNMENT SECURITIES--17.7%
United States Treasury
bills,*
US$ 1,500# 5.49%, 1/25/96............$ 1,493,824
1,500# 5.59%, 2/29/96............ 1,487,870
1,600# 5.37%, 3/28/96............ 1,580,247
1,600# 5.44%, 4/25/96............ 1,574,338
-----------
Total U.S. Government
Securities
(cost US$6,134,387)...... 6,136,279
-----------
REPURCHASE AGREEMENT--1.5%
510 State Street Bank & Trust
Company, 2.25%, dated
12/29/95, due 1/2/96 in
the amount of $510,128
(cost US$510,000; value
of collateral including
accrued interest
-US$523,628)............. 510,000
-----------
Total short-term
investments
(cost US$6,644,387)...... 6,646,279
-----------
TOTAL INVESTMENTS--97.0%
(cost US$32,840,832;
Note 4).................. 33,626,279
Other assets in excess of
liabilities--3.0%........ 1,033,504
-----------
NET ASSETS--100%........... $34,659,940
===========
</TABLE>
- ------------------
# Principal amount segregated as collateral for forward currency contracts.
Aggregate value of segregated securities--$19,292,202.
* Percentages quoted represent yield-to-maturity as of purchase date.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-54
<PAGE> 145
TOTAL RETURN BOND PORTFOLIO
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ---------- --------- ----------- --------
<S> <C> <C> <C>
LONG-TERM
[email protected]%

Corporate Bonds--21.5%

AGRICULTURE &
EQUIPMENT--0.7%
Varity Corp.,
Baa3 $ 300 11.375%, 11/15/98.....$ 312,954
-----------
AIRLINES--6.9%
American Airlines,
Inc.,
A3 1,000 9.78%, 11/26/11....... 1,197,965
AMR Corp.,
Baa3 100 10.00%, 2/1/01........ 114,880
Delta Airlines, Inc.,
Baa2 288 9.32%, 1/2/09......... 336,436
Baa2 691 9.875%, 4/30/08....... 800,761
United Airlines, Inc.,
Baa3 450 10.67%, 5/1/04........ 542,826
Baa3 100 11.21%, 5/1/14........ 132,365
-----------
3,125,233
-----------
AUTOMOBILES & TRUCKS--0.8%
Chrysler Financial
Corp.,
A3 250 10.34%, 5/15/08....... 253,878
Ford Motor Credit Co.,
A1 100 6.25%, 2/26/98........ 101,491
-----------
355,369
-----------
BANKING--1.2%
Kansallis Osake
Pankki,
(Finland)
A3 500++ 8.65%, 12/29/49....... 534,297
-----------
FINANCIAL SERVICES--2.1%
G.I. Holdings, Inc.,
Zero Coupon,
Ba3 885 10/1/98............. 682,556
PaineWebber Group,
Inc.,
Baa1 250 6.25%, 6/15/98........ 250,795
-----------
933,351
-----------
MISCELLANEOUS--1.7%
CTC Mansfield Funding
Corp.,
Ba3 $ 300 11.125%, 9/30/16......$ 319,380
PDV America, Inc.,
Baa3 450 7.25%, 8/1/98......... 436,558
-----------
755,938
-----------
PETROLEUM SERVICES--2.3%
Occidental Petroleum
Corp.,
Baa3 1,000 11.75%, 3/15/11....... 1,058,850
-----------
PUBLISHING--2.2%
Time Warner, Inc.,
Ba1 87++ 6.835%, 8/15/00....... 87,493
Ba1 600 7.45%, 2/1/98......... 616,710
Ba1 262 8.11%, 8/15/06........ 278,962
-----------
983,165
-----------
TOBACCO--2.2%
RJR Nabisco, Inc.
Baa3 1,000 8.00%, 7/15/01........ 1,019,120
-----------
UTILITIES--1.4%
Cleveland Electric
Illuminating Co.,
Ba2 600 9.45%, 12/1/97........ 622,056
-----------
Total corporate bonds
(cost $9,444,973)... 9,700,333
-----------
U.S. GOV'T AGENCY
MORTGAGE BACKED
Securities--48.6%
Federal Home Loan
Mortgage Corp.,
2,500 6.50%, 1/16/26........ 2,472,650
1,369 6.50%, 9/15/18, I/O... 163,627
6.50%, 12/15/21,
2,101 I/O................. 305,467
1,838++ 6.891%, 1/1/24........ 1,887,498
35 9.25%, 1/1/10......... 37,206
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-55

<PAGE> 146

THE TARGET PORTFOLIO TRUST
TOTAL RETURN BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- --------- ----------- --------
<S> <C> <C> <C>
U.S. GOV'T AGENCY MORTGAGE BACKED
SECURITIES--(CONT'D)
Federal National Mortgage Assn.,
$ 1,000+ 6.36%, 1/24/26...... $ 1,011,250
2,285+ 6.383%, 11/1/27..... 2,313,642
Federal National Mortgage Corp.,
2,203+ 6.383%, 12/1/30..... 2,239,898
2,848+ 7.558%, 1/1/20...... 2,913,622
25 8.50%, 4/1/99....... 25,801
Government National
Mortgage Assn.,
563 5.00%, 8/20/25...... 558,988
1,448 5.00%, 9/20/25...... 1,431,295
1,522#/+ 5.50%, 7/20/25...... 1,521,983
216+ 6.50%, 1/20/24...... 219,717
1,666+ 7.00%, 1/20/24...... 1,707,346
465+ 7.25%, 9/20/24...... 474,340
605+ 7.375%, 6/20/21..... 616,387
798+ 7.375%, 6/20/23..... 810,224
Resolution Trust
Corp.,
Aa2 591+ 7.075%, 6/25/23..... 594,265
AAA* 50 7.75%, 4/25/28...... 50,453
AAA* 200 8.35%, 6/25/29...... 201,516
Aa2 128 8.625%, 7/25/30..... 131,228
Baa2 211 9.25%, 6/25/23...... 219,916
-----------
Total U.S. gov't
agency
mortgage backed
securities
(cost $21,787,635).. 21,908,319
-----------
FOREIGN SECURITIES--15.6%
GERMAN GOVERNMENT
Bonds,
6.25%, 1/4/24
Aaa DM 9,500 (Germany)........... 6,144,413
Petroleas Mexicano
6.8125%, 3/8/99
Ba2 US$1,000 (Mexico)............ 890,000
-----------
Total foreign
securities
(cost US$6,869,722). 7,034,413
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS--9.5%
American Housing Trust 1,
Senior Mortgage Pass
Through Certificate
Series 1-5 Class A,
Aaa $ 29 8.625%, 8/25/18..... $ 29,853
Champion Home Loan
Equity,
Series 1995, Class
A2-3,
Aaa 1,971+ 6.624%, 2/25/28..... 2,010,468
Countrywide
Collateralized
Mortgage Obligation,
Aa1 765+ 7.662%, 11/25/24.... 784,262
Main Place Funding,
Mortgage Obligation
Series 95-1,
Aaa 1,000+ 6.107%, 10/25/00.... 1,000,000
PaineWebber Mortgage
Acceptance Corp.,
Aaa 329 7.00%, 10/25/23..... 327,886
Salomon Capital Access
Corp.,
Aaa 27 8.40%, 3/1/16....... 26,976
Sears Mortgage
Securities Corp.,
Aa2 113+ 8.702%, 5/25/32..... 114,539
-----------
Total collateralized
mortgage
obligations
(cost $4,294,831)... 4,293,984
-----------
Total long-term
investments
(cost $42,397,161).. 42,937,049
-----------
SHORT-TERM
INVESTMENTS--14.1%

CORPORATE NOTES--3.5%
AMR Corp.,
Baa3 100 9.72%, 1/9/96....... 100,054
Banco Nacional,
Ba2 300+ 11.25%, 11/30/95.... 299,700
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-56

<S> <C> <C> <C>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
CORPORATE NOTES--(CONT'D)
Delta Airlines, Inc.,
Ba1 $ 500 8.25%, 5/15/96........$ 503,255
Salomon, Inc.,
Baa1 200 4.95%, 1/12/96........ 193,313
Baa1 500 4.97%, 2/15/96........ 499,185
-----------
Total corporate notes
(cost $1,600,364)..... 1,595,507
-----------
COMMERCIAL PAPER--6.0%
Abbott Laboratories,
P1 800 5.62%, 1/9/96......... 799,001
P1 500 5.65%, 1/22/96........ 498,352
Bellsouth
Telecommunications,
Inc.,
P1 1,400 5.75%, 1/12/96........ 1,397,540
-----------
Total commercial paper
(cost $2,694,893)..... 2,694,893
-----------
U. S. TREASURY
OBLIGATIONS--0.5%
United States Treasury
bills,
5.305%, 2/22/96
210D (cost $208,391)..... 209,969
-----------

PRIVATE PLACEMENT--2.2%
Banco Latinoamericano
De Export,
Baa2 $ 1,000++ 6.6406%, 5/23/96,
(cost $999,746)..... $ 999,373
-----------
REPURCHASE
AGREEMENT--1.9%
State Street Bank &
Trust Company,
882 2.25%, dated 12/29/95,
due 1/2/96 in the
amount of $882,221
(cost $882,000;
value of collateral
including accrued
interest-$908,997).... 882,000
-----------
Total short-term
investments
(cost $6,385,394)..... 6,381,742
-----------
TOTAL INVESTMENTS--
109.3%
(cost $48,782,555;
Note 4)............. 49,318,791
Liabilities in excess
of other
assets--(9.3%)...... (4,201,061)
-----------
NET ASSETS--100%...... $45,117,730
===========

</TABLE>

- ---------------
* Standard & Poor's Rating.
+ Pledged as initial margin on financial futures
contracts.
++ Rate shown reflects current rate on variable rate
instrument.
# Entire principal amount pledged as collateral for
reverse repurchase agreements.
@ Principal amount of securities rated A or better
segregated as collateral for forward currency
contracts.

NR--Not Rated.
I/O--Interest Only Security.
The Fund's current Statement of Additional Information contains a description of
Moody's ratings.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-57
<PAGE> 148
THE TARGET PORTFOLIO TRUST
Intermediate-Term Bond Portfolio
Portfolio of Investments
December 31, 1995
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- --------- ----------- --------
<S> <C> <C> <C>
LONG-TERM
[email protected]%

CORPORATE BONDS--20.8%

AGRICULTURAL EQUIPMENT--0.7%
Varity Corp.,
Baa3 $ 500 11.375%, 11/15/98... $ 521,590
-----------
AIRLINES--3.7%
AMR Corp.,
Baa3 100 10.375%, 3/15/21.... 128,853
Delta AirLines, Inc.,
Baa2 479 9.32%, 1/2/09....... 560,727
Ba1 250 9.875%, 1/1/98...... 266,670
Baa2 1,086 9.875%, 4/30/08..... 1,258,652
United Airlines, Inc.,
Debenture Series B
Baa3 500 11.21%, 5/1/14...... 661,825
-----------
2,876,727
-----------
FINANCIAL SERVICES--4.8%
Banponce Financial
Corp.,
Baa1 1,000 7.73%, 8/15/97...... 1,031,330
Chrysler Financial
Corp.,
A3 900 10.34%, 5/15/08..... 913,959
Ford Motor Credit Co.,
A1 500 6.25%, 2/26/98...... 507,455
General Motors Acceptance Corp.,
A3 1,000 6.875%, 6/10/97..... 1,018,010
A3 250 8.125%, 1/13/97..... 256,410
-----------
3,727,164
-----------
MISCELLANEOUS--1.3%
PDV America, Inc.,
Baa3 1,050 7.25%, 8/1/98....... 1,018,637
-----------
PETROLEUM SERVICES--1.4%
Occidental Petroleum
Corp.,
Baa3 1,000 11.75%, 3/15/11..... 1,058,850
-----------
PUBLISHING--3.0%
Time Warner Inc.,
Ba1 $ 300++ 6.835%, 8/15/00..... $ 301,701
Ba1 1,000 7.45%, 2/1/98....... 1,027,850
Ba1 900 8.11%, 8/15/06...... 958,266
-----------
2,287,817
-----------
TOBACCO--2.5%
RJR Nabisco, Inc.
Baa3 1,250 8.00%, 7/15/01...... 1,288,197
Baa3 600 8.625%, 12/1/02..... 623,154
-----------
1,911,351
-----------
UTILITIES--3.4%
Cleveland Electric
Illuminating Co.,
Ba2 1,500 9.45%, 12/1/97...... 1,555,140
CTC Mansfield Funding Corp.,
Ba3 1,000 11.125%, 9/30/16.... 1,064,600
-----------
2,619,740
-----------
Total corporate bonds
(cost
$15,700,981)........ 16,021,876
-----------
COLLATERALIZED MORTGAGE
OBLIGATIONS--10.7%
Champion Home Loan
Equity,
Series 1995, Class A2
Aaa 2,957++ 6.624%, 2/25/28..... 3,015,702
Chase Mortgage Finance Corp.,
Aaa 336 7.50%, 11/25/23..... 335,933
CMO Countrywide,
Aaa 986 6.75%, 2/25/24...... 972,686
Aa1 765++ 7.66171%, 11/25/24.. 784,262
Main Place Funding,
Series 95,
Aaa 2,000++ 6.1075%, 10/25/00... 2,000,000
PaineWebber Mortgage
Acceptance Corp.,
Aaa 657 7.00%, 10/25/23..... 655,772
Salomon Capital Access
Aaa 137 Corp., 8.40%,
3/1/16.............. 137,995
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-58
<PAGE> 149
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- --------- ----------- --------
COLLATERALIZED MORTGAGE
OBLIGATIONS--(CONT'D)
Sears Mortgage
Securities Corp.,
Aa2 $ 327++ 8.7082%, 5/25/32.... $ 330,187
-----------
Total collateralized
mortgage obligations
(cost $8,281,751)... 8,232,537
-----------
U.S. GOV'T AGENCY
MORTGAGE BACKED
SECURITIES--35.1%
Federal Home Loan
Mortgage Corp.,
160 6.00%, 4/1/24....... 154,869
2,243 6.50%, 9/15/18, I/O. 268,123
6.50%, 12/15/21,
3,502 I/O............... 509,112
2,750 6.50%, 1/16/26...... 2,719,915
177 9.25%, 1/1/10....... 187,888
Federal National
Mortgage Assn.,
3,428++ 6.383%, 11/1/27..... 3,471,120
2,937++ 6.383%, 12/1/30..... 2,986,529
2,975++ 6.955%, 8/1/25...... 3,071,920
79 8.50%, 4/1/99....... 80,961
75 8.50%, 7/1/99....... 77,447
Government National
Mortgage Assn.,
3,290++ 5.50%, 8/20/25...... 3,308,407
216++ 6.50%, 1/20/24...... 219,717
2,550++ 7.00%, 5/20/23...... 2,612,814
1,666++ 7.00%, 1/20/24...... 1,707,346
1,059++ 7.375%, 6/20/21..... 1,078,676
1,596++ 7.375%, 6/20/23..... 1,620,448
Resolution Trust
Corp.,
Aa2 934++ 7.075%, 6/25/23..... 938,939
AAA* 1,000 8.35%, 6/25/29...... 1,007,580
Aa2 642 8.625%, 7/25/30..... 656,138
Baa2 423 9.25%, 6/25/23...... 439,832
-----------
Total U.S. Gov't
agency mortgage
backed securities
(cost $27,011,805).. 27,117,781
-----------
PRIVATE PLACEMENT--3.2%
Cemex S.A.,
Ba3 $ 2,560 8.875%, 6/10/98
(cost $2,539,976)... $ 2,457,600
-----------
FOREIGN SECURITIES--
14.0%
German Government Bonds,
6.25%, 1/4/24
Aaa DM16,700 (Germany)
(cost US$10,554,919).. 10,801,232
-----------
Total long-term
investments
(cost $64,089,432)... 64,631,026
-----------
SHORT-TERM
INVESTMENTS--17.9%

CORPORATE NOTES--3.9%
AMR Corp.,
Baa3 $ 500 9.72%, 1/9/96....... 500,265
Delta Airlines, Inc.,
Ba1 1,000 8.25%, 5/15/96...... 1,006,510
Salomon, Inc.,
Baa1 1,500 4.97%, 2/15/96...... 1,497,555
-----------
3,004,330
-----------
Total corporate notes
(cost $3,000,174)... 3,004,330
-----------
COMMERCIAL PAPER--10.3%
Abbott Laboratories,
P1 300 5.60%, 1/23/96...... 298,974
Du Pont (E. I.)
de Nemours & Co.
P1 1,800 5.74%, 1/19/96...... 1,794,340
General Electric
Capital Corp.,
P1 1,400 5.69%, 1/24/96...... 1,394,579
Hewlett Packard
Company,
P1 500 5.44%, 3/14/96...... 493,916
P1 300 5.72%, 1/4/96....... 299,852
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-59
<PAGE> 150
THE TARGET PORTFOLIO TRUST
INTERMEDIATE-TERM BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------- --------- ----------- --------
<S> <C> <C> <C>
COMMERCIAL PAPER--(CONT'D)
General Electric
Capital Corp.,
P1 $ 1,600 5.70%, 1/19/96...... $ 1,595,231
Warner Lambert Co.,
P1 600 5.54%, 4/9/96....... 590,232
Wisconsin Electric
Power Company,
P1 1,500 5.70%, 1/17/96...... 1,496,021
-----------
Total commercial paper
(cost $7,965,559)... 7,963,145
-----------
U.S. TREASURY
OBLIGATIONS--0.3%
United States Treasury
bills
130+ 5.305%, 2/22/96..... 129,027
30+ 5.325%, 2/29/96..... 29,775
20+ 5.325%, 3/7/96...... 19,821
35+ 5.38%, 2/8/96....... 34,795
-----------
Total U.S. Treasury
obligations
(cost $213,348)..... 213,418
-----------

PRIVATE PLACEMENT--2.6%
Banco Latinoamericano
De Export,
Baa2 $ 2,000++ 6.6406%, 5/23/96
(cost $1,999,492)... $ 1,998,746
-----------
REPURCHASE AGREEMENT--
0.8%
State Street Bank &
Trust Co.,
661 2.25%, dated 12/29/95,
due 1/2/96 in the
amount of $661,165
(cost $661,000;
value of collateral
including accrued
interest-$683,233).. 661,000
-----------
Total short-term
investments
(cost $13,839,573).. 13,840,639
-----------
TOTAL INVESTMENTS--
101.7%
(cost $77,929,005).. 78,471,665
Liabilities in excess
of other
assets--(1.7%)...... (1,346,954)
-----------
NET ASSETS--100%...... $77,124,711
===========
</TABLE>

- ---------------
I/O--Interest Only Security.
* Standard & Poor's Rating.
+ Pledged as initial margin on financial futures
contracts.
++ Rate shown reflects current rate on variable rate
instrument.
@ Principal amount of securities rated A or better
segregated as collateral for forward currency
contracts.

The Fund's current Statement of Additional Information contains a description of
Moody's ratings.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-60
<PAGE> 151
Mortgage Backed Securities Portfolio
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------- ----------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS--98.1%
COLLATERALIZED MORTGAGE
OBLIGATIONS--19.8%
Federal Home Loan Mortgage
Corp.,
$ 432 4.50%, 9/15/21 PAC.........$ 374,082
806 5.60%, 5/15/21............. 698,976
100 5.95%, 6/15/19 PAC......... 98,875
1,008 6.00%, 10/15/20 - 8/15/21 971,700
PAC......................
2,300 6.50%, 2/15/23 PAC I/O..... 637,531
500 6.50%, 8/15/06 PAC......... 505,465
10,266 7.50%, 6/15/22 PAC I/O..... 1,552,657
427 8.00%, 7/15/21 PAC......... 439,040
142 10.00% 6/15/19 PAC......... 147,794
Federal National Mortgage
Assn.,
1,796 5.00%, 8/25/10............. 1,634,569
230 6.00%, 10/25/21............ 224,538
875 6.50%, 7/25/20 PAC......... 865,428
4,625 7.00%, 9/25/19 PAC I/O..... 708,244
1,797 7.00%, 3/25/18............. 1,758,264
300 8.00% 8/25/06 PAC.......... 320,718
290 8.50%, 6/25/21............. 302,688
508 9.00%, 1/25/21 PAC......... 552,789
First Boston Mortgage
Securities,
1,674 Zero Coupon, 4/25/17 P/O... 1,332,130
1,674 8.99%, 4/25/17 I/O......... 435,152
885 10.97%, 5/25/17 I/O........ 247,325
----------
Total collateralized
mortgage obligations (cost
$12,795,481)............. 13,807,965
----------
U.S. GOVERNMENT
SECURITIES--4.4%
United States Treasury
Bonds,
2,000 12.00%, 8/15/13
(cost $2,950,038)........ 3,081,560
----------
U.S. GOVERNMENT AGENCY MORTGAGE
PASS-THROUGH OBLIGATIONS--73.9%
Federal Home Loan Mortgage
Corp.,
7,086 6.50%, 1/1/98 - 2/1/25..... 7,009,096
6,666 7.00%, 2/1/99 - 10/1/25.... 6,791,062
48 7.25%, 7/1/06.............. 48,887
582 8.00%, 1/1/02 - 4/1/10..... 603,828

Federal Home Loan Mortgage
Corp.,
$ 198 8.25%, 12/1/05 - 5/1/08..$ 204,878
665 8.50%, 6/1/03 - 7/1/21... 696,663
207 8.75%, 12/1/08........... 217,837
1,561 9.00%, 1/1/02 - 3/1/11... 1,652,381
70 10.00%, 1/1/04........... 72,901
179 10.50%, 11/1/19.......... 198,007
85 11.50%, 3/1/16........... 95,477
64 12.75%, 11/1/13.......... 72,547
29 13.25%, 5/1/13........... 33,258
47 14.00%, 9/1/10 - 6/1/11.. 55,423
Federal National Mortgage
Assn.,
1,024 7.00%, 12/1/00 - 6/1/25.. 1,033,345
2,224 7.56%, 10/1/24 ARM....... 2,267,338
29 8.00%, 3/1/07 - 6/1/07... 30,562
299 8.50%, 6/1/10............ 315,420
713 9.75%, 8/1/10 - 10/1/17.. 758,033
269 10.00%, 9/1/19........... 290,761
Government National
Mortgage Assn.,
554 6.50%, 7/15/08 - 11/15/10.. 559,076
4,049 7.00%, 7/15/08 - 10/15/25.. 4,131,041
4,723 7.50%, 3/15/17 - 10/15/25.. 4,865,346
4,789 8.00%, 3/15/17 - 11/15/25.. 5,013,851
2,061 8.50%, 3/15/05 - 6/15/24... 2,180,728
5,625 9.00%, 4/20/01 - 7/15/17... 6,010,902
3,439 9.50%, 9/15/02 - 1/15/21... 3,711,035
81 10.50%, 1/15/98 - 1/15/04.. 85,240
1,113 11.00%, 4/15/98 - 1/15/01.. 1,175,806
310 11.50%, 6/15/98 - 4/15/00.. 327,700
434 12.00%, 9/15/98 - 1/15/13.. 462,536
1 13.00%, 2/15/11............ 1,546
36 13.25%, 7/15/14............ 41,522
127 13.50%, 6/15/10 - 11/15/12. 152,173
190 14.00%, 6/15/11 - 4/15/12.. 232,090
101 16.00%, 12/15/11 -5/15/12.. 118,923
----------
Total U.S. Government 51,517,219
agency mortgage pass-through
obligations
(cost $50,615,373).......
----------
Total long-term investments 68,406,744
(cost $66,360,892).......
----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-61
<PAGE> 152
THE TARGET PORTFOLIO TRUST
MORTGAGE BACKED SECURITIES PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- ---------- ----------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS--1.6%
Swiss Bank Corp, Repurchase
$ 1,098 Agreement, 5.85%, dated
12/29/95, due 1/2/96 in
the amount $1,098,714
(cost $1,098,000; value
of collateral including
accrued interest--
$1,130,605).............. $1,098,000
----------
Contracts
(000)
- ----------
OUTSTANDING CALL OPTIONS
PURCHASED--0.1%
United States Treasury Bond
Future,
40 expiring 2/17/96 @ $112.00
(cost $67,280)........... 111,875
----------
Total Investments Before
Outstanding Call Options
Written--99.8% (cost
$67,526,172; Note 4)..... 69,616,619

OUTSTANDING CALL OPTIONS
WRITTEN
United States Treasury
Notes,
40 expiring 2/17/96 @
$116.00 (premiums
received $14,595)........ (19,375)
----------
TOTAL INVESTMENTS, NET OF
OUTSTANDING CALL OPTIONS
WRITTEN--99.8%........... 69,597,244
Other assets in excess of
other liabilities--0.2%.. 161,826
-----------
NET ASSETS--100%........... $69,759,070
===========
</TABLE>

- ---------------
ARM--Adjustable Rate Mortgage.
I/O--Interest Only Security.
PAC--Planned Amortization Class.
P/O--Principal Only.
D Non-income producing security.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-62
<PAGE> 153
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
--------- ----------- --------
<S> <C> <C>
Federal Farm Credit Bank--18.4%
$ 2,000 5.54%, 2/14/96........... $ 1,986,458
1,500 5.38%, 3/12/96........... 1,484,084
------------
3,470,542
------------
Federal Home Loan Bank--5.3%
1,000 5.53%, 2/14/96........... 993,241
------------
Federal Home Loan Mortgage
Corporation--51.8%
460 5.58%, 1/24/96........... 458,360
1,290 5.58%, 2/8/96............ 1,282,402
1,000 5.54%, 2/15/96........... 993,075
3,100 5.42%, 2/16/96........... 3,078,531
2,500 5.47%, 3/6/96............ 2,475,309
1,500 5.47%, 3/11/96........... 1,484,046
------------
9,771,723
------------
FEDERAL NATIONAL MORTGAGE
Association--26.1%
25 5.60%, 1/18/96........... 24,934
500 5.55%, 2/13/96........... 496,685
950 5.54%, 2/28/96........... 941,521
2,000 5.52%, 3/8/96............ 1,979,453
1,500 5.48%, 3/12/96........... 1,483,788
------------
4,926,381
------------
REPURCHASE AGREEMENT--3.3%
Swiss Bank Corp., 5.85%,
dated 12/29/95, due
1/2/96 in the amount of
$615,400, (cost $615,000;
value of collateral
including accrued inter-
$ 615 est--$631,518)........... $ 615,000
----------
Total Investments--104.9%
(amortized cost 19,776,887
$19,776,887*)............
Liabilities in excess of
other assets--(4.9%)..... (922,331)
----------
NET ASSETS--100%........... $18,854,556
===========
</TABLE>

- ---------------
* Federal income tax basis of portfolio securities is the
same as for financial reporting purposes.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-63
<PAGE> 154
THE TARGET PORTFOLIO TRUST
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
- ---------------------------------------------------------------------------------------------------------------
Investments, at value* $182,842,516 $187,708,318 $121,264,292
- ---------------------------------------------------------------------------------------------------------------
Cash 1,567 18,455 21,730
- ---------------------------------------------------------------------------------------------------------------
Foreign currency, at value -- -- --
- ---------------------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 715,718 708,724 491,311
- ---------------------------------------------------------------------------------------------------------------
Receivable for investments sold 305,986 -- 1,708,330
- ---------------------------------------------------------------------------------------------------------------
Dividends and interest receivable 160,281 430,528 44,139
- ---------------------------------------------------------------------------------------------------------------
Deferred expenses and other assets 9,930 14,086 9,243
- ---------------------------------------------------------------------------------------------------------------
Due from broker - variation margin -- -- --
- ---------------------------------------------------------------------------------------------------------------
Forward currency contracts-net amount
receivable from counterparties -- -- --
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 184,035,998 188,880,111 123,539,045

LIABILITIES
- ---------------------------------------------------------------------------------------------------------------
Reverse repurchase agreements (Note 5) -- -- --
- ---------------------------------------------------------------------------------------------------------------
Payable for investments purchased 3,030,867 11,455 914,992
- ---------------------------------------------------------------------------------------------------------------
Payable for Fund shares reacquired 760,093 1,114,728 977,062
- ---------------------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 68,484 49,343 46,578
- ---------------------------------------------------------------------------------------------------------------
Dividends payable -- -- --
- ---------------------------------------------------------------------------------------------------------------
Outstanding options written (premiums
received $14,595) -- -- --
- ---------------------------------------------------------------------------------------------------------------
Withholding taxes payable 1,548 8,050 1,205
- ---------------------------------------------------------------------------------------------------------------
Deferred trustees' fees 5,464 5,464 5,464
- ---------------------------------------------------------------------------------------------------------------
Due to Manager 92,302 94,868 61,022
- ---------------------------------------------------------------------------------------------------------------
Forward currency contracts-net amount
payable to counterparties -- -- --
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,958,758 1,283,908 2,006,323

NET ASSETS $180,077,240 $187,596,203 $121,532,722
- ---------------------------------------------------------------------------------------------------------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 14,843 $ 14,924 $ 8,586
- ---------------------------------------------------------------------------------------------------------------
Paid-in capital in excess of par 144,132,476 150,351,569 98,510,912
- ---------------------------------------------------------------------------------------------------------------
144,147,319 150,366,493 98,519,498
- ---------------------------------------------------------------------------------------------------------------
Under (over) distribution of net
investment income (loss) 453,260 2,023,032 103,545
- ---------------------------------------------------------------------------------------------------------------
Accumulated net realized gains
(losses) 15,885,732 1,740,955 1,821,234
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation 19,590,929 33,465,723 21,088,445
- ---------------------------------------------------------------------------------------------------------------
Net assets, December 31, 1995 $180,077,240 $187,596,203 $121,532,722
- ---------------------------------------------------------------------------------------------------------------
Shares of beneficial interest issued
and outstanding 14,842,911 14,923,940 8,586,273
- ---------------------------------------------------------------------------------------------------------------
Net asset value per share $12.13 $12.57 $14.15
- ---------------------------------------------------------------------------------------------------------------
*Identified cost. $163,251,587 $154,242,595 $100,175,847

<CAPTION>
- --------------------------------------------------------------
SMALL CAPITALIZATION
VALUE PORTFOLIO
- --------------------------------------------------------------
<S> <C>
ASSETS
- --------------------------------------------------------------
Investments, at value* $ 97,695,009
- --------------------------------------------------------------
Cash 45,471
- --------------------------------------------------------------
Foreign currency, at value --
- --------------------------------------------------------------
Receivable for Fund shares sold 425,882
- --------------------------------------------------------------
Receivable for investments sold 938,264
- --------------------------------------------------------------
Dividends and interest receivable 135,612
- --------------------------------------------------------------
Deferred expenses and other assets 9,004
- --------------------------------------------------------------
Due from broker - variation margin --
- --------------------------------------------------------------
Forward currency contracts-net amount
receivable from counterparties --
- --------------------------------------------------------------
TOTAL ASSETS 99,249,242

LIABILITIES
- --------------------------------------------------------------
Reverse repurchase agreements (Note 5) --
- --------------------------------------------------------------
Payable for investments purchased 914,572
- --------------------------------------------------------------
Payable for Fund shares reacquired 610,231
- --------------------------------------------------------------
Accrued expenses and other liabilities 73,841
- --------------------------------------------------------------
Dividends payable --
- --------------------------------------------------------------
Outstanding options written (premiums
received $14,595) --
- --------------------------------------------------------------
Withholding taxes payable 1,491
- --------------------------------------------------------------
Deferred trustees' fees 5,464
- --------------------------------------------------------------
Due to Manager 49,164
- --------------------------------------------------------------
Forward currency contracts-net amount
payable to counterparties --
- --------------------------------------------------------------
TOTAL LIABILITIES 1,654,763

NET ASSETS $ 97,594,479
- --------------------------------------------------------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 7,470
- --------------------------------------------------------------
Paid-in capital in excess of par 91,433,903
- --------------------------------------------------------------
91,441,373
- --------------------------------------------------------------
Under (over) distribution of net
investment income (loss) 23,851
- --------------------------------------------------------------
Accumulated net realized gains
(losses) (3,589,371)
- --------------------------------------------------------------
Net unrealized appreciation 9,718,626
- --------------------------------------------------------------
Net assets, December 31, 1995 $ 97,594,479
- --------------------------------------------------------------
Shares of beneficial interest issued
and outstanding 7,469,911
- --------------------------------------------------------------
Net asset value per share $13.07
- --------------------------------------------------------------
*Identified cost. $ 87,976,383
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-64
<PAGE> 155
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM MORTGAGE BACKED U.S. GOVERNMENT MONEY
EQUITY PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO SECURITIES PORTFOLIO MARKET PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
$192,099,342 $ 33,626,436 $ 49,318,791 $ 78,471,665 $ 69,616,619 $19,776,887
- --------------------------------------------------------------------------------------------------------------------------------
17,388 100 355 461 730 390
- --------------------------------------------------------------------------------------------------------------------------------
1,526,626 622,864 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
1,017,221 217,082 200,571 588,244 247,564 196,600
- --------------------------------------------------------------------------------------------------------------------------------
221,826 550,401 2,041,329 14,701 -- --
- --------------------------------------------------------------------------------------------------------------------------------
413,417 650,666 833,463 1,408,933 653,367 300
- --------------------------------------------------------------------------------------------------------------------------------
13,775 36,121 12,096 12,467 12,418 11,888
- --------------------------------------------------------------------------------------------------------------------------------
-- -- 39,375 48,657 -- --
- --------------------------------------------------------------------------------------------------------------------------------
-- 27,028 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
195,309,595 35,730,698 52,445,980 80,545,128 70,530,698 19,986,065
- --------------------------------------------------------------------------------------------------------------------------------
-- -- 1,473,000 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
2,303,345 534,148 5,482,734 2,706,602 138,433 --
- --------------------------------------------------------------------------------------------------------------------------------
1,152,491 118,268 229,339 510,378 377,259 1,083,030
- --------------------------------------------------------------------------------------------------------------------------------
131,184 35,575 63,042 69,161 88,076 30,114
- --------------------------------------------------------------------------------------------------------------------------------
-- 17,298 21,684 35,741 124,078 7,932
- --------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- 19,375 --
- --------------------------------------------------------------------------------------------------------------------------------
6,471 14,042 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
5,464 3,776 5,464 5,464 5,464 5,464
- --------------------------------------------------------------------------------------------------------------------------------
113,074 5,013 15,899 27,942 18,943 4,969
- --------------------------------------------------------------------------------------------------------------------------------
-- 342,638 37,088 65,129 -- --
- --------------------------------------------------------------------------------------------------------------------------------
3,712,029 1,070,758 7,328,250 3,420,417 771,628 1,131,509
$191,597,566 $ 34,659,940 $ 45,117,730 $ 77,124,711 $ 69,759,070 $18,854,556
- --------------------------------------------------------------------------------------------------------------------------------
$ 14,050 $ 3,401 $ 4,249 $ 7,339 $ 6,767 $ 18,855
- --------------------------------------------------------------------------------------------------------------------------------
169,625,540 34,207,067 43,619,433 75,516,757 69,399,004 18,835,701
- --------------------------------------------------------------------------------------------------------------------------------
169,639,590 34,210,468 43,623,682 75,524,096 69,405,771 18,854,556
991,203 (103,798) 265,669 270,696 (124,078) --
- --------------------------------------------------------------------------------------------------------------------------------
1,389,337 79,160 587,729 704,694 (1,608,290) --
- --------------------------------------------------------------------------------------------------------------------------------
19,577,436 474,110 640,650 625,225 2,085,667 --
- --------------------------------------------------------------------------------------------------------------------------------
$191,597,566 $ 34,659,940 $ 45,117,730 $ 77,124,711 $ 69,759,070 $18,854,556
- --------------------------------------------------------------------------------------------------------------------------------
14,049,880 3,401,401 4,249,004 7,339,006 6,767,472 18,854,556
- --------------------------------------------------------------------------------------------------------------------------------
$13.64 $10.19 $10.62 $10.51 $10.31 $1.00
$172,543,389 $ 32,840,832 $ 48,782,555 $ 77,929,005 $ 67,526,172 $19,776,887
- --------------------------------------------------------------------------------------------------------------------------------

</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-65
<PAGE> 156
THE TARGET PORTFOLIO TRUST
STATEMENTS OF OPERATIONS
Year Ended December 31, 1995
<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME
- ---------------------------------------------------------------------------------------------------------------
Income
Interest $ 932,545 $ 410,905 $ 348,030
- ---------------------------------------------------------------------------------------------------------------
Dividends 1,794,834 5,345,902 708,711
- ---------------------------------------------------------------------------------------------------------------
Less: Foreign withholding taxes (22,037) (36,346) (4,878)
- ---------------------------------------------------------------------------------------------------------------
Total income 2,705,342 5,720,461 1,051,863
- ---------------------------------------------------------------------------------------------------------------
Expenses
Management fee 977,893 978,742 645,895
- ---------------------------------------------------------------------------------------------------------------
Custodian's fees and expenses 99,000 64,000 98,000
- ---------------------------------------------------------------------------------------------------------------
Transfer agent's fees and expenses 85,200 85,200 84,900
- ---------------------------------------------------------------------------------------------------------------
Registration fees 44,000 50,800 34,000
- ---------------------------------------------------------------------------------------------------------------
Reports to shareholders 23,000 23,500 18,000
- ---------------------------------------------------------------------------------------------------------------
Audit fees and expenses 15,200 15,200 15,200
- ---------------------------------------------------------------------------------------------------------------
Legal fees and expenses 6,000 6,000 6,000
- ---------------------------------------------------------------------------------------------------------------
Trustees' fees and expenses 4,250 4,250 4,250
- ---------------------------------------------------------------------------------------------------------------
Amortization of organization expenses 5,771 5,771 5,771
- ---------------------------------------------------------------------------------------------------------------
Insurance 4,406 4,397 2,935
- ---------------------------------------------------------------------------------------------------------------
Miscellaneous 2,418 4,475 5,268
- ---------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 1,267,138 1,242,335 920,219
- ---------------------------------------------------------------------------------------------------------------
Less: expense subsidy (Note 2) -- -- --
- ---------------------------------------------------------------------------------------------------------------
NET EXPENSES 1,267,138 1,242,335 920,219
- ---------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,438,204 4,478,126 131,644
- ---------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Investment transactions 19,526,858 6,875,810 15,587,518
- ---------------------------------------------------------------------------------------------------------------
Financial futures contracts -- -- --
- ---------------------------------------------------------------------------------------------------------------
Foreign currency transactions -- 512 --
- ---------------------------------------------------------------------------------------------------------------
Options written -- -- --
- ---------------------------------------------------------------------------------------------------------------
TOTAL NET REALIZED GAIN (LOSS) 19,526,858 6,876,322 15,587,518
- ---------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation on:
Investments 15,296,515 33,534,250 7,737,858
- ---------------------------------------------------------------------------------------------------------------
Financial futures contracts -- -- --
- ---------------------------------------------------------------------------------------------------------------
Foreign currencies -- -- --
- ---------------------------------------------------------------------------------------------------------------
Options written -- -- --
- ---------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION 15,296,515 33,534,250 7,737,858
- ---------------------------------------------------------------------------------------------------------------
Net gain 34,823,373 40,410,572 23,325,376
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS $ 36,261,577 $ 44,888,698 $ 23,457,020
- ---------------------------------------------------------------------------------------------------------------

<CAPTION>
SMALL CAPITALIZATION
VALUE PORTFOLIO
<S> <C>
NET INVESTMENT INCOME
- --------------------------------------------------------------
Income
Interest $ 412,919
- --------------------------------------------------------------
Dividends 1,488,770
- --------------------------------------------------------------
Less: Foreign withholding taxes (13,946)
- --------------------------------------------------------------
TOTAL INCOME 1,887,743
- --------------------------------------------------------------
Expenses
Management fee 528,512
- --------------------------------------------------------------
Custodian's fees and expenses 120,000
- --------------------------------------------------------------
Transfer agent's fees and expenses 81,200
- --------------------------------------------------------------
Registration fees 37,000
- --------------------------------------------------------------
Reports to shareholders 74,000
- --------------------------------------------------------------
Audit fees and expenses 15,200
- --------------------------------------------------------------
Legal fees and expenses 6,000
- --------------------------------------------------------------
Trustees' fees and expenses 4,250
- --------------------------------------------------------------
Amortization of organization expenses 5,771
- --------------------------------------------------------------
Insurance 2,542
- --------------------------------------------------------------
Miscellaneous 5,863
- --------------------------------------------------------------
Total expenses 880,338
- --------------------------------------------------------------
Less: expense subsidy (Note 2) --
- --------------------------------------------------------------
NET EXPENSES 880,338
- --------------------------------------------------------------
NET INVESTMENT INCOME 1,007,405
- --------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
- --------------------------------------------------------------
Net realized gain (loss) on:
Investment transactions (1,278,985)
- --------------------------------------------------------------
Financial futures contracts --
- --------------------------------------------------------------
Foreign currency transactions 2,600
- --------------------------------------------------------------
Options written --
- --------------------------------------------------------------
TOTAL NET REALIZED GAIN (LOSS) (1,276,385)
- --------------------------------------------------------------
Net change in unrealized
appreciation/depreciation on:
Investments 15,684,311
- --------------------------------------------------------------
Financial futures contracts --
- --------------------------------------------------------------
Foreign currencies --
- --------------------------------------------------------------
Options written --
- --------------------------------------------------------------
NET CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION 15,684,311
- --------------------------------------------------------------
NET GAIN 14,407,926
- --------------------------------------------------------------
NET INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS $ 15,415,331
- --------------------------------------------------------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-66
<PAGE> 157
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM MORTGAGE BACKED
EQUITY PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO SECURITIES PORTFOLIO
<S> <C> <C> <C> <C>
$ 453,103 $ 1,944,491 $ 2,619,577 $ 4,718,976 $ 4,977,578
4,469,825 -- -- -- --
(623,587) (8,427) -- -- --
4,299,341 1,936,064 2,619,577 4,718,976 4,977,578
1,283,896 147,549 166,602 308,827 293,172
378,000 111,000 112,000 112,000 192,000
87,300 23,200 33,400 36,200 48,000
43,700 14,000 31,000 40,000 29,500
28,000 8,000 10,000 10,000 6,000
25,200 15,200 15,200 15,200 15,200
10,000 4,000 4,000 4,000 4,000
4,250 4,250 4,250 4,250 4,250
5,771 10,196 5,771 5,771 5,771
5,523 500 1,000 2,000 1,500
3,658 2,105 2,669 1,738 2,489
1,875,298 340,000 385,892 539,986 601,882
-- (44,839) (68,615) -- (47,957)
1,875,298 295,161 317,277 539,986 553,925
2,424,043 1,640,903 2,302,300 4,178,990 4,423,653
6,577,180 1,847,152 245,115 683,032 2,221,947
-- -- 2,377,068 2,717,747 (207,971)
(820,929) (632,282) 57,279 109,488 --
-- 32,083 10,701 -- 118,660
5,756,251 1,246,953 2,690,163 3,510,267 2,132,636
17,874,417 913,970 1,487,923 2,871,208 3,289,532
-- -- 124,562 161,875 --
112,161 (251,704) (37,088) (65,129) --
-- (7,744) -- -- (4,780)
17,986,578 654,522 1,575,397 2,967,954 3,284,752
23,742,829 1,901,475 4,265,560 6,478,221 5,417,388
26,166,872
$ $ 3,542,378 $ 6,567,860 $ 10,657,211 $ 9,841,041

U.S. GOVERNMENT MONEY
MARKET PORTFOLIO
<S> <C>
$ 1,195,600
--
--
1,195,600
50,432
53,500
7,200
19,500
7,500
6,200
4,000
4,250
5,771
--
2,510
160,863
(9,401)
151,462
1,044,138
548
--
--
--
548
--
--
--
--
--
548
$ 1,044,686
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-67
<PAGE> 158
THE TARGET PORTFOLIO TRUST
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION
LARGE CAPITALIZATION LARGE CAPITALIZATION GROWTH
GROWTH PORTFOLIO VALUE PORTFOLIO PORTFOLIO
------------------------------- ------------------------------- --------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
------------------------------- ------------------------------- --------------
1995 1994 1995 1994 1995
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Operations
Net investment income $ 1,438,204 $ 1,398,745 $ 4,478,126 $ 3,421,545 $ 131,644
- ------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on
investment and foreign currency
transactions 19,526,858 (3,326,414) 6,876,322 825,201 15,587,518
- ------------------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/
depreciation of investments 15,296,515 1,313,545 33,534,250 (1,289,846) 7,737,858
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets
resulting from operations 36,261,577 (614,124) 44,888,698 2,956,900 23,457,020
- ------------------------------------------------------------------------------------------------------------------------
Net equalization (debits)/credits 23,852 284,936 137,234 678,432 5,006
- ------------------------------------------------------------------------------------------------------------------------
Dividends and Distributions
Dividends from net investment
income (1,438,204) (1,398,745) (4,180,840) (3,386,240) (126,023)
- ------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment
income (172,473) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Distributions from net
realized gains (146,425) (49,742) (5,166,575) (827,768) (2,310,413)
- ------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Fund share transactions(b)
Net proceeds from shares sold 56,432,734 85,142,573 54,585,252 82,921,166 43,301,027
- ------------------------------------------------------------------------------------------------------------------------
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions 1,723,164 1,424,557 9,096,375 4,133,634 2,409,004
- ------------------------------------------------------------------------------------------------------------------------
Cost of shares reacquired (54,679,344) (40,805,667) (53,982,606) (40,331,871) (41,665,163)
- ------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in net
assets from Fund share
transactions 3,476,554 45,761,463 9,699,021 46,722,929 4,044,868
- ------------------------------------------------------------------------------------------------------------------------
Total increase/(decrease) 38,004,881 43,983,788 45,377,538 46,144,253 25,070,458
NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Beginning of period 142,072,359 98,088,571 142,218,665 96,074,412 96,462,264
- ------------------------------------------------------------------------------------------------------------------------
End of period $180,077,240 $142,072,359 $187,596,203 $142,218,665 $121,532,722
- ------------------------------------------------------------------------------------------------------------------------

<CAPTION>
SMALL
CAPITALIZATION
GROWTH SMALL CAPITALIZATION
PORTFOLIO VALUE PORTFOLIO
-------------- -------------------------------
Year Ended Year Ended
December 31, December 31,
------------- -------------------------------
1994 1995 1994
<S> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS

Operations
Net investment income $ 87,234 $ 1,007,405 $ 738,596
- --------------------------------------------------------------------------------------

Net realized gain (loss) on
investment and foreign currency
transactions (9,861,033) (1,276,385) (2,260,005)
- --------------------------------------------------------------------------------------

Net change in unrealized
appreciation/
depreciation of investments 7,066,817 15,684,311 (8,631,799)
- --------------------------------------------------------------------------------------

Net increase (decrease) in net
assets
resulting from operations (2,706,982) 15,415,331 (10,153,208)
- --------------------------------------------------------------------------------------

Net equalization (debits)/credits 34,440 (6,129) 31,111
- --------------------------------------------------------------------------------------

Dividends and Distributions
Dividends from net investment
income (83,251) (1,001,120) --
- --------------------------------------------------------------------------------------

Distributions in excess of net
investment
income -- -- --
- --------------------------------------------------------------------------------------

Distributions from net
realized gains -- -- (1,995,416)
- --------------------------------------------------------------------------------------

Distributions in excess of net
realized gains -- -- --
- --------------------------------------------------------------------------------------

Fund share transactions(b)
Net proceeds from shares sold 63,789,055 33,516,882 58,638,475
- --------------------------------------------------------------------------------------

Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions 82,459 976,655 1,959,413
- --------------------------------------------------------------------------------------

Cost of shares reacquired (28,570,277) (35,469,754) (28,747,891)
- --------------------------------------------------------------------------------------

Net increase/(decrease) in net
assets from Fund share
transactions 35,301,237 (976,217) 31,849,997
- --------------------------------------------------------------------------------------

Total increase/(decrease) 32,545,444 13,431,865 19,732,484
NET ASSETS
- --------------------------------------------------------------------------------------

Beginning of period 63,916,820 84,162,614 64,430,130
- --------------------------------------------------------------------------------------

End of period $ 96,462,264 $ 97,594,479 $ 84,162,614
- --------------------------------------------------------------------------------------

</TABLE>

(a) Commencement of investment operations.
(b) Fund share transactions are at $1 per share for the U.S. Government Money
Market Portfolio.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-68
<PAGE> 159
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
EQUITY BOND TOTAL RETURN INTERMEDIATE-TERM
PORTFOLIO PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
--------------------------- ---------------------------- ------------------------- ---------------------------
May 17,
Year Ended 1994(a) Year Ended Year Ended
December 31, Year Ended Through December 31, December 31,
--------------------------- December 31, December 31, ------------------------- --------------------------
1995 1994 1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,424,043 $ 844,536 $ 1,640,903 $ 466,822 $ 2,302,300 $ 1,526,429 $ 4,178,990 $ 3,520,673
- --------------------------------------------------------------------------------------------------------------------------
5,756,251 11,963,921 1,246,953 (208,113) 2,690,163 (1,678,647) 3,510,267 (2,575,982)
- --------------------------------------------------------------------------------------------------------------------------
17,986,578 (15,991,699) 654,522 (180,412) 1,575,397 (987,969) 2,967,954 (2,573,121)
- --------------------------------------------------------------------------------------------------------------------------
26,166,872 (3,183,242) 3,542,378 78,297 6,567,860 (1,140,187) 10,657,211 (1,628,430)
- --------------------------------------------------------------------------------------------------------------------------
(305,576) 572,620 -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
(1,548,526) (130,893) (1,640,903) (466,822) (2,138,946) (1,429,962) (4,081,709) (3,324,163)
- --------------------------------------------------------------------------------------------------------------------------
-- (13,724) (21,207) (406,000) -- -- -- (18,798)
- --------------------------------------------------------------------------------------------------------------------------
(493,586) (17,019,578) (642,900) -- (335,308) -- (188,877) --
- --------------------------------------------------------------------------------------------------------------------------
-- (45,216) -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
140,908,056 133,399,208 20,469,941 24,525,854 23,640,083 25,309,731 29,966,150 49,642,553
- --------------------------------------------------------------------------------------------------------------------------
1,993,113 17,108,354 2,145,942 840,517 2,334,835 1,313,753 4,022,268 3,132,792
- --------------------------------------------------------------------------------------------------------------------------
(163,147,872) (69,783,053) (10,640,585) (3,124,572) (16,141,734) (18,779,619) (26,174,351) (45,530,874)
- --------------------------------------------------------------------------------------------------------------------------
(20,246,703) 80,724,509 11,975,298 22,241,799 9,833,184 7,843,865 7,814,067 7,244,471
- --------------------------------------------------------------------------------------------------------------------------
3,572,481 60,904,476 13,212,666 21,447,274 13,926,790 5,273,716 14,200,692 2,273,080

- --------------------------------------------------------------------------------------------------------------------------
188,025,085 127,120,609 21,447,274 -- 31,190,940 25,917,224 62,924,019 60,650,939
- --------------------------------------------------------------------------------------------------------------------------
$191,597,566 $188,025,085 $ 34,659,940 $21,447,274 $45,117,730 $31,190,940 $ 77,124,711 $62,924,019
==========================================================================================================================
<CAPTION>
U.S. GOVERNMENT
MORTGAGE BACKED MONEY
SECURITIES PORTFOLIO MARKET PORTFOLIO
--------------------------- ---------------------------
Year Ended Year Ended
December 31, December 31,
--------------------------- -----------------------------
1995 1994 1995 1994
<S> <C> <C> <C>
$ 4,423,653 $ 4,102,931 $ 1,044,138 $ 606,938
- --------------------------------------------------------------------------
2,132,636 (3,740,926) 548 (232)
- --------------------------------------------------------------------------
3,284,752 (832,326) -- --
- --------------------------------------------------------------------------
9,841,041 (470,321) 1,044,686 606,706
- --------------------------------------------------------------------------
-- -- -- --
- --------------------------------------------------------------------------
(4,423,653) (4,102,931) (1,044,686) (606,706)
- --------------------------------------------------------------------------
(196,430) (76,542) -- --
- --------------------------------------------------------------------------
-- -- -- --
- --------------------------------------------------------------------------
-- -- -- --
- --------------------------------------------------------------------------
19,667,652 43,981,833 139,918,716 66,208,427
- --------------------------------------------------------------------------
3,702,170 3,405,322 945,815 549,041
- --------------------------------------------------------------------------
(20,802,368) (40,866,698) (143,448,009) (48,316,420)
- --------------------------------------------------------------------------
2,567,454 6,520,457 (2,583,478) 18,441,048
- --------------------------------------------------------------------------
7,788,412 1,870,663 (2,583,478) 18,441,048

- --------------------------------------------------------------------------
61,970,658 60,099,995 21,438,034 2,996,986
- --------------------------------------------------------------------------
$ 69,759,070 $61,970,658 $ 18,854,556 $21,438,034
==========================================================================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-69
<PAGE> 160
THE TARGET PORTFOLIO TRUST
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
LARGE CAPITALIZATION
GROWTH PORTFOLIO(e)
--------------------------------------------------------
January 5,
Year Ended 1993(a)
December 31, Through
---------------------------------- December 31,
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- -----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.74 $9.91 $10.00
- -----------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (loss) .10 .10 .07(c)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on
investment transactions 2.41 (.16) (.12)
- -----------------------------------------------------------------------------------------------------------------
Total from investment
operations 2.51 (.06) (.05)
- -----------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment
income (.10) (.10) (.04)
- -----------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income (.01) (.01) --
- -----------------------------------------------------------------------------------------------------------------
Distributions from net realized gains (.01) -- --
- -----------------------------------------------------------------------------------------------------------------
Distributions in excess of net realized
gains -- -- --
- -----------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.12) (.11) (.04)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.13 $9.74 $9.91
- -----------------------------------------------------------------------------------------------------------------
TOTAL RETURN(d) 25.76% (.68)% (.46)%
- -----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $180,077 $142,072 $98,089
- -----------------------------------------------------------------------------------------------------------------
Average net assets (000) $162,982 $129,687 $48,033
- -----------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .78% .81% 1.05%(b)(c)
- -----------------------------------------------------------------------------------------------------------------
Net investment income (loss) .88% 1.08% .84%(b)(c)
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 154% 24% 4%
- -----------------------------------------------------------------------------------------------------------------
Average commission rate per share $ .0578 N/A N/A
- -----------------------------------------------------------------------------------------------------------------

LARGE CAPITALIZATION
VALUE PORTFOLIO(e)
------------------------------------------------------
January 5,
1993(a)
Year Ended Through
December 31, December
--------------------------------- 31,
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- -----------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.02 $10.11 $10.00
- -----------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (loss) .33 .26 .21(c)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) on
investment transactions 2.89 (.04) .02
- -----------------------------------------------------------------------------------------------------------------
Total from investment
operations 3.22 .22 .23
- -----------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment
income (.30) (.25) (.11)
- -----------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- -- --
- -----------------------------------------------------------------------------------------------------------------
Distributions from net realized gains (.37) (.06) (.01)
- -----------------------------------------------------------------------------------------------------------------
Distributions in excess of net realized
gains -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total distributions (.67) (.31) (.12)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.57 $10.02 $10.11
- -----------------------------------------------------------------------------------------------------------------
TOTAL RETURN(d) 32.08% 2.18% 2.29%
- -----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $187,596 $142,219 $96,074
- -----------------------------------------------------------------------------------------------------------------
Average net assets (000) $163,124 $128,865 $46,623
- -----------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .76% .81% 1.05%(b)(c)
- -----------------------------------------------------------------------------------------------------------------
Net investment income (loss) 2.83% 2.66% 2.12%(b)(c)
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 59% 6% 3%
- -----------------------------------------------------------------------------------------------------------------
Average commission rate per share $ .0514 N/A N/A
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidies.
(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 period are not annualized.
(e) Calculated based upon average shares outstanding during the period.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-70
<PAGE> 161
<TABLE>
<CAPTION>
SMALL CAPITALIZATION SMALL CAPITALIZATION
GROWTH VALUE INTERNATIONAL
PORTFOLIO(e) PORTFOLIO(e) EQUITY PORTFOLIO(e)
- ---------------------------------------------- ---------------------------------------------- -----------------------------
January 5, January 5,
Year Ended 1993(a) Year Ended 1993(a) Year Ended
December 31, Through December 31, Through December 31,
- ----------------------------- December 31, ----------------------------- December 31, -----------------------------
1995 1994 1993 1995 1994 1993 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11.59 $11.86 $10.00 $11.07 $12.72 $10.00 $11.95 $13.09
- -----------------------------------------------------------------------------------------------------------------------------------
.02 .01 .01(c) .14 .11 (.01)(c) .17 .06
- -----------------------------------------------------------------------------------------------------------------------------------
2.84 (.27) 1.86 2.00 (1.49) 3.19 1.67 (.01)
- -----------------------------------------------------------------------------------------------------------------------------------
2.86 (.26) 1.87 2.14 (1.38) 3.18 1.84 .05
- -----------------------------------------------------------------------------------------------------------------------------------
(.02) (.01) (.01) (.14) -- -- (.11) (.01)
- -----------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(.28) -- -- -- (.27) (.46) (.04) (1.07)
- -----------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- (.11)
- -----------------------------------------------------------------------------------------------------------------------------------
(.30) (.01) (.01) (.14) (.27) (.46) (.15) (1.19)
- -----------------------------------------------------------------------------------------------------------------------------------
$14.15 $11.59 $11.86 $13.07 $11.07 $12.72 $13.64 $11.95
- -----------------------------------------------------------------------------------------------------------------------------------

24.62% (2.19)% 18.66 % 19.21% (11.03)% 31.86% 15.38% .18%
- -----------------------------------------------------------------------------------------------------------------------------------

- -----------------------------------------------------------------------------------------------------------------------------------
$121,533 $96,462 $63,917 $97,594 $84,163 $64,430 $191,598 $188,025
- -----------------------------------------------------------------------------------------------------------------------------------
$107,649 $87,403 $29,313 $88,085 $83,891 $29,039 $183,414 $179,614
- -----------------------------------------------------------------------------------------------------------------------------------
.85% .93% 1.05% (b)(c) 1.00% .93% 1.05%(b)(c) 1.02% 1.07%
- -----------------------------------------------------------------------------------------------------------------------------------
.12% .10% .11% (b)(c) 1.14% .88% (.11)%(b)(c) 1.32% .47%
- -----------------------------------------------------------------------------------------------------------------------------------
120% 97% 72 % 110% 97% 112% 76% 116%
- -----------------------------------------------------------------------------------------------------------------------------------
$ .0586 N/A N/A $ .0561 N/A N/A $ .0250 N/A
- -----------------------------------------------------------------------------------------------------------------------------------

<CAPTION>
- --------
January 5,
1993(a)
Through
December 31,
1993
- -----------
<S> <C>
$ 10.00
- --------
.07
- --------
3.16
- --------
3.23
- --------
(.01)
- --------
--
- --------
(.05)
- --------
(.08)
- --------
(.14)
- --------
$ 13.09
- --------

32.38%
- --------

- --------
$127,121
- --------
$ 49,769
- --------
1.40%(b)
- --------
.64%(b)
- --------
65%
- --------
N/A
- --------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-71
<PAGE> 162
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
INTERNATIONAL
BOND TOTAL RETURN
PORTFOLIO BOND PORTFOLIO
--------------------------------- --------------------------------------------------
May 17, January 5,
1994(a) Year Ended 1993(a)
Year Ended Through December 31, Through
December 31, December 31, ------------------------------- December 31,
1995 1994 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.57 $10.00 $9.48 $10.28 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income .57(c) .27(c) .62(c) .47(c) .44(c)
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on investment transactions .82 (.19) 1.18 (.82) .56
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.39 .08 1.80 (.35) 1.00
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment
income (.57) (.27) (.58) (.45) (.44)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- (.24) -- -- (.02)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized
gains (.20) -- (.08) -- (.19)
- --------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- -- -- (.07)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.77) (.51) (.66) (.45) (.72)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.19 $9.57 $10.62 $9.48 $10.28
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(d) 14.66% .71% 19.63% (3.54)% 10.18%
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000) $34,660 $21,447 $45,118 $31,191 $25,917
- --------------------------------------------------------------------------------------------------------------------------------
Average net assets (000) $29,510 $15,366 $37,023 $31,141 $12,594
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses 1.00%(c) 1.00%(b)(c) .85%(c) .85%(c) .85%(b)(c)
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.56%(c) 4.84%(b)(c) 6.21%(c) 4.90%(c) 3.87%(b)(c)
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 456% 361% 141% 121% 171%
- --------------------------------------------------------------------------------------------------------------------------------

INTERMEDIATE-TERM
BOND PORTFOLIO
--------------------------------------------------
January 5,
Year Ended 1993(a)
December 31, Through
------------------------------- December 31,
1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- ----------------------------------------------------------------------------------------

Net asset value, beginning of period $9.56 $10.26 $10.00
- ----------------------------------------------------------------------------------------

Income from investment operations
Net investment income .63 .49 .46(c)
- ----------------------------------------------------------------------------------------

Net realized and unrealized gains
(losses) on investment transactions .94 (.71) .46
- ----------------------------------------------------------------------------------------

Total from investment
operations 1.57 (.22) .92
- ----------------------------------------------------------------------------------------

Less distributions
Dividends from net investment
income (.60) (.48) (.45)
- ----------------------------------------------------------------------------------------

Distributions in excess of net
investment income -- -- --
- ----------------------------------------------------------------------------------------

Distributions from net realized
gains (.02) -- (.18)
- ----------------------------------------------------------------------------------------

Distributions in excess of net
realized gains -- -- (.03)
- ----------------------------------------------------------------------------------------

Total distributions (.62) (.48) (.66)
- ----------------------------------------------------------------------------------------

Net asset value, end of period $10.51 $9.56 $10.26
- ----------------------------------------------------------------------------------------

TOTAL RETURN(d) 16.87% (2.23)% 9.33%
- ----------------------------------------------------------------------------------------

RATIOS/SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------

Net assets, end of period (000) $77,125 $62,924 $60,651
- ----------------------------------------------------------------------------------------

Average net assets (000) $68,628 $69,602 $32,441
- ----------------------------------------------------------------------------------------

Ratios to average net assets
Expenses .79% .80% .85%(b)(c)
- ----------------------------------------------------------------------------------------

Net investment income 6.09% 5.06% 4.27%(b)(c)
- ----------------------------------------------------------------------------------------

Portfolio turnover rate 93% 77% 129%
- ----------------------------------------------------------------------------------------

</TABLE>
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidies.
(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.

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-72

<PAGE> 163

<TABLE>
<CAPTION>
U.S. GOVERNMENT
MORTGAGE BACKED MONEY
SECURITIES PORTFOLIO MARKET PORTFOLIO
- ------------------------------------------------ --------------------------------------------------
January 5, January 5,
Year Ended 1993(a) Year Ended 1993(a)
December 31, Through December 31, Through
- ----------------------------- December 31, ------------------------------- December 31,
1995 1994 1993 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.51 $10.18 $10.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------
.68(c) .61(c) .57(c) .051(c) .037(c) .025(c)
- ------------------------------------------------------------------------------------------------------
.83 (.66) .28 -- -- --
- ------------------------------------------------------------------------------------------------------
1.51 (.05) .85 .051 .037 .025
- ------------------------------------------------------------------------------------------------------
(.68) (.61) (.57) (.051) (.037) (.025)
- ------------------------------------------------------------------------------------------------------
(.03) (.01) (.02) -- -- --
- ------------------------------------------------------------------------------------------------------
-- -- (.08) -- -- --
- ------------------------------------------------------------------------------------------------------
-- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
(.71) (.62) (.67) (.051) (.037) (.025)
- ------------------------------------------------------------------------------------------------------
$10.31 $9.51 $10.18 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------

16.18% (.51)% 8.56% 5.25% 3.79% 2.56%
- ------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------
$69,759 $61,971 $60,100 $18,855 $21,438 $2,997
- ------------------------------------------------------------------------------------------------------
$65,149 $66,276 $29,710 $20,173 $15,048 $1,407
- ------------------------------------------------------------------------------------------------------
.85%(c) .85%(c) .85%(b)(c) .75%(c) .50%(c) .50%(b)(c)
- ------------------------------------------------------------------------------------------------------
6.79%(c) 6.19%(c) 5.30%(b)(c) 5.18%(c) 4.03%(c) 2.51%(b)(c)
- ------------------------------------------------------------------------------------------------------
154% 380% 134% -- -- --
- ------------------------------------------------------------------------------------------------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements beginning on page B-74

B-73
<PAGE> 164
THE TARGET PORTFOLIO TRUST
NOTES TO FINANCIAL STATEMENTS

The Target Portfolio Trust (the "Fund") is an open-end management
investment company. The Fund was established as a Delaware business trust on
July 29, 1992 and consists of ten separate portfolios (the "Portfolio" or
"Portfolios"): Large Capitalization Growth Portfolio, Large Capitalization
Value Portfolio, Small Capitalization Growth Portfolio, Small Capitalization
Value Portfolio, International Equity Portfolio, International Bond Portfolio,
Total Return Bond Portfolio, Intermediate-Term Bond Portfolio, Mortgage Backed
Securities Portfolio and U.S. Government Money Market Portfolio. All the
Portfolios are diversified as defined under the Investment Company Act of 1940
except for International Bond Portfolio. Investment operations commenced on
January 5, 1993 with the exception of the International Bond Portfolio which
commenced on May 17, 1994.

The Portfolios' investment objectives are as follows: Large Capitalization
Growth Portfolio--long-term capital appreciation through investment primarily in
equities that, in the investment adviser's opinion, have a growth of earnings
potential greater than that of the S&P 500; Large Capitalization Value
Portfolio--total return of capital appreciation and dividend income through
investment primarily in equities that, in the adviser's opinion, have above
average price appreciation potential; Small Capitalization Growth
Portfolio--maximum capital appreciation through investment primarily in equities
of "emerging growth" companies; Small Capitalization Value Portfolio--above
average capital appreciation through investment in equities that, in the
adviser's opinion, are undervalued or overlooked in the marketplace;
International Equity Portfolio--capital appreciation through investment
primarily in equity securities of companies domiciled outside the United States;
International Bond Portfolio--high total return through investment primarily in
high quality foreign debt securities denominated primarily in foreign
currencies; Total Return Bond Portfolio--total return of current income and
capital appreciation through investment primarily in fixed-income securities of
varying maturities with a dollar-weighted average portfolio maturity of more
than four years but not more than fifteen years; Intermediate-Term Bond
Portfolio--current income and reasonable stability of principal through
investment primarily in high quality fixed-income securities of varying
maturities with a dollar-weighted average portfolio maturity of more than three
years but not more than ten years; Mortgage Backed Securities Portfolio--high
current income and capital appreciation each consistent with the protection of
capital through investment primarily in mortgage related securities; U.S.
Government Money Market Portfolio--high current income, maintenance of liquidity
and preservation of principal through investment exclusively in short-term
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.

The ability of issuers of debt securities (other than those issued or
guaranteed by the U.S. Government) held by the Portfolios to meet their
obligations may be affected by economic or political developments in a specific
industry, region or country.

- ----------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES

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

SECURITIES VALUATIONS: Securities, including options, futures contracts
and options thereon, for which the primary market is on a national securities
exchange, commodities exchange or board of trade 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 available closing bid and
asked prices on such day.

Securities, including options, that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the 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 are
valued at a price provided by an independent broker/dealer or pricing service.

Quotations of foreign securities in a foreign currency are converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer.

Securities for which market quotations are not available, are valued in
good faith under procedures adopted by the Trustees.

Securities held by the U.S. Government Money Market Portfolio are valued
at amortized cost, which approximates market value. Short-term securities held
by the other portfolios which mature in 60 days or less are valued at amortized
cost which approximates market value. The amortized cost method involves valuing
a security at its cost on the date of purchase and thereafter assuming a
constant amortization to maturity of the difference between the principal amount
due at maturity and cost. Short-term securities held by the other portfolios
which mature in more than 60 days are valued at current market quotations.

In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian take possession of the underlying collateral
securities, the value of which

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

B-74
<PAGE> 165
exceeds the principal amount of the repurchase transaction, including accrued
interest. If the seller defaults, and the value of the collateral declines or,
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.

All securities (except those of the U.S. Government Money Market
Portfolio) are valued as of 4:15 P.M., New York time. The U.S. Government Money
Market Portfolio calculates net asset value as of 4:30 P.M., New York time.

SECURITIES TRANSACTIONS AND NET 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. The Fund
amortizes premiums and discounts paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management. The cost of portfolio
securities for federal income tax purposes is substantially the same as for
financial reporting purposes.

REVERSE REPURCHASE AGREEMENTS: Reverse repurchase agreements involve the
sale of a portfolio-eligible security by the Fund, coupled with an agreement to
repurchase the security at a specified date and price. The Fund maintains
segregated assets consisting of cash, U.S. Government securities or high grade
debt securities equal (on a daily mark-to-market basis) to its obligations under
reverse repurchase agreements with broker-dealers (but not banks). Reverse
repurchase agreements involve the risk that the market value of securities
retained by the Fund may decline below the repurchase price of the securities
sold by the Fund which it is obligated to repurchase. Reverse repurchase
agreements are considered to be borrowings by the Fund, and are subject to the
Fund's overall restriction on borrowing under which it must maintain asset
coverage of at least 300%.

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 Portfolio 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 Portfolio 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 Portfolio invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Portfolio intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Portfolio may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets. The International Equity Portfolio, International Bond Portfolio,
Intermediate-Term Bond Portfolio, Mortgage-Backed Securities Portfolio and Total
Return Bond Portfolio are the only portfolios that may invest in financial
futures contracts.

FOREIGN CURRENCY TRANSLATION: The books and records of the Portfolios are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:

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

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

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

Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of short-term
securities, holding of foreign currencies, currency gains or losses realized
between the trade and settlement dates of securities transactions, and the
difference between the amounts of dividends, interest and foreign taxes recorded
on the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at year end exchange rates are reflected as a component
of net unrealized appreciation/depreciation on investments and foreign
currencies.

Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, the level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.

FORWARD CURRENCY CONTRACTS: The International Equity Portfolio,
International Bond Portfolio, Intermediate-Term Bond Portfolio and Total Return
Bond Portfolio may enter into forward currency contracts in order to hedge their
exposure to changes in foreign currency exchange rates on their foreign
portfolio holdings. A forward currency contract is a commitment to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The
Portfolio enters into forward currency contracts in order to hedge its exposure
to changes in foreign currency exchange rates on its foreign portfolio holdings

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

B-75
<PAGE> 166

or on specific receivables and payables denominated in a foreign currency. The
contracts are valued daily at current exchange rates and any unrealized gain or
loss is included in net unrealized appreciation or depreciation on investments.
Gain or loss is realized on the settlement date of the contract equal to the
difference between the settlement value of the original and renegotiated forward
contracts. This gain or loss, if any, is included in net realized gain (loss)
on foreign currency transactions. Risks may arise upon entering into these
contracts from the potential inability of the counter parties to meet the terms
of their contracts.

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

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

EQUALIZATION: The Portfolios (except for the U.S. Government Money Market
Portfolio) follow the accounting practice known as equalization by which a
portion of the proceeds from sales and costs of reacquisitions of Portfolio
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of Portfolio shares.

RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts for and reports
distributions to shareholders in accordance with AICPA Statement of Position
93-2: Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this Statement of Position, on the Small Capitalization Value
Portfolio, International Equity Portfolio, Total Return Bond Portfolio,
Intermediate-Term Bond Portfolio and International Bond Portfolio, was to
reclassify $2,600, ($978,444), $109,323, $193,129 and $245,549, respectively, of
foreign currency gains (losses) to undistributed net investment income from
accumulated net realized gains (losses). In addition, the Mortgage Backed
Securities Portfolio reclassified $96,463 of overdistributed income to paid-in
capital from overdistributed net investment income and the Small Capitalization
Value Portfolio reclassified $736,006 of tax equalization to paid-in capital
from underdistributed net investment income. Current year net investment income,
net realized gains (losses) and net assets were not affected by this statement.

DIVIDENDS AND DISTRIBUTIONS: The International Bond Portfolio, Total
Return Bond Portfolio, Intermediate-Term Bond Portfolio and Mortgage Backed
Securities Portfolio declare dividends of their net investment income daily and
pay such dividends monthly. The U.S. Government Money Market Portfolio declares
net investment income and any net capital gain (loss) daily and pays such
dividends monthly. Each other Portfolio declares and pays a dividend of its net
investment income, if any, at least annually. Each Portfolio except for the U.S.
Government Money Market Portfolio declares and pays its net capital gains, if
any, at least annually.

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

TAXES: For federal income tax purposes, each portfolio in the Fund is
treated as a separate taxpaying entity. It is the intent of each portfolio to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its taxable net income
to its shareholders. Therefore, no federal income tax provision is required.

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

DEFERRED ORGANIZATIONAL EXPENSES: A total of $279,000 was incurred in
connection with the organization of the Fund. These costs have been deferred and
are being amortized ratably over a period of sixty months from the date the
Portfolio commenced investment operations.

- ----------------------------------------------------------
NOTE 2. AGREEMENTS

The Fund has a management agreement with Prudential Mutual Fund
Management, Inc. ("PMF") pursuant to which PMF manages the investment
operations of the Fund, administers the Fund's affairs and is responsible for
the selection, subject to review and approval of the Trustees, of the advisers.
PMF supervises the advisers' performance of advisory services and makes
recommendations to the Trustees as to whether the advisers' contracts should be
renewed, modified or terminated. PMF pays for the costs pursuant to the advisory
agreements, the cost of compensation of officers of the Fund, occupancy

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

B-76
<PAGE> 167

and certain clerical and accounting costs of the Fund. The Fund bears all other
costs and expenses.

PMF has subadvisory agreements with the advisers noted below pursuant to
which each adviser furnishes investment advisory services in connection with the
management of the Portfolios. Each of the two Advisers of the domestic equity
Portfolios--the Large Capitalization Growth Portfolio, Large Capitalization
Value Portfolio, Small Capitalization Growth Portfolio and Small Capitalization
Value Portfolio--manages approximately 50% of the assets of the respective
Portfolio. In general, in order to maintain an approximately equal division of
assets between the two Advisers, all daily cash inflows (i.e., subscriptions and
reinvested distributions) and outflows (i.e., redemptions and expenses items)
will be divided between the two Advisers as the Manager deems it appropriate. In
addition, there will be a periodic rebalancing of each Portfolio's assets to
take account of market fluctuations in order to maintain the approximately equal
allocation. As a consequence, each Portfolio will allocate assets from the
better performing of the two Advisers to the other.

PORTFOLIO ADVISER
- ----------------- ------------------------------------------
<S> <C>
Large
Capitalization
Growth
Portfolio...... Oak Associates (effective 11/22/95) and
Columbus Circle Investors
Large
Capitalization
Value
Portfolio...... INVESCO MIM Inc. and
Hotchkis and Willey
Small
Capitalization
Growth
Portfolio...... Nicholas-Applegate Capital Management and
Investment Advisors, Inc.
Small
Capitalization
Value
Portfolio...... Wood, Struthers & Winthrop (effective
4/13/95) and
Lazard Freres Asset Management
International
Equity
Portfolio...... Lazard Freres Asset Management
International
Bond
Portfolio...... Fiduciary International, Inc.
Total Return Bond
and Intermediate-
Term Bond
Portfolios..... Pacific Investment Management Co.
Mortgage Backed
Securities and
U.S. Government
Money Market
Portfolios..... Wellington Management Co.
</TABLE>

The management fee paid PMF is computed daily and payable monthly, at an
annual rate of the average daily net assets of the Portfolios specified below
and PMF, in turn, pays each adviser a fee for its services.

<TABLE>
<CAPTION>
TOTAL
PORTFOLIO MANAGEMENT FEE ADVISER FEE
- ------------------------- -------------- -----------
<S> <C> <C>
Large Capitalization
Growth Portfolio....... .60% .30%
Large Capitalization
Value Portfolio........ .60% .30%
Small Capitalization
Growth Portfolio....... .60% .30%
Small Capitalization
Value Portfolio........ .60% .30%
International Equity
Portfolio.............. .70% .40%
International Bond
Portfolio.............. .50% .30%
Total Return Bond
Portfolio.............. .45% .25%
Intermediate-Term Bond
Portfolio.............. .45% .25%
Mortgage Backed
Securities Portfolio... .45% .25%
U.S. Government Money
Market Portfolio....... .25% .125%
</TABLE>

PMF has agreed to subsidize a portion of the operating expenses of the
Portfolios until December 31, 1995. The Portfolios are not required to reimburse
PMF for such subsidies. For the year ended December 31, 1995, PMF subsidized the
following amounts:

<TABLE>
<CAPTION>
ANNUALIZED
PERCENTAGE OF PER
PORTFOLIO AMOUNT AVERAGE NET ASSETS SHARE
- ------------------------- ------- ------------------ -----
<S> <C> <C> <C>
International Bond
Portfolio.............. $44,839 .15% $.02
Total Return Bond
Portfolio.............. 68,615 .19% .02
Mortgage Backed
Securities
Portfolio.............. 47,957 .07% .01
U.S. Government Money
Market Portfolio....... 9,401 .05% .001
</TABLE>

The Fund has entered into a distribution agreement with Prudential
Securities Incorporated ("PSI") for distribution of the Fund's shares. PSI
serves the Fund without compensation.
PMF and PSI are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.

- ----------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES

Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned
subsidiary of PMF, serves as the Fund's transfer agent. The following amounts
represent the fees PMFS charged for the year ended December 31, 1995 as well as
the fees due PMFS as of December 31, 1995.

<TABLE>
<CAPTION>
AMOUNT INCURRED
FOR THE
YEAR ENDED AMOUNT DUE
DECEMBER 31, AS OF
PORTFOLIO 1995 DECEMBER 31, 1995
- --------------------- --------------- -----------------
<S> <C> <C>
Large Capitalization
Growth Portfolio... $85,200 $ 7,200
Large Capitalization
Value Portfolio.... 85,200 7,200
Small Capitalization
Growth Portfolio... 84,900 7,200
Small Capitalization
Value Portfolio.... 81,200 6,800
International Equity
Portfolio.......... 87,300 7,300
International Bond
Portfolio.......... 23,200 2,300
Total Return Bond
Portfolio.......... 33,400 2,900
Intermediate-Term
Bond Portfolio..... 36,200 3,100
Mortgage Backed
Securities
Portfolio.......... 48,000 4,000
U.S. Government Money
Market Portfolio... 7,200 600
</TABLE>

For the year ended December 31, 1995, PSI earned approximately $28,400 and
$20,100 in brokerage commissions on behalf of certain portfolio transactions
executed with the Large Capitalization Value Portfolio and the Small
Capitalization Growth Portfolio, respectively.

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

B-77
<PAGE> 168

- ----------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES

Purchases and sales of portfolio securities, excluding short-term
investments and written options, for the year ended December 31, 1995 were as
follows:

PORTFOLIO PURCHASES SALES
- ----------------------------- ------------ ------------
<S> <C> <C>
Large Capitalization Growth
Portfolio.................. $234,649,834 $226,512,935
Large Capitalization Value
Portfolio.................. 102,117,865 92,702,420
Small Capitalization Growth
Portfolio.................. 125,776,450 123,980,415
Small Capitalization Value
Portfolio.................. 109,444,010 90,359,206
International Equity
Portfolio.................. 132,053,915 152,588,435
International Bond
Portfolio.................. 108,266,083 96,780,805
Total Return Bond
Portfolio.................. 56,627,532 39,767,557
Intermediate-Term Bond
Portfolio.................. 41,726,354 55,562,278
Mortgage Backed Securities
Portfolio.................. 108,442,584 99,428,393
</TABLE>

The federal income tax basis and unrealized appreciation/depreciation of
each of the Portfolios' investments, excluding written options as of December
31, 1995, were as follows:

<TABLE>
<CAPTION>
NET
UNREALIZED GROSS UNREALIZED
PORTFOLIO BASIS APPRECIATION APPRECIATION DEPRECIATION
- ---------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Large
Capitalization
Growth
Portfolio..... $163,253,091 $19,589,425 $ 22,279,213 $ 2,689,788
Large
Capitalization
Value
Portfolio..... 154,242,595 33,465,723 39,108,059 5,642,336
Small
Capitalization
Growth
Portfolio..... 100,304,134 20,960,158 26,031,359 5,071,201
Small
Capitalization
Value
Portfolio..... 87,984,547 9,710,462 12,970,539 3,260,077
International
Equity
Portfolio..... 172,627,730 19,471,612 25,877,996 6,406,384
International
Bond
Portfolio..... 32,840,832 785,604 886,875 101,271
Total Return
Bond
Portfolio..... 48,782,555 536,236 713,976 177,740
Intermediate-Term
Bond
Portfolio..... 77,929,005 542,660 1,023,792 481,132
Mortgage Backed
Securities
Portfolio..... 67,526,172 2,090,447 2,250,666 160,219
</TABLE>

For federal income tax purposes, the Small Capitalization Value and
Mortgage Backed Securities portfolios had capital loss carryforwards as of
December 31, 1995. Accordingly, no capital gain distributions are expected to be
paid to shareholders of these portfolios until future net gains have been
realized in excess of such carryforwards. In addition, certain portfolios have
either partially or fully utilized prior year capital losses and/or are electing
to treat net currency losses incurred in the two month period ended December 31,
1995 as having been incurred in the following year.

<TABLE>
<CAPTION>
NET LOSSES
UTILIZATION OF IN TWO
PRIOR YEAR MONTHS ENDED
CAPITAL LOSS EXPIRATION CAPITAL LOSS DECEMBER 31,
PORTFOLIO CARRYFORWARD YEAR CARRYFORWARD 1995
- ------------------ -------------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Large
Capitalization
Growth
Portfolio....... -- -- $ 3,494,700 --
Small
Capitalization
Growth
Portfolio....... -- -- 10,623,600 --
Small
Capitalization
Value
Portfolio....... $1,755,000 2003 -- $ 87,500
1,738,800 2002 -- --
International
Equity
Portfolio....... -- -- -- 68,600
International Bond
Portfolio....... -- -- 236,800 268,300
Total Return
Bond
Portfolio....... -- -- 1,635,000 --
Intermediate-Term
Bond
Portfolio....... -- -- 2,427,300 --
Mortgage Backed
Securities
Portfolio....... 1,539,900 2002 1,637,200 --
- ---------------------------------------------------------------------------
</TABLE>

At December 31, 1995, the Total Return and Intermediate-Term Bond
Portfolios bought 148 and 230 financial futures contracts, respectively, on U.S.
Treasury Notes expiring in March 1996. In addition, the Total Return Portfolio
bought 16 financial futures contracts on U.S. Treasury Bonds expiring in March
1996.

The unrealized appreciation on such contracts as of December 31, 1995 were as
follows:

<TABLE>
<CAPTION>
VALUE ON
VALUE AT DECEMBER 31, UNREALIZED
PORTFOLIO DISPOSITION 1995 APPRECIATION
- ----------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Total Return Bond
Portfolio............ $18,379,125 $18,526,500 $147,375
Intermediate-Term Bond
Portfolio............ 25,360,938 25,519,063 158,125
</TABLE>

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

B-78
<PAGE> 169

At December 31, 1995, the International Bond Portfolio had outstanding
forward currency contracts, both to purchase and sell foreign currencies, as
follows:

<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT APPRECIATION
PURCHASE CONTRACTS PAYABLE VALUE (DEPRECIATION)
- ------------------- --------------- ----------- --------------
<S> <C> <C> <C>
British Pounds,
expiring
1/8/96........... $ 2,767,997 $ 2,771,688 $ 3,691
Canadian Dollars,
expiring
2/16/96.......... 475,592 470,849 (4,743)
Danish Kroner,
expiring
2/16/96.......... 85,045 85,101 56
Deutschemarks,
expiring
2/16/96.......... 4,037,105 3,970,433 (66,672)
Italian Lira,
expiring
4/18/96.......... 1,232,442 1,240,602 8,160
Japanese Yen,
expiring
1/8/96........... 4,660,137 4,525,603 (134,534)
Spanish Pesetas,
expiring
2/6/96........... 382,331 382,807 476
----------- ----------- ----------
$13,640,649 $13,447,083 $ (193,566)
=========== =========== ==========
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT APPRECIATION
SALE CONTRACTS RECEIVABLE VALUE (DEPRECIATION)
- ------------------- --------------- ----------- --------------
<S> <C> <C> <C>
Australian Dollars,
expiring
1/16/96.......... $ 374,673 $ 376,539 $ (1,866)
Austrian Schilling,
expiring
5/15/96.......... 404,573 397,403 7,170
Belgian Francs,
expiring
1/12/96.......... 558,129 562,168 (4,039)
British Pounds,
expiring
1/8/96........... 29,966 29,503 463
Canadian Dollars,
expiring
2/16/96.......... 288,490 285,353 3,137
Danish Kroner,
expiring
2/12/96.......... 175,523 174,533 990
Deutschemarks,
expiring
2/16/96.......... 1,655,934 1,653,049 2,885
French Francs,
expiring
1/12/96.......... 2,823,977 2,873,058 (49,081)
Italian Lira,
expiring
4/18/96.......... 1,121,082 1,127,744 (6,662)
Spanish Pesetas,
expiring
2/6/96........... 4,598,982 4,674,023 (75,041)
----------- ----------- ----------
$12,031,329 $12,153,373 $ (122,044)
=========== =========== ==========
</TABLE>

At December 31, 1995, the Total Return Bond Portfolio had outstanding
forward currency contracts to sell foreign currencies, as follows:

<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT
SALE CONTRACTS RECEIVABLE VALUE DEPRECIATION
- ------------------- --------------- ----------- --------------
<S> <C> <C> <C>
Deutschemarks
expiring
12/9-12/16/96.... $ 6,543,418 $ 6,580,506 $ (37,088)
</TABLE>

At December 31, 1995, the Intermediate Term Bond Portfolio had outstanding
forward currency contracts to sell foreign currencies, as follows:

Transactions in options written during the year ended December 31, 1995,
were as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
INTERNATIONAL BOND PORTFOLIO (000) RECEIVED
- -------------------------------------- --------- --------
<S> <C> <C>
Options outstanding at December 31,
1994................................ 84,366 $ 15,337
Options written....................... 134,123 63,474
Options terminated in closing purchase
transactions........................ (129,658) (38,829)
Options expired....................... (88,831) (39,982)
-------- --------
Options outstanding at December 31,
1995................................ -- $ --
======== ========

TOTAL RETURN BOND PORTFOLIO
- --------------------------------------
<S> <C> <C>
Options outstanding at December 31,
1994................................ -- --
Options written....................... 57 $ 34,588
Options exercised..................... (37) (23,887)
Options expired....................... (20) (10,701)
------- --------
Options outstanding at December 31,
1995................................ -- $ --
======= ========
<CAPTION>
MORTGAGE BACKED SECURITIES PORTFOLIO
- --------------------------------------
<S> <C> <C>
Options outstanding at December 31,
1994................................ -- --
Options written....................... 85 $32,581
Options terminated in closing purchase
transactions........................ (45) (17,986)
------- -------
Options outstanding at December 31,
1995................................ 40 $ 14,595
======= ========
</TABLE>

- ----------------------------------------------------------
NOTE 5. BORROWINGS UNDER REVERSE REPURCHASE AGREEMENTS

The amount of borrowings outstanding for the Total Return Bond portfolio
during the period was $1,473,000 at an interest rate of 5.70%. On December 31,
1995, securities valued at $1,521,983 were pledged as collateral for reverse
repurchase agreements.

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

B-79
<PAGE> 170

- -----------------------------------------------------------
NOTE 6. CAPITAL

The Fund has authorized an unlimited number of shares of beneficial
interest at $.001 par value per share. Of the shares outstanding at December 31,
1995, PMF owned 1,125 shares of each portfolio, except for the International
Bond Portfolio, of which it owns 226,630 shares.

Transactions in shares of beneficial interest during the year ended
December 31, 1995 were as follows:

<TABLE>
<CAPTION>
SHARES
ISSUED IN
REINVESTMENT INCREASE/
OF DIVIDENDS (DECREASE)
SHARES AND SHARES IN SHARES
PORTFOLIO SOLD DISTRIBUTIONS REACQUIRED OUTSTANDING
- -------------------------------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio........................... 5,088,274 140,781 (4,979,073) 249,982
Large Capitalization Value
Portfolio........................... 4,775,800 734,989 (4,779,753) 731,036
Small Capitalization Growth
Portfolio........................... 3,325,532 172,318 (3,236,827) 261,023
Small Capitalization Value
Portfolio........................... 2,807,377 76,421 (3,018,792) (134,994)
International Equity Portfolio........ 11,209,899 150,197 (13,045,509) (1,685,413)
International Bond Portfolio.......... 1,976,236 208,497 (1,025,274) 1,159,459
Total Return Bond Portfolio........... 2,317,689 227,833 (1,588,241) 957,281
Intermediate-Term Bond Portfolio...... 2,958,764 396,173 (2,600,802) 754,135
Mortgage Backed Securities Portfolio.. 1,971,802 371,098 (2,094,123) 248,777
</TABLE>

Transactions in shares of beneficial interest during the period ended
December 31, 1994 were as follows:

<TABLE>
<CAPTION>
SHARES
ISSUED IN
REINVESTMENT
OF DIVIDENDS INCREASE
SHARES AND SHARES IN SHARES
PORTFOLIO SOLD DISTRIBUTIONS REACQUIRED OUTSTANDING
- -------------------------------------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio........................... 8,762,398 151,227 (4,221,440) 4,962,185
Large Capitalization Value
Portfolio........................... 8,338,262 423,050 (4,070,874) 4,690,438
Small Capitalization Growth
Portfolio........................... 5,395,450 7,671 (2,468,500) 2,934,621
Small Capitalization Value
Portfolio........................... 4,791,105 165,073 (2,418,215) 2,537,963
International Equity Portfolio........ 9,846,776 1,400,029 (5,223,523) 6,023,282
International Bond Portfolio(a)....... 2,471,795 86,716 (316,569) 2,241,942
Total Return Bond Portfolio........... 2,568,158 135,120 (1,933,860) 769,418
Intermediate-Term Bond Portfolio...... 4,996,072 318,588 (4,639,643) 675,017
Mortgage Backed Securities Portfolio.. 4,438,423 349,104 (4,172,917) 614,610
- ---------------
(a) Investment operations commenced on May 17, 1994.
</TABLE>

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

B-80
<PAGE> 171
THE TARGET PORTFOLIO TRUST
INDEPENDENT AUDITORS' REPORT

The Shareholders and Trustees of
The Target Portfolio Trust:

We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of The Target Portfolio Trust
(consisting of the Large Capitalization Growth Portfolio, Large Capitalization
Value Portfolio, Small Capitalization Growth Portfolio, Small Capitalization
Value Portfolio, International Equity Portfolio, International Bond Portfolio,
Total Return Bond Portfolio, Intermediate-Term Bond Portfolio, Mortgage Backed
Securities Portfolio and U.S. Government Money Market Portfolio) as of December
31, 1995, the related statements of operations for the year then ended and of
changes in net assets, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
December 31, 1995 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 each of the
respective portfolios constituting The Target Portfolio Trust as of December 31,
1995, the results of their operations, the changes in their net assets, and
their financial highlights for the periods presented in conformity with
generally accepted accounting principles.

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

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

B-81
<PAGE> 172

APPENDIX--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.

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

<TABLE>
<S> <C>
Small Stocks $3,822

Common Stocks $1,114

Long-Term Bonds $ 34

Treasury Bills $ 13

Inflation $ 9
</TABLE>

Source: Prudential Investment Corporation based on data from Ibbotson
Associates' Encorr Software, Chicago, Illinois. Used with permission. 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 governemnt 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 bong 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.

A-1

<PAGE> 173

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

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

Historical Total Returns of Different Bond Market Sectors

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year '87 '88 '89 '90 '91 '92 '93 '94 '95
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Treasury 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4%
Bonds
- --------------------------------------------------------------------------------------------------------------
Mortgage
Securities 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8%

- --------------------------------------------------------------------------------------------------------------
U.S.
Corporate 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3%
Bonds
- --------------------------------------------------------------------------------------------------------------
U.S. High
Yield 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2%
Corporate
Bonds
- --------------------------------------------------------------------------------------------------------------
World
Government 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
Bonds
- --------------------------------------------------------------------------------------------------------------
Difference
between 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
highest and
lowest
return in
percent

- --------------------------------------------------------------------------------------------------------------
</TABLE>

1Lehman 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.
2Lehman 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).
3Lehman 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.
4Lehman 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.
5Salomon 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.

A-2

<PAGE> 174

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.

AVERAGE ANNUAL TOTAL RETURNS
OF MAJOR WORLD STOCK MARKETS
(1986-1995) (IN U.S. DOLLARS)

<TABLE>
<S> <C>
Hong Kong 23.8%
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Switzerland 17.1%
France 15.3%
U.K. 15.0%
U.S. 14.8%
Japan 12.8%
Austria 10.9%
Germany 10.7%
</TABLE>

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

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

[Chart]

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
in the Standard & Poor's 500 Stock Index, a market-value-weighted index made up
of 500 of the largest stocks in the U.S. Based upon their stock market value.
Investors cannot invest directly in indices.

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

World Stock Market
Capitalization by Region

World Total: $9.2 Trillion
<S> <C>
Canada 2.2%
Europe 28.3%
U.S. 40.8%
Pacific Basin 28.7%
</TABLE>

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

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

A-3

<PAGE> 175

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

LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)

[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 Trust,
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.

The Range of Annual Total Returns for Major Stock &
Bond Indices Over the Past 20 Years
(12/31/75-12/31/95)*

<TABLE>
<CAPTION>
Lehman
S&P 500 EAFE Aggregate
<S> <C> <C>
- -7.2% - 37.6% -23.2% - 69.9% -2.9% - 32.6%
</TABLE>

* 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.

A-4

<PAGE> 176

APPENDIX--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.

A-5

<PAGE> 177

APPENDIX--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 Trust.

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 1995, Institutional Investor ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations
in the United States as of December 31, 1994. As of December 31, 1995,
Prudential had more than $314 billion in assets under management. Prudential's
Money Management Group (of which Prudential Mutual Funds is a key part) manages
over $190 billion in assets of institutions and individuals.

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

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

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

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

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

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

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 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.

A-6

<PAGE> 178

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

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

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

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

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

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

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

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

Trading 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 assets. 5_Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In
1994, the Prudential Mutual Funds effected more than 40,000 trades in money
market securities and held on average $20 billion of money market securities.6

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.

A-7
<PAGE> 179

INFORMATION ABOUT PRUDENTIAL SECURITIES

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

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

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

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

For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------------
7 As of December 31, 1994.

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

A-8