PRUDENTIAL INVESTMENT PORTFOLIOS INC, 497, 2000-09-25

PRUDENTIAL INVESTMENT PORTFOLIOS INC
497, 2000-09-25

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PRUDENTIAL BALANCED FUND
Gateway Center Three
100 Mulberry Street, 4th Floor
Newark, New Jersey 07102-4077

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IMPORTANT PROXY MATERIALS

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PLEASE VOTE NOW!

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September 18, 2000

Dear Shareholder:

I am inviting you to vote on an important proposal to reorganize Prudential
Balanced Fund into Prudential Active Balanced Fund. A shareholder meeting of
Prudential Balanced Fund is scheduled for October 27, 2000. This package
contains information about the proposal and includes materials you will need
to vote by mail, through the Internet or by telephone.

The Board of Trustees of Prudential Balanced Fund has reviewed the
reorganization proposal and has recommended that it be presented to
shareholders for their consideration. Although the Trustees have determined
that a reorganization is in the shareholders' best interest, the final
decision is yours.

If approved, the reorganization would give you the opportunity to
participate in a larger fund with similar investment policies and investment
objectives and identical class structures. The combined fund would have a
better long-term performance record and benefit from increased economies of
scale. To help you understand the proposal, we are including a section that
answers commonly asked questions about these transactions. The accompanying
proxy statement includes a detailed description of the proposed
reorganization.

Please read the enclosed materials carefully and cast your vote. Remember,
your vote is extremely important, no matter how large or small your holdings.
By voting now, you can help avoid additional costs that are incurred with
follow-up letters and calls.

TO VOTE, YOU MAY USE ANY OF THE FOLLOWING METHODS:

--BY MAIL. Please complete, date and sign your proxy card before mailing it
in the enclosed postage-paid envelope.

--BY INTERNET. Have your proxy card available. Go to the web site:

WWW.PROXYVOTE.COM. Enter your 12-digit control number from your proxy
card. Follow the simple instructions found on the web site.

--BY TELEPHONE. Call 1-800-690-6903 toll free. Enter your 12-digit control
number from your proxy card. Follow the simple instructions.

SPECIAL NOTE FOR SYSTEMATIC INVESTMENT PLANS AND THOSE WITH OUTSTANDING
CERTIFICATES (E.G., AUTOMATIC INVESTMENT PLAN, SYSTEMATIC EXCHANGE, ETC.)
Shareholders on systematic investment plans must contact their Financial
Advisor or call our customer service division, toll free, at 1-800-225-1852 to
change their options. Otherwise, starting November 3, 2000, future purchases
shall be made in shares of the Prudential Active Balanced Fund if the
reorganization is approved.

Shareholders with outstanding certificates are also urged to contact their
Financial Advisors or call our customer service division to deposit their
certificates.

If you have any questions before you vote, please call us at 1-800-225-1852.
We're glad to help you understand the proposal and assist you in voting. Thank
you for your participation.

Sincerely,

John R. Strangfeld
President
<PAGE>

IMPORTANT INFORMATION TO HELP YOU UNDERSTAND
AND VOTE ON THE PROPOSAL

Please read the enclosed prospectus and proxy statement for a complete
description of the reorganization proposal. As a quick reference, the
following provides a brief overview of the proposal.

WHAT PROPOSAL AM I BEING ASKED TO VOTE ON?

You are being asked to approve a reorganization of Prudential Balanced Fund
(Balanced Fund) into Prudential Active Balanced Fund (Active Balanced Fund).

WHAT IS THE REASON FOR THIS REORGANIZATION?

The proposed reorganization is intended to combine two similarly managed
funds with the goal of increased economies of scale and a better long-term
performance record. The reorganization is also desirable because of the
inability of Balanced Fund to keep its net outflows to a minimum, increase its
net asset base, keep investors and build an investment portfolio that can
effectively pursue the Fund's objective. Active Balanced Fund has built an
investment portfolio that can more fully implement its objective of income and
long-term growth of capital.

DO THE FUNDS HAVE SIMILAR INVESTMENT POLICIES?

YES. Both Funds are classified as "balanced" funds, which means they have
the ability to invest in stocks, bonds and money market instruments. As a
result, they are grouped in the same Lipper Balanced investment category. The
Funds have very similar investment objectives. Balanced Fund seeks to provide
total investment return consistent with moderate risk. Active Balanced Fund
seeks income and long-term growth of capital by investing in a portfolio of
equity, fixed-income and money market securities that is actively managed to
capitalize on opportunities created by perceived misvaluation. Balanced Fund
invests up to 75% of its total assets in equity-related securities and Active
Balanced Fund invests between 40% and 75% in the same. Balanced Fund invests
up to 30% of its assets in foreign securities compared to Active Balanced
Fund, which invests up to 35%. Balanced Fund invests at least 25% of its total
assets in fixed-income obligations, while Active Balanced Fund invests between
25% and 60%.

WHO ARE THE PORTFOLIO MANAGERS FOR THESE FUNDS?

James Scott and Mark Stumpp currently manage the equity portion of both
Active Balanced Fund and Balanced Fund. Messrs. Scott and Stumpp began
managing Balanced Fund in May 2000. Prudential Investments' Fixed Income
Liquidity Team, headed by Michael Lillard, is primarily responsible for the
fixed-income portion of Active Balanced Fund, and Prudential Investments'
Fixed Income Corporate Team, headed by Steven Kellner, is primarily
responsible for the fixed-income portion of Balanced Fund.

HOW DO THE EXPENSE STRUCTURES OF THE FUNDS COMPARE?

<TABLE>
<CAPTION>
ACTIVE
ACTIVE BALANCED
ANNUAL FUND OPERATING EXPENSES BALANCED BALANCED PRO FORMA
(AS A % OF AVERAGE NET ASSETS) FUND* FUND** COMBINED**
------------------------------ -------- -------- ----------
<S> <C> <C> <C>
Class A..................................... 1.17% 1.41% 1.16%
Class B..................................... 1.92% 2.16% 1.91%
Class C..................................... 1.92% 2.16% 1.91%
Class Z..................................... 0.92% 1.16% 0.91%
</TABLE>
----------
* Ratios are for the fiscal year ended July 31, 1999. For the fiscal year
ended July 31, 2000, the Distributor contractually agreed to waive .05 of
1% of its distribution and service fee for Class A shares, limiting this
fee to .25 of 1% of the average daily net assets of the Class A shares.
** Ratios are for the fiscal year ended September 30, 1999. For the fiscal
year ending September 30, 2000, the Distributor has contractually agreed to
waive .05 of 1% of its distribution and service fee for Class A shares,
limiting this fee to .25 of 1% of the average daily net assets of the Class
A shares. Pro forma combined figures reflect what the expense structure
would have been on March 31, 2000, if the reorganization had been
consummated twelve months prior to that date.

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IS THE REORGANIZATION A TAXABLE EVENT FOR FEDERAL INCOME TAX PURPOSES?

Typically, the exchange of shares pursuant to a reorganization does not
result in a gain or loss for federal income tax purposes. A description of the
conditions necessary to avoid tax recognition is included in the prospectus
and proxy statement.

WHAT WILL BE THE SIZE OF ACTIVE BALANCED FUND AFTER THE REORGANIZATION?

If the proposal is approved, the combined fund is estimated to have over
$1.2 billion in assets.

WHAT HAS BEEN THE COMPARATIVE PERFORMANCE OF THE FUNDS?

A. The table below shows average annual total returns (which include the
deduction of sales charges) for Active Balanced Fund, its Lipper peer group
and two relevant indexes over the 1 and 5 year and since inception periods.
Please keep in mind that past performance is no guarantee of future results
and you may have a gain or loss when you sell your shares.

AVERAGE ANNUAL TOTAL RETURNS(1)
AS OF JUNE 30, 2000

PRUDENTIAL ACTIVE BALANCED FUND

<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
------ ------- ---------------------
<S> <C> <C> <C> <C>
Class A shares............................ 2.35% N/A 10.97% (since 11-7-96)
Class B shares............................ 2.12% N/A 11.35% (since 11-7-96)
Class C shares............................ 5.05% N/A 11.46% (since 11-7-96)
Class Z shares............................ 8.13% 14.38% 11.72% (since 1-4-93)
S&P 500(2)................................ 7.24% 23.80% N/A(2)
Lehman Govt./Credit(3).................... 4.32% 6.10% N/A(3)
Lipper Average(4)......................... 4.43% 13.40% N/A(4)
</TABLE>
----------
(1) The Fund's returns are after deduction of sales charges and expenses.
Without the distribution and service (12b-1) fee waiver for Class A
shares, the returns would have been lower.
(2) The Standard & Poor's 500 Composite Stock Price Index (S&P 500)--an
unmanaged index of 500 stocks of large U.S. companies--gives a broad look
at how stock prices have performed. These returns do not include the
effect of any sales charges or operating expenses of a mutual fund. These
returns would be lower if they included the effect of sales charges and
operating expenses. S&P 500 returns since the inception of each class are
23.66% for Class A, Class B and Class C shares and 19.88% for Class Z
shares. Source: Lipper Inc.
(3) The Lehman Brothers Government/Credit Bond Index (Lehman Govt./Credit) is
a weighted index of public, fixed-rate, nonconvertible domestic corporate
debt securities rated at least investment grade and public obligations of
the U.S. Treasury. These returns do not include the effect of any sales
charges or operating expenses of a mutual fund. These returns would be
lower if they included the effect of sales charges and operating expenses.
Lehman Govt./Credit returns since the inception of each class are 5.89%
for Class A, Class B and Class C shares and 6.56% for Class Z shares.
Source: Lipper Inc.
(4) The Lipper Average is based on the average return of all mutual funds in
the Lipper Balanced Fund category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Lipper returns since the inception of each class
are 12.57% for Class A, Class B and Class C shares and 11.92% for Class Z
shares. Source: Lipper Inc.

ii
<PAGE>

B. The table below shows average annual total returns (which include the
deduction of sales charges) for Balanced Fund, its Lipper peer group and two
relevant indexes over the 1, 5 and 10 year and since inception periods. Please
keep in mind that past performance is no guarantee of future results and you
may have a gain or loss when you sell your shares.

AVERAGE ANNUAL TOTAL RETURNS(1)
AS OF JUNE 30, 2000

PRUDENTIAL BALANCED FUND

<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
------ ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Class A shares................ 1.33% 10.67% 10.68% 10.81% (since 1-22-90)
Class B shares................ 0.78% 10.84% 10.41% 9.37% (since 9-15-87)
Class C shares................ 3.73% 10.75% N/A 10.83% (since 8-1-94)
Class Z shares................ 6.92% N/A N/A 11.91% (since 3-1-96)
S&P 500(2) ................... 7.24% 23.80% 8.07% N/A(2)
Lehman Govt./Credit(3)........ 4.32% 6.10% 18.82% N/A(3)
Lipper Average(4)............. 4.43% 13.40% 12.37% N/A(4)
</TABLE>
----------
(1) The Fund's returns are after deduction of sales charges and expenses.
Without the distribution and service (12b-1) fee waiver for Class A
shares, the returns would have been lower.
(2) The Standard & Poor's 500 Composite Stock Price Index (S&P 500)--an
unmanaged index of 500 stocks of large U.S. companies--gives a broad look
at how stock prices have performed. These returns do not include the
effect of any sales charges or operating expenses of a mutual fund. These
returns would be lower if they included the effect of sales charges and
operating expenses. S&P 500 returns since the inception of each class are
18.14% for Class A, 16.25% for Class B, 23.87% for Class C and 22.80% for
Class Z shares. Source: Lipper Inc.
(3) The Lehman Brothers Government/Credit Bond Index (Lehman Govt./Credit) is
a weighted index of public, fixed-rate, nonconvertible domestic corporate
debt securities rated at least investment grade and public obligations of
the U.S. Treasury. These returns do not include the effect of any sales
charges or operating expenses of a mutual fund. These returns would be
lower if they included the effect of sales charges and operating expenses.
Lehman Brothers Govt./Credit returns since the inception of each class are
7.90% for Class A, 7.69% for Class B, 6.93% for Class C and 5.86% for
Class Z shares. Source: Lipper Inc.
(4) The Lipper Average is based on the average return of all mutual funds in
the Lipper Balanced Fund category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Lipper returns since the inception of each class
are 11.95% for Class A, 10.68% for Class B, 13.93% for Class C and 12.55%
for Class Z shares. Source: Lipper Inc.

iii
<PAGE>

HOW WILL YOU DETERMINE THE NUMBER OF SHARES OF PRUDENTIAL ACTIVE BALANCED FUND
THAT I WILL RECEIVE?

As of the close of business of the New York Stock Exchange on the Closing
Date of the reorganization, shareholders will receive the number of full and
fractional Class A, Class B, Class C or Class Z shares of Active Balanced
Fund, respectively, that is equal in value to the net asset value of their
Class A, Class B, Class C or Class Z shares of Balanced Fund on that date. The
anticipated Closing Date is November 3, 2000.

WHAT IF THERE ARE NOT ENOUGH VOTES TO REACH QUORUM BY THE SCHEDULED
SHAREHOLDER MEETING DATE?

If we do not receive sufficient votes to hold the meeting, we or Shareholder
Communications Corporation, a proxy solicitation firm, may contact you by mail
or telephone to encourage you to vote. Shareholders should review the proxy
materials and cast their vote to avoid additional mailings or telephone calls.
If there are not sufficient votes to approve the proposal by the time of the
Shareholder Meeting (October 27, 2000), the meeting may be adjourned to permit
further solicitation of proxy votes.

HAS EACH FUND'S BOARD OF DIRECTORS/TRUSTEES APPROVED THE PROPOSAL?

Yes. The Board of Trustees of Balanced Fund and the Board of Directors of
The Prudential Investment Portfolios, Inc., of which Active Balanced Fund is a
Series, has approved the proposal and recommends that you vote to approve it.

HOW MANY VOTES AM I ENTITLED TO CAST?

As a shareholder, you are entitled to one vote for each share you own of
Balanced Fund on the record date. The record date is August 25, 2000.

HOW DO I VOTE MY SHARES?

You can vote your shares by completing and signing the enclosed proxy card,
and mailing it in the enclosed postage paid envelope. You can also vote your
shares by calling 1-800-690-6903, entering your 12-digit control number from
your proxy card and following the simple instructions. Lastly, you can vote
your shares by going to the Internet web site: www.proxyvote.com, entering
your 12-digit control number from your proxy card and following the simple
instructions found on the web site. If you need any assistance, or have any
questions regarding the proposal or how to vote your shares, please call
Prudential at (800) 225-1852.

HOW DO I SIGN THE PROXY CARD?

INDIVIDUAL ACCOUNTS: Shareholders should sign exactly as their names appear
on the account registration shown on the card.

JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.

ALL OTHER ACCOUNTS: The person signing must indicate his or her capacity.
For example, a trustee for a trust should include his/her title, such as "Jane
Doe, Trustee"; or an authorized officer of a company should indicate his/her
position with the company, such as "John Smith, President."

iv
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PRUDENTIAL BALANCED FUND
Gateway Center Three
100 Mulberry Street, 4th Floor
Newark, New Jersey 07102-4077

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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

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To our Shareholders:

Notice is hereby given that a Special Meeting of Shareholders (the Meeting)
of Prudential Balanced Fund (Balanced Fund) will be held at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102, on October 27, 2000, at
9:00 a.m. Eastern time, for the following purposes:

1. To approve an Agreement and Plan of Reorganization between Balanced
Fund and The Prudential Investment Portfolios, Inc., on behalf of its
series Prudential Active Balanced Fund (Active Balanced Fund), providing
for the transfer of all of the assets of Balanced Fund to Active Balanced
Fund in exchange solely for Class A, Class B, Class C and Class Z shares of
common stock of Active Balanced Fund and the assumption by Active Balanced
Fund of Balanced Fund's liabilities, followed by the distribution of Active
Balanced Fund Class A, Class B, Class C and Class Z shares to shareholders
of Balanced Fund in termination of Balanced Fund.

2. To transact such other business as may properly come before the
Meeting or any adjournments of the Meeting.

The Board of Trustees has fixed the close of business on August 25, 2000 as
the record date for the determination of the shareholders of Balanced Fund
entitled to notice of, and to vote at, this Meeting and any adjournments.

Marguerite E. H. Morrison
Secretary

Dated: September 18, 2000

PROXY CARDS FOR YOUR FUND ARE ENCLOSED ALONG WITH THE PROXY STATEMENT. PLEASE
VOTE YOUR SHARES TODAY BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD IN THE
POSTAGE PREPAID ENVELOPE PROVIDED. YOU CAN ALSO VOTE YOUR SHARES THROUGH THE
INTERNET OR BY TELEPHONE USING THE 12-DIGIT "CONTROL" NUMBER THAT APPEARS ON
THE ENCLOSED PROXY CARD AND FOLLOWING THE SIMPLE INSTRUCTIONS. THE BOARD OF
YOUR FUND RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL.
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC. --
PRUDENTIAL ACTIVE BALANCED FUND
PROSPECTUS

PRUDENTIAL BALANCED FUND
PROSPECTUS/PROXY STATEMENT

Gateway Center Three
100 Mulberry Street, 4th Floor
Newark, New Jersey 07102-4077
(800) 225-1852

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

September 18, 2000

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

This Proxy Statement and Prospectus (Prospectus/Proxy Statement) is being
furnished to shareholders of Prudential Balanced Fund (Balanced Fund) in
connection with the solicitation of proxies by the Balanced Fund's Board of
Trustees for use at the Special Meeting of Shareholders of Balanced Fund and
at any adjournments of the meeting (the Meeting). The Meeting will be held on
Friday, October 27, 2000, at 9:00 a.m. Eastern time at Gateway Center Three,
100 Mulberry Street, Newark, New Jersey 07102.

The purpose of the Meeting is to vote on a proposed reorganization
(Reorganization) between Balanced Fund and Prudential Active Balanced Fund
(Active Balanced Fund), a series of The Prudential Investment Portfolios, Inc.
(the Company). Under an Agreement and Plan of Reorganization (the Agreement),
Balanced Fund would transfer all of its assets to Active Balanced Fund in
exchange solely for Class A, Class B, Class C and Class Z shares of common
stock of Active Balanced Fund and the assumption by Active Balanced Fund of
Balanced Fund's liabilities. The number of shares issued to shareholders of
Balanced Fund in the proposed Reorganization would be based upon the relative
net asset values per share of the two Funds at the time of the exchange.
Balanced Fund would distribute Class A, Class B, Class C and Class Z shares of
Active Balanced Fund to its shareholders in termination of Balanced Fund on
November 3, 2000, or a later date as the parties may agree (the Closing Date).

Active Balanced Fund is a series of the Company, a diversified fund
registered as an open-end management investment company that is organized as a
Maryland corporation. Active Balanced Fund's investment objective is to seek
income and long-term growth of capital by investing in a portfolio of equity,
fixed-income and money market securities which is actively managed to
capitalize on opportunities created by perceived misvaluation. Normally Active
Balanced Fund will invest 40% to 75% of its assets in equity-related
securities. Under normal circumstances, Active Balanced Fund will invest 25%
to 60% of its total assets in investment-grade fixed-income securities.
Normally, Active Balanced Fund also may invest up to 35% of its assets in
money market instruments.

Balanced Fund is a diversified fund registered as an open-end management
investment company and is organized as a Massachusetts business trust.
Balanced Fund's investment objective is to achieve a high total investment
return consistent with moderate risk. Balanced Fund seeks to achieve its
investment objective by investing in a wide variety of equity-related
securities, debt securities and money market instruments. Balanced Fund's
investment adviser determines, at least monthly, what percentage of assets to
allocate among the different types of securities. Like Active Balanced Fund,
Balanced Fund may actively and frequently trade its portfolio securities.
Under normal circumstances, Balanced Fund will invest at least 25% of its
total assets in debt securities. Balanced Fund also may invest in money market
instruments.

This Prospectus/Proxy Statement should be retained for your future
reference. It sets forth concisely the information about the Reorganization
and Active Balanced Fund that a shareholder should know before voting on the
proposed Reorganization. A Statement of Additional Information dated September
18, 2000, which relates to this Prospectus/Proxy Statement, has been filed
with the Securities and Exchange Commission (Commission) and is incorporated
into this Prospectus/Proxy Statement by reference. This Prospectus/Proxy
Statement is accompanied by the Prospectus, dated December 2, 1999, as
supplemented August 30, 2000, which offers shares of Active Balanced Fund. The
Statement of Additional Information for the Company, including Active Balanced
Fund, dated December 2, 1999, is available upon request. Appendix B to this
Prospectus/Proxy Statement contains the Performance Overview from the Annual
Report of Active Balanced Fund for the year ended September 30, 1999. The
Prospectus and Statement of Additional Information for Active Balanced Fund
have been filed with the Commission and are incorporated into this
Prospectus/Proxy Statement by reference. The Prospectus dated October 4, 1999
and Prospectus Supplements dated May 8, 2000 and August 30, 2000 and the
Statement of Additional Information dated October 4, 1999 for Balanced Fund
have been filed with the Commission and are incorporated into this
Prospectus/Proxy Statement by reference. Copies of the documents referred to
above may be obtained without charge by contacting Prudential Mutual Fund
Services LLC at Post Office Box 15005, New Brunswick, New Jersey 08906-5005,
or by calling (800) 225-1852.

The Securities and Exchange Commission has not approved or disapproved the
Active Balanced Fund's shares, nor has the Commission determined that this
Prospectus/Proxy Statement is complete or accurate. It is a criminal offense
to state otherwise.
<PAGE>

SPECIAL MEETING OF SHAREHOLDERS OF

PRUDENTIAL BALANCED FUND

TO BE HELD ON OCTOBER 27, 2000 AT:

GATEWAY CENTER THREE

100 MULBERRY STREET

NEWARK, NEW JERSEY 07102-4077

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PROXY STATEMENT AND PROSPECTUS

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VOTING INFORMATION

This Proxy Statement and Prospectus (Prospectus/Proxy Statement) is
furnished in connection with a solicitation of proxies made by, and on behalf
of, the Board of Trustees of Prudential Balanced Fund (Balanced Fund) to be
used at the Special Meeting of Shareholders of Balanced Fund and at any
adjournments of the Special Meeting (the Meeting), to be held on Friday,
October 27, 2000 at 9:00 a.m. Eastern time at Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102.

The purpose of the Meeting is described in the accompanying Notice. The
solicitation is made primarily by first mailing this Prospectus/Proxy
Statement and the accompanying proxy card on or about September 20, 2000.
Supplementary solicitations may be made by mail, telephone, telegraph,
facsimile, electronic means or by personal interview by representatives of
Balanced Fund. In addition, Shareholder Communications Corporation, a proxy
solicitation firm, may be retained to solicit shareholders on behalf of
Balanced Fund. The expenses of the Reorganization and the solicitation of
proxies will be borne by Prudential Active Balanced Fund (Active Balanced
Fund) and Balanced Fund (each, a Fund, and collectively, the Funds) in
proportion to their respective assets and will include reimbursement of
brokerage firms and others for expenses in forwarding proxy solicitation
materials to the shareholders of Balanced Fund.

Even if you sign and return the enclosed proxy card, you may revoke your
proxy at any time prior to its use by written notification received by
Balanced Fund, by submitting a later-dated proxy card, or by attending the
Meeting and voting in person.

All proxy cards that are properly completed and received by the Secretary of
Balanced Fund before the Meeting, and which are not revoked, will be voted at
the Meeting. Shares represented by proxies will be voted in accordance with
the instructions you provide. If no instruction is made on a proxy card, it
will be voted FOR Proposal No. 1. Only proxies that are actually voted will be
counted toward establishing a quorum, which is the minimum number of shares
necessary to transact business at the Meeting. A majority of Balanced Fund's
outstanding shares constitutes a quorum for the transaction of business.

If a proxy that is properly signed and returned is accompanied by
instructions to withhold authority to vote (an abstention) or represents a
broker "non-vote" (that is, a proxy from a broker or nominee indicating that
they have not received instructions from the beneficial owner or other person
entitled to vote shares on this matter for which the broker or nominee does
not have discretionary power), the shares represented by the proxy will be
considered present for purposes of determining the existence of a quorum for
the transaction of business, but will have the effect of a vote against
Proposal No. 1.

Balanced Fund also may arrange to have votes recorded by telephone. The
expenses associated with telephone voting will be borne by Balanced Fund and
Active Balanced Fund in proportion to their respective assets. If Balanced
Fund takes votes by telephone, it will use procedures designed to authenticate
shareholders' identities, to allow shareholders to authorize the voting of
their shares in accordance with their instructions, and to confirm that their
instructions have been properly recorded. Proxies given by telephone or via
the Internet may be revoked at any time before they are voted in the same
manner that proxies voted by mail may be revoked.

1
<PAGE>

If a quorum is not present at the Meeting, or if a quorum is present at the
Meeting but sufficient votes to approve Proposal No. 1 are not received, or if
other matters arise requiring shareholder attention, the persons named as
proxy agents may propose one or more adjournments of the Meeting to permit the
further solicitation of proxies. An adjournment will require the affirmative
vote of a majority of shares present at the Meeting or represented by proxy.
When voting on a proposed adjournment, the persons named as proxy agents will
vote FOR the proposed adjournment all shares that they are entitled to vote
with respect to Proposal No. 1, unless directed to vote AGAINST the Proposal,
in which case such shares will be voted against the proposed adjournment. A
shareholder vote may be taken on the Reorganization described in this Proxy
Statement or on any other business properly presented at the Meeting prior to
adjournment if sufficient votes have been received.

On August 25, 2000, there were 40,737,803 Class A shares, 26,613,675 Class B
shares, 790,013 Class C shares and 9,536,135 Class Z shares issued and
outstanding for Balanced Fund. Shareholders of record at the close of business
on August 25, 2000, will be entitled to vote at the Meeting. Each such
shareholder will be entitled to one vote for each share (each fractional share
is entitled to a proportionate fractional vote) held on that date. The
following shareholders held 5% or more of the class of shares indicated of
Balanced Fund on August 25, 2000: Prudential Trust Company FBO Prudential
Employee Savings, 30 Ed Preate Dr., Scranton, PA 18507, ATTN: Leann Yannuzzi,
which held 6,152,785 Class Z shares of the Fund (65% of the outstanding Class
Z shares); and Prudential Trust Company FBO PRU-DC TRUST ACCOUNTS, ATTN: John
Surdy, 30 Scranton Office Park, Moosic, PA 18507, which held 2,718,619 Class Z
shares of the Fund (or 29% of the outstanding Class Z shares). Prudential
Securities Incorporated was the record holder for other beneficial owners of
15,045,346 Class A shares (or 37% of the outstanding Class A shares),
5,430,876 Class B shares (or 20% of the outstanding Class B shares), 270,661
Class C shares (or 34% of the outstanding Class C shares), and 75,530 Class Z
shares (or .79% of the outstanding Class Z shares) of the Fund.

On August 25, 2000, there were 1,187,488 Class A shares, 1,325,715 Class B
shares, 184,737 Class C shares and 10,627,352 Class Z shares issued and
outstanding for Active Balanced Fund. Shareholders of Active Balanced Fund are
not entitled to vote on this matter. The following shareholders held 5% or
more of the class of shares of Active Balanced Fund indicated on August 25,
2000: Prudential Trust Company FBO PRU-DC TRUST ACCOUNTS, 30 Scranton Office
Park, Moosic, PA 18507, ATTN: John Surdy, which held 279,958 Class A shares of
the Fund (or 24% of the outstanding Class A shares); The Prudential Insurance
Company Derivatives Management Group C, 2 Gateway Center, 10th Floor, Mailstop
NJ 04-10-5A, Newark, NJ 07102, ATTN: Linda Bitondo, which held 176,189 Class A
shares of the Fund (or 15% of the outstanding Class A shares); Prudential
Trust Company FBO PRU-DC TRUST ACCOUNTS, 30 Scranton Office Park, Moosic, PA
18507, ATTN: John Surdy, which held 14,687 Class C shares of the Fund (or 8%
of the outstanding Class C shares); Pru Defined Contribution Services FBO Pru-
DC Qualified Clients, 30 Scranton Office Park, Moosic, PA 18507, ATTN: John
Surdy, which held 4,150,986 Class Z shares of the Fund (or 39% of the
outstanding Class Z shares); and Prudential Trust Company FBO Pru-DC Clients,
30 Scranton Office Park, Moosic, PA 18507, ATTN: John Surdy, which held
6,457,618 Class Z shares of the Fund (or 60% of the outstanding Class Z
shares). Prudential Securities Incorporated was the record holder for other
beneficial owners of 170,442 Class A shares (or 14% of the outstanding Class A
shares), 376,726 Class B shares (or 28% of the outstanding Class B shares),
108,548 Class C shares (or 59% of the outstanding Class C shares), and 17,254
Class Z shares (or .16% of the outstanding Class Z shares) of the Fund.

As of August 25, 2000, the Directors/Trustees and officers of both Balanced
Fund and Active Balanced Fund owned, in the aggregate, less than 1% of each
class of each Fund's total outstanding shares. Prudential intends to vote any
shares for which it has direct voting authority FOR the Proposal.

VOTE REQUIRED

APPROVAL OF THE REORGANIZATION REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY
OF THE OUTSTANDING SHARES OF BENEFICIAL INTEREST OF BALANCED FUND, PROVIDED A
QUORUM IS PRESENT. APPROVAL OF THE REORGANIZATION BY THE SHAREHOLDERS OF
ACTIVE BALANCED FUND IS NOT REQUIRED, AND THE AGREEMENT IS NOT BEING SUBMITTED
FOR THEIR APPROVAL.

2
<PAGE>

SYNOPSIS

The following is a summary of information contained elsewhere in this
Prospectus/Proxy Statement, in the Agreement, and in the Prospectuses of
Balanced Fund and Active Balanced Fund, which are incorporated into this Proxy
Statement by reference. Shareholders should read the Prospectus/Proxy
Statement and the Prospectus of Active Balanced Fund for more complete
information.

The Reorganization would transfer the assets and liabilities of Balanced
Fund to Active Balanced Fund, a mutual fund also managed by Prudential
Investments Fund Management LLC (PIFM). If the Reorganization is approved,
Balanced Fund will be terminated and current shareholders of Balanced Fund
will become shareholders of Active Balanced Fund instead.

INVESTMENT OBJECTIVES AND POLICIES

Balanced Fund and Active Balanced Fund have substantially similar investment
objectives and policies. Active Balanced Fund's objective is "to achieve
income and long-term growth of capital by investing in a portfolio of equity,
fixed-income and money market securities which is actively managed to
capitalize on opportunities created by perceived misvaluation." Balanced
Fund's objective is "high total investment return consistent with moderate
risk."

Each Fund divides its assets among equity, fixed-income and money market
investments. Active Balanced Fund may invest up to 15% of its assets in
foreign equity securities and 20% in foreign debt obligations; Balanced Fund
may invest up to 30% of its assets in foreign securities (equity and debt).
Both Funds' portfolio managers use a quantitative model to manage the Fund's
asset allocation. The Balanced Fund's equity portfolio managers manage the
stock portion of the Fund's portfolio using behavioral finance models to
select securities they believe to be underpriced, while maintaining a risk
profile like the Standard & Poor's 500 Composite Stock Price Index (S&P 500).
Active Balanced Fund's equity portfolio managers (who are the same individuals
that manage Balanced Fund's stocks) use a similar quantitative approach to
find stocks with above-average total returns.

On the fixed-income side, both Funds may invest in U.S. Government
securities, mortgage-related securities and asset-backed securities. Active
Balanced Fund's debt securities will have a weighted average maturity of
between 3 and 30 years. Balanced Fund's debt obligations will have an average
duration of not more than 10 years. Active Balanced Fund may enter into
reverse repurchase agreements and forward rolls; Balanced Fund may not. Each
Fund can buy non-investment grade debt, but Active Balanced Fund can't invest
more than 20% of its assets in non-investment grade debt (none rated lower
than B), whereas Balanced Fund can invest up to 25% of its assets in non-
investment grade debt (with no limit as to the lowest rating category).

The investment restrictions of the Funds also are very similar. The few
differences include: Active Balanced Fund can borrow, and if need be, pledge
up to 30% of the value of its assets on a temporary basis, whereas Balanced
Fund can only borrow and pledge up to 20%; Active Balanced Fund can invest up
to 10% of its assets in other investment companies and can purchase affiliated
investment company shares if permitted by the Securities and Exchange
Commission, while Balanced Fund cannot invest more than 5% of its assets in
other investment companies; loans by Active Balanced Fund are limited to 30%
of its total assets, whereas loans by Balanced Fund are limited to 33%; with
few exceptions, Balanced Fund cannot purchase securities if as a result the
Fund would have more than 5% of its total assets in companies that are less
than three years old, while Active Balanced Fund has no similar restriction;
and Balanced Fund cannot invest in oil, gas or other mineral exploration or
development programs, while Active Balanced Fund has no similar restriction.

Both Funds have the same Manager (PIFM) and the same investment adviser, The
Prudential Investment Corporation (PIC). The equity portfolio managers of both
Funds are James Scott and Mark Stumpp (both managers having begun managing
Balanced Fund's equity securities in May 2000) and a PIC Fixed Income Team
manages the fixed-income portion of each Fund. The address of PIFM is Gateway
Center Three, 14th Floor, 100 Mulberry Street, Newark, New Jersey 07102-4077.
The address of PIC is Prudential Plaza, 751 Broad Street, Newark, New Jersey
07102.

One benchmark for both Balanced Fund and Active Balanced Fund is the Lipper
Balanced Funds average, an average of balanced mutual funds. Both Funds
compare their performance to that of both the S&P 500 and the Lehman Brothers
Government/Credit Bond Index.

Balanced Fund pays any dividends from net investment income typically every
quarter (although in May 2000 the Board changed this to an annual dividend
payment). Active Balanced Fund pays any dividends from net investment income
typically once a year. Net realized capital gains for both Funds, if any, also
are distributed annually.

3
<PAGE>

EXPENSE STRUCTURES

Balanced Fund and Active Balanced Fund pay a monthly management fee to PIFM
at an annual rate of 0.65% of average net assets up to $1 billion and
thereafter at the annual rate of 0.60% of average net assets. PIFM, in turn,
pays the investment adviser, PIC, at the annual rate of .325% of average net
assets for providing advisory services to each Fund.

The management fee paid by both Funds covers PIFM's oversight of the Funds'
respective investment portfolios. PIFM also administers each Fund's business
affairs and furnishes the Funds with office facilities, together with those
ordinary clerical and bookkeeping services that are not furnished by the
Funds' custodian or transfer and dividend disbursing agent. Officers of PIFM
serve as officers and Directors/Trustees of the Funds without compensation by
the Funds.

The Funds' distribution expense structures are the same. Prudential
Investment Management Services LLC (PIMS), the Funds' Distributor, has
contractually agreed to waive a portion of the distribution and service (12b-
1) fee to limit fees for the current fiscal year payable by Class A shares of
both Funds to .25 of 1%. The contractual waivers by PIMS are enforceable for
one-year periods and may be terminated with respect to any subsequent fiscal
year on not less than 30 days' notice prior to the end of a current fiscal
year. The contractual waivers for Balanced Fund and Active Balanced Fund
extend through July 31, 2001 and September 30, 2000, respectively.

As of July 31, 1999 for Balanced Fund and September 30, 1999 for Active
Balanced Fund, the net annual operating expenses for Class A shares were 1.17%
for Balanced Fund and 1.41% for Active Balanced Fund; for Class B shares were
1.92% for Balanced Fund and 2.16% for Active Balanced Fund; for Class C shares
were 1.92% for Balanced Fund and 2.16% for Active Balanced Fund; and for Class
Z shares were 0.92% for Balanced Fund and 1.16% for Active Balanced Fund.

As of June 30, 2000, the average annual total returns for Class A shares
were 1.33% for the 1 year period, 10.67% for the 5 year period, 10.68% for the
10 year period and 10.81% for the period since inception (1-22-90) for
Balanced Fund and 2.35% for the 1 year period, not applicable for the 5 year
and 10 year periods and 10.97% for the period since inception (11-7-96) for
Active Balanced Fund. The average annual total returns for Class B shares were
0.78% for the 1 year period, 10.84% for the 5 year period, 10.41% for the 10
year period and 9.37% for the period since inception (9-15-87) for Balanced
Fund and 2.12% for the 1 year period, not applicable for the 5 year and 10
year periods and 11.35% for the period since inception (11-7-96) for Active
Balanced Fund. The average annual total returns for Class C shares were 3.73%
for the 1 year period, 10.75% for the 5 year period, not applicable for the 10
year period and 10.83% for the period since inception (8-1-94) for Balanced
Fund, and 5.05% for the 1 year period, not applicable for the 5 year and 10
year periods and 11.46% for the period since inception (11-7-96) for Active
Balanced Fund. The average annual total returns for Class Z shares were 6.92%
for the 1 year period, not applicable for the 5 year and 10 year periods and
11.91% for the period since inception (3-1-96) for Balanced Fund and 8.13% for
the 1 year period, 14.38% for the 5 year period, not applicable for the 10
year period and 11.72% for the period since inception (1-4-93) for Active
Balanced Fund.

Overall, the proposed Reorganization would provide Balanced Fund
shareholders with the following benefits:

--the opportunity to participate in a fund with a better long-term
performance record;

--investment in a fund with an investment objective and policies similar to
Balanced Fund's investment objective and policies;

--increased economies of scale; and

--annual operating expenses that are estimated to be lower than those of
Balanced Fund (approximately 1 basis point lower).

THE BOARD OF TRUSTEES BELIEVES THAT THE REORGANIZATION WILL BENEFIT BALANCED
FUND SHAREHOLDERS AND RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF THE
REORGANIZATION.

THE PROPOSED REORGANIZATION

Shareholders of Balanced Fund will be asked at the Meeting to vote upon and
approve the Reorganization and the Agreement, which provide for the
acquisition by Active Balanced Fund of all of the assets of Balanced Fund in
exchange solely for Class A, Class B, Class C and Class Z shares of Active
Balanced Fund and the assumption by Active Balanced Fund of the liabilities of
Balanced Fund. Class A, Class B, Class C and Class Z shares of Active Balanced
Fund will be distributed to Balanced Fund

4
<PAGE>

Class A, Class B, Class C and Class Z shareholders, so that each shareholder
will receive the number of full and fractional shares of Active Balanced Fund
equal in value to the aggregate net asset value of the shareholder's shares of
Balanced Fund on or about Friday, November 3, 2000 (the Closing Date). The
exchange of Balanced Fund's assets, subject to its liabilities, for Active
Balanced Fund's shares will occur as of the close of business of the New York
Stock Exchange (NYSE) on the Closing Date or such other time and date as the
parties may agree. Balanced Fund will then be terminated as soon as
practicable after the Closing Date. Approval of the Reorganization will be
determined solely by approval of the shareholders of Balanced Fund. No vote by
shareholders of Active Balanced Fund is required.

The Funds have received an opinion of counsel that the Reorganization will
not result in any gain or loss for federal income tax purposes to either
Balanced Fund, Active Balanced Fund, or the shareholders of each Fund. The
rights and privileges of the former shareholders of Balanced Fund will be
effectively unchanged by the Reorganization.

FUND OPERATING EXPENSES

Each Fund pays a management fee to PIFM for managing its investments and
business affairs which is calculated and paid to PIFM every month. Each Fund
pays PIFM a management fee at an annual rate of 0.65% of its average net
assets up to $1 billion and 0.60% of average net assets in excess of $1
billion.

In addition to the management fee, each Fund incurs other expenses for
services such as maintaining shareholder records and furnishing shareholder
statements and financial reports. If shareholders approve the Reorganization,
the combined fund will retain Active Balanced Fund's expense structure.
ASSUMING CONTINUATION OF ACTIVE BALANCED FUND'S FEE WAIVERS AND REDUCED ANNUAL
OPERATING EXPENSES FOR A LARGER ACTIVE BALANCED FUND, IT IS ESTIMATED THAT
SHAREHOLDERS OF ALL SHARE CLASSES WOULD ENJOY SOMEWHAT LOWER NET OPERATING
EXPENSES. THIS EXPENSE STRUCTURE IS EXPECTED TO DECREASE THE TOTAL OPERATING
EXPENSES CURRENTLY INCURRED BY CLASS A SHAREHOLDERS OF BALANCED FUND FROM
1.17% TO 1.16% OF AVERAGE NET ASSETS, FROM 1.92% TO 1.91% OF AVERAGE NET
ASSETS FOR CLASS B AND CLASS C SHAREHOLDERS AND FROM 0.92% TO 0.91% OF AVERAGE
NET ASSETS FOR CLASS Z SHAREHOLDERS, BASED ON EXPENSES INCURRED FOR THE TWELVE
MONTHS ENDED MARCH 31, 2000. However, if the proposed Reorganization is not
approved, Balanced Fund is expected to maintain its current fee structure. For
more information about the Funds' current fees, refer to their Prospectuses.
See the Pro Forma Capitalization and Ratios below for estimates of expenses if
the Reorganization is approved.

COMPARATIVE EXPENSE TABLES

The following table shows the fees and expenses of Class A, Class B, Class C
and Class Z shares of Balanced Fund and Active Balanced Fund and pro forma
fees for the combined fund based on expenses incurred for the twelve months
ended March 31, 2000, after giving effect to the Reorganization, including the
effect of PIMS's expense waivers previously described and the increased size
of the combined fund.

Fund operating expenses are paid out of each Fund's assets. Expenses are
factored into each Fund's share price or dividends and are not charged
directly to shareholder accounts. The following figures are based on
historical expenses of each Fund for the 12-month periods ended July 31, 1999
for Balanced Fund and September 30, 1999 for Active Balanced Fund, and are
calculated as a percentage of average net assets of each Fund. The pro forma
combined figures reflect what the fee schedule would have been on March 31,
2000, if the reorganization had been consummated twelve months prior to that
date.

Class A Shares

<TABLE>
<CAPTION>
ACTIVE PRO FORMA
BALANCED FUND BALANCED FUND COMBINED FUND
CLASS A SHARES CLASS A SHARES CLASS A SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Management fees................ .65% .65% .65%
+ Distribution and service
(12b-1) fees................. .30% .30% .30%
+ Other expenses............... .27% .51% .26%
= Total annual operating
expenses..................... 1.22% 1.46% 1.21%
- Fee waiver................... (.05)% (.05)% (.05)%
= NET ANNUAL OPERATING
EXPENSES..................... 1.17% 1.41% 1.16%
</TABLE>

5
<PAGE>

Class B Shares

<TABLE>
<CAPTION>
PRO FORMA
ACTIVE COMBINED FUND
BALANCED FUND BALANCED FUND CLASS B
CLASS B SHARES CLASS B SHARES SHARES
-------------- -------------- -------------
<S> <C> <C> <C>
Management fees................. .65% .65% .65%
+ Distribution and service (12b-
1) fees....................... 1.00% 1.00% 1.00%
+ Other expenses................ .27% .51% .26%
= Total annual operating
expenses...................... 1.92% 2.16% 1.91%
- Fee waiver.................... None None None
= NET ANNUAL OPERATING EXPENSES. 1.92% 2.16% 1.91%
</TABLE>

Class C Shares

<TABLE>
<CAPTION>
PRO FORMA
ACTIVE COMBINED FUND
BALANCED FUND BALANCED FUND CLASS C
CLASS C SHARES CLASS C SHARES SHARES
-------------- -------------- -------------
<S> <C> <C> <C>
Management fees................. .65% .65% .65%
+ Distribution and service (12b-
1) fees....................... 1.00% 1.00% 1.00%
+ Other expenses................ .27% .51% .26%
= Total annual operating
expenses...................... 1.92% 2.16% 1.91%
- Fee waiver.................... None None None
= NET ANNUAL OPERATING EXPENSES. 1.92% 2.16% 1.91%
</TABLE>

Class Z Shares

<TABLE>
<CAPTION>
PRO FORMA
ACTIVE COMBINED FUND
BALANCED FUND BALANCED FUND CLASS Z
CLASS Z SHARES CLASS Z SHARES SHARES
-------------- -------------- -------------
<S> <C> <C> <C>
Management fees................. .65% .65% .65%
+ Distribution and service (12b-
1) fees....................... None None None
+ Other expenses................ .27% .51% .26%
= Total annual operating
expenses...................... .92% 1.16% .91%
- Fee waiver.................... None None None
= NET ANNUAL OPERATING EXPENSES. .92% 1.16% .91%
</TABLE>

EXAMPLES OF THE EFFECT OF FUND EXPENSES

The following table illustrates the expenses on a hypothetical $10,000
investment in each Fund under the current and pro forma (combined fund)
expenses calculated at the rates stated above for the first year, and
thereafter using gross expenses with no fee waivers, assuming a 5% annual
return, and assuming that you sell your shares at the end of each period.

Class A Shares

<TABLE>
<CAPTION>
PRO FORMA
ACTIVE COMBINED FUND
BALANCED FUND BALANCED FUND CLASS A
CLASS A SHARES CLASS A SHARES SHARES
-------------- -------------- -------------
<S> <C> <C> <C>
1 Year........................... $ 613 $ 636 $ 612
3 Years.......................... $ 863 $ 934 $ 860
5 Years.......................... $1,132 $1,253 $1,127
10 Years......................... $1,899 $2,155 $1,888
</TABLE>

Class B Shares

<TABLE>
<CAPTION>
PRO FORMA
ACTIVE COMBINED FUND
BALANCED FUND BALANCED FUND CLASS B
CLASS B SHARES CLASS B SHARES SHARES
-------------- -------------- -------------
<S> <C> <C> <C>
1 Year........................... $ 695 $ 719 $ 694
3 Years.......................... $ 903 $ 976 $ 900
5 Years.......................... $1,137 $1,259 $1,132
10 Years......................... $1,976 $2,232 $1,965
</TABLE>

6
<PAGE>

Class C Shares

<TABLE>
<CAPTION>
PRO FORMA
ACTIVE COMBINED FUND
BALANCED FUND BALANCED FUND CLASS C
CLASS C SHARES CLASS C SHARES SHARES
-------------- -------------- -------------
<S> <C> <C> <C>
1 Year........................... $ 393 $ 417 $ 392
3 Years.......................... $ 697 $ 769 $ 694
5 Years.......................... $1,126 $1,248 $1,121
10 Years......................... $2,321 $2,568 $2,310
</TABLE>

Class Z Shares

<TABLE>
<CAPTION>
PRO FORMA
ACTIVE COMBINED FUND
BALANCED FUND BALANCED FUND CLASS Z
CLASS Z SHARES CLASS Z SHARES SHARES
-------------- -------------- -------------
<S> <C> <C> <C>
1 Year........................... $ 94 $ 118 $ 93
3 Years.......................... $ 293 $ 368 $ 290
5 Years.......................... $ 509 $ 638 $ 504
10 Years......................... $1,131 $1,409 $1,120
</TABLE>

These examples assume that all dividends and other distributions are
reinvested. These examples illustrate the effect of expenses, but are not
meant to suggest actual or expected expenses, which may vary. The assumed
return of 5% is not a prediction of, and does not represent, actual or
expected performance of any Fund.

PRO FORMA CAPITALIZATION AND RATIOS

The following table shows the capitalization of Balanced Fund and Active
Balanced Fund as of March 31, 2000 and the pro forma combined capitalization
as if the Reorganization had occurred on March 31, 2000.

<TABLE>
<CAPTION>
ACTIVE BALANCED PRO FORMA
BALANCED FUND FUND COMBINED
------------- --------------- ---------
<S> <C> <C> <C>
Net Assets (000s)
Class A............................ $534,187 $12,841 $547,028
Class B............................ 378,650 13,221 391,871
Class C............................ 10,539 1,647 12,186
Class Z............................ 132,060 135,936 267,996
Net Asset Value per share
Class A............................ $ 12.59 $ 13.76 $ 13.76
Class B............................ 12.54 13.75 13.75
Class C............................ 12.54 13.75 13.75
Class Z............................ 12.60 13.79 13.79
Shares Outstanding (000s)
Class A............................ 42,425 933 39,755
Class B............................ 30,185 962 28,500
Class C............................ 840 120 886
Class Z............................ 10,483 9,858 19,434
</TABLE>

7
<PAGE>

The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of Balanced Fund and
of Active Balanced Fund for the twelve months ended March 31, 2000. The ratios
also are shown on a pro forma combined basis as of March 31, 2000.

<TABLE>
<CAPTION>
ACTIVE BALANCED PRO FORMA
BALANCED FUND FUND COMBINED
------------- --------------- ---------
<S> <C> <C> <C>
Ratio of expenses to average net
assets
Class A.......................... 1.17% 1.40% 1.16%
Class B.......................... 1.92% 2.15% 1.91%
Class C.......................... 1.92% 2.15% 1.91%
Class Z.......................... .92% 1.15% .91%
Ratio of net investment income to
average net assets
Class A.......................... 2.54% 2.47% 2.57%
Class B.......................... 1.79% 1.72% 1.82%
Class C.......................... 1.79% 1.72% 1.82%
Class Z.......................... 2.79% 2.72% 2.82%
</TABLE>

FORMS OF ORGANIZATION

Balanced Fund is a diversified, open-end management investment company. It
was organized as a Massachusetts business trust on February 23, 1987. Balanced
Fund is authorized to issue an unlimited number of shares of beneficial
interest, $.01 per share, divided into four classes.

Active Balanced Fund is a series of The Prudential Investment Portfolios,
Inc. (the Company), also a diversified, open-end management investment
company. It was organized as a Maryland corporation on August 10, 1995. The
Company added Prudential Jennison Active Balanced Fund, its third series, on
August 27, 1997. The series commenced operations on January 23, 1998, when it
acquired the assets of Prudential Active Balanced Fund, and changed its name
to Prudential Active Balanced Fund on May 29, 1998. The Company is authorized
to issue 3 billion shares of common stock, par value $.001 per share, divided
into three series, and each series may issue 1 billion shares, further divided
into 250 million shares per class.

The Company is a Maryland corporation and the rights of its shareholders are
governed by its Charter, By-Laws and the Maryland General Corporation Law.
Balanced Fund is a Massachusetts business trust and the rights of its
shareholders are governed by its Declaration of Trust, By-Laws and applicable
Massachusetts law.

Generally, neither Fund is required to hold annual meetings of its
shareholders. Each Fund is required to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Director/Trustee when
requested in writing to do so by the holders of at least 10% of the Fund's
outstanding shares. In addition, each Fund is required to call a meeting of
shareholders for the purpose of electing Directors/Trustees if, at any time,
less than a majority of the Directors/Trustees holding office at the time were
elected by shareholders.

Under the Declaration of Trust, Balanced Fund shareholders are entitled to
vote only with respect to the following matters: (1) the election or removal
of Trustees if a meeting is called for such purpose; (2) the adoption of any
contract for which shareholder approval is required by the Investment Company
Act; (3) any amendment of the Declaration of Trust, other than amendments to
change Balanced Fund's name, authorize additional series of shares, supply any
omission or cure, correct or supplement any ambiguity or defective or
inconsistent provision contained therein; (4) any termination or
reorganization of Balanced Fund to the extent and as provided in the
Declaration of Trust; (5) a determination as to whether a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of Balanced Fund or its shareholders, to the
same extent as the shareholders of a Massachusetts business corporation would
be entitled to vote on such a determination; (6) with respect to any plan of
distribution adopted pursuant to Rule 12b-1 under the Investment Company Act;
and (7) such additional matters relating to Balanced Fund as may be required
by law, the Declaration of Trust, Balanced Fund's By-Laws, or any registration
of Balanced Fund with the Securities and Exchange Commission (Commission) or
any state securities commission, or as the Trustees may consider necessary or
desirable. Balanced Fund shareholders also vote upon changes in fundamental
investment policies or restrictions.

The Declaration of Trust provides that a "Majority Shareholder Vote" of
Balanced Fund is required to decide any question. "Majority Shareholder Vote"
means the vote of the holders of a majority of shares, which shall consist of:
(i) a majority of shares represented in person or by proxy and entitled to
vote at a meeting of shareholders at which a quorum, as determined in

8
<PAGE>

accordance with the By-Laws, is present; (ii) a majority of shares issued and
outstanding and entitled to vote when action is taken by written consent of
shareholders; or (iii) a "majority of the outstanding voting securities," as
that phrase is defined in the Investment Company Act, when action is taken by
shareholders with respect to approval of an investment advisory or management
contract or an underwriting or distribution agreement or continuance thereof.

Shareholders of Active Balanced Fund are entitled to one vote for each share
on all matters submitted to a vote of its shareholders under Maryland law.
Approval of certain matters, such as an amendment to the charter, a merger,
consolidation or transfer of all or substantially all assets, dissolution and
removal of a Director, requires the affirmative vote of a majority of the
votes entitled to be cast. A plurality of votes cast is required to elect
Directors. Other matters require the approval of the affirmative vote of a
majority of the votes cast at a meeting at which a quorum is present.

Balanced Fund's and Active Balanced Fund's By-Laws provide that a majority
and a one-third presence, respectively, of the outstanding shares shall
constitute a quorum for the transaction of business at a shareholders'
meeting. Matters requiring a larger vote by law or under the organization
documents for either Fund are not affected by such quorum requirements.

With respect to shareholder liability, under Maryland law, Active Balanced
Fund's shareholders have no personal liability as such for Active Balanced
Fund's acts or obligations. Under Massachusetts law, Balanced Fund's
shareholders, under certain circumstances, could be held personally liable for
Balanced Fund's obligations. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of Balanced Fund and requires
that notice of such disclaimer be given in each note, bond, contract, order,
agreement, obligation or instrument entered into or executed by Balanced Fund
or its Trustees. The Declaration of Trust provides for indemnification out of
Balanced Fund's property for all losses and expenses of any shareholder held
personally liable for Balanced Fund's obligations solely by reason of his or
her being or having been a Balanced Fund shareholder and not because of his or
her acts or omissions or some other reason. Thus, Balanced Fund considers the
risk of a shareholder incurring financial loss on account of shareholder
liability to be remote since it is limited to circumstances in which a
disclaimer is inoperative or Balanced Fund itself would be unable to meet its
obligations.

With respect to the liability and indemnification of Directors under
Maryland law, a Director or officer of Active Balanced Fund is not liable to
Active Balanced Fund or its shareholders for monetary damages for breach of
fiduciary duty as a Director or officer except to the extent such exemption
from liability or limitation thereof is not permitted by law, including under
the Investment Company Act. Active Balanced Fund's By-Laws provide that its
Directors and officers will not be liable to Active Balanced Fund, and may be
indemnified for liabilities, for any action or failure to act, except for bad
faith, willful misfeasance, gross negligence or reckless disregard of duties.

With respect to the liability and indemnification of Trustees of Balanced
Fund, under Balanced Fund's Declaration of Trust, a Trustee is entitled to
indemnification against all liability and expenses reasonably incurred by him
or her in connection with the defense or disposition of any threatened or
actual proceeding by reason of his or her being or having been a Trustee,
unless such Trustee shall have been adjudicated to have acted with bad faith,
willful misfeasance, gross negligence or in reckless disregard of his or her
duties.

Under the Investment Company Act, a Director of Active Balanced Fund and a
Trustee of Balanced Fund may not be protected against liability to Active
Balanced Fund or Balanced Fund, respectively, and their security holders to
which he or she would otherwise be subject as a result of his or her willful
misfeasance, bad faith or gross negligence in the performance of his or her
duties, or by reason of reckless disregard of his or her obligations and
duties. The staff of the Commission interprets the Investment Company Act to
require additional limits on indemnification of Directors, Trustees and
officers.

PERFORMANCE COMPARISONS OF THE FUNDS

The following table compares each Fund's average annual total returns for
the one, five and ten years ended March 31, 2000. Average annual total returns
include the deduction of applicable sales charges, are based on past results
and are not an indication of future performance.

AVERAGE ANNUAL TOTAL RETURNS (CLASS A SHARES)
(PERIODS ENDED MARCH 31)

<TABLE>
<CAPTION>
1 YEAR* 5 YEARS* 10 YEARS* SINCE INCEPTION*
------ ------- --------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund.................... 7.16% 12.11% 11.12% 11.06%(1-22-90)
Active Balanced Fund............. 6.45% N/A N/A 12.13%(11-7-96)
</TABLE>
----------
* If the Funds' Distributor had not waived a portion of its fees during
the periods shown, total returns would have been lower.

9
<PAGE>

AVERAGE ANNUAL TOTAL RETURNS (CLASS B SHARES)
(PERIODS ENDED MARCH 31)

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
------ ------- -------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund....................... 6.99% 12.32% 10.86% 9.56%(9-15-87)
Active Balanced Fund................ 6.26% N/A N/A 12.58%(11-7-96)
</TABLE>

AVERAGE ANNUAL TOTAL RETURNS (CLASS C SHARES)
(PERIODS ENDED MARCH 31)

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
------ ------- ---------------
<S> <C> <C> <C>
Balanced Fund................................ 9.87% 12.22% 11.33%(8-1-94)
Active Balanced Fund......................... 9.15% N/A 12.69%(11-7-96)
</TABLE>

AVERAGE ANNUAL TOTAL RETURNS (CLASS Z SHARES)
(PERIODS ENDED MARCH 31)

<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
------ ------- ---------------
<S> <C> <C> <C>
Balanced Fund................................. 13.07% N/A 12.59%(3-1-96)
Active Balanced Fund.......................... 12.38% 14.38% 12.28%(1-4-93)
</TABLE>

COMPARISON OF PRINCIPAL RISK FACTORS

As described more fully above, each Fund has substantially similar
investment objectives, policies and permissible investments. Because each Fund
normally invests in equity-related securities, debt obligations and money
market instruments, the Funds have substantially similar levels of risk. These
risks include market risk, credit risk and interest rate risk. Active Balanced
Fund's portfolio managers always have used a quantitative model for stock
selection, which has led to less volatility than Balanced Fund.

Both Funds may also use investment strategies such as derivatives that
involve above average risks. The Funds may use these risk management
techniques to try to preserve assets or enhance return. Derivatives may not
fully offset the underlying positions and this could result in losses to the
Fund that would not otherwise have occurred. Unlike Balanced Fund, which can
borrow in amounts up to 20% of its assets, and not for investment purposes,
Active Balanced Fund may borrow an amount up to 30% of its assets, including
for investment purposes, i.e., use "leverage". Leverage risk is the risk
associated with investments or trading strategies that relatively small market
movements may result in large changes in the value of an investment. Active
Balanced Fund's ability to use forward rolls exposes the Fund to investment
costs that may exceed the potential underlying investment gains, potentially
magnifying any underlying investment losses. Also, Active Balanced Fund may
invest in debt securities with a weighted average maturity between 3 and 30
years. The longer the maturity, the more risky is the investment. On the other
hand, Balanced Fund can invest up to 25% of its assets in junk bonds, with no
limit as to the lowest rating category, whereas Active Balanced Fund can
invest up to 20% of its assets in junk bonds, with none rated lower than B.
Also, Balanced Fund can invest up to 30% of its assets in foreign securities,
while Active Balanced Fund can invest up to 35% of its assets in foreign
securities.

Like any mutual fund, an investment in either Balanced Fund or Active
Balanced Fund could lose value. For a more complete discussion of the risks
associated with either Fund, please refer to the "Risk/Return Summary" or the
section entitled "Investment Risks" of each Fund's Prospectus.

INVESTMENT OBJECTIVES AND POLICIES

INVESTMENT OBJECTIVES

Balanced Fund and Active Balanced Fund have substantially similar investment
objectives and policies. Balanced Fund seeks to achieve a high total
investment return consistent with moderate risk. Active Balanced Fund seeks
income and long-term growth of capital by investing in a portfolio of equity,
fixed-income and money market securities which is actively managed to
capitalize on opportunities created by perceived misvaluation. Each Fund
invests in a wide variety of equity-related securities as well as debt
instruments. Balanced Fund and Active Balanced Fund have the same Manager
(PIFM), the same investment adviser (PIC), the same equity portfolio managers
(James Scott and Mark Stumpp) and a fixed-income team of professionals.

10
<PAGE>

The investment objective of each Fund is a fundamental policy. This means
that the objective cannot be changed without the approval of shareholders of
the Fund. There can be no assurance that either Balanced Fund or Active
Balanced Fund will achieve its objective. With the exception of fundamental
policies, investment policies (other than specified investment restrictions)
of the Funds can be changed without shareholder approval.

PRINCIPAL INVESTMENT STRATEGIES

Balanced Fund and Active Balanced Fund have similar investment strategies.
Each Fund divides its assets among equity, fixed-income and money market
investments. Active Balanced Fund may invest up to 15% of its assets in
foreign equity securities and 20% in foreign debt obligations; Balanced Fund
may invest up to 30% of its assets in foreign securities (equity and debt).
Both Funds' portfolio managers use a quantitative model to manage the Fund's
asset allocation. The Balanced Fund's equity portfolio managers manage the
stock portion of the Fund's portfolio using behavioral finance models to
select securities they believe to be underpriced, while maintaining a risk
profile like the S&P 500. Active Balanced Fund's equity portfolio managers use
a similar quantitative approach to find stocks with above-average total
returns.

COMPARISON OF OTHER POLICIES OF THE FUNDS

DIVERSIFICATION

Balanced Fund and Active Balanced Fund are both diversified funds. This
means that, with respect to 75% of its total assets, the Fund may not invest
more than 5% of its total assets in the securities of a single issuer
(excluding U.S. Government obligations).

BORROWING

Each Fund may borrow money for temporary or emergency purposes and for the
clearance of transactions from banks or, with respect to Active Balanced Fund,
through reverse repurchase agreements. In addition, Active Balanced Fund may
borrow money for investment purposes. Balanced Fund may not borrow money in an
amount exceeding 20% of its total assets and Active Balanced Fund may not
borrow money in an amount exceeding 30% of its total assets.

LENDING

Both Funds may lend assets to brokers, dealers and financial institutions,
Balanced Fund up to 33% of the value of its total assets and Active Balanced
Fund up to 30% of the value of its total assets.

ILLIQUID SECURITIES

Each Fund may invest in illiquid securities, including those without a
readily available market and repurchase agreements with maturities longer than
seven days. Each Fund may hold up to 15% of its net assets in illiquid
securities.

TEMPORARY DEFENSIVE INVESTMENTS

Although PIC normally invests each Fund's assets according to the Fund's
investment strategy, there are times when a Fund may temporarily invest up to
100% of its assets in money market instruments in response to adverse market,
economic or political conditions. Balanced Fund may invest up to 100% of its
assets in U.S. Government securities in addition to money market instruments
under such conditions.

For more information about the risks and restrictions associated with these
policies, see each Fund's Prospectus, and for a more detailed discussion of
the Funds' investments, see their Statements of Additional Information, all of
which are incorporated into this Prospectus/Proxy Statement by reference.

11
<PAGE>

OPERATIONS OF ACTIVE BALANCED FUND
FOLLOWING THE REORGANIZATION

Neither PIFM nor PIC expect Active Balanced Fund to revise its investment
policies, management or general investment approach as a result of the
Reorganization. James Scott and Mark Stumpp, together with a team of fixed-
income professionals, are expected to continue to serve as co-portfolio
managers of Active Balanced Fund following the Reorganization, except that the
responsibility to provide investment advisory services is to be assumed by
another Prudential affiliate, Jennison Associates LLC (Jennison), as discussed
below. The agents that provide Active Balanced Fund with services, such as its
Custodian and Transfer Agent, which also provide these services to Balanced
Fund, are not expected to change. The Directors, Trustees and officers of the
respective Funds are the same.

All of the current investments of Balanced Fund are permissible investments
for Active Balanced Fund. Nevertheless, the investment adviser may sell
securities held by Balanced Fund or Active Balanced Fund between shareholder
approval and the Closing Date of the Reorganization as may be necessary or
desirable in the ongoing management of each Fund and the adjustment of each
Fund's portfolio in anticipation of the Reorganization. Transaction costs
associated with such adjustments will be borne by the Fund that incurred them.
Transaction costs associated with such adjustments that occur after the
Closing Date will be borne by Active Balanced Fund.

THE POTENTIAL IMPACT OF A SPECIAL MEETING OF SHAREHOLDERS OF ACTIVE BALANCED
FUND

On August 22, 2000, the Board of Directors of The Prudential Investment
Portfolios, Inc. (the Company) approved the proposals summarized below. The
proposals are being submitted for approval by shareholders of the Company,
including its series Active Balanced Fund, at a special meeting of
shareholders scheduled to be held on December 14, 2000 (the "Special
Meeting"). Because the record date for shareholders that are permitted to vote
at the Special Meeting is prior to the Closing Date of the Reorganization,
shareholders of Balanced Fund that become shareholders of Active Balanced
Fund, if the Reorganization is approved, will not vote on the matters
described below. For this reason, you should consider the impact of the
following proposals when deciding to approve or disapprove the Reorganization.

.Election of Directors

The Board of Directors approved a proposal to elect Saul F. Fenster, Delayne
Dedrick Gold, Robert F. Gunia, Douglas H. McCorkindale, W. Scott McDonald,
Jr., Thomas T. Mooney, Stephen P. Munn, David R. Odenath, Jr., Richard A.
Redeker, Robin B. Smith, John R. Strangfeld, Louis A. Weil, III and Clay T.
Whitehead as Directors of the Company. Each of these individuals is a current
Director/Trustee of the Company and the Balanced Fund.

.Amendment to Management Agreement

The Board of Directors approved an amendment to the management contract with
PIFM to provide PIFM with flexibility to select additional investment advisers
and allocate Fund assets to them for management. Specifically, if the Active
Balanced Fund shareholders approve the amended management contract, PIFM will
have the authority (1) to hire one or more additional subadvisers for the
Fund, subject to Board approval, and (2) to allocate and reallocate Fund
assets among such subadvisers and the current subadviser, PIC.

.New Subadvisory Agreement

The Board also considered a new subadvisory contract between PIFM and
Jennison, which will be submitted to shareholders for their approval. The
proposed agreement would allow PIFM to increase or decrease, without
limitation, the allocation of Fund assets under the management of Jennison,
PIC or an unaffiliated subadviser, and any subadviser would be compensated
only with respect to assets allocated to its management.

The proposal to allow PIFM to employ other subadvisers without a shareholder
vote, subject to Board approval, is subject to certain conditions. The first
condition is that the Active Balanced Fund shareholders must approve this
grant of authority to the Board of Directors. Second, this proposal may be
implemented only if the Active Balanced Fund is permitted to rely on an
exemptive order previously issued by the Securities and Exchange Commission or
it receives a new exemptive order authorizing the arrangement.

12
<PAGE>

Subject to satisfaction of these two conditions, which cannot be assured,
PIFM would be permitted, with Board approval but without further shareholder
approval, to employ new subadvisers for the Fund, change the terms of the
Fund's subadvisory agreements or enter into new subadvisory agreements with
existing subadvisers. Shareholders would be notified of any changes in
subadvisers or of any material amendments to subadvisory agreements.
Shareholders of the Fund would continue to have the right to terminate any
subadvisory agreement at any time by a vote of the majority of the outstanding
voting securities of the Fund.

.Borrowing

If approved by its shareholders, Active Balanced Fund's investment
restriction regarding borrowing would be modified to allow borrowing of up to
33 1/3% of Active Balanced Fund's total assets and to delete the requirement
that such borrowing can be made only from banks. Active Balanced Fund
currently can borrow up to 30% of its total assets, and only from banks.

The proposed amendment to the Fund's fundamental investment restriction
would facilitate the future development and adoption of an interfund lending
program with other Prudential Funds. The Fund (and other Prudential Funds)
intends to apply to the Commission for an exemption from interfund borrowing,
pursuant to authorization by the Board of Directors obtained in November 1999.
There is, of course, no assurance that the Commission would grant such
request. If the Commission did grant the request, the Fund would be allowed to
borrow from other Prudential Funds. The ability to engage in borrowing
transactions with other participating Prudential Funds as part of the
"interfund lending program" may allow the Fund to obtain lower interest rates
on money borrowed for temporary or emergency purposes.

Approval of this proposal will not by itself result in implementation of the
interfund lending program. Among other things, any such program would be
subject to receipt of a Commission exemptive order.

In addition to the proposed change to the fundamental investment restriction
relating to borrowing, the Board approved a proposal to amend the Fund's
fundamental investment restriction on lending. If only one of the two
proposals is approved by shareholders, then the Fund's fundamental investment
restrictions will be amended only to the extent of shareholder approval.

If both of the proposed changes to borrowing and lending are adopted and the
Fund were to participate in an interfund lending program, there is a risk that
a borrowing fund could have a loan recalled on one day's notice and the
borrowing fund might then have to borrow from a bank at a higher interest rate
if money could not be borrowed from another Prudential Fund. There is also a
risk that a lending fund could experience a delay in obtaining prompt
repayment of a loan. A lending fund would not necessarily have received
collateral for its loan, although it could require that collateral be provided
as a condition for making an interfund loan. A delay in obtaining prompt
payment could cause a lending fund to miss an investment opportunity or to
incur costs to borrow money to replace the delayed payment.

.Investment in Securities of Other Investment Companies

If approved by shareholders, Active Balanced Fund's investment restriction
regarding the purchase of shares of investment companies would be modified to
permit Active Balanced Fund to invest in the shares of other investment
companies as permitted under applicable law or by an order of the Commission.
The Fund (and other Prudential mutual funds, including Balanced Fund) has
received an order permitting it to invest up to 25% of its assets,
representing cash collateral from securities lending transactions and
uninvested cash, in certain other Prudential mutual funds. Approval by
shareholders of this amended investment restriction would allow Active
Balanced Fund to invest a greater portion of its assets in Prudential money
market funds and short-term bond funds. To the extent that Active Balanced
Fund does invest in securities of other investment companies, shareholders may
be subject to duplicate management and advisory fees.

.Securities Lending

If approved by shareholders, Active Balanced Fund's investment restriction
regarding securities lending would be modified to permit Active Balanced Fund
to make loans of portfolio securities in amounts up to 33 1/3% of Active
Balanced Fund's total assets and as permitted by an order of the Commission.
Active Balanced Fund currently may loan its portfolio securities in an amount
up to 30% of its total assets. The proposed amendment to the Fund's
fundamental investment restriction would facilitate the future development and
adoption of an interfund lending program with other Prudential Funds, as
described above. The nature of such a program and the risks associated with
the Fund's participation therein are set forth above under "Borrowing".
Shareholders would be asked to consider, and vote separately, on the Fund's
fundamental investment restrictions relating to borrowing and lending.

13
<PAGE>

PURCHASES, REDEMPTIONS AND EXCHANGES

PURCHASING SHARES

The price to buy one share of each Fund is each Fund's net asset value, or
NAV, plus, in the case of Class A and Class C shares, a front-end sales
charge. Each Fund offers Class A, Class B, Class C and Class Z shares.

The Class A shares you receive in the Reorganization are not subject to a
front-end sales charge although additional purchases after the Reorganization
will be subject to the Active Balanced Fund Class A sales charge schedule
(which is the same as that for Balanced Fund Class A shares).

The contingent deferred sales charge (CDSC) imposed on Class B shares of
Balanced Fund is identical to that charged by Active Balanced Fund. Class B
shares are sold with a 5% CDSC that declines over seven years. Each CDSC
declines by 1% every year with Class B shares automatically converting to
Class A shares (which have a lower 12b-1 fee) approximately seven years after
they are purchased.

The sales charge imposed on Class C shares of Active Balanced Fund is
identical to that charged by Balanced Fund. Class C shares are sold with a 1%
front-end load and a 1% CDSC for shares redeemed within 18 months of purchase.

The Class B or Class C shares you receive in the Reorganization will be
subject to the identical CDSC that is applicable to your Balanced Fund
investment. In other words, the contingent deferred sales charge will be
calculated from the first day of the month after your purchase of shares of
Balanced Fund, exclusive of any time during which you may have been invested
in a money market fund.

Both Funds also offer Class Z shares, which are sold without either a front-
end load or a CDSC and are available only to a limited group of investors. You
will receive the same class of shares in Active Balanced Fund that you own in
Balanced Fund.

Shares in both Funds are purchased at the next NAV calculated after your
investment is received and accepted. Each Fund's NAV is normally calculated
each business day at 4:15 p.m., New York time. Refer to each Fund's Prospectus
for more information regarding how to buy shares.

REDEEMING SHARES

The redemption policies for each Fund are identical. Your shares will be
sold at the next NAV, less any applicable CDSC imposed on Class B and Class C
shares, calculated after your order is received and accepted. Refer to each
Fund's Prospectus for more information regarding how to sell shares.

MINIMUM INVESTMENT REQUIREMENTS

For both Funds, the minimum initial investment amount is $1,000 for Class A
and Class B shares and $2,500 for Class C shares. The minimum additional
investment amount is $100. There is no minimum investment for Class Z shares.

PURCHASES AND REDEMPTIONS OF BALANCED FUND

On May 8, 2000, Balanced Fund stopped accepting orders to purchase or
exchange into its shares of any class, except for purchases by certain
automatic investment, retirement and savings programs and plans (excluding IRA
accounts). Balanced Fund shareholders may continue to acquire shares through
dividend reinvestment.

Shareholders of Balanced Fund may redeem shares of Balanced Fund through the
Closing Date of the Reorganization. If the Reorganization is approved, the
purchase and redemption policies of the combined fund will be the same as the
current policies of Active Balanced Fund.

EXCHANGES OF FUND SHARES

The exchange privilege currently offered by each Fund is the same and is not
expected to change after the Reorganization. Shareholders of the Funds may
exchange their shares for shares of the same class of any other Prudential
mutual fund. If you hold Class B or Class C shares and wish to exchange into a
money market fund, you must exchange into Prudential Special Money Market
Fund, Inc. During the time you are invested in Prudential Special Money Market
Fund, Inc., the period of time during which your contingent deferred sales
charge is calculated is frozen. Refer to each Fund's Prospectus for
restrictions governing exchanges.

14
<PAGE>

DIVIDENDS AND OTHER DISTRIBUTIONS

Each Fund distributes substantially all of its net investment income and
capital gains to shareholders each year. Balanced Fund pays any dividends from
net investment income typically every quarter, although the Board of Trustees
recently changed this to an annual dividend payment. Active Balanced Fund pays
any dividends from net investment income typically once a year. Net realized
capital gains for both Funds, if any, are also distributed annually. On or
before the Closing Date, Balanced Fund may declare additional dividends or
other distributions in order to distribute substantially all of its investment
company taxable income and net realized capital gains. Such dividends or other
distributions generally will be subject to federal income taxes.

FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION

Each Fund has received an opinion of outside counsel that the Reorganization
will constitute a tax-free reorganization within the meaning of Section
368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code). Accordingly, no gain or loss will be recognized by the Funds or
their shareholders as a result of the Reorganization. Please see the section
entitled "The Proposed Transaction--Federal Income Tax Considerations With
Respect to the Reorganization" for more information.

During the period between shareholder approval and the Closing Date, the
investment adviser may sell certain securities to make portfolio adjustments
to Balanced Fund and Active Balanced Fund in connection with the
Reorganization. Selling these securities may result in realization of capital
gains, which, when distributed, would be taxable to the selling Fund's
shareholders.

THE PROPOSED TRANSACTION

REORGANIZATION PLAN

The Agreement and Plan of Reorganization describes the terms and conditions
under which the proposed transaction may be completed. Significant provisions
of the Agreement are summarized below; however, this summary is qualified in
its entirety by reference to the Agreement, a copy of which is attached as
Appendix A to this Proxy Statement.

The Agreement contemplates (a) Active Balanced Fund acquiring as of the
Closing Date all of the assets of Balanced Fund in exchange solely for shares
of Active Balanced Fund and the assumption by Active Balanced Fund of Balanced
Fund's liabilities; and (b) the distribution of shares of Active Balanced Fund
to the shareholders of Balanced Fund as provided for in the Agreement.

The assets of Balanced Fund to be acquired by Active Balanced Fund include
all cash, cash equivalents, securities, receivables (including interest or
dividends receivable), claims and other property owned by Balanced Fund, and
any deferred or prepaid expenses shown as an asset on the books of Balanced
Fund on the Closing Date. Active Balanced Fund will assume from Balanced Fund
all liabilities, debts and obligations of Balanced Fund of whatever kind or
nature, whether absolute, accrued, contingent or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable on the
Closing Date and whether or not specifically referred to in the Agreement;
provided, however, that Balanced Fund will use its best efforts, to the extent
practicable, to discharge all of its known liabilities prior to the Closing
Date, other than liabilities incurred in the ordinary course of business.

Active Balanced Fund will deliver to Balanced Fund the number of full and
fractional shares of Active Balanced Fund having an aggregate net asset value
equal to the value of the assets of Balanced Fund less the liabilities of
Balanced Fund as of the Closing Date. Balanced Fund will then distribute the
Active Balanced Fund shares pro rata to its shareholders, Class A shares for
Class A shares, Class B shares for Class B shares, Class C shares for Class C
shares and Class Z shares for Class Z shares.

The value of Balanced Fund's assets to be acquired by Active Balanced Fund
and the amount of its liabilities to be assumed by Active Balanced Fund will
be determined as of the close of business on the Closing Date, using the
valuation procedures set forth in Balanced Fund's Prospectus and Statement of
Additional Information. The net asset value of a share of Active Balanced Fund
will be determined as of the same time using the valuation procedures set
forth in its Prospectus and Statement of Additional Information. The valuation
procedures are the same for each Fund.

15
<PAGE>

As of the Closing Date, Balanced Fund will distribute to its shareholders of
record the shares of Active Balanced Fund it receives, so that each Balanced
Fund shareholder will receive the number of full and fractional shares of
Active Balanced Fund equal in value to the aggregate net asset value of shares
of Balanced Fund held by such shareholder on the Closing Date. Balanced Fund
will then be terminated as soon as practicable. The distribution of shares of
Active Balanced Fund will be accomplished by opening accounts on the books of
Active Balanced Fund in the names of the Balanced Fund shareholders and by
transferring to such accounts shares of Active Balanced Fund. Each Balanced
Fund shareholder's account will be credited with the respective pro rata
number of full and fractional shares of Active Balanced Fund due that
shareholder. If requested, Active Balanced Fund will issue certificates
representing its shares only upon surrender of shares of Balanced Fund.

Immediately after the Reorganization, each former Balanced Fund shareholder
will own shares of Active Balanced Fund equal to the aggregate net asset value
of that shareholder's shares of Balanced Fund immediately prior to the
Reorganization. The net asset value per share of Active Balanced Fund will not
be affected by the transaction. Thus, the Reorganization will not result in a
dilution of any shareholder's interest.

Any transfer taxes payable upon issuance of shares of Active Balanced Fund
in a name other than that of the registered holder of the shares on the books
of Balanced Fund as of that time will be payable by the person to whom such
shares are to be issued as a condition of such transfer. Any reporting
responsibility of Balanced Fund is and will continue to be its responsibility
up to and including the Closing Date and such later date on which Balanced
Fund is terminated.

The completion of the Reorganization is subject to a number of conditions
set forth in the Agreement, some of which may be waived by a Fund. In
addition, the Agreement may be amended in any mutually agreeable manner,
except that no amendment that may have a materially adverse effect on the
shareholders' interests may be made subsequent to the Meeting.

REASONS FOR THE REORGANIZATION

The Board of Directors/Board of Trustees (the Boards) of each Fund have each
determined that the Reorganization is in the best interests of the
shareholders of their respective Fund and that the Reorganization will not
result in a dilution of the interests of shareholders of either Fund.

In considering the Reorganization, the Boards each considered a number of
factors, including the following:

--the compatibility of the Funds' investment objectives, policies and
restrictions;

--the relative past and current growth in assets and investment performance
of the Funds and future prospects for Active Balanced Fund;

--the effect of the Reorganization on the economies of scales of the Funds;

--the estimated costs of the Reorganization;

--the tax consequences of the Reorganization;

--the relative size of the Funds; and

--the benefits to the shareholders of the Funds.

PIFM and PIC recommended the Reorganization to the Boards at the meeting of
the Boards held on May 2, 2000. In recommending the Reorganization, PIFM and
PIC advised the Boards that the Funds have similar investment objectives,
policies and investment portfolios. PIFM and PIC informed the Boards that the
Funds differed primarily with respect to the Funds' net asset sizes.

The Board considered that, if the Reorganization is approved, shareholders
of Balanced Fund would likely incur lower total combined fund operating
expenses. It is expected that if the Reorganization is consummated, total
operating expenses would be lowered from 1.17% to 1.16% of average daily net
assets for Class A shares, from 1.92% to 1.91% of average daily net assets for
Class B shares, from 1.92% to 1.91% of average daily net assets for Class C
shares, and from 0.92% to 0.91% of average daily net assets for Class Z shares
based on expenses incurred in the twelve months ended March 31, 2000.

16
<PAGE>

DESCRIPTION OF THE SECURITIES TO BE ISSUED

Active Balanced Fund is a series of The Prudential Investment Portfolios,
Inc. (the Company), which was incorporated in Maryland on August 10, 1995. It
is registered with the Securities and Exchange Commission as an open-end
management investment company. The Company is authorized to issue 3 billion of
shares of common stock, $.001 par value per share, divided into three series.
Each series may issue 1 billion shares, divided equally into four classes of
shares, designated as Class A, Class B, Class C and Class Z common stock. Each
class of common stock represents an interest in the same assets of Active
Balanced Fund and is identical in all respects except that:

--each class is subject to different sales charges and distribution and/or
service (12b-1) fees, except for Class Z shares, which are not subject to
any sales charges or distribution and/or service fees;

--each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangement and has separate
voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class;

--each class has a different exchange privilege;

--only Class B shares have a conversion feature whereby Class B shares will
automatically convert to Class A shares, on a quarterly basis,
approximately seven years after purchase; and

--Class Z shares are offered exclusively for sale to a limited group of
investors.

Shares of Active Balanced Fund, when issued for the net asset value thereof,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the shareholder. Except for the conversion feature applicable to Class B
shares, there are no conversion, preemptive or other subscription rights. The
voting and dividend rights, the right of redemption and the privilege of
exchange are described in Active Balanced Fund's Prospectus.

Active Balanced Fund does not hold annual meetings of shareholders. There
will normally be no meetings of shareholders for the purpose of electing
Directors unless less than a majority of the Directors holding office have
been elected by shareholders, at which time the Directors then in office will
call a shareholder meeting for the election of Directors. Under the Investment
Company Act, shareholders of record of at least two-thirds of the outstanding
shares of an investment company may remove a Director by votes cast in person
or by proxy at a meeting called for that purpose. The Directors are required
to call a meeting of shareholders for the purpose of voting upon the question
of removal of any Director, or to transact any other business, when requested
in writing to do so by the shareholders of record holding at least 10% of the
Company's outstanding shares.

FEDERAL INCOME TAX CONSIDERATIONS WITH RESPECT TO THE REORGANIZATION

The exchange of Balanced Fund's assets for Active Balanced Fund's shares and
the assumption of the liabilities of Balanced Fund by Active Balanced Fund is
intended to qualify for federal income tax purposes as a tax-free
reorganization under the Internal Revenue Code. With respect to the
Reorganization, the Funds have received an opinion from Gardner, Carton &
Douglas, counsel to Balanced Fund and Active Balanced Fund, based upon
representations made by both Balanced Fund and Active Balanced Fund,
substantially to the effect that, for federal income tax purposes:

(1) The acquisition by Active Balanced Fund of substantially all of the
assets of Balanced Fund in exchange solely for voting shares of Active
Balanced Fund and the assumption by Active Balanced Fund of Balanced
Fund's liabilities, if any, followed by the distribution of Active
Balanced Fund's voting shares by Balanced Fund pro rata to its
shareholders, as a liquidating distribution, and the liquidation of
Balanced Fund pursuant to the Reorganization and constructively in
exchange for the shareholders' Balanced Fund shares, will constitute a
reorganization within the meaning of section 368(a)(1)(D) of the
Internal Revenue Code, and Balanced Fund and Active Balanced Fund each
will be "a party to a reorganization" within the meaning of section
368(b) of the Code;

(2) No gain or loss will be recognized by Balanced Fund upon the transfer
of substantially all of its assets to Active Balanced Fund in exchange
solely for Class A, Class B, Class C and Class Z shares of Active
Balanced Fund and the assumption by Active Balanced Fund of Balanced
Fund's liabilities, if any. In addition, no gain or loss will be
recognized by Balanced Fund on the distribution of such shares to the
Balanced Fund shareholders in liquidation of Balanced Fund;

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<PAGE>

(3) No gain or loss will be recognized by Active Balanced Fund upon the
acquisition of Balanced Fund's assets in exchange solely for Class A,
Class B, Class C and Class Z shares of Active Balanced Fund and the
assumption of Balanced Fund's liabilities, if any;

(4) Balanced Fund's shareholders will recognize no gain or loss upon the
receipt of Class A, Class B, Class C and Class Z shares of Active
Balanced Fund solely in exchange for and in cancellation of Balanced
Fund shares of beneficial interest, as described above and in the
Agreement;

(5) Active Balanced Fund's basis in the assets acquired from Balanced Fund
will be the same as the basis of such assets in the hands of Balanced
Fund immediately before the Reorganization, and the holding period of
such assets acquired by Active Balanced Fund will include the holding
period thereof when held by Balanced Fund immediately before the
Reorganization;

(6) Balanced Fund shareholders' basis in the Class A, Class B, Class C and
Class Z shares of Active Balanced Fund to be received by them pursuant
to the Reorganization will be the same as their respective basis in the
Class A, Class B, Class C and Class Z shares of Balanced Fund to be
constructively surrendered in exchange therefor; and

(7) The holding period of Active Balanced Fund shares to be received by
Balanced Fund shareholders will include the period during which
Balanced Fund shares to be constructively surrendered in exchange
therefor were held; provided such Balanced Fund shares were held as
capital assets by those shareholders on the date of the Reorganization.

Shareholders of Balanced Fund should consult their tax advisers regarding
the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Because the foregoing discussion relates only to the
federal income tax consequences of the Reorganization, shareholders also
should consult their tax advisers as to state and local tax consequences, if
any, of the Reorganization.

CONCLUSION

The Agreement and Plan of Reorganization was approved by the Boards of
Balanced Fund and the Company, respectively, at the Board meeting held on May
2, 2000. The Board of each Fund determined that the proposed Reorganization is
in the best interests of shareholders of the Fund and that the interests of
existing shareholders of Balanced Fund and Active Balanced Fund would not be
diluted as a result of the Reorganization. If the Reorganization is not
completed, Balanced Fund will continue to engage in business as a registered
investment company and the Board of Trustees of Balanced Fund will consider
other proposals for the Fund, including proposals for the reorganization or
liquidation of the Fund. If the Reorganization is not approved, it is likely
that Balanced Fund shareholders will be solicited to vote on matters similar
to those described above under "Operations of Active Balanced Fund Following
the Reorganization--The Potential Impact of a Special Meeting of Shareholders
of Active Balanced Fund."

ADDITIONAL INFORMATION ABOUT ACTIVE BALANCED FUND

Active Balanced Fund's Prospectus dated December 2, 1999, as supplemented
August 30, 2000, is enclosed with this Prospectus/Proxy Statement and is
incorporated into this Prospectus/Proxy Statement by reference. The Prospectus
contains additional information about Active Balanced Fund, including its
investment objective and policies, Manager, investment adviser, advisory fees
and expenses and procedures for purchasing and redeeming shares. The
Prospectus also contains Active Balanced Fund's financial highlights for the
fiscal years ended September 30, 1999. The performance overview from Active
Balanced Fund's Annual Report for the year ended September 30, 1999 is
attached as Appendix B to this Prospectus/Proxy Statement.

MISCELLANEOUS

LEGAL MATTERS

Certain legal matters in connection with the issuance of Active Balanced
Fund shares have been passed upon by Piper Marbury Rudnick & Wolfe L.L.P.,
special Maryland counsel to Active Balanced Fund. Certain legal and tax
matters in connection with the reorganization have been or will be passed upon
by Gardner, Carton & Douglas, counsel to Active Balanced Fund and Balanced
Fund.

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INDEPENDENT ACCOUNTANTS

The financial statements of Balanced Fund and Active Balanced Fund,
incorporated by reference into the Statement of Additional Information, have
been audited by PricewaterhouseCoopers LLP, independent accountants, whose
reports thereon are included in the Annual Report to Shareholders for Balanced
Fund's fiscal year ended July 31, 1999 and Active Balanced Fund's fiscal year
ended September 30, 1999, respectively. The financial statements audited by
PricewaterhouseCoopers LLP have been incorporated by reference in reliance on
their reports given on their authority as experts in auditing and accounting.

AVAILABLE INFORMATION

Balanced Fund and Active Balanced Fund are each subject to the informational
requirements of the Securities Exchange Act of 1934 and the Investment Company
Act, and in accordance with these laws, they each file reports, proxy material
and other information with the Securities and Exchange Commission. Such
reports, proxy material and other information can be inspected and copied at
the Public Reference Room maintained by the Commission at 450 Fifth Street,
N.W., Washington D.C. 20549 and 7 World Trade Center, New York, NY 10048.
Copies of such material can also be obtained from the Public Reference Branch,
Office of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington D.C. 20549, at prescribed rates.

NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES

Please advise Balanced Fund, in care of Prudential Investment Management
Services LLC, Gateway Center Three, 100 Mulberry Street, 4th Floor, Newark,
New Jersey 07102-4077, whether other persons are beneficial owners of shares
for which proxies are being solicited and, if so, the number of copies of the
Prospectus/Proxy Statement you wish to receive in order to supply copies to
the beneficial owners of the shares.

SHAREHOLDER PROPOSALS

Any shareholder of Balanced Fund who wishes to submit a proposal to be
considered by the Fund's shareholders at the next meeting of shareholders
should send the proposal to Balanced Fund at Gateway Center Three, 100
Mulberry Street, 4th Floor, Newark, New Jersey 07102-4077, so as to be
received within a reasonable time before the Board of Trustees of Balanced
Fund makes the solicitation relating to such meeting. Shareholder proposals
that are submitted in a timely manner will not necessarily be included in the
Balanced Fund's proxy materials. Including shareholder proposals in proxy
materials is subject to limitations under federal securities laws. If the
Reorganization is approved, it is unlikely that Balanced Fund will hold any
more shareholders' meetings.

The Balanced Fund's By-Laws provide that the Fund will not be required to
hold annual meetings of shareholders if the election of Trustees is not
required under the Investment Company Act. It is the present intention of the
Board of Trustees not to hold annual meetings of shareholders unless required
to do so by the Investment Company Act.

OTHER BUSINESS

Management of Balanced Fund knows of no business to be presented at the
Meeting other than the Proposal described in this Prospectus/Proxy Statement.
However, if any other matter requiring a shareholder vote should arise, the
proxies will vote according to their best judgment in the interest of Balanced
Fund.

By order of the Board of Trustees,

MARGUERITE E. H. MORRISON
Secretary

September 18, 2000

IT IS IMPORTANT THAT YOU EXECUTE AND RETURN YOUR PROXY PROMPTLY.

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APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION

Agreement and Plan of Reorganization (Agreement) made as of the 23rd day of
August, 2000, by and between Prudential Balanced Fund (Balanced Fund) and
Prudential Active Balanced Fund (Active Balanced Fund), a series of The
Prudential Investment Portfolios, Inc. (the Company) (collectively, the Funds
and each individually, a Fund). Balanced Fund is a business trust organized
under the laws of the Commonwealth of Massachusetts. The Company is a
corporation organized under the laws of the State of Maryland. Balanced Fund
and the Company each maintains its principal place of business at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. Shares of
each Fund are divided into four classes, designated Class A, Class B, Class C
and Class Z.

This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(D) of the Internal Revenue Code
of 1986, as amended (Internal Revenue Code). Upon receipt of such
representations from each of the Funds as Gardner, Carton & Douglas may
require, Gardner, Carton & Douglas will deliver the opinion referenced in
paragraph 8.6 herein. The reorganization will comprise the transfer of all of
the assets of Balanced Fund, in exchange solely for shares of common stock of
Active Balanced Fund, and Active Balanced Fund's assumption of Balanced Fund's
liabilities, if any, and the constructive distribution, after the Closing Date
hereinafter referred to, of such shares of Active Balanced Fund to the
shareholders of Balanced Fund, in termination of Balanced Fund as provided
herein, all upon the terms and conditions as hereinafter set forth.

In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:

1. Transfer of Assets of Balanced Fund in Exchange for Shares of Active
Balanced Fund and Assumption of Liabilities, if any, and Termination of
Balanced Fund.

1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, Balanced Fund
agrees to sell, assign, transfer and deliver its assets, as set forth in
paragraph 1.2, to Active Balanced Fund, and Active Balanced Fund agrees (a)
to issue and deliver to Balanced Fund in exchange therefor the number of
shares in Active Balanced Fund determined by dividing the net asset value
of Balanced Fund allocable to Class A, Class B, Class C and Class Z shares
of common stock (computed in the manner and as of the time and date set
forth in paragraph 2.1) by the net asset value allocable to a Class A,
Class B, Class C and Class Z share of Active Balanced Fund (rounded to the
third decimal place) (computed in the manner and as of the time and date
set forth in paragraph 2.2); and (b) to assume all of Balanced Fund's
liabilities, if any, as set forth in paragraph 1.3. Such transactions shall
take place at the closing provided for in paragraph 3 (Closing).

1.2 The assets of Balanced Fund to be acquired by Active Balanced Fund
shall include without limitation all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other
property of any kind owned by Balanced Fund and any deferred or prepaid
expenses shown as assets on the books of Balanced Fund on the closing date
provided in paragraph 3 (Closing Date). Active Balanced Fund has no plan or
intent to sell or otherwise dispose of any assets of Balanced Fund, other
than in the ordinary course of business.

1.3 Except as otherwise provided herein, Active Balanced Fund will assume
from Balanced Fund all debts, liabilities, obligations and duties of
Balanced Fund of whatever kind or nature, whether absolute, accrued,
contingent or otherwise, whether or not determinable as of the Closing Date
and whether or not specifically referred to in this Agreement; provided,
however, that Balanced Fund agrees to utilize its best efforts to discharge
all of its known debts, liabilities, obligations and duties prior to the
Closing Date.

1.4 On or immediately prior to the Closing Date, Balanced Fund will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in
any event not less than ninety-eight percent) of its investment company
taxable income (computed without regard to any deduction for dividends
paid), and realized net capital gains, if any, for all taxable years
through the Closing Date so as to retain its qualification as a regulated
investment company pursuant to Section 851 of the Internal Revenue Code.

1.5 On a date (Termination Date) as soon after the Closing Date as is
conveniently practicable but in any event within 30 days of the Closing
Date, Balanced Fund will distribute pro rata to its Class A, Class B, Class
C and Class Z shareholders of record, determined as of the close of
business on the Closing Date, the Class A, Class B, Class C and Class Z
shares of

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Active Balanced Fund received by Balanced Fund pursuant to paragraph 1.1 in
exchange for their interest in Balanced Fund. Such distribution will be
accomplished by opening accounts on the books of Active Balanced Fund in
the names of Balanced Fund shareholders and transferring thereto the shares
credited to the account of Balanced Fund on the books of Active Balanced
Fund. Each account opened shall be credited with the respective pro rata
number of Active Balanced Fund Class A, Class B, Class C and Class Z shares
due Balanced Fund's Class A, Class B, Class C and Class Z shareholders,
respectively. Fractional shares of Active Balanced Fund shall be rounded to
the third decimal place. On or about the Closing Date, if appropriate, the
Company will file Articles of Transfer with the State Department of
Assessments and Taxation of the State of Maryland. Upon the receipt of an
order from the Securities and Exchange Commission (SEC) indicating
acceptance of the Form N-8F that Balanced Fund must file pursuant to the
Investment Company Act of 1940, as amended (Investment Company Act) to
deregister as an investment company, Balanced Fund will file with the
Commonwealth of Massachusetts such documents as may be required, but in any
event such termination will be completed within twelve months following the
Closing Date.

1.6 Active Balanced Fund shall not issue certificates representing its
shares in connection with such exchange. With respect to any Balanced Fund
shareholder holding Balanced Fund share certificates as of the Closing
Date, until Active Balanced Fund is notified by Balanced Fund's transfer
agent that such shareholder has surrendered his or her outstanding Balanced
Fund share certificates or, in the event of lost, stolen or destroyed share
certificates, posted adequate bond or submitted a lost certificate form, as
the case may be, Active Balanced Fund will not permit such shareholder to
(1) receive dividends or other distributions on Active Balanced Fund shares
in cash (although such dividends and distributions shall be credited to the
account of such shareholder established on Active Balanced Fund's books
pursuant to paragraph 1.5, as provided in the next sentence), (2) exchange
Active Balanced Fund shares credited to such shareholder's account for
shares of other Prudential Mutual Funds, or (3) pledge or redeem such
shares. In the event that a shareholder is not permitted to receive
dividends or other distributions on Active Balanced Fund shares in cash as
provided in the preceding sentence, Active Balanced Fund shall pay such
dividends or other distributions in additional Active Balanced Fund shares,
notwithstanding any election such shareholder shall have made previously
with respect to the payment of dividends or other distributions on shares
of Balanced Fund. Balanced Fund will, at its expense, request its
shareholders to surrender their outstanding Balanced Fund share
certificates, post adequate bond or submit a lost certificate form, as the
case may be.

1.7 Ownership of Active Balanced Fund shares will be shown on the books
of the Company's transfer agent. Shares of Active Balanced Fund will be
issued in the manner described in Active Balanced Fund's then-current
prospectus and statement of additional information.

1.8 Any transfer taxes payable upon issuance of shares of Active Balanced
Fund in a name other than the registered holder of the shares being
exchanged on the books of Balanced Fund as of that time shall be paid by
the person to whom such shares are to be issued as a condition to the
registration of such transfer.

1.9 Any reporting responsibility with the SEC or any state securities
commission of Balanced Fund is, and shall remain, the responsibility of
Balanced Fund up to and including the Termination Date.

1.10 All books and records of Balanced Fund, including all books and
records required to be maintained under the Investment Company Act and the
rules and regulations thereunder, shall be available to Active Balanced
Fund from and after the Closing Date and shall be turned over to Active
Balanced Fund on or prior to the Termination Date.

2. Valuation

2.1 The value of Balanced Fund's assets and liabilities to be acquired
and assumed, respectively, by Active Balanced Fund shall be the net asset
value computed as of 4:15 p.m., New York time, on the Closing Date (such
time and date being hereinafter called the Valuation Time), using the
valuation procedures set forth in Balanced Fund's then-current prospectus
and statement of additional information.

2.2 The net asset value of Class A, Class B, Class C and Class Z shares
of Active Balanced Fund shall be the net asset value for Class A, Class B,
Class C and Class Z shares computed as of the Valuation Time, using the
valuation procedures set forth in Active Balanced Fund's then-current
prospectus and statement of additional information.

2.3 The number of Active Balanced Fund shares to be issued (including
fractional shares, if any) in exchange for Balanced Fund's net assets shall
be calculated as set forth in paragraph 1.1.

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2.4 All computations of net asset value shall be made by or under the
direction of Prudential Investments Fund Management LLC (PIFM) in
accordance with its regular practice as manager of the Funds.

3. Closing and Closing Date

3.1 The Closing Date shall be November 3, 2000 or such later date as the
parties may agree. All acts taking place at the Closing shall be deemed to
take place simultaneously as of the close of business on the Closing Date
unless otherwise provided. The Closing shall be at the office of the
Company or at such other place as the parties may agree.

3.2 State Street Bank and Trust Company (State Street), as custodian for
Balanced Fund, shall deliver to Active Balanced Fund at the Closing a
certificate of an authorized officer of State Street stating that (a)
Balanced Fund's portfolio securities, cash and any other assets have been
transferred in proper form to Active Balanced Fund on the Closing Date and
(b) all necessary taxes, if any, have been paid, or provision for payment
has been made, in conjunction with the transfer of portfolio securities.

3.3 In the event that immediately prior to the Valuation Time (a) the New
York Stock Exchange (NYSE) or other primary exchange is closed to trading
or trading thereon is restricted or (b) trading or the reporting of trading
on the NYSE or other primary exchange or elsewhere is disrupted so that
accurate appraisal of the value of the net assets of Balanced Fund and of
the net asset value per share of Active Balanced Fund is impracticable, the
Closing Date shall be postponed until the first business day after the date
when such trading shall have been fully resumed and such reporting shall
have been restored.

3.4 Balanced Fund shall deliver to Active Balanced Fund on or prior to
the Termination Date the names and addresses of its shareholders and the
number of outstanding shares owned by each such shareholder, all as of the
close of business on the Closing Date, certified by the Transfer Agent of
Balanced Fund. Active Balanced Fund shall issue and deliver to Balanced
Fund at the Closing a confirmation or other evidence satisfactory to
Balanced Fund that shares of Active Balanced Fund have been or will be
credited to Balanced Fund's account on the books of the Active Balanced
Fund. At the Closing each party shall deliver to the other such bills of
sale, checks, assignments, share certificates, receipts and other documents
as such other party or its counsel may reasonably request to effect the
transactions contemplated by this Agreement.

4. Representations and Warranties

4.1 Balanced Fund represents and warrants as follows:

4.1.1 Balanced Fund is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts;

4.1.2 Balanced Fund is an open-end management investment company duly
registered under the Investment Company Act, and such registration is
in full force and effect;

4.1.3 Balanced Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the Declaration of Trust or By-Laws of Balanced Fund or of
any material agreement, indenture, instrument, contract, lease or other
undertaking to which Balanced Fund is a party or by which Balanced Fund
is bound;

4.1.4 All material contracts or other commitments to which Balanced
Fund, or the properties or assets of Balanced Fund, is subject, or by
which Balanced Fund is bound, except this Agreement, will be terminated
on or prior to the Closing Date without Balanced Fund or Active
Balanced Fund incurring any liability or penalty with respect thereto;

4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Balanced Fund or any of
its properties or assets. Balanced Fund knows of no facts that might
form the basis for the institution of such proceedings, and Balanced
Fund is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body that materially
and adversely affects its business or its ability to consummate the
transactions herein contemplated;

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4.1.6 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Cash Flows,
Statement of Changes in Net Assets, and Financial Highlights of
Balanced Fund at July 31, 1999 and for the year then ended (copies of
which have been furnished to Active Balanced Fund) have been audited by
PricewaterhouseCoopers LLP, independent accountants, in accordance with
generally accepted auditing standards. Such financial statements are
prepared in accordance with generally accepted accounting principles
and present fairly, in all material respects, the financial condition,
results of operations, changes in net assets and financial highlights
of Balanced Fund as of and for the period ended on such date, and there
are no material known liabilities of Balanced Fund (contingent or
otherwise) not disclosed therein;

4.1.7 Since July 31, 1999, there has not been any material adverse
change in Balanced Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of
business, or any incurrence by Balanced Fund of indebtedness maturing
more than one year from the date such indebtedness was incurred, except
as otherwise disclosed to and accepted by Active Balanced Fund. For the
purposes of this paragraph 4.1.7, a decline in net asset value, net
asset value per share or change in the number of shares outstanding
shall not constitute a material adverse change;

4.1.8 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Balanced Fund required by law to have
been filed on or before such dates shall have been timely filed, and
all federal and other taxes shown as due on said returns and reports
shall have been paid insofar as due, or provision shall have been made
for the payment thereof, and, to the best of Balanced Fund's knowledge,
all federal or other taxes required to be shown on any such return or
report have been shown on such return or report, no such return is
currently under audit and no assessment has been asserted with respect
to such returns;

4.1.9 For each past taxable year since it commenced operations,
Balanced Fund has met the requirements of Subchapter M of the Internal
Revenue Code for qualification and treatment as a regulated investment
company and intends to meet those requirements for the current taxable
year; and, for each past calendar year since it commenced operations,
Balanced Fund has made such distributions as are necessary to avoid the
imposition of federal excise tax or has paid or provided for the
payment of any excise tax imposed;

4.1.10 All issued and outstanding shares of Balanced Fund are, and at
the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of Balanced Fund will, at the time of the Closing, be held in
the name of the persons and in the amounts set forth in the list of
shareholders submitted to Active Balanced Fund in accordance with the
provisions of paragraph 3.4. Balanced Fund does not have outstanding
any options, warrants or other rights to subscribe for or purchase any
of its shares, nor is there outstanding any security convertible into
any of its shares, except for the Class B shares which have the
conversion feature described in Balanced Fund's current prospectus;

4.1.11 At the Closing Date, Balanced Fund will have good and
marketable title to its assets to be transferred to Active Balanced
Fund pursuant to paragraph 1.1, and full right, power and authority to
sell, assign, transfer and deliver such assets hereunder free of any
liens, claims, charges or other encumbrances, and, upon delivery and
payment for such assets, Active Balanced Fund will acquire good and
marketable title thereto;

4.1.12 The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Trustees of Balanced Fund and by
all necessary corporate action, other than shareholder approval, on the
part of Balanced Fund, and this Agreement constitutes a valid and
binding obligation of Balanced Fund, subject to shareholder approval;

4.1.13 The information furnished and to be furnished by Balanced Fund
for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection with
the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is in compliance and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and

4.1.14 On the effective date of the registration statement filed with
the SEC by the Company on Form N-14 relating to the shares of Active
Balanced Fund issuable thereunder, and any supplement or amendment
thereto (Registration Statement), at the time of the meeting of the
shareholders of Balanced Fund and on the Closing Date, the Proxy
Statement of Balanced Fund, the Prospectus of Active Balanced Fund and
the Statements of Additional

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Information of both Funds to be included in the Registration Statement
(collectively, Proxy Statement) (i) will comply in all material
respects with the provisions and regulations of the Securities Act of
1933 (1933 Act), the Securities Exchange Act of 1934 (1934 Act) and the
Investment Company Act and (ii) will not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein in light of the circumstances under which they were made
or necessary to make the statements therein not misleading; provided,
however, that the representations and warranties in this paragraph
4.1.14 shall not apply to statements in or omissions from the Proxy
Statement and Registration Statement made in reliance upon and in
conformity with information furnished by Active Balanced Fund for use
therein.

4.2 Active Balanced Fund represents and warrants as follows:

4.2.1 Active Balanced Fund is a series of the Company which is a
corporation duly organized and validly existing under the laws of the
State of Maryland;

4.2.2 The Company is an open-end management investment company duly
registered under the Investment Company Act, and such registration is
in full force and effect;

4.2.3 Active Balanced Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the Articles of Incorporation or By-Laws of the Company or
of any material agreement, indenture, instrument, contract, lease or
other undertaking to which the Company is a party or by which Active
Balanced Fund is bound;

4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or threatened against Active Balanced Fund or any of its
properties or assets, except as previously disclosed in writing to
Balanced Fund. Active Balanced Fund knows of no facts that might form
the basis for the institution of such proceedings, and the Company on
behalf of Active Balanced Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;

4.2.5 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net
Assets, and Financial Highlights of Active Balanced Fund at September
30, 1999 and for the fiscal year then ended (copies of which have been
furnished to Balanced Fund) have been audited by PricewaterhouseCoopers
LLP, independent accountants, in accordance with generally accepted
auditing standards. Such financial statements are prepared in
accordance with generally accepted accounting principles and present
fairly, in all material respects, the financial condition, results of
operations, changes in net assets and financial highlights of Active
Balanced Fund as of and for the period ended on such date, and there
are no known material liabilities of Active Balanced Fund (contingent
or otherwise) not disclosed therein;

4.2.6 Since September 30, 1999, there has not been any material
adverse change in Active Balanced Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Active Balanced Fund of
indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and
accepted by Balanced Fund. For the purposes of this paragraph, a
decline in net asset value, net asset value per share or a decrease in
the number of shares outstanding shall not constitute a material
adverse change;

4.2.7 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Active Balanced Fund required by law
to have been filed on or before such dates shall have been filed, and
all federal and other taxes shown as due on said returns and reports
shall have been paid insofar as due, or provision shall have been made
for the payment thereof, and, to the best of Active Balanced Fund's
knowledge, all federal or other taxes required to be shown on any such
return or report are shown on such return or report, no such return is
currently under audit and no assessment has been asserted with respect
to such returns;

4.2.8 For each past taxable year since it commenced operations,
Active Balanced Fund has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and intends to meet those requirements for the
current taxable year; and, for each past calendar year since it
commenced operations, Active Balanced Fund has made such distributions
as are necessary to avoid the imposition of federal excise tax or has
paid or provided for the payment of any excise tax imposed;

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4.2.9 All issued and outstanding shares of Active Balanced Fund are,
and at the Closing Date will be, duly and validly authorized, issued
and outstanding, fully paid and non-assessable. Except as contemplated
by this Agreement, Active Balanced Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of
its shares nor is there outstanding any security convertible into any
of its shares, except for Class B shares which have a conversion
feature described in Active Balanced Fund's prospectus dated December
2, 1999;

4.2.10 The execution, delivery and performance of this Agreement have
been duly authorized by the Board of Directors of the Company and by
all necessary corporate action on the part of the Company, and this
Agreement constitutes a valid and binding obligation of the Company on
behalf of Active Balanced Fund;

4.2.11 The shares of Active Balanced Fund to be issued and delivered
to Balanced Fund pursuant to this Agreement will, at the Closing Date,
have been duly authorized and, when issued and delivered as provided in
this Agreement, will be duly and validly issued and outstanding shares
of Active Balanced Fund, fully paid and non-assessable;

4.2.12 The information furnished and to be furnished by Active
Balanced Fund for use in applications for orders, registration
statements, proxy materials and other documents which may be necessary
in connection with the transactions contemplated hereby is and shall be
accurate and complete in all material respects and is and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and

4.2.13 On the effective date of the Registration Statement, at the
time of the meeting of the shareholders of Balanced Fund and on the
Closing Date, the Proxy Statement and the Registration Statement (i)
will comply in all material respects with the provisions and
regulations of the 1933 Act, the 1934 Act and the Investment Company
Act, (ii) will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) with
respect to the Registration Statement, at the time it becomes
effective, it will not contain an untrue statement of a material fact
or omit to state a material fact necessary to make the statements
therein in the light of the circumstances under which they were made,
not misleading; provided, however, that the representations and
warranties in this paragraph 4.2.13 shall not apply to statements in or
omissions from the Proxy Statement and the Registration Statement made
in reliance upon and in conformity with information furnished by
Balanced Fund for use therein.

5. Covenants of Active Balanced Fund and Balanced Fund

5.1 Balanced Fund and Active Balanced Fund each covenants to operate its
respective business in the ordinary course between the date hereof and the
Closing Date, it being understood that the ordinary course of business will
include declaring and paying customary dividends and other distributions
and such changes in operations as are contemplated by the normal operations
of the Funds, except as may otherwise be required by paragraph 1.4 hereof.

5.2 Balanced Fund covenants to call a shareholders' meeting to consider
and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated hereby (including the
determinations of its Board of Trustees as set forth in Rule 17a-8(a) under
the Investment Company Act).

5.3 Balanced Fund covenants that Active Balanced Fund shares to be
received by Balanced Fund in accordance herewith are not being acquired for
the purpose of making any distribution thereof other than in accordance
with the terms of this Agreement.

5.4 Balanced Fund covenants that it will assist Active Balanced Fund in
obtaining such information as Active Balanced Fund reasonably requests
concerning the beneficial ownership of Balanced Fund's shares.

5.5 Subject to the provisions of this Agreement, each Fund will take, or
cause to be taken, all action, and will do, or cause to be done, all things
reasonably necessary, proper or advisable to consummate and make effective
the transactions contemplated by this Agreement.

5.6 Balanced Fund covenants to prepare the Proxy Statement in compliance
with the 1934 Act, the Investment Company Act and the rules and regulations
under each such Act.

A-6
<PAGE>

5.7 Balanced Fund covenants that it will, from time to time, as and when
requested by Active Balanced Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action, as Active Balanced Fund may
deem necessary or desirable in order to vest in and confirm to Active
Balanced Fund title to and possession of all the assets of Balanced Fund to
be sold, assigned, transferred and delivered hereunder and otherwise to
carry out the intent and purpose of this Agreement.

5.8 Active Balanced Fund covenants to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the
Investment Company Act (including the determinations of the Company's Board
of Directors as set forth in Rule 17a-8(a) thereunder) and such of the
state Blue Sky or securities laws as it may deem appropriate in order to
continue its operations after the Closing Date.

5.9 The Company on behalf of Active Balanced Fund covenants that it will,
from time to time, as and when requested by Balanced Fund, execute and
deliver or cause to be executed and delivered all such assignments and
other instruments, and will take and cause to be taken such further action,
as Balanced Fund may deem necessary or desirable in order to (i) vest in
and confirm to Balanced Fund title to and possession of all the shares of
Active Balanced Fund to be transferred to Balanced Fund pursuant to this
Agreement and (ii) assume all of Balanced Fund's liabilities in accordance
with this Agreement.

6. Conditions Precedent to Obligations of Balanced Fund

The obligations of Balanced Fund to consummate the transactions provided
for herein shall be subject to the performance by Active Balanced Fund of
all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:

6.1 All representations and warranties of Active Balanced Fund contained
in this Agreement shall be true and correct in all material respects as of
the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.

6.2 Active Balanced Fund shall have delivered to Balanced Fund on the
Closing Date a certificate executed in the Company's name by its President
or a Vice President in form and substance satisfactory to Balanced Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of Active Balanced Fund in this Agreement are true and correct
at and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters
as Balanced Fund shall reasonably request.

6.3 Balanced Fund shall have received on the Closing Date a favorable
opinion from Piper Marbury Rudnick & Wolfe LLP, special Maryland counsel to
the Company, dated as of the Closing Date, to the effect that:

6.3.1 The Company is duly incorporated and validly existing as a
Maryland corporation, with power under its charter to own all of its
properties and assets and, to the knowledge of such counsel, to carry
on its business as presently conducted;

6.3.2 This Agreement has been duly authorized, executed and delivered
by an authorized officer of the Company on behalf of Active Balanced
Fund and, assuming due authorization, execution and delivery of the
Agreement by Balanced Fund, is a valid and binding obligation of the
Company on behalf of Active Balanced Fund enforceable in accordance
with its terms, except to the extent that enforcement thereof may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general principles of equity
(regardless of whether enforcement is sought in a proceeding at law or
in equity), and further subject to the qualification that no opinion is
expressed as to the validity or enforceability of any provision
regarding the choice of New York law to govern the Agreement;

6.3.3 The shares of Active Balanced Fund to be distributed to
Balanced Fund shareholders under this Agreement, assuming their due
authorization and delivery as contemplated by this Agreement, will be
validly issued and outstanding and fully paid and non-assessable, and
no shareholder of Active Balanced Fund has any pre-emptive right under
Maryland law to subscribe for or purchase such shares;

6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i)
conflict with the Company's charter or By-Laws or (ii) result in a
default or a breach of (a) the Management Agreement for Active Balanced
Fund dated January 23, 1998 and amended and restated on January 1, 2000
between the Company and Prudential Investments Fund Management LLC, (b)
the Custodian Contract dated June 1, 1998 between the Company and State
Street Bank and Trust Company, (c) the Distribution Agreement

A-7
<PAGE>

dated June 1, 1998 between the Company and Prudential Investment
Management Services LLC, and (d) the Transfer Agency and Service
Agreement dated October 27, 1995 between the Company and Prudential
Mutual Fund Services, Inc.; provided, however, that such counsel may
state that they express no opinion with respect to federal or state
securities laws, other antifraud laws and fraudulent transfer laws; and
provided further that insofar as performance by the Company of its
obligations under this Agreement is concerned, such counsel may state
that they express no opinion as to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;

6.3.5 To the knowledge of such counsel and without independent inquiry
or investigation, no consent, approval, authorization, filing or order
of any court or governmental authority is required for the consummation
by the Company on behalf of Active Balanced Fund of the transactions
contemplated herein, except such as have been obtained under the 1933
Act, the 1934 Act and the Investment Company Act and such as may be
required under state Blue Sky or securities laws;

6.3.6 The Company has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and

6.3.7 Such counsel knows and has not made independent inquiry or
investigation to ascertain the existence of any litigation or
government proceeding instituted or threatened against Active Balanced
Fund that could be required to be disclosed in its registration
statement on Form N-1A and is not so disclosed.

7. Conditions Precedent to Obligations of Active Balanced Fund

The obligations of Active Balanced Fund to complete the transactions
provided for herein shall be subject to the performance by Balanced Fund of
all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:

7.1 All representations and warranties of Balanced Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as
if made on and as of the Closing Date.

7.2 Balanced Fund shall have delivered to Active Balanced Fund on the
Closing Date a statement of its assets and liabilities, which statement
shall be prepared in accordance with generally accepted accounting
principles consistently applied, together with a list of its portfolio
securities showing the adjusted tax bases of such securities by lot, as of
the Closing Date, certified by the Treasurer or Assistant Treasurer of
Balanced Fund.

7.3 Balanced Fund shall have delivered to Active Balanced Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Balanced Fund, in form and substance satisfactory to Active
Balanced Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Balanced Fund made in this Agreement are
true and correct at and as of the Closing Date except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as Active Balanced Fund shall reasonably request.

7.4 On or immediately prior to the Closing Date, Balanced Fund shall have
declared and paid to its shareholders of record one or more dividends
and/or other distributions so that it will have distributed substantially
all (and in any event not less than ninety-eight percent) of such Fund's
investment company taxable income (computed without regard to any deduction
for dividends paid), and realized net capital gain, if any, of Balanced
Fund for all completed taxable years from the inception of the Fund through
the Closing Date.

7.5 Active Balanced Fund shall have received on the Closing Date a
favorable opinion from Gardner, Carton & Douglas, counsel to Balanced Fund,
dated as of the Closing Date, to the effect that:

7.5.1 Balanced Fund is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with power
under its Declaration of Trust to own all of its properties and assets
and, to the knowledge of such counsel, to carry on its business as
described in its prospectus;

7.5.2 This Agreement has been duly authorized for execution and
delivery by an authorized officer of Balanced Fund and constitutes a
valid and legally binding obligation of Balanced Fund enforceable
against Balanced Fund in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles, provided that such
counsel may state that they express no opinion as to the validity or
enforceability of any provision regarding New York law to govern this
agreement;

A-8
<PAGE>

7.5.3 The execution and delivery of the Agreement did not, and the
performance by Balanced Fund of its obligations hereunder will not, (i)
violate Balanced Fund's Declaration of Trust or By-Laws or (ii) result
in a default or a breach of (a) the Management Agreement, dated March
1, 1988, between Balanced Fund and Prudential Investments Fund
Management LLC as successor to Prudential Mutual Fund Management, Inc.,
(b) the Custodian Contract, dated September 4, 1987, between Balanced
Fund and State Street Bank and Trust Company, (c) the Distribution
Agreement dated June 1, 1998, between Balanced Fund and Prudential
Investment Management Services LLC, and (d) the Transfer Agency and
Service Agreement, dated January 1, 1988, between Balanced Fund and
Prudential Mutual Fund Services, Inc.; provided, however, that such
counsel may state that they express no opinion in their opinion
pursuant to this paragraph 7.5.3 with respect to federal or state
securities laws, other antifraud laws and fraudulent transfer laws;
provided further that insofar as performance by Balanced Fund of its
obligations under this Agreement is concerned, such counsel may state
that they express no opinion as to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;

7.5.4 All regulatory consents, authorizations and approvals required
to be obtained by Balanced Fund under the federal laws of the United
States, and the laws of the Commonwealth of Massachusetts for the
consummation of the transactions contemplated by this Agreement have
been obtained (other than such as may be required under Massachusetts
securities laws or Blue Sky laws as to which such counsel may state
that they express no opinion);

7.5.5 Such counsel knows of no litigation or any governmental
proceeding instituted or threatened against Balanced Fund that would be
required to be disclosed in the Registration Statement and is not so
disclosed; and

7.5.6 Balanced Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration.

Such opinion may rely on an opinion of Massachusetts counsel to the
extent it addresses Massachusetts law. As to paragraph 7.5.2, such counsel
may state that they have assumed that the agreement is governed by the laws
of the State of Illinois.

8. Further Conditions Precedent to Obligations of Active Balanced Fund
and Balanced Fund

The obligations of each Fund hereunder are subject to the further
conditions that on or before the Closing Date:

8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of (a) the Board of Trustees of
Balanced Fund and the Board of Directors of the Company, as to the
determinations set forth in Rule 17a-8(a) under the Investment Company Act,
(b) the Board of Directors of the Company as to the assumption by Active
Balanced Fund of the liabilities of Balanced Fund and (c) the holders of
the outstanding shares of Balanced Fund in accordance with the provisions
of Balanced Fund's Declaration of Trust, and certified copies of the
resolutions evidencing such approvals shall have been delivered to Active
Balanced Fund and Balanced Fund, as applicable.

8.2 Any proposed change to Active Balanced Fund's operations that may be
approved by the Board of Directors of the Company subsequent to the date of
this Agreement but in connection with and as a condition to implementing
the transactions contemplated by this Agreement, for which the approval of
Active Balanced Fund's shareholders is required pursuant to the Investment
Company Act or otherwise, shall have been approved by the requisite vote of
the holders of the outstanding shares of the Active Balanced Fund in
accordance with the Investment Company Act and Maryland law, and certified
copies of the resolutions evidencing such approval shall have been
delivered to Balanced Fund.

8.3 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein.

8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC
and of state Blue Sky or securities authorities, including "no-action"
positions of such authorities) deemed necessary by Active Balanced Fund or
Balanced Fund to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where
failure to obtain any such consent, order or permit would not involve a
risk of a material adverse effect on the assets or properties of Active
Balanced Fund or Balanced Fund, provided that either party hereto may for
itself waive any part of this condition.

A-9
<PAGE>

8.5 The Registration Statement shall have become effective under the 1933
Act, and no stop orders suspending the effectiveness thereof shall have
been issued, and to the best knowledge of the parties hereto, no
investigation or proceeding under the 1933 Act for that purpose shall have
been instituted or be pending, threatened or contemplated.

8.6 Balanced Fund and Active Balanced Fund shall have received on or
before the Closing Date an opinion of Gardner, Carton & Douglas
satisfactory to Balanced Fund and to Active Balanced Fund, substantially to
the effect that for federal income tax purposes:

8.6.1 The acquisition by Active Balanced Fund of the assets of
Balanced Fund in exchange solely for voting shares of Active Balanced
Fund and the assumption by Active Balanced Fund of Balanced Fund's
liabilities, if any, followed by the distribution of Active Balanced
Fund's voting shares by Balanced Fund pro rata to its shareholders, as
a liquidating distribution and constructively in exchange for their
Balanced Fund shares, will constitute a reorganization within the
meaning of Section 368(a)(1)(D) of the Internal Revenue Code, and
Balanced Fund and Active Balanced Fund each will be "a party to a
reorganization" within the meaning of Section 368(b) of the Internal
Revenue Code;

8.6.2 Balanced Fund's shareholders will recognize no gain or loss
upon the receipt of Class A, Class B, Class C and Class Z shares of
Active Balanced Fund solely in exchange for and in cancellation of the
Balanced Fund shares as described above and in the Agreement;

8.6.3 No gain or loss will be recognized by Balanced Fund upon the
transfer of its assets to Active Balanced Fund in exchange solely for
Class A, Class B, Class C and Class Z shares of Active Balanced Fund
and the assumption by Active Balanced Fund of Balanced Fund's
liabilities, if any. In addition, no gain or loss will be recognized by
Balanced Fund on the distribution of such shares to the Balanced Fund
shareholders in liquidation of Balanced Fund;

8.6.4 No gain or loss will be recognized by Active Balanced Fund upon
the acquisition of Balanced Fund's assets in exchange solely for Class
A, Class B, Class C and Class Z shares of Active Balanced Fund and the
assumption of Balanced Fund's liabilities, if any;

8.6.5 Active Balanced Fund's basis in the assets acquired from
Balanced Fund will be the same as the basis thereof when held by
Balanced Fund immediately before the transfer, and the holding period
of such assets acquired by Active Balanced Fund will include the
holding period thereof when held by Balanced Fund immediately before
the transfer;

8.6.6 Balanced Fund shareholders' basis in the Class A, Class B,
Class C and Class Z shares of Active Balanced Fund to be received by
them pursuant to the reorganization will be the same as their basis in
the Class A, Class B, Class C and Class Z shares of Balanced Fund to be
constructively surrendered in exchange therefor; and

8.6.7 The holding period of Active Balanced Fund shares to be
received by Balanced Fund shareholders will include the period during
which Balanced Fund shares to be constructively surrendered in exchange
therefor were held; provided such Balanced Fund shares were held as
capital assets by those shareholders on the date of the exchange.

In rendering this opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the representations
made in this Agreement (or in separate letters addressed to such counsel)
and the certificates delivered pursuant to paragraph 3.4.

9. Finder's Fees and Expenses

9.1 Each Fund represents and warrants to the other that there are no
finder's fees payable in connection with the transactions provided for
herein.

9.2 The expenses incurred in connection with the entering into and
carrying out of the provisions of this Agreement shall be allocated to
Balanced Fund and Active Balanced Fund pro rata in a fair and equitable
manner in proportion to their respective assets.

10. Entire Agreement; Survival of Warranties

10.1 This Agreement constitutes the entire agreement between the Funds.

A-10
<PAGE>

10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.

11. Termination

Either Fund may at its option terminate this Agreement at or prior to the
Closing Date because of:

11.1 A material breach by the other of any representation, warranty
or covenant contained herein to be performed at or prior to the Closing
Date; or

11.2 A condition herein expressed to be precedent to the obligations
of either party not having been met and it reasonably appearing that it
will not or cannot be met; or

11.3 A mutual written agreement of Balanced Fund and Active Balanced
Fund.

In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds
to pay their allocated expenses pursuant to paragraph 9.2) or any
Director/Trustee or officer of the Company or Balanced Fund.

12. Amendment

This Agreement may be amended, modified or supplemented only in writing
by the parties; provided, however, that following the shareholders' meeting
called by Balanced Fund pursuant to paragraph 5.2, no such amendment may
have the effect of changing the provisions for determining the number of
shares of Active Balanced Fund to be distributed to Balanced Fund
shareholders under this Agreement to the detriment of such shareholders
without their further approval.

13. Notices

Any notice, report, demand or other communication required or permitted
by any provision of this Agreement shall be in writing and shall be given
by hand delivery, or prepaid certified mail or overnight service addressed
to Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102, Attention: Marguerite E. H.
Morrison.

14. Headings; Counterparts; Governing Law; Assignment

14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation
of this Agreement.

14.2 This Agreement may be executed in any number of counterparts, each
of which will be deemed an original.

14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter
shall govern.

14.4 This Agreement shall bind and inure to the benefit of the parties
and their respective successors and assigns, and no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by either
party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation other than the parties and their
respective successors and assigns any rights or remedies under or by reason
of this Agreement.

15. No Personal Liability

Balanced Fund's Declaration of Trust provides that no shareholder of the
Fund shall be subject to any personal liability whatsoever to any person in
connection with the Fund's property, or the acts, obligations or affairs of
the Fund. No Trustee, officer, employee or agent of Balanced Fund shall be
subject to any personal liability whatsoever to any person, other than the
Fund or its shareholders, in connection with the Fund's property or the
affairs of the Fund, save only that arising from bad faith, willful
misfeasance, gross negligence or reckless disregard of his or its duty to
such person; and all persons shall look solely to the Fund's property for
satisfaction of claims of any nature arising in connection with the affairs
of the Fund. If any shareholder, Trustee, officer, employee or agent, as
such, of Balanced Fund is made a party to any suit or proceeding to enforce
any such liability, he or it shall not, on account thereof, be held to any
personal liability.

A-11
<PAGE>

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its President or Vice President.

Prudential Balanced Fund

/s/ Robert F. Gunia
By:
-----------------------------------
Vice President

The Prudential Investment
Portfolios, Inc.

/s/ John R. Strangfeld
By:
-----------------------------------
President

A-12
<PAGE>

APPENDIX B

PERFORMANCE OVERVIEW FROM THE ANNUAL REPORT OF
ACTIVE BALANCED FUND DATED SEPTEMBER 30, 1999

Performance Review
-------------------------------------------------------------------------------
(PHOTO) (PHOTO) (PHOTO)

Equity Portfolio Managers Mark S. Stumpp and James H. Scott, and Michael
Lillard, team leader of the U.S. Liquidity team.

Investment Goals and Style
Prudential Active Balanced Fund seeks income and long-term growth of capital by
investing in a portfolio of equity, fixed-income, and money market securities
that is actively managed to take advantage of opportunities created by what we
see as market misvaluations. The Fund's investments will be shifted among equity
securities, fixed-income securities, and money market instruments to capitalize
on such opportunities and to maximize the Fund's total investment return. Mark
Stumpp and James Scott manage the asset allocation using a quantitative model.
They also manage the stocks, using behavioral finance models to select
securities they believe to be underpriced, but maintaining a risk profile like
that of the S&P 500 Index. Prudential Investment's U.S. Liquidity Team manages
the bonds. There can be no assurance that the Fund will meet its investment
objective.

We moved well
We began our reporting period as the markets were rebounding from their steep
decline in the summer of 1998. We were well above our neutral position in
stocks, and the impact of the rebound was magnified by this overweight. As
stocks moved up in price, we reduced our allocation, moving to a neutral one by
year end and to an underweight by the end of the first quarter of 1999. This
helped in the third quarter of 1999 when stocks generally declined. We held very
little cash through most of the fiscal year, but rose above our neutral cash
position at the end.

We held the leading growth stocks
We generally hold at least 175 different stocks and generally buy no more than
0.75 percentage points or less than their representation in the S&P 500 Index.
Our goal is to limit the difference between our stock performance and that of
the Index, while increasing the likelihood that our return will be higher than
the Index. At the beginning of our reporting period, market gains were focused
on a few key growth stocks. We emphasized the large-capitalization,
growth-oriented stocks that then led the S&P 500 Index. In fact, companies like
Microsoft, General Electric, and Wal-Mart were solid performers in the portfolio
over the fiscal year. However, during the first quarter of 1999, their positive
impact was offset by a decline of our value stocks, and we trailed the S&P 500
Index slightly. In the following quarter, value stocks shot ahead to lead the
market, and ours drove us slightly ahead of our stock benchmark. In the last
quarter of our fiscal year, the strength of our growth stocks supported our
portfolio, as it held up better than the S&P 500 Index in a generally falling
market. Over the full fiscal year, we benefited most from our stock selection in

Active Asset Allocation
Asset class has a greater impact on returns over the long term than selection of
individual securities. We use quantitative models to determine which market
sectors offer the best opportunities. Using companies' earnings expectations and
stock prices, we compare the expected returns on stocks with the interest rates
on bonds. We try to increase the proportion of the type of securities that offer
the best value at any time, monitoring our allocation daily. We implement most
of these allocation changes with stock and bond futures contracts because it is
quicker and less expensive than trading the actual securities. Our neutral
position is 57.5% stocks, 40% bonds, and 2.5% cash.

B-1
<PAGE>

the strongly rising quarter that began our reporting period and in the declining
market that ended it.

Our bonds had a positive return in a difficult period
The Lehman Aggregate Bond Index posted a negative return for the year, but our
portfolio came in slightly positive. Bonds rose only marginally by the end of
1998, but investors had retreated from other securities to U.S. Treasury bonds
in the summer panic. Corporate bonds performed better in the fall, as investors'
confidence returned and demand for a higher yield increased. We had a
significantly larger representation of corporate bonds than our benchmark. These
corporate bonds and our focus on higher-grade bonds contributed to our superior
bond return. Our modest overweight in mortgage-backed securities also helped.

Looking Ahead
Stocks are expensive
At the end of our reporting period, our quantitative model recommended a lower
equity allocation than normal. This year's increase in interest rates and stock
prices led us to favor bonds over stocks in making adjustments from our normal
risk profile. However, the degree of market overvaluation varies considerably
from day to day.

Performance at a Glance

Cumulative Total Returns1 As of 9/30/99

<TABLE>
<CAPTION>
One Five Since
Year Years Inception2
<S> <C> <C> <C>
Class A 16.07% N/A 39.00%
Class B 15.12 N/A 36.08
Class C 15.12 N/A 36.08
Class Z 16.32 85.05% 106.67
Lipper Balanced Fund Avg3 12.56 96.33 ***
</TABLE>

Average Annual Total Returns1 As of 9/30/99

<TABLE>
<CAPTION>
One Five Since
Year Years Inception2
<S> <C> <C> <C>
Class A 10.27% N/A 10.08%
Class B 10.12 N/A 10.38
Class C 12.97 N/A 10.85
Class Z 16.32 13.10% 11.38
</TABLE>

Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.

1 Source: Prudential Investments Fund Management LLC and Lipper, Inc. The
cumulative total returns do not take into account sales charges. The average
annual total returns do take into account applicable sales charges. The Fund
charges a maximum front-end sales charge of 5% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of 5%,
4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically convert
to Class A shares, on a quarterly basis, approximately seven years after
purchase. Class C shares are subject to a front-end sales charge of 1% and a
CDSC of 1% for 18 months. Class C shares bought before November 2, 1998, have a
1% CDSC if sold within one year. Class Z shares are not subject to a sales
charge or distribution and service (12b-1) fees.

2 Inception dates: Class A, B, and C, 11/7/96; Class Z, 1/4/93.

3 Lipper average returns are for all funds in each share class for the one- and
five-year periods in the Balanced Fund category. The Lipper average is
unmanaged. Balanced funds are funds whose primary objective is to conserve
principal by maintaining at all times a balanced portfolio of both stocks and
bonds. Typically, the stock/bond ratio ranges around 60%/40%.

***Lipper Since Inception returns are 42.02% for Class A, B, and C; and 115.21%
for Class Z, based on all funds in each share class.

B-2
<PAGE>

Review Cont'd.
-------------------------------------------------------------------------------

The uncertainty about interest-rate direction and the slowing U.S. economy have
led us to increase our cash position to slightly above neutral.

Our stock portfolio emphasizes--within the limits we described earlier--
electronic technology, finance, technology services, manufacturers, and
retailers. We are underrepresenting health technology and consumer nondurables.
Our bond holdings favor corporate and mortgage-backed bonds because we believe
they continue to offer an attractively greater return in a generally healthy
economy.

Five Largest Equity Holdings
Expressed as a percentage of net assets as of 9/30/99

Microsoft Corporation 1.9%
Computer Software & Services
General Electric Co. 1.6
Diversified Operations
Wal-Mart Stores, Inc. 1.0
Retail
CISCO Systems, Inc. 1.0
Networking
IBM Corp. 0.9
Computer Systems/Peripherals

Portfolio Composition
Expressed as a percentage of net assets as of 9/30/99
Bonds 44.0%

Equity:
Electronic Tech & Services 11.8
Finance 7.3
Producer Manufacturing 4.4
Utilities 4.4
Health Services & Technology 4.1
Consumer Durables & Nondurables 3.5
Retail Trade 3.5
Process Industries 2.3
Consumer Services 1.7
Transportation 0.9
Commercial Services 0.7
Energy & Nonenergy Minerals 0.1
Cash & Equivalents 11.3*

* Primarily collateral for stock and bond futures contracts used to manage asset
allocation.

B-3
<PAGE>

Comparing a $10,000 Investment
---------------------------------------------------------
Prudential Active Balanced Fund vs. the S&P 500 Index and
the Lehman Brothers Government/Corporate Bond Index

Chart A
(GRAPH)

Average Annual Total Returns
With Sales Load
Since Inception 10.08%
One Year 10.27%

Without Sales Load
Since Inception 12.05%
One Year 16.07%

Chart B
(GRAPH)

Average Annual Total Returns
With Sales Load
Since Inception 10.38%
One Year 10.12%

Without Sales Load
Since Inception 11.23%
One Year 15.12%

Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. These graphs compare a $10,000 investment
in The Prudential Investment Portfolios, Inc.: Prudential Active Balanced Fund
(Class A, B, C, and Z shares) with similar investments in the Standard & Poor's
500 Composite Stock Price Index (S&P 500 Index) and the Lehman Brothers
Government/Corporate Bond Index (the Lehman Index) by portraying the initial
account values at the commencement of operations of each class, and subsequent
account values at the end of each fiscal year (September 30), as measured on a
quarterly basis, beginning in 1996 for Class A, B, and C shares, and in 1993 for
Class Z shares. For purposes of the graphs, and unless otherwise indicated in
the accompanying tables, it has been assumed that (a) the maximum applicable
front-end sales charge was deducted from the initial $10,000 investment in Class
A shares; (b) the maximum applicable contingent deferred sales charges were
deducted from the value of the investment in Class B and Class C shares,
assuming full redemption on September 30, 1999; (c) all recurring fees
(including management fees) were deducted; and (d) all dividends and
distributions were reinvested. Class B shares will automatically convert to
Class A

B-4
<PAGE>

Chart C
(GRAPH)

Average Annual Total Returns
With Sales Load
Since Inception 10.85%
One Year 12.97%

Without Sales Load
Since Inception 11.23%
One Year 15.12%

Chart Z
(GRAPH)

Average Annual Total Returns
Since Inception 11.38%
Five Years 13.10%
One Year 16.32%

shares, on a quarterly basis, approximately seven years after purchase. This
conversion feature is not reflected in the graphs. Class Z shares are not
subject to a sales charge or distribution and service (12b-1) fees.

The Lehman Index is a weighted index comprising of public, fixed-rate,
nonconvertible domestic corporate debt that is rated at least investment grade
(BBB/Baa or higher) and public obligations of the U.S. Treasury. The S&P 500
Index is a market capitalization-weighted index representing the aggregate
market value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The Lehman Index and the S&P 500 Index are unmanaged indexes,
and both include the reinvestment of all income and dividends, but do not
reflect the payment of transaction costs and advisory fees associated with an
investment in the Fund. The Lehman Index and the S&P 500 Index are not the only
indexes that may be used to characterize performance of actively balanced funds,
and other indexes may portray different comparative performance. Investors
cannot invest directly in an index. These graphs are furnished to you in
accordance with SEC regulations.

B-5
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
VOTING INFORMATION......................................................... 1
SYNOPSIS................................................................... 3
Investment Objectives and Policies......................................... 3
Expense Structures......................................................... 4
The Proposed Reorganization................................................ 4
Fund Operating Expenses.................................................... 5
Comparative Fee Tables..................................................... 5
Examples of the Effect of Fund Expenses.................................... 6
Pro Forma Capitalization and Ratios........................................ 7
Forms of Organization...................................................... 8
Performance Comparisons of the Funds....................................... 9
COMPARISON OF PRINCIPAL RISK FACTORS....................................... 10
INVESTMENT OBJECTIVES AND POLICIES......................................... 10
Investment Objectives...................................................... 10
Principal Investment Strategies............................................ 11
COMPARISON OF OTHER POLICIES OF THE FUNDS.................................. 11
Diversification............................................................ 11
Borrowing.................................................................. 11
Lending.................................................................... 11
Illiquid Securities........................................................ 11
Temporary Defensive Investments............................................ 11
OPERATIONS OF ACTIVE BALANCED FUND FOLLOWING THE REORGANIZATION............ 12
The Potential Impact of a Special Meeting of Shareholders of Active
Balanced Fund............................................................. 12
PURCHASES, REDEMPTIONS AND EXCHANGES....................................... 14
Purchasing Shares.......................................................... 14
Redeeming Shares........................................................... 14
Minimum Investment Requirements............................................ 14
Purchases and Redemptions of Balanced Fund................................. 14
Exchanges of Fund Shares................................................... 14
Dividends and Other Distributions.......................................... 15
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION...................... 15
THE PROPOSED TRANSACTION................................................... 15
Reorganization Plan........................................................ 15
Reasons for the Reorganization............................................. 16
Description of the Securities to be Issued................................. 17
Federal Income Tax Considerations With Respect to the Reorganization....... 17
Conclusion................................................................. 18
ADDITIONAL INFORMATION ABOUT ACTIVE BALANCED FUND.......................... 18
MISCELLANEOUS.............................................................. 18
Legal Matters.............................................................. 18
Independent Accountants.................................................... 19
Available Information...................................................... 19
Notice to Banks, Broker-Dealers and Voting Trustees and Their Nominees..... 19
SHAREHOLDER PROPOSALS...................................................... 19
OTHER BUSINESS............................................................. 19
APPENDIX A: Agreement and Plan of Reorganization between Prudential
Balanced Fund and The Prudential Investment Portfolios, Inc., on behalf of
Prudential Active Balanced Fund........................................... A-1
APPENDIX B: Performance Overview from the Annual Report of Active Balanced
Fund dated September 30, 1999............................................. B-1
</TABLE>
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.--PRUDENTIAL ACTIVE BALANCED FUND,
GATEWAY CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077,
(800) 225-1852

STATEMENT OF ADDITIONAL INFORMATION

dated September 18, 2000

PRUDENTIAL BALANCED FUND, GATEWAY CENTER THREE, 100 MULBERRY STREET, NEWARK,
NEW JERSEY 07102-4077, (800) 225-1852

This Statement of Additional Information specifically relates to the
proposed transfer of all of the assets and the assumption of all of the
liabilities, if any, of Prudential Balanced Fund (Balanced Fund) by Prudential
Active Balanced Fund (Active Balanced Fund), a series of The Prudential
Investment Portfolios, Inc. (the Company). This Statement of Additional
Information consists of this cover page and the following described documents,
each of which is attached hereto and incorporated herein by reference:

1. Pro-Forma Financial Statements as of March 31, 2000.

2. Statement of Additional Information of the Company dated December 2,
1999.

3. Annual Report of Active Balanced Fund for the fiscal year ended
September 30, 1999 and Semi-Annual Report for the six months ended March
31, 2000.

4. Annual Report of Balanced Fund for the fiscal year ended July 31, 1999
and Semi-Annual Report for the six months ended January 31, 2000.

This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated
September 18, 2000, relating to the above-referred matter. A copy of the
Prospectus and Proxy Statement may be obtained from Active Balanced Fund
without charge by writing or calling Active Balanced Fund at the address or
phone number listed above.

B-1
<PAGE>

The following are pro-forma financial statements which give effect to the
proposed transaction whereby all the assets of Prudential Balanced Fund will
be exchanged for shares of Prudential Active Balanced Fund and Prudential
Active Balanced Fund will assume the liabilities, if any, of Prudential
Balanced Fund. Immediately thereafter, the shares of Prudential Active
Balanced Fund will be distributed to the shareholders of Prudential Balanced
Fund in a total liquidation of Prudential Balanced Fund, which will
subsequently be terminated. The following pro-forma financial statements
include a pro-forma Portfolio of Investments at March 31, 2000, a pro-forma
Statement of Assets and Liabilities at March 31, 2000 and a pro-forma
Statement of Operations for the 12 months ended March 31, 2000.

PRO-FORMA FINANCIAL STATEMENTS

PRO-FORMA PORTFOLIO OF INVESTMENTS

MARCH 31, 2000
(UNAUDITED)

<TABLE>
<CAPTION>
SHARES (000) DESCRIPTION VALUE
------------------------------- ------------------------ --------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED BALANCED PRO-FORMA
FUND FUND COMBINED FUND FUND COMBINED
-------- -------- ------------- ----------- ------------ -------------
<C> <C> <C> <S> <C> <C> <C>

LONG-TERM INVESTMENTS--
88.0%
COMMON STOCKS--56.8%
ADVERTISING--0.7%
Interpublic Group of
1,000 72,300 73,300 Companies, Inc.......... $ 47,250 $ 3,458,700 $ 3,505,950
-- 108,000 108,000 Young & Rubicam Inc. ... -- 5,076,000 5,076,000
----------- ------------ ------------
47,250 8,534,700 8,581,950
----------- ------------ ------------
AEROSPACE/DEFENSE--0.1%
3,600 -- 3,600 General Dynamics Corp... 179,100 -- 179,100
Honeywell International,
2,237 -- 2,237 Inc..................... 117,862 -- 117,862
1,600 -- 1,600 Lockheed Martin Corp.... 32,700 -- 32,700
7,500 -- 7,500 Raytheon Co. ........... 133,125 -- 133,125
5,500 -- 5,500 The Boeing Co........... 208,656 -- 208,656
----------- ------------ ------------
671,443 -- 671,443
----------- ------------ ------------
AIRLINES--0.5%
America West Holdings
5,600 -- 5,600 Corp.................... 86,800 -- 86,800
2,400 178,000 180,400 AMR Corp.(a)............ 76,500 5,673,750 5,750,250
2,700 -- 2,700 Delta Airlines, Inc..... 143,775 -- 143,775
1,350 -- 1,350 Southwest Airlines Co... 28,097 -- 28,097
4,900 -- 4,900 UAL Corp.(a)............ 293,387 -- 293,387
----------- ------------ ------------
628,559 5,673,750 6,302,309
----------- ------------ ------------
AUTOMOBILES & TRUCKS--
0.7%
9,700 -- 9,700 Arvin Industries, Inc... 219,462 -- 219,462
Delphi Automotive
3,500 -- 3,500 Systems Corp............ 56,000 -- 56,000
13,300 53,200 66,500 Ford Motor Co........... 610,969 2,443,875 3,054,844
8,100 59,800 67,900 General Motors Corp..... 670,781 4,952,187 5,622,968
400 -- 400 PACCAR, Inc............. 20,000 -- 20,000
----------- ------------ ------------
1,577,212 7,396,062 8,973,274
----------- ------------ ------------
AUTOMOTIVE PARTS--0.2%
-- 22,800 22,800 BorgWarner, Inc......... -- 897,750 897,750
-- 45,600 45,600 Dana Corp............... -- 1,285,350 1,285,350
5,200 -- 5,200 TRW, Inc................ 304,200 -- 304,200
----------- ------------ ------------
304,200 2,183,100 2,487,300
----------- ------------ ------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-1
<PAGE>

LONG-TERM INVESTMENTS--
(CONTINUED)
COMMON STOCKS--
(CONTINUED)
BANKING--1.0%
5,994 -- 5,994 Bank One Corp........... $ 206,044 $ -- $ 206,044
4,300 43,900 48,200 Chase Manhattan Corp.... 374,906 3,827,531 4,202,437
-- 78,100 78,100 Comerica Inc............ -- 3,270,438 3,270,438
12,900 -- 12,900 Dime Bancorp, Inc....... 238,650 -- 238,650
6,200 -- 6,200 First Union Corp........ 230,950 -- 230,950
-- 255,200 255,200 Hanvit Bank(a).......... -- 797,500 797,500
Huntington Bancshares,
3,200 -- 3,200 Inc..................... 71,600 -- 71,600
13,600 -- 13,600 KeyCorp................. 258,400 -- 258,400
2,700 65,400 68,100 PNC Bank Corp. ......... 121,669 2,947,087 3,068,756
2,900 -- 2,900 Regions Financial Corp.. 66,156 -- 66,156
2,600 -- 2,600 Suntrust Banks, Inc..... 150,150 -- 150,150
----------- ------------ ------------
1,718,525 10,842,556 12,561,081
----------- ------------ ------------
BEVERAGES--0.5%
Anheuser-Busch
2,600 -- 2,600 Companies, Inc.......... 161,850 -- 161,850
7,900 -- 7,900 Coca-Cola Co............ 370,806 -- 370,806
11,600 160,900 172,500 PepsiCo, Inc. .......... 400,925 5,561,106 5,962,031
----------- ------------ ------------
933,581 5,561,106 6,494,687
----------- ------------ ------------
BUILDING & CONSTRUCTION
10,500 -- 10,500 Centex Corp............. 250,031 -- 250,031
11,500 -- 11,500 Pulte Corp.............. 240,063 -- 240,063
----------- ------------ ------------
490,094 -- 490,094
----------- ------------ ------------
BUSINESS SERVICES--0.4%
2,700 -- 2,700 Kelly Services, Inc..... 64,631 -- 64,631
2,800 -- 2,800 Omnicom Group, Inc...... 261,625 -- 261,625
1,734 135,424 137,158 Sabre Holdings Corp.(a). 64,063 5,002,224 5,066,287
----------- ------------ ------------
390,319 5,002,224 5,392,543
----------- ------------ ------------
CHEMICALS--1.5%
-- 458,600 458,600 Agrium, Inc. (Canada)... -- 3,632,663 3,632,663
1,100 50,400 51,500 Dow Chemical Co......... 125,400 5,745,600 5,871,000
-- 351,500 351,500 Geon Co................. -- 7,557,250 7,557,250
-- 95,900 95,900 Lyondell Chemical Co.... -- 1,414,525 1,414,525
400 -- 400 Praxair, Inc............ 16,650 -- 16,650
7,100 -- 7,100 Schulman (A.), Inc...... 94,075 -- 94,075
300 -- 300 Union Carbide Corp...... 17,494 -- 17,494
----------- ------------ ------------
253,619 18,350,038 18,603,657
----------- ------------ ------------
COMMERCIAL SERVICES
600 -- 600 Paychex, Inc............ 31,425 -- 31,425
----------- ------------ ------------
COMPUTER SERVICES--0.1%
Automatic Data
1,900 -- 1,900 Processing, Inc......... 91,675 -- 91,675
Electronic Data Systems,
2,500 -- 2,500 Corp.................... 160,469 -- 160,469
Network Appliance,
1,000 -- 1,000 Inc.(a)................. 82,750 -- 82,750
1,000 -- 1,000 Unisys Corp.(a)......... 25,500 -- 25,500
VERITAS Software
3,450 -- 3,450 Corp.(a)................ 451,950 -- 451,950
3,800 -- 3,800 Yahoo, Inc.(a).......... 651,225 -- 651,225
----------- ------------ ------------
1,463,569 -- 1,463,569
----------- ------------ ------------
COMPUTER SOFTWARE &
SERVICES--5.2%
1,400 -- 1,400 Adobe Systems, Inc...... 155,838 -- 155,838
13,000 97,100 110,100 America Online, Inc.(a). 874,50 6,529,975 7,404,225
42,600 201,100 243,700 Cisco Systems, Inc.(a).. 3,293,512 15,547,544 18,841,056
Computer Associates
10,300 -- 10,300 International, Inc...... 609,631 -- 609,631
</TABLE>

See Notes to Pro-Forma Financial Statements

F-2
<PAGE>

LONG-TERM INVESTMENTS--
(CONTINUED)
COMMON STOCKS--
(CONTINUED)
COMPUTER SOFTWARE &
SERVICES--(CONTINUED)
Comverse Technology,
2,050 -- 2,050 Inc.(a)................. $ 387,450 $ -- $ 387,450
3,200 -- 3,200 DST Systems, Inc.(a).... 207,800 -- 207,800
5,700 59,800 65,500 EMC Corp.(a)............ 712,500 7,475,000 8,187,500
31,300 71,100 102,400 Microsoft Corp.(a)...... 3,325,625 7,554,375 10,880,000
21,800 163,900 185,700 Oracle Systems Corp.(a). 1,701,763 12,794,444 14,496,207
600 -- 600 Siebel Systems, Inc.(a). 71,663 -- 71,663
Sun Microsystems,
12,600 -- 12,600 Inc.(a)................. 1,180,659 -- 1,180,659
6,100 -- 6,100 Teradyne, Inc.(a)....... 501,725 -- 501,725
----------- ------------ ------------
13,022,416 49,901,338 62,923,754
----------- ------------ ------------
COMPUTER
SYSTEMS/PERIPHERALS--
0.2%
2,500 -- 2,500 Apple Computer, Inc.(a). 339,531 -- 339,531
4,800 -- 4,800 Dell Computer Corp.(a).. 258,900 -- 258,900
7,300 -- 7,300 Hewlett-Packard Co...... 967,706 -- 967,706
International Business
11,300 -- 11,300 Machines Corp........... 1,333,400 -- 1,333,400
Seagate Technology,
100 -- 100 Inc.(a)................. 6,025 -- 6,025
----------- ------------ ------------
2,905,562 -- 2,905,562
----------- ------------ ------------
CONSTRUCTION--1.9%
Hanson PLC (ADR) (United
-- 376,900 376,900 Kingdom)................ -- 13,332,838 13,332,838
-- 260,500 260,500 U.S. Home Corp.(a)...... -- 9,899,000 9,899,000
----------- ------------ ------------
-- 23,231,838 23,231,838
----------- ------------ ------------
CONTAINERS--0.2%
Crown Cork & Seal Co.,
-- 150,700 150,700 Inc..................... -- 2,411,200 2,411,200
----------- ------------ ------------
COSMETICS/TOILETRIES--
0.4%
3,000 79,000 82,000 Colgate-Palmolive Co.... 169,125 4,453,625 4,622,750
2,300 -- 2,300 Kimberly-Clark Corp..... 128,800 -- 128,800
----------- ------------ ------------
297,925 4,453,625 4,751,550
----------- ------------ ------------
DISTRIBUTION/WHOLESALERS
1,800 -- 1,800 Costco Wholesale Corp. . 94,613 -- 94,613
----------- ------------ ------------
DIVERSIFIED CONSUMER
PRODUCTS--0.4%
-- 43,100 43,100 Gillette Co. ........... -- 1,624,331 1,624,331
4,500 47,900 52,400 Procter & Gamble Co. ... 253,125 2,694,375 2,947,500
5,717 -- 5,717 Unilever NV............. 275,131 -- 275,131
----------- ------------ ------------
528,256 4,318,706 4,846,962
----------- ------------ ------------
DIVERSIFIED
MANUFACTURING--0.8%
1,100 29,900 31,000 Corning, Inc. .......... 213,400 5,800,600 6,014,000
2,600 -- 2,600 Eaton Corp. ............ 202,800 -- 202,800
Illinois Tool Works,
1,200 64,900 66,100 Inc. ................... 66,300 3,585,725 3,652,025
Minnesota Mining &
1,400 -- 1,400 Manufacturing Co........ 123,987 -- 123,987
500 -- 500 Textron, Inc............ 30,438 -- 30,438
Trinity Industries,
4,200 -- 4,200 Inc..................... 99,487 -- 99,487
----------- ------------ ------------
736,412 9,386,325 10,122,737
----------- ------------ ------------
DIVERSIFIED OPERATIONS--
2.8%
20,300 54,450 74,750 General Electric Co..... 3,150,306 8,449,959 11,600,265
-- 125,100 125,100 JDS Uniphase Corp.(a)... -- 15,082,369 15,082,369
Nabisco Group Holdings
-- 418,500 418,500 Corp.................... -- 5,022,000 5,022,000
Tomkins PLC (ADR)
-- 152,200 152,200 (United Kingdom)........ -- 2,016,650 2,016,650
----------- ------------ ------------
3,150,306 30,570,978 33,721,284
----------- ------------ ------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-3
<PAGE>

LONG-TERM INVESTMENTS--
(CONTINUED)
COMMON STOCKS--
(CONTINUED)
ELECTRICAL SERVICES--
0.9%
-- 96,400 96,400 AES Corp.(a)............ $ -- $ 7,591,500 $ 7,591,500
-- 82,500 82,500 PECO Energy Co. ........ -- 3,042,187 3,042,187
----------- ------------ ------------
-- 10,633,687 10,633,687
----------- ------------ ------------
ELECTRICAL UTILITIES--
0.6%
American Electric Power
200 -- 200 Co., Inc. .............. 5,963 -- 5,963
Central & South West
8,200 -- 8,200 Corp.................... 139,912 -- 139,912
Consolidated Edison,
2,600 -- 2,600 Inc. ................... 75,400 -- 75,400
5,600 -- 5,600 DTE Energy Co........... 162,400 -- 162,400
3,400 -- 3,400 Duke Energy Corp........ 178,500 -- 178,500
5,900 -- 5,900 Edison International.... 97,719 -- 97,719
7,900 -- 7,900 Entergy Corp............ 159,481 -- 159,481
7,700 -- 7,700 FirstEnergy Corp. ...... 158,813 -- 158,813
4,200 -- 4,200 Florida Progress Corp... 192,675 -- 192,675
4,400 -- 4,400 FPL Group, Inc. ........ 202,675 -- 202,675
9,600 -- 9,600 PG&E Corp............... 201,600 -- 201,600
Public Service Company
15,000 -- 15,000 of New Mexico........... 236,250 -- 236,250
Public Service
2,500 -- 2,500 Enterprise Group, Inc... 74,062 -- 74,062
17,300 -- 17,300 Reliant Energy, Inc. ... 405,469 -- 405,469
5,700 176,400 182,100 Texas Utilities Co...... 169,219 5,236,875 5,406,094
----------- ------------ ------------
2,460,138 5,236,875 7,697,013
----------- ------------ ------------
ELECTRONIC COMPONENTS--
4.4%
7,400 72,800 80,200 Altera Corp.(a)......... 660,450 6,497,400 7,157,850
1,000 -- 1,000 Analog Devices, Inc.(a). 80,563 -- 80,563
6,300 -- 6,300 Atmel Corp.(a).......... 325,238 -- 325,238
-- 28,600 28,600 Broadcom Corp.(a)....... -- 6,946,225 6,946,225
2,200 -- 2,200 Emerson Electric Co. ... 116,325 -- 116,325
22,600 101,600 124,200 Intel Corp.............. 2,981,787 13,404,850 16,386,637
2,200 -- 2,200 Jabil Circuit, Inc.(a).. 95,150 -- 95,150
6,700 -- 6,700 KLA-Tencor Corp.(a)..... 564,475 -- 564,475
-- 128,300 128,300 LSI Logic Corp.(a)...... -- 9,317,788 9,317,788
Micron Technology,
1,000 -- 1,000 Inc.(a)................. 126,000 126,000
3,630 71,300 74,930 Motorola, Inc........... 516,821 10,151,337 10,668,158
Novellus Systems,
1,800 -- 1,800 Inc.(a)................. 101,025 -- 101,025
4,400 -- 4,400 Sanmina Corp.(a)........ 297,275 -- 297,275
12,600 -- 12,600 Solectron Corp.(a)...... 504,787 -- 504,787
3,400 -- 3,400 Texas Instruments, Inc.. 544,000 -- 544,000
1,400 -- 1,400 Xilinx, Inc.(a)......... 115,938 -- 115,938
----------- ------------ ------------
7,029,834 46,317,600 53,347,434
----------- ------------ ------------
FINANCIAL SERVICES--5.6%
Allmerica Financial
3,900 -- 3,900 Corp.................... 198,900 -- 198,900
3,300 -- 3,300 American Express Co..... 491,494 491,494
Associates First
-- 147,900 147,900 Capital................. -- 3,170,606 3,170,606
6,000 -- 6,000 Astoria Financial Corp.. 170,250 -- 170,250
9,360 -- 9,360 BankAmerica Corp. ...... 490,815 -- 490,815
Bear Stearns Companies,
10,430 163,446 173,876 Inc..................... 475,869 7,457,224 7,933,093
7,900 -- 7,900 Charles Schwab Corp. ... 448,819 -- 448,819
19,425 -- 19,425 Citigroup, Inc.......... 1,152,145 -- 1,152,145
Countrywide Credit
2,900 102,800 105,700 Industries, Inc......... 79,025 2,801,300 2,880,325
-- 147,900 147,900 Edwards (A.G.), Inc..... -- 5,916,000 5,916,000
Federal Home Loan
5,100 -- 5,100 Mortgage Corp........... 225,356 -- 225,356
Federal National
7,400 28,200 35,600 Mortgage Association.... 417,637 1,591,537 2,009,174
Fleet Boston Financial
15,900 -- 15,900 Corp. .................. 580,350 -- 580,350
Golden West Financial
5,000 -- 5,000 Corp. .................. 155,937 -- 155,937
</TABLE>

See Notes to Pro-Forma Financial Statements

F-4
<PAGE>

LONG-TERM INVESTMENTS--
(CONTINUED)
COMMON STOCKS--
(CONTINUED)
FINANCIAL SERVICES--
(CONTINUED)
-- 15,500 15,500 Goldman, Sachs & Co..... $ -- $ 1,629,438 $ 1,629,438
Lehman Brothers
2,400 196,400 198,800 Holdings, Inc........... 232,800 19,050,800 19,283,600
3,900 239,950 243,850 MBNA Corp............... 99,450 6,118,725 6,218,175
Merrill Lynch & Co.,
700 -- 700 Inc..................... 73,500 -- 73,500
Morgan Stanley, Dean
9,200 -- 9,200 Witter & Co............. 750,375 -- 750,375
9,000 -- 9,000 PaineWebber Group, Inc.. 396,000 -- 396,000
Providian Financial
5,400 76,000 81,400 Corp.................... 467,775 6,583,500 7,051,275
3,400 -- 3,400 SLM Holding Corp........ 113,263 -- 113,263
-- 140,500 140,500 Washington Mutual, Inc.. -- 3,723,250 3,723,250
9,300 50,500 59,800 Wells Fargo Co.......... 380,719 2,067,344 2,448,063
----------- ------------ ------------
7,400,479 60,109,724 67,510,203
----------- ------------ ------------
FOOD DISTRIBUTION
1,000 -- 1,000 SYSCO Corp.............. 35,688 -- 35,688
----------- ------------ ------------
FOODS--0.1%
Archer-Daniels Midland
10,914 -- 10,914 Co...................... 113,233 -- 113,233
500 -- 500 Bestfoods............... 23,406 -- 23,406
6,700 -- 6,700 ConAgra, Inc............ 121,437 -- 121,437
5,400 -- 5,400 General Mills, Inc...... 195,412 -- 195,412
1,500 -- 1,500 H.J. Heinz Co........... 52,313 -- 52,313
19,800 -- 19,800 Ibp, Inc................ 311,850 -- 311,850
1,600 -- 1,600 Kellogg Co.............. 41,000 -- 41,000
600 -- 600 Quaker Oats Co.......... 36,375 -- 36,375
4,200 -- 4,200 Sara Lee Corp........... 75,600 -- 75,600
----------- ------------ ------------
970,626 -- 970,626
----------- ------------ ------------
FUNERAL SERVICES--0.1%
Service Corp.
-- 278,700 278,700 International(a)........ -- 836,100 836,100
----------- ------------ ------------
HEALTH CARE
SERVICES/HOSPITAL
MANAGEMENT--2.2%
Columbia/HCA Healthcare
2,200 387,300 389,500 Corp.................... 55,688 9,803,531 9,859,219
-- 443,000 443,000 HCR Manor Care, Inc.(a). -- 5,980,500 5,980,500
-- 438,800 438,800 Humana, Inc.(a)......... -- 3,208,725 3,208,725
Tenet Healthcare
-- 321,900 321,900 Corp.(a)................ -- 7,403,700 7,403,700
1,900 -- 1,900 United Healthcare Corp.. 113,288 -- 113,288
----------- ------------ ------------
168,976 26,396,456 26,565,432
----------- ------------ ------------
HOME FURNISHINGS
Springs Industries,
2,400 -- 2,400 Inc..................... 91,200 -- 91,200
----------- ------------ ------------
INSURANCE--2.4%
900 65,100 66,000 Aetna, Inc.............. 50,119 3,625,256 3,675,375
6,600 -- 6,600 Allstate Corp........... 157,163 -- 157,163
American International
10,400 71,981 82,381 Group, Inc.............. 1,138,800 7,881,920 9,020,720
-- 64,900 64,900 Chubb Corp.............. -- 4,384,806 4,384,806
25,800 -- 25,800 Conseco, Inc............ 295,087 -- 295,087
Hartford Financial
2,200 -- 2,200 Services Group.......... 116,050 -- 116,050
Old Republic
14,800 -- 14,800 International Corp...... 203,500 -- 203,500
St. Paul Companies,
11,100 -- 11,100 Inc..................... 378,787 -- 378,787
-- 154,500 154,500 SAFECO Corp............. -- 4,103,906 4,103,906
Selective Insurance
-- 212,100 212,100 Group, Inc.............. -- 3,618,956 3,618,956
-- 121,600 121,600 Torchmark Corp.......... -- 2,812,000 2,812,000
----------- ------------ ------------
2,339,506 26,426,844 28,766,350
----------- ------------ ------------
INTERNET SOFTWARE--0.3%
-- 30,100 30,100 Software.com, Inc.(a)... -- 3,879,137 3,879,137
----------- ------------ ------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-5
<PAGE>

LONG-TERM INVESTMENTS--
(CONTINUED)
COMMON STOCKS--
(CONTINUED)
LEISURE
4,400 -- 4,400 Carnival Corp........... $ 109,175 $ -- $ 109,175
Marriott International,
2,500 -- 2,500 Inc..................... 78,750 -- 78,750
----------- ------------ ------------
187,925 -- 187,925
----------- ------------ ------------
MACHINERY & EQUIPMENT--
0.8%
Applied Materials,
8,600 67,200 75,800 Inc.(a)................. 810,550 6,333,600 7,144,150
700 -- 700 Deere & Co.............. 26,600 -- 26,600
600 -- 600 Dover Corp.............. 28,725 -- 28,725
500 -- 500 Ingersoll-Rand Co....... 22,125 -- 22,125
Rockwell International
700 -- 700 Corp.................... 29,269 -- 29,269
United Dominion
Industries, Ltd.
-- 131,200 131,200 (Canada)................ -- 2,386,200 2,386,200
----------- ------------ ------------
917,269 8,719,800 9,637,069
----------- ------------ ------------
MANUFACTURING--0.4%
-- 145,900 145,900 Donaldson Inc........... -- 3,291,869 3,291,869
York International
-- 66,200 66,200 Corp.................... -- 1,547,425 1,547,425
----------- ------------ ------------
-- 4,839,294 4,839,294
----------- ------------ ------------
MEASURING & CONTROL
INSTRUMENT
4,100 -- 4,100 Johnson Controls, Inc... 221,656 -- 221,656
----------- ------------ ------------
MEDIA & ENTERTAINMENT--
1.6%
-- 141,400 141,400 CBS Corp.(a)............ -- 8,006,775 8,006,775
Clear Channel
-- 60,400 60,400 Communications, Inc.(a). -- 4,171,375 4,171,375
1,000 -- 1,000 Dow Jones & Co., Inc. .. 71,812 -- 71,812
1,400 -- 1,400 Gannett Co., Inc........ 98,525 -- 98,525
Hispanic Broadcasting
1,100 -- 1,100 Corp.(a)................ 124,575 -- 124,575
Infinity Broadcasting
-- 151,300 151,300 Corp.(a)................ -- 4,898,338 4,898,338
McGraw-Hill Companies,
600 -- 600 Inc..................... 27,300 -- 27,300
10,700 -- 10,700 Time Warner, Inc........ 1,070,000 -- 1,070,000
11,200 -- 11,200 Walt Disney Co.......... 463,400 -- 463,400
----------- ------------ ------------
1,855,612 17,076,488 18,932,100
----------- ------------ ------------
MEDICAL PRODUCTS &
SERVICES--1.4%
Baxter International,
1,300 -- 1,300 Inc. ................... 81,494 -- 81,494
5,900 42,950 48,850 Cardinal Health, Inc.... 270,662 1,970,331 2,240,993
6,700 -- 6,700 Johnson & Johnson Co.... 469,419 -- 469,419
100 -- 100 Medtronic, Inc.......... 5,144 -- 5,144
Pharmacia & Upjohn,
-- 51,800 51,800 Inc..................... -- 3,069,150 3,069,150
13,800 -- 13,800 Schering-Plough Corp.... 507,150 -- 507,150
Tyco International,
17,000 191,100 208,100 Ltd..................... 847,875 9,531,112 10,378,987
6,600 -- 6,600 Warner-Lambert Co....... 643,500 -- 643,500
----------- ------------ ------------
2,825,244 14,570,593 17,395,837
----------- ------------ ------------
MEDICAL TECHNOLOGY--0.6%
9,600 109,700 119,300 Abbott Laboratories..... 337,800 3,860,069 4,197,869
9,900 -- 9,900 Amgen, Inc.(a).......... 607,612 -- 607,612
700 -- 700 Biogen, Inc.(a)......... 48,913 -- 48,913
-- 108,600 108,600 IMS Health, Inc......... -- 1,839,413 1,839,413
----------- ------------ ------------
994,325 5,699,482 6,693,807
----------- ------------ ------------
METALS-NON FERROUS--1.7%
-- 94,800 94,800 Alcoa Inc............... -- 6,659,700 6,659,700
-- 163,800 163,800 Reynolds Metals Co...... -- 10,954,125 10,954,125
UCAR International
-- 271,000 271,000 Inc.(a)................. -- 3,573,812 3,573,812
----------- ------------ ------------
-- 21,187,637 21,187,637
----------- ------------ ------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-6
<PAGE>

<TABLE>
<CAPTION>
SHARES (000) DESCRIPTION VALUE
--------------------------------- ------------------------ --------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED BALANCED PRO-FORMA
FUND FUND COMBINED FUND FUND COMBINED
-------- ---------- ------------- ----------- ------------ -------------
<C> <C> <C> <S> <C> <C> <C>

LONG-TERM INVESTMENTS--
(CONTINUED)
COMMON STOCKS--
(CONTINUED)
METALS PROCESSING
Precision Castparts
8,800 -- 8,800 Corp. .................. $ 321,200 $ -- $ 321,200
----------- ------------ ------------
MINING--1.0%
-- 387,000 387,000 Newmont Mining Corp. ... -- 8,683,313 8,683,313
Stillwater Mining
-- 83,900 83,900 Co.(a) ................. -- 3,356,000 3,356,000
----------- ------------ ------------
-- 12,039,313 12,039,313
----------- ------------ ------------
OFFICE EQUIPMENT &
SUPPLIES
1,100 -- 1,100 Pitney Bowes, Inc. ..... 49,156 -- 49,156
----------- ------------ ------------
OIL & GAS EQUIPMENT &
SERVICES--5.2%
Anadarko Petroleum
-- 114,600 114,600 Corp.................... -- 4,433,587 4,433,587
-- 95,900 95,900 Baker Hughes, Inc. ..... -- 2,900,975 2,900,975
Burlington Resources,
-- 74,600 74,600 Inc. ................... -- 2,760,200 2,760,200
-- 169,700 169,700 Enron Corp.............. -- 12,706,287 12,706,287
-- 121,636 121,636 KeySpan Corp............ -- 3,360,195 3,360,195
McDermott International,
-- 477,300 477,300 Inc..................... -- 4,385,194 4,385,194
-- 248,100 248,100 Noble Affiliates, Inc... -- 8,140,781 8,140,781
Pioneer Natural
-- 1,145,400 1,145,400 Resources Co.(a)........ -- 12,169,875 12,169,875
Western Gas Resources,
-- 468,600 468,600 Inc..................... -- 7,439,025 7,439,025
Williams Companies,
-- 104,900 104,900 Inc..................... -- 4,609,044 4,609,044
----------- ------------ ------------
-- 62,905,163 62,905,163
----------- ------------ ------------
OIL & GAS
EXPLORATION/PRODUCTION--
0.2%
11,500 -- 11,500 Apache Corp............. 572,125 -- 572,125
2,300 -- 2,300 Atlantic Richfield Co... 195,500 -- 195,500
4,800 -- 4,800 Coastal Corp............ 220,800 -- 220,800
15,532 -- 15,532 Exxon Mobil Corp........ 1,208,584 -- 1,208,584
Royal Dutch Petroleum
7,300 -- 7,300 Co...................... 420,206 -- 420,206
3,100 -- 3,100 Texaco, Inc............. 166,237 -- 166,237
2,800 -- 2,800 USX-Marathon Group...... 72,975 -- 72,975
----------- ------------ ------------
2,856,427 -- 2,856,427
----------- ------------ ------------
OIL & GAS SERVICES--0.1%
2,500 -- 2,500 Amerada Hess Corp....... 161,562 -- 161,562
4,400 -- 4,400 Chevron Corp............ 406,725 -- 406,725
1,600 -- 1,600 Schlumberger, Ltd....... 122,400 -- 122,400
1,400 -- 1,400 Sempra Energy........... 23,450 -- 23,450
----------- ------------ ------------
714,137 -- 714,137
----------- ------------ ------------
PAPER & FOREST
PRODUCTS--0.8%
Champion International
100 -- 100 Corp. .................. 5,325 -- 5,325
International Paper
1,900 -- 1,900 Co. .................... 81,225 -- 81,225
-- 257,900 257,900 Longview Fibre Co....... -- 3,804,025 3,804,025
Louisiana-Pacific
18,100 429,300 447,400 Corp. .................. 251,137 5,956,538 6,207,675
Willamette Industries,
3,800 -- 3,800 Inc..................... 152,475 -- 152,475
----------- ------------ ------------
490,162 9,760,563 10,250,725
----------- ------------ ------------
PHARMACEUTICALS--1.2%
1,800 -- 1,800 Allergan, Inc........... 90,000 -- 90,000
Bristol-Myers Squibb
13,200 81,700 94,900 Co...................... 762,300 4,718,175 5,480,475
7,300 -- 7,300 Eli Lilly & Co. ........ 459,900 -- 459,900
16,800 67,400 84,200 Merck & Co., Inc........ 1,043,700 4,187,225 5,230,925
27,300 64,400 91,700 Pfizer, Inc............. 998,156 2,354,625 3,352,781
----------- ------------ ------------
3,354,056 11,260,025 14,614,081
----------- ------------ ------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-7
<PAGE>

LONG-TERM INVESTMENTS--
(CONTINUED)
COMMON STOCKS--
(CONTINUED)
PHOTOGRAPHY--0.7%
1,600 160,400 162,000 Eastman Kodak Co........ $ 86,900 $ 8,711,725 $ 8,798,625
----------- ------------ ------------
PRECIOUS METALS
700 -- 700 Barrick Gold Corp....... 10,981 -- 10,981
----------- ------------ ------------
PRINTING & PUBLISHING--
0.5%
Donnelley (R.R.) & Sons
-- 149,300 149,300 Co...................... -- 3,125,969 3,125,969
2,100 -- 2,100 Knight-Ridder, Inc...... 106,969 -- 106,969
900 50,800 51,700 New York Times Co....... 38,644 2,181,225 2,219,869
2,800 -- 2,800 Tribune Co.............. 102,375 -- 102,375
----------- ------------ ------------
247,988 5,307,194 5,555,182
----------- ------------ ------------
RAILROADS
Canadian National
3,800 -- 3,800 Railway Co.............. 101,413 -- 101,413
----------- ------------ ------------
REAL ESTATE INVESTMENT
TRUST--1.4%
Crescent Real Estate
-- 374,100 374,100 Equities Co............. -- 6,546,750 6,546,750
-- 708,200 708,200 Prison Realty Corp...... -- 2,036,075 2,036,075
-- 248,300 248,300 Vornado Realty Trust.... -- 8,318,050 8,318,050
----------- ------------ ------------
-- 16,900,875 16,900,875
----------- ------------ ------------
RETAIL--2.3%
Abercrombie & Fitch
2,400 -- 2,400 Co.(a).................. 38,400 -- 38,400
Circuit City Stores--
10,800 -- 10,800 Circuit City Group...... 657,450 -- 657,450
1,700 90,200 91,900 CVS Corp................ 63,856 3,388,137 3,451,993
-- 370,900 370,900 Dillard's, Inc.......... -- 6,096,669 6,096,669
Federated Department
5,000 -- 5,000 Stores, Inc.(a)......... 208,750 -- 208,750
10,475 -- 10,475 Gap, Inc................ 521,786 -- 521,786
18,300 -- 18,300 Home Depot, Inc......... 1,180,350 -- 1,180,350
16,700 366,100 382,800 Kmart Corp.(a).......... 161,781 3,546,594 3,708,375
4,200 -- 4,200 Kohl's Corp.(a)......... 430,500 -- 430,500
1,800 -- 1,800 Lowes Companies, Inc.... 105,075 -- 105,075
May Department Stores
1,300 -- 1,300 Co...................... 37,050 -- 37,050
7,000 114,800 121,800 McDonald's Corp......... 262,937 4,312,175 4,575,112
2,500 -- 2,500 Safeway Inc.(a)......... 113,125 -- 113,125
7,000 48,900 55,900 Sears, Roebuck & Co..... 216,125 1,509,788 1,725,913
11,100 -- 11,100 Staples, Inc.(a)........ 222,000 -- 222,000
3,400 -- 3,400 Starbucks Corp.......... 152,362 -- 152,362
2,200 -- 2,200 Target Corp............. 164,450 -- 164,450
-- 61,900 61,900 The Limited, Inc........ -- 2,607,537 2,607,537
1,000 -- 1,000 TJX Companies, Inc...... 22,188 -- 22,188
Tricon Global
1,800 -- 1,800 Restaurants, Inc.(a).... 55,913 -- 55,913
30,000 -- 30,000 Wal-Mart Stores, Inc.... 1,665,000 -- 1,665,000
5,000 -- 5,000 Walgreen Co............. 128,750 -- 128,750
----------- ------------ ------------
6,407,848 21,460,900 27,868,748
----------- ------------ ------------
STEEL--PRODUCERS--0.1%
-- 159,100 159,100 AK Steel Holding Corp... -- 1,650,663 1,650,663
----------- ------------ ------------
TELECOMMUNICATION
SERVICES--0.9%
22,350 -- 22,350 AT&T Corp............... 1,257,187 -- 1,257,187
9,400 -- 9,400 Bell Atlantic Corp...... 574,575 -- 574,575
3,400 -- 3,400 BellSouth Corp.......... 159,800 -- 159,800
750 -- 750 CenturyTel, Inc......... 27,844 -- 27,844
5,400 -- 5,400 GTE Corp................ 383,400 -- 383,400
8,812 150,950 159,762 MCI WorldCom, Inc.(a)... 399,294 6,839,922 7,239,216
SBC Communications,
20,912 -- 20,912 Inc. ................... 878,304 -- 878,304
</TABLE>

See Notes to Pro-Forma Financial Statements

F-8
<PAGE>

<TABLE>
<CAPTION>
SHARES (000) DESCRIPTION VALUE
------------------------------- -------------------------------- --------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED BALANCED PRO-FORMA
FUND FUND COMBINED FUND FUND COMBINED
-------- -------- ------------- ----------- ------------ -------------
<C> <C> <C> <S> <C> <C> <C>

LONG-TERM INVESTMENTS--
(CONTINUED)
COMMON STOCKS--(CONTINUED)
TELECOMMUNICATION SERVICES--
(CONTINUED)
4,700 -- 4,700 Sprint Corp..................... $ 296,100 $ -- $ 296,100
----------- ------------ ------------
3,976,504 6,839,922 10,816,426
----------- ------------ ------------
TELECOMMUNICATIONS EQUIPMENT--
0.9%
13,400 -- 13,400 ADC Telecommunications, Inc.(a). 721,925 -- 721,925
-- 26,700 26,700 Comverse Technology, Inc.(a).... -- 5,046,300 5,046,300
12,800 35,700 48,500 Lucent Technologies, Inc. ...... 777,600 2,168,775 2,946,375
6,900 -- 6,900 Nortel Networks Corp. .......... 869,400 -- 869,400
4,700 -- 4,700 QUALCOMM, Inc.(a)............... 701,769 -- 701,769
900 -- 900 Tellabs, Inc.(a)................ 56,686 -- 56,686
----------- ------------ ------------
3,127,380 7,215,075 10,342,455
----------- ------------ ------------
TEXTILE-APPAREL MANUFACTURING
500 -- 500 Jones Apparel Group, Inc.(a).... 15,938 -- 15,938
----------- ------------ ------------
TOBACCO--0.5%
18,000 149,000 167,000 Philip Morris Co., Inc. ........ 380,250 3,147,625 3,527,875
R.J. Reynolds Tobacco Holdings,
-- 139,466 139,466 Inc............................. -- 2,370,922 2,370,922
4,300 -- 4,300 UST, Inc........................ 67,188 -- 67,188
----------- ------------ ------------
447,438 5,518,547 5,965,985
----------- ------------ ------------
TOOLS--0.3%
-- 133,500 133,500 Snap-on, Inc.................... -- 3,496,031 3,496,031
----------- ------------ ------------
TRANSPORTATION/TRUCKING/SHIPPING
17,700 -- 17,700 Burlington Northern, Inc........ 391,612 -- 391,612
1,200 -- 1,200 Fedex Corp...................... 46,800 -- 46,800
Kansas City Southern Industries,
100 -- 100 Inc............................. 8,594 -- 8,594
1,000 -- 1,000 Union Pacific Corp. ............ 39,125 -- 39,125
----------- ------------ ------------
486,131 -- 486,131
----------- ------------ ------------
Total common stocks
(cost $592,614,770)............. $79,437,423 $612,813,259 $692,250,682
----------- ------------ ------------
</TABLE>

<TABLE>
<CAPTION>
MOODY'S
RATING PRINCIPAL (000) DESCRIPTION VALUE
------- ------------------------------- ------------------------ ------------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED PRO-FORMA
FUND FUND COMBINED FUND BALANCED FUND COMBINED
-------- -------- ------------- ------------ -------------- --------------
<C> <C> <C> <C> <S> <C> <C> <C>

DEBT OBLIGATIONS--31.2%
CORPORATE BONDS--21.8%
AEROSPACE/DEFENSE--0.4%
A1 $700(e) $ -- $ 700 Boeing Inc., Deb.,
8.10%, 11/15/06......... $ 731,941 $ -- $ 731,941
Honeywell International,
A2 -- 530 530 Inc.
7.50%, 3/1/10........... -- 534,267 534,267
Litton Industries, Inc.,
Baa2 -- 400 400 Note,
8.00%, 10/15/09......... -- 397,360 397,360
Northrop Grumman Corp.,
Deb.
Baa3 700(e) -- 700 7.75%, 3/1/16........... 667,499 -- 667,499
Baa3 -- 900 900 7.875%, 3/1/26.......... -- 852,939 852,939
Raytheon Co., Note
Baa2 500(e) -- 500 6.30%, 3/15/05.......... 466,020 -- 466,020
Baa2 -- 1,300 1,300 6.50%, 7/15/05.......... -- 1,217,645 1,217,645
------------ -------------- --------------
1,865,460 3,002,211 4,867,671
------------ -------------- --------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-9
<PAGE>

<TABLE>
<CAPTION>
MOODY'S
RATING PRINCIPAL (000) DESCRIPTION VALUE
------- -------------------------------- ------------------------ ------------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED PRO-FORMA
FUND FUND COMBINED FUND BALANCED FUND COMBINED
--------- -------- ------------- ------------ -------------- --------------
<C> <C> <C> <C> <S> <C> <C> <C>

DEBT OBLIGATIONS--
(CONTINUED)
CORPORATE BONDS--
(CONTINUED)
AGRICULTURAL PRODUCTS--
0.1%
Monsanto Company, Note,
A1 $ 500 $ -- $ 500 5.75%, 12/1/05.......... $ 471,350 $ -- $ 471,350
A2 -- 245 245 6.50%, 12/1/18.......... -- 217,136 217,136
A1 -- 585 585 6.75%, 12/15/27......... -- 518,679 518,679
------------ -------------- --------------
471,350 735,815 1,207,165
------------ -------------- --------------
AIRLINES--0.7%
Continental Airlines,
Inc., Notes,
Ba2 -- 1,570 1,570 8.00%, 12/15/05......... -- 1,448,780 1,448,780
Aa3 -- 1,420 1,420 7.46%, 4/1/15........... -- 1,372,389 1,372,389
Delta Air Lines Inc.,
Deb., Note,
Baa3 230(e) -- 230 8.30%, 12/15/29......... 213,838 -- 213,838
Baa3 -- 500 500 7.90%, 12/15/09......... -- 467,095 467,095
Baa3 -- 5,000 5,000 United Airlines, Inc.,
10.67%, 5/1/04.......... -- 5,418,150 5,418,150
------------ -------------- --------------
213,838 8,706,414 8,920,252
------------ -------------- --------------
ASSET BACKED
SECURITIES--2.1%
California
Aaa -- 3,000 3,000 Infrastructure, PG&E,
6.32%, 9/25/05.......... -- 2,924,063 2,924,063
Citibank Credit Card
Master Trust, Class A,
Aaa 500(e) -- 500 5.875%, 3/10/11......... 463,590 -- 463,590
Aaa 1,500(e) -- 1,500 6.05%, 1/15/10.......... 1,382,340 -- 1,382,340
Aaa -- 5,000 5,000 6.10%, 5/15/08.......... -- 4,696,050 4,696,050
MBNA Master Credit Card
Trust, Ser C,
Aaa 500(e) -- 500 6.45%, 2/15/08.......... 482,810 -- 482,810
Aaa -- 5,000 5,000 5.90%, 8/15/11.......... -- 4,595,897 4,595,897
Team Fleet Financial
Aaa -- 11,000 11,000 Corp.,
7.35%, 5/15/03.......... -- 10,926,094 10,926,094
------------ -------------- --------------
2,328,740 23,142,104 25,470,844
------------ -------------- --------------
AUTOMOBILES & TRUCKS--
1.1%
Ford Motor Co.,
A1 -- 3,000 3,000 6.375%, 2/1/29.......... -- 2,530,110 2,530,110
A1 -- 600 600 7.45%, 7/16/31.......... -- 580,260 580,260
Lear Corp, Sr. Note,
Ba3 -- 770 770 8.25%, 2/1/02........... -- 750,750 750,750
Ba2 -- 2,335 2,335 7.96%, 5/15/05.......... -- 2,148,200 2,148,200
Navistar International
Corp., Sr. Note,
Baa3 -- 2,000 2,000 7.00%, 2/1/03........... -- 1,910,000 1,910,000
Ba2 -- 370 370 8.00%, 2/1/08........... -- 343,175 343,175
Baa1 -- 5,000 5,000 TRW, Inc., Note,
6.45%, 6/15/01.......... -- 4,914,062 4,914,062
------------ -------------- --------------
-- 13,176,557 13,176,557
------------ -------------- --------------
BANKING--1.7%
A1 -- 3,900 3,900 Bank Nova Scotia NY,
6.50%, 7/15/07.......... -- 3,890,250 3,890,250
Aa3 500(e) -- 500 Bank One Corp., Note,
6.875%, 8/1/06.......... 478,405 -- 478,405
Bank Tokyo Mitsubishi
Ltd, Global Sr. Sub.
A3 250 350 600 Note,
8.40%, 4/15/10.......... 253,125 354,375 607,500
Aa2 1,000(e) -- 1,000 BankAmerica Corp., MTN,
7.125%, 5/12/05......... 981,090 -- 981,090
Aa3 400(e) 500 900 Barclays Bank Plc, Note,
7.40%, 12/15/09......... 391,168 488,960 880,128
</TABLE>

See Notes to Pro-Forma Financial Statements

F-10
<PAGE>

DEBT OBLIGATIONS--
(CONTINUED)
CORPORATE BONDS--
(CONTINUED)
BANKING--(CONTINUED)
Aa3 $ -- $ 300 $ 300 Bayer Hypo-Vereinsbank,
8.74%, 6/30/31.......... $ -- $ 299,250 $ 299,250
Aa3 -- 200 200 9.00%, 10/22/31......... -- 202,500 202,500
Aaa -- 1,950 1,950 Bayerische Landesbank,
5.875%, 12/01/08........ -- 1,754,805 1,754,805
Capital One Bank, Sr.
Baa2 -- 3,000 3,000 Note,
7.08%, 10/30/01......... -- 2,960,940 2,960,940
Chemical Bank, Sub,
Aa3 1,000(e) -- 1,000 Note,
7.00%, 6/1/05........... 979,800 -- 979,800
Chonhung Bank, Sub.
B1 -- 2,150 2,150 Note,
1.00%, 1/7/05........... -- 2,233,313 2,233,313
A1 500(e) -- 500 Citicorp, Sub. Note,
7.125%, 9/1/05.......... 494,440 -- 494,440
A1 -- 1,300 1,300 Compass Bank, MTN,
8.10%, 8/15/09.......... -- 1,305,876 1,305,876
First Union-Lehman
Aaa 400(e) -- 400 Brothers Bank., Ser. 98,
6.56%, 11/18/08......... 381,517 -- 381,517
Keycorp Capital III,
A1 100(e) 750 850 Capital Securities,
7.75%, 7/15/29.......... 92,138 691,035 783,173
National Australia Bank
A1 -- 2,100 2,100 Ltd,
6.40%, 12/10/07......... -- 2,066,295 2,066,295
National Westminster
Aa3 550 -- 550 Bank PLC, Sub. Note,
7.375%, 10/1/09......... 536,387 -- 536,387
------------ -------------- --------------
4,588,070 16,247,599 20,835,669
------------ -------------- --------------
BEVERAGES
Baa2 -- 600 600 Coca Cola Bottling Co.,
6.375%, 5/01/09......... -- 529,848 529,848
------------ -------------- --------------
BROADCASTING--0.1%
Liberty Media Corp.,
Notes,
Baa3 -- 400 400 7.875, 7/15/09.......... -- 395,972 395,972
Baa3 -- 700 700 8.50%, 7/15/29.......... -- 701,750 701,750
------------ -------------- --------------
-- 1,097,722 1,097,722
------------ -------------- --------------
BUILDING &
CONSTRUCTION--0.1%
Hanson Overseas BV, Sr.
A3 800(e) -- 800 Note,
6.75%, 9/15/05.......... 764,480 -- 764,480
------------ -------------- --------------
CABLE & PAY TELEVISION
SYSTEMS--0.5%
British Sky Broadcasting
Baa3 -- 500 500 Group,
6.875%, 2/23/09......... -- 447,740 447,740
CSC Holdings, Inc., Sr.
Notes,
Ba1 -- 900 900 7.25%, 7/15/08.......... -- 858,123 858,123
Ba1 -- 475 475 7.875%, 12/15/07........ -- 470,820 470,820
Century Communications
B1 -- 2,000 2,000 Corp., Sr. Note,
9.75%, 2/15/02.......... -- 2,000,000 2,000,000
Comcast Cable
Baa2 -- 2,000 2,000 Communications,
8.375%, 5/1/07.......... -- 2,062,620 2,062,620
Rogers Cablesystems
B2 -- 885 885 Ltd., Sr. Note,
11.00%, 12/01/15........ -- 995,625 995,625
------------ -------------- --------------
-- 6,834,928 6,834,928
------------ -------------- --------------
CAPTIVE FINANCE--0.4%
Sear Roebuck Acceptance
A3 -- 5,000 5,000 Corp., Note,
6.38%, 10/7/02.......... -- 4,890,200 4,890,200
------------ -------------- --------------
</TABLE>
See Notes to Pro-Forma Financial Statements

F-11
<PAGE>

DEBT OBLIGATIONS--
(CONTINUED)
CORPORATE BONDS--
(CONTINUED)
CELLULAR
COMMUNICATIONS--0.1%
Rogers Cantel, Inc,
Ba3 $ -- $ 790 $ 790 (Canada)
9.375%, 6/1/08.......... $ -- $ 801,850 $ 801,850
------------ -------------- --------------
CHEMICALS
Ba3 -- 325 325 Lyondell Chemical Co.,
9.625%, 5/1/07.......... -- 309,562 309,562
------------ -------------- --------------
COMPUTER SERVICES--0.2%
Baa1 -- 1,400 1,400 Cendant Corp., Note,
7.75%, 12/1/03.......... -- 1,379,476 1,379,476
Ba1 -- 1,075 1,075 Unisys Corp., Sr. Note,
12.00%, 4/15/03......... -- 1,139,500 1,139,500
------------ -------------- --------------
-- 2,518,976 2,518,976
------------ -------------- --------------
CONSULTING
Baa1 400(e) -- 400 Comdisco, Inc., Note,
5.95%, 4/30/02.......... 385,968 -- 385,968
------------ -------------- --------------
CONTAINERS--0.7%
Ba1 -- 2,100 2,100 Owens Illinois, Inc.,
7.50%, 5/15/10.......... -- 1,916,880 1,916,880
Pactiv Corp., Notes,
Baa3 -- 5,000 5,000 7.20%, 12/15/05......... -- 4,689,500 4,689,500
Baa3 -- 1,650 1,650 7.95%, 12/15/25......... -- 1,458,056 1,458,056
------------ -------------- --------------
-- 8,064,436 8,064,436
------------ -------------- --------------
DIVERSIFIED OPERATIONS--
0.2%
Baa1 -- 900 900 Cox Enterprises, Inc.,
6.625%, 6/14/02......... -- 879,633 879,633
Seagram (J.) & Sons
Baa3 -- 1,400 1,400 Inc.,
5.79%, 4/15/01.......... -- 1,374,660 1,374,660
------------ -------------- --------------
-- 2,254,293 2,254,293
------------ -------------- --------------
ELECTRICAL SERVICES--
1.0%
Ba1 -- 1,640 1,640 AES Corp., Sr. Note,
9.50%, 6/01/09.......... -- 1,574,400 1,574,400
Calpine Corp., Sr.
Ba1 -- 1,355 1,355 Notes,
10.50%, 5/15/06......... -- 1,407,506 1,407,506
CMS Energy Corp., Sr.
Ba3 -- 1,300 1,300 Note,
8.00%, 7/1/01........... -- 1,285,050 1,285,050
Cogentrix Inc., Sr.
Ba1 -- 950 950 Note,
8.10%, 3/15/04.......... -- 911,620 911,620
Edison Mission Energy
A3 -- 900 900 Co., Sr. Note,
7.73%, 6/15/09.......... -- 917,892 917,892
Ba1 -- 870 870 PSEG Energy Holdings,
10.00%, 10/01/09........ -- 921,928 921,928
TXU Eastern Funding Co.,
Baa1 -- 5,000 5,000 Sr. Note,
6.45%, 5/15/05.......... -- 4,661,850 4,661,850
Utilicorp United Inc.,
Baa3 -- 800 800 Sr. Note,
7.00%, 7/15/04.......... -- 765,360 765,360
------------ -------------- --------------
-- 12,445,606 12,445,606
------------ -------------- --------------
ENTERTAINMENT--0.1%
Harrahs Operating, Inc.,
Ba2 -- 95 95 Sr. Note,
7.875%, 12/15/05........ -- 87,400 87,400
</TABLE>

See Notes to Pro-Forma Financial Statements

F-12
<PAGE>

<TABLE>
<CAPTION>
MOODY'S
RATING PRINCIPAL (000) DESCRIPTION VALUE
------- -------------------------------- ------------------------ ------------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED PRO-FORMA
FUND FUND COMBINED FUND BALANCED FUND COMBINED
--------- -------- ------------- ------------ -------------- --------------
<C> <C> <C> <C> <S> <C> <C> <C>

DEBT OBLIGATIONS--
(CONTINUED)
CORPORATE BONDS--
(CONTINUED)
ENTERTAINMENT--
(CONTINUED)
Park Place Entertainment
Corp., Sr. Note,
Ba2 $ -- $ 300 $ 300 9.375%, 2/15/07......... $ -- $ 294,000 $ 294,000
Ba2 -- 815 815 7.875%, 12/15/05........ -- 749,800 749,800
------------ -------------- --------------
-- 1,131,200 1,131,200
------------ -------------- --------------
EQUIPMENT RENTAL
B1 -- 190 190 United Rentals, Inc.,
8.80%, 8/15/08.......... -- 163,400 163,400
------------ -------------- --------------
FINANCIAL SERVICES--2.7%
Aa3 350 -- 350 Associates Corporation
of North America,
Sr. Note,
5.75%, 11/1/03.......... 334,047 -- 334,047
BCH Cayman Islands Ltd.,
A1 160 -- 160 Sub. Note,
7.70%, 7/15/06.......... 159,376 -- 159,376
Bear, Stearns & Co.
Inc., Sr. Note,
A2 1,000(e) -- 1,000 8.75%, 3/15/04.......... 1,038,120 -- 1,038,120
A2 -- 190 190 7.625%, 12/7/09......... -- 186,415 186,415
Capital One Financial
Baa3 -- 1,650 1,650 Corp,. Note,
7.25%, 5/1/06........... -- 1,534,500 1,534,500
A1 -- 3,700 3,700 Dresdner Funding Trust,
8.151%, 6/30/31......... -- 3,524,250 3,524,250
Ford Motor Credit Co.,
A1 800(e) 400 1,200 7.375%, 10/28/09........ 783,728 391,864 1,175,592
A2 -- 5,000 5,000 7.50%, 3/15/05.......... -- 5,003,050 5,003,050
A1 285 -- 285 7.40%, 11/1/46.......... 268,920 -- 268,920
General Motors
Acceptance Corp.,
A2 570(e) -- 570 6.75%, 2/7/02, Sr. Note. 563,143 -- 563,143
A2 250(e) -- 250 7.75%, 1/19/10, Note.... 252,307 -- 252,307
Goldman, Sachs Group LP,
Note,
A1 700(e) -- 700 7.25%, 10/1/05.......... 692,216 -- 692,216
A1 -- 2,500 2,500 7.80%, 1/28/10.......... -- 2,540,625 2,540,625
A3 400(e) 800 1,200 Heller Financial Inc.,
Note,
6.00%, 3/19/04.......... 378,272 756,544 1,134,816
A1 -- 2,500 2,500 KBC Funding Trust,
9.86%, 11/29/49......... -- 2,653,125 2,653,125
Lehman Brothers
Holdings, Inc., Notes,
A3 240(e) 3,565 3,805 6.625%, 4/1/04.......... 231,000 3,431,312 3,662,313
A3 130(e) -- 130 6.625%, 2/5/06.......... 124,144 124,144
A3 -- 1,370 1,370 6.625%, 2/15/06......... -- 1,308,281 1,308,281
Aa3 500(e) -- 500 Merrill Lynch & Co.,
MTN,
6.02%, 5/11/01.......... 493,705 -- 493,705
Baa2 -- 3,000 3,000 Osprey Trust Inc., Sr.
Note,
8.31%, 1/15/03.......... -- 3,001,560 3,001,560
Aa3 500(e) -- 500 PaineWebber Group Inc.,
7.625%, 12/1/09......... 490,820 -- 490,820
Ba3 -- 415 415 RBF Finance Co., Sr.
Note,
11.375%, 3/15/09........ -- 439,900 439,900
A1 520(e) -- 520 Santander Finance
Issuances, Note,
6.80%, 7/15/05.......... 500,453 -- 500,453
Baa1 -- 1,250 1,250 Sanwa Finance,
8.35%, 7/15/09.......... -- 1,289,175 1,289,175
</TABLE>

See Notes to Pro-Forma Financial Statements

F-13
<PAGE>

DEBT OBLIGATIONS--
(CONTINUED)
CORPORATE BONDS--
(CONTINUED)
FINANCIAL SERVICES--
(CONTINUED)
Baa1 $600(e) $ -- $ 600 US West Capital Funding
Inc., Note,
6.125%, 7/15/02......... $ 584,082 $ -- $ 584,082
------------ -------------- --------------
6,894,333 26,060,601 32,954,935
------------ -------------- --------------
FOODS--0.6%
Aa3 -- 1,600 1,600 Archer Daniels Midland
Co.,
6.625%, 5/1/29.......... -- 1,356,288 1,356,288
Kroger Co., Sr. Note,
Baa3 -- 3,400 3,400 6.375%, 3/1/08.......... -- 3,069,520 3,069,520
Baa3 -- 1,800 1,800 6.34%, 6/1/01........... -- 1,760,344 1,760,344
Baa3 -- 1,000 1,000 7.25%, 6/1/09........... -- 975,938 975,938
Baa3 -- 250 250 7.70%, 6/1/29........... -- 242,734 242,734
------------ -------------- --------------
-- 7,404,824 7,404,824
------------ -------------- --------------
HEALTHCARE
SERVICES/HOSPITAL
MANAGEMENT--0.1%
Ba2 -- 825 825 Columbia/HCA Healthcare
Corp., Notes,
6.91%, 6/15/05.......... -- 744,562 744,562
Ba1 -- 620 620 Tenet Healthcare Corp.,
Sr. Notes,
7.875%, 1/15/03......... -- 593,650 593,650
------------ -------------- --------------
-- 1,338,212 1,338,212
------------ -------------- --------------
HOTELS & LEISURE--0.8%
Ba2 -- 1,080 1,080 HMH Propoerties Inc.,
Sr. Note,
7.875%, 8/1/05.......... -- 947,700 947,700
Baa1 175(e) 100 275 Marriott International
Inc., Ser. C, Note,
7.875, 9/15/09.......... 171,073 97,756 268,829
Baa2 -- 5,000 5,000 Royal Caribbean Cruises
Ltd., Sr. Note,
8.25%, 4/1/05........... -- 4,844,800 4,844,800
Baa1 -- 3,500 3,500 ITT Corp.
6.75%, 11/15/03......... -- 3,264,905 3,264,905
------------ -------------- --------------
171,073 9,155,161 9,326,234
------------ -------------- --------------
INSURANCE--0.6%
A1 -- 200 200 Allstate Corp., Sr.
Note,
7.20%, 12/01/09......... -- 193,538 193,538
Conseco Finance Trust,
Ba2 -- 5,000 5,000 8.70%, 11/15/26......... -- 4,206,200 4,206,200
Ba2 -- 2,665 2,665 8.796%, 4/1/27.......... -- 2,223,383 2,223,383
A1 -- 600 600 Royal Sun Alliance
Insurance Group, Plc.,
8.95%, 10/15/29......... -- 614,298 614,298
------------ -------------- --------------
-- 7,237,419 7,237,419
------------ -------------- --------------
MEDIA & ENTERTAINMENT--
0.8%
News America Holdings,
Inc., Deb.,
Baa3 300(e) -- 300 9.25%, 2/1/13........... 328,569 -- 328,569
Baa3 -- 6,500 6,500 6.703%, 5/21/34......... -- 6,279,520 6,279,520
Time Warner, Inc., Sr.
Note,
Baa3 600(e) -- 600 9.125%, 1/15/13......... 666,792 -- 666,792
Baa3 -- 2,000 2,000 8.11%, 8/15/06.......... -- 2,051,860 2,051,860
Baa2 -- 550 550 United News & Media PLC,
Note,
7.25%, 7/1/04........... -- 535,645 535,645
------------ -------------- --------------
995,361 8,867,025 9,862,386
------------ -------------- --------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-14
<PAGE>

<TABLE>
<CAPTION>
MOODY'S
RATING PRINCIPAL (000) DESCRIPTION VALUE
------- ------------------------------- ------------------------- ------------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED PRO-FORMA
FUND FUND COMBINED FUND BALANCED FUND COMBINED
-------- -------- ------------- ------------ -------------- --------------
<C> <C> <C> <C> <S> <C> <C> <C>

DEBT OBLIGATIONS--
(CONTINUED)
CORPORATE BONDS--
(CONTINUED)
MEDICAL PRODUCTS &
SERVICES
Tyco International Group,
Note,
Baa1 $400(e) $ -- $ 400 6.375%, 6/15/05.......... $ 375,188 $ -- $ 375,188
Baa1 -- 400 400 7.00%, 6/15/28........... -- 348,908 348,908
------------ -------------- --------------
375,188 348,908 724,096
------------ -------------- --------------
OIL & GAS
EXPLORATION/PRODUCTION--
0.2%
A2 700(e) -- 700 Atlantic Richfield Co.,
Deb.,
10.875%, 7/15/05......... 810,173 -- 810,173
Baa3 200 -- 200 Occidental Petroleum
Corporation, Sr. Note,
7.65%, 2/15/06........... 196,610 -- 196,610
Ba2 -- 500 500 Parker & Parsley
Petroleum Co., Note,
8.875%, 4/15/05.......... -- 501,125 501,125
Ba1 -- 615 615 Seagull Energy Corp., Sr.
Note,
7.875%, 8/1/03........... -- 596,550 596,550
------------ -------------- --------------
1,006,783 1,097,675 2,104,458
------------ -------------- --------------
OIL & GAS EQUIPMENT &
SERVICES--1.1%
Amerada Hess Corp., Note,
Baa1 -- 150 150 7.375%, 10/1/09.......... -- 145,215 145,215
Baa1 50(e) 400 450 7.875%, 10/1/29.......... 48,478 387,820 436,298
A2 -- 1,760 1,760 Atlantic Richfield Co.,
Notes,
5.90%, 4/15/09........... -- 1,599,312 1,599,312
Baa2 -- 3,500 3,500 BJ Services Co., Sr.
Note,
7.00%, 2/1/06............ -- 3,342,605 3,342,605
Baa2 -- 1,000 1,000 El Paso Energy Corp., Sr.
Note,
6.625%, 7/15/01.......... -- 990,740 990,740
Ba2 -- 670 670 Eott Energy Partners LP,
Sr. Notes,
11.00%, 10/1/09.......... -- 666,650 666,650
Baa3 -- 4,250 4,250 Limestone Electron Trust,
Sr. Notes,
8.625, 3/15/03........... -- 4,276,733 4,276,733
Baa2 -- 1,400 1,400 Sonat Inc., Note,
7.625%. 7/15/11.......... -- 1,409,954 1,409,954
------------ -------------- --------------
48,478 12,819,029 12,867,507
------------ -------------- --------------
PAPER & FOREST PRODUCTS--
0.5%
Baa2 -- 2,000 2,000 Fort James Corp., Note,
6.234%, 3/15/01.......... -- 1,979,040 1,979,040
Baa2 -- 225 225 Georgia Pacific Corp.,
7.75%, 11/15/29.......... -- 210,694 210,694
Baa2 -- 4,800 4,800 Scotia Pacific Co.,
7.71%, 7/20/28........... -- 3,648,000 3,648,000
------------ -------------- --------------
-- 5,837,734 5,837,734
------------ -------------- --------------
PRINTING--0.1%
World Color Press Inc.,
Baa3 -- 260 260 8.375%, 11/15/08......... -- 241,800 241,800
Baa3 -- 815 815 7.75%, 2/15/09........... -- 749,800 749,800
------------ -------------- --------------
-- 991,600 991,600
------------ -------------- --------------
RETAIL--0.8%
A2 -- 3,525 3,525 Dayton Hudson Corp.,
Note,
6.40%, 2/15/03........... -- 3,446,745 3,446,745
Federated Dept. Stores,
Inc., Sr. Notes,
Baa1 -- 2,500 2,500 8.125%, 10/15/02......... -- 2,540,325 2,540,325
Baa1 -- 2,500 2,500 8.50%, 6/15/03........... -- 2,561,100 2,561,100
</TABLE>

See Notes to Pro-Forma Financial Statements

F-15
<PAGE>

<TABLE>
<CAPTION>
MOODY'S
RATING PRINCIPAL (000) DESCRIPTION VALUE
------- ------------------------------- ------------------------------- ------------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED PRO-FORMA
FUND FUND COMBINED FUND BALANCED FUND COMBINED
-------- -------- ------------- ------------ -------------- --------------
<C> <C> <C> <C> <S> <C> <C> <C>

DEBT OBLIGATIONS--(CONTINUED)
CORPORATE BONDS--(CONTINUED)
RETAIL--(CONTINUED)
Baa3 $ -- $1,000 $1,000 Saks Inc.,
8.25%, 11/15/08................ $ -- $ 949,000 $ 949,000
Aa2 150 -- 150 Wal-Mart Stores Inc., Note,
6.875%, 8/10/09................ 145,932 -- 145,932
------------ -------------- --------------
145,932 9,497,170 9,643,102
------------ -------------- --------------
REAL ESTATE INVESTMENT TRUST--
0.6%
Baa1 -- 800 800 Duke Realty Ltd., Sr. Note,
7.30%, 6/30/03................. -- 784,000 784,000
ERP Operating, LP, Notes,
A3 -- 5,000 5,000 6.15%, 9/15/00................. -- 4,969,000 4,969,000
A3 -- 400 400 7.10%, 6/23/04................. -- 387,036 387,036
A3 -- 2,000 2,000 6.63%, 4/13/15................. -- 1,882,360 1,882,360
------------ -------------- --------------
-- 8,022,396 8,022,396
------------ -------------- --------------
SAVINGS & LOAN--0.2%
Sovereign Bancorp Inc., Sr.
Notes,
Ba3 -- 445 445 10.25%, 5/15/04................ -- 447,772 447,772
Ba3 -- 770 770 10.50%, 11/15/06............... -- 758,450 758,450
A3 -- 1,000 1,000 Washington Mutual Inc., Sr.
Notes,
7.50%, 8/15/06................. -- 977,970 977,970
------------ -------------- --------------
-- 2,184,192 2,184,192
------------ -------------- --------------
TELECOMMUNICATIONS SERVICES--
1.3%
Baa3 -- 500 500 AT&T Inc., Sr. Note, (Canada)
7.65%, 9/15/06................. -- 500,590 500,590
Baa1 -- 600 600 Cable & Wireless Communication,
Note,
6.75%, 12/1/08................. -- 605,292 605,292
A2 -- 900 900 Electric Lightwave Inc., Note,
6.05%, 5/15/04................. -- 841,500 841,500
GTE Corp.,
Baa1 220(e) -- 220 6.36%, 4/15/06, Deb............ 207,238 -- 207,238
Baa1 210(e) -- 210 7.51%, 4/1/09, Note............ 209,078 -- 209,078
Ba2 -- 1,485 1,485 Global Crossing Holdings, Ltd,
Sr. Note,
9.125%, 11/15/06............... -- 1,425,600 1,425,600
Ba1 -- 3,550 3,550 LCI International Inc.,
7.25%, 6/15/07................. -- 3,458,020 3,458,020
Ba1 -- 1,870 1,870 Qwest Communications Int'l,
Inc., Sr. Note,
7.50%, 11/1/08................. -- 1,816,237 1,816,237
Baa1 330(e) 2,500 2,830 Sprint Capital Corp., Note,
6.875%, 11/15/28............... 295,934 2,241,925 2,537,859
Telecomunicaciones de Puerto
Rico, Notes,
Baa2 -- 1,800 1,800 6.65%, 5/15/06................. -- 1,666,531 1,666,531
Baa2 -- 1,400 1,400 6.80%, 6/15/09................. -- 1,283,114 1,283,114
Williams Communications Group,
Inc., Sr. Notes,
B2 -- 680 680 10.70%, 10/1/07................ -- 681,700 681,700
Aa3 -- 120 120 10.875%, 10/1/09............... -- 118,200 118,200
------------ -------------- --------------
712,250 14,638,709 15,350,959
------------ -------------- --------------
TRANSPORTATION/TRUCKING/SHIPING
Baa3 -- 600 600 Union Pacific Resources Group,
Inc.,
7.95%, 4/15/29................. -- 572,088 572,088
------------ -------------- --------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-16
<PAGE>

<TABLE>
<CAPTION>
MOODY'S
RATING PRINCIPAL (000) DESCRIPTION VALUE
------- -------------------------------- ------------------------ ------------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED PRO-FORMA
FUND FUND COMBINED FUND BALANCED FUND COMBINED
--------- -------- ------------- ------------ -------------- --------------
<C> <C> <C> <C> <S> <C> <C> <C>

DEBT OBLIGATIONS--
(CONTINUED)
CORPORATE BONDS--
(CONTINUED)
UTILITIES--1.8%
Baa3 $ -- $4,500 $4,500 Calenergy Co., Inc., Sr.
Note,
6.96%, 9/15/03.......... $ -- $ 4,372,065 $ 4,372,065
Cleveland Electric
Illuminating, Notes,
Baa1 -- 3,000 3,000 7.19%, 7/01/00.......... -- 2,992,800 2,992,800
Baa2 -- 2,000 2,000 7.67%, 7/01/24.......... -- 1,988,200 1,988,200
Hydro Quebec
A2 300 -- 300 8.00%, 2/1/13........... 315,783 -- 315,783
A2 -- 125 125 7.50%, 4/01/16.......... -- 125,974 125,974
A2 -- 1,175 1,175 9.40%, 2/1/21........... -- 1,404,853 1,404,853
Niagara Mohawk Power
Corp.,
Baa2 -- 4,500 4,500 7.375%, 8/01/03......... -- 4,435,650 4,435,650
Baa2 -- 2,000 2,000 8.00%, 6/01/04.......... -- 2,001,960 2,001,960
A2 1,000(e) -- 1,000 Southern California
Edison Co., Note,
6.50%, 6/1/01........... 992,360 -- 992,360
Ba2 -- 3,000 3,000 Western Massachusetts
Electric Co.,
7.375%, 7/01/01......... -- 2,984,790 2,984,790
------------ -------------- --------------
1,308,143 20,306,292 21,614,435
------------ -------------- --------------
WASTE MANAGEMENT--0.1%
Ba3 -- 765 765 Allied Waste North
America, Inc.,
7.625%, 1/1/06.......... -- 627,300 627,300
Ba1 -- 1,000 1,000 Waste Management Inc.,
6.125%, 7/15/01......... -- 956,200 956,200
------------ -------------- --------------
-- 1,583,500 1,583,500
------------ -------------- --------------
Total U.S. Corporate
Bonds
(cost $276,347,377).... 22,275,447 244,015,256 266,290,703
------------ -------------- --------------
COLLATERALIZED MORTGAGE
OBLIGATIONS--0.1%
Aaa 195 -- 195 Commercial Mortgage
Asset Trust, Series
1999 C2 Class A1,
7.285%, 12/17/07........ 193,030 -- 193,030
Aaa 600 -- 600 Federal National
Mortgage Association
REMIC, Series 1993
C155K
6.50%, 5/25/08.......... 580,500 -- 580,500
------------ -------------- --------------
Total Collateralized
Mortgage Obligations
(cost $787,156)........ 773,530 -- 773,530
------------ -------------- --------------
U.S. GOVERNMENT AGENCY
MORTGAGE PASS-THROUGH
OBLIGATION--1.3%
Aaa 2,000(c) -- 2,000 Federal Home Loan
Mortgage Corp.,
7.00%, 12/1/99.......... 1,923,740 -- 1,923,740
Federal National
Mortgage Assoc.,
Aaa 558 -- 558 8.50%, 10/1/24.......... 569,430 -- 569,430
0(d) -- -- 9.50%, 7/1/25........... 139 -- 139
Aaa 319 -- 319 8.50%, 2/1/28........... 325,236 -- 325,236
Aaa 5,600(c) -- 5,600 7.50%, 12/1/99.......... 5,503,736 -- 5,503,736
Aaa 5,100(c) -- 5,100 6.50%, 12/1/99.......... 4,821,746 -- 4,821,746
Government National
Mortgage Assoc.,
Aaa 1,500(c) -- 1,500 7.00%, 12/15/99......... 1,453,125 -- 1,453,125
Aaa 1,000(c) -- 1,000 8.00%, 12/15/99......... 1,011,250 -- 1,011,250
------------ -------------- --------------
Total U.S. Government
Agency Mortgage Pass-
Through Obligations
(cost $15,552,052)..... 15,608,402 -- 15,608,402
------------ -------------- --------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-17
<PAGE>

<TABLE>
<CAPTION>
MOODY'S
RATING PRINCIPAL (000) DESCRIPTION VALUE
------- -------------------------------- ------------------------ ------------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED PRO-FORMA
FUND FUND COMBINED FUND BALANCED FUND COMBINED
--------- -------- ------------- ------------ -------------- --------------
<C> <C> <C> <C> <S> <C> <C> <C>

DEBT OBLIGATIONS--
(CONTINUED)
U.S. GOVERNMENT AGENCY
STRIPPED SECURITIES--
0.2%
Federal National
Mortgage Assoc.,
Aaa $ 437 $ -- $ 437 8.00%, 12/1/23.......... $ 440,485 $ -- $ 440,485
Aaa 1,800(c) -- 1,800 7.00%, 12/1/99.......... 1,767,924 -- 1,767,924
------------ -------------- --------------
Total U.S. Government
Agency Stripped
Securities
(cost $2,204,317)...... 2,208,409 -- 2,208,409
------------ -------------- --------------
U.S. GOVERNMENT
SECURITIES--7.1%
United States Treasury
Bonds,
Aaa -- 19,000 19,000 13.875%, 5/15/11........ -- 25,964,640 25,964,640
Aaa -- 10,000 10,000 8.125%, 8/15/19......... -- 12,157,800 12,157,800
Aaa -- 7,400 7,400 8.125%, 8/15/21......... -- 9,097,338 9,097,338
Aaa -- 2,700 2,700 7.625%, 11/15/22........ -- 3,180,087 3,180,087
Aaa -- 13,800 13,800 7.125%, 2/15/23......... -- 15,443,028 15,443,028
Aaa -- 1,400 1,400 6.75%, 8/15/26.......... -- 1,521,618 1,521,618
Aaa 1,045(e) 5,000 6,045 6.125%, 8/15/29......... 1,065,085 5,096,100 6,161,185
United States Treasury
Notes,
Aaa 550 -- 550 6.50%, 2/28/02.......... 549,741 -- 549,741
Aaa -- 3,000 3,000 6.625%, 4/30/02......... -- 3,007,266 3,007,266
Aaa -- 150 150 5.50%, 3/31/03.......... -- 146,179 146,179
Aaa 200(e) -- 200 6.00%, 8/15/04.......... 197,282 -- 197,282
Aaa -- 2,065 2,065 5.875%, 11/15/04........ -- 2,027,562 2,027,562
Aaa 270(e) -- 270 7.50%, 2/15/05.......... 282,318 -- 282,318
Aaa 351(e) 2,909 3,260 6.00%, 8/15/09.......... 346,556 2,872,172 3,218,728
Aaa 132(e) 2,290 2,422 6.50%, 2/15/10.......... 136,620 2,370,150 2,506,770
Aaa 2,600 -- 2,600 United States Treasury
Stripped Interest,
Zero Coupon, 11/15/21... 713,154 -- 713,154
------------ -------------- --------------
Total U.S. Government
Securities
(cost $85,546,159)..... 3,290,756 82,883,940 86,174,696
------------ -------------- --------------
FOREIGN GOVERNMENT
BONDS--0.7%
Comunidad Autonoma De
Andalucia, Note,
Aa3 120 120 240 7.25%, 10/1/29.......... 115,764 115,764 231,528
Ba1 -- 700 700 Republic of Philippines,
(Philippines)
8.875%, 4/15/08......... -- 649,250 649,250
Republic of Quebec,
(Canada)
A2 -- 800 800 7.125%, 2/9/24.......... -- 760,096 760,096
A2 -- 780 780 5.75%, 2/15/09.......... -- 699,176 699,176
A2 -- 500 500 Republic of
Saskatchewan, (Canada)
9.125%, 2/15/21......... -- 591,620 591,620
United Mexican States,
(Mexico)
Baa3 -- 2,500 2,500 10.375%, 2/17/09........ -- 2,687,500 2,687,500
Baa3 -- 1,700 1,700 5.874%,12/31/19......... -- 1,678,750 1,678,750
Baa3 -- 1,800 1,800 5.875%, 12/31/19........ -- 1,777,500 1,777,500
------------ -------------- --------------
Total Foreign Government
Bonds
(cost $8,688,976)...... 115,764 8,959,656 9,075,420
------------ -------------- --------------
Total Debt Obligations
(cost $389,126,037).... 44,272,308 335,858,852 380,131,160
------------ -------------- --------------
UNITS
--------------------------
WARRANTS (A)
-- -- 5,384 5,384 United Mexican States,
(Mexico) expiring
12/31/03............... -- 0 0
------------ -------------- --------------
Total Long-Term
Investments
(cost $981,740,807).... 123,709,731 948,672,111 1,072,381,842
------------ -------------- --------------
</TABLE>

See Notes to Pro-Forma Financial Statements

F-18
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL (000) DESCRIPTION VALUE
------------------------------- ------------------------ ------------------------------------------
ACTIVE ACTIVE
ACTIVE BALANCED FUND ACTIVE BALANCED FUND
BALANCED BALANCED PRO-FORMA BALANCED PRO-FORMA
FUND FUND COMBINED FUND BALANCED FUND COMBINED
-------- -------- ------------- ------------ -------------- --------------
<C> <C> <C> <S> <C> <C> <C>

SHORT-TERM INVESTMENTS--
12.9%
U.S. GOVERNMENT
SECURITIES--0.5%
United States Treasury
Bills,
$350(b) $ -- $ 350 5.63%, 6/22/00.......... $ 345,512 $ -- $ 345,512
950(b) -- 950 5.6725%, 6/22/00........ 937,725 -- 937,725
4,892 -- 4,892 Federal Home Loan Bank
Discount Notes,
6.05%, 4/3/00........... 4,890,356 -- 4,890,356
------------ -------------- --------------
Total U.S. Government
Securities
(cost $6,173,593)...... 6,173,593 -- 6,173,593
------------ -------------- --------------
COMMERCIAL PAPER--1.5%
3,500 -- 3,500 Centric Capital Corp.,
6.08%, 5/19/00.......... 3,471,626 -- 3,471,626
3,000 -- 3,000 Cox Enterprises Inc.,
6.20%, 4/26/00.......... 2,987,083 -- 2,987,083
General Electric Capital
Services Inc.,
4,000 -- 4,000 6.07%, 5/18/00.......... 3,968,301 -- 3,968,301
Johnson Controls, Inc.,
3,746 -- 3,746 6.33%, 4/3/00........... 3,744,683 -- 3,744,683
Old Line Funding Corp.,
4,500 -- 4,500 6.05%, 5/15/00.......... 4,466,725 -- 4,466,725
------------ -------------- --------------
Total Commercial Paper
(cost $18,638,418)..... 18,638,418 -- 18,638,418
------------ -------------- --------------
REPURCHASE AGREEMENT--
10.9%
31,014 101,818 132,832 Joint Repurchase
Agreement Account,
6.15%, 4/30/00 (cost
$132,832,000).......... 31,014,000 101,818,000 132,832,000
------------ -------------- --------------
Total Short-Term
Investments
(cost $157,644,011).... 55,826,011 101,818,000 157,644,011
------------ -------------- --------------
Total Investments--
100.9%
(cost $1,139,384,818).. 179,535,742 1,050,490,111 1,230,025,853
------------ -------------- --------------
Liabilities in excess of
other assets--(0.9)%... (15,891,444) 4,946,711 (10,944,733)
------------ -------------- --------------
Net Assets.............. $163,644,298 $1,055,436,822 $1,219,081,120
============ ============== ==============
</TABLE>
----------
(a) Non-income producing security.
(b) All or partial amount of security is segregated as collateral for financial
futures transactions.
(c) Mortgage dollar rolls.
(d) Figures are actual, not rounded to the nearest thousand.
(e) Pledged as collateral for dollar rolls.
ADR--American Depository Receipts.
MTN--Medium Term Note.
NR--Not rated by Moody's or Standard & Poor's.

See Notes to Pro-Forma Financial Statements

F-19
<PAGE>

PRO-FORMA FINANCIAL STATEMENTS

PRO-FORMA STATEMENT OF ASSETS AND LIABILITIES

MARCH 31, 2000
(UNAUDITED)

<TABLE>
<CAPTION>
PRUDENTIAL
PRUDENTIAL PRUDENTIAL ACTIVE BALANCED
ACTIVE BALANCED BALANCED FUND PRO-FORMA
FUND FUND COMBINED
--------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS
Investments, at value (cost
$130,105,844 and $876,446,974,
respectively) ................. $148,521,742 $ 948,672,111 $1,097,193,853
Repurchase agreement (cost
$31,014,000 and $101,818,000,
respectively).................. 31,014,000 101,818,000 132,832,000
Foreign currency at value (cost
$0 and $20,019, respectively) . -- 20,256 20,256
Cash............................ 312 -- 312
Dividends and interest
receivable..................... 578,816 7,811,075 8,389,891
Receivable for Fund shares sold. 312,258 798,973 1,111,231
Receivable for investments sold. 279,799 10,244,233 10,524,032
Due from broker-variation
margin......................... 145,988 10,497 156,485
Prepaid expenses and other
assets......................... 4,771 35,270 40,041
------------ -------------- --------------
Total assets ............... 180,857,686 1,069,410,415 1,250,268,101
------------ -------------- --------------
LIABILITIES
Bank overdraft ................. -- 16,557 16,557
Payable for investments
purchased...................... 16,746,649 8,789,076 25,535,725
Payable for Fund shares
reacquired..................... 203,601 3,512,024 3,715,625
Accrued expenses and other
liabilities.................... 161,343 617,102 778,445
Management fee payable.......... 87,034 571,778 658,812
Distribution fee payable........ 14,761 441,768 456,529
Withholding tax payable......... -- 25,288 25,288
------------ -------------- --------------
Total liabilities .......... 17,213,388 13,973,593 31,186,981
------------ -------------- --------------
NET ASSETS ..................... $163,644,298 $1,055,436,822 $1,219,081,120
============ ============== ==============
Net assets were comprised of:
Common stock/shares of
beneficial interest at par .. $ 11,873 $ 839,329 $ 885,750
Paid-in capital in excess of
par.......................... 141,308,908 919,533,273 1,060,807,633
------------ -------------- --------------
141,320,781 920,372,602 1,061,693,383
Undistributed net investment
income....................... 1,200,937 288,983 1,489,920
Accumulated net realized gain
on investments............... 977,217 62,478,168 63,455,385
Net unrealized appreciation of
investments.................. 20,145,363 72,297,069 92,442,432
------------ -------------- --------------
Net assets, March 31, 2000 ..... $163,644,298 $1,055,436,822 $1,219,081,120
============ ============== ==============
Class A:
Net asset value and redemption
price per share.............. $ 13.76 $ 12.59 $ 13.76
Maximum sales charge (5.00% of
offering price).............. 0.72 0.66 0.72
------------ -------------- --------------
Maximum offering price to
public....................... $ 14.48 $ 13.25 $ 14.48
============ ============== ==============
Shares outstanding 932,986;
42,424,823 and 39,754,927;
respectively
Net assets $12,840,607;
$534,187,194 and
$547,027,801; respectively
Class B:
Net asset value, offering
price and redemption price
per share.................... $ 13.75 $ 12.54 $ 13.75
============ ============== ==============
Shares outstanding 961,681;
30,184,999 and 28,499,715;
respectively
Net assets $13,221,126;
$378,649,954 and
$391,871,080; respectively
Class C:
Net asset value and redemption
price per share.............. $ 13.75 $ 12.54 $ 13.75
Sales charge (1.00% of
offering price).............. 0.14 0.13 0.14
------------ -------------- --------------
Offering price to public...... $ 13.89 $ 12.67 $ 13.89
============ ============== ==============
Shares outstanding 119,774;
840,172 and 886,249;
respectively
Net assets $1,646,547;
$10,539,373 and $12,185,920;
respectively
Class Z:
Net asset value, offering
price and redemption price
per share.................... $ 13.79 $ 12.60 $ 13.79
============ ============== ==============
Shares outstanding 9,858,229;
10,482,871 and 19,434,106;
respectively
Net assets $135,936,018;
$132,060,301 and
$267,996,319; respectively
</TABLE>

See Notes to Pro-Forma Financial Statements

F-20
<PAGE>

PRO-FORMA STATEMENT OF OPERATIONS

12-MONTH PERIOD ENDED MARCH 31, 2000
(UNAUDITED)

<TABLE>
<CAPTION>
PRUDENTIAL
ACTIVE
BALANCED
PRUDENTIAL PRUDENTIAL FUND PRO-
ACTIVE BALANCED BALANCED PRO-FORMA FORMA
FUND FUND ADJUSTMENTS COMBINED
--------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Investment Income
Income
Interest ............... $ 4,799,058 $ 29,272,214 $ -- $ 34,071,272
Dividends (net of
foreign withholding
taxes of $658 and
$13,694, respectively). 957,087 11,030,434 -- 11,987,521
----------- ------------ --------- ------------
5,756,145 40,302,648 -- 46,058,793
----------- ------------ --------- ------------
Expenses
Management fee ......... 969,483 7,033,279 12,225 (a) 8,014,987
Distribution Fee--Class
A...................... 25,868 1,303,571 (1,225)(a) 1,328,214
Distribution Fee--Class
B...................... 107,074 4,315,020 (3,479)(a) 4,418,615
Distribution Fee--Class
C...................... 11,107 100,570 (102)(a) 111,575
Transfer agent's fees
and expenses .......... 258,000 2,309,000 (167,000)(b) 2,400,000
Reports to shareholders. 173,000 201,000 (124,000)(b) 250,000
Custodian's fees and
expenses............... 159,000 200,000 (59,000)(b) 300,000
Registration fees ...... 91,000 120,000 (71,000)(b) 140,000
Legal fees and expenses. 23,000 41,000 (14,000)(b) 50,000
Audit fees and expenses. 20,000 30,000 (30,000)(b) 20,000
Directors'/Trustees'
fees and expenses ..... 8,500 26,000 (13,000)(b) 21,500
Miscellaneous .......... 4,391 41,138 (5,741)(b) 39,788
----------- ------------ --------- ------------
Total expenses........ 1,850,423 15,720,578 (476,322) 17,094,679
----------- ------------ --------- ------------
Net investment income..... 3,905,722 24,582,070 476,322 28,964,114
----------- ------------ --------- ------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss)
on:
Investment transactions. 2,518,816 95,028,491 -- 97,547,307
Financial futures
contracts.............. 3,012 565,613 -- 568,625
Foreign currency
transactions........... -- 3,391 -- 3,391
----------- ------------ --------- ------------
2,521,828 95,597,495 -- 98,119,323
----------- ------------ --------- ------------
Net change in unrealized
appreciation/depreciation
of
Investments............. 11,252,276 6,391,450 -- 17,643,726
----------- ------------ --------- ------------
Net gain (loss) on
investments.............. 13,774,104 101,988,945 -- 115,763,049
----------- ------------ --------- ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS............... $17,679,826 $126,571,015 $ 476,322 $144,727,163
=========== ============ ========= ============
</TABLE>
----------
(a) Adjustment to reflect management fee and distribution fee of each Class
based on the surviving Fund's fee schedule.
(b) Adjustment to reflect elimination of duplicative expenses.

See Notes to Pro-Forma Financial Statements

F-21
<PAGE>

PRUDENTIAL ACTIVE BALANCED FUND
NOTES TO PRO-FORMA FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF COMBINATION--The Pro-Forma Statement of Assets and Liabilities,
including the Portfolio of Investments at March 31, 2000 and the related
Statement of Operations ("Pro Forma Statements") for the twelve months ended
March 31, 2000, reflect the accounts of Prudential Active Balanced Fund
("Active Balanced") and Prudential Balanced Fund ("Balanced").

The Pro Forma Statements give effect to the proposed transfer of all assets
and liabilities of Balanced in exchange for shares in Active Balanced. The Pro
Forma Statements should be read in conjunction with the historical financial
statements of each Fund included in its Statement of Additional Information.

Active Balanced would not have to sell any Balanced securities shown in the
Portfolio of Investments that it might acquire in the proposed reorganization
in order to comply with its investment objectives and policies.

2. SHARES OF COMMON STOCK--The pro-forma net asset value per share assumes the
issuance of additional shares of each class of Active Balanced which would
have been issued on March 31, 2000 in connection with the proposed
reorganization. Shareholders of Balanced would become shareholders of Active
Balanced receiving shares of Active Balanced equal to the value of their
holdings in Balanced. The amount of additional shares assumed to be issued was
calculated based on the March 31, 2000 net assets of Balanced and the net
asset value per share of Active Balanced as follows:

<TABLE>
<CAPTION>
NET ASSET VALUE
NET ASSETS PER SHARE
3/31/00 3/31/00
ADDITIONAL SHARES ISSUED BALANCED ACTIVE BALANCED
------------------------ ----------- ---------------
<S> <C> <C>
Class A 38,821,941 534,187,194 $13.76
Class B 27,538,034 378,649,954 13.75
Class C 766,475 10,539,373 13.75
Class Z 9,575,877 132,060,301 13.79
</TABLE>

3. PRO FORMA OPERATIONS--The Pro-Forma Statement of Operations assumes similar
rates of gross investment income for the investments of each Fund.
Accordingly, the combined gross investment income is equal to the sum of each
Fund's gross investment income. Certain expenses have been adjusted to reflect
the expected expenses of the combined entity. The pro-forma investment
management fees and distribution fees of the combined Fund are based on the
fee schedule in effect for Active Balanced at the combined level of average
net assets for the twelve months ended March 31, 2000. The Pro-Forma Statement
of Operations does not include the effect of any realized gains or losses, or
transaction fees incurred in connection with the realignment of the portfolio.
The expenses of the proposed reorganization and the solicitation of proxies,
which will be borne by each Fund in proportion to their assets, approximating
$223,000, have not been included in the Pro-Forma Statement of Operations.

F-22
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Statement of Additional Information dated December 2, 1999

The Prudential Investment Portfolios, Inc. (the Company) is an open-end,
diversified, management investment company consisting of three series:
Prudential Active Balanced Fund (Active Balanced Fund), Prudential Jennison
Growth Fund (Growth Fund) and Prudential Jennison Growth & Income Fund (Growth &
Income Fund) (each a Fund and collectively the Funds).

The investment objective of Active Balanced Fund is to seek income and long-
term growth of capital by investing in a portfolio of equity-related, fixed-
income and money market securities which is actively managed to capitalize on
opportunities created by perceived misvaluation.

The investment objective of Growth Fund is long-term growth of capital. The
Growth Fund seeks to achieve this objective by investing primarily in equity
securities (common stock, preferred stock and securities convertible into common
stock) of established companies with above-average growth prospects. Current
income, if any, is incidental. Under normal market conditions, the Growth Fund
intends to invest at least 65% of its total assets in equity securities of
companies that exceed $1 billion in market capitalization.

The primary investment objective of Growth & Income Fund is long-term growth of
capital and income, with current income as a secondary objective. The Growth &
Income Fund seeks to achieve this objective by investing primarily in common
stocks of established companies with growth prospects believed to be
under appreciated by the market.

Each Fund may also engage in various derivative transactions, such as using
options on stocks, stock indexes and foreign currencies, entering into foreign
currency exchange contracts and the purchase and sale of futures contracts on
stock indexes and options thereon to hedge its portfolio and to attempt to
enhance return.

There can be no assurance that the Funds' investment objectives will be
achieved. See "Description of the Funds, Their Investments and Risks."

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

This Statement of Additional Information is not a prospectus and should be read
in conjunction with Active Balanced Fund's Prospectus, Growth Fund's Prospectus
and Growth & Income Fund's Prospectus, each dated December 2, 1999, copies of
which may be obtained from the Company upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Company History................................................. B-2
Description of the Funds, Their Investments and Risks........... B-2
Investment Restrictions......................................... B-24
Management of the Company....................................... B-27
Control Persons and Principal Holders of Securities............. B-30
Investment Advisory and Other Services.......................... B-31
Brokerage Allocation and Other Practices........................ B-37
Capital Shares, Other Securities and Organization............... B-39
Purchase, Redemption and Pricing of Fund Shares................. B-40
Shareholder Investment Account.................................. B-51
Net Asset Value................................................. B-56
Taxes, Dividends and Distributions.............................. B-57
Performance Information......................................... B-59
Financial Statements............................................ B-62
Report of Independent Accountants............................... B-78,B-89,B-101
Description of Security Ratings................................. A-1
Appendix I--General Investment Information...................... I-1
Appendix II--Historical Performance Data........................ II-1
Appendix III--Information Relating to Prudential................ III-1
Appendix IV--5% Shareholders.................................... IV-1
</TABLE>

MF172B
<PAGE>

COMPANY HISTORY

The Company changed its name from Prudential Jennison Fund, Inc. to Prudential
Jennison Series Fund, Inc., effective on September 10, 1996, in connection with
the offering of a second series, Prudential Jennison Growth & Income Fund
(Growth & Income Fund). The existing series of the Company was redesignated
Prudential Jennison Growth Fund (Growth Fund). On August 27, 1997, the Company
added a third series, Prudential Jennison Active Balanced Fund. Prudential
Jennison Active Balanced Fund did not commence operations until January 23,
1998, when it acquired the assets of Prudential Active Balanced Fund, a series
of Prudential Index Series Fund (formerly Prudential Dryden Fund). On June 1,
1998, the Company changed its name to The Prudential Investment Portfolios,
Inc., in connection with the replacement of Prudential Jennison Active Balanced
Fund's investment adviser and Prudential Jennison Active Balanced Fund's name
was changed to Prudential Active Balanced Fund (Active Balanced Fund).

DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS

(a) Classification. The Company is an open-end, diversified, management
investment company consisting of three series. Each series operates as a
separate fund with its own investment objectives and policies.

(b) and (c) Investment Strategies, Policies and Risks. The investment objective
of the Active Balanced Fund is to seek income and long-term growth of capital by
investing in a portfolio of equity, fixed-income and money market securities
which is actively managed to capitalize on opportunities created by perceived
misvaluation. The investment objective of the Growth Fund is long-term growth of
capital. The Growth Fund seeks to achieve this objective by investing primarily
in equity securities (common stock, preferred stock and securities convertible
into common stock) of established companies with above-average growth prospects.
Current income, if any, is incidental. Under normal market conditions, the
Growth Fund intends to invest at least 65% of its total assets in equity
securities of companies that exceed $1 billion in market capitalization. The
primary investment objective of the Growth & Income Fund is long-term growth of
capital and income, with current income as a secondary objective. The Growth &
Income Fund seeks to achieve its objectives by investing primarily in common
stocks of established companies with growth prospects believed to be
under appreciated by the market. While the principal investment policies and
strategies for seeking to achieve a Fund's objective are described in its
Prospectus, a Fund may from time to time also use the securities, instruments,
policies and principal and non-principal strategies described below in trying to
achieve its objective. A Fund may not succeed in achieving its objective and you
could lose money.

The terms "investment adviser" and "Subadviser" refer, in the case of Growth
Fund and Growth & Income Fund, to Jennison Associates LLC (Jennison), and in the
case of Active Balanced Fund, to The Prudential Investment Corporation, doing
business as Prudential Investments (PI). See "Management of the Company" below.

Equity-Related Securities

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

ADRs and ADSs are U.S. dollar-denominated certificates or shares issued by a
U.S. bank or trust company and represent the right to receive securities of a
foreign issuer deposited in a domestic bank or foreign branch of a U.S. bank and
traded on a U.S. exchange or in an over-the-counter market. Generally, ADRs and
ADSs are in registered form. There are no fees imposed on the purchase or sale
of ADRs when purchased from the issuing bank or trust company in the initial
underwriting, although the issuing bank or trust company may impose charges for
the collection of dividends and the conversion of ADRs

B-2
<PAGE>

or ADSs into the underlying securities. Investment in ADRs and ADSs has certain
advantages over direct investment in the underlying foreign securities since:
(1) ADRs and ADSs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (2) issuers whose securities are represented by ADRs or ADSs are
usually subject to comparable auditing, accounting and financial reporting
standards as domestic issuers.

A convertible security is a bond, debenture, corporate note, preferred stock or
other similar security that may be converted at a stated price within a
specified period of time into a certain quantity of the common stock or other
equity securities of the same or a different issuer. A warrant or right entitles
the holder to purchase equity securities at a specific price for a specific
period of time. Convertible securities are senior to common stocks in a
corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation dependent upon a market price advance in
the convertible security's underlying common stock.

In general, the market value of a convertible security is at least the higher
of its "investment value" (that is, its value as a fixed-income security) or its
"conversion value" (that is, its value upon conversion into its underlying
common stock). A convertible security tends to increase in market value when
interest rates decline and tends to decrease in value when interest rates rise.
However, the price of a convertible security is also influenced by the market
value of the security's underlying stock. The price of a convertible security
tends to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines. While no
securities investment is without some risk, investments in convertible
securities generally entail less risk than investments in the common stock of
the same issuer. In recent years, convertible securities have been developed
which combine higher or lower current income with options and other features.
Each Fund may invest in these types of convertible securities.

The Growth Fund may invest in convertible securities which are rated investment
grade or in unrated securities of comparable quality. The Growth & Income Fund
may invest in convertible securities which are rated below investment grade or
in unrated securities of comparable quality. The Active Balanced Fund may invest
in convertible securities which are rated below investment grade or in unrated
securities of comparable quality.

U.S. Government Securities

U.S. Treasury Securities. Each Fund is permitted to invest in U.S. Treasury
securities, including 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. Each Fund may invest in securities issued by agencies of the
U.S. Government or instrumentalities of the U.S. Government except that the
Growth & Income Fund does not intend to invest in mortgage-related securities.
These obligations, including those which are guaranteed by federal agencies or
instrumentalities, may or may not be backed by the full faith and credit of the
United States. Obligations of the Government National Mortgage Association
(GNMA), the Farmers Home Administration and the Small Business Administration
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, a Fund
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 if the agency or instrumentality does not meet its commitments.
Securities in which a Fund may invest which are not backed by the full faith

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and credit of the United States include obligations such as those issued by the
Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation (FHLMC), the
Federal National Mortgage Association, the Student Loan Marketing Association,
Resolution Funding Corporation and the Tennessee Valley Authority, each of which
has the right to borrow from the U.S. Treasury to meet its obligations, and
obligations of the Farm Credit System, the obligations of which may be satisfied
only by the individual credit of the issuing agency. FHLMC investments may
include collateralized mortgage obligations.

Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by a Fund 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 commonly
referred to as Treasury strips.

Mortgage-Related Securities

The Active Balanced Fund and the Growth Fund may invest in mortgage-backed
securities, including those which represent undivided ownership interests in
pools of mortgages, issued by the U.S. Government or an issuing agency or
instrumentality which guarantees the payment of interest on and principal of
these securities. However, the guarantees do not extend to the yield or value of
the securities nor do the guarantees extend to the yield or value of a Fund's
shares. The Active Balanced Fund also may invest in mortgage-backed securities
issued by private entities. Mortgage-backed securities are in most cases
"pass-through" instruments, through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees. Because the prepayment characteristics of the underlying
mortgages vary, it is not possible to predict accurately the average life of a
particular issue of pass-through certificates. Mortgage- backed securities are
often subject to more rapid repayment than their maturity date would indicate as
a result of the pass-through of prepayments of principal on the underlying
mortgage obligations. During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities can be expected to accelerate. A
Fund's ability to invest in high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium could result in capital losses. During periods of rising interest rates,
the rate of prepayment of mortgages underlying mortgage-backed securities can be
expected to decline, extending the projected average maturity of the
mortgage-backed securities. This maturity extension risk may effectively change
a security which was considered short- or intermediate-term at the time of
purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short- or
intermediate-term securities.

The Active Balanced Fund and the Growth Fund may invest in both adjustable rate
mortgage securities (ARMs), which are pass-through mortgage securities
collateralized by adjustable rate mortgages, and fixed-rate mortgage securities
(FRMs), which are collateralized by fixed-rate mortgages.

Private mortgage-backed securities in which the Active Balanced Fund may invest
represent pass-through pools consisting principally of conventional residential
mortgage loans created by non-governmental issuers, such as commercial banks,
savings and loan associations and private mortgage insurance companies.

The Active Balanced Fund expects that private and governmental entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may be shorter than
previously was customary. As new types of mortgage-backed securities are
developed and offered to investors, the Active Balanced Fund, consistent with
its investment objective and policies, will consider making investments in those
new types of securities.

The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying

B-4
<PAGE>

mortgages. Factors affecting mortgage prepayments include the level of interest
rates, general economic and social conditions, the location of the mortgaged
property and age of the mortgage. Because prepayment rates of individual pools
vary widely, it is not possible to predict accurately the average life of a
particular pool. Common practice is to assume that prepayments will result in an
average life ranging from two to ten years for pools of fixed rate 30-year
mortgages. Pools of mortgages with other maturities or different characteristics
will have varying average life assumptions.

Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fund will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, the Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that a Fund purchases mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to
any unamortized premium.

Government stripped mortgage-related interest only (IOs) and principal only
(POs) securities in which the Growth Fund and Active Balanced Fund may invest
are currently traded in an over-the-counter market maintained by several large
investment banking firms. There can be no assurance that a Fund will be able to
effect a trade of IOs or POs at a time when it wishes to do so. A Fund will
acquire IOs and POs only if, in the opinion of the Fund's Subadviser, a
secondary market for the securities exists at the time of acquisition, or is
subsequently expected. Each Fund will treat IOs and POs that are not U.S.
Government securities as illiquid and will limit its investments in these
securities, together with other illiquid investments, in order not to hold more
than 15% of its net assets in illiquid securities. With respect to IOs and POs
that are issued by the U.S. Government, the Subadviser, subject to the
supervision of the Board of Directors, may determine that such securities are
liquid, if it determines the securities can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of net asset value per share.

Investment in IOs and POs involves the risks normally associated with investing
in government and government agency mortgage-related securities. In addition,
the yields on IOs and POs are extremely sensitive to the prepayment experience
on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs and
increasing the yield to maturity on POs. Sufficiently high prepayment rates
could result in the Fund not fully recovering its initial investment in an IO.

Collateralized Mortgage Obligations

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

In 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 underlying 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 the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the underlying
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

B-5
<PAGE>

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 is 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.

In reliance on Securities and Exchange Commission (Commission) rules and
orders, a Fund's investments in certain qualifying CMOs, including CMOs that
have elected to be treated as Real Estate Mortgage Investment Conduits (REMICs),
are not subject to the limitations of the Investment Company Act of 1940, as
amended (Investment Company Act) on acquiring interests in other investment
companies. In order to be able to rely on the Commission's interpretation, the
CMOs and REMICs must be unmanaged, fixed-asset issuers that (i) invest primarily
in mortgage-backed securities, (ii) do not issue redeemable securities, (iii)
operate under general exemptive orders exempting them from all provisions of the
Investment Company Act, and (iv) are not registered or regulated under the
Investment Company Act as investment companies. To the extent that a Fund
selects CMOs or REMICs that do not meet the above requirements, the Fund may not
invest more than 10% of its assets in all such entities and may not acquire more
than 3% of the voting securities of any single such entity.

Asset-Backed Securities

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

Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage pass-
through securities), which may shorten the securities' weighted average life and
reduce their overall return to certificate holders. On the other hand,
asset-backed securities may present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities often do not have the
benefit of a security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of which
may reduce the ability to obtain full payment. In the case of automobile
receivables, the security interests in the underlying automobiles are often not
transferred when the pool is created, with the resulting possibility that the
collateral could be resold.

Unlike traditional fixed-income securities, interest and principal payments on
asset-backed securities are made more frequently, usually monthly, and principal
may be prepaid at any time. As a result, if the Fund purchases such a security
at a premium, a prepayment rate that is faster than expected will reduce yield
to maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Alternatively, if the Fund
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce yield to maturity.
Certificate holders may also experience delays in payment if the full amounts
due on underlying loans, leases or receivables are not realized because of
unanticipated legal or administrative costs of enforcing the contracts or
because of depreciation or damage to the collateral (usually automobiles)
securing certain contracts, or other factors. If consistent with its investment
objective and policies, the Fund may invest in other asset- backed securities
that may be developed in the future.

Types of Credit Enhancement. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, those securities may contain elements of
credit support, which fall into two categories: (i) liquidity

B-6
<PAGE>

protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction or through a combination of such
approaches. The Fund will not pay any fees for credit support, although the
existence of credit support may increase the price of a security.

Custodial Receipts

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

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

Liquidity Puts

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

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

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<PAGE>

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

Lower-Rated and Unrated Debt Securities

The Active Balanced Fund and the Growth & Income Fund may invest, to a limited
extent, in lower-rated and unrated debt securities. Non-investment grade
fixed-income securities are rated lower than Baa (or the equivalent rating or,
if not rated, determined by the Subadviser to be of comparable quality to
securities so rated) and are commonly referred to as high risk or high yield
securities or "junk" bonds. High yield securities are generally riskier than
higher quality securities and are subject to more credit risk, including risk of
default, and the prices of such securities are more volatile than higher quality
securities. Such securities may also have less liquidity than higher quality
securities. The Active Balanced Fund is not authorized to invest in excess of
20% of the fixed-income portion of its portfolio in non- investment grade
fixed-income securities. The Growth & Income Fund may not invest more than 10%
of its net assets in non-investment grade fixed-income securities.

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

Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities and, from time
to time, it may be more difficult to value high yield securities than more
highly rated securities. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer. As a
result, the investment adviser could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating a Fund's net asset value.

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

Foreign Securities

Each Fund is permitted to invest in foreign corporate and government
securities. "Foreign government securities" 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, Government Entities) of foreign countries
denominated in the currencies of such countries or in U.S. dollars (including
debt securities of a Government Entity in any such country denominated in the
currency of another such country).

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<PAGE>

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 (International Bank
for Reconstruction and Development), the European 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.

Risk Factors and Special Considerations of Investing in Foreign Securities

Foreign securities involve certain risks, which should be considered carefully
by an investor in any Fund. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possible imposition of exchange controls and
the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States and there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect investment.

Additional costs could be incurred in connection with the Funds' international
investment activities. Foreign brokerage commissions are generally higher than
U.S. brokerage commissions. Increased custodian costs as well as administrative
difficulties (such as the applicability of foreign laws to foreign custodians in
various circumstances) may be associated with the maintenance of assets in
foreign jurisdictions.

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

Shareholders should be aware that investing in the equity markets of developing
countries involves exposure to economies that are generally less diverse and
mature, and to political systems which can be expected to have less stability,
than those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the markets of
developed countries. The risks associated with investments in foreign
securities, described above, may be greater with respect to investments in
developing countries.

B-9
<PAGE>

Risk Factors and Special Considerations of Investing in Euro-Denominated
Securities

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

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

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

The Funds' Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable each Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Funds' other service providers to address the
conversion. No Fund has borne any expenses relating to these actions.

Risk Management and Return Enhancement Strategies

Each Fund also may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. A Fund, and thus its investors, may lose money if the Fund is
unsuccessful in its use of these strategies. These strategies currently include
the use of options, foreign currency forward contracts and futures contracts and
options thereon. The Active Balanced Fund also may purchase and sell currency
spot contracts. A Fund's ability to use these strategies may be limited by
market conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. The investment advisers do
not intend to buy all of these instruments or use all of these strategies to the
full extent permitted unless it is believed that doing so will help a Fund
achieve its objectives. New financial products and risk management techniques
continue to be developed and a Fund may use these new investments and techniques
to the extent consistent with its investment objectives and policies.

Options on Securities

Each Fund may purchase and write (that is, sell) put and call options on
securities that are traded on U.S. or foreign securities exchanges or that are
traded in the over-the-counter markets. A call option is a short-term contract
pursuant to which the purchaser, in return for a premium paid, has the right to
buy the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying security against payment of the exercise price. A put option is a
similar contract which gives the purchaser, in return for a premium, the right
to sell the underlying security at a specified price during the term of the
option. The writer of the put, who receives the premium, has the obligation to
buy the underlying security upon exercise at the exercise price. A Fund will
generally write put options when its investment adviser desires to invest in the
underlying security. The premium paid by the purchaser of an option will
reflect, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates.

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<PAGE>

A call option written by a Fund is "covered" if the Fund owns the security
underlying the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its Custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds on a share-for-share basis a call on the same security
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. A Fund may also write a call
option or write a put option if it maintains cash or other liquid assets with a
value equal to the exercise price in a segregated account with its Custodian. A
Fund may also write a put option if it holds on a share-for- share basis a put
on the same security as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written.

If the writer of an option wishes to terminate the obligation, he or she may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after he or she had been notified of the exercise of an option. Similarly, an
investor who is the holder of an option may liquidate his or her position by
effecting a "closing sale transaction." This is accomplished 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. To secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option is generally required to pledge
for the benefit of the broker the underlying security or other assets in
accordance with the rules of the relevant exchange or clearinghouse, such as The
Options Clearing Corporation (OCC), an institution created to interpose itself
between buyers and sellers of options in the United States. Technically, the
clearinghouse assumes the other side of every purchase and sale transaction on
an exchange and, by doing so, guarantees the transaction.

A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; a Fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option may be offset in whole or in
part if the Fund holds the underlying security by appreciation of the underlying
security owned by the Fund.

A Fund may also purchase a "protective put," that is, a put option acquired for
the purpose of protecting a portfolio security from a decline in market value.
In exchange for the premium paid for the put option, the Fund acquires the right
to sell the underlying security at the exercise price of the put regardless of
the extent to which the underlying security declines in value. The loss to the
Fund is limited to the premium paid for, and transaction costs in connection
with, the put plus the initial excess, if any, of the market price of the
underlying security over the exercise price. However, if the market price of the
security underlying the put rises, the profit the Fund realizes on the sale of
the security will be reduced by the premium paid for the put option less any
amount (net of transaction costs) for which the put may be sold. Similar
principles apply to the purchase of puts on stock indexes, as described below.

Options on Securities Indexes

In addition to options on securities, each Fund may also purchase and sell put
and call options on securities indexes traded on U.S. or foreign securities
exchanges or traded in the over-the-counter markets. Options on securities
indexes are similar to options on securities 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 expressed in dollars times a specified multiple (the
multiplier). The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. All settlements on options on indexes
are in cash, and gain or loss depends on price movements in the securities
market generally (or in a particular industry or segment of the market) rather
than price movements in individual securities.

B-11
<PAGE>

The multiplier for an index option performs a function similar to the unit of
trading for a stock option. It determines the total dollar value per contract of
each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indexes may have
different multipliers. Because exercises of index options are settled in cash, a
call writer 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. In addition, unless a Fund has other liquid assets that
are sufficient to satisfy the exercise of a call, the Fund would be required to
liquidate portfolio securities or borrow in order to satisfy the exercise.

Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular security, whether a Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of security prices in the market generally or in an
industry or market segment rather than movements in the price of a particular
security. Accordingly, successful use by a Fund of options on indexes would be
subject to the investment adviser's ability to predict correctly movements in
the direction of the securities market generally or of a particular industry.
This requires different skills and techniques than predicting changes in the
price of individual stocks.

Risks of Transactions in Options

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

Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders. Each Fund intends to purchase and sell only those options which are
cleared by clearinghouses whose facilities are considered to be adequate to
handle the volume of options transactions.

Risks of Options on Indexes

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

B-12
<PAGE>

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, a Fund 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 Fund. It is the policy of each Fund to
purchase or write options only on indexes 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 Fund
will not purchase or sell any index option contract unless and until, in the
investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is not
substantially greater than the risk in connection with options on securities in
the index.

Special Risks of Writing Calls on Indexes

Because exercises of index options are settled in cash, a call writer such as a
Fund 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, a Fund will write call options on indexes only under the
circumstances described below under "Limitations on Purchase and Sale of Stock
Options, Options on Stock Indexes and Foreign Currencies and Futures Contracts
and Related Options."

Price movements in a Fund's portfolio probably will not correlate precisely
with movements in the level of the index and, therefore, a Fund bears the risk
that the price of the securities held by the Fund may not increase as much as
the index. In such event, the Fund would bear a loss on the call which is not
completely offset by movements in the price of the Fund's portfolio. It is also
possible that the index may rise when a Fund's portfolio of stocks does not
rise. If this occurred, the Fund 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 a Fund in the opposite direction as the market would
be likely to occur for only a short period or to a small degree.

Unless a Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if a Fund fails to anticipate an
exercise, it may have to borrow from a bank (in the case of Growth Fund and
Growth & Income Fund, in amounts not exceeding 20% of the Fund's total assets
and in the case of Active Balanced Fund, in amounts not exceeding 30% of the
Fund's total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.

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

B-13
<PAGE>

If a Fund 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 Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer. Although a Fund 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 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.

Risks Related to Foreign Currency Forward Contracts

Each Fund may enter into foreign currency forward contracts in several
circumstances. When a Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when a Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, a Fund 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 the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, a Fund may enter into a forward contract for a fixed amount of dollars,
to sell the amount of foreign currency approximating the value of some or all of
the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. If a Fund enters into a hedging
transaction as described above, the transaction will be "covered" by the
position being hedged, or the Fund's Custodian will segregate cash or other
liquid assets in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign currency exchange contracts
(less the value of the covering positions, if any). The assets segregated will
be marked-to-market daily, and if the value of the assets segregated declines,
additional cash or other liquid assets will be placed in the account so that the
value of the account will, at all times, equal the amount of the Fund's net
commitments with respect to such contracts.

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

It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the 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 a Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).

If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period

B-14
<PAGE>

between a Fund's entering into a forward contract for the sale of a foreign
currency and the date it enters into an offsetting contract for the purchase of
the foreign currency, the Fund will realize a gain to the extent that the price
of the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward contract prices increase, the Fund will
suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.

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

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

Foreign Currency Strategies--Special Considerations

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

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

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

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

B-15
<PAGE>

Settlement of futures contracts, forward contracts and options involving
foreign currencies might be required to take place with in the country issuing
the underlying currency. Thus, the Fund might be required to accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might by required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.

Futures Contracts

As a purchaser of a futures contract, a Fund 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, a Fund incurs an obligation to deliver the specified amount of
the underlying obligation at a specified time in return for an agreed upon
price. The Growth & Income Fund may purchase futures contracts on debt
securities, including U.S. Government securities, aggregates of debt securities,
stock indexes and foreign currencies. The Growth Fund may purchase futures
contracts on stock indexes and foreign currencies. The Active Balanced Fund may
purchase futures contracts on securities, foreign currencies, stock indexes and
interest rate indexes and options thereon.

A Fund 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 Fund's portfolio securities may fall,
a Fund may sell a futures contract. If declining interest rates are anticipated,
a Fund may purchase a futures contract to protect against a potential increase
in the price of securities the Fund intends to purchase. Subsequently,
appropriate securities may be purchased by a Fund 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 or cash, 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 (or currency) 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 a Fund will be able to enter into a closing transaction.

When a Fund 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 other liquid assets 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 a Fund upon the proper termination of the futures contract.
The margin deposits made are marked-to-market daily and a Fund may be required
to make subsequent deposits into the segregated account, maintained at its
Custodian for that purpose, of cash or other liquid assets, called "variation
margin," in the name of the broker, which are reflective of price fluctuations
in the futures contract.

B-16
<PAGE>

Risks of Transactions in Futures Contracts

There are several risks in connection with the use of futures contracts as a
hedging device. In the case of futures contracts on securities indices, the
correlation between the price of the futures contract and the movements in the
index may not be perfect. Therefore, a correct forecast of market trends by the
investment adviser may still not result in a successful hedging transaction.

Although a Fund will purchase or sell futures contracts only on exchanges where
there appears to be an adequate secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular contract or
at any particular time. Accordingly, there can be no assurance that it will be
possible, at any particular time, to close a futures position. In the event a
Fund could not close a futures position and the value of such position declined,
the Fund would be required to continue to make daily cash payments of variation
margin. Currently, index futures contracts are available on various U.S. and
foreign securities indices.

Successful use of futures contracts by a Fund is also subject to the ability of
the Fund's investment adviser to predict correctly movements in the direction of
markets and other factors affecting the securities market generally. If a Fund
has insufficient cash to meet daily variation margin requirements, it may need
to sell securities to meet such requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it is disadvantageous
to do so.

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

Options on Futures Contracts

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

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

Limitations on Purchase and Sale of Stock Options, Options on Stock Indexes
and Foreign Currencies and Futures Contracts and Related Options

Each Fund may write put and call options on stocks only if they are covered as
described above, and such options must remain covered so long as the Fund is
obligated as a writer. A Fund will write put options on stock indexes and
foreign currencies only if they are covered by segregating with the Fund's
Custodian an amount of cash or other liquid assets equal to the aggregate
exercise price of the puts. A Fund will not enter into futures contracts or
related options if the aggregate initial margin and premiums exceed 5% of the
market value of such Fund's total assets, taking into account unrealized profits
and losses on such contracts, provided, however, that in the case of an option
that is in-the-money, the in-the-money amount may be excluded in computing such
5%. The above restriction does not apply to the purchase or sale of futures
contracts

B-17
<PAGE>

and related options for bona fide hedging purposes, within the meaning of
regulations of the Commodity Futures Trading Commission. Neither Growth Fund nor
Growth & Income Fund intends to purchase options on equity securities or
securities indexes if the aggregate premiums paid for such outstanding options
would exceed 10% of the Fund's total assets.

Except as described below, a Fund will write call options on indexes 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 Fund writes a
call option on a broadly-based stock market index, the Fund will segregate with
its Custodian, or pledge to a broker as collateral for the option, cash or other
liquid assets substantially replicating the movement of the index, in the
judgment of the Fund's investment adviser, 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.

If a Fund has written an option on an industry or market segment index, it will
segregate 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, and that, in the judgment of the investment
adviser, substantially replicate the movement of the index 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 Fund's holdings in
that industry or market segment. No individual security will represent more than
15% of the amount so segregated or pledged in the case of broadly-based stock
market index options or 25% of such amount in the case of industry or market
segment index options. If at the close of business on any day the market value
of such qualified securities so segregated or pledged falls below 100% of the
current index value times the multiplier times the number of contracts, the Fund
will segregate or pledge an amount in cash or other liquid assets equal in value
to the difference. In addition, when a Fund writes a call on an index which is
in-the-money at the time the call is written, the Fund will segregate with its
Custodian or pledge to the broker as collateral cash or other liquid assets
equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on NASDAQ against
which the Fund has not written a stock call option and which has not been hedged
by the Fund by the sale of stock index futures. However, if a Fund holds a call
on the same index as the call written where the exercise price of the call held
is equal to or less than the exercise price of the call written or greater than
the exercise price of the call written if the difference is segregated by the
Fund in cash or other liquid assets with its Custodian, it will not be subject
to the requirements described in this paragraph.

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

Risks of Risk Management and Return Enhancement Strategies

Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Funds
would not be subject absent the use of these strategies. A Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If
the investment adviser's predictions of movements in

B-18
<PAGE>

the direction of the securities, foreign currency or interest rate markets are
inaccurate, the adverse consequences to a Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, foreign currency and futures contracts and options on futures contracts
include (1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the risk that the counterparty may be unable to complete the transaction and
(6) the possible inability of a Fund to purchase or sell a portfolio security at
a time that otherwise would be favorable for it to do so, or the possible need
for a Fund to sell a portfolio security at a disadvantageous time, due to the
need for the Fund to maintain "cover" or to segregate liquid assets in
connection with hedging transactions. See "Taxes, Dividends and Distributions."

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

Short Sales

The Growth Fund and Growth & Income Fund may make short sales of securities or
maintain a short position, provided that at all times when a short position is
open the Fund owns an equal amount of such securities or securities convertible
into or exchangeable, without payment of any further consideration, for an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box), and that not more than 25% of the Fund's net assets
(determined at the time of the short sale) may be subject to such sales. The
Active Balanced Fund may make short sales against- the-box, provided no more
than 25% of the Fund's net assets (determined at the time of the short sale
against-the-box) may be subject to such sales.

The Growth Fund and Growth & Income Fund may sell a security it does not own in
anticipation of a decline in the market value of that security (short sales). To
complete such a transaction, the Fund must borrow the security to make delivery
to the buyer. The Fund then is obligated to replace the security borrowed by
purchasing it at 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 Fund.
Until the security is replaced, the Fund is required to pay to the lender any
dividends or interest which accrue during the period of the loan. To borrow the
security, the Fund also 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 Fund replaces a borrowed security, the
Fund will segregate with its Custodian cash or other liquid assets at such a
level that (i) the amount segregated plus the amount deposited with the broker
as collateral will equal the current value of the security sold short and (ii)
the amount segregated plus the amount deposited with the broker as collateral
will not be less than the market value of the security at the time it was sold
short. The Fund 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 Fund replaces the borrowed security. The Fund 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 increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with a short sale. No more than 25% of the Fund'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) segregated in
connection with short sales.

B-19
<PAGE>

Repurchase Agreements

Each Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date usually is within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the repurchase price, the Fund
will suffer a loss.

A Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the investment adviser. In the event of a
default or bankruptcy by a seller, a Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss.

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

Forward Rolls, Dollar Rolls and Reverse Repurchase Agreements

The Active Balanced Fund may commit up to 30% of the value of its total assets
to investment techniques such as dollar rolls, forward rolls and reverse
repurchase agreements. A forward roll is a transaction in which the Fund sells a
security to a financial institution, such as a bank or broker- dealer, and
simultaneously agrees to repurchase the same or similar security from the
institution at a later date at an agreed upon price. With respect to
mortgage-related securities, such transactions are often called "dollar rolls."
In dollar roll transactions, the mortgage-related securities that are
repurchased will bear the same coupon rate as those sold, but generally will be
collateralized by different pools of mortgages with different prepayment
histories than those sold. During the roll period, the Fund forgoes principal
and interest paid on the securities and is compensated by the difference between
the current sales price and the forward price for the future purchase as well as
by interest earned on the cash proceeds of the initial sale. A "covered roll" is
a specific type of dollar roll for which there is an offsetting cash position or
a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction.

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

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

The Active Balanced Fund may enter into reverse repurchase agreements with
banks and securities dealers which meet the creditworthiness standards
established by the investment adviser. Reverse repurchase agreements involve the
risk that the market value of the securities retained in lieu of sale by the
Active Balanced Fund may decline below the price of the securities the Fund has
sold but is obligated to repurchase.

B-20
<PAGE>

Lending of Securities

Consistent with applicable regulatory requirements, a Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and provided that such loans are callable at any time by the
Fund and are at all times secured by cash or other liquid assets or an
irrevocable letter of credit in favor of the Fund equal to at least 100% of the
market value, determined daily, of the loaned securities. The advantage of such
loans is that the Fund continues to receive payments in lieu of the interest and
dividends on the loaned securities, while at the same time earning interest
either directly from the borrower or on the collateral which will be invested in
short-term obligations.

A loan may be terminated by a Fund at any time. If the borrower fails to
maintain the requisite amount of collateral, the loan automatically terminates,
and the Fund 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
loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made to
firms determined to be creditworthy pursuant to procedures approved by the Board
of Directors. On termination of the loan, the borrower is required to return the
securities to the Fund, and any gain or loss in the market price during the loan
would inure to the Fund.

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

Borrowing

Active Balanced Fund may borrow an amount equal to no more than 30% of the
value of its total assets and Growth Fund and Growth & Income Fund may each
borrow an amount equal to no more than 20% of the value of their respective
total assets (calculated at the time of the borrowing) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Active Balanced Fund also may borrow through forward rolls, dollar rolls or
through reverse repurchase agreements, and also to take advantage of investment
opportunities. Active Balanced Fund may pledge up to 30% of its total assets and
Growth Fund and Growth & Income Fund may each pledge up to 20% of their
respective total assets to secure these borrowings. If a Fund's asset coverage
for borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. Growth Fund and Growth & Income Fund will not purchase portfolio
securities when borrowings exceed 5% of the value of their respective total
assets.

Borrowing for investment purposes is generally known as "leveraging."
Leveraging exaggerates the effect on net asset value of any increase or decrease
in the market value of a Fund's portfolio. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased and may exceed the income from the securities
purchased. In addition, a Fund may be required to maintain minimum average
balances in connection with such borrowing or pay a commitment fee to maintain a
line of credit which would increase the cost of borrowing over the stated
interest rate.

B-21
<PAGE>

Illiquid Securities

Each Fund may hold up to 15% of its net assets in illiquid securities. If a
Fund were to exceed this limit, the investment adviser would take prompt action
to reduce the Fund's holdings in illiquid securities to no more than 15% of its
net assets, as required by applicable law. Illiquid securities include
repurchase agreements that have a maturity of longer than seven days, securities
with legal or contractual restrictions on resale (restricted securities) and
securities that are not readily marketable in securities markets (either within
or outside of the United States). Repurchase agreements subject to demand are
deemed to have a maturity equal to the applicable notice period.

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

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

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

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Board of Directors. The Funds' investments in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. Each investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Directors. In reaching liquidity decisions, the investment adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to 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 (for example, the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (a) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (b) it must not be "traded
flat" (that is, without accrued interest) or in default as to principal or
interest.

B-22
<PAGE>

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

Securities of Other Investment Companies

Each Fund may invest up to 10% of its total assets in securities of other
investment companies. Generally, a Fund does not intend to invest more than 5%
of its total assets in such securities. If a Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees. In addition, the Active Balanced Fund may purchase
shares of affiliated investment companies. See "Investment Restrictions" below.

Segregated Assets

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

When-Issued and Delayed Delivery Securities

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

(d) Temporary Defensive Strategy and Short-Term Investments

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

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

(e) Portfolio Turnover

As a result of the investment policies described above, each Fund may engage in
a substantial number of portfolio transactions, but neither the Growth Fund's
nor the Growth & Income Fund's portfolio turnover rate is expected to exceed

B-23
<PAGE>

100%, and the Active Balanced Fund's portfolio turnover rate is not expected to
exceed 200%. The portfolio turnover rate generally is the percentage computed by
dividing the lesser of portfolio purchases or sales (excluding all securities,
including options, whose maturities or expiration date at acquisition were one
year or less) by the monthly average value of the portfolio. High portfolio
turnover (100% or more) involves correspondingly greater brokerage commissions
and other transaction costs, which are borne directly by a Fund. In addition,
high portfolio turnover may also mean that a proportionately greater amount of
distributions to shareholders will be taxed as ordinary income rather than
long-term capital gains compared to investment companies with lower portfolio
turnover. See "Brokerage Allocation and Other Practices" and "Taxes, Dividends
and Distributions."

INVESTMENT RESTRICTIONS

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

Growth Fund and Growth & Income Fund may not:

1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options 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 Fund'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
Fund may borrow from banks up to 20% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 20% of
the value of its total assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
futures contracts and options thereon and with respect to the writing of options
and obligations of the Fund to Directors pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets or the issuance of a senior
security.

4. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result: (i) with respect to 75% of the
Fund's total assets, more than 5% of the Fund'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 Fund's total assets (determined at the time of the
investment) would be invested in a single industry.

5. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell securities which are secured by real estate, securities of
companies which invest or deal in real estate and publicly traded securities of
real estate investment trusts. The Fund may not purchase interests in real
estate limited partnerships which are not readily marketable.

6. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon. (For purposes
of this restriction, futures contracts on currencies and on securities indexes
and, with respect to Growth & Income Fund, futures contracts on debt securities,
and foreign currency forward contracts are not deemed to be commodities or
commodity contracts.)

B-24
<PAGE>

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. Neither Fund has adopted a fundamental
investment policy with respect to investments in restricted securities. See
"Description of the Funds, Their Investments and Risks--Illiquid Securities."

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 Fund 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 of one or more investment companies, 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 Fund 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 30% of the Fund's total assets.

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

Active Balanced Fund may not:

2. Make short sales of securities. Short sales "against-the-box" are not
subject to this limitation.

3. Issue senior securities, borrow money or pledge its assets, except that the
Fund may borrow from banks or through forward rolls, dollar rolls or reverse
repurchase agreements in an amount up to 30% of the value of its total assets
(calculated when the loan is made) to take advantage of investment
opportunities, for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 30% of the value of its
total assets to secure such borrowings. The purchase or sale of securities on a
when-issued or delayed delivery basis, forward foreign currency exchange
contracts and collateral arrangements relating thereto, and collateral
arrangements with respect to futures contracts and options thereon and with
respect to the writing of options and obligations of the Fund to Directors
pursuant to deferred compensation arrangements are not deemed to be a pledge of
assets subject to this restriction.

4. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result; (i) with respect to 75% of the
Fund's total assets, more than 5% of the Fund'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 Fund's total assets (determined at the time of
investment) would be invested in a single industry.

6. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon, and foreign
currency forward contracts.

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

B-25
<PAGE>

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

9. Invest in securities of other investment companies, except: (i) purchases in
the open market involving only customary brokerage commissions and as a result
of which the Fund 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 of one or more investment companies, (ii) as part of a merger,
consolidation or other acquisition, or (iii) purchases of affiliated investment
company shares pursuant to and subject to such limits as the Commission may
impose by rule or order.

10. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 30% of the Fund's total assets.

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

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

B-26
<PAGE>

MANAGEMENT OF THE COMPANY

<TABLE>
<CAPTION>
Name and Address ** Position with
(Age) Company Principal Occupations During Past 5 Years
------------------- ------------- -----------------------------------------
<S> <C> <C>
Edward D. Beach (74) Director President and Director of BMC Fund, Inc., a
closed-end investment company; formerly, Vice
Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary
and Treasurer of Broyhill Family Foundation,
Inc.; Member of the Board of Trustees of Mars
Hill College; Director of The High Yield
Income Fund, Inc.; Director or Trustee of 44
funds within the Prudential Mutual Funds.

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

*Robert F. Gunia (52) Vice President Chief Administrative Officer (since June 1999) of
and Director Prudential Investments; Vice President
(since September 1997) of The Prudential Insurance
Company of America (Prudential); Executive Vice
President and Treasurer (since December 1996) of
Prudential Investments Fund Management LLC (PIFM);
Senior Vice President (March 1987-May 1999) of
Prudential Securities Incorporated (Prudential
Securities); formerly Chief Administrative Officer
(July 1990-September 1996), Director (January 1989-
September 1996) and Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-
September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Director of
The Asia Pacific Fund, Inc. (since May 1989);
Director of The High Yield Income Fund, Inc.;
Director or Trustee of 45 funds within the
Prudential Mutual Funds.

Douglas H. McCorkindale Director Vice Chairman (since March 1984) and President
(60) (since September 1997) of Gannett Co. Inc.
(publishing and media); Director of Gannett
Co. Inc., Frontier Corporation and Continental
Airlines, Inc.; Director or Trustee of 24
funds within the Prudential Mutual Funds.

Thomas T. Mooney (57) Director President of the Greater Rochester Metro Chamber
of Commerce; former Rochester City Manager;
Trustee of Center for Governmental Research,
Inc.; Director of Blue Cross of Rochester,
Monroe County Water Authority, Rochester Jobs,
Inc., Executive Service Corps of Rochester,
Monroe County Industrial Development
Corporation and Northeast Midwest Institute;
President, Director and Treasurer of First
Financial Fund, Inc. and The High Yield Plus
Fund, Inc.; Director or Trustee of 34 other
funds within the Prudential Mutual Funds.
</TABLE>

B-27
<PAGE>

<TABLE>
<CAPTION>
Name and Address **
(Age) Position with Company Principal Occupations During Past 5 Years
------------------- --------------------- -----------------------------------------
<S> <C> <C>
Stephen P. Munn (57) Director Chairman (since January 1994), Director and
President (since 1988) and Chief Executive
Officer (1988-December 1993) of Carlisle
Companies Incorporated (manufacturer of
industrial products); Director or Trustee of
30 funds within the Prudential Mutual Funds.

*David R. Odenath, Jr. Director Officer in Charge, President, Chief
Executive (42) Officer and Chief Operating
Officer (since June 1999), PIFM; Senior Vice
President (since June 1999), Prudential;
Senior Vice President (August 1993-May
1999), PaineWebber Group Inc.; Director or
Trustee of 44 funds within the Prudential
Mutual Funds.

Richard A. Redeker (56) Director Formerly President, Chief Executive Officer
and Director (October 1993-September 1996)
of Prudential Mutual Fund Management, Inc.,
Executive Vice President, Director and
Member of the Operating Committee (1993-
September 1996), Prudential Securities,
Director (October 1993-September 1996) of
Prudential Securities Group, Inc., Executive
Vice President (January 1994-September
1996), The Prudential Investment
Corporation, Director (January 1994-
September 1996), Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual
Fund Services, Inc., and Senior Executive
Vice President and Director (September 1978-
September 1993) of Kemper Financial
Services, Inc.; Director or Trustee of 30
funds within the Prudential Mutual Funds.

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

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

B-28

<PAGE>

<TABLE>
<CAPTION>
Name and Address ** Position with
(Age) Company Principal Occupations During Past 5 Years
------------------- ------------- -----------------------------------------
<S> <C> <C>
Louis A. Weil, III (58) Director Chairman (since January 1999), President and
Chief Executive Officer (since January 1996)
and Director (since September 1991) of Central
Newspapers, Inc.; Chairman of the Board (since
January 1996), Publisher and Chief Executive
Officer (August 1991-December 1995) of Phoenix
Newspapers, Inc.; formerly Publisher of Time
Magazine (May 1989-March 1991), President,
Publisher & CEO of The Detroit News (February
1986-August 1989) and member of the Advisory
Board, Chase Manhattan Bank-Westchester;
Director or Trustee of 30 funds within the
Prudential Mutual Funds.

Clay T. Whitehead (61) Director President (since May 1983) of National Exchange
Inc. (new business development firm); Director
or Trustee of 33 funds within the Prudential
Mutual Funds.

Grace C. Torres (40) Treasurer and First Vice President (since December 1996) of
Principal Financial PIFM; First Vice President (since March 1993)
and Accounting of Prudential Securities; formerly First Vice
Officer President (March 1994-September 1996) of
Prudential Mutual Fund Management, Inc.

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

Stephen M. Ungerman (46) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments; formerly First Vice President of
Prudential Mutual Fund Management, Inc.
(February 1993-September 1996).
</TABLE>

__________________

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

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

Pursuant to each Management Agreement with the Company, the Manager pays all
compensation of officers and employees of the Company as well as the fees and
expenses of all Directors of the Company who are affiliated persons of the
Manager. The Company currently pays each of its Directors who is not an
affiliated person of PIFM, PI or Jennison annual compensation of $2,500, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Director may change as a result of the introduction of additional
funds on the Boards of which the Director will be asked to serve.

B-29
<PAGE>

Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Company. Under the terms of the agreement, the Company
accrues daily the amount of Directors' 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 (the T-bill rate) or,
pursuant to a Commission exemptive order, at the daily rate of return of a Fund
(the Fund rate). Payment of the interest so accrued is also deferred and
accruals become payable at the option of the Director. The Company's obligation
to make payments of deferred Directors' fees, together with interest thereon, is
a general obligation of the Company.

The Board of Directors has adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 75. Mr. Beach is scheduled to retire on December 31, 1999.

The following table sets forth aggregate compensation paid by the Company to
the Directors for the fiscal year ended September 30, 1999 and the aggregate
compensation paid to such Directors for service on the Company's board and the
boards of other investment companies managed by PIFM (Fund Complex) for the
calendar year ended December 31, 1998.

Compensation Table
<TABLE>
<CAPTION>
Total 1998
Compensation
Paid to Board
Members

Aggregate From Company and
Compensation Fund
Name and Position From Company Complex(/2/)
----------------- ------------ ---------------
<S> <C> <C>
Beach, Edward D.--Director $2,500 $135,000(44/71)*
Gold, Delayne D.--Director $2,500 $135,000(44/71)*
Gunia, Robert F.(/1/)--Director -- --
McCorkindale, Douglas H.(/2/)--Director $2,500 $ 70,000(23/40)*
Mooney, Thomas T.(/2/)--Director $2,500 $115,000(35/70)*
Munn, Stephen P.--Director $2,500 $ 45,000(18/24)*
Odenath, Jr., David R.(/1/)--Director -- --
Redeker, Richard A.(/1/)--Director $1,875 --
Smith, Robin B.(/2/)--Director $2,500 $ 90,000(32/41)*
Strangfeld, Jr., John R.(/1/)--President and Di-
rector -- --
Weil, III, Louis A.--Director $1,250 $ 90,000(30/54)*
Whitehead, Clay T.--Director $1,250 $ 45,000(18/24)*
</TABLE>
---------
* Indicates number of funds/portfolios in Fund Complex (including the Company)
to which aggregate compensation relates.
(1) Directors who are "interested" do not receive compensation from the Fund
Complex (including the Company). Mr. Redeker is no longer an interested
Director.
(2) Total compensation from all the funds in the Fund Complex for the calendar
year ended December 31, 1998, including amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest, total deferred compensation amounted to $71,145, $119,740 and
$116,225 for Messrs. McCorkindale and Mooney and Ms. Smith, respectively.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

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

As of November 5, 1999, the Directors and officers of the Company, as a group,
owned less than 1% of the outstanding shares of each Fund.

As of November 5, 1999, Prudential Securities was the record holder for other
beneficial owners of 101,127 Class A shares (or 13% of the outstanding Class A
shares), 192,958 Class B shares (or 22.6% of the outstanding Class B shares),
57,336 Class C shares (or 64% of the outstanding Class C shares), and 11,353
Class Z shares (or 0.12% of the outstanding Class Z shares) of Active Balanced
Fund. In the event of any meetings of shareholders, Prudential Securities will
forward, or cause the forwarding of, proxy materials to the beneficial owners
for which it is the record holder.

As of November 5, 1999, Prudential Securities was the record holder for other
beneficial owners of 26,298,145 Class A shares (or 54.3% of the outstanding
Class A shares), 50,902,436 Class B shares (or 64.3% of the outstanding Class B

B-30
<PAGE>

shares), 6,183,786 Class C shares (or 79.4% of the outstanding Class C shares),
and 2,087,186 Class Z shares (or 2.1% of the outstanding Class Z shares) of
Growth Fund. In the event of any meetings of shareholders, Prudential Securities
will forward, or cause the forwarding of, proxy materials to the beneficial
owners for which it is the record holder.

As of November 5, 1999, Prudential Securities was the record holder for other
beneficial owners of 1,999,853 Class A shares (or 67.9% of the outstanding Class
A shares), 4,866,234 Class B shares (or 67.2% of the outstanding Class B
shares), 530,806 Class C shares (or 83.1% of the outstanding Class C shares),
and 160,731 Class Z shares (or 47.8% of the outstanding Class Z shares) of
Growth & Income Fund. In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy materials to the
beneficial owners for which it is the record holder.

A list of shareholders who own 5% of the outstanding shares of the Funds as of
November 5, 1999 is attached as Appendix IV.

INVESTMENT ADVISORY AND OTHER SERVICES

(a) Manager and Investment Advisers

The manager of the Company is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Funds, comprise the Prudential Mutual Funds. As of
October 31, 1999, PIFM managed and/or administered open-end and closed- end
management investment companies with assets of approximately $72 billion.
According to the Investment Company Institute, as of September 30, 1999, the
Prudential Mutual Funds were the 20th largest family of mutual funds in the
United States.

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

Pursuant to each Management Agreement with the Company (the Management
Agreements), PIFM, subject to the supervision of the Company's Board of
Directors and in conformity with the stated policies of each Fund, manages both
the investment operations of each Fund and the composition of each Fund's
portfolio, including the purchase, retention, disposition and loan of securities
and other assets. In connection therewith, PIFM is obligated to keep certain
books and records of the Company. PIFM has hired The Prudential Investment
Corporation, doing business as Prudential Investments (PI), to provide
subadvisory services to the Active Balanced Fund and Jennison Associates LLC
(Jennison) to provide subadvisory services to the Growth Fund and Growth &
Income Fund. PIFM also administers the Company's corporate affairs and, in
connection therewith, furnishes the Company with office facilities, together
with those ordinary clerical and bookkeeping services which are not being
furnished by State Street Bank and Trust Company, the Funds' custodian (the
Custodian), and PMFS, the Funds' transfer and dividend disbursing agent. The
management services of PIFM for the Funds are not exclusive under the terms of
the Management Agreements and PIFM is free to, and does, render management
services to others.

For its services, PIFM receives, pursuant to the Management Agreements, a fee
at an annual rate of .60 of 1% of each of Growth Fund's and Growth & Income
Fund's average daily net assets and a fee at an annual rate of .65 of 1% of the
Active Balanced Fund's average daily net assets. Each fee is computed daily and
payable monthly. Effective January 1, 2000, PIFM will receive a management fee
from the Growth Fund at an annual rate of .60% of the Fund's average net assets
up to $300 million, .575% of the Fund's average net assets from $300 million to
$5 billion and .55% of the Fund's average net assets over $5 billion. Also
effective January 1, 2000, PIFM will receive a management fee from the Growth &
Income Fund at an annual rate of .60% of the Fund's average net assets up to
$300 million and .575% of the Fund's average net assets over $300 million. The
Management Agreements also provide that, in the event the expenses of a Fund
(including the fees of

B-31
<PAGE>

PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. No jurisdiction currently limits a Fund's
expenses.

In connection with its management of the corporate affairs of the Company, PIFM
bears the following expenses:

(a) the salaries and expenses of all personnel of the Company and the Manager,
except the fees and expenses of Directors who are not affiliated persons of PIFM
or the Company's investment advisers;

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

(c) with respect to Growth Fund and Growth & Income Fund, the fees payable to
Jennison pursuant to a Subadvisory Agreement between PIFM and Jennison and, with
respect to Active Balanced Fund, the costs and expenses payable to PI pursuant
to a Subadvisory Agreement between PIFM and PI (collectively, the Subadvisory
Agreements).

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

Each Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by a Fund in connection with the matters to
which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. Each
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. Each 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.

PIFM has entered into a Subadvisory Agreement with Jennison, a wholly-owned
subsidiary of Prudential, and a Subadvisory Agreement with PI, also a wholly-
owned subsidiary of Prudential. Under the Subadvisory Agreements, Jennison will
furnish investment advisory services in connection with the management of the
Growth Fund and Growth & Income Fund and PI will furnish investment advisory
services in connection with the management of the Active Balanced Fund,
respectively. In connection therewith, Jennison and PI are obligated to keep
certain books and records of each Fund for which they serve as investment
adviser. Under each Subadvisory Agreement, Jennison and PI, respectively,
subject to the

B-32
<PAGE>

supervision of PIFM, are responsible for managing the assets of each Fund for
which they serve as investment adviser in accordance with such Fund's investment
objectives, investment program and policies. Jennison and PI determine what
securities and other instruments are purchased and sold for each such Fund and
are responsible for obtaining and evaluating financial data relevant to such
Fund. PIFM continues to have responsibility for all investment advisory services
pursuant to each Management Agreement. Under its Subadvisory Agreement with
Jennison, PIFM compensates Jennison for its services at an annual rate of .30 of
1% of Growth Fund's and Growth & Income Fund's respective average daily net
assets up to and including $300 million and .25 of 1% of those Fund's respective
average daily net assets in excess of $300 million. Under its Subadvisory
Agreement with PIFM, PI is reimbursed by PIFM for the reasonable costs and
expenses incurred by PI in furnishing investment advisory services to Active
Balanced Fund. Effective January 1, 2000, PI will be reimbursed by PIFM at an
annual rate of .325 of 1% of Active Balanced Fund's average daily net assets
(representing half of the compensation received from the Fund by PIFM).

For the fiscal year ended September 30, 1997, PIFM received from the Growth
Fund management fees of $5,276,337, of which $2,348,474 was paid to Jennison,
and PIFM received from the Growth & Income Fund management fees of $513,032, of
which $256,516 was paid to Jennison. For the fiscal year ended September 30,
1998, PIFM received from the Growth Fund management fees of $9,927,436, of which
$4,286,432 was paid to Jennison, and PIFM received from the Growth & Income Fund
management fees of $826,308, of which $413,154 was paid to Jennison. The Active
Balanced Fund was not a series of the Company during the fiscal year ended
September 30, 1997. For the period January 23, 1998 through September 30, 1998,
PIFM received from the Active Balanced Fund management fees of $788,381. For the
fiscal year ended September 30, 1999, PIFM received from the Growth Fund
management fees of $22,079,891, of which $9,349,954 was paid to Jennison, PIFM
received from the Growth & Income Fund management fees of $849,053, of which
$424,526 was paid to Jennison and PIFM received from the Active Balanced Fund
management fees of $940,298.

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

PI's Fixed Income Group manages more than $135 billion for Prudential's retail
investors, institutional investors and policyholders. Senior Managing Directors
James J. Sullivan and Jack W. Gaston head the Group, which is organized into
teams (Teams) specializing in different market sectors. Top- down, broad
investment decisions are made by the Fixed Income Investment Policy Committee,
whereas bottom-up security selection is made by the sector Teams.

Mr. Sullivan has overall responsibility for overseeing portfolio management and
credit research. Prior to joining PI in 1998, he was a managing director in
Prudential's Capital Management Group, where he oversaw portfolio management and
credit research for Prudential's General Account and subsidiary fixed-income
portfolios. He has more than 16 years of experience in risk management,
arbitrage trading and corporate bond investing.

Mr. Gaston has overall responsibility for overseeing quantitative research and
risk management. Prior to this appointment in 1999, he was senior managing
director of Prudential's Capital Management Group, where he was responsible for
the investment performance and risk management for Prudential's General Account
and subsidiary fixed-income portfolios. He has more than 20 years of experience
in investment management, including extensive experience applying quantitative
techniques to portfolio management.

The Fixed Income Investment Policy Committee is comprised of key senior
investment managers. Members include seven sector Team leaders, the chief
investment strategist and the head of risk management. The Committee uses a
top-down approach to investment strategy, asset allocation and general risk
management, identifying sectors in which to invest.

B-33
<PAGE>

The Fixed Income Liquidity Team, headed by Michael Lillard, is primarily
responsible for overseeing the day-to-day management of the fixed-income portion
of the Active Balanced Fund. This Team uses a bottom-up approach, which focuses
on individual securities, while staying within the guidelines of the Fixed
Income Investment Policy Committee and the Active Balanced Fund's investment
restrictions and policies. In addition, a credit research team of analysts
supports the Team using bottom-up fundamentals, as well as economic and industry
trends. Other sector teams may contribute to securities selection when
appropriate.

(b) Principal Underwriter, Distributor and Rule 12b-1 Plans

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

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

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

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

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

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

For the fiscal year ended September 30, 1999, the Growth Fund paid total
distribution fees of $1,870,788 to PIMS under the Class A Plan. For the fiscal
year ended September 30, 1999, the Growth & Income Fund paid total distribution
fees of $89,537 to PIMS under the Class A Plan. For the fiscal year ended
September 30, 1999, the Active Balanced Fund paid total distribution fees of
$17,294 to PIMS under the Class A Plan. These amounts were primarily expended
for the payment of account servicing fees to financial advisers and other
persons who sell Class A shares of the applicable Fund. In addition, for the
same period, PIMS received approximately $2,331,800 and $72,600, respectively,
in initial sales charges with respect to the sale of Class A shares of the
Growth Fund and Growth & Income Fund, respectively, and PIMS received
approximately $60,400 in initial sales charges with respect to the sale of Class
A shares of the Active Balanced Fund.

B-34
<PAGE>

Class B and Class C Plans. Under each Fund's Class B and Class C Plans, the
Fund pays the Distributor for its distribution-related activities with respect
to Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan provides
that (1) up to .25 of 1% of the average daily net assets of the Class B shares
may be paid as a service fee and (2) up to .75 of 1% (not including the service
fee) of the average daily net assets of the Class B shares (asset- based sales
charge) may be paid for distribution-related expenses with respect to the Class
B shares. The Class C Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class C shares may be paid as a service fee and (2) up
to .75 of 1% of the average daily net assets of the Class C shares may be paid
for distribution-related expenses with respect to Class C shares. The service
fee (.25 of 1% of average daily net assets) is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders and, with
respect to Class C shares, an initial sales charge.

Class B Plan. For the fiscal year ended September 30, 1999, PIMS received
$12,368,254, $949,035 and $70,178 on behalf of the Growth Fund, Growth & Income
Fund and Active Balanced Fund, respectively, under the Class B Plan. For the
fiscal year ended September 30, 1999, PIMS spent approximately the following
amounts on behalf of each such Fund.

<TABLE>
<CAPTION>
Approximate
Compensation to Total
Prusec for Amount
Commission Commission Spent by
Payments to Payments to Distributor
Financial Representatives and on behalf of
Fund Printing Advisers Overhead Costs Other Expenses Fund
--------- -------- ----------- -------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Growth $2,673 $5,588,791 $6,669,091 $4,636,717 $16,897,272
Growth &
Income $2,485 $ 271,923 $ 165,167 $ 181,177 $ 620,752
Active
Balanced $2,289 $ 23,195 $ 54,421 $ 207,141 $ 287,046
</TABLE>

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

The Distributor also receives the proceeds of contingent deferred sales charges
paid by investors upon certain redemptions of Class B shares. For the fiscal
year ended September 30, 1999, PIMS received approximately $2,013,100, $294,400
and $59,100 in contingent deferred sales charges attributable to Class B shares
of the Growth Fund, Growth & Income Fund and Active Balanced Fund, respectively.

Class C Plan. For the fiscal year ended September 30, 1999, PIMS received
$980,326, $77,020 and $6,737 on behalf of the Growth Fund, Growth & Income Fund
and Active Balanced Fund, respectively, under the Class C Plan. For the fiscal
year ended September 30, 1999, PIMS spent approximately the following amounts on
behalf of each such Fund.

<TABLE>
<CAPTION>
Approximate
Compensation to Total
Prusec for Amount
Commission Commission Spent by
Payments to Payments to Distributor
Financial Representatives and on behalf of
Fund Printing Advisers Overhead Costs Other Expenses Fund
---------- -------- ----------- -------------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
Growth $222 $877,027 $392,770 $61,261 $1,331,280
Growth &
Income $193 $ 61,299 $ 10,450 $ 1,574 $ 73,516
Active
Balanced $195 $ 4,402 $ 4,122 $ 5,814 $ 14,533
</TABLE>

The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by holders of Class C shares upon certain
redemptions of Class C shares. For the fiscal year ended September 30, 1999,
PIMS received approximately $46,500, $900 and $700 in contingent deferred sales
charges attributable to Class C shares of the Growth Fund, Growth & Income Fund
and Active Balanced Fund, respectively. For the fiscal year ended September 30,
1999, the

B-35
<PAGE>

Distributor also received approximately $629,300, $15,300 and $6,600 in initial
sales charges in connection with the sale of Class C shares of the Growth Fund,
Growth & Income Fund and Active Balanced Fund, respectively.

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

The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Directors who
are not interested persons of the Company and who have no direct or indirect
financial interest in the Class A, Class B and Class C Plans or in any agreement
related to the Plans (the Rule 12b-1 Directors), cast in person at a meeting
called for the purpose of voting on such continuance. A Plan may be terminated
at any time, without penalty, by the vote of a majority of the Rule 12b-1
Directors or by the vote of the holders of a majority of the outstanding shares
of the applicable class of the Fund on not more than 60 days', nor less than 30
days', written notice to any other party to the Plan. The Plan may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class,
and all material amendments are required to be approved by the Board of
Directors in the manner described above. Each Plan will automatically terminate
in the event of its assignment. A Fund will not be obligated to pay expenses
incurred under any Plan if it is terminated or not continued.

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

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

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

Fee Waivers/Subsidies

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

NASD Maximum Sales Charge Rule

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

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

B-36
<PAGE>

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

PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Company's independent accountants, and in that capacity
audits the annual financial statements of each Fund.

BROKERAGE ALLOCATION AND OTHER PRACTICES

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

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

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

When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research products and/or services, such as
research reports, research compilations, statistical and economic data, computer
data bases, quotation equipment and services, research oriented computer
software, hardware and services, reports concerning the performance of accounts,
valuations of securities; investment related periodicals, investment seminars
and other economic services and consultants. Such services are used in
connection with some or all of the Manager's investment activities; some of such
services, obtained in connection

B-37
<PAGE>

with the execution of transactions for one investment account, may be used in
managing other accounts, and not all of these services may be used in connection
with a Fund.

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

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

The allocation or orders among firms and the commission rates paid are reviewed
periodically by the Company's Board of Directors. Portfolio securities may not
be purchased from any underwriting or selling syndicate of which Prudential
Securities or any affiliate, during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the Commission. This limitation, in the opinion of the
Company, will not significantly affect a Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, a Fund may
be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.

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

The table below sets forth information concerning payment of commissions by the
Funds, including the amount of such commissions paid to Prudential Securities,
for the three years ended September 30, 1999:

<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, 1999 September 30, 1998 September 30, 1997
------------------------------- ------------------------------- -----------------------------------
Active Growth & Active Growth & Active Growth &
Balanced Growth Income Balanced Growth Income Balanced Growth Income
-------- ---------- -------- -------- ---------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage
commissions paid by the
Funds.................. $77,497 $3,797,681 $596,107 $225,669 $1,776,771 $396,571 -- $1,135,470 $298,280
Total brokerage
commissions paid to
Prudential Securities.. -- $ 391,685 $ 43,115 -- $ 16,922 $ 205 -- $ 50,605 $ 13,935
Percentage of total
brokerage commissions
paid to Prudential
Securities............. -- 10.31% 7.23% -- 0.96% .05% -- 4.4% 4.67%
</TABLE>

B-38
<PAGE>

Of the total brokerage commissions paid during the fiscal year ended September
30, 1999, $0, $419,628 and $5,445 (or 0%, 24% and 2%) was paid to firms which
provide research, statistical or other services to PIFM or affiliates on behalf
of the Active Balanced Fund, the Growth Fund and the Growth & Income Fund,
respectively. PIFM has not separately identified a portion of such brokerage
commissions as applicable to the provision of such research, statistical or
other services.

Each Fund is required to disclose its holdings of securities or its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at September 30, 1999. As of September 30, 1999, the
Growth Fund held debt securities of the following: American Express Credit
Corp. in the amount of $119,847,000; and the Active Balanced Fund held debt
securities of the following: Warburg Dillon Read LLC, Bear, Stearns & Co.
Inc., Morgan (J.P.) Securities, Inc., Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith, and Lehman Brothers, Inc. in the amount of $8,997,443,
$10,061,713, $8,997,443, $4,911,828, $497,430 and $356,507, respectively.

CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION

The Company is authorized to issue 3 billion shares of common stock, $.001 par
value per share divided into three series (the Funds), and each Fund may issue 1
billion shares. Each Fund is divided into four classes, designated Class A,
Class B, Class C and Class Z shares, consisting of 250 million authorized shares
per class. With respect to each Fund, each class of shares represents an
interest in the same assets of the Fund and is identical in all respects except
that (1) each class is subject to different sales charges and distribution
and/or service fees (except for Class Z shares, which are not subject to any
sales charges and distribution and/or service fees), which may affect
performance, (2) each class has exclusive voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Company's Articles of Incorporation, the Directors may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Directors may
determine. The voting rights of the shareholders of a series or class can be
modified only by the majority vote of shareholders of that series or class.

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

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

Under the Articles of Incorporation, the Directors may authorize the creation
of additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios with distinct investment objectives
and policies

B-39
<PAGE>

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

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

PURCHASE, REDEMPTION AND PRICING OF FUND SHARES

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

Purchase by Wire

For an initial purchase of shares of the Company by wire, you must complete an
application and telephone PMFS to receive an account number at (800) 225- 1852
(toll-free). The following information will be requested: your name, address,
tax identification number, fund and class elections, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company (State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: The Prudential Investment Portfolios, Inc., specifying on
the wire the account number assigned by PMFS and your name and identifying the
Fund and the class in which you are eligible to invest (Class A, Class B, Class
C or Class Z shares).

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

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

Issuance of Fund Shares for Securities

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

B-40
<PAGE>

Specimen Price Make-up

Under the current distribution arrangements between the Company and the
Distributor, Class A shares are sold with a maximum sales charge of 5%, Class C*
shares are sold with a sales charge of 1% and Class B* and Class Z shares are
sold at NAV. Using the NAV at September 30, 1999, the maximum offering price of
the Funds' shares is as follows:

<TABLE>
<CAPTION>
Active Growth
Balanced & Income
Fund Growth Fund Fund
-------- ----------- --------
<S> <C> <C> <C>
Class A
Net asset value and redemption price per Class A
share........................................... $13.25 $20.05 $12.76
Maximum sales charge (5% of offering price)...... .70 1.06 .67
------ ------ ------
Maximum offering price to public................. $13.95 $21.11 $13.43
====== ====== ======
Class B
Net asset value, offering price and redemption
price per Class B share*........................ $13.17 $19.43 $12.68
====== ====== ======
Class C
Net asset value and redemption price per Class C
share*.......................................... $13.17 $19.43 $12.68
Sales charge (1% of offering price).............. .13 .20 .13
------ ------ ------
Offering price to public......................... $13.30 $19.63 $12.81
====== ====== ======
Class Z
Net asset value, offering price and redemption
price per Class Z share......................... $13.27 $20.24 $12.80
====== ====== ======
</TABLE>
- -------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions.

Selecting a Purchase Alternative

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

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

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

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

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

B-41
<PAGE>

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

Reduction and Waiver of Initial Sales Charge--Class A Shares

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

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

. officers of the Prudential Mutual Funds (including the Company),

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

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

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

.members of the Board of Directors of Prudential,

. real estate brokers, agents and employees of real estate brokerage companies
affiliated with The Prudential Real Estate Affiliates who maintain an
account at Prudential Securities, Prusec or with the Transfer Agent,

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

. investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that (1)
the purchase is made within 180 days of the commencement of the financial
adviser's employment at Prudential Securities, or within one year in the
case of Benefit Plans, (2) the purchase is made with proceeds of a
redemption of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (3) the financial
adviser served as the client's broker on the previous purchase,

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

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

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

B-42
<PAGE>

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

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

Combined Purchase and Cumulative Purchase Privilege. If an investor or eligible
group of related investors purchases Class A shares of a Fund concurrently with
Class A shares of other Prudential Mutual Funds, the purchases may be combined
to take advantage of the reduced sales charges applicable to larger purchases.

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

. an individual,

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

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

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

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

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

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

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

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

Letters of Intent. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of a Fund
and shares of other Prudential Mutual Funds (Investment Letter of Intent).
Retirement and group plans no longer qualify to purchase Class A shares at NAV
by entering into a Letter of Intent.

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

B-43
<PAGE>

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

The Investment Letter of Intent does not obligate the investor to purchase, nor
the Company to sell, the indicated amount. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser is required
to pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such payment
may be made directly to the Distributor or, if not paid, the Distributor will
liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of a Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.

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

Class B Shares

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

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

Class C Shares

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

Waiver of Initial Sales Charge--Class C Shares

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

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

B-44
<PAGE>

Class Z Shares

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

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

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

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

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

Other Types of Investors. Class Z shares also are available for purchase by
the following categories of investors:

. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the Prudential
Mutual Funds are an available option;

. Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Company); and

. Prudential, with an investment of $10 million or more.

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

Rights of Accumulation

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

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

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<PAGE>

Sale of Shares

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

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

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

Signature Guarantee. If the proceeds of the redemption (1) exceed $50,000, (2)
are to be paid to a person other than the record owner, (3) are to be sent to an
address other than the address on the Transfer Agent's records, or (4) are to be
paid to a corporation, partnership, trust or fiduciary, and your shares are held
directly with the Transfer Agent, the signature(s) on the redemption request and
on the certificates, if any, or stock power must be guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker, dealer or credit union. The Transfer Agent reserves the right to request
additional information from, and make reasonable inquiries of, any eligible
guarantor institution. For clients of Prusec, a signature guarantee may be
obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices. In the case of redemptions
from a PruArray Plan, if the proceeds of the redemption are invested in another
investment option of the plan in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.

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

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

B-46
<PAGE>

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

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

Contingent Deferred Sales Charge

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

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

B-47
<PAGE>

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

Contingent Deferred Sales
Charge as a Percentage
Year Since Purchase of Dollars invested or
Payment Made Redemption Proceeds
------------------- -------------------------

First........................................... 5.0%
Second.......................................... 4.0%
Third........................................... 3.0%
Fourth.......................................... 2.0%
Fifth........................................... 1.0%
Sixth........................................... 1.0%
Seventh......................................... None

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

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

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

Waiver of Contingent Deferred Sales Charge--Class B Shares. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy, at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability.

The CDSC also will be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.

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

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

B-48
<PAGE>

In addition, the CDSC will be waived on redemptions of shares held by Directors
of the Company.

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

Category of Waiver Required Documentation

Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.

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

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

Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.

Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee
on company letterhead indicating the
amount of the excess and whether or not
taxes have been paid.

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

Waiver of Contingent Deferred Sales Charge--Class C Shares

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

Conversion Feature--Class B Shares

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

Since the Company tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (1)
the ratio of (a) the amounts paid for Class B shares purchased at least seven

B-49
<PAGE>

years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (2) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.

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

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

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

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

B-50
<PAGE>

SHAREHOLDER INVESTMENT ACCOUNT

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

Automatic Reinvestment of Dividends and Distributions. For the convenience of
investors, all dividends and distributions are automatically reinvested in full
and fractional shares of the applicable Fund at net asset value per share. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the broker. Any
shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividend or distribution at NAV by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
reinvestment will be made at the NAV per share next determined after receipt of
the check by the Transfer Agent. Shares purchased with reinvested dividends
and/or distributions will not be subject to any CDSC upon redemption.

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

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

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

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

If you hold certificates, the certificates must be returned in order for the
shares to be exchanged.

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

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

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<PAGE>

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

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

Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)

Prudential MoneyMart Assets, Inc. (Class A shares)

Prudential Tax-Free Money Fund, Inc.

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

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

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

B-52
<PAGE>

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

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

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

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

Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Funds' Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on 60 days' notice, and any fund, including each of these Funds, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.

Dollar Cost Averaging

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

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

B-53
<PAGE>

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

Period of
Monthly Investments $100,000 $150,000 $200,000 $250,000
------------------- -------- -------- -------- --------
25 Years........ $ 105 $ 158 $ 210 $ 263
20 Years........ 170 255 340 424
15 Years........ 289 433 578 722
10 Years........ 547 820 1,093 1,366
5 Years......... 1,361 2,041 2,721 3,402

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

See "Automatic Investment Plan."

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

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

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

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

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

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

Furthermore, each withdrawal constitutes a redemption of shares, and any gain
or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (1) the purchase of Class
A shares and (2) the redemption of Class B and Class C

B-54
<PAGE>

shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the plan, particularly if used in connection with a
retirement plan.

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

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

Tax-Deferred Retirement Accounts

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

Tax-Deferred Compounding(/1/)

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

(/1/) The chart is for illustrative purposes only and does not represent the
performance of a Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account will be subject to tax when
withdrawn from the account. Distributions from a Roth IRA which meet the
conditions required under the Internal Revenue Code will not be subject to
tax upon withdrawal from the account.

Mutual Fund Programs

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

The mutual funds in the program may be purchased individually or as part of a
program. If investors elect to purchase the individual mutual funds that
constitute the program in an investment ratio different from that offered by the
program, the standard minimum investment requirements for the individual mutual
funds will apply.

B-55
<PAGE>

NET ASSET VALUE

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

A Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of shares outstanding. Under the Investment Company Act, the Board of
Directors is responsible for determining in good faith the fair value of
securities of the Company. In accordance with procedures adopted by the
Company's Board of Directors, the value of investments listed on a securities
exchange and NASDAQ National Market System securities (other than options on
stock and stock indexes) are valued at the last sales price on such exchange
system on the day of valuation, or, if there was no sale on such day, the mean
between the last bid and asked prices on such day, or at the bid price on such
day in the absence of an asked price. Corporate bonds (other than convertible
debt securities) and U.S. Government securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager in consultation with the investment adviser to
be over-the-counter, are valued on the basis of valuations provided by an
independent pricing agent or principal market maker which uses information with
respect to transactions in bonds, quotations from bond dealers, agency ratings,
market transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed by the Manager in consultation with the Subadviser to
be over-the-counter, are valued at the mean between the last reported bid and
asked prices provided by principal market makers. Options on stock and stock
indexes traded on an exchange are valued at the mean between the most recently
quoted bid and asked prices on the respective exchange and futures contracts and
options thereon are valued at their last sales prices as of the close of trading
on the applicable commodities exchange or board of trade or, if there was no
sale on the applicable commodities exchange or board of trade on such day, at
the mean between the most recently quoted bid and asked prices on such exchange
or board of trade. 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 Board of Directors.

Securities or other assets for which reliable market quotations are not readily
available, or for which the pricing agent or principal market maker does not
provide a valuation or methodology or provides a valuation or methodology that,
in the judgment of the Manager or the investment adviser (or Valuation Committee
or Board of Directors), does not represent fair value, are valued by the
Valuation Committee or Board of Directors in consultation with the Manager or
the Subadviser, including its portfolio managers, traders and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, the investment
adviser, Board of Directors or Valuation Committee to materially affect the
value of the security. Short-term debt securities are valued at cost, with
interest accrued or discount amortized to the date of maturity, if their
original maturity was 60 days or less, unless this is determined by the Board of
Directors not to represent fair value. Short-term securities with remaining
maturities of more than 60 days, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker.

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

B-56
<PAGE>

or service fee. It is expected, however, that the NAV per share of each class
will tend to converge immediately after the recording of dividends, if any,
which will differ by approximately the amount of the distribution and/or service
fee expense accrual differential among the classes.

TAXES, DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

Gain or loss on the sale, lapse or other termination of options on stock and on
narrowly-based stock indices will be capital gain or loss and will be long- term
or short-term depending upon the holding period of the option. In addition,
positions which are part of a straddle will be subject to certain wash sale,
short sale and constructive sale provisions of the

B-57
<PAGE>

Internal Revenue Code. In the case of a straddle, a Fund may be required to
defer the recognition of losses on positions it holds to the extent of any
unrecognized gain on offsetting positions held by the Fund. The conversion
transaction rules may apply to certain transactions to treat all or a portion of
the gain thereon as ordinary income rather than as capital gain.

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

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

Each Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. Each Fund also is required to distribute
during the calendar year 98% of the capital gain net income it earned during the
12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from the
prior year or the twelve-month period ending on October 31 of such prior year,
respectively. To the extent it does not meet these distribution requirements, a
Fund will be subject to a non-deductible 4% excise tax on the undistributed
amount. For purposes of this excise tax, income on which a Fund pays income tax
is treated as distributed.

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

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

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

Dividends of net investment income and distributions of net short-term capital
gains paid to a shareholder (including a shareholder acting as a nominee or
fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.

B-58
<PAGE>

Dividends received by corporate shareholders are eligible for a dividends-
received deduction of 70% to the extent a Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign corporations, interest income, capital and currency
gain, gain or loss from Section 1256 contracts (described above), and income
from certain other sources will not constitute qualified dividends. Individual
shareholders are not eligible for the dividends-received deduction.

Income received by a Fund from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries. Income tax treaties
between certain countries and the United States may reduce or eliminate such
taxes. It is impossible to determine in advance the effective rate of foreign
tax to which a Fund will be subject, since the amount of the Fund's assets to be
invested in various countries will vary. The Funds do not expect to meet the
requirements of the Internal Revenue Code for "passing- through" to their
shareholders any foreign income taxes paid.

A Fund may, from time to time, invest in Passive Foreign Investment Companies
(PFICs). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. If the Fund acquires and holds stock in a PFIC beyond the
end of the year of its acquisition, the Fund will be subject to federal income
tax on a portion of any "excess distribution" received on the stock or on any
gain from disposition of the stock (collectively, PFIC income), plus interest
thereon, even if the Fund distributes the PFIC income as a taxable dividend to
its shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders. The Fund may make a
"mark-to-market" election with respect to any marketable stock it holds of a
PFIC. If the election is in effect, at the end of the Fund's taxable year, the
Fund will recognize the amount of gains, if any, as ordinary income with respect
to PFIC stock. No loss will be recognized on PFIC stock, except to the extent of
gains recognized in prior years. Alternatively, the Fund, if it meets certain
requirements, may elect to treat any PFIC in which it invests as a "qualified
electing fund," in which case, in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain, even if they are not distributed to the Fund; those amounts would
be subject to the distribution requirements applicable to the Fund described
above.

Dividends and distributions also may be subject to state and local taxes.

Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in a Fund.

PERFORMANCE INFORMATION

Average Annual Total Return. A Fund may from time to time advertise its average
annual total return. Average annual total return is determined separately for
Class A, Class B, Class C and Class Z shares.

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

P ( 1 + T ) to the nth power = ERV

Where:P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).

B-59
<PAGE>

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

Below are the average annual total returns for each Fund's share classes for
the periods ended September 30, 1999.

Fund Class 1 Yr. 5 Yr. Since Inception
---- ------- ------ ----- ----------------
Growth Class A 36.40% N/A 21.81% (11/2/95)
Class B 37.51% N/A 22.22% (11/2/95)
Class C 40.09% N/A 22.19% (11/2/95)
Class Z 43.94% N/A 26.01% (4/15/96)
Growth & Income Class A 19.70% N/A 12.51% (11/7/96)
Class B 19.98% N/A 12.85% (11/7/96)
Class C 22.73% N/A 13.28% (11/7/96)
Class Z 26.31% N/A 14.84% (11/7/96)
Active Balanced Class A 10.27% N/A 10.08% (11/7/96)
Class B 10.12% N/A 10.38% (11/7/96)
Class C 12.97% N/A 10.85% (11/7/96)
Class Z 16.32% 13.10% 11.38% (01/4/93)

On September 20, 1996, the assets and liabilities of Growth Stock Fund (a
series of Prudential Index Series Fund, formerly Prudential Dryden Fund, and
formerly The Prudential Institutional Fund) were transferred to the Growth Fund
in exchange solely for Class Z shares of the Growth Fund (the Reorganization).
The investment objectives and policies of the Growth Stock Fund were
substantially similar to those of Growth Fund and both funds had the same
investment adviser. Accordingly, if you purchased shares of Growth Stock Fund at
its inception on November 5, 1992, owned such shares through September 20, 1996
(thereby participating in the Reorganization), and continued to own Class Z
shares received in the Reorganization through September 30, 1999, your average
annual total returns (after fees and expenses) for the one and five year and
since inception (November 5, 1992) periods ended September 30, 1999 would have
been 43.94%, 26.05% and 21.53%, respectively. In addition, the aggregate total
returns for such periods would have been 43.94%, 218.26% and 283.88%,
respectively.

On or about January 23, 1998, the assets and liabilities of Prudential Jennison
Active Balanced Fund were transferred to the Active Balanced Fund, in exchange
solely for shares of Active Balanced Fund (the Conversion). The investment
objectives and policies of Prudential Jennison Active Balanced Fund and Active
Balanced Fund were virtually identical and each fund had the same Manager
through September 30, 1999, although the Fund's investment adviser changed from
Jennison to PIC on June 1, 1998.

Aggregate Total Return. A Fund may also advertise its aggregate total return.
Aggregate total return is determined separately for Class A, Class B, Class C
and Class Z shares.

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

ERV - P
-----
P

Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).

B-60
<PAGE>

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

Below are the aggregate total returns for each Fund's share classes for the
periods ended September 30, 1999.

Fund Class 1 Yr. 5 Yr. Since Inception
---- ------- ------ ----- ----------------
Growth Class A 43.58% N/A 127.64%(11/2/95)
Class B 42.51% N/A 121.11%(11/2/95)
Class C 42.51% N/A 121.11%(11/2/95)
Class Z 43.94% N/A 122.42%(4/15/96)
Growth & Income Class A 26.00% N/A 48.07%(11/7/96)
Class B 24.98% N/A 44.90%(11/7/96)
Class C 24.98% N/A 44.90%(11/7/96)
Class Z 26.31% N/A 49.26%(11/7/96)
Active Balanced Class A 16.07% N/A 39.00%(11/7/96)
Class B 15.12% N/A 36.08%(11/7/96)
Class C 15.12% N/A 36.08%(11/7/96)
Class Z 16.32% 85.05% 106.67%(01/4/93)

The Company may include comparative performance information in advertising or
marketing a Fund's shares. Such performance information may include data from
Lipper Inc., Morningstar Publications, Inc. and other industry publications,
business periodicals and market indexes.

Set forth below is a chart which compares the performance of different types of
investments over the long term and the rate of inflation.(1)

[BAR CHART APPEARS HERE]

Performance Comparison of Different Types of Investments
Over the Long Term (12/31/25 - 12/31/98)

Common Stocks 11.2%
Long-Term Gov't. Bonds 5.3%
Inflation 3.1%

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

B-61
<PAGE>

Shares Description Value (Note 1)

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

LONG-TERM INVESTMENTS--73.3%
COMMON STOCKS--44.7%
---------------------------------------------------------------------
Aerospace/Defense--0.9%
5,900 Allied Signal, Inc. $ 353,631
5,500 Boeing Co. 234,438
3,600 General Dynamics Corp. 224,775
1,600 Lockheed Martin Corp. 52,300
3,000 Raytheon Co. 148,875
5,200 United Technologies Corp. 308,425
-------------
1,322,444

---------------------------------------------------------------------
Airlines--0.5%
2,500 Alaska Air Group, Inc. (a) 101,719
5,900 America West Holdings Corp. 102,144
3,300 AMR Corp. 179,850
4,500 Delta Airlines, Inc. 218,250
1,350 Southwest Airlines Co. 20,503
1,800 UAL Corp. (a) 117,562
-------------
740,028

---------------------------------------------------------------------
Appliances--0.1%
5,700 Maytag Corp. 189,881

---------------------------------------------------------------------
Automobiles & Trucks--0.9%
4,500 Arvin Industries, Inc. 139,219
12,900 Ford Motor Co. 647,419
3,600 General Motors Corp. 226,575
6,900 PACCAR, Inc. 351,037
-------------
1,364,250

---------------------------------------------------------------------
Advertising
1,000 Interpublic Group of Companies, Inc. 41,125

---------------------------------------------------------------------
Automotive Parts--0.2%
7,000 TRW, Inc. 348,250

---------------------------------------------------------------------
Banking--1.7%
5,994 Bank One Corp. 208,666
4,620 Charter One Financial, Inc. 106,838
3,900 Chase Manhattan Corp. 293,962
1,400 Dime Bancorp, Inc. 24,500
6,200 First Union Corp. 220,487
836 Firstar Corp. 21,423
11,400 Fleet Financial Group, Inc. 417,525
13,900 Hibernia Corp. 161,587
3,500 Huntington Bancshares, Inc. 92,969
13,600 KeyCorp 351,050
1,500 Pacific Century Financial Corp. 30,656
3,900 PNC Bank Corp. 205,481
3,200 Regions Financial Corp. 96,000
3,000 Suntrust Banks, Inc. 197,250
1,000 U.S. Bancorp 30,188
-------------
2,458,582

---------------------------------------------------------------------
Beverages--0.6%
2,600 Anheuser-Busch Companies, Inc. 182,162
7,900 Coca-Cola Co. 379,694
8,500 PepsiCo, Inc. 257,125
-------------
818,981

---------------------------------------------------------------------
Building & Construction
1,600 Masco Corp. 49,600

---------------------------------------------------------------------
Business Services--0.2%
4,400 Omnicom Group, Inc. 348,425

---------------------------------------------------------------------
Chemicals--0.3%
500 Air Products & Chemicals, Inc. 14,531
1,100 Dow Chemical Co. 124,987
100 E.I. Du Pont de Nemours & Co. 6,088
1,100 Octel Corp. (a) 12,375
400 Praxair, Inc. 18,400
11,000 Schulman (A.), Inc. 190,437
300 Union Carbide Corp. 17,044
800 Waters Corp. (a) 48,450
-------------
432,312

---------------------------------------------------------------------
Computer Services--0.2%
2,500 Electronic Data Systems Corp. 132,344
2,000 First Data Corp. 87,750
1,000 Unisys Corp. (a) 45,125
-------------
265,219
----------------------------------------------------------------------------
See Notes to Financial Statements.

B-62
<PAGE>

Shares Description Value (Note 1)

- --------------------------------------------------------------------
Computer Software & Services--5.5%
800 Adobe Systems, Inc. $ 90,800
6,500 America Online, Inc. (a) 676,000
7,200 BMC Software Inc. (a) 515,250
6,200 Citrix Systems, Inc. (a) 384,012
10,300 Computer Associates International,
Inc. 630,875
600 Compuware Corp. (a) 15,638
2,950 Comverse Technology, Inc. (a) 278,222
4,500 DST Systems, Inc. (a) 255,937
10,100 EMC Corp. 721,519
30,900 Microsoft Corp. (a) 2,798,381
12,400 Oracle Systems Corp. (a) 564,200
300 Siebel Systems, Inc. (a) 19,988
7,900 Sun Microsystems, Inc. (a) 734,700
9,400 Teradyne, Inc. (a) 331,350
-------------
8,016,872

- --------------------------------------------------------------------
Computer Systems/Peripherals--1.5%
3,400 Apple Computer, Inc. (a) 215,262
4,200 Dell Computer Corp. (a) 175,613
4,000 Hewlett-Packard Co. 368,000
11,300 International Business Machines Corp. 1,371,537
-------------
2,130,412

- --------------------------------------------------------------------
Cosmetics/Toiletries--0.1%
3,000 Colgate-Palmolive Co. 137,250

- --------------------------------------------------------------------
Distribution/ Wholesalers--0.1%
900 Costco Wholesale Corp. 64,800

- --------------------------------------------------------------------
Diversfied Consumer Products--0.9%
9,800 Procter & Gamble Co. 918,750
1,000 Ralston-Purina Group 27,812
5,717 Unilever NV 389,471
-------------
1,336,033

- --------------------------------------------------------------------
Diversified Operations--1.6%
20,300 General Electric Co. 2,406,819

- --------------------------------------------------------------------
Diversified Manufacturing--0.5%
1,000 Corning Inc. 68,562
3,900 Eaton Corp. 336,619
3,800 Harsco Corp. 104,975
1,200 Illinois Tool Works Inc. 89,475
600 PPG Industries, Inc. 36,000
500 Textron, Inc. 38,688
3,400 Trinity Industries, Inc. 104,975
-------------
779,294

- --------------------------------------------------------------------
Electrical Utilities--1.5%
200 American Electric Power Co., Inc. 6,825
5,500 Central & South West Corp. 116,187
2,600 Consolidated Edison, Inc. 107,900
2,200 Dominion Resources, Inc. 99,275
3,300 DTE Energy Co. 119,212
3,400 Duke Energy Corp. 187,425
12,400 Entergy Corp. 358,825
7,200 Florida Progress Corp. 333,000
7,500 GPU, Inc. 244,687
2,696 PP & L Resources, Inc. 72,961
15,000 Public Service Company of New Mexico 273,750
2,500 Public Service Enterprise Group Inc. 96,563
6,100 Southern Co. 157,075
-------------
2,173,685

- --------------------------------------------------------------------
Electrical Services--0.1%
5,900 Edison International 143,444

- --------------------------------------------------------------------
Electronic Components--1.8%
2,200 Emerson Electric Co. 139,012
18,300 Intel Corp. 1,359,919
5,500 KLA-Tencor Corp. (a) 357,500
3,400 Motorola, Inc. 299,200
6,300 Solectron Corp. (a) 452,419
700 Xilinx, Inc. (a) 45,872
-------------
2,653,922

- --------------------------------------------------------------------
Financial Services--4.2%
500 Allmerica Financial Corp. 23,813
5,800 AMBAC Financial Group, Inc. 274,775
3,300 American Express Co. 444,262
9,060 BankAmerica Corp. 504,529
8,600 Bear Stearns Companies, Inc. 330,563
7,900 Charles Schwab Corp. 266,131
19,425 Citigroup Inc. 854,700
6,800 Countrywide Credit Industries, Inc. 219,300
5,700 Federal Home Loan Mortgage Corp. 296,400
7,400 Federal National Mortgage Assoc. 463,887
3,800 Golden West Financial Corp. 373,350

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

B-63
<PAGE>

Shares Description Value (Note 1)

- ------------------------------------------------------------------
Financial Services (cont'd.)
1,900 Lehman Brothers Holdings, Inc. $ 110,794
3,900 MBNA Corp. 88,969
700 Merrill Lynch & Co., Inc. 47,031
3,600 Morgan (J.P.) & Co., Inc. 411,300
4,800 Morgan Stanley, Dean Witter & Co. 428,100
3,600 PaineWebber Group, Inc. 130,500
4,700 Providian Financial Corp. 372,181
3,400 SLM Holding Corp. 146,200
700 The PMI Group, Inc. 28,613
9,300 Wells Fargo Co. 368,512
-------------
6,183,910

- ------------------------------------------------------------------
Food Distribution
1,000 SYSCO Corp. 35,063

- ------------------------------------------------------------------
Foods--0.6%
10,914 Archer-Daniels Midland Co. 133,014
6,700 ConAgra, Inc. 151,169
2,700 General Mills, Inc. 219,037
1,500 H.J. Heinz Co. 64,500
1,600 Kellogg Co. 59,900
300 Nabisco Group Holdings Corp. 4,500
4,200 Sara Lee Corp. 98,438
3,400 Suiza Foods Corp. (a) 127,500
-------------
858,058

- ------------------------------------------------------------------
Health Care Services--0.1%
700 American Home Products Corp. 29,050
1,900 United Healthcare Corp. 92,506
-------------
121,556

- ------------------------------------------------------------------
Home Furnishings--0.1%
4,000 Springs Industries, Inc. 135,750

- ------------------------------------------------------------------
Hospital Management
2,200 Columbia/HCA Healthcare Corp. 46,613

- ------------------------------------------------------------------
Hotels & Leisure
600 Marriott International, Inc. 19,613

- ------------------------------------------------------------------
Human Resources--0.1%
7,000 Kelly Services, Inc. 210,875

- ------------------------------------------------------------------
Insurance--1.4%
14,400 Allstate Corp. 359,100
10,800 American International Group, Inc. 938,925
2,000 CIGNA Corp. 155,500
2,700 Hartford Financial Services Group 110,362
1,200 Marsh & McLennan Cos., Inc. 82,200
12,900 Old Republic International Corp. 186,244
4,000 SAFECO Corp. 112,000
2,600 Torchmark Corp. 67,275
-------------
2,011,606

- ------------------------------------------------------------------
Leisure & Tourism--0.1%
3,200 Carnival Corp. 139,200

- ------------------------------------------------------------------
Machinery & Equipment--0.3%
2,900 Caterpillar, Inc. 158,956
700 Deere & Co. 27,081
600 Dover Corp. 24,525
500 Ingersoll-Rand Co. 27,469
8,800 MagneTek, Inc. (a) 78,650
700 Rockwell International Corp. 36,750
2,400 Tecumseh Products Co. 120,300
-------------
473,731

- ------------------------------------------------------------------
Measuring & Control Instruments
500 Honeywell Inc. 55,657
100 Johnson Controls, Inc. 6,631
-------------
62,288

- ------------------------------------------------------------------
Media & Communications--0.5%
1,300 Gannett Co., Inc. 89,944
600 McGraw-Hill Companies, Inc. 29,025
3,800 Time Warner Inc. 230,850
5,100 Univision Communications Inc. (a) 415,012
-------------
764,831

- ------------------------------------------------------------------
Medical Products & Services--1.6%
1,300 Baxter International Inc. 78,325
4,700 Johnson & Johnson Co. 431,812
13,800 Schering-Plough Corp. 602,025
8,500 Tyco International Ltd. 877,625
6,100 Warner-Lambert Co. 404,888
-------------
2,394,675
- ------------------------------------------------------------------------------
See Notes to Financial Statements.

B-64
<PAGE>

Shares Description Value (Note 1)

- -------------------------------------------------------------------
Medical Technology--0.6%
9,600 Abbott Laboratories $ 352,800
5,000 Amgen, Inc. (a) 407,500
700 Biogen, Inc.(a) 55,169
900 Genzyme Corp. 40,556
500 VISX, Inc. (a) 39,547
-------------
895,572
- -------------------------------------------------------------------
Metals Processing--0.1%
3,100 Precision Castparts Corp. 94,550

- -------------------------------------------------------------------
Networking--1.0%
21,300 Cisco Systems, Inc. (a) 1,460,381

- -------------------------------------------------------------------
Office Equipment & Supplies--0.1%
1,100 Pitney Bowes Inc. 67,031

- -------------------------------------------------------------------
Oil & Gas Equipment & Services--0.1%
3,600 Enron Corp. 148,500

- -------------------------------------------------------------------
Oil & Gas Exploration/Production--1.2%
2,300 Atlantic Richfield Co. 203,837
4,800 Coastal Corp. 196,500
1,000 Kerr-McGee Corp. 55,063
2,000 Phillips Petroleum Co. 97,500
16,500 Royal Dutch Petroleum Co. 974,531
3,100 Texaco, Inc. 195,688
2,800 USX - Marathon Group 81,900
-------------
1,805,019

- -------------------------------------------------------------------
Oil & Gas Services--1.1%
3,800 Amerada Hess Corp. 232,750
4,400 Chevron Corp. 390,500
8,800 Exxon Corp. 668,250
2,600 Mobil Corp. 261,950
-------------
1,553,450

- -------------------------------------------------------------------
Paper & Packaging
500 Fort James Corp. 13,344

- -------------------------------------------------------------------
Paper & Forest Products--0.4%
100 Champion International Corp. 5,137
5,200 Georgia-Pacific Group 210,600
1,900 International Paper Co. 91,319
800 Weyerhaeuser Co. 46,100
3,800 Willamette Industries, Inc. 163,875
-------------
517,031

- -------------------------------------------------------------------
Pharmaceuticals--1.8%
900 Allergan, Inc. 99,000
13,000 Bristol-Myers Squibb Co. 877,500
700 Eli Lilly & Co. 44,800
17,000 Merck & Co., Inc. 1,101,813
13,900 Pfizer, Inc. 499,531
-------------
2,622,644

- -------------------------------------------------------------------
Photography--0.1%
1,600 Eastman Kodak Co. 120,700

- -------------------------------------------------------------------
Precious Metals
700 Barrick Gold Corp. 15,225

- -------------------------------------------------------------------
Printing & Publishing--0.4%
2,100 Knight-Ridder, Inc. 115,237
3,600 Lexmark International Group, Inc. (a) 289,800
900 New York Times Co. 33,750
2,800 Tribune Co. 139,300
-------------
578,087

- -------------------------------------------------------------------
Railroads--0.1%
5,800 Canadian National Railway Co. 175,813

- -------------------------------------------------------------------
Retail--3.6%
7,200 Abercrombie & Fitch Co. (a) 245,250
1,800 Bed Bath & Beyond Inc. (a) 62,888
2,600 Best Buy Co., Inc. (a) 161,362
10,800 Circuit City Stores-Circuit City Group 455,625
1,700 CVS Corp. 69,381
2,200 Dayton-Hudson Corp. 132,138
5,000 Federated Department Stores, Inc. (a) 218,437
10,975 Gap, Inc. 351,200
12,800 Home Depot, Inc. 878,400
16,700 Kmart Corp.(a) 195,181
4,300 Kohl's Corp. (a) 284,337
1,300 May Department Stores Co. 47,369
6,700 McDonald's Corp. 288,100
2,500 Safeway Inc. (a) 95,156
1,600 Sears, Roebuck & Co. 50,200
1,000 TJX Companies, Inc. 28,063
200 Tricon Global Restaurants, Inc. (a) 8,188
31,700 Wal-Mart Stores, Inc. 1,507,731
5,000 Walgreen Co. 126,875
100 Winn-Dixie Stores, Inc. 2,969
-------------
5,208,850

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

B-65
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL ACTIVE BALANCED FUND
------------------------------------------------------------------

Shares Description Value (Note 1)

------------------------------------------------------------------
Steel & Metals--0.1%
5,700 Carpenter Technology Corp. $ 139,650

------------------------------------------------------------------
Telecommunication Services--2.9%
8,900 Ameritech Corp. 597,969
22,350 AT&T Corp. 972,225
8,500 Bell Atlantic Corp. 572,156
4,800 BellSouth Corp. 216,000
750 CenturyTel, Inc. 30,469
820 Global Crossing Ltd. (a) 21,730
8,100 GTE Corp. 622,687
5,875 MCI WorldCom, Inc. (a) 422,266
11,600 SBC Communications, Inc. 592,325
4,000 Sprint Corp. 217,000
----------
4,264,827

------------------------------------------------------------------
Telecommunications Equipment--1.9%
400 General Instrument Corp. (a) 19,250
13,700 Lucent Technologies, Inc. 888,787
15,800 Nortel Networks Corp. 805,800
3,000 QUALCOMM, Inc. (a) 567,563
7,600 Tellabs, Inc. (a) 432,725
----------
2,714,125

------------------------------------------------------------------
Textile-Apparel Manufacturing--0.2%
25,300 Burlington Industries, Inc. (a) 112,269
11,300 Unifi, Inc. (a) 124,300
----------
236,569

------------------------------------------------------------------
Tobacco--0.6%
18,800 Philip Morris Co., Inc. 642,725
4,100 Universal Corp. 107,113
5,900 UST, Inc. 178,106
----------
927,944

------------------------------------------------------------------
Transportation/Trucking/Shipping--0.2%
2,000 Arnold Industries, Inc. 25,250
7,700 Burlington Northern, Inc. 211,750
1,200 FDX Corp. (a) 46,500
100 Kansas City Southern Industries, Inc. 4,644
1,000 Union Pacific Corp. 48,062
----------
336,206
Total common stocks
(cost $57,888,147) 65,574,915
-----------

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

Moody's Principal
Rating Amount
(Unaudited) (000)

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

DEBT OBLIGATIONS--28.6%
CORPORATE BONDS--14.0%

------------------------------------------------------------------
Aerospace/Defense--1.3%
A1 $ 700(d) Boeing Inc., Deb.
8.10%, 11/15/2006 739,410
Baa3 700(d) Northrop Grumman Corp.,
Deb.
7.75%, 3/1/2016 679,000
Baa1 500(d) Raytheon Co., Note
6.30%, 3/15/2005 482,145
----------
1,900,555

------------------------------------------------------------------
Airlines--0.2%
Baa3 225 Delta Air Lines, Inc.,
Deb.
9.75%, 5/15/2021 255,460

------------------------------------------------------------------
Asset Backed Securities--1.6%
Aaa 500 Citibank Credit Card
Master Trust I, Class A
5.875%, 3/10/2011 459,685
Aaa 1,500(d) Citibank Credit Card
Master Trust, Cl. A
6.05%, 1/15/2010 1,406,250
Aaa 500(d) MBNA Master Credit Card
Trust, Ser. C, Cl. A
6.45%, 2/15/2008 494,060
----------
2,359,995

------------------------------------------------------------------
Automobiles & Trucks--0.1%
A1 150(d) Ford Motor Co., Deb.
6.50%, 8/1/2018 135,130

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

B-66
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL ACTIVE BALANCED FUND
-------------------------------------------------------------------

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

-------------------------------------------------------------------
Banking--2.1%
Aa2 $ 1,000(d) BankAmerica Corp., MTN
7.125%, 5/12/2005 $ 1,003,050
Aa3 1,000(d) Chase Manhattan Bank,
Sub. Note
7.00%, 6/1/2005 997,300
A1 500(d) Citicorp, Sub. Note
7.125%, 9/1/2005 501,600
Deutsche Bank, Deb.
A1 160 6.70%, 12/13/2006 154,640
A1 280(d) 7.50%, 4/25/2009 281,532
Aa3 150 National Westminster Bank
PLC, Sub. Note
7.375%, 10/1/2009 149,824
------------
3,087,946

------------------------------------------------------------------
Beverages--0.1%
A2 100 Coca Cola Enterprises
Inc., Note
7.125%, 9/30/2009 99,667

------------------------------------------------------------------
Building & Construction--0.5%
A3 800(d) Hanson Overseas BV, Sr.
Note
6.75%, 9/15/2005 786,088

------------------------------------------------------------------
Consulting--0.3%
Baa1 400(d) Comdisco, Inc., Note
5.95%, 4/30/2002 387,656

------------------------------------------------------------------
Financial Services--4.3%
Aa3 750(d) Associates Corp. North
America, Sr. Note
6.75%, 7/15/2001 754,635
A1 160 BCH Cayman Islands Ltd.,
Sub Note
7.70%, 7/15/2006 160,758
A2 1,000(d) Bear, Stearns & Co. Inc.,
Sr. Note
8.75%, 3/15/2004 1,064,270
A1 285(d) Ford Motor Credit Corp.,
Deb.
7.40%, 11/1/2046 272,460
A2 570(d) General Motors Acceptance
Corp., Sr. Note
6.75%, 2/7/2002 573,568
A1 700(d) Goldman, Sachs Group LP,
Note
7.25%, 10/1/2005 703,157
A3 400(d) Heller Financial Inc.,
Note
6.00%, 3/19/2004 383,520
A1 400(d) International Lease
Finance Corp., Note
6.00%, 5/15/2002 395,156
A1 100 Keycorp Capital III,
Capital Securities,
7.75%, 7/15/2029 95,399
Lehman Brothers Holdings,
Inc., Notes
A3 240(d) 6.625%, 4/1/2004 231,912
A3 130(d) 6.625%, 2/5/2006 124,595
Aa3 500(d) Merrill Lynch & Co., MTN
6.02%, 5/11/2001 497,430
A1 520(d) Santander Finance
Issuances, Note
6.80%, 7/15/2005 507,848
Baa1 600(d) US West Capital Funding
Inc., Note
6.125%, 7/15/2002 586,668
------------
6,351,376

------------------------------------------------------------------
Foreign Government Bonds--0.1%
Aa3 120 Comunidad Autonoma De
Andalucia, Note
7.25%, 10/1/2029 118,416

------------------------------------------------------------------
Leisure--0.1%
Baa1 175 Marriott International
Inc.,
Ser. C, Note
7.875%, 9/15/2009 174,661

------------------------------------------------------------------
Media & Communications--0.7%
Baa3 300(d) News America Holdings,
Inc., Deb.
9.25%, 2/1/2013 330,555
Baa3 600(d) Time Warner, Inc., Sr.
Note
9.125%, 1/15/2013 673,560
------------
1,004,115

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

B-67
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL ACTIVE BALANCED FUND
-------------------------------------------------------------------

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

-------------------------------------------------------------------
Medical Products & Services--0.2%
Baa1 $ 400(d) Tyco International Group,
Note
6.375%, 6/15/2005 $ 386,508

------------------------------------------------------------------
Oil & Gas Exploration/Production--0.6%
A2 700(d) Atlantic Richfield Co.,
Deb.
10.875%, 7/15/2005 837,445

------------------------------------------------------------------
Oil & Gas Services
Baa1 50 Amerada Hess Corp., Note
7.875%, 10/1/2029 49,377

------------------------------------------------------------------
Railroads
Baa3 50 Union Pacific Corp., Sr.
Note
7.375%, 9/15/2009 49,775

------------------------------------------------------------------
Retail--0.4%
A3 565(d) Penney (J.C.) Co., Inc.,
MTN
7.05%, 5/23/2005 543,728

------------------------------------------------------------------
Telecommunication Services--0.5%
GTE Corp.,
Baa1 220(d) 6.36%, 4/15/2006, Deb. 210,989
Baa1 210(d) 7.51%, 4/1/2009, Note 216,027
Baa1 330(d) Sprint Capital Corp., Note
6.875%, 11/15/2028 299,158
------------
726,174

------------------------------------------------------------------
Utilities--0.9%
A2 300(d) Hydro Quebec, Deb.
(Canada)
7.50%, 4/1/2016 301,311
A2 1,000(d) Southern California Edison
Co., Note
6.50%, 6/1/2001 1,000,170
------------
1,301,481
Total corporate bonds
(cost $21,457,973) 20,555,553
------------

------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--0.6%
Aaa 400 First Union-Lehman
Brothers Bank., Ser.
1998
6.56%, 11/18/2008 382,003
Aaa 500 LB Commercial Conduit
Mortgage Trust, Ser. C,
Class A
6.48%, 1/18/2008 472,856
------------
Total collateralized
mortgage obligations
(cost $915,860) 854,859
------------

------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH OBLIGATIONS--10.8%
Aaa 1,000(c) Federal Home Loan Mortgage
Corp.,
7.00%, 12/1/2029 983,120
Federal National Mortgage
Assoc.,
Aaa 2,100(c) 6.50%, 12/1/2014 2,060,625
Aaa 1,000(c) 7.50%, 12/1/2014 1,015,000
Aaa 620 8.50%, 10/1/2024 641,604
Aaa 132(e) 9.50%, 7/1/2025 140
Aaa 361 8.50%, 2/1/2028 373,676
Aaa 4,000(c) 6.50%, 12/1/2029 3,835,000
Aaa 2,000(c) 7.00%, 12/1/2029 1,965,000
Aaa 2,500(c) 7.50%, 12/1/2029 2,507,025
Government National
Mortgage Assoc.,
Aaa 1,500(c) 7.00%, 12/15/2029 1,471,395
Aaa 1,000(c) 8.00%, 12/15/2029 1,021,870
------------
Total U.S. government
agency mortgage
pass-through obligations
(cost $15,803,931) 15,874,455
------------

------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--3.2%
United States Treasury
Bonds,
Aaa 55(d) 5.25%, 11/15/2028 47,670
Aaa 715 5.25%, 2/15/2029 625,739
United States Treasury
Notes,
Aaa 400 6.00%, 8/15/2004 403,876
Aaa 1,140(d) 7.50%, 2/15/2005 1,218,375
Aaa 890 6.00%, 8/15/2009 897,227

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

B-68
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

- ------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (cont'd.)
United States Treasury
Stripped Interest,
NR $ 2,765 Zero Coupon, 2/15/2010 $ 1,435,643
------------
Total U.S. government
securities
(cost $4,693,178) 4,628,530
------------
Total debt obligations
(cost $42,870,942) 41,913,397
------------
Total long-term
investments
(cost $100,759,089) 107,488,312
------------

- ------------------------------------------------------------------
SHORT-TERM INVESTMENTS--36.6%
- ------------------------------------------------------------------
COMMERCIAL PAPER--10.9%
Bombardier Capital Inc.,
P-2 3,288 5.80%, 10/1/1999 3,288,000
Centric Capital Corp.,
P-1 1,600 5.45%, 10/5/1999 1,599,031
Conagra, Inc.,
P-1 3,600 5.49%, 10/29/1999 3,584,628
Dayton Hudson Corp., Deb.
P-2 1,000 5.55%, 10/15/1999 997,841
Delaware Funding Corp.,
P-1 2,603 5.40%, 11/15/1999 2,585,430
Rohm & Haas Co.,
P-2 4,000 5.60%, 10/6/1999 3,996,889
------------
Total commercial paper
(cost $16,051,819) 16,051,819
------------

--------------------------------------------------------------------
CORPORATE BONDS--0.2%
--------------------------------------------------------------------
Health Care Services
A2 365(d) American Home Products
Corp., Note
7.70%, 2/15/2000
(cost $367,534) 367,745
------------

--------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH
OBLIGATIONS--3.5%
Aaa 5,106 Federal Home Loan Mortgage
Discount Notes
5.20%, 10/1/1999
(cost $5,106,000) 5,106,000
------------

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

Principal
Amount
(000) Description Value (Note 1)

--------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--0.7%
United States Treasury
Bills,
100(b) 4.55%, 12/16/1999 99,040
1,000(b) 4.615%, 12/16/1999 990,257
------------
Total U.S. government
securities
(cost $1,089,297) 1,089,297
------------

--------------------------------------------------------------------
REPURCHASE AGREEMENT--21.3%
31,201 Joint Repurchase Agreement
Account
5.22%, 10/1/1999
(cost $31,201,000; Note
5) 31,201,000
------------
Total short-term
investments
(cost $53,815,650) 53,815,861
------------

--------------------------------------------------------------------
Total Investments--109.9%
(cost $154,574,739; Note
4) 161,304,173
Liabilities in excess of
other
assets--(9.9%) (14,561,181)
------------
Net Assets--100% $146,742,992
============
----------------
(a) Non-income producing security.
(b) All or partial amount of security is segregated as initial margin for
financial futures transactions.
(c) Mortgage dollar roll, see Note 1 and Note 4.
(d) All or partial principal amount pledged as collateral for mortgage dollar
rolls.
(e) Figures are actual and not rounded to the nearest thousand.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
--------------------------------------------------------------------------------
See Notes to Financial Statements.

B-69
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Statement of Assets and Liabilities PRUDENTIAL ACTIVE BALANCED FUND
-----------------------------------------------------------

Assets September 30, 1999

Investments, at value (cost $123,373,739).................. $ 130,103,173
Repurchase agreement (cost $31,201,000).................... 31,201,000
Cash....................................................... 10,681
Receivable for investments sold............................ 9,754,014
Receivable for Series shares sold.......................... 834,456
Dividends and interest receivable.......................... 502,037
Due from broker-variation margin........................... 261,660
Other assets............................................... 5,706
---------------
Total assets........................................... 172,672,727
---------------
Liabilities
Payable for investments purchased.......................... 24,759,123
Payable for Series shares reacquired....................... 893,055
Accrued expenses........................................... 186,596
Management fee payable..................................... 79,004
Distribution fee payable................................... 11,957
---------------
Total liabilities...................................... 25,929,735
---------------
Net Assets................................................. $ 146,742,992
===============
Net assets were comprised of:
Common stock, at par..................................... $ 11,066
Paid-in capital in excess of par......................... 130,746,428
---------------
130,757,494
Undistributed net investment income...................... 2,395,226
Accumulated net realized gain on investments............. 7,135,434
Net unrealized appreciation on investments............... 6,454,838
---------------
Net assets, September 30, 1999.............................. $ 146,742,992
===============
Class A:
Net asset value and redemption price per share
($10,396,956 / 784,592 shares of common stock issued
and outstanding)......................................... $ 13.25
Maximum sales charge (5% of offering price).............. .70
---------------
Maximum offering price to public......................... $ 13.95
===============

Class B:
Net asset value, offering price and redemption price per
share
($10,979,133 / 833,370 shares of common stock issued
and outstanding)......................................... $ 13.17
===============

Class C:
Net asset value and redemption price per share
($1,116,852 / 84,777 shares of common stock issued and
outstanding)............................................. $ 13.17
Sales charge (1% of offering price)...................... .13
---------------
Offering price to public................................. $ 13.30
===============

Class Z:
Net asset value, offering price and redemption price per
share
($124,250,051 / 9,363,638 shares of common stock
issued and outstanding).................................. $ 13.27
===============
-----------------------------------------------------------
See Notes to Financial Statements.

B-70
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Operations
--------------------------------------------------------------

Year Ended
Net Investment Income September 30, 1999
------------------
Income
Interest.............................. $ 4,361,548
Dividends (net of foreign withholding
taxes
of $13,694)........................ 977,951
------------
Total income......................... 5,339,499
------------
Expenses
Management fee........................ 940,298
Distribution fee--Class A............. 17,294
Distribution fee--Class B............. 70,178
Distribution fee--Class C............. 6,737
Transfer agent's fees and expenses.... 260,000
Reports to shareholders............... 165,000
Custodian's fees and expenses......... 140,000
Registration fees..................... 110,000
Legal fees and expenses............... 25,000
Audit fee and expenses................ 20,000
Directors' fees and expenses.......... 7,500
Miscellaneous......................... 4,301
------------
Total expenses....................... 1,766,308
------------
Net investment income.................... 3,573,191
------------
Realized and Unrealized Gain on
Investments Net realized gain on:
Investment transactions............... 5,565,895
Financial futures contracts........... 4,358,935
------------
9,924,830
------------
Net change in unrealized appreciation
(depreciation) on:
Investments........................... 10,871,412
Financial futures contracts........... (988,830)
------------
9,882,582
------------
Net gain on investments.................. 19,807,412
------------
Net Increase in Net Assets
Resulting from Operations................ $ 23,380,603
============

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Changes in Net Assets
--------------------------------------------------------------

Year Ended September 30,
Increase (Decrease) ---------------------------
in Net Assets 1999 1998
------------ ------------
Operations
Net investment income........... $ 3,573,191 $ 5,391,746
Net realized gain on
investments.................. 9,924,830 26,438,362
Net change in unrealized
appreciation (depreciation)
on investments............... 9,882,582 (28,216,192)
------------ ------------
Net increase in net assets
resulting from operations.... 23,380,603 3,613,916
------------ ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A........................ (74,318) (24,889)
Class B........................ (52,406) (4,933)
Class C........................ (4,693) (273)
Class Z........................ (4,048,216) (4,664,569)
------------ ------------
(4,179,633) (4,694,664)
------------ ------------
Distributions from net realized
gains
Class A........................ (438,657) (82,174)
Class B........................ (480,842) (24,906)
Class C........................ (43,068) (1,378)
Class Z........................ (21,035,473) (13,860,433)
------------ ------------
(21,998,040) (13,968,891)
------------ ------------
Series share transactions (net of
share conversion) (Note 6) Net
proceeds from shares sold........ 69,542,543 105,305,809
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions............ 26,157,302 18,663,277
Cost of shares reacquired...... (114,537,650) (100,421,933)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................. (18,837,805) 23,547,153
------------ ------------
Total increase (decrease)......... (21,634,875) 8,497,514
Net Assets
Beginning of year................. 168,377,867 159,880,353
------------ ------------
End of year(a).................... $146,742,992 $168,377,867
============ ============

----------------
(a) Includes undistributed net
investment income of.......... $ 2,395,226 $ 3,863,980
------------ ------------

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

B-71
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
Prudential Active Balanced Fund (the "Series") is a separately managed series of
The Prudential Investment Portfolios, Inc. (the "Fund"). The Fund was
incorporated in Maryland on August 10, 1995 and is registered under the
Investment Company Act of 1940 as a diversified, open-end, management investment
company.

The Series' investment objective is to seek income and long-term growth of
capital. It invests in a portfolio of equity, fixed-income and money market
securities, which is actively managed to capitalize on opportunities created by
perceived misvaluation.

---------------------------------------------------
Note 1. Accounting Policies

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

Securities Valuation: Securities listed on a securities exchange and NASDAQ
(other than options on securities and indices) are valued at the last sale price
on such exchange or system on the day of valuation or, if there was no sale on
such day, at the mean between the last bid and asked prices on such day or at
the bid price on such day in the absence of an asked price. Securities that are
actively traded in the over-the-counter market, including listed securities for
which the primary market is believed by the Manager, in consultation with the
Subadviser, to be over-the-counter, are valued by an independent pricing agent
or principal market maker. Futures contracts and options thereon traded on a
commodities exchange or board of trade are valued at the last sale price at the
close of trading on such exchange or board of trade or, if there was no sale on
the applicable commodities exchange or board of trade on such day, at the mean
between the most recently quoted bid and asked prices on such exchange or board
of trade. Securities for which market quotations are not readily available,
other than private placements, are valued at a price supplied by an independent
pricing agent which is, in the opinion of such pricing agent, representative of
the market value of such securities as of the time of determination of net asset
value or, using a methodology developed by an independent pricing agent, which
is, in the judgement of the Manager and Subadviser, able to produce prices which
are representative of market value.

Short-term securities which mature in more than 60 days, for which market
quotations are readily available, are valued at current market quotations as
provided by an independent pricing agent or principal market maker. Short-term
securities which mature in 60 days or less are valued at cost with interest
accrued or discount amortized to the date of maturity, unless the Board of
Directors determines that such variation does not represent fair value.

All securities are valued as of 4:15 p.m., New York time.

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

Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities or commodities at
a set price for delivery on a future date. Upon entering into a financial
futures contract, the Series 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 Series each day, depending on
the daily fluctuations in the value of the underlying security or commodity.
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.

The Series invests in financial futures contracts in order to hedge its existing
portfolio securities or securities the Series intends to purchase against
fluctuations in value caused by changes in prevailing interest rates or market
conditions. Should interest rates move unexpectedly, the Series 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.

Dollar Rolls: The Series enters into mortgage dollar rolls in which the Series
sells mortgage securities for delivery in the current month, realizing a gain or
loss and simultaneously contracts to repurchase somewhat similar (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Series forgoes principal and interest paid on the securities. The
Series is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date. The difference
between the sales proceeds and the lower repurchase price is recorded as
interest income. The Series maintains a segregated account, the dollar value of
which is at least equal to its obligations in respect of dollar rolls.

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

B-72
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.

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

Dividends and Distributions: The Series will declare and distribute its net
investment income and net capital gains, if any, at least annually. Dividends
and distributions are recorded on the ex-dividend date.

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

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

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

Reclassification of Capital Accounts: The Series accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants, Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease undistributed net investment income by $862,312,
decrease accumulated net realized gain on investments by $4,358,827, and
increase paid-in capital by $5,221,139 for redemptions utilized as distributions
for federal income tax purposes during the year ended September 30, 1999. Net
investment income, net realized gains and net assets were not affected by this
change.

---------------------------------------------------
Note 2. Agreements

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

The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .65 of 1% of the Series' average daily net assets.

The Fund has a distribution agreement with Prudential Investment Management
Services LLC ("PIMS"), which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Fund compensates PIMS for distributing and
servicing the Series' Class A, Class B and Class C shares, pursuant to plans of
distribution (the "Class A, B and C Plans"), regardless of expenses actually
incurred. The distribution fees are accrued daily and payable monthly. No
distribution or service fees were paid to PIMS as distributor of the Class Z
shares of the Series.

Pursuant to the Class A, B and C Plans, the Series compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the year ended
September 30, 1999.

PIMS has advised the Series that it received approximately $60,400 and $6,600 in
front-end sales charges resulting from sales of Class A shares and Class C
shares, respectively, during the year ended September 30, 1999. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.

PIMS has advised the Series that for the year ended September 30, 1999, it
received approximately $27,500 and $700 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.

PIC, PIFM and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America ("Prudential").

As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the "Funds"), entered into a syndicated credit agreement
(`SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. The Funds pay a
commitment fee at an annual rate of .065 of 1% on the unused portion of the
credit facility, which is accrued and paid quarterly on a pro rata basis by the
Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had
a credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund did not
borrow any amounts pursuant to either agreement during the year

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

B-73
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
ended September 30, 1999. The purpose of the agreements is to serve as an
alternative source of funding for capital share redemptions.

---------------------------------------------------
Note 3. Other Transactions With Affiliates

Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended September 30, 1999,
the Series incurred fees of approximately $233,400 for the services of PMFS. As
of September 30, 1999, approximately $16,900 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out-of-pocket expenses paid to nonaffiliates.

---------------------------------------------------
Note 4. Portfolio Securities

Purchases and sales of investment securities other than short-term investments,
for the year ended September 30, 1999 were $264,840,951 and $310,274,690,
respectively.

The average monthly balance of dollar rolls outstanding during the year ended
September 30, 1999 was approximately $15,856,258. The value of dollar rolls
outstanding at September 30, 1999 was $14,859,035 (principal $15,100,000), which
was 8.6% of total assets.

The cost basis of investments for federal income tax purposes as of September
30, 1999 was $154,670,010 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $6,634,163 (gross unrealized
appreciation--$11,505,180, gross unrealized depreciation--$4,871,017).

During the year ended September 30, 1999, the Series entered into financial
futures contracts. Details of open contracts at September 30, 1999 are as
follows:

<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration September 30, Trade Appreciation/
Contracts Type Date 1999 Date (Depreciation)
------------- ---------------- -------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Long Position:
17 U.S. T-Bond Dec. 99 $ 1,936,938 $ 1,947,297 $ (10,359)
42 S&P Bond Dec. 99 13,631,094 13,977,675 (346,581)
155 U.S. T-Note Dec. 99 16,812,656 16,730,312 82,344
--------------
$ (274,596)
==============
</TABLE>

---------------------------------------------------
Note 5. Joint Repurchase Agreement Account

The Series, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Government or federal agency obligations. At September
30, 1999, the Series had a 4.9% undivided interest in repurchase agreements in
the joint account. The undivided interest for the Series represented $32,201,000
in principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefore was as follows:

Warburg Dillon Read LLC, 5.32%, in the principal amount of $190,000,000,
repurchase price of $190,028,077, due 10/1/99. The value of the collateral
including accrued interest was $193,802,299.

Bear, Stearns & Co. Inc., 5.32%, in the principal amount of $190,000,000,
repurchase price of $190,028,077, due 10/1/99. The value of the collateral
including accrued interest was $194,200,266.

Morgan (J.P.) Securities, Inc., 5.25%, in the principal amount of $190,000,000,
repurchase price $190,027,708, due 10/1/99. The value of the collateral
including accrued interest was $193,800,121.

Goldman, Sachs & Co., 4.75%, in the principal amount of $88,875,000, repurchase
price $88,886,726, due 10/1/99. The value of the collateral including accrued
interest was $90,653,200.

---------------------------------------------------
Note 6. Capital

The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 5%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Prior to November 2, 1998, Class C
shares were sold with a contingent deferred sales charge of 1% during the first
year. Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.

There are 3 billion shares of $.001 par value common stock of the Fund
authorized which are divided into three series, each of which offers four
classes, designated Class A, Class B, Class C and Class Z, each of which
consists of 250 million authorized shares.

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

B-74
<PAGE>

<TABLE>
<CAPTION>
Class A Shares Amount
------------------------------------ ---------- ------------
<S> <C> <C>
Year ended September 30, 1999:
Shares sold........................ 806,345 $ 10,710,045
Shares issued in reinvestment of
dividends and distributions...... 41,285 510,287
Shares reacquired.................. (305,438) (4,105,228)
---------- ------------
Net increase in shares outstanding
before conversion................ 542,192 7,115,104
Shares issued upon conversion
from Class B..................... 236 3,120
---------- ------------
Net increase in shares
outstanding...................... 542,428 $ 7,118,224
========== ============

Class B
------------------------------------
Year ended September 30, 1999:
Shares sold........................ 652,713 $ 8,665,383
Shares issued in reinvestment of
dividends and distributions...... 41,783 516,862
Shares reacquired.................. (90,666) (1,202,053)
---------- ------------
Net increase in shares outstanding
before conversion................ 603,830 7,980,192
Shares reacquired upon conversion
into Class A..................... (236) (3,120)
---------- ------------
Net increase in shares
outstanding...................... 603,594 $ 7,977,072
========== ============

Year ended September 30, 1998:
Shares sold........................ 224,444 $ 3,091,278
Shares issued in reinvestment of
dividends and distributions...... 2,309 29,757
Shares reacquired.................. (11,806) (161,521)
---------- ------------
Net increase in shares
outstanding...................... 214,947 $ 2,959,514
========== ============

Class C Shares Amount
------------------------------------ ---------- ------------
Year ended September 30, 1999:
Shares sold........................ 98,943 $ 1,301,393
Shares issued in reinvestment of
dividends and distributions...... 3,860 47,750
Shares reacquired.................. (39,496) (519,205)
---------- ------------
Net increase in shares
outstanding...................... 63,307 $ 829,938
========== ============

Year ended September 30, 1998:
Shares sold........................ 22,836 $ 314,699
Shares issued in reinvestment of
dividends and distributions...... 127 1,642
Shares reacquired.................. (1,859) (25,489)
---------- ------------
Net increase in shares
outstanding...................... 21,104 $ 290,852
========== ============

Class Z
------------------------------------
Year ended September 30, 1999:
Shares sold........................ 3,692,823 $ 48,865,722
Shares issued in reinvestment of
dividends and distributions...... 2,032,131 25,082,403
Shares reacquired.................. (8,515,198) (108,711,164)
---------- ------------
Net decrease in shares
outstanding...................... (2,790,244) $(34,763,039)
========== ============

Year ended September 30, 1998:
Shares sold........................ 6,947,226 $ 97,448,833
Shares issued in reinvestment of
dividends and distributions...... 1,437,147 18,524,825
Shares reacquired.................. (7,211,135) (98,037,987)
---------- ------------
Net increase in shares
outstanding...................... 1,173,238 $ 17,935,671
========== ============
</TABLE>

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

B-75
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Financial Highlights PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class A Class B
------------------------------------ ------------------------------------
November 7, November 7,
Year Ended 1996(a) Year Ended 1996(a)
September 30, Through September 30, Through
------------------ ------------------
September 30, September 30,
1999 1998 1997 1999 1998 1997
------- ------ ------------- ------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 13.29 $14.41 $13.40 $ 13.22 $14.34 $13.40
------- ------ ------- ------- ------ -------
Income from investment operations:
Net investment income............. .31 .44 .21(b) .19 .27 .19(b)
Net realized and unrealized gain
(loss) on investment
transactions................... 1.69 (.20) 1.97 1.69 (.14) 1.92
------- ------ ------- ------- ------ -------
Total from investment
operations.................. 2.00 .24 2.18 1.88 .13 2.11
------- ------ ------- ------- ------ -------
Less distributions:
Dividends from net investment
income......................... (.30) (.32) (.39) (.19) (.21) (.39)
Distributions from net realized
gains.......................... (1.74) (1.04) (.78) (1.74) (1.04) (.78)
------- ------ ------- ------- ------ -------
Total distributions............ (2.04) (1.36) (1.17) (1.93) (1.25) (1.17)
------- ------ ------- ------- ------ -------
Net asset value, end of period.... $ 13.25 $13.29 $14.41 $ 13.17 $13.22 $14.34
======= ====== ======= ======= ====== =======

TOTAL RETURN(d):.................. 16.07% 1.93% 17.48% 15.12% 1.10% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $10,397 $3,218 $990 $10,979 $3,038 $213
Average net assets (000).......... $ 6,918 $2,090 $100 $ 7,018 $1,285 $71
Ratios to average net assets:
Expenses, including
distribution fees........... 1.41% 1.28% 1.31%(c) 2.16% 2.03% 2.06%(c)
Expenses, excluding
distribution fees........... 1.16% 1.03% 1.06%(c) 1.16% 1.03% 1.06%(c)
Net investment income.......... 2.29% 2.72% 2.69%(c) 1.54% 1.95% 1.94%(c)
Portfolio turnover rate........... 230% 256% 50% 230% 256% 50%
</TABLE>

____________
(a) Commencement of offering of Class A and B shares.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.

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

B-76
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Financial Highlights PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class C Class Z
----------------------------------- -----------------------------------------------
November 7,
Year Ended 1996(e)
September 30, Through Year Ended September 30,
----------------- September 30, -----------------------------------------------
1999 1998 1997 1999 1998 1997 1996
------ ------ ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $13.22 $14.34 $ 13.40 $ 13.32 $ 14.45 $ 13.01 $ 12.46
------ ------ ------- -------- -------- -------- --------
Income from investment operations:
Net investment income............. .19 .48 .13(b) .35 .38 .39(b) .29(a)
Net realized and unrealized gain
(loss) on investment
transactions................... 1.69 (.35) 1.98 1.68 (.12) 2.22 .81
------ ------ ------- -------- -------- -------- --------
Total from investment
operations.................. 1.88 .13 2.11 2.03 .26 2.61 1.10
------ ------ ------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income......................... (.19) (.21) (.39) (.34) (.35) (.39) (.37)
Distributions from net realized
gains.......................... (1.74) (1.04) (.78) (1.74) (1.04) (.78) (.18)
------ ------ ------- -------- -------- -------- --------
Total distributions............ (1.93) (1.25) (1.17) (2.08) (1.39) (1.17) (.55)
------ ------ ------- -------- -------- -------- --------
Net asset value, end of period.... $13.17 $13.22 $ 14.34 $ 13.27 $ 13.32 $ 14.45 $ 13.01
====== ====== ======= ======== ======== ======== ========

TOTAL RETURN(d):.................. 15.12% 1.10% 16.91% 16.32% 2.12% 21.34% 9.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $1,117 $ 284 $ 5 $124,250 $161,838 $158,672 $153,588
Average net assets (000).......... $ 674 $ 118 $ 1 $130,052 $177,443 $154,199 $142,026
Ratios to average net assets:
Expenses, including
distribution fees........... 2.16% 2.03% 2.06%(c) 1.16% 1.03% 1.06% 1.00%(a)
Expenses, excluding
distribution fees........... 1.16% 1.03% 1.06%(c) 1.16% 1.03% 1.06% 1.00%(a)
Net investment income.......... 1.54% 2.04% 1.94%(c) 2.54% 2.99% 2.94% 3.09%(a)
Portfolio turnover rate........... 230% 256% 50% 230% 256% 50% 51%

<CAPTION>
1995
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 10.92
--------
Income from investment operations:
Net investment income............. .33(a)
Net realized and unrealized gain
(loss) on investment
transactions................... 1.54
--------
Total from investment
operations.................. 1.87
--------
Less distributions:
Dividends from net investment
income......................... (.29)
Distributions from net realized
gains.......................... (.04)
--------
Total distributions............ (.33)
--------
Net asset value, end of period.... $ 12.46
========

TOTAL RETURN(d):.................. 17.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $133,352
Average net assets (000).......... $104,821
Ratios to average net assets:
Expenses, including
distribution fees........... 1.00%(a)
Expenses, excluding
distribution fees........... 1.00%(a)
Net investment income.......... 3.53%(a)
Portfolio turnover rate........... 30%
</TABLE>

_________________
(a) Net of expense subsidy.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(e) Commencement of offering of Class C shares.

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

B-77
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Report of Independent Accountants PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------

The Shareholders and Board of Directors of
The Prudential Investment Portfolios, Inc.--Prudential Active Balanced Fund

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Prudential Investment
Portfolios, Inc.--Prudential Active Balanced Fund (the "Fund," one of the
portfolios constituting The Prudential Investment Portfolios, Inc.) at September
30, 1999, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended and the
financial highlights for each of the three years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for each of
the two years in the year ended September 30, 1996 were audited by other
independent accountants, whose opinion dated November 13, 1996 was unqualified.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 17, 1999

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

B-78
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL JENNISON GROWTH FUND
--------------------------------------------------------------------------------

Shares Description Value (Note 1)

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

LONG-TERM INVESTMENTS--97.7%
COMMON STOCKS--97.7%

---------------------------------------------------------------
Banks & Financial Services--9.3%
1,709,100 Chase Manhattan Corp. $ 128,823,412
3,056,225 Citigroup, Inc. 134,473,900
1,623,300 MBNA Corp. 37,031,531
830,190 Morgan Stanley Dean Witter 74,042,571
928,566 Mutual Risk Management, Ltd. 11,374,934
848,100 Schwab (Charles) Corp. 28,570,369
--------------
414,316,717

---------------------------------------------------------------
Computer Systems/Peripherals--9.6%
2,270,800 Dell Computer Corp.(a) 94,947,825
1,173,000 EMC Corp.(a) 83,796,188
940,700 Hewlett-Packard Co. 86,544,400
1,018,500 International Business Machines
Corp. 123,620,437
428,600 Sun Microsystems, Inc.(a) 39,859,800
--------------
428,768,650

---------------------------------------------------------------
Diversified Manufacturing--6.6%
866,400 AlliedSignal, Inc. 51,929,850
1,235,200 General Electric Co. 146,448,400
907,400 Tyco International Ltd. 93,689,050
--------------
292,067,300

---------------------------------------------------------------
EDP Software & Services--6.4%
450,700 America Online, Inc.(a) 46,872,800
326,400 Equant NV (ADR) (Netherlands)(a) 26,560,800
2,326,600 Microsoft Corp.(a) 210,702,712
--------------
284,136,312

---------------------------------------------------------------
Electronic Components--7.7%
886,000 Altera Corp.(a) 38,430,250
1,631,500 Intel Corp. 121,240,844
207,200 JDS Uniphase Corp.(a) 23,581,950
1,967,600 Texas Instruments, Inc. 161,835,100
--------------
345,088,144

---------------------------------------------------------------
Household & Personal Care Products--0.9%
970,100 Estee Lauder Co., Inc. 37,894,531

---------------------------------------------------------------
Industrial Technology/Instruments--3.0%
820,400 Applied Materials, Inc.(a) 63,734,825
678,700 KLA-Tencor Corp.(a) 44,115,500
803,900 Symbol Technologies, Inc. 27,031,138
--------------
134,881,463

---------------------------------------------------------------
Insurance--2.8%
1,442,350 American International Group,
Inc. 125,394,303

---------------------------------------------------------------
Media & Communications--9.3%
1,516,800 AT&T Corp. - Liberty Media
Group(a) 56,311,200
2,986,800 CBS Corp.(a) 138,139,500
1,220,800 Clear Channel Communications,
Inc.(a) 97,511,400
929,300 Omnicom Group, Inc. 73,588,944
609,400 Univision Communications Inc.(a) 49,589,925
--------------
415,140,969

---------------------------------------------------------------
Networking--4.3%
2,463,100 Cisco Systems, Inc.(a) 168,876,294
115,300 Juniper Networks, Inc.(a) 20,991,807
--------------
189,868,101

---------------------------------------------------------------
Pharmaceuticals--12.4%
1,897,000 American Home Products Corp. 78,725,500
550,400 Amgen, Inc.(a) 44,857,600
927,200 Bristol-Myers Squibb Co. 62,586,000
139,500 Genentech, Inc.(a) 20,410,594

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

B-79
<PAGE>

Shares Description Value (Note 1)

---------------------------------------------------------------
Pharmaceuticals (cont'd.)
1,235,100 Glaxo Wellcome PLC (ADR)
(United Kingdom) $ 64,225,200
901,200 Johnson & Johnson 82,797,750
2,064,700 Schering-Plough Corp. 90,072,537
1,638,000 Warner-Lambert Co. 108,722,250
--------------
552,397,431

---------------------------------------------------------------
Restaurants--1.6%
1,643,500 McDonald's Corp. 70,670,500

---------------------------------------------------------------
Retail--9.3%
400,600 Abercrombie & Fitch Co.(a) 13,645,438
1,920,287 Gap, Inc. 61,449,184
2,122,000 Home Depot, Inc. 145,622,250
1,104,900 Kohl's Corp.(a) 73,061,512
1,543,600 Staples, Inc.(a) 33,669,775
657,300 Tiffany & Co. 39,396,919
973,800 Wal-Mart Stores, Inc. 46,316,362
--------------
413,161,440

---------------------------------------------------------------
Telecommunications--9.1%
614,400 Allegiance Telecom, Inc.(a) 32,332,800
445,400 Level 3 Communications, Inc.(a) 23,258,231
2,030,500 MCI WorldCom, Inc.(a) 145,942,187
519,100 NEXTLINK Communications, Inc.(a) 26,912,091
412,100 NTL, Inc.(a) 39,600,234
1,598,200 Qwest Communications
International, Inc.(a) 47,246,788
377,050 Vodafone AirTouch PLC (ADR)
(United Kingdom)(a) 89,643,638
--------------
404,935,969

---------------------------------------------------------------
Telecommunications Equipment--5.4%
928,560 Lucent Technologies, Inc. $ 60,240,330
518,300 Motorola, Inc. 45,610,400
779,600 Nokia Corp. (ADR)(Finland) 70,017,825
1,151,000 Tellabs, Inc.(a) 65,535,062
--------------
241,403,617
--------------
Total long-term investments
(cost $3,323,718,834) 4,350,125,447
--------------

Principal
Amount
(000)
SHORT-TERM INVESTMENTS--2.7%
Commercial Paper--2.7%
$ 119,847 American Express Credit Corp.
5.57%, 10/1/99
(cost $119,847,000) 119,847,000
--------------
---------------------------------------------------------------
Total Investments--100.4%
(cost $3,443,565,834; Note 4) 4,469,972,447
Liabilities in excess of other
assets--(0.4%) (16,439,846)
--------------
Net Assets--100% $4,453,532,601
==============

_________________
(a) Non-income producing security.
ADR--American Depository Receipt.

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

B-80
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Statement of Assets and Liabilities PRUDENTIAL JENNISON GROWTH FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Assets
September 30, 1999
------------------
<S> <C>
Investments, at value (cost $3,443,565,834)............................................................ $4,469,972,447
Receivable for Series shares sold...................................................................... 14,624,693
Receivable for investments sold........................................................................ 12,892,040
Dividends and interest receivable...................................................................... 1,779,009
Deferred expenses and other assets..................................................................... 94,428
--------------
Total assets........................................................................................ 4,499,362,617
--------------
Liabilities
Bank overdraft......................................................................................... 494,680
Payable for investments purchased...................................................................... 32,478,586
Payable for Series shares reacquired................................................................... 8,763,607
Management fee payable................................................................................. 2,244,165
Distribution fees payable.............................................................................. 1,574,451
Accrued expenses and other liabilities................................................................. 231,730
Foreign withholding taxes payable...................................................................... 42,797
--------------
Total liabilities................................................................................... 45,830,016
--------------
Net Assets............................................................................................. $4,453,532,601
==============
Net assets were comprised of:
Common stock, at par................................................................................ $ 223,837
Paid-in capital in excess of par.................................................................... 3,228,228,646
--------------
3,228,452,483
Accumulated net realized gain on investments........................................................ 198,673,505
Net unrealized appreciation on investments.......................................................... 1,026,406,613
--------------
Net assets, September 30, 1999......................................................................... $4,453,532,601
==============

Class A:
Net asset value and redemption price per share
($911,466,742 divided by 45,453,887 shares of common stock issued and outstanding)............... $ 20.05
Maximum sales charge (5% of offering price)......................................................... 1.06
--------------
Maximum offering price to public.................................................................... $ 21.11
==============
Class B:
Net asset value, offering price and redemption price per share
($1,506,838,758 divided by 77,542,364 shares of common stock issued and outstanding)............. $ 19.43
==============
Class C:
Net asset value and redemption price per share
($141,769,655 divided by 7,295,397 shares of common stock issued and outstanding)................ $ 19.43
Sales charge (1% of offering price)................................................................. .20
--------------
Offering price to public............................................................................ $ 19.63
==============
Class Z:
Net asset value, offering price and redemption price per share
($1,893,457,446 divided by 93,545,646 shares of common stock issued and outstanding)............. $ 20.24
==============
</TABLE>

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

B-81
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Operations
--------------------------------------------------------------
Year Ended
Net Investment Income (Loss) September 30, 1999
------------------
Income
Dividends (net of foreign withholding
taxes of $95,578).................. $ 18,615,326
Interest.............................. 3,968,260
----------------
Total income....................... 22,583,586
----------------
Expenses
Management fee........................ 22,079,891
Distribution fee--Class A............. 1,870,788
Distribution fee--Class B............. 12,368,254
Distribution fee--Class C............. 980,326
Transfer agent's fees and expenses.... 6,273,000
Reports to shareholders............... 470,000
Registration fees..................... 434,000
Custodian's fees and expenses......... 160,000
Legal fees and expenses............... 65,000
Amortization of deferred organization
expenses........................... 37,967
Audit fee and expenses................ 20,000
Insurance expense..................... 11,000
Directors' fees and expenses.......... 7,500
Miscellaneous......................... 16,740
----------------
Total expenses..................... 44,794,466
----------------
Net investment loss...................... (22,210,880)
----------------
Realized and Unrealized Gain on
Investments Net realized gain on:
Investment transactions............... 201,079,990
Financial futures contracts........... 244,090
----------------
201,324,080
Net change in unrealized appreciation on
investments........................... 828,202,820
----------------
Net gain on investments.................. 1,029,526,900
----------------
Net Increase in Net Assets
Resulting from Operations................ $1,007,316,020
================

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Changes in Net Assets

Year Ended September 30,
Increase (Decrease) in ------------------------
Net Assets 1999 1998
---- ----
Operations
Net investment loss......... $ (22,210,880) $ (6,754,609)
Net realized gain on
investments.............. 201,324,080 131,020,013
Net change in unrealized
appreciation
(depreciation) of
investments.............. 828,202,820 (190,394,651)
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations............... 1,007,316,020 (66,129,247)
-------------- --------------
Distributions from net realized
capital gains (Note 1)
Class A..................... (17,349,525) (12,677,688)
Class B..................... (27,545,469) (37,861,226)
Class C..................... (1,752,623) (2,330,817)
Class Z..................... (38,052,986) (55,817,957)
-------------- --------------
(84,700,603) (108,687,688)
-------------- --------------
Series share transactions (net
of conversion) (Note 5)
Net proceeds from shares
sold..................... 2,794,924,604 1,822,040,223
Net asset value of shares
issued in reinvestment of
distributions............ 83,061,464 106,812,422
Cost of shares reacquired... (1,569,556,414) (730,978,040)
-------------- --------------
Net increase in net assets
from Series share
transactions............. 1,308,429,654 1,197,874,605
-------------- --------------
Total increase................. 2,231,045,071 1,023,057,670

Net Assets

Beginning of year.............. 2,222,487,530 1,199,429,860
-------------- --------------
End of year.................... $4,453,532,601 $2,222,487,530
============== ==============

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

B-82
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
--------------------------------------------------------------------------------
Prudential Jennison Growth Fund (the "Series") is a separately managed series of
The Prudential Investment Portfolios, Inc. (the "Fund"). The Fund was
incorporated in Maryland on August 10, 1995 and is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Series had no significant operations other than the issuance of
3,334 shares of Class A and 3,333 shares of Class B and Class C common stock for
$100,000 on September 13, 1995 to Prudential Investments Fund Management LLC
("PIFM"). Investment operations of the Series commenced on November 2, 1995.

The Series' investment objective is to achieve long-term growth of capital. It
invests primarily in equity securities (common stock, preferred stock and
securities convertible into common stock) of established companies with
above-average growth prospects.

-------------------------------------------------------------
Note 1. Accounting Policies

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

Securities Valuation: Securities listed on a securities exchange and NASDAQ
(other than options on securities and indices) are valued at the last sale price
on such exchange or system on the day of valuation or, if there was no sale on
such day, at the mean between the last bid and asked prices on such day or at
the bid price on such day in the absence of an asked price. Securities that are
actively traded in the over-the-counter market, including listed securities for
which the primary market is believed by the Manager, in consultation with the
Subadviser, to be over-the-counter, are valued by an independent pricing agent
or principal market maker. Futures contracts and options thereon traded on a
commodities exchange or board of trade are valued at the last sale price at the
close of trading on such exchange or board of trade or, if there was no sale on
the applicable commodities exchange or board of trade on such day, at the mean
between the most recently quoted bid and asked prices on such exchange or board
of trade. Securities for which market quotations are not readily available,
other than private placements, are valued at a price supplied by an independent
pricing agent, which is, in the opinion of such pricing agent, representative of
the market value of such securities as of the time of determination of net asset
value, or using a methodology developed by an independent pricing agent, which
is, in the judgment of the Manager and the Subadviser, able to produce prices
which are representative of market value.

All securities are valued as of 4:15 p.m., New York time.

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

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

Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities or
commodities at a set price for delivery on a future date. Upon entering into a
financial futures contract, the Series 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 Series each day, depending on
the daily fluctuations in the value of the underlying security or commodity.
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.

Dividends and Distributions: The Series expects to pay dividends of net
investment income, if any, semi-annually and to make distributions of any

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

B-83
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
--------------------------------------------------------------------------------

net capital gains at least annually. Dividends and distributions are recorded on
the ex-dividend date. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.

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

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

Deferred Organization Expenses: Approximately $200,000 of expenses were incurred
in connection with the organization of the Series. These costs have been
deferred and are being amortized ratably over a period of sixty months from the
date the Series commenced investment operations.

Reclassification of Capital Accounts: The Series accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: "Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies." For the year ended
September 30, 1999, the Series reclassified current net operating losses and
redemptions utilized as distributions for federal income tax purposes by
decreasing accumulated net investment loss by $22,210,880, decreasing
accumulated net realized gain on investments by $18,041,231 and decreasing
paid-in capital by $4,169,649. Net investment income, net realized gains and net
assets were not affected by this change.

-------------------------------------------------------------
Note 2. Agreements

The Fund has a management agreement with PIFM. Pursuant to a subadvisory
agreement between PIFM and Jennison Associates LLC ("Jennison"), Jennison
furnishes investment advisory services in connection with the management of the
Series. Under the subadvisory agreement, Jennison, subject to the supervision of
PIFM, is responsible for managing the assets of the Series in accordance with
its investment objective and policies.

The management fee paid PIFM will be computed daily and payable monthly, at an
annual rate of .60 of 1% of the average daily net assets of the Series. PIFM
pays Jennison a subadvisory fee at an annual rate of .30 of 1% of the average
daily net assets of the Series up to and including $300 million and .25 of 1% of
such assets in excess of $300 million. PIFM also pays the cost of compensation
of officers and employees of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.

The Fund has a distribution agreement with Prudential Investment Management
Services LLC ("PIMS"), which acts as the distributor of the Fund. The Fund
compensates PIMS for distributing and servicing the Series' Class A, Class B and
Class C shares, pursuant to plans of distribution (the "Class A, B and C
Plans"), regardless of expenses actually incurred by them. The distribution fees
are accrued daily and payable monthly. No distribution or service fees are paid
to PIMS as distributor of the Class Z shares of the Series.

PIMS has advised the Series that it received approximately $2,331,800 and
$629,300 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the fiscal year ended September 30, 1999. From
these fees, PIMS paid such sales charges to affiliated broker-dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.

PIMS has advised the Series that for the fiscal year ended September 30, 1999,
it received approximately $2,013,100 and $46,500 in contingent deferred sales
charges imposed upon certain redemptions by Class B and C shareholders,
respectively.

PIFM, PIMS and Jennison are wholly owned subsidiaries of The Prudential
Insurance Company of America ("Prudential").

As of March 11, 1999, the Fund along with other unaffiliated registered
investment companies (the "Funds"), entered into a syndicated credit agreement
("SCA") with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. The Funds pay a
commitment fee at an annual rate of .065 of 1% on the unused portion of the
credit facility, which is accrued and paid quarterly on a pro rata basis by the
Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had
a credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund

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

B-84
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
--------------------------------------------------------------------------------

did not borrow any amounts pursuant to either agreement during the year ended
September 30, 1999. The purpose of the agreements is to serve as an alternative
source of funding for capital share redemptions.

-------------------------------------------------------------
Note 3. Other Transactions with Affiliates

Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the fiscal year ended September 30,
1999, the Series incurred fees of approximately $6,215,000 for the services of
PMFS. As of September 30, 1999, approximately $543,000 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to nonaffiliates.

For the fiscal year ended September 30, 1999, Prudential Securities
Incorporated, which is an indirect, wholly owned subsidiary of Prudential,
earned approximately $391,700 in brokerage commissions from portfolio
transactions executed on behalf of the Series.

-------------------------------------------------------------
Note 4. Portfolio Securities

Purchases and sales of investment securities, other than short-term investments,
for the fiscal year ended September 30, 1999 were $3,187,479,690 and
$2,011,088,170, respectively.

The cost of investments for federal income tax purposes at September 30, 1999,
was $3,446,231,745 and, accordingly, net unrealized appreciation of investments
for federal income tax purposes was $1,023,740,702 (gross unrealized
appreciation--$1,085,425,006; gross unrealized depreciation--$61,684,304).

-------------------------------------------------------------
Note 5. Capital

The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 5%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class B shares automatically convert to
Class A shares on a quarterly basis approximately seven years after purchase. A
special exchange privilege is also available for shareholders who qualified to
purchase Class A shares at net asset value. Class C shares are sold with a
front-end sales charge of 1% and a contingent deferred sales charge of 1% during
the first 18 months. Prior to November 2, 1998, Class C shares were sold with a
contingent deferred sales charge of 1% during the first year. Class Z shares are
not subject to any sales or redemption charge and are offered for sale to a
limited group of investors.

Transactions in shares of common stock were as follows:

<TABLE>
<CAPTION>
Class A Shares Amount
--------------------------------- ------------- -------------
<S> <C> <C>
Year ended September 30, 1999:
Shares sold...................... 34,344,966 $ 662,914,500
Shares issued in reinvestment of
distributions.................. 1,032,752 16,627,307
Shares reacquired................ (23,547,037) (457,441,788)
------------ -------------
Net increase in shares
outstanding before
conversion..................... 11,830,681 222,100,019
Shares issued upon conversion
from Class B................... 2,660,015 51,625,561
------------ -------------
Net increase in shares
outstanding.................... 14,490,696 $ 273,725,580
============ =============

Year ended September 30, 1998:
Shares sold...................... 14,958,226 $ 229,811,039
Shares issued due to merger of
Prudential Multi-Sector
Fund........................... 15,525,419 255,703,652
Shares issued in reinvestment of
distributions.................. 913,659 12,215,617
Shares reacquired................ (10,632,449) (163,008,985)
------------ -------------
Net increase in shares
outstanding before
conversion..................... 20,764,855 334,721,323
Shares issued upon conversion
from Class B................... 777,059 11,419,782
------------ -------------
Net increase in shares
outstanding.................... 21,541,914 $ 346,141,105
============ =============

Class B
---------------------------------
Year ended September 30, 1999:
Shares sold..................... 42,766,896 $ 799,643,630
Shares issued in reinvestment of
distributions................. 1,698,149 26,677,924
Shares reacquired............... (14,404,393) (265,401,893)
------------ -------------
Net increase in shares
outstanding before
conversion.................... 30,060,652 560,919,661
Shares reacquired upon
conversion into Class A....... (2,736,865) (51,625,561)
------------ -------------
Net increase in shares
outstanding................... 27,323,787 $ 509,294,100
============ =============
</TABLE>

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

B-85
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class B Shares Amount
--------------------------------- ------------ -------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold..................... 22,754,015 $ 342,894,551
Shares issued due to merger of
Prudential Multi-Sector
Fund.......................... 7,486,124 120,751,178
Shares issued in reinvestment of
distributions................. 2,776,715 36,513,797
Shares reacquired............... (9,639,289) (143,137,800)
------------ --------------
Net increase in shares
outstanding before
conversion.................... 23,377,565 357,021,726
Shares reacquired upon
conversion
into Class A.................. (793,565) (11,419,782)
------------ --------------
Net increase in shares
outstanding................... 22,584,000 $ 345,601,944
============ ==============

Class C
---------------------------------
Year ended September 30, 1999:
Shares sold..................... 6,235,444 $ 117,953,942
Shares issued in reinvestment of
distributions................. 108,868 1,710,322
Shares reacquired............... (2,247,639) (41,843,724)
------------ --------------
Net increase in shares
outstanding................... 4,096,673 $ 77,820,539
============ ==============

Year ended September 30, 1998:
Shares sold..................... 1,687,844 $ 25,645,005
Shares issued due to merger of
Prudential Multi-Sector
Fund.......................... 260,502 4,201,896
Shares issued in reinvestment of
distributions................. 172,793 2,272,229
Shares reacquired............... (578,482) (8,683,902)
------------ --------------
Net increase in shares
outstanding................... 1,542,657 $ 23,435,228
============ ==============

Class Z
---------------------------------
Year ended September 30, 1999:
Shares sold..................... 63,109,118 $1,214,412,532
Shares issued in reinvestment of
distributions................. 2,345,617 38,045,912
Shares reacquired............... (42,230,402) (804,869,008)
------------ --------------
Net increase in shares
outstanding................... 23,224,333 $ 447,589,436
============ ==============

Year ended September 30, 1998:
Shares sold..................... 52,992,987 $ 825,209,682
Shares issued due to merger of
Prudential Multi-Sector
Fund.......................... 1,075,632 17,823,220
Shares issued in reinvestment of
distributions................. 4,155,680 55,810,779
Shares reacquired............... (27,380,773) (416,147,353)
------------ --------------
Net increase in shares
outstanding................... 30,843,526 $ 482,696,328
============ ==============
</TABLE>

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

B-86
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Financial Highlights PRUDENTIAL JENNISON GROWTH FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------------- ------------------------------------
November 2,
Year Ended 1995(a) Year Ended
September 30, Through September 30,
---------------------------------- September 30, ------------------------------------
1999 1998 1997 1996 1999 1998 1997
-------- -------- -------- ------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period......................... $ 14.44 $ 15.39 $ 10.97 $ 10.00 $ 14.11 $ 15.18 $ 10.89
-------- -------- -------- ------ ---------- -------- --------
Income from investment operations
Net investment income (loss)(c)... (.08) (.04) (.03) (.03) (.22) (.15) (.12)
Net realized and unrealized gain
on investment transactions..... 6.23 .40 4.45 1.00 6.08 .39 4.41
-------- -------- -------- ------ ---------- -------- --------
Total from investment
operations.................. 6.15 .36 4.42 .97 5.86 .24 4.29
-------- -------- -------- ------ ---------- -------- --------
Less distributions
Distributions from net realized
gains.......................... (.54) (1.31) -- -- (.54) (1.31) --
-------- -------- -------- ------ ---------- -------- --------
Net asset value, end of period.... $ 20.05 $ 14.44 $ 15.39 $ 10.97 $ 19.43 $ 14.11 $ 15.18
======== ======== ======== ====== ========== ======== ========

TOTAL RETURN(b)................... 43.58% 3.02% 40.29% 9.70% 42.51% 2.21% 39.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)... $911,467 $446,996 $145,022 $85,440 $1,506,839 $708,463 $419,405
Average net assets (000).......... $748,315 $251,118 $105,982 $70,667 $1,236,825 $557,823 $299,476
Ratios to average net assets:
Expenses, including
distribution fees........... 1.05% 1.08% 1.09% 1.23%(d) 1.80% 1.83% 1.84%
Expenses, excluding
distribution fees........... .80% .83% .84% .98%(d) .80% .83% .84%
Net investment income (loss)... (.44)% (.26)% (.25)% (.37)%(d) (1.19)% (1.01)% (1.00)%
For Class A, B, C and Z shares:
Portfolio turnover rate........ 56% 58% 63% 42% 56% 58% 63%

<CAPTION>
November 2,
1995(a)
Through
September 30,
1996
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period......................... $ 10.00
-------------
Income from investment operations
Net investment income (loss)(c)... (.10)
Net realized and unrealized gain
on investment transactions..... .99
-------------
Total from investment
operations.................. .89
-------------
Less distributions
Distributions from net realized
gains.......................... --
-------------
Net asset value, end of period.... $ 10.89
=============

TOTAL RETURN(b)................... 8.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)... $ 231,541
Average net assets (000).......... $ 162,412
Ratios to average net assets:
Expenses, including
distribution fees........... 1.98%(d)
Expenses, excluding
distribution fees........... .98%(d)
Net investment income (loss)... (1.12)%(d)
For Class A, B, C and Z shares:
Portfolio turnover rate........ 42%
</TABLE>

______________
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) Annualized.

See Notes to Financial Statements.

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

B-87
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Financial Highlights PRUDENTIAL JENNISON GROWTH FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class C Class Z
-------------------------------------------------- --------------------------------------
November 2,
Year Ended 1995(a) Year Ended
September 30, Through September 30,
-------------------------------- September 30, --------------------------------------
1999 1998 1997 1996 1999 1998 1997
-------- ------- ------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period......................... $ 14.11 $ 15.18 $ 10.89 $ 10.00 $ 14.53 $ 15.45 $ 10.98
-------- ------- ------- ------- ---------- ---------- --------
Income from investment operations
Net investment income (loss)(c)... (.22) (.15) (.12) (.10) (.04) -- --
Net realized and unrealized gain
on investment transactions..... 6.08 .39 4.41 .99 6.29 .39 4.47
-------- ------- ------- ------- ---------- ---------- --------
Total from investment
operations.................. 5.86 .24 4.29 .89 6.25 .39 4.47
-------- ------- ------- ------- ---------- ---------- --------
Less distributions
Distributions from net realized
gains....................... (.54) (1.31) -- -- (.54) (1.31) --
-------- ------- ------- ------- ---------- ---------- --------
Net asset value, end of period.... $ 19.43 $ 14.11 $ 15.18 $ 10.89 $ 20.24 $ 14.53 $ 15.45
======== ======= ======= ======= ========== ========== ========

TOTAL RETURN(b)................... 42.51% 2.21% 39.39% 8.90% 43.94% 3.22% 40.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)... $141,770 $45,126 $25,134 $15,281 $1,893,457 $1,021,903 $609,869
Average net assets (000).......... $ 98,033 $35,337 $18,248 $12,550 $1,596,809 $ 810,296 $455,684
Ratios to average net assets:
Expenses, including
distribution fees........... 1.80% 1.83% 1.84% 1.98%(d) .80% .83% .84%
Expenses, excluding
distribution fees........... .80% .83% .84% .98%(d) .80% .83% .84%
Net investment income (loss)... (1.20)% (1.01)% (1.00)% (1.12)%(d) (.19)% (.01)% --

<CAPTION>
April 15,
1996(a)
Through
September 30,
1996
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period......................... $ 10.32
-------------
Income from investment operations
Net investment income (loss)(c)... (.02)
Net realized and unrealized gain
on investment transactions..... .68
-------------
Total from investment
operations.................. .66
-------------
Less distributions
Distributions from net realized
gains....................... --
-------------
Net asset value, end of period.... $ 10.98
=============

TOTAL RETURN(b)................... 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)... $ 362,416
Average net assets (000).......... $ 26,829
Ratios to average net assets:
Expenses, including
distribution fees........... .98%(d)
Expenses, excluding
distribution fees........... .98%(d)
Net investment income (loss)... (.12)%(d)
</TABLE>

_______________
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) Annualized.
-------------------------------------------------------------------------------
See Notes to Financial Statements.

B-88
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Report of Independent Accountants PRUDENTIAL JENNISON GROWTH FUND
--------------------------------------------------------------------------------

To the Shareholders and Board of Directors of
The Prudential Investment Portfolios, Inc.--Prudential Jennison Growth Fund

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Prudential Investment
Portfolios, Inc.--Prudential Jennison Growth Fund (the "Fund", one of the
portfolios constituting The Prudential Investment Portfolios, Inc.) at September
30, 1999, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended and the
financial highlights for each of the three years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for the
period ended September 30, 1996 were audited by other independent accountants,
whose opinion dated November 4, 1996 was unqualified.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 17, 1999
--------------------------------------------------------------------------------

B-89
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL JENNISON GROWTH & INCOME FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<S> <C> <C>
------------------------------------------------------------------
LONG-TERM INVESTMENTS--84.1%
COMMON STOCKS--84.1%
------------------------------------------------------------------
Aerospace/Defense--3.3%
57,240 Raytheon Co. $ 2,776,140
66,000 The B.F. Goodrich Co. 1,914,000
------------
4,690,140

------------------------------------------------------------------
Airlines--1.7%
45,000 AMR Corp. 2,452,500

------------------------------------------------------------------
Aluminum--3.1%
70,200 Alcan Aluminum Ltd. 2,193,750
36,600 Reynolds Metals Co. 2,209,725
------------
4,403,475

------------------------------------------------------------------
Apparel--1.5%
120,700 Polo Ralph Lauren Corp.(a) 2,165,056

------------------------------------------------------------------
Banking--4.0%
33,500 Chase Manhattan Corp. 2,525,062
49,300 Fleet Financial Group, Inc. 1,805,613
112,800 Hibernia Corp., Class A 1,311,300
------------
5,641,975

------------------------------------------------------------------
Business Services--3.7%
105,900 Convergys Corp.(a) 2,098,144
51,300 Hertz Corp. 2,257,200
40,900 Ryder System, Inc. 833,338
------------
5,188,682

------------------------------------------------------------------
Chemicals--5.0%
79,000 Cytec Industries, Inc.(a) 1,896,000
55,400 Dexter Corp. 2,067,113
82,400 IMC Global, Inc. 1,199,950
118,000 W.R. Grace & Co.(a) 1,895,375
------------
7,058,438

------------------------------------------------------------------
Computer Systems/Peripherals--0.7%
10,300 Hewlett-Packard Co. 947,600

------------------------------------------------------------------
Data Processing & Reproduction--0.8%
134,800 Informix Corp.(a) 1,069,975

------------------------------------------------------------------
Drugs & Health Care--1.8%
60,700 American Home Products Corp. 2,519,050

------------------------------------------------------------------
EDP Software & Services--0.4%
104,600 Intergraph Corp.(a) 588,375

------------------------------------------------------------------
Foods--1.4%
26,300 Dole Food Co., Inc. 499,700
68,300 SUPERVALU, Inc. 1,489,794
------------
1,989,494

------------------------------------------------------------------
Hotels--2.7%
158,900 Hilton Hotels Corp. 1,569,137
70,700 Promus Hotel Corp.(a) 2,302,169
------------
3,871,306

------------------------------------------------------------------
Human Resources--1.9%
93,000 Manpower, Inc. 2,708,625

------------------------------------------------------------------
Industrial Technology/Instruments--1.5%
54,900 Millipore Corp. 2,062,181

------------------------------------------------------------------
Insurance--3.6%
20,600 CIGNA Corp. 1,601,650
64,800 The Allstate Corp. 1,615,950
61,000 Travelers Property Casualty Corp. 1,799,500
------------
5,017,100
</TABLE>

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

B-90
<PAGE>

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<S> <C> <C>
-------------------------------------------------------------------
Media--3.1%
54,600 CBS Corp. $ 2,525,250
31,904 Chris-Craft Industries, Inc.(a) 1,790,612
------------
4,315,862

-------------------------------------------------------------------
Motor Vehicles & Equipment--4.1%
26,800 Dana Corp. 994,950
37,300 General Motors Corp, Class H 2,135,425
41,400 General Motors Corp. 2,605,613
------------
5,735,988

-------------------------------------------------------------------
Oil Services--3.0%
54,200 McDermott International, Inc. 1,097,550
83,200 Unocal Corp. 3,083,600
------------
4,181,150

-------------------------------------------------------------------
Paper & Forest Products--6.1%
169,500 Abitibi-Consolidated, Inc. 2,044,594
68,600 Boise Cascade Corp. 2,499,612
36,600 Champion International Corp. 1,880,325
104,054 Smurfit-Stone Container Corp.(a) 2,250,168
------------
8,674,699

-------------------------------------------------------------------
Petroleum--6.1%
66,900 Anadarko Petroleum Corp. 2,044,631
59,000 Burlington Resources, Inc. 2,168,250
89,600 Tosco Corp. 2,262,400
73,400 USX - Marathon Group 2,146,950
------------
8,622,231

-------------------------------------------------------------------
Pharmaceuticals--1.3%
60,900 Vertex Pharmaceuticals, Inc.(a) 1,891,706

-------------------------------------------------------------------
Photography/Image Technology--0.8%
42,900 Polaroid Corp. 1,115,400
-------------------------------------------------------------------
Publishing--3.6%
83,300 New York Times Co., Class A 3,123,750
38,900 Tribune Co. 1,935,275
------------
5,059,025

-------------------------------------------------------------------
Retail--5.5%
84,100 AutoZone, Inc.(a) 2,360,056
101,900 Boise Cascade Office Products
Corp.(a) 1,108,163
209,100 Kmart Corp.(a) 2,443,856
48,609 The Limited, Inc. 1,859,294
------------
7,771,369

-------------------------------------------------------------------
Semiconductors--2.9%
121,200 International Rectifier Corp.(a) 1,848,300
71,500 National Semiconductor Corp.(a) 2,180,750
------------
4,029,050

-------------------------------------------------------------------
Specialty Chemicals--3.2%
173,026 CK Witco Corp. 2,519,691
112,400 Engelhard Corp. 2,044,275
------------
4,563,966

-------------------------------------------------------------------
Steel & Metals--3.8%
32,800 AK Steel Holding Corp. 598,600
51,700 Nucor Corp. 2,462,213
90,200 USX-U.S. Steel Group 2,322,650
------------
5,383,463

-------------------------------------------------------------------
Telecommunications--1.8%
149,900 Loral Space & Communications Ltd.(a) 2,576,406

-------------------------------------------------------------------
Transportation--1.7%
54,100 Airborne Freight Corp. 1,139,481
33,100 CNF Transportation, Inc. 1,232,975
------------
2,372,456
------------
Total long-term investments
(cost $110,807,284) 118,666,743
------------
</TABLE>

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

B-91
<PAGE>

<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
---------------------------------------------------------------------
SHORT-TERM INVESTMENTS--15.9%
---------------------------------------------------------------------
COMMERCIAL PAPER--9.1%
P-1 $6,855 American Express Co.,
5.57%, 10/1/99 $ 6,855,000
P-1 6,000 Chevron USA, Inc.,
5.30%, 10/1/99 6,000,000
--------------
Total commercial paper
(cost $12,855,000) 12,855,000
U.S. GOVERNMENT SECURITIES--6.8%
9,615(b) United States Treasury
Bills,
4.77%, 11/12/99
(cost $9,564,202) 9,555,413
--------------
Total short-term
investments
(cost $22,419,202) 22,410,413
--------------
Total investments before
short sales--100.0%
(cost $133,226,486; Note 4) 141,077,156
--------------

Shares Description Value (Note 1)

------------------------------------------------------------------
COMMON STOCKS SOLD SHORT(a)--(6.4%)
------------------------------------------------------------------
Aerospace/Defense--(0.4%)
(9,700) United Technologies Corp. $ (575,331)

------------------------------------------------------------------
Beverages--(1.1%)
(31,600) Coca-Cola Co. (1,518,775)

------------------------------------------------------------------
Cosmetics/Toiletries--(0.6%)
(26,400) The Gillette Co. (895,950)

------------------------------------------------------------------
Financial Services--(2.4%)
(9,200) Federal National Mortgage Assoc. (576,725)
(23,100) Nasdaq-100 Shares Trust (2,780,662)
------------
(3,357,387)

------------------------------------------------------------------
Retail--(1.9%)
(34,200) Circuit City Stores-Circuit City
Group (1,442,813)
(21,400) Dayton Hudson Corp. (1,285,338)
------------
(2,728,151)
------------
Total common stocks sold short
(proceeds at cost $9,941,334) (9,075,594)
------------
Total investments, net of short
sales--93.6%
(cost $123,285,152) 132,001,562
Other assets in excess of
liabilities--6.4% 9,086,790
------------
Net Assets--100% $141,088,352
============
</TABLE>

______________
(a) Non-income producing securities.
(b) $9,555,413 of principal amount pledged as collateral for short sales.

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

B-92
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Statement of Assets and Liabilities PRUDENTIAL JENNISON GROWTH & INCOME FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Assets September 30, 1999
------------------
<S> <C>
Investments, at value (cost $133,226,486)....................................... $141,077,156
Cash............................................................................ 645
Receivables for securities sold short........................................... 9,941,334
Receivable for investments sold................................................. 3,596,014
Receivable for Series shares sold............................................... 251,042
Dividends and interest receivable............................................... 138,187
Other assets.................................................................... 1,342
------------------
Total assets................................................................. 155,005,720
------------------
Liabilities
Investments sold short, at value (proceeds $9,941,334).......................... 9,075,594
Payable for investments purchased............................................... 3,420,501
Due to broker for securities sold short......................................... 947,727
Payable for Series shares reacquired............................................ 162,134
Accrued expenses................................................................ 146,357
Distribution fees payable....................................................... 93,034
Management fee payable.......................................................... 72,021
------------------
Total liabilities............................................................ 13,917,368
------------------
Net Assets...................................................................... $141,088,352
==================

Net assets were comprised of:
Common stock, at par......................................................... $ 11,102
Paid-in capital in excess of par............................................. 118,323,878
------------------
118,334,980
Accumulated net realized gain on investments................................. 14,036,962
Net unrealized appreciation on investments................................... 8,716,410
------------------
Net assets, September 30, 1999.................................................. $141,088,352
==================

Class A:
Net asset value and redemption price per share
($37,157,842 divided by 2,911,247 shares of common
stock issued and outstanding.............................................. $12.76
Maximum sales charge (5% of offering price).................................. .67
------------------
Maximum offering price to public............................................. $13.43
==================

Class B:
Net asset value, offering price and redemption price per share
($92,031,782 divided by 7,255,503 shares of common stock
issued and outstanding).................................................. $12.68
==================

Class C:
Net asset value and redemption price per share
($7,635,741 divided by 601,957 shares of common stock
issued and outstanding)................................................... $12.68
Sales charge (1% of offering price).......................................... .13
------------------
Offering price to public..................................................... $12.81
==================

Class Z:
Net asset value, offering price and redemption price per share
($4,262,987 divided by 332,964 shares of common stock
issued and outstanding)................................................... $12.80
==================
</TABLE>
--------------------------------------------------------------------------------

See Notes to Financial Statements.

B-93
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH &
INCOME FUND
Statement of Operations
---------------------------------------------------------------

Year Ended
Net Investment Income September 30, 1999
------------------
Income
Dividends (net of foreign withholding
taxes of $4,304)................... $ 1,844,883
Interest.............................. 767,804
---------------
Total income....................... 2,612,687
---------------
Expenses
Distribution fee--Class A............. 89,537
Distribution fee--Class B............. 949,035
Distribution fee--Class C............. 77,020
Management fee........................ 849,053
Transfer agent's fees and expenses.... 217,000
Reports to shareholders............... 151,000
Custodian's fees and expenses......... 110,000
Registration fees..................... 57,000
Legal fees and expenses............... 39,000
Dividends on securities sold short.... 27,759
Audit fees and expenses............... 20,000
Directors' fees and expenses.......... 7,500
Miscellaneous......................... 6,479
---------------
Total expenses..................... 2,600,383
---------------
Net investment income.................... 12,304
---------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............... 16,896,114
Financial futures transactions........ (255,928)
Short sales........................... 117,643
---------------
16,757,829
---------------

Net change in unrealized
appreciation/depreciation on:
Investments........................... 14,326,911
Short sales........................... (798,696)
---------------
13,528,215
---------------
Net gain on investments.................. 30,286,044
---------------
Net Increase in Net Assets Resulting from
Operations............................... $ 30,298,348
===============

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH &
INCOME FUND
Statement of Changes in Net Assets
- ---------------------------------------------------------------

Year Ended September 30,
Increase (Decrease) ------------------------
in Net Assets 1999 1998
---- ----
Operations
Net investment income.......... $ 12,304 $ 908,928
Net realized gain on investment
transactions................ 16,757,829 10,777,238
Net change in unrealized
appreciation/depreciation on
investments................. 13,528,215 (25,848,538)
------------- -------------
Net increase (decrease) in net
assets resulting from
operations.................. 30,298,348 (14,162,372)
------------- -------------
Dividends and distributions (Note 1)
Dividends from net investment
income
Class A..................... (153,895) (350,759)
Class B..................... (76,687) (267,306)
Class C..................... (6,448) (22,287)
Class Z..................... (12,628) (17,381)
------------- -------------
(249,658) (657,733)
------------- -------------
Distributions from net realized
capital gains
Class A..................... (2,540,009) (1,652,658)
Class B..................... (6,978,474) (4,349,846)
Class C..................... (586,830) (352,855)
Class Z..................... (164,167) (39,211)
------------- -------------
(10,269,480) (6,394,570)
------------- -------------
Series share transactions (Note 5)
Net proceeds from shares
sold........................ 39,742,571 49,851,743
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 10,032,426 6,672,687
Cost of shares reacquired...... (53,515,736) (40,383,538)
------------- -------------
Net increase (decrease) in net
assets from Series share
transactions................ (3,740,739) 16,140,892
------------- -------------
Total increase (decrease)......... 16,038,471 (5,073,783)

Net Assets

Beginning of period............... 125,049,881 130,123,664
------------- -------------
End of period(a).................. $ 141,088,352 $ 125,049,881
============= =============

----------------
(a) Includes undistributed net
investment income of.......... $ -- $ 290,719
============= =============

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

See Notes to Financial Statements.

B-94
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH & INCOME FUND

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

Prudential Jennison Growth & Income Fund (the 'Series') is a separately managed
series of The Prudential Investment Portfolios, Inc. (the `Fund'). The Fund was
incorporated in Maryland on August 10, 1995 and is registered under the
Investment Company Act of 1940 as a diversified, open-end, management investment
company. Investment operations of the Series commenced on November 7, 1996.

The Series' investment objective is to achieve long-term growth of capital and
income, with current income as a secondary objective. The Series seeks to
achieve its objectives by investing primarily in common stocks of established
companies with growth prospects believed to be underappreciated by the market.

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

Note 1. Accounting Policies

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

Securities Valuation: Securities listed on a securities exchange or NASDAQ
(other than options on securities and indices) are valued at the last sales
price on such exchange or system on the day of valuation, or, if there was no
sale on such day, at the mean between the last bid and asked prices on such day
or at the bid price on such day in the absence of an asked price. Securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager, in
consultation with the Subadviser, to be over-the-counter, are valued by an
independent pricing agent or principal market maker. Convertible debt securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager and the
Subadviser to be over-the-counter, are valued at the mean between the last
reported bid and asked prices provided by a principal market maker. Options on
securities and indices traded on an exchange are valued at the mean between the
most recently quoted bid and asked prices on such exchange. Futures contracts
and options thereon traded on a commodities exchange or board of trade are
valued at the last sale price at the close of trading on such exchange or board
of trade or, if there was no sale on the applicable commodities exchange or
board of trade on such day, at the mean between the most recently quoted bid and
asked prices on such exchange or board of trade. Securities for which market
quotations are not readily available, other than private placements, are valued
at a price supplied by an independent pricing agent, which is, in the opinion of
such pricing agent, representative of the market value of such securities as of
the time of determination of net asset value, or using a methodology developed
by an independent pricing agent, which is, in the judgment of the Manager and
the Subadviser, able to produce prices which are representative of market value.

All securities are valued as of 4:15 p.m., New York time.

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

Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities or commodities at
a set price for delivery on a future date. Upon entering into a financial
futures contract, the Series 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 Series each day, depending on
the daily fluctuations in the value of the underlying security or commodity.
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 Series invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Series intends to purchase, against
fluctuations in value caused by changes in market conditions or prevailing
interest rates. Should interest rates move unexpectedly, the

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

B-95
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH & INCOME FUND

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

Series 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.

Short Sales: The Series may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Series makes
a short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale. The proceeds received from
the short sale are maintained as collateral for its obligation to deliver the
security upon conclusion of the sale. In addition, the Series may have to make
additional subsequent deposits with the broker equal to the change in the market
value of the security sold short. The Series may have to pay a fee to borrow the
particular security and may be obligated to remit any payments received on such
borrowed securities. A gain, limited to the price at which the Series sold the
security short, or a loss, unlimited in magnitude, will be recognized upon the
termination of a short sale if the market price at termination is less than or
greater than, respectively, the proceeds originally received.

Dividends and Distributions: The Series expects to pay dividends of net
investment income, if any, semi-annually and to make distributions of any net
capital gains at least annually. Dividends and distributions are recorded on the
ex-dividend date. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.

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

Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants, Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease undistributed net investment income by $53,365,
decrease accumulated net realized gain on investments by $1,364,827 and increase
paid-in capital by $1,418,192 due to the Fund treating redemptions as
distributions for federal income tax purposes during the year ended September
30, 1999. Net investment income, net realized gains and net assets were not
affected by this change.

Note 2. Agreements

The Fund has a management agreement with Prudential Investments Fund Management
LLC (`PIFM'). Pursuant to a subadvisory agreement between PIFM and Jennison
Associates LLC (`Jennison'), Jennison furnishes investment advisory services in
connection with the management of the Series. Under the subadvisory agreement,
Jennison, subject to the supervision of PIFM, is responsible for managing the
assets of the Series in accordance with its investment objectives and policies.

The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .60 of 1% of the average daily net assets of the Series. PIFM pays
Jennison a subadvisory fee at an annual rate of .30 of 1% of the average daily
net assets of the Series up to and including $300 million and .25 of 1% of such
assets in excess of $300 million. PIFM also pays the cost of compensation of
officers and employees of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.

The Fund has a distribution agreement with Prudential Investment Management
Services LLC (`PIMS'), which acts as the distributor of the Fund. The Fund
compensates PIMS for distributing and servicing the Series' Class A, Class B and
Class C shares, pursuant to plans of distribution (the 'Class A, B and C
Plans'), regardless of expenses actually incurred by them. The distribution fees
are accrued daily and payable monthly. No distribution or service fees are paid
to PIMS as distributor of the Class Z shares of the Series.

Pursuant to the Class A, B and C Plans, the Series compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of average daily net
assets of the Class A, B and C shares, respectively, for the year ended
September 30, 1999.

PIMS has advised the Series that it received approximately $72,600 and $15,300
in front-end sales charges resulting from sales of Class A and C shares,
respectively, during the year ended September 30, 1999. From these fees PIMS
paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.

PIMS has advised the Series that for the year ended September 30, 1999, it
received approximately $294,400 and $900 in contingent deferred sales

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

B-96
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH & INCOME FUND

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

charges imposed upon certain redemptions by Class B and C shareholders,
respectively.

PIFM, PIMS and Jennison are wholly owned subsidiaries of The Prudential
Insurance Company of America (`Prudential').

As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the `Funds'), entered into a syndicated credit agreement
(`SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. The Funds pay a
commitment fee at an annual rate of .065 of 1% on the unused portion of the
credit facility, which is accrued and paid quarterly on a pro rata basis by the
Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had
a credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund did not
borrow any amounts pursuant to either agreement during the year ended September
30, 1999. The purpose of the agreements is to serve as an alternative source of
funding for capital share redemptions.

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

Note 3. Other Transactions with Affiliates

Prudential Mutual Fund Services LLC (`PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended September 30, 1999,
the Series incurred fees of approximately $187,600 for the services of PMFS. As
of September 30, 1999, approximately $15,900 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.

For the year ended September 30, 1999, Prudential Securities Incorporated
(`PSI'), which is an indirect, wholly owned subsidiary of Prudential, earned
approximately $43,100 in brokerage commissions from portfolio transactions
executed on behalf of the Series.

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

Note 4. Portfolio Securities

Purchases and sales of investment securities, other than short-term investments,
for the year ended September 30, 1999 were $142,344,623 and $161,701,363,
respectively.

The cost basis of the investments for federal income tax purposes at September
30, 1999 was $134,317,080 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $6,760,076 (gross unrealized
appreciation-$15,275,883; gross unrealized depreciation--$8,515,807).

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

Note 5. Capital

The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 5%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class B shares will automatically
convert to Class A shares on a quarterly basis approximately seven years after
purchase. A special exchange privilege is also available for shareholders who
qualified to purchase Class A shares at net asset value. Class C shares are sold
with a front-end sales charge of 1% and a contingent deferred sales charge of 1%
during the first 18 months. Prior to November 2, 1998, Class C shares were sold
with a contingent deferred sales charge of 1% during the first year. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.

Transactions in shares of common stock were as follows:

Class A Shares Amount
-------------------------------------- ---------- ------------
Year ended September 30, 1999:
Shares sold.......................... 923,437 $ 11,737,931
Shares issued in reinvestment of
dividends and distributions........ 226,178 2,592,003
Shares reacquired.................... (1,265,737) (15,677,893)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (116,122) (1,347,959)
Shares issued upon conversion from
Class B............................ 174,209 2,193,555
---------- ------------
Net increase in shares outstanding... 58,087 $ 845,596
========== ============
Year ended September 30, 1998:
Shares sold.......................... 1,121,704 $ 13,786,056
Shares issued in reinvestment of
dividends and distributions........ 162,663 1,913,429
Shares reacquired.................... (1,213,010) (14,774,385)
---------- ------------
Net increase in shares outstanding
before conversion.................. 71,357 925,100
Shares issued upon conversion from
Class B............................ 77,566 935,576
---------- ------------
Net increase in shares outstanding... 148,923 $ 1,860,676
========== ============

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

B-97
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH & INCOME FUND

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

Class B Shares Amount
-------------------------------------- ---------- ------------
Year ended September 30, 1999:
Shares sold.......................... 1,447,677 $ 18,020,614
Shares issued in reinvestment of
dividends and distributions........ 583,173 6,683,169
Shares reacquired.................... (2,334,384) (28,622,257)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (303,534) (3,918,474)
Shares reacquired upon conversion
from Class A....................... (174,767) (2,193,555)
---------- ------------
Net decrease in shares outstanding... (478,301) $ (6,112,029)
========== ============

Year ended September 30, 1998:
Shares sold.......................... 2,383,930 $ 29,462,184
Shares issued in reinvestment of
dividends and distributions........ 369,244 4,332,243
Shares reacquired.................... (1,750,224) (21,297,211)
---------- ------------
Net increase in shares outstanding
before conversion.................. 1,002,950 12,497,216
Shares reacquired upon conversion
from Class A....................... (77,755) (935,576)
---------- ------------
Net increase in shares outstanding... 925,195 $ 11,561,640
========== ============

Class C
--------------------------------------
Year ended September 30, 1999:
Shares sold.......................... 199,958 $ 2,519,215
Shares issued in reinvestment of
dividends and distributions........ 51,069 585,254
Shares reacquired.................... (299,144) (3,644,790)
---------- ------------
Net decrease in shares outstanding... (48,117) $ (540,321)
========== ============

Year ended September 30, 1998:
Shares sold.......................... 217,879 $ 2,701,940
Shares issued in reinvestment of
dividends and distributions........ 31,625 371,055
Shares reacquired.................... (152,419) (1,873,645)
---------- ------------
Net increase in shares outstanding... 97,085 $ 1,199,350
========== ============

Class Z Shares Amount
-------------------------------------- ---------- ------------
Year ended September 30, 1999:
Shares sold.......................... 570,577 $ 7,464,811
Shares issued in reinvestment of
dividends and distributions........ 14,995 172,000
Shares reacquired.................... (419,436) (5,570,796)
---------- ------------
Net increase in shares outstanding... 166,136 $ 2,066,015
========== ============
Year ended September 30, 1998:
Shares sold.......................... 309,216 $ 3,901,563
Shares issued in reinvestment of
dividends and distributions........ 4,713 55,960
Shares reacquired.................... (194,189) (2,438,297)
---------- ------------
Net increase in shares outstanding... 119,740 $ 1,519,226
========== ============

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

B-98
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Financial Highlights PRUDENTIAL JENNISON GROWTH & INCOME FUND
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------------------- -------------
November 7,
1996(a) Year Ended
Year Ended September 30, Through September 30,
------------------------------- September 30, -------------
1999 1998 1997 1999
------------- ------------- -------------------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 10.98 $ 12.89 $ 10.00 $ 10.96
------ ------ ------ ------
Income from investment operations
Net investment income......................... .07 .15 .09 (.03)
Net realized and unrealized gain (loss) on
investment transactions.................... 2.68 (1.32) 2.87 2.67
------ ------ ------ ------
Total from investment operations........... 2.75 (1.17) 2.96 2.64
------ ------ ------ ------
Less distributions
Dividends from net investment income.......... (.06) (.12) (.07) (.01)
Distributions from net realized gains......... (.91) (.62) -- (.91)
------ ------ ------ ------
Total distributions........................ (.97) (.74) (.07) (.92)
------ ------ ------ ------
Net asset value, end of period................ $ 12.76 $ 10.98 $ 12.89 $ 12.68
====== ====== ====== ======
TOTAL RETURN(c)............................... 26.00% (9.40)% 29.72% 24.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $37,158 $31,339 $ 34,846 $92,032
Average net assets (000)...................... $35,815 $35,145 $ 27,008 $94,904
Ratios to average net assets:
Expenses, including distribution fees...... 1.30% 1.31% 1.58%(b) 2.05%
Expenses, excluding distribution fees...... 1.05% 1.06% 1.33%(b) 1.05%
Net investment income...................... .54% 1.20% .90%(b) (.20)%
Portfolio turnover rate....................... 111% 99% 55% 111%

<CAPTION>
November 7,
1996(a)
Year Ended Through
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 12.86 $ 10.00
------ ------
Income from investment operations
Net investment income......................... .06 .02
Net realized and unrealized gain (loss) on
investment transactions.................... (1.31) 2.86
------ ------
Total from investment operations........... (1.25) 2.88
------ ------
Less distributions
Dividends from net investment income.......... (.03) (.02)
Distributions from net realized gains......... (.62) --
------ ------
Total distributions........................ (.65) (.02)
------ ------
Net asset value, end of period................ $ 10.96 $ 12.86
====== ======

TOTAL RETURN(c)............................... (10.01)% 28.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $84,751 $87,558
Average net assets (000)...................... $93,465 $62,575
Ratios to average net assets:
Expenses, including distribution fees...... 2.06% 2.33%(b)
Expenses, excluding distribution fees...... 1.06% 1.33%(b)
Net investment income...................... .46% .15%(b)
Portfolio turnover rate....................... 99% 55%
</TABLE>

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

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

B-99
<PAGE>

TOTAL RETURN(c)............................... 24.98% (10.01)% 28.83% 26.31%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $ 7,636 $ 7,124 $7,111 $ 4,263
Average net assets (000)...................... $ 7,702 $ 7,734 $5,631 $ 3,088
Ratios to average net assets:
Expenses, including distribution fees...... 2.05% 2.06% 2.33%(b) 1.05%
Expenses, excluding distribution fees...... 1.05% 1.06% 1.33%(b) 1.05%
Net investment income...................... (.19)% .46% .15%(b) .76%
Portfolio turnover rate....................... 111% 99% 55% 111%

<CAPTION>
November 7,
1996(a)
Through
September 30,
1998 1997
------------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 12.93 $ 10.00
----- -----
Income from investment operations
Net investment income......................... .17 .10
Net realized and unrealized gain (loss) on
investment transactions.................... (1.33) 2.92
----- -----
Total from investment operations........... (1.16) 3.02
----- -----
Less distributions
Dividends from net investment income.......... (.15) (.09)
Distributions from net realized gains......... (.62) --
----- -----
Total distributions........................ (.77) (.09)
----- -----
Net asset value, end of period................ $ 11.00 $ 12.93
===== =====

TOTAL RETURN(c)............................... (9.31)% 30.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $ 1,836 $ 609
Average net assets (000)...................... $ 1,374 $ 227
Ratios to average net assets:
Expenses, including distribution fees...... 1.06% 1.33%(b)
Expenses, excluding distribution fees...... 1.06% 1.33%(b)
Net investment income...................... 1.54% 1.15%(b)
Portfolio turnover rate....................... 99% 55%
</TABLE>

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

B-100
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Report of Independent Accountants PRUDENTIAL JENNISON GROWTH & INCOME FUND
--------------------------------------------------------------------------------

To the Shareholders and Board of Directors of
The Prudential Investment Portfolios, Inc.--
Prudential Jennison Growth & Income Fund:

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Prudential Investment
Portfolios, Inc.--Prudential Jennison Growth & Income Fund (the `Fund', one of
the portfolios constituting The Prudential Investment Portfolios, Inc.) at
September 30, 1999, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the two years in the period then ended and
for the period November 7, 1996 (commencement of operations) through September
30, 1997, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
`financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
September 30, 1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 17, 1999

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

B-101
<PAGE>

DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE, INC.

Debt Ratings

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

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

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

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

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

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

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

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

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

Short-Term Ratings

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

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

. Leading market positions in well-established industries.

. High rates of return on funds employed.

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

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

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

A-1
<PAGE>

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

STANDARD & POOR'S RATINGS GROUP

Debt Ratings

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

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

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

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

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

Commercial Paper Ratings

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

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

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

DUFF & PHELPS CREDIT RATING CO.

Long-Term Debt and Preferred Stock Ratings

AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA+ AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.

A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.

BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.

BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.

B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.

A-2
<PAGE>

CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.

Short-Term Debt Ratings

D- 1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.

D- 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.

D- 1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.

D- 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

FITCH IBCA, INC.

Long-Term Ratings

AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to change in circumstances
or in economic conditions than is the case for higher ratings.

BBB Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

BB Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

B Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of some
kind appears probable. "C" ratings signal imminent default.

DDD, DD, D Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. "DDD" obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. "DD" indicates
potential recoveries in the range of 50%-90%, and "D" the lowest recovery
potential, i.e., below 50%.

Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.

A-3
<PAGE>

APPENDIX I--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

Asset Allocation

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

Diversification

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

Duration

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

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

Market Timing

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

Power of Compounding

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

Standard Deviation

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

I-1
<PAGE>

APPENDIX II-HISTORICAL PERFORMANCE DATA

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

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

[LINE GRAPH]

Value of $1.00 invested on 1/1/26 through 12/31/98

Small Stocks $5,116.95
Common Stocks $2,350.89
Long-Term Bonds $ 44.18
Treasury Bills $ 14.94
Inflation $ 9.16

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

Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index 500 stocks (currently) in a
variety of industries. It is often used as a broad measure of stock market
performance.

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

II-1
<PAGE>

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

All information relies on data obtained from statistical services, reports and
other services believed by the Manager to be reliable. Such information has not
been verified. The figures do not reflect the operating expenses and fees of a
mutual fund. See "Risk/Return Summary--Fees and Expenses" in each 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 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury
Bonds/1/ 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
---------------------------------------------------------------------------------------------------------------
U.S. Government
Mortgage
Securities/2/ 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
---------------------------------------------------------------------------------------------------------------
U.S. Investment
Grade
Corporate Bonds/3/ 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
---------------------------------------------------------------------------------------------------------------
U.S. High Yield
Bonds/4/ 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
---------------------------------------------------------------------------------------------------------------
World Government
Bonds/5/ 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0 % 19.6% 4.1% (4.3)% 5.3%
---------------------------------------------------------------------------------------------------------------
Difference between
highest and lowest 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4
returns percent
---------------------------------------------------------------------------------------------------------------
</TABLE>

___________
/1/ Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.

/2/ Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15-and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).

/3/ Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year. Source: Lipper Inc.

/4/ Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.

/5/ Salomon Smith Barney World Government Index (Non U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

II-2
<PAGE>

This chart illustrates the This chart shows the growth of a
performance of major world stock hypothetical $10,000 investment
markets for the period from made in the stocks representing
December 31, 1985 through the S&P 500 stock index with and
December 31, 1998. It does not without reinvested dividends.
represent the performance of any
Prudential Mutual Fund.

Average Annual Total Returns of Major World
Stock Markets (12/31/85 - 12/31/98) (in U.S. dollars)

Belgium 22.7%
Spain 22.5%
The Netherlands 20.8%
Sweden 19.9%
Switzerland 18.3% [LINE GRAPH APPEARS HERE]
USA 18.1% (1969 -1998)
Hong Kong 17.8% Capital Appreciation and Reinvesting
France 17.4% Dividends - $391,707
UK 16.7% Capital Appreciation only - $133,525
Germany 13.4%
Austria 8.9%
Japan 6.5%

Source: Morgan Stanley Capital Source: Lipper Inc. All rights
International (MSCI) and Lipper reserved. This chart is used for
Inc. as of 12/31/98. Used with illustrative purposes only and is
permission. Morgan Stanley not intended to represent the
Country indices are unmanaged past, present or future
indices which include those performance of any Prudential
stocks making up the largest two- Mutual Fund. Common stock total
thirds of each country's total return is based on the Standard &
stock market capitalization. Poor's 500 Stock Index, a market-
Returns reflect the reinvestment value-weighted index made up of
of all distributions. This chart 500 of the largest stocks in the
is for illustrative purposes only U.S. based upon their stock
and is not indicative of the market value. Investors cannot
past, present or future invest directly in indices.
performance of any specific
investment. Investors cannot
invest directly in stock indices.

[PIE CHART APPEARS HERE]

World Stock Market Capitalization by Region
World Total: $15.8 Trillion

U.S. 51.0%
Europe 34.7%
Pacific Basin 12.5%
Canada 1.8%

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

II-3
<PAGE>

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

Long Term U.S. Treasury Bond Yield in Percent (1926-1998)

[LINE GRAPH APPEARS HERE]

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

II-4
<PAGE>

APPENDIX III--INFORMATION RELATING TO PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company of
America (Prudential) and its subsidiaries as well as information relating to the
Prudential Mutual Funds. See "How the Fund is Managed--Manager" in each
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by either Fund.

Information about Prudential

The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs more than 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and nearly
6,500 domestic and international 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 nearly 40 million people worldwide.
Long one of the largest issuers of life insurance, Prudential has 25 million
life insurance policies in force today with a face value of almost $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. The Prudential provides auto insurance for more
than 1.5 million cars and insures more than 1.2 million homes.

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

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

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

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

/2/ As of December 31, 1996.

III-1
<PAGE>

Information about the Prudential Mutual Funds

As of September 30, 1999, Prudential Investments Fund Management is the 20th
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.

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

From time to time, there may be media coverage of portfolio managers and other
investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.

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

High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitors
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase./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. Investment grade bond analysts monitor the financial
viability of different bond issuers in the investment grade corporate and
municipal bond markets--from IBM to small municipalities, such as Rockaway
Township, New Jersey. These analysts consider among other things sinking fund
provisions and interest coverage ratios.

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

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

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

________
/3/ As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.

III-2
<PAGE>

Information about Prudential Securities

Prudential Securities is the fifth largest retail brokerage firm in the United
States with approximately 6,000 financial advisors. It offers to its clients a
wide range of products, including Prudential Mutual Funds and Annuities. As of
December 31, 1998, assets held by Prudential Securities for its clients
approximated $268 billion. During 1998, over 31,000 new customer accounts were
opened each month at Prudential Securities./4/

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

In addition to training, Prudential Securities provides its financial advisors
with access to firm economists and market analysts. It has also developed
proprietary tools for use by financial advisors, including the Financial
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.

________
/4/ As of December 31, 1998.

III-3
<PAGE>

Appendix IV

Below is a list of shareholders who owned 5% or more of the outstanding shares
of each Fund as of November 5, 1999:

Prudential Active Balanced Fund:

<TABLE>
<CAPTION>
Name Address Shares/Class/Percentage
---- ------------------------- -----------------------
<S> <C> <C>
Prudential Trust Company 30 Scranton Office Park 171,389/A/22%
FBO PRU--DC TRUST Moosic, PA 18507
ACCOUNTS
Attn: John Surdy
Pru Defined Contribution 30 Scranton Office Park 78,493/A/10%
Servi Moosic, PA 18507
FBO Prudential Bank & Trust
CU
Attn: John Surdy
Prudential Securities C/F 1122 N 15th ST APT 709 6,263/C/7%
Ms. Nancy C. Cooke Canon City, CO 81212-4640
IRA DTD 06/23/99
Helen G. Bauer TTEE Suite 1600 5,510/C/6%
Dorothy A. Pelster Tr 7777 Bonhomme Ave
UA DTD 10/06/88 Clayton, MO 63105-1911
FBO Dorothy A. Pelster
Conversion Holding Accts Mail Stop 213 7,277/C/8%
PO Box 15040
New Brunswick, NJ 08906
Pru Defined Contribution 30 Scranton Office Park 3,561,405/Z/38%
Svcs FBO Pru-DC Qualified Moosic, PA 18507
Clients
Attn: John Surdy
Prudential Trust Company 30 Scranton Office Park 5,743,561/Z/62%
FBO Pru-DC Clients Moosic, PA 18507
Attn: John Surdy

Prudential Jennison Growth Fund:

Pru Defined Contribution Svcs 30 Scranton Office Park 42,391,191/Z/44%
FBO Pru-Non-Trust Accounts Moosic, PA 18507
Attn: John Surdy
Prudential Trust Company 30 Scranton Office Park 27,269,175/Z/29%
FBO Pru-DC Trust Accounts Moosic, PA 18507
Att: John Surdy
Boston Safe Deposit & Trust 1 Cabot Road #28-0035 11,796,492/Z/12%
As Trustee K-Mart PRT S Medford, MA 02155
Core Account
</TABLE>

IV-1
<PAGE>

Prudential Jennison Growth & Income Fund:

<TABLE>
<CAPTION>
Name Address Shares/Class/Percentage
---- ------------------------- -----------------------
<S> <C> <C>
Bradley L. Goldberg 502 Orienta Avenue 160,579/A/5.4%
Mamaroneck, NY 10543-4317
Pru Defined Contribution 30 Scranton Office Park 139,356/Z/42%
Svcs Moosic, PA 18507
FBO Pru-Non-Trust Accounts
Attn: John Surdy
Prudential Trust Company 30 Scranton Office Park 34,921/Z/10.4%
FBO Pru-DC Trust Accounts Moosic, PA 18507
Attn: John Surdy
</TABLE>

IV-2
<PAGE>

(ICON)

Prudential
Active
Balanced
Fund

ANNUAL
REPORT
Sept. 30, 1999

(LOGO)

1
<PAGE>

A Message from the Fund's President November 18, 1999
-------------------------------------------------------------------------------
(PHOTO)

Dear Shareholder,
The fiscal year ended September 30, 1999, was an excellent one for Prudential
Active Balanced Fund. The 16.07% return of its Class A shares was well above the
historical average for large-cap stocks. Moreover, the Fund's return was less
volatile than a portfolio of stocks alone, which is the primary reason investors
buy balanced funds. In the last quarter of 1998, when stock markets rebounded
from their steep summer drop, the Fund's return did not rise as high, but it
also held up better in the third quarter of 1999 when the S&P 500 fell 6%. The
Fund's performance range was much narrower than stocks alone.

Its performance also was strong in comparison to other balanced
funds--three-and-a-half percentage points above the Lipper Balanced Fund
Average. Both its bonds and stocks beat their respective benchmarks. Active
asset allocation also added value--the portfolio managers transferred funds from
one asset class to another as the various markets rallied and fell in this
turbulent fiscal year. Their models told them when overall market values got out
of balance; they took advantage of the bargain opportunities when offered and
reduced their exposure to stocks when markets looked extended.

The strong stock market gains of the last three years may have tempted many
investors whose time horizon or temperament suits them poorly for occasional
losses. Declining quarters, such as the third quarter of 1999, serve to remind
us of the benefits of diversification. Bonds tend to hold up better in
downturns. Investors who cannot accept the volatility of a portfolio consisting
entirely of stocks, but who want to share in the inflation protection and growth
potential of equity investing, have an excellent choice in Prudential Active
Balanced Fund.

Sincerely,

John R. Strangfeld
President
The Prudential Investment Portfolios, Inc.

2
<PAGE>

Performance Review
-------------------------------------------------------------------------------
(PHOTO) (PHOTO) (PHOTO)

Equity Portfolio Managers Mark S. Stumpp and James H. Scott, and Michael
Lillard, team leader of the U.S. Liquidity team.

3
<PAGE>

the strongly rising quarter that began our reporting period and in the declining
market that ended it.

Performance at a Glance

Cumulative Total Returns1 As of 9/30/99

Average Annual Total Returns1 As of 9/30/99

<TABLE>
<CAPTION>
One Five Since
Year Years Inception2
<S> <C> <C> <C>
Class A 10.27% N/A 10.08%
Class B 10.12 N/A 10.38
Class C 12.97 N/A 10.85
Class Z 16.32 13.10% 11.38
</TABLE>

Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.

2 Inception dates: Class A, B, and C, 11/7/96; Class Z, 1/4/93.

***Lipper Since Inception returns are 42.02% for Class A, B, and C; and 115.21%
for Class Z, based on all funds in each share class.

4
<PAGE>

Review Cont'd.
-------------------------------------------------------------------------------

The uncertainty about interest-rate direction and the slowing U.S. economy have
led us to increase our cash position to slightly above neutral.

Additional Performance Tracking Tools
You can access comprehensive information about the performance of your
Prudential mutual funds 24 hours a day through our Web site and automated phone
service. At www.prudential.com/investing, you'll find the daily closing values,
changes from the previous day, and quarterly performance for all of our retail
mutual funds. Other available resources include daily, monthly, and quarterly
market commentary.

Prudential is committed to meeting shareholders' needs. That is why we continue
to upgrade and make improvements to our Web site. Please send us your comments
about how we can continue to improve our site to meet your needs.

Daily fund values are also a toll-free call away from any touch-tone phone. Call
(800) 225-1852 and follow the voice prompts to obtain mutual fund closing values
and yields. You can even set up a personalized "watch list" to track specific
Prudential mutual funds.

Mutual Fund Automated Service: (800) 225-1852

Main Menu Submenus
1. Account information 1. Account balance
2. Transactions
3. Order forms
2. Prices and yields
3. Transactions
4. Order checks and statements
5. PIN change

Five Largest Equity Holdings
Expressed as a percentage of net assets as of 9/30/99

Portfolio Composition
Expressed as a percentage of net assets as of 9/30/99
Bonds 44.0%

* Primarily collateral for stock and bond futures contracts used to manage asset
allocation.

5
<PAGE>

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<S> <C> <C>
--------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--73.3%
COMMON STOCKS--44.7%
--------------------------------------------------------------------------------
Aerospace/Defense--0.9%
5,900 Allied Signal, Inc. $ 353,631
5,500 Boeing Co. 234,438
3,600 General Dynamics Corp. 224,775
1,600 Lockheed Martin Corp. 52,300
3,000 Raytheon Co. 148,875
5,200 United Technologies Corp. 308,425
-------------
1,322,444
------------------------------------------------------------------
Airlines--0.5%
2,500 Alaska Air Group, Inc. (a) 101,719
5,900 America West Holdings Corp. 102,144
3,300 AMR Corp. 179,850
4,500 Delta Airlines, Inc. 218,250
1,350 Southwest Airlines Co. 20,503
1,800 UAL Corp. (a) 117,562
-------------
740,028
------------------------------------------------------------------
Appliances--0.1%
5,700 Maytag Corp. 189,881
------------------------------------------------------------------
Automobiles & Trucks--0.9%
4,500 Arvin Industries, Inc. 139,219
12,900 Ford Motor Co. 647,419
3,600 General Motors Corp. 226,575
6,900 PACCAR, Inc. 351,037
-------------
1,364,250
------------------------------------------------------------------
Advertising
1,000 Interpublic Group of Companies, Inc. 41,125
------------------------------------------------------------------
Automotive Parts--0.2%
7,000 TRW, Inc. 348,250
------------------------------------------------------------------
Banking--1.7%
5,994 Bank One Corp. 208,666
4,620 Charter One Financial, Inc. 106,838
3,900 Chase Manhattan Corp. 293,962
1,400 Dime Bancorp, Inc. 24,500
6,200 First Union Corp. 220,487
836 Firstar Corp. $ 21,423
11,400 Fleet Financial Group, Inc. 417,525
13,900 Hibernia Corp. 161,587
3,500 Huntington Bancshares, Inc. 92,969
13,600 KeyCorp 351,050
1,500 Pacific Century Financial Corp. 30,656
3,900 PNC Bank Corp. 205,481
3,200 Regions Financial Corp. 96,000
3,000 Suntrust Banks, Inc. 197,250
1,000 U.S. Bancorp 30,188
-------------
2,458,582
------------------------------------------------------------------
Beverages--0.6%
2,600 Anheuser-Busch Companies, Inc. 182,162
7,900 Coca-Cola Co. 379,694
8,500 PepsiCo, Inc. 257,125
-------------
818,981
------------------------------------------------------------------
Building & Construction
1,600 Masco Corp. 49,600
------------------------------------------------------------------
Business Services--0.2%
4,400 Omnicom Group, Inc. 348,425
------------------------------------------------------------------
Chemicals--0.3%
500 Air Products & Chemicals, Inc. 14,531
1,100 Dow Chemical Co. 124,987
100 E.I. Du Pont de Nemours & Co. 6,088
1,100 Octel Corp. (a) 12,375
400 Praxair, Inc. 18,400
11,000 Schulman (A.), Inc. 190,437
300 Union Carbide Corp. 17,044
800 Waters Corp. (a) 48,450
-------------
432,312
------------------------------------------------------------------
Computer Services--0.2%
2,500 Electronic Data Systems Corp. 132,344
2,000 First Data Corp. 87,750
1,000 Unisys Corp. (a) 45,125
-------------
265,219
</TABLE>

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

6
<PAGE>

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<S> <C> <C>
-------------------------------------------------------------------------------
Computer Software & Services--5.5%
800 Adobe Systems, Inc. $ 90,800
6,500 America Online, Inc. (a) 676,000
7,200 BMC Software Inc. (a) 515,250
6,200 Citrix Systems, Inc. (a) 384,012
10,300 Computer Associates International,
Inc. 630,875
600 Compuware Corp. (a) 15,638
2,950 Comverse Technology, Inc. (a) 278,222
4,500 DST Systems, Inc. (a) 255,937
10,100 EMC Corp. 721,519
30,900 Microsoft Corp. (a) 2,798,381
12,400 Oracle Systems Corp. (a) 564,200
300 Siebel Systems, Inc. (a) 19,988
7,900 Sun Microsystems, Inc. (a) 734,700
9,400 Teradyne, Inc. (a) 331,350
-------------
8,016,872
------------------------------------------------------------------
Computer Systems/Peripherals--1.5%
3,400 Apple Computer, Inc. (a) 215,262
4,200 Dell Computer Corp. (a) 175,613
4,000 Hewlett-Packard Co. 368,000
11,300 International Business Machines Corp. 1,371,537
-------------
2,130,412
------------------------------------------------------------------
Cosmetics/Toiletries--0.1%
3,000 Colgate-Palmolive Co. 137,250
------------------------------------------------------------------
Distribution/ Wholesalers--0.1%
900 Costco Wholesale Corp. 64,800
------------------------------------------------------------------
Diversfied Consumer Products--0.9%
9,800 Procter & Gamble Co. 918,750
1,000 Ralston-Purina Group 27,812
5,717 Unilever NV 389,471
-------------
1,336,033
------------------------------------------------------------------
Diversified Operations--1.6%
20,300 General Electric Co. 2,406,819
------------------------------------------------------------------
Diversified Manufacturing--0.5%
1,000 Corning Inc. 68,562
3,900 Eaton Corp. 336,619
3,800 Harsco Corp. 104,975
1,200 Illinois Tool Works Inc. $ 89,475
600 PPG Industries, Inc. 36,000
500 Textron, Inc. 38,688
3,400 Trinity Industries, Inc. 104,975
-------------
779,294
------------------------------------------------------------------
Electrical Utilities--1.5%
200 American Electric Power Co., Inc. 6,825
5,500 Central & South West Corp. 116,187
2,600 Consolidated Edison, Inc. 107,900
2,200 Dominion Resources, Inc. 99,275
3,300 DTE Energy Co. 119,212
3,400 Duke Energy Corp. 187,425
12,400 Entergy Corp. 358,825
7,200 Florida Progress Corp. 333,000
7,500 GPU, Inc. 244,687
2,696 PP & L Resources, Inc. 72,961
15,000 Public Service Company of New Mexico 273,750
2,500 Public Service Enterprise Group Inc. 96,563
6,100 Southern Co. 157,075
-------------
2,173,685
------------------------------------------------------------------
Electrical Services--0.1%
5,900 Edison International 143,444
------------------------------------------------------------------
Electronic Components--1.8%
2,200 Emerson Electric Co. 139,012
18,300 Intel Corp. 1,359,919
5,500 KLA-Tencor Corp. (a) 357,500
3,400 Motorola, Inc. 299,200
6,300 Solectron Corp. (a) 452,419
700 Xilinx, Inc. (a) 45,872
-------------
2,653,922
------------------------------------------------------------------
Financial Services--4.2%
500 Allmerica Financial Corp. 23,813
5,800 AMBAC Financial Group, Inc. 274,775
3,300 American Express Co. 444,262
9,060 BankAmerica Corp. 504,529
8,600 Bear Stearns Companies, Inc. 330,563
7,900 Charles Schwab Corp. 266,131
19,425 Citigroup Inc. 854,700
6,800 Countrywide Credit Industries, Inc. 219,300
5,700 Federal Home Loan Mortgage Corp. 296,400
7,400 Federal National Mortgage Assoc. 463,887
3,800 Golden West Financial Corp. 373,350
</TABLE>
------------------------------------------------------------------
See Notes to Financial Statements.

7
<PAGE>

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<S> <C> <C>
------------------------------------------------------------------
Financial Services (cont'd.)
1,900 Lehman Brothers Holdings, Inc. $ 110,794
3,900 MBNA Corp. 88,969
700 Merrill Lynch & Co., Inc. 47,031
3,600 Morgan (J.P.) & Co., Inc. 411,300
4,800 Morgan Stanley, Dean Witter & Co. 428,100
3,600 PaineWebber Group, Inc. 130,500
4,700 Providian Financial Corp. 372,181
3,400 SLM Holding Corp. 146,200
700 The PMI Group, Inc. 28,613
9,300 Wells Fargo Co. 368,512
-------------
6,183,910
------------------------------------------------------------------
Food Distribution
1,000 SYSCO Corp. 35,063
------------------------------------------------------------------
Foods--0.6%
10,914 Archer-Daniels Midland Co. 133,014
6,700 ConAgra, Inc. 151,169
2,700 General Mills, Inc. 219,037
1,500 H.J. Heinz Co. 64,500
1,600 Kellogg Co. 59,900
300 Nabisco Group Holdings Corp. 4,500
4,200 Sara Lee Corp. 98,438
3,400 Suiza Foods Corp. (a) 127,500
-------------
858,058
------------------------------------------------------------------
Health Care Services--0.1%
700 American Home Products Corp. 29,050
1,900 United Healthcare Corp. 92,506
-------------
121,556
------------------------------------------------------------------
Home Furnishings--0.1%
4,000 Springs Industries, Inc. 135,750
------------------------------------------------------------------
Hospital Management
2,200 Columbia/HCA Healthcare Corp. 46,613
------------------------------------------------------------------
Hotels & Leisure
600 Marriott International, Inc. 19,613
------------------------------------------------------------------
Human Resources--0.1%
7,000 Kelly Services, Inc. 210,875
Insurance--1.4%
14,400 Allstate Corp. $ 359,100
10,800 American International Group, Inc. 938,925
2,000 CIGNA Corp. 155,500
2,700 Hartford Financial Services Group 110,362
1,200 Marsh & McLennan Cos., Inc. 82,200
12,900 Old Republic International Corp. 186,244
4,000 SAFECO Corp. 112,000
2,600 Torchmark Corp. 67,275
-------------
2,011,606
------------------------------------------------------------------
Leisure & Tourism--0.1%
3,200 Carnival Corp. 139,200
------------------------------------------------------------------
Machinery & Equipment--0.3%
2,900 Caterpillar, Inc. 158,956
700 Deere & Co. 27,081
600 Dover Corp. 24,525
500 Ingersoll-Rand Co. 27,469
8,800 MagneTek, Inc. (a) 78,650
700 Rockwell International Corp. 36,750
2,400 Tecumseh Products Co. 120,300
-------------
473,731
------------------------------------------------------------------
Measuring & Control Instruments
500 Honeywell Inc. 55,657
100 Johnson Controls, Inc. 6,631
-------------
62,288
------------------------------------------------------------------
Media & Communications--0.5%
1,300 Gannett Co., Inc. 89,944
600 McGraw-Hill Companies, Inc. 29,025
3,800 Time Warner Inc. 230,850
5,100 Univision Communications Inc. (a) 415,012
-------------
764,831
------------------------------------------------------------------
Medical Products & Services--1.6%
1,300 Baxter International Inc. 78,325
4,700 Johnson & Johnson Co. 431,812
13,800 Schering-Plough Corp. 602,025
8,500 Tyco International Ltd. 877,625
6,100 Warner-Lambert Co. 404,888
-------------
2,394,675
</TABLE>

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

8
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<S> <C> <C>
-------------------------------------------------------------------
Medical Technology--0.6%
9,600 Abbott Laboratories $ 352,800
5,000 Amgen, Inc. (a) 407,500
700 Biogen, Inc.(a) 55,169
900 Genzyme Corp. 40,556
500 VISX, Inc. (a) 39,547
-------------
895,572
------------------------------------------------------------------
Metals Processing--0.1%
3,100 Precision Castparts Corp. 94,550
------------------------------------------------------------------
Networking--1.0%
21,300 Cisco Systems, Inc. (a) 1,460,381
------------------------------------------------------------------
Office Equipment & Supplies--0.1%
1,100 Pitney Bowes Inc. 67,031
------------------------------------------------------------------
Oil & Gas Equipment & Services--0.1%
3,600 Enron Corp. 148,500
------------------------------------------------------------------
Oil & Gas Exploration/Production--1.2%
2,300 Atlantic Richfield Co. 203,837
4,800 Coastal Corp. 196,500
1,000 Kerr-McGee Corp. 55,063
2,000 Phillips Petroleum Co. 97,500
16,500 Royal Dutch Petroleum Co. 974,531
3,100 Texaco, Inc. 195,688
2,800 USX - Marathon Group 81,900
-------------
1,805,019
------------------------------------------------------------------
Oil & Gas Services--1.1%
3,800 Amerada Hess Corp. 232,750
4,400 Chevron Corp. 390,500
8,800 Exxon Corp. 668,250
2,600 Mobil Corp. 261,950
-------------
1,553,450
------------------------------------------------------------------
Paper & Packaging
500 Fort James Corp. 13,344
------------------------------------------------------------------
Paper & Forest Products--0.4%
100 Champion International Corp. 5,137
5,200 Georgia-Pacific Group 210,600
1,900 International Paper Co. 91,319
800 Weyerhaeuser Co. 46,100
3,800 Willamette Industries, Inc. 163,875
-------------
517,031
Pharmaceuticals--1.8%
900 Allergan, Inc. $ 99,000
13,000 Bristol-Myers Squibb Co. 877,500
700 Eli Lilly & Co. 44,800
17,000 Merck & Co., Inc. 1,101,813
13,900 Pfizer, Inc. 499,531
-------------
2,622,644
------------------------------------------------------------------
Photography--0.1%
1,600 Eastman Kodak Co. 120,700
------------------------------------------------------------------
Precious Metals
700 Barrick Gold Corp. 15,225
------------------------------------------------------------------
Printing & Publishing--0.4%
2,100 Knight-Ridder, Inc. 115,237
3,600 Lexmark International Group, Inc. (a) 289,800
900 New York Times Co. 33,750
2,800 Tribune Co. 139,300
-------------
578,087
------------------------------------------------------------------
Railroads--0.1%
5,800 Canadian National Railway Co. 175,813
------------------------------------------------------------------
Retail--3.6%
7,200 Abercrombie & Fitch Co. (a) 245,250
1,800 Bed Bath & Beyond Inc. (a) 62,888
2,600 Best Buy Co., Inc. (a) 161,362
10,800 Circuit City Stores-Circuit City Group 455,625
1,700 CVS Corp. 69,381
2,200 Dayton-Hudson Corp. 132,138
5,000 Federated Department Stores, Inc. (a) 218,437
10,975 Gap, Inc. 351,200
12,800 Home Depot, Inc. 878,400
16,700 Kmart Corp.(a) 195,181
4,300 Kohl's Corp. (a) 284,337
1,300 May Department Stores Co. 47,369
6,700 McDonald's Corp. 288,100
2,500 Safeway Inc. (a) 95,156
1,600 Sears, Roebuck & Co. 50,200
1,000 TJX Companies, Inc. 28,063
200 Tricon Global Restaurants, Inc. (a) 8,188
31,700 Wal-Mart Stores, Inc. 1,507,731
5,000 Walgreen Co. 126,875
100 Winn-Dixie Stores, Inc. 2,969
-------------
5,208,850
</TABLE>

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

9
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
Shares Description Value (Note 1)
---------------------------------------------------------------------
Steel & Metals--0.1%
5,700 Carpenter Technology Corp. $ 139,650
---------------------------------------------------------------------
Telecommunication Services--2.9%
8,900 Ameritech Corp. 597,969
22,350 AT&T Corp. 972,225
8,500 Bell Atlantic Corp. 572,156
4,800 BellSouth Corp. 216,000
750 CenturyTel, Inc. 30,469
820 Global Crossing Ltd. (a) 21,730
8,100 GTE Corp. 622,687
5,875 MCI WorldCom, Inc. (a) 422,266
11,600 SBC Communications, Inc. 592,325
4,000 Sprint Corp. 217,000
-------------
4,264,827
---------------------------------------------------------------------
Telecommunications Equipment--1.9%
400 General Instrument Corp. (a) 19,250
13,700 Lucent Technologies, Inc. 888,787
15,800 Nortel Networks Corp. 805,800
3,000 QUALCOMM, Inc. (a) 567,563
7,600 Tellabs, Inc. (a) 432,725
-------------
2,714,125
---------------------------------------------------------------------
Textile-Apparel Manufacturing--0.2%
25,300 Burlington Industries, Inc. (a) 112,269
11,300 Unifi, Inc. (a) 124,300
-------------
236,569
---------------------------------------------------------------------
Tobacco--0.6%
18,800 Philip Morris Co., Inc. 642,725
4,100 Universal Corp. 107,113
5,900 UST, Inc. 178,106
-------------
927,944
---------------------------------------------------------------------
Transportation/Trucking/Shipping--0.2%
2,000 Arnold Industries, Inc. 25,250
7,700 Burlington Northern, Inc. 211,750
1,200 FDX Corp. (a) $ 46,500
100 Kansas City Southern Industries, Inc. 4,644
1,000 Union Pacific Corp. 48,062
-------------
336,206
Total common stocks
(cost $57,888,147) 65,574,915
-------------
---------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000)
---------------------------------------------------------------------
DEBT OBLIGATIONS--28.6%
CORPORATE BONDS--14.0%
---------------------------------------------------------------------
Aerospace/Defense--1.3%
A1 $ 700(d) Boeing Inc., Deb.
8.10%, 11/15/2006 739,410
Baa3 700(d) Northrop Grumman Corp.,
Deb.
7.75%, 3/1/2016 679,000
Baa1 500(d) Raytheon Co., Note
6.30%, 3/15/2005 482,145
------------
1,900,555
---------------------------------------------------------------------
Airlines--0.2%
Baa3 225 Delta Air Lines, Inc.,
Deb.
9.75%, 5/15/2021 255,460
---------------------------------------------------------------------
Asset Backed Securities--1.6%
Aaa 500 Citibank Credit Card
Master Trust I, Class A
5.875%, 3/10/2011 459,685
Aaa 1,500(d) Citibank Credit Card
Master Trust, Cl. A
6.05%, 1/15/2010 1,406,250
Aaa 500(d) MBNA Master Credit Card
Trust, Ser. C, Cl. A
6.45%, 2/15/2008 494,060
------------
2,359,995
---------------------------------------------------------------------
Automobiles & Trucks--0.1%
A1 150(d) Ford Motor Co., Deb.
6.50%, 8/1/2018 135,130
------------------------------------------------------------------------------

See Notes to Financial Statements.

10
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL ACTIVE BALANCED FUND
-------------------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------
Banking--2.1%
Aa2 $ 1,000(d) BankAmerica Corp., MTN
7.125%, 5/12/2005 $ 1,003,050
Aa3 1,000(d) Chase Manhattan Bank,
Sub. Note
7.00%, 6/1/2005 997,300
A1 500(d) Citicorp, Sub. Note
7.125%, 9/1/2005 501,600
Deutsche Bank, Deb.
A1 160 6.70%, 12/13/2006 154,640
A1 280(d) 7.50%, 4/25/2009 281,532
Aa3 150 National Westminster Bank
PLC, Sub. Note
7.375%, 10/1/2009 149,824
------------
3,087,946
---------------------------------------------------------------------
Beverages--0.1%
A2 100 Coca Cola Enterprises
Inc., Note
7.125%, 9/30/2009 99,667
---------------------------------------------------------------------
Building & Construction--0.5%
A3 800(d) Hanson Overseas BV, Sr.
Note
6.75%, 9/15/2005 786,088
---------------------------------------------------------------------
Consulting--0.3%
Baa1 400(d) Comdisco, Inc., Note
5.95%, 4/30/2002 387,656
---------------------------------------------------------------------
Financial Services--4.3%
Aa3 750(d) Associates Corp. North
America, Sr. Note
6.75%, 7/15/2001 754,635
A1 160 BCH Cayman Islands Ltd.,
Sub Note
7.70%, 7/15/2006 160,758
A2 1,000(d) Bear, Stearns & Co. Inc.,
Sr. Note
8.75%, 3/15/2004 1,064,270
A1 285(d) Ford Motor Credit Corp.,
Deb.
7.40%, 11/1/2046 272,460
A2 $ 570(d) General Motors Acceptance
Corp., Sr. Note
6.75%, 2/7/2002 $ 573,568
A1 700(d) Goldman, Sachs Group LP,
Note
7.25%, 10/1/2005 703,157
A3 400(d) Heller Financial Inc.,
Note
6.00%, 3/19/2004 383,520
A1 400(d) International Lease
Finance Corp., Note
6.00%, 5/15/2002 395,156
A1 100 Keycorp Capital III,
Capital Securities,
7.75%, 7/15/2029 95,399
Lehman Brothers Holdings,
Inc., Notes
A3 240(d) 6.625%, 4/1/2004 231,912
A3 130(d) 6.625%, 2/5/2006 124,595
Aa3 500(d) Merrill Lynch & Co., MTN
6.02%, 5/11/2001 497,430
A1 520(d) Santander Finance
Issuances, Note
6.80%, 7/15/2005 507,848
Baa1 600(d) US West Capital Funding
Inc., Note
6.125%, 7/15/2002 586,668
------------
6,351,376
---------------------------------------------------------------------
Foreign Government Bonds--0.1%
Aa3 120 Comunidad Autonoma De
Andalucia, Note
7.25%, 10/1/2029 118,416
---------------------------------------------------------------------
Leisure--0.1%
Baa1 175 Marriott International
Inc.,
Ser. C, Note
7.875%, 9/15/2009 174,661
---------------------------------------------------------------------
Media & Communications--0.7%
Baa3 300(d) News America Holdings,
Inc., Deb.
9.25%, 2/1/2013 330,555
Baa3 600(d) Time Warner, Inc., Sr.
Note
9.125%, 1/15/2013 673,560
------------
1,004,115
-------------------------------------------------------------------------------
See Notes to Financial Statements.

11
<PAGE>

Portfolio of Investments as THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
of September 30, 1999 PRUDENTIAL ACTIVE BALANCED FUND
-----------------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
---------------------------------------------------------------------
Medical Products & Services--0.2%
Baa1 $ 400(d) Tyco International Group,
Note
6.375%, 6/15/2005 $ 386,508
---------------------------------------------------------------------
Oil & Gas Exploration/Production--0.6%
A2 700(d) Atlantic Richfield Co.,
Deb.
10.875%, 7/15/2005 837,445
---------------------------------------------------------------------
Oil & Gas Services
Baa1 50 Amerada Hess Corp., Note
7.875%, 10/1/2029 49,377
---------------------------------------------------------------------
Railroads
Baa3 50 Union Pacific Corp., Sr.
Note
7.375%, 9/15/2009 49,775
---------------------------------------------------------------------
Retail--0.4%
A3 565(d) Penney (J.C.) Co., Inc.,
MTN
7.05%, 5/23/2005 543,728
---------------------------------------------------------------------
Telecommunication Services--0.5%
GTE Corp.,
Baa1 220(d) 6.36%, 4/15/2006, Deb. 210,989
Baa1 210(d) 7.51%, 4/1/2009, Note 216,027
Baa1 330(d) Sprint Capital Corp., Note
6.875%, 11/15/2028 299,158
------------
726,174
---------------------------------------------------------------------
Utilities--0.9%
A2 300(d) Hydro Quebec, Deb.
(Canada)
7.50%, 4/1/2016 301,311
A2 1,000(d) Southern California Edison
Co., Note
6.50%, 6/1/2001 1,000,170
------------
1,301,481
Total corporate bonds
(cost $21,457,973) 20,555,553
------------
COLLATERALIZED MORTGAGE OBLIGATIONS--0.6%
Aaa $ 400 First Union-Lehman
Brothers Bank., Ser.
1998
6.56%, 11/18/2008 $ 382,003
Aaa 500 LB Commercial Conduit
Mortgage Trust, Ser. C,
Class A
6.48%, 1/18/2008 472,856
------------
Total collateralized
mortgage obligations
(cost $915,860) 854,859
------------
---------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH OBLIGATIONS--10.8%
Aaa 1,000(c) Federal Home Loan Mortgage
Corp.,
7.00%, 12/1/2029 983,120
Federal National Mortgage
Assoc.,
Aaa 2,100(c) 6.50%, 12/1/2014 2,060,625
Aaa 1,000(c) 7.50%, 12/1/2014 1,015,000
Aaa 620 8.50%, 10/1/2024 641,604
Aaa 132(e) 9.50%, 7/1/2025 140
Aaa 361 8.50%, 2/1/2028 373,676
Aaa 4,000(c) 6.50%, 12/1/2029 3,835,000
Aaa 2,000(c) 7.00%, 12/1/2029 1,965,000
Aaa 2,500(c) 7.50%, 12/1/2029 2,507,025
Government National
Mortgage Assoc.,
Aaa 1,500(c) 7.00%, 12/15/2029 1,471,395
Aaa 1,000(c) 8.00%, 12/15/2029 1,021,870
------------
Total U.S. government
agency mortgage
pass-through obligations
(cost $15,803,931) 15,874,455
------------
---------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--3.2%
United States Treasury
Bonds,
Aaa 55(d) 5.25%, 11/15/2028 47,670
Aaa 715 5.25%, 2/15/2029 625,739
United States Treasury
Notes,
Aaa 400 6.00%, 8/15/2004 403,876
Aaa 1,140(d) 7.50%, 2/15/2005 1,218,375
Aaa 890 6.00%, 8/15/2009 897,227
-------------------------------------------------------------------------------
See Notes to Financial Statements.

12
<PAGE>

-----------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--0.7%
United States Treasury
Bills,
$ 100(b) 4.55%, 12/16/1999 $ 99,040
1,000(b) 4.615%, 12/16/1999 990,257
------------
Total U.S. government
securities
(cost $1,089,297) 1,089,297
------------
---------------------------------------------------------------------
REPURCHASE AGREEMENT--21.3%
31,201 Joint Repurchase Agreement
Account
5.22%, 10/1/1999
(cost $31,201,000; Note
5) 31,201,000
------------
Total short-term
investments
(cost $53,815,650) 53,815,861
------------
---------------------------------------------------------------------
Total Investments--109.9%
(cost $154,574,739; Note
4) 161,304,173
Liabilities in excess of
other
assets--(9.9%) (14,561,181)
------------
Net Assets--100% $146,742,992
============
----------------
(a) Non-income producing security.
(b) All or partial amount of security is segregated as initial margin for
financial futures transactions.
(c) Mortgage dollar roll, see Note 1 and Note 4.
(d) All or partial principal amount pledged as collateral for mortgage dollar
rolls.
(e) Figures are actual and not rounded to the nearest thousand.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
-------------------------------------------------------------------------------
See Notes to Financial Statements.

13
<PAGE>

<TABLE>
<CAPTION>
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Statement of Assets and Liabilities PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
<S> <C>
Assets September 30, 1999
Investments, at value (cost $123,373,739).............................................................. $ 130,103,173
Repurchase agreement (cost $31,201,000)................................................................ 31,201,000
Cash................................................................................................... 10,681
Receivable for investments sold........................................................................ 9,754,014
Receivable for Series shares sold...................................................................... 834,456
Dividends and interest receivable...................................................................... 502,037
Due from broker-variation margin....................................................................... 261,660
Other assets........................................................................................... 5,706
------------------
Total assets....................................................................................... 172,672,727
------------------
Liabilities
Payable for investments purchased...................................................................... 24,759,123
Payable for Series shares reacquired................................................................... 893,055
Accrued expenses....................................................................................... 186,596
Management fee payable................................................................................. 79,004
Distribution fee payable............................................................................... 11,957
------------------
Total liabilities.................................................................................. 25,929,735
------------------
Net Assets............................................................................................. $ 146,742,992
==================

Net assets were comprised of:
Common stock, at par................................................................................ $ 11,066
Paid-in capital in excess of par.................................................................... 130,746,428
------------------
130,757,494
Undistributed net investment income................................................................. 2,395,226
Accumulated net realized gain on investments........................................................ 7,135,434
Net unrealized appreciation on investments.......................................................... 6,454,838
------------------
Net assets, September 30, 1999......................................................................... $ 146,742,992
==================

Class A:
Net asset value and redemption price per share
($10,396,956 / 784,592 shares of common stock issued and outstanding)............................ $ 13.25
Maximum sales charge (5% of offering price)......................................................... .70
------------------
Maximum offering price to public.................................................................... $ 13.95
Class B:
Net asset value, offering price and redemption price per share
($10,979,133 / 833,370 shares of common stock issued and outstanding)............................ $ 13.17
Class C:
Net asset value and redemption price per share
($1,116,852 / 84,777 shares of common stock issued and outstanding).............................. $ 13.17
Sales charge (1% of offering price)................................................................. .13
------------------
Offering price to public............................................................................ $ 13.30
Class Z:
Net asset value, offering price and redemption price per share
($124,250,051 / 9,363,638 shares of common stock issued and outstanding)......................... $ 13.27
</TABLE>

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

14
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Operations
--------------------------------------------------------------------------------
Year Ended
Net Investment Income September 30, 1999
Income
Interest.............................. $ 4,361,548
Dividends (net of foreign withholding
taxes of $13,694).................. 977,951
------------------
Total income......................... 5,339,499
------------------
Expenses
Management fee........................ 940,298
Distribution fee--Class A............. 17,294
Distribution fee--Class B............. 70,178
Distribution fee--Class C............. 6,737
Transfer agent's fees and expenses.... 260,000
Reports to shareholders............... 165,000
Custodian's fees and expenses......... 140,000
Registration fees..................... 110,000
Legal fees and expenses............... 25,000
Audit fee and expenses................ 20,000
Directors' fees and expenses.......... 7,500
Miscellaneous......................... 4,301
------------------
Total expenses....................... 1,766,308
------------------
Net investment income.................... 3,573,191
------------------
Realized and Unrealized Gain on Investments
Net realized gain on:
Investment transactions............... 5,565,895
Financial futures contracts........... 4,358,935
------------------
9,924,830
------------------
Net change in unrealized appreciation (depreciation) on:
Investments........................... 10,871,412
Financial futures contracts........... (988,830)
------------------
9,882,582
------------------
Net gain on investments.................. 19,807,412
------------------
Net Increase in Net Assets
Resulting from Operations................ $ 23,380,603
==================

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
Statement of Changes in Net Assets
---------------------------------------------------------------------
Increase (Decrease) Year Ended September 30,
in Net Assets 1999 1998
Operations
Net investment income.......... $ 3,573,191 $ 5,391,746
Net realized gain on
investments................. 9,924,830 26,438,362
Net change in unrealized
appreciation (depreciation)
on investments.............. 9,882,582 (28,216,192)
------------ ------------
Net increase in net assets
resulting from operations... 23,380,603 3,613,916
------------ ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (74,318) (24,889)
Class B..................... (52,406) (4,933)
Class C..................... (4,693) (273)
Class Z..................... (4,048,216) (4,664,569)
------------ ------------
(4,179,633) (4,694,664)
------------ ------------
Distributions from net realized
gains
Class A..................... (438,657) (82,174)
Class B..................... (480,842) (24,906)
Class C..................... (43,068) (1,378)
Class Z..................... (21,035,473) (13,860,433)
------------ ------------
(21,998,040) (13,968,891)
------------ ------------
Series share transactions (net of
share conversion) (Note 6)
Net proceeds from shares
sold............................ 69,542,543 105,305,809
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 26,157,302 18,663,277
Cost of shares reacquired...... (114,537,650) (100,421,933)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (18,837,805) 23,547,153
------------ ------------
Total increase (decrease)......... (21,634,875) 8,497,514
Net Assets
Beginning of year................. 168,377,867 159,880,353
------------ ------------
End of year(a).................... $146,742,992 $168,377,867
============ ============
----------------
(a) Includes undistributed net
investment income of.......... $ 2,395,226 $ 3,863,980
------------ ------------
-------------------------------------------------------------------------------
See Notes to Financial Statements.

15
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
Prudential Active Balanced Fund (the `Series') is a separately managed series of
The Prudential Investment Portfolios, Inc. (the 'Fund'). The Fund was
incorporated in Maryland on August 10, 1995 and is registered under the
Investment Company Act of 1940 as a diversified, open-end, management investment
company.

---------------------------------------------------------------------
Note 1. Accounting Policies

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

All securities are valued as of 4:15 p.m., New York time.

Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities or commodities at
a set price for delivery on a future date. Upon entering into a financial
futures contract, the Series 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 Series each day, depending on
the daily fluctuations in the value of the underlying security or commodity.
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.

16
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.

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

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

---------------------------------------------------------------------
Note 2. Agreements

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

The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .65 of 1% of the Series' average daily net assets.

The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Fund compensates PIMS for distributing and
servicing the Series' Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred. The distribution fees are accrued daily and payable monthly. No
distribution or service fees were paid to PIMS as distributor of the Class Z
shares of the Series.

PIC, PIFM and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America ('Prudential').

As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. The Funds pay a
commitment fee at an annual rate of .065 of 1% on the unused portion of the
credit facility, which is accrued and paid quarterly on a pro rata basis by the
Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had
a credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund did not
borrow any amounts pursuant to either agreement during the year
--------------------------------------------------------------------------------

17
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Notes to Financial Statements PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
ended September 30, 1999. The purpose of the agreements is to serve as an
alternative source of funding for capital share redemptions.

--------------------------------------------------------------------------------
Note 3. Other Transactions With Affiliates

Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended September 30, 1999,
the Series incurred fees of approximately $233,400 for the services of PMFS. As
of September 30, 1999, approximately $16,900 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out-of-pocket expenses paid to nonaffiliates.

--------------------------------------------------------------------------------
Note 4. Portfolio Securities

Purchases and sales of investment securities other than short-term investments,
for the year ended September 30, 1999 were $264,840,951 and $310,274,690,
respectively.

During the year ended September 30, 1999, the Series entered into financial
futures contracts. Details of open contracts at September 30, 1999 are as
follows:

<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration September 30, Trade Appreciation/
Contracts Type Date 1999 Date (Depreciation)
------------ ---------------- ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Long Position:
17 U.S. T-Bond Dec. 99 $ 1,936,938 $ 1,947,297 $ (10,359)
42 S&P Bond Dec. 99 13,631,094 13,977,675 (346,581)
155 U.S. T-Note Dec. 99 16,812,656 16,730,312 82,344
--------------
$ (274,596)
--------------
</TABLE>

---------------------------------------------
Note 5. Joint Repurchase Agreement Account

Warburg Dillon Read LLC, 5.32%, in the principal amount of $190,000,000,
repurchase price of $190,028,077, due 10/1/99. The value of the collateral
including accrued interest was $193,802,299.

Bear, Stearns & Co. Inc., 5.32%, in the principal amount of $190,000,000,
repurchase price of $190,028,077, due 10/1/99. The value of the collateral
including accrued interest was $194,200,266.

Morgan (J.P.) Securities, Inc., 5.25%, in the principal amount of $190,000,000,
repurchase price $190,027,708, due 10/1/99. The value of the collateral
including accrued interest was $193,800,121.

Goldman, Sachs & Co., 4.75%, in the principal amount of $88,875,000, repurchase
price $88,886,726, due 10/1/99. The value of the collateral including accrued
interest was $90,653,200.

--------------------------------------------------------------------------------
Note 6. Capital

18
<PAGE>

<TABLE>
<CAPTION>
Class A Shares Amount
----------------------------------- ---------- ------------
<S> <C> <C>
Year ended September 30, 1999:
Shares sold........................ 806,345 $ 10,710,045
Shares issued in reinvestment of
dividends and distributions...... 41,285 510,287
Shares reacquired.................. (305,438) (4,105,228)
---------- ------------
Net increase in shares outstanding
before conversion................ 542,192 7,115,104
Shares issued upon conversion
from Class B..................... 236 3,120
---------- ------------
Net increase in shares
outstanding...................... 542,428 $ 7,118,224
---------- ------------

Year ended September 30, 1998:
Shares sold........................ 324,143 $ 4,450,999
Shares issued in reinvestment of
dividends and distributions...... 8,312 107,053
Shares reacquired.................. (159,004) (2,196,936)
---------- ------------
Net increase in shares
outstanding...................... 173,451 $ 2,361,116
---------- ------------
<CAPTION>
Class B
-----------------------------------
<S> <C> <C>
Year ended September 30, 1999:
Shares sold........................ 652,713 $ 8,665,383
Shares issued in reinvestment of
dividends and distributions...... 41,783 516,862
Shares reacquired.................. (90,666) (1,202,053)
---------- ------------
Net increase in shares outstanding
before conversion................ 603,830 7,980,192
Shares reacquired upon conversion
into
Class A.......................... (236) (3,120)
---------- ------------
Net increase in shares
outstanding...................... 603,594 $ 7,977,072
---------- ------------

<CAPTION>
Class C Shares Amount
----------------------------------- ---------- ------------
<S> <C> <C>
Year ended September 30, 1999:
Shares sold........................ 98,943 $ 1,301,393
Shares issued in reinvestment of
dividends and distributions...... 3,860 47,750
Shares reacquired.................. (39,496) (519,205)
---------- ------------
Net increase in shares
outstanding...................... 63,307 $ 829,938
---------- ------------

<CAPTION>
Class Z
-----------------------------------
<S> <C> <C>
Year ended September 30, 1999:
Shares sold........................ 3,692,823 $ 48,865,722
Shares issued in reinvestment of
dividends and distributions...... 2,032,131 25,082,403
Shares reacquired.................. (8,515,198) (108,711,164)
---------- ------------
Net decrease in shares
outstanding...................... (2,790,244) $(34,763,039)
---------- ------------

19
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Financial Highlights PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class A Class B
------------------------------------ ------------------------------------
November 7, November 7,
Year Ended 1996(a) Year Ended 1996(a)
September 30, Through September 30, Through
------------------ September 30, ------------------ September 30,
1999 1998 1997 1999 1998 1997
------- ------ ------------- ------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 13.29 $14.41 $ 13.40 $ 13.22 $14.34 $ 13.40
------- ------ ----- ------- ------ -----
Income from investment operations:
Net investment income............. .31 .44 .21(b) .19 .27 .19(b)
Net realized and unrealized gain
(loss) on investment
transactions................... 1.69 (.20) 1.97 1.69 (.14) 1.92
------- ------ ----- ------- ------ -----
Total from investment
operations.................. 2.00 .24 2.18 1.88 .13 2.11
------- ------ ----- ------- ------ -----
Less distributions:
Dividends from net investment
income......................... (.30) (.32) (.39) (.19) (.21) (.39)
Distributions from net realized
gains.......................... (1.74) (1.04) (.78) (1.74) (1.04) (.78)
------- ------ ----- ------- ------ -----
Total distributions............ (2.04) (1.36) (1.17) (1.93) (1.25) (1.17)
------- ------ ----- ------- ------ -----
Net asset value, end of period.... $ 13.25 $13.29 $ 14.41 $ 13.17 $13.22 $ 14.34
------- ------ ----- ------- ------ -----

TOTAL RETURN(d):.................. 16.07% 1.93% 17.48% 15.12% 1.10% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $10,397 $3,218 $ 990 $10,979 $3,038 $ 213
Average net assets (000).......... $ 6,918 $2,090 $ 100 $ 7,018 $1,285 $ 71
Ratios to average net assets:
Expenses, including
distribution fees........... 1.41% 1.28% 1.31%(c) 2.16% 2.03% 2.06%(c)
Expenses, excluding
distribution fees........... 1.16% 1.03% 1.06%(c) 1.16% 1.03% 1.06%(c)
Net investment income.......... 2.29% 2.72% 2.69%(c) 1.54% 1.95% 1.94%(c)
Portfolio turnover rate........... 230% 256% 50% 230% 256% 50%
</TABLE>

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

20
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Financial Highlights PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class C Class Z
----------------------------------- -----------------------------------------------
November 7,
Year Ended 1996(e)
September 30, Through Year Ended September 30,
----------------- September 30, -----------------------------------------------
1999 1998 1997 1999 1998 1997 1996
------ ------ ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $13.22 $14.34 $ 13.40 $ 13.32 $ 14.45 $ 13.01 $ 12.46
------ ------ ----- -------- -------- -------- --------
Income from investment operations:
Net investment income............. .19 .48 .13(b) .35 .38 .39(b) .29(a)
Net realized and unrealized gain
(loss) on investment
transactions................... 1.69 (.35) 1.98 1.68 (.12) 2.22 .81
------ ------ ----- -------- -------- -------- --------
Total from investment
operations.................. 1.88 .13 2.11 2.03 .26 2.61 1.10
------ ------ ----- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income......................... (.19) (.21) (.39) (.34) (.35) (.39) (.37)
Distributions from net realized
gains.......................... (1.74) (1.04) (.78) (1.74) (1.04) (.78) (.18)
------ ------ ----- -------- -------- -------- --------
Total distributions............ (1.93) (1.25) (1.17) (2.08) (1.39) (1.17) (.55)
------ ------ ----- -------- -------- -------- --------
Net asset value, end of period.... $13.17 $13.22 $ 14.34 $ 13.27 $ 13.32 $ 14.45 $ 13.01
------ ------ ----- -------- -------- -------- --------

TOTAL RETURN(d):.................. 17.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $133,352
Average net assets (000).......... $104,821
Ratios to average net assets:
Expenses, including
distribution fees........... 1.00(a)
Expenses, excluding
distribution fees........... 1.00(a)
Net investment income.......... 3.53(a)
Portfolio turnover rate........... 30%
</TABLE>

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

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

21
<PAGE>

THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Report of Independant Accountants PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
The Shareholders and Board of Directors of
The Prudential Investment Portfolios, Inc.--Prudential Active Balanced Fund

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Prudential Investment
Portfolios, Inc.--Prudential Active Balanced Fund (the 'Fund,' one of the
portfolios constituting The Prudential Investment Portfolios, Inc.) at September
30, 1999, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended and the
financial highlights for each of the three years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for each of
the two years in the year ended September 30, 1996 were audited by other
independent accountants, whose opinion dated November 13, 1996 was unqualified.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 17, 1999
--------------------------------------------------------------------------------
See Notes to Financial Statements.

22
<PAGE>

Federal Income Tax Information THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
(Unaudited) PRUDENTIAL ACTIVE BALANCED FUND
--------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of the
Series' fiscal year end (September 30, 1999) as to the federal tax status of
dividends and distributions paid by the Series during such fiscal year.
Accordingly, we are advising you that in the fiscal year ended September 30,
1999, dividends paid from net investment income were $.30 per share for Class A
shares, $.19 per share for Class B and Class C shares and $.34 per share for
Class Z shares, which are taxable as ordinary income. In addition, the Series
paid to Class A, B, C and Z shares a short-term capital gain distribution of
$.125 per share which is taxable as ordinary income and a long-term capital gain
distribution of $1.61 per share which is taxable as such. The Series' utilized
redemptions as distributions in the amount of $.068, $.022, and $.323 of
ordinary income, short-term capital gains and long-term capital gains,
respectively, for each class of shares.

We are required by Massachusetts, Missouri and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders. Please be advised that 5.0% of the dividends paid from
ordinary income in the fiscal year ended September 30, 1999 qualify for each of
these states' tax exclusion.

We also wish to advise you that 17.48% of the dividends paid from ordinary
income in the fiscal year ended September 30, 1999 qualified for the corporate
dividends received deduction available to corporate taxpayers.

In January 2000, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV
as to the federal tax status of the distributions received by you in calendar
year 1999.
--------------------------------------------------------------------------------
See Notes to Financial Statements.

23
<PAGE>

Getting the Most from Your Prudential Mutual Fund How many times have you read
these reports--or other financial materials--and stumbled across a word that you
don't understand?

Many shareholders have run into the same problem. We'd like to help. So we'll
use this space from time to time to explain some of the words you might have
read, but not understood. And if you have a favorite word that no one can
explain to your satisfaction, please write to us.

Basis Point: 1/100th of 1%. For example, one-half of one percent is 50 basis
points.

Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate
mortgage pools into different maturity classes, called tranches. These
instruments are sensitive to changes in interest rates and homeowner refinancing
activity. They are subject to prepayment and maturity extension risk.

Derivatives: Securities that derive their value from other securities. The rate
of return of these financial instruments rises and falls--sometimes very
suddenly--in response to changes in some specific interest rate, currency,
stock, or other variable.

Discount Rate: The interest rate charged by the Federal Reserve on loans to
member banks.

Federal Funds Rate: The interest rate charged by one bank to another on
overnight loans.

Futures Contract: An agreement to purchase or sell a specific amount of a
commodity or financial instrument at a set price at a specified date in the
future.

Leverage: The use of borrowed assets to enhance return. The expectation is that
the interest rate charged on borrowed funds will be lower than the return on the
investment. While leverage can increase profits, it can also magnify losses.

Liquidity: The ease with which a financial instrument (or product) can be
bought or sold (converted into cash) in the financial markets.

Price/Earnings Ratio: The price of a share of stock divided by the earnings per
share for a 12-month period.

Option: An agreement to purchase or sell something, such as shares of stock,
by a certain time for a specified price. An option need not be exercised.

Spread: The difference between two values; often used to describe the difference
between "bid" and "asked" prices of a security, or between the yields of two
similar maturity bonds.

Yankee Bond: A bond sold by a foreign company or government in the U.S. market
and denominated in U.S. dollars.

24
<PAGE>

Getting the Most from Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this--they don't read annual and
semiannual reports. It's quite understandable. These annual and semi-annual
reports are prepared to comply with federal regulations, and are often written
in language that is difficult to understand. So, when most people run into those
particularly daunting sections of these reports, they don't read them.

We think that's a mistake.

At Prudential Mutual Funds, we've made some changes to our report to make it
easier to understand and more pleasant to read. We hope you'll find it
profitable to spend a few minutes familiarizing yourself with your investment.
Here's what you'll find in the report:

Performance at a Glance
Since an investment's performance is often a shareholder's primary concern, we
present performance information in two different formats. You'll find it first
on the "Performance at a Glance" page where we compare the Fund and the
comparable average calculated by Lipper, Inc., a nationally recognized mutual
fund rating agency. We report both the cumulative total returns and the average
annual total returns. The cumulative total return is the total amount of income
and appreciation the Fund has achieved in various time periods. The average
annual total return is an annualized representation of the Fund's performance.
It gives you an idea of how much the Fund has earned in an average year for a
given time period. Under the performance box, you'll see legends that explain
the performance information, whether fees and sales charges have been included
in returns, and the inception dates for the Fund's share classes.

See the performance comparison charts at the back of the report for more
performance information. Please keep in mind that past performance is not
indicative of future results.

Portfolio Manager's Report
The portfolio manager, who invests your money for you, reports on successful--
and not-so-successful--strategies in this section of your report. Look for
recent purchases and sales here, as well as information about the sectors the
portfolio manager favors, and any changes that are on the drawing board.

Portfolio of Investments
This is where the report begins to appear technical, but it's really just a
listing of each security held at the end of the reporting period, along with
valuations and other information. Please note that sometimes we discuss a
security in the Portfolio Manager's Report that doesn't appear in this listing
because it was sold before the close of the reporting period.

25
<PAGE>

Statement of Assets and Liabilities
The balance sheet shows the assets (the value of the Fund's holdings),
liabilities (how much the Fund owes), and net assets (the Fund's equity, or
holdings after the Fund pays its debts) as of the end of the reporting period.
It also shows how we calculate the net asset value per share for each class of
shares. The net asset value is reduced by payment of your dividend, capital
gain, or other distribution, but remember that the money or new shares are being
paid or issued to you. The net asset value fluctuates daily, along with the
value of every security in the portfolio.

Statement of Operations
This is the income statement, which details income (mostly interest and
dividends earned) and expenses (including what you pay us to manage your money).
You'll also see capital gains here--both realized and unrealized.

Statement of Changes in Net Assets
This schedule shows how income and expenses translate into changes in net
assets. The Fund is required to pay out the bulk of its income to shareholders
every year, and this statement shows you how we do it--through dividends and
distributions--and how that affects the net assets. This statement also shows
how money from investors flowed into and out of the Fund.

Notes to Financial Statements
This is the kind of technical material that can intimidate readers, but it does
contain useful information. The Notes provide a brief history and explanation of
your Fund's objectives. In addition, they outline how Prudential Mutual Funds
prices securities. The Notes also explain who manages and distributes the Fund's
shares and, more importantly, how much they are paid for doing so. Finally, the
Notes explain how many shares are outstanding and the number issued and redeemed
over the period.

Financial Highlights
This information contains many elements from prior pages, but on a per-share
basis. It is designed to help you understand how the Fund performed, and to
compare this year's performance and expenses to those of prior years.

Independent Auditor's Report
Once a year, an outside auditor looks over our books and certifies that the
information is fairly presented and complies with generally accepted accounting
principles.

Tax Information
This is information which we report annually about how much of your total return
is taxable. Should you have any questions, you may want to consult a tax
adviser.

Performance Comparison
These charts are included in the annual report and are required by the
Securities Exchange Commission. Performance is presented here as a hypothetical
$10,000 investment in the Fund since its inception or for 10 years (whichever is
shorter). To help you put that return in context, we are required to include the
performance of an unmanaged, broad-based securities index as well. The index
does not reflect the cost of buying the securities it contains or the cost of
managing a mutual fund. Of course, the index holdings do not mirror those of the
Fund--the index is a broad-based reference point commonly used by investors to
measure how well they are doing. A definition of the selected index is also
provided. Investors cannot invest directly in an index.

26
<PAGE>

Comparing a $10,000 Investment
---------------------------------------------------------
Prudential Active Balanced Fund vs. the S&P 500 Index and
the Lehman Brothers Government/Corporate Bond Index

Chart A
(GRAPH)

Prudential Active Balanced Fund: $13,205
S&P 500 Index: $19,049
Lehman Brothers Gov't/Corp. Bond
Index: $11,889

Average Annual Total Returns
With Sales Load
Since Inception 10.08%
One Year 10.27%

Without Sales Load
Since Inception 12.05%
One Year 16.07%

Chart B
(GRAPH)

Prudential Active Balanced Fund: $13,308
S&P 500 Index: $19,049
Lehman Brothers Gov't/Corp. Bond
Index: $11,889

Average Annual Total Returns
With Sales Load
Since Inception 10.38%
One Year 10.12%

Without Sales Load
Since Inception 11.23%
One Year 15.12%

27
<PAGE>

Chart C
(GRAPH)

Prudential Active Balanced Fund: $13,308
S&P 500 Index: $19,049
Lehman Brothers Gov't/Corp. Bond Index: $11,889

Average Annual Total Returns
With Sales Load
Since Inception 10.85%
One Year 12.97%

Without Sales Load
Since Inception 11.23%
One Year 15.12%

Chart Z
(GRAPH)

Prudential Active Balanced Fund: $20,667
S&P 500 Index: $34,068
Lehman Brothers Gov't/Corp. Bond Index: $15,519

Average Annual Total Returns
Since Inception 11.38%
Five Years 13.10%
One Year 16.32%

Build on the Rock

28
<PAGE>

Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077

(800) 225-1852
http://www.prudential.com

Class NASDAQ Cusip
A -- 74437E883
B -- 74437E875
C -- 74437E867
Z PABFX 74437E859

Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
Robin B. Smith
John R. Strangfeld
Louis A. Weil, III
Clay T. Whitehead

Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Marguerite E.H. Morrison, Secretary
Stephen M. Ungerman, Assistant Treasurer

Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077

Investment Adviser
The Prudential Investment Corporation
Prudential Plaza, Newark, NJ 07102-3777

Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077

Custodian
State Street Bank and Trust Company
One Heritage Drive, North Quincy, MA 02171

Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005, New Brunswick, NJ 08906

Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas, New York, NY 10036

Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street, Chicago, IL 60610-4795

Prudential Investments is a unit of The Prudential Insurance Company of America,
751 Broad Street, Newark, NJ 07102.

The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.

This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.

MF185E
29
<PAGE>

SEMIANNUAL REPORT MARCH 31, 2000

Prudential
Active Balanced Fund

Fund Type Stock and bond

Objective Income and long-term growth of capital

(GRAPHIC)

This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.

(LOGO)

72
<PAGE>

Investment Goals and Style
Prudential Active Balanced Fund seeks income and long-term growth of capital by
investing in a portfolio of equity, fixed-income, and money market securities
that is actively managed to take advantage of opportunities created by what we
see as market misvaluations. The Fund's investments will be shifted among equity
securities, fixed-income securities, and money market instruments to maximize
its total investment return. Mark Stumpp and James Scott manage the asset
allocation with the aid of a quantitative model. They also manage the stocks,
using behavioral finance models to select securities they believe to be
underpriced, but maintaining a risk profile like that of the S&P 500 Index.
Prudential U.S. Liquidity Team manages the bonds. There can be no assurance that
the Fund will achieve its investment objective.

Portfolio Composition
Expressed as a percentage of
net assets as of 3/31/00
42.3% Bonds
9.2 Cash & Equivalents*
Equities:
12.6 Electronic Tech & Services
7.0 Finance
5.0 Technology Services
4.1 Utilities
3.7 Health Technology
3.7 Retail Trade
2.4 Process Industries
2.0 Energy Materials
1.9 Consumer Non-Durables
1.7 Producer Manufacturing
1.6 Consumer Services
1.1 Consumer Durables
0.8 Transportation
0.3 Commercial Services
0.3 Health Services
0.2 Non-Energy Materials
0.1 Industrial Services

Ten Largest Equity Holdings
Expressed as a percentage of
net assets as of 3/31/00

2.03% Microsoft Corporation
Computer Software & Services
2.01 Cisco
Computer Software & Services
1.93 General Electric Co.
Diversified Operations
1.82 Intel Corp.
Electronic Components
1.04 Oracle Systems Corp.
Computer Software & Services
1.02 Wal-Mart Stores, Inc.
Retail
0.81 IBM, Corp.
Computer Systems/Peripherals
0.77 AT&T Corp.
Telecommunications Services
0.74 Exxon Mobile Corp.
Oil & Gas Exploration/Production
0.72 Sun Microsystems
Computer Software & Services

* Primarily collateral for stock
and bond futures contracts
used to manage asset allocation.

Source: Prudential

73
<PAGE>

www.prudential.com (800) 225-1852

Performance at a Glance

Cumulative Total Returns1 As of 3/31/00
Six One Five Since
Months Year Years Inception2
Class A 11.72% 12.06% N/A 55.29%
Class B 11.35 11.26 N/A 51.52
Class C 11.35 11.26 N/A 51.52
Class Z 11.87 12.38 95.74% 131.20
Lipper Balanced
Fund Avg.3 10.51 10.50 105.81 ***

Average Annual Total Returns1 As of 3/31/00
One Five Since
Year Years Inception2
Class A 6.45% N/A 12.13%
Class B 6.26 N/A 12.58
Class C 9.15 N/A 12.69
Class Z 12.38 14.38% 12.28

Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.

Class B shares are subject to a declining contingent deferred sales charge
(CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will
automatically convert to Class A shares, on a quarterly basis, approximately
seven years after\purchase. Class C shares are subject to a front-end sales
charge of 1% and a CDSC of 1% for 18 months. Class Z shares are not subject to a
sales charge or distribution and service (12b-1) fees.

2 Inception dates: Class A, B, and C, 11/7/96; Class Z, 1/4/93.

3 Lipper average returns are for all funds in each share class for the six-
month, one-, and five-year periods in the Balanced Fund category. The Lipper
average is unmanaged. Balanced funds are funds whose primary objective is to
conserve principal by maintaining at all times a balanced portfolio of both
stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
***Lipper Since Inception returns are 57.11% for Class A, B, and C, and 38.09%
for Class Z, based on all funds in each share class.

74
<PAGE>

Prudential Active Balanced Fund

Message From the Fund's President May 16, 2000

Dear Shareholder,

Over the six months ended March 31, 2000, Prudential Active Balanced Fund
returned 11.72%, beating the Lipper Balanced Fund Average. The return was 6.13%
for those paying an initial Class A share maximum sales charge. This would be
considered a strong performance, by historical standards, even for a fund
holding only stocks.

The stage for the Fund's outperformance was set by the exceptional volatility of
securities markets during this period. U.S. bond markets were roiled by the
tension between the Treasury's plans to buy back debt (potentially reducing
long-term interest rates) and the strong economy (which kept the Federal Reserve
raising short-term rates). The stock markets swung between confidence in the
unique growth potential of technology and biotechnology stocks on the one hand,
and concern about their very high prices on the other. When markets swing
widely, opportunities to buy cheaply and sell high arise for dispassionate
investors who emphasize fundamentals. Prudential Active Balanced Fund benefited
from volatility among the various asset classes and also from its strong
selection within the stock market.

It's important to emphasize that Prudential Active Balanced Fund holds a
diversified blend of stocks, bonds, and money market instruments. The word
"active" in the name of the Fund refers to the Fund's mandate to manage its
exposures to the various securities markets instead of leaving them at a fixed
allocation. By doing so, it attempts to allow shareholders to participate in the
strong capital appreciation of stocks while trying to reduce the swings in asset
value that may accompany that growth.

Sincerely,

John R. Strangfeld, President
The Prudential Investment Portfolios, Inc.--Prudential Active Balanced Fund

75
<PAGE>

www.prudential.com (800) 225-1852

Investment Adviser's Report

Dear Shareholder,

Stock and bond market volatility rose considerably over the last six months,
increasing both risk and opportunity. We underweighted stocks through much of
this period, as our quantitative models suggested that stocks were relatively
expensive. Normally we would hold approximately 55% to 60% of the portfolio in
stocks, but we held that proportion closer to 50% because of the overvalued
stock market. Underweighting stocks detracted from our performance in the fourth
quarter of 1999, when the Standard & Poor's 500 Composite Stock Price Index (S&P
500) rose by 14.9%, but enhanced our return in the first quarter of 2000, as the
stock market rally faltered.

Although, on average, we underweighted stocks over the reporting period, we made
small variations in our asset allocation in response to sharp swings in stock
prices. These helped our performance. For example, we held approximately 50% of
the portfolio in stocks at the end of January, but increased that allocation
after prices fell in late February. We increased the allocation to stocks in
time to catch the rebound that began in mid-March.

We normally maintain a relatively low allocation to cash. However, in October,
we held close to 3% of our assets in money market instruments as a substitute
for our bond allocation because bond prices were faltering. By March, the cash
allocation had dropped to slightly more than 1%--a more normal level. These
moves also helped our performance.

Stock returns were strong
The strong performance of our stock portfolio considerably enhanced our return.
We attempt to construct an equity portfolio that will outperform the S&P 500
while maintaining a risk profile that is similar to that of the Index. For
example, we normally hold industry, sector, and company size proportions fairly
close to those of the S&P 500. We allow a slight additional exposure to
industries and other factors only when stocks in these categories overall are
more attractive than average on our quantitative measures.

76
<PAGE>

Prudential Active Balanced Fund

Investment Adviser's Report

Although much of our equity outperformance over the last six months was the
result of good stock selection within these risk categories, we also benefited
from some modest industry focuses: performance was boosted by slight overweights
in the electronic equipment, investment banks, and telecommunications equipment
industries. The strongest contributors to equity performance were in the
technology sector. For example, the portfolio held KLA-Tencor, Teradyne, and
Applied Materials, each of which more than doubled in value over the quarter.

Active Asset Allocation

Asset class exposure can have a greater impact on returns over the long term
than selection of individual securities. We use quantitative models to determine
which market sectors offer the best opportunities. Using companies' earnings
expectations and stock prices, we compare the expected returns on stocks with
the interest rates on bonds. We try to increase the proportion of the kind of
security that offers the best value at any time, monitoring our allocation
daily. We implement most of these allocation changes with stock and bond futures
contracts because it is quicker and less expensive than trading the actual
securities. Our neutral position is 48.5% stocks, 42.3% bonds, and 9.2% cash.

Looking ahead

We expect the U.S. stock market to continue to be unusually volatile.
Surprisingly, we view high volatility as an opportunity rather than as a risk,
because we tend to be buyers on market panics and sellers into strong rallies.
Our strategy of buying on weakness and selling into strength has tended to add
value to the Fund.

Prudential Active Balanced Fund Management Team

77
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited)

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 75.6%
Common Stocks 48.5%
-------------------------------------------------------------------------------------
<S> <C>
Aerospace/Defense 0.4%
3,600 General Dynamics Corp. $ 179,100
2,237 Honeywell International, Inc. 117,862
1,600 Lockheed Martin Corp. 32,700
7,500 Raytheon Co. 133,125
5,500 The Boeing Co. 208,656
--------------
671,443
-------------------------------------------------------------------------------------
Airlines 0.4%
5,600 America West Holdings Corp. 86,800
2,400 AMR Corp.(a) 76,500
2,700 Delta Airlines, Inc. 143,775
1,350 Southwest Airlines Co. 28,097
4,900 UAL Corp.(a) 293,387
--------------
628,559
-------------------------------------------------------------------------------------
Automobiles & Trucks 1.0%
9,700 Arvin Industries, Inc. 219,462
3,500 Delphi Automotive Systems Corp. 56,000
13,300 Ford Motor Co. 610,969
8,100 General Motors Corp. 670,781
400 PACCAR, Inc. 20,000
--------------
1,577,212
-------------------------------------------------------------------------------------
Advertising
1,000 Interpublic Group of Companies, Inc. 47,250
-------------------------------------------------------------------------------------
Automotive Parts 0.2%
5,200 TRW, Inc. 304,200
-------------------------------------------------------------------------------------
Banking 1.1%
5,994 Bank One Corp. 206,044
4,300 Chase Manhattan Corp. 374,906
</TABLE>

See Notes to Financial Statements

78
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<S> <C> <C>
12,900 Dime Bancorp, Inc. $ 238,650
6,200 First Union Corp. 230,950
3,200 Huntington Bancshares, Inc. 71,600
13,600 KeyCorp. 258,400
2,700 PNC Bank Corp. 121,669
2,900 Regions Financial Corp. 66,156
2,600 Suntrust Banks, Inc. 150,150
--------------
1,718,525
-------------------------------------------------------------------------------------
Beverages 0.6%
2,600 Anheuser-Busch Companies, Inc. 161,850
7,900 Coca-Cola Co. 370,806
11,600 PepsiCo, Inc. 400,925
--------------
933,581
-------------------------------------------------------------------------------------
Building & Construction 0.3%
10,500 Centex Corp. 250,031
11,500 Pulte Corp. 240,063
--------------
490,094
-------------------------------------------------------------------------------------
Business Services 0.2%
2,700 Kelly Services, Inc. 64,631
2,800 Omnicom Group, Inc. 261,625
1,734 Sabre Group Holdings, Inc.(a) 64,063
--------------
390,319
-------------------------------------------------------------------------------------
Chemicals 0.2%
1,100 Dow Chemical Co. 125,400
400 Praxair, Inc. 16,650
7,100 Schulman (A.), Inc. 94,075
300 Union Carbide Corp. 17,494
--------------
253,619
-------------------------------------------------------------------------------------
Commercial Services
600 Paychex, Inc. 31,425
</TABLE>

See Notes to Financial Statements

79
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<S> <C> <C>
Computer Services 0.9%
1,900 Automatic Data Processing, Inc. $ 91,675
2,500 Electronic Data Systems Corp. 160,469
1,000 Network Appliance, Inc.(a) 82,750
1,000 Unisys Corp.(a) 25,500
3,450 VERITAS Software Corp.(a) 451,950
3,800 Yahoo, Inc.(a) 651,225
--------------
1,463,569
-------------------------------------------------------------------------------------
Computer Software & Services 8.0%
1,400 Adobe Systems, Inc. 155,838
13,000 America Online, Inc.(a) 874,250
42,600 Cisco Systems, Inc.(a) 3,293,512
10,300 Computer Associates International, Inc. 609,631
2,050 Comverse Technology, Inc.(a) 387,450
3,200 DST Systems, Inc.(a) 207,800
5,700 EMC Corp.(a) 712,500
31,300 Microsoft Corp.(a) 3,325,625
21,800 Oracle Systems Corp.(a) 1,701,763
600 Siebel Systems, Inc.(a) 71,663
12,600 Sun Microsystems, Inc.(a) 1,180,659
6,100 Teradyne, Inc.(a) 501,725
--------------
13,022,416
-------------------------------------------------------------------------------------
Computer Systems/Peripherals 1.8%
2,500 Apple Computer, Inc.(a) 339,531
4,800 Dell Computer Corp.(a) 258,900
7,300 Hewlett-Packard Co. 967,706
11,300 International Business Machines Corp. 1,333,400
100 Seagate Technology, Inc.(a) 6,025
--------------
2,905,562
-------------------------------------------------------------------------------------
Cosmetics/Toiletries 0.2%
3,000 Colgate-Palmolive Co. 169,125
2,300 Kimberly-Clark Corp. 128,800
--------------
297,925
</TABLE>

See Notes to Financial Statements

80
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<S> <C> <C>
Distribution/Wholesalers 0.1%
1,800 Costco Wholesale Corp. $ 94,613
-------------------------------------------------------------------------------------
Diversfied Consumer Products 0.3%
4,500 Procter & Gamble Co. 253,125
5,717 Unilever NV 275,131
--------------
528,256
-------------------------------------------------------------------------------------
Diversified Operations 1.9%
20,300 General Electric Co. 3,150,306
-------------------------------------------------------------------------------------
Diversified Manufacturing 0.4%
1,100 Corning, Inc. 213,400
2,600 Eaton Corp. 202,800
1,200 Illinois Tool Works, Inc. 66,300
1,400 Minnesota Mining & Manufacturing Co. 123,987
500 Textron, Inc. 30,438
4,200 Trinity Industries, Inc. 99,487
--------------
736,412
-------------------------------------------------------------------------------------
Electrical Utilities 1.5%
200 American Electric Power Co., Inc. 5,963
8,200 Central & South West Corp. 139,912
2,600 Consolidated Edison, Inc. 75,400
5,600 DTE Energy Co. 162,400
3,400 Duke Energy Corp. 178,500
5,900 Edison International 97,719
7,900 Entergy Corp. 159,481
7,700 FirstEnergy Corp. 158,813
4,200 Florida Progress Corp. 192,675
4,400 FPL Group, Inc. 202,675
9,600 PG&E Corp. 201,600
15,000 Public Service Company of New Mexico 236,250
2,500 Public Service Enterprise Group, Inc. 74,062
17,300 Reliant Energy, Inc. 405,469
5,700 Texas Utilities Co. 169,219
--------------
2,460,138
</TABLE>

See Notes to Financial Statements

81
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<S> <C> <C>
Electronic Components 4.3%
7,400 Altera Corp.(a) $ 660,450
1,000 Analog Devices, Inc.(a) 80,563
6,300 Atmel Corp.(a) 325,238
2,200 Emerson Electric Co. 116,325
22,600 Intel Corp. 2,981,787
2,200 Jabil Circuit, Inc.(a) 95,150
6,700 KLA-Tencor Corp.(a) 564,475
1,000 Micron Technology, Inc.(a) 126,000
3,630 Motorola, Inc. 516,821
1,800 Novellus Systems, Inc.(a) 101,025
4,400 Sanmina Corp.(a) 297,275
12,600 Solectron Corp.(a) 504,787
3,400 Texas Instruments, Inc. 544,000
1,400 Xilinx, Inc.(a) 115,938
--------------
7,029,834
-------------------------------------------------------------------------------------
Financial Services 4.5%
3,900 Allmerica Financial Corp. 198,900
3,300 American Express Co. 491,494
6,000 Astoria Financial Corp. 170,250
9,360 BankAmerica Corp. 490,815
10,430 Bear Stearns Companies, Inc. 475,869
7,900 Charles Schwab Corp. 448,819
19,425 Citigroup, Inc. 1,152,145
2,900 Countrywide Credit Industries, Inc. 79,025
5,100 Federal Home Loan Mortgage Corp. 225,356
7,400 Federal National Mortgage Association 417,637
15,900 Fleet Boston Financial Corp. 580,350
5,000 Golden West Financial Corp. 155,937
2,400 Lehman Brothers Holdings, Inc. 232,800
3,900 MBNA Corp. 99,450
700 Merrill Lynch & Co., Inc. 73,500
9,200 Morgan Stanley, Dean Witter & Co. 750,375
9,000 PaineWebber Group, Inc. 396,000
5,400 Providian Financial Corp. 467,775
3,400 SLM Holding Corp. 113,263
9,300 Wells Fargo Co. 380,719
--------------
7,400,479
</TABLE>

See Notes to Financial Statements

82
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<S> <C> <C>
Food Distribution
1,000 SYSCO Corp. $ 35,688
-------------------------------------------------------------------------------------
Foods 0.6%
10,914 Archer-Daniels Midland Co. 113,233
500 Bestfoods 23,406
6,700 ConAgra, Inc. 121,437
5,400 General Mills, Inc. 195,412
1,500 H.J. Heinz Co. 52,313
19,800 Ibp, Inc. 311,850
1,600 Kellogg Co. 41,000
600 Quaker Oats Co. 36,375
4,200 Sara Lee Corp. 75,600
--------------
970,626
-------------------------------------------------------------------------------------
Health Care Services 0.1%
2,200 Columbia/HCA Healthcare Corp. 55,688
1,900 United Healthcare Corp. 113,288
--------------
168,976
-------------------------------------------------------------------------------------
Home Furnishings 0.1%
2,400 Springs Industries, Inc. 91,200
-------------------------------------------------------------------------------------
Insurance 1.4%
900 Aetna, Inc. 50,119
6,600 Allstate Corp. 157,163
10,400 American International Group, Inc. 1,138,800
25,800 Conseco, Inc. 295,087
2,200 Hartford Financial Services Group 116,050
14,800 Old Republic International Corp. 203,500
11,100 St. Paul Companies, Inc. 378,787
--------------
2,339,506
-------------------------------------------------------------------------------------
Leisure 0.1%
4,400 Carnival Corp. 109,175
2,500 Marriott International, Inc. 78,750
--------------
187,925
</TABLE>

See Notes to Financial Statements

83
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<S> <C> <C>
Machinery & Equipment 0.6%
8,600 Applied Materials, Inc.(a) $ 810,550
700 Deere & Co. 26,600
600 Dover Corp. 28,725
500 Ingersoll-Rand Co. 22,125
700 Rockwell International Corp. 29,269
--------------
917,269
-------------------------------------------------------------------------------------
Measuring & Control Instrument 0.1%
4,100 Johnson Controls, Inc. 221,656
-------------------------------------------------------------------------------------
Media & Entertainment 1.1%
1,000 Dow Jones & Co., Inc. 71,812
1,400 Gannett Co., Inc. 98,525
1,100 Hispanic Broadcasting Corp.(a) 124,575
600 McGraw-Hill Companies, Inc. 27,300
10,700 Time Warner, Inc. 1,070,000
11,200 Walt Disney Co. 463,400
--------------
1,855,612
-------------------------------------------------------------------------------------
Medical Products & Services 1.7%
1,300 Baxter International, Inc. 81,494
5,900 Cardinal Health, Inc. 270,662
6,700 Johnson & Johnson Co. 469,419
100 Medtronic, Inc. 5,144
13,800 Schering-Plough Corp. 507,150
17,000 Tyco International, Ltd. 847,875
6,600 Warner-Lambert Co. 643,500
--------------
2,825,244
-------------------------------------------------------------------------------------
Medical Technology 0.6%
9,600 Abbott Laboratories 337,800
9,900 Amgen, Inc.(a) 607,612
700 Biogen, Inc.(a) 48,913
--------------
994,325
-------------------------------------------------------------------------------------
Metals Processing 0.2%
8,800 Precision Castparts Corp. 321,200
</TABLE>

See Notes to Financial Statements

84
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Shares Description Value (Note 1)
-------------------------------------------------------------------------------------
<S> <C> <C>
Office Equipment & Supplies
1,100 Pitney Bowes, Inc. $ 49,156
-------------------------------------------------------------------------------------
Oil & Gas Exploration/Production 1.7%
11,500 Apache Corp. 572,125
2,300 Atlantic Richfield Co. 195,500
4,800 Coastal Corp. 220,800
15,532 Exxon Mobil Corp. 1,208,584
7,300 Royal Dutch Petroleum Co. 420,206
3,100 Texaco, Inc. 166,237
2,800 USX - Marathon Group 72,975
--------------
2,856,427
-------------------------------------------------------------------------------------
Oil & Gas Services 0.4%
2,500 Amerada Hess Corp. 161,562
4,400 Chevron Corp. 406,725
1,600 Schlumberger, Ltd. 122,400
1,400 Sempra Energy 23,450
--------------
714,137
-------------------------------------------------------------------------------------
Paper & Forest Products 0.3%
100 Champion International Corp. 5,325
1,900 International Paper Co. 81,225
18,100 Louisiana-Pacific Corp. 251,137
3,800 Willamette Industries, Inc. 152,475
--------------
490,162
-------------------------------------------------------------------------------------
Pharmaceuticals 2.0%
1,800 Allergan, Inc. 90,000
13,200 Bristol Myers Squibb Co. 762,300
7,300 Eli Lilly & Co. 459,900
16,800 Merck & Co., Inc. 1,043,700
27,300 Pfizer, Inc. 998,156
--------------
3,354,056
</TABLE>

See Notes to Financial Statements

85
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

Shares Description Value (Note 1)
--------------------------------------------------------------------------------
Photography 0.1%
1,600 Eastman Kodak Co. $ 86,900
--------------------------------------------------------------------------------
Precious Metals
700 Barrick Gold Corp. 10,981
--------------------------------------------------------------------------------
Printing & Publishing 0.2%
2,100 Knight-Ridder, Inc. 106,969
900 New York Times Co. 38,644
2,800 Tribune Co. 102,375
----------
247,988
--------------------------------------------------------------------------------
Railroads 0.1%
3,800 Canadian National Railway Co. 101,413
--------------------------------------------------------------------------------
Retail 3.9%
2,400 Abercrombie & Fitch Co.(a) 38,400
10,800 Circuit City Stores-Circut City Group 657,450
1,700 CVS Corp. 63,856
5,000 Federated Department Stores, Inc.(a) 208,750
10,475 Gap, Inc. 521,786
18,300 Home Depot, Inc. 1,180,350
16,700 Kmart Corp.(a) 161,781
4,200 Kohl's Corp.(a) 430,500
1,800 Lowes Companies, Inc. 105,075
1,300 May Department Stores Co. 37,050
7,000 McDonald's Corp. 262,937
2,500 Safeway Inc.(a) 113,125
7,000 Sears, Roebuck & Co. 216,125
11,100 Staples, Inc.(a) 222,000
3,400 Starbucks Corp. 152,362
2,200 Target Corp. 164,450
1,000 TJX Companies, Inc. 22,188
1,800 Tricon Global Restaurants, Inc.(a) 55,913
30,000 Wal-Mart Stores, Inc. 1,665,000
5,000 Walgreen Co. 128,750
----------
6,407,848

See Notes to Financial Statements

86
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

Shares Description Value (Note 1)
--------------------------------------------------------------------------------
Telecommunication Services 2.4%
22,350 AT&T Corp. $ 1,257,187
9,400 Bell Atlantic Corp. 574,575
3,400 BellSouth Corp. 159,800
750 CenturyTel, Inc. 27,844
5,400 GTE Corp. 383,400
8,812 MCI WorldCom, Inc.(a) 399,294
20,912 SBC Communications, Inc. 878,304
4,700 Sprint Corp. 296,100
--------------
3,976,504
--------------------------------------------------------------------------------
Telecommunications Equipment 1.9%
13,400 ADC Telecommunications, Inc.(a) 721,925
12,800 Lucent Technologies, Inc. 777,600
6,900 Nortel Networks Corp. 869,400
4,700 QUALCOMM, Inc.(a) 701,769
900 Tellabs, Inc.(a) 56,686
--------------
3,127,380
--------------------------------------------------------------------------------
Textile-Apparel Manufacturing
500 Jones Apparel Group, Inc.(a) 15,938
--------------------------------------------------------------------------------
Tobacco 0.3%
18,000 Philip Morris Co., Inc. 380,250
4,300 UST, Inc. 67,188
---------------
447,438
--------------------------------------------------------------------------------
Transportation/Trucking/Shipping 0.3%
17,700 Burlington Northern, Inc. 391,612
1,200 Fedex Corp. 46,800
100 Kansas City Southern Industries, Inc. 8,594
1,000 Union Pacific Corp. 39,125
---------------
486,131
---------------
Total common stocks (cost $60,103,770) 79,437,423
---------------

See Notes to Financial Statements

87
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

Principal
Moody's Amount
Rating (000) Description Value (Note 1)
--------------------------------------------------------------------------------
DEBT OBLIGATIONS 27.1%
CORPORATE BONDS 13.7%
--------------------------------------------------------------------------------
Aerospace/Defense 1.1%
Boeing Inc., Deb.,
8.10%, 11/15/06 $ 731,941
A1 $ 700(e)
Northrop Grumman Corp., Deb.,
7.75%, 3/1/16 667,499
Baa3 700(e)
Raytheon Co., Note,
6.30%, 3/15/05 466,020
Baa2 500(e)
------------
1,865,460
--------------------------------------------------------------------------------
Agricultural Products 0.3%
Monsanto Company, Note,
5.75%, 12/1/05 471,350
A1 500
--------------------------------------------------------------------------------
Airlines 0.1%
Delta Air Lines Inc. Deb., Note,
8.30%, 12/15/29 213,838
Baa3 230(e)
--------------------------------------------------------------------------------
Asset Backed Securities 1.4%
Citibank Credit Card Master Trust
I,
Class A,
5.875%, 3/10/11 463,590
Aaa 500(e)
Citibank Credit Card Master Trust,
Cl. A,
6.05%, 1/15/10 1,382,340
Aaa 1,500(e)
MBNA Master Credit Card Trust, Ser.
C, Cl. A,
6.45%, 2/15/08 482,810
Aaa 500(e)
------------
2,328,740
--------------------------------------------------------------------------------
Banking 2.4%
BankAmerica Corp., MTN,
7.125%, 5/12/05 981,090
Aa2 1,000(e)
Barclays Bank Plc, Note,
7.40%, 12/15/09 391,168
Aa3 400(e)
Chemical Bank, Sub. Note,
7.00%, 6/1/05 979,800
Aa3 1,000(e)

See Notes to Financial Statements

88
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

Principal
Moody's Amount
Rating (000) Description Value (Note 1)
--------------------------------------------------------------------------------

Citicorp, Sub. Note,
7.125%, 9/1/05 $ 494,440
A1 $ 500(e)
First Union-Lehman Brothers Bank.,
Ser. 98,
6.56%, 11/18/08 381,517
Aaa 400(e)
Keycorp Capital III, Capital
Securities,
7.75%, 7/15/29 92,138
A1 100(e)
National Westminster Bank PLC,
Sub. Note
7.375%, 10/1/09 536,387
Aa3 550
--------------
3,856,540

--------------------------------------------------------------------------------
Building & Construction 0.5%
Hanson Overseas BV, Sr. Note,
6.75%, 9/15/05 764,480
A3 800(e)
--------------------------------------------------------------------------------
Commercial Paper 1.1%
Bank One Corp., Note,
6.875%, 8/1/06 478,405
Aa3 500(e)
Bank Tokyo Mitsubishi Ltd
Global Sr Sub Note
8.40%, 4/15/10 253,125
A3 250
General Motors Acceptance
Corporation, Note,
7.75%, 1/19/10 252,307
A2 250(e)
Hydro-Quebec
8.00%, 2/1/13 315,783
A2 300
PaineWebber Group, Inc.
7.625%, 12/1/09 490,820
Baa1 500(e)
--------------
1,790,440

--------------------------------------------------------------------------------
Consulting 0.2%
Comdisco, Inc., Note,
5.95%, 4/30/02 385,968
Baa1 400(e)
--------------------------------------------------------------------------------
Financial Services 3.8%
Associates Corporation of North
America, Senior Note,
5.75%, 11/1/03 334,047
Aa3 350

See Notes to Financial Statements

89
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

Principal
Moody's Amount
Rating (000) Description Value (Note 1)
--------------------------------------------------------------------------------
BCH Cayman Islands Ltd., Sub Note,
7.70%, 7/15/06 $ 159,376
A1 $ 160
Bear, Stearns & Co. Inc., Sr. Note,
8.75%, 3/15/04 1,038,120
A2 1,000(e)
Ford Motor Credit Co.,
7.375%, 10/28/09 783,728
A1 800(e)
Ford Motor Credit Corp., Deb.,
7.40%, 11/1/46 268,920
A1 285
General Motors Acceptance Corp.,
Sr. Note,
6.75%, 2/7/02 563,143

A2 570(e)
Goldman, Sachs Group LP, Note,
7.25%, 10/1/05 692,216
A1 700(e)
Heller Financial Inc., Note,
6.00%, 3/19/04 378,272
A3 400(e)
Lehman Brothers Holdings, Inc.,
Notes,
A3 240(e) 6.625%, 4/1/04 231,000
A3 130(e) 6.625%, 2/5/06 124,144

Merrill Lynch & Co., MTN,
6.02%, 5/11/01 493,705
Aa3 500(e)
Santander Finance Issuances, Note,
6.80%, 7/15/05 500,453
A1 520(e)
US West Capital Funding Inc., Note,
6.125%, 7/15/02 584,082
Baa1 600(e)
--------------
6,151,206
--------------------------------------------------------------------------------
Foreign Government Bonds 0.1%
Comunidad Autonoma De Andalucia,
Note,
7.25%, 10/1/29 115,764
Aa3 120
--------------------------------------------------------------------------------
Leisure 0.1%
Marriott International Inc., Ser.
C, Note,
7.875%, 9/15/09 171,073
Baa1 175(e)
-------------------------------------------------------------------------------
Media & Entertainment 0.6%
News America Holdings, Inc., Deb.,
9.25%, 2/1/13 328,569
Baa3 300(e)

See Notes to Financial Statements

90
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

Principal
Moody's Amount
Rating (000) Description Value (Note 1)
--------------------------------------------------------------------------------
Time Warner, Inc., Sr. Note,
9.125%, 1/15/13 $ 666,792
Baa3 $ 600(e)
--------------
995,361
--------------------------------------------------------------------------------
Medical Products & Services 0.2%
Tyco International Group, Note,
6.375%, 6/15/05 375,188
Baa1 400(e)
--------------------------------------------------------------------------------
Oil & Gas Exploration/Production 0.6%
Atlantic Richfield Co., Deb.,
10.875%, 7/15/05 810,173
A2 700(e)
Occidental Petroleum Corporation,
Senior Note,
7.65%, 2/15/06 196,610
Baa3 200
--------------
1,006,783
--------------------------------------------------------------------------------
Oil & Gas Services
Amerada Hess Corp., Note,
7.875%, 10/1/29 48,478
Baa1 50(e)
--------------------------------------------------------------------------------
Retail 0.1%
Wal Mart Stores Incorporated Note,
6.875%, 8/10/09 145,932
Aa2 150
--------------------------------------------------------------------------------
Telecommunication Services 0.4%
GTE Corp.,
Baa1 220(e) 6.36%, 4/15/06, Deb. 207,238
7.51%, 4/1/09, Note 209,078
Baa1 210(e)
Sprint Capital Corp., Note,
6.875%, 11/15/28 295,934
Baa1 330(e)
--------------
712,250
--------------------------------------------------------------------------------
Utilities 0.6%
Southern California Edison Co.,
Note,
6.50%, 6/1/01 992,360
A2 1,000(e)
--------------
Total U.S. corporate bonds
(cost $23,434,454) 22,391,211
--------------

See Notes to Financial Statements

91
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

Principal
Moody's Amount
Rating (000) Description Value (Note 1)
--------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS 0.5%
Commercial Mortgage Asset Trust
Series 1999 C2 Class A1,
7.285%, 12/17/07 $ 193,030
Aaa $ 195
Federal National Mortgage
Association Remic,
Series 1993 Cl55K,
6.50%, 5/25/08 580,500
Aaa 600
--------------
Total collateralized mortgage
obligations (cost $787,156) 773,530
--------------
--------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH OBLIGATIONS 9.5%
Federal Home Loan Mortgage Corp.,
7.00%, 12/1/99 1,923,740
Aaa 2,000(c)
Federal National Mortgage Assoc.,
Aaa 558 8.50%, 10/1/24 569,430
Aaa 0(d) 9.50%, 7/1/25 139
Aaa 319 8.50%, 2/1/28 325,236
Aaa 5,600(c) 7.50%, 12/1/99 5,503,736
Aaa 3,500(c) 6.50%, 12/1/99 3,281,250
Aaa 1,600(c) 6.50%, 12/1/99 1,540,496
Government National Mortgage
Assoc.,
Aaa 1,500(c) 7.00%, 12/15/99 1,453,125
Aaa 1,000(c) 8.00%, 12/15/99 1,011,250
--------------
Total U.S. government agency
mortgage pass-through obligations
(cost $15,552,052) 15,608,402
--------------
--------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY STRIPPED SECURITIES 1.4%
Federal National Mortgage Assoc.,
8.00%, 12/1/23 440,485
Aaa 437
Federal National Mortgage Assoc.,
7.00%, 12/1/99 1,767,924
Aaa 1,800(c)
--------------
2,208,409
--------------
Total U.S. government agency
stripped security (cost
$2,204,317) 2,208,409
--------------

See Notes to Financial Statements

92
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

Principal
Moody's Amount
Rating (000) Description Value (Note 1)
--------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES 2.0%

United States Treasury Notes,
Aaa $ 200(e) 6.00%, 8/15/04 $ 197,282
Aaa 270(e) 7.50%, 2/15/05 282,318
Aaa 351(e) 6.00%, 8/15/09 346,556
United States Treasury Bonds,
6.125%, 8/15/29 1,065,085
Aaa 1,045(e)
United States Treasury Notes,
6.50%, 2/28/02 549,741
Aaa 550
132(e) 6.50%, 2/15/10 136,620
Aaa
United States Treasury Stripped
Interest,
Zero Coupon, 11/15/21 713,154
Aaa 2,600
--------------
Total U.S. government securities
(cost $3,212,071) 3,290,756
--------------
Total debt obligations (cost
$45,190,050) 44,272,308
--------------
Total long-term investments
(cost $105,293,820) 123,709,731
--------------
SHORT-TERM INVESTMENTS 34.1%
--------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES 3.8%
United States Treasury Bills.
350(b) 5.63%, 6/22/00 345,512
950(b) 5.6725%, 6/22/00 937,725
Federal Home Loan Bank
Discount Notes,
6.05%, 4/3/00 4,890,356
4,892
--------------
Total U.S. government securities
(cost $6,173,593) 6,173,593
--------------

See Notes to Financial Statements

93
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Portfolio of Investments as of March 31, 2000 (Unaudited) Cont'd.

Principal
Moody's Amount
Rating (000) Description Value (Note 1)
--------------------------------------------------------------------------------
COMMERCIAL PAPER 11.4%

Centric Capital Corp.,
6.08%, 5/19/00 $ 3,471,626
P-1 $ 3,500
Cox Enterprises Inc.,
6.20%, 4/26/00 2,987,083
P-2 3,000
General Electric Capital Services
Inc.,
6.07%, 5/18/00 3,968,301
P-1 4,000
Johnson Controls, Inc.,
6.33%, 4/3/00 3,744,683
P-1 3,746
Old Line Funding Corp.,
6.05%, 5/15/00 4,466,725
P-1 4,500
-------------
Total commercial paper
(cost $18,638,418) 18,638,418
-------------
--------------------------------------------------------------------------------
REPURCHASE AGREEMENT 18.9%
31,014,000 Joint Repurchase Agreement
Account, 6.15%, 4/3/00 (cost
$31,014,000, Note 5) 31,014,000
-------------
Total short-term investments
(cost $55,826,011) 55,826,011
-------------
Total Investments 109.7%
(cost $161,119,831) 179,535,742
Liabilities in excess of other
assets (9.7%) (15,891,444)
-------------
Net Assets 100% $ 163,644,298
=============

--------------------------------------------------------------------------------
(a) Non-income producing security.
(b) All or partial amount of security is segregated as collateral for financial
futures transactions.
(c) Mortgage dollar roll, see Note 1 and Note 4.
(d) Figures are actual, not rounded to the nearest thousand.
(e) Pledged as collateral for dollar rolls.
MTN--Medium Term Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.

See Notes to Financial Statements

94
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Statement of Assets and Liabilities (Unaudited)
<TABLE>
<CAPTION>
March 31, 2000
<S> <C>
- ----------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $130,105,844) $ 148,521,743
Repurchase agreement (cost $31,014,000) 31,014,000
Cash 312
Dividends and interest receivable 578,816
Receivable for Fund shares sold 312,258
Receivable for investments sold 279,799
Due from broker-variation margin 145,988
Other assets 4,770
--------------
Total assets 180,857,686
--------------
LIABILITIES
Payable for investments purchased 16,746,649
Payable for Fund shares reacquired 203,601
Accrued expenses and other liabilities 161,343
Management fee payable 87,034
Distribution fee payable 14,761
--------------
Total liabilities 17,213,388
--------------
NET ASSETS $ 163,644,298
==============
Net assets were comprised of:

Common stock, at par $ 11,873
Paid-in capital in excess of par 141,308,908
--------------
141,320,781
Undistributed net investment income 1,200,937
Accumulated net realized gain on investments 977,217
Net unrealized appreciation on investments 20,145,363
--------------
Net assets, March 31, 2000 $ 163,644,298
==============
</TABLE>

See Notes to Financial Statements

95
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Statement of Assets and Liabilities (Unaudited) Cont'd.

<TABLE>
<CAPTION>
March 31, 2000
- ----------------------------------------------------------------------------------
<S> <C>
Class A:
Net asset value and redemption price per share
($12,840,607 / 932,986 shares of common stock issued and
outstanding) $13.76
Maximum sales charge (5% of offering price) .72
--------------
Maximum offering price to public $14.48
==============
Class B:
Net asset value, offering price and redemption price per
share
($13,221,126 / 961,681 shares of common stock issued and
outstanding) $13.75
==============
Class C:
Net asset value and redemption price per share
($1,646,547 / 119,774 shares of common stock issued and
outstanding) $13.75
Sales charge (1% of offering price) .14
--------------
Offering price to public $13.89
==============
Class Z:
Net asset value, offering price and redemption price per
share
($135,936,018 / 9,858,229 shares of common stock issued
and outstanding) $13.79
==============
</TABLE>

See Notes to Financial Statements

96
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Statement of Operations (Unaudited)

<TABLE>
<CAPTION>
Six Months
Ended
March 31, 2000
<S> <C>
- -----------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 2,546,354
Dividends (net of foreign withholding taxes of $658) 446,648
-----------------
Total income 2,993,002
-----------------
Expenses
Management fee 498,745
Distribution fee--Class A 14,200
Distribution fee--Class B 59,787
Distribution fee--Class C 6,860
Transfer agent's fees and expenses 138,000
Reports to shareholders 70,000
Custodian's fees and expenses 69,000
Registration fees 45,000
Legal fees and expenses 10,000
Audit fee and expenses 10,000
Directors' fees and expenses 4,000
Miscellaneous 1,118
-----------------
Total expenses 926,710
-----------------
Net investment income 2,066,292
-----------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions 1,467,737
Financial futures contracts (39,379)
-----------------
1,428,358
-----------------
Net change in unrealized appreciation on:
Investments 11,686,465
Financial futures contracts 2,004,060
-----------------
13,690,525
-----------------
Net gain on investments 15,118,883
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 17,185,175
=================
</TABLE>

See Notes to Financial Statements

97
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
March 31, 2000 September 31, 1999
<S> <C> <C>
- -----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 2,066,292 $ 3,573,191
Net realized gain on investments 1,428,358 9,924,830
Net change in unrealized appreciation on
investments 13,690,525 9,882,582
-------------- ------------------
Net increase in net assets resulting from
operations 17,185,175 23,380,603
-------------- ------------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A (218,395) (74,318)
Class B (155,300) (52,406)
Class C (17,058) (4,693)
Class Z (2,869,828) (4,048,216)
-------------- ------------------
(3,260,581) (4,179,633)
-------------- ------------------
Distributions from net realized gains
Class A (538,187) (438,657)
Class B (595,317) (480,842)
Class C (65,388) (43,068)
Class Z (6,387,683) (21,035,473)
-------------- ------------------
(7,586,575) (21,998,040)
-------------- ------------------
Series share transactions (net of share
conversion) (Note 6)
Net proceeds from shares sold 23,663,309 69,542,543
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions 10,820,733 26,157,302
Cost of shares reacquired (23,920,755) (114,537,650)
-------------- ------------------
Net increase (decrease) in net assets
from Series share transactions 10,563,287 (18,837,805)
-------------- ------------------
Total increase (decrease) 16,901,306 (21,634,875)
NET ASSETS
Beginning of period 146,742,992 168,377,867
-------------- ------------------
End of period(a) $163,644,298 $146,742,992
============== ==================
- ------------------------------
(a) Includes undistributed net investment
income of $ 1,200,937 $ 2,395,226
-------------- ------------------
</TABLE>

See Notes to Financial Statements

98
<PAGE>

The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Notes to Financial Statements (Unaudited)

Prudential Active Balanced Fund (the 'Series') is a separately managed
series of The Prudential Investment Portfolios, Inc. (the 'Fund'). The Fund was
incorporated in Maryland on August 10, 1995 and is registered under the
Investment Company Act of 1940 as a diversified, open-end, management investment
company.

Note 1. Accounting Policies

The following is a summary of significant accounting policies followed by the
Fund and the Series in the preparation of its financial statements.
Securities Valuation: Securities listed on a securities exchange and
NASDAQ (other than options on securities and indices) are valued at the last
sale price on such exchange or system on the day of valuation or, if there was
no sale on such day, at the mean between the last bid and asked prices on such
day or at the bid price on such day in the absence of an asked price. Securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager, in
consultation with the Subadviser, to be over-the-counter, are valued by an
independent pricing agent or principal market maker. Futures contracts and
options thereon traded on a commodities exchange or board of trade are valued at
the last sale price at the close of trading on such exchange or board of trade
or, if there was no sale on the applicable commodities exchange or board of
trade on such day, at the mean between the most recently quoted bid and asked
prices on such exchange or board of trade. Securities for which market
quotations are not readily available, other than private placements, are valued
at a price supplied by an independent pricing agent which is, in the opinion of
such pricing agent, representative of the market value of such securities as of
the time of determination of net asset value or, using a methodology developed
by an independent pricing agent, which is, in the judgement of the Manager and
Subadviser, able to produce prices which are representative of market value.

99
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Notes to Financial Statements (Unaudited) Cont'd.

amortized to the date of maturity, unless the Board of Directors determines that
such variation does not represent fair value.

All securities are valued as of 4:15 p.m., New York time.

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

Financial Futures Contracts: A financial futures contract is an agreement
to purchase (long) or sell (short) an agreed amount of securities or commodities
at a set price for delivery on a future date. Upon entering into a financial
futures contract, the Series 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 Series each day, depending on
the daily fluctuations in the value of the underlying security or commodity.
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.

The Series invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series intends to purchase
against fluctuations in value caused by changes in prevailing interest rates or
market conditions. Should interest rates move unexpectedly, the Series 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.

Dollar Rolls: The Series enters into mortgage dollar rolls in which the
Series sells mortgage securities for delivery in the current month, realizing a
gain or loss and simultaneously contracts to repurchase somewhat similar (same
type, coupon and maturity) securities on a specified future date. During the
roll period, the Series forgoes principal and interest paid on the securities.
The Series is compensated by the interest earned on the cash proceeds of the
initial sale and by the lower repurchase price at the future date. The
difference between the sales proceeds and the lower repurchase price is recorded
as interest income. The Series maintains a segregated

100
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Notes to Financial Statements (Unaudited) Cont'd.

account, the dollar value of which is at least equal to its obligations in
respect of dollar rolls.

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

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

Dividends and Distributions: The Series will declare and distribute its
net investment income and net capital gains, if any, at least annually.
Dividends and distributions are recorded on the ex-dividend date.

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

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

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

Note 2. Agreements

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

The management fee paid PIFM is computed daily and payable monthly at an
annual rate of .65 of 1% of the Series' average daily net assets.

101
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Notes to Financial Statements (Unaudited) Cont'd.

Series' Class A, Class B and Class C shares, pursuant to plans of distribution
(the 'Class A, B and C Plans'), regardless of expenses actually incurred. The
distribution fees are accrued daily and payable monthly. No distribution or
service fees were paid to PIMS as distributor of the Class Z shares of the
Series.

PIMS has advised the Series that it received approximately $16,299 and
$4,395 in front-end sales charges resulting from sales of Class A shares and
Class C shares, respectively, during the six months ended March 31, 2000. From
these fees, PIMS paid such sales charges to affiliated broker-dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.

PIMS has advised the Series that for the six months ended March 31, 2000,
it received approximately $21,244 and $853 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.

PIC, PIFM and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America ('Prudential').

The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The Funds pay a
commitment fee of .080 of 1% of the unused portion of the credit facility. The
commitment fee is accrued and paid quarterly on a pro rata basis by the Funds.
The expiration date of the SCA is March 9, 2001. Prior to March 9, 2000, the
commitment fee was .065 of 1% of the unused portion of the credit facility. The
Fund did not borrow any amounts pursuant to the SCA during the year ended March
31, 2000.

Note 3. Other Transactions With Affiliates

Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended March 31, 2000,
the Series incurred fees of approximately $133,300 for the services of PMFS. As
of March 31, 2000, approximately $19,100 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also include certain
out-of-pocket expenses paid to nonaffiliates.

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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund

Notes to Financial Statements (Unaudited) Cont'd.
Note 4. Portfolio Securities
Purchases and sales of investment securities other than short-term investments,
for the six months ended March 31, 2000 were $133,343,053 and $130,609,063,
respectively.
The average monthly balance of dollar rolls outstanding during the six
months ended March 31, 2000 was approximately $1,149,061. The value of dollar
rolls outstanding at March 31, 2000 was $16,481,521 (principal $16,393,687),
which was 9.1% of total assets.
The cost basis of investments for federal income tax purposes as of March
31, 2000 was $161,436,773 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $18,098,969 (gross unrealized
appreciation--$24,570,567, gross unrealized depreciation--$6,471,598).
During the six months ended March 31, 2000, the Series entered into
financial futures contracts. Details of open contracts at March 31, 2000 are as
follows:

<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration March 31, Trade Appreciation/
Contracts Type Date 2000 Date (Depreciation)
----------------------- ----------- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Long Position:
U.S. 10yr
28 T-Note Jun. 00 $ 2,746,188 $ 2,676,805 $ 69,383
42 S&P 500 Jun. 00 15,910,650 14,468,475 1,442,175
U.S. 5yr
164 T-Note Jun. 00 16,154,000 15,936,094 217,906
----------
$1,729,464
==========
</TABLE>

Note 5. Joint Repurchase Agreement Account
The Series, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Government or federal agency obligations. At March 31,
2000, the Series had a 4.7% undivided interest in repurchase agreements in the
joint account. The undivided interest for the Series represented $31,014,000 in
principal amount. As of such date,

103
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund

Notes to Financial Statements (Unaudited) Cont'd.
each repurchase agreement in the joint account and the value of the collateral
therefore was as follows:
Bear, Stearns & Co. Inc., 6.10%, in the principal amount of $120,000,000,
repurchase price of $120,061,000, due 4/3/00. The value of the collateral
including accrued interest was $123,642,827.
Credit Suisse First Boston Corp., 6.10%, in the principal amount of
$130,000,000, repurchase price of $130,066,083, due 4/3/00. The value of the
collateral including accrued interest was $134,450,258.
Greenwich Capital Markets, Inc., 6.15%, in the principal amount of
$100,000,000, repurchase price of $100,051,250, due 4/3/00. The value of the
collateral including accrued interest was $102,005,200.
Goldman, Sachs & Co., 6.09%, in the principal amount of $100,000,000,
repurchase price of $100,050,750, due 4/3/00. The value of the collateral
including accrued interest was $102,000,425.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 6.25%, in the principal
amount of $207,289,000, repurchase price of $207,396,963, due 4/3/00. The value
of the collateral including accrued interest was $211,435,308.

Note 6. Capital
The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 5%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
There are 3 billion shares of $.001 par value common stock of the Fund
authorized which are divided into three series, each of which offers four
classes, designated

104
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Notes to Financial Statements (Unaudited) Cont'd.
Class A, Class B, Class C and Class Z, each of which consists of 250 million
authorized shares.
Transactions in shares of common stocks were as follows:

<TABLE>
<CAPTION>
Class A Shares Amount
---------------------------------------------------------- ---------- ------------
<S> <C> <C>
Six months ended March 31, 2000:
Shares sold 196,715 $ 2,594,785
Shares issued in reinvestment of dividends and
distributions 57,495 751,456
Shares reacquired (109,229) (1,440,019)
---------- ------------
Net increase in shares outstanding before conversion 144,981 1,906,222
Shares issued upon conversion from Class B 3,413 44,738
---------- ------------
Net increase in shares outstanding 148,394 $ 1,950,960
========== ============

Year ended September 30, 1999:
Shares sold 806,345 $ 10,710,045
Shares issued in reinvestment of dividends and
distributions 41,285 510,287
Shares reacquired (305,438) (4,105,228)
---------- ------------
Net increase in shares outstanding before conversion 542,192 7,115,104
Shares issued upon conversion from Class B 236 3,120
---------- ------------
Net increase in shares outstanding 542,428 $ 7,118,224
========== ============

<CAPTION>
Class B
----------------------------------------------------------
<S> <C> <C>
Six months ended March 31, 2000:
Shares sold 262,998 $ 3,473,991
Shares issued in reinvestment of dividends and
distributions 56,023 732,778
Shares reacquired (187,290) (2,470,666)
---------- ------------
Net increase in shares outstanding before conversion 131,731 1,736,103
Shares reacquired upon conversion into Class A (3,420) (44,738)
---------- ------------
Net increase in shares outstanding 128,311 $ 1,691,365
========== ============

Year ended September 30, 1999:
Shares sold 652,713 $ 8,665,383
Shares issued in reinvestment of dividends and
distributions 41,783 516,862
Shares reacquired (90,666) (1,202,053)
---------- ------------
Net increase in shares outstanding before conversion 603,830 7,980,192
Shares reacquired upon conversion into Class A (236) (3,120)
---------- ------------
Net increase in shares outstanding 603,594 $ 7,977,072
========== ============
</TABLE>

105
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Notes to Financial Statements (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Class C Shares Amount
---------------------------------------------------------- ---------- ------------
<S> <C> <C>
Six months ended March 31, 2000:
Shares sold 51,469 $ 679,021
Shares issued in reinvestment of dividends and
distributions 6,048 79,112
Shares reacquired (22,520) (297,822)
---------- ------------
Net increase in shares outstanding 34,997 $ 460,311
========== ============

Year ended September 30, 1999:
Shares sold 98,943 $ 1,301,393
Shares issued in reinvestment of dividends and
distributions 3,860 47,750
Shares reacquired (39,496) (519,205)
---------- ------------
Net increase in shares outstanding 63,307 $ 829,938
========== ============

<CAPTION>
Class Z
----------------------------------------------------------
<S> <C> <C>
Six months ended March 31, 2000:
Shares sold 1,277,760 $ 16,915,512
Shares issued in reinvestment of dividends and
distributions 708,293 9,257,387
Shares reacquired (1,491,462) (19,712,248)
---------- ------------
Net increase in shares outstanding 494,591 $ 6,460,651
========== ============
Year ended September 30, 1999:
Shares sold 3,692,823 $ 48,865,722
Shares issued in reinvestment of dividends and
distributions 2,032,131 25,082,403
Shares reacquired (8,515,198) (108,711,164)
---------- ------------
Net decrease in shares outstanding (2,790,244) $(34,763,039)
========== ============
</TABLE>

106
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund

Financial Highlights (Unaudited)

<TABLE>
<CAPTION>
Class A
----------------------
Six Months Ended
March 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 13.25
--------
Income from investment operations:
Net investment income .19
Net realized and unrealized gain (loss) on investment
transactions 2.01
--------
Total from investment operations 2.20
--------
Less distributions:
Dividends from net investment income (.28)
Distributions from net realized gains (.69)
--------
Total distributions (.97)
--------
Net asset value, end of period $ 14.48
=========
TOTAL RETURN(d): 11.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 12,841
Average net assets (000) $ 11,360
Ratios to average net assets:
Expenses, including distribution fees 1.35%(c)
Expenses, excluding distribution fees 1.10%(c)
Net investment income 2.55%(c)
Portfolio turnover rate 112%
</TABLE>

------------------------------
(a) Commencement of offering of Class A shares.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.

See Notes to Financial Statements

107
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Financial Highlights (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------------------------
Year Ended September 30, November 7, 1996(a)
------------------------------------------ through September 30,
1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
$ 13.29 $14.41 $13.40
.31 .44 .21(b)
1.69 (.20) 1.97
-------- ------- -------
2.00 .24 2.18
-------- ------- -------
(.30) (.32) (.39)
(1.74) (1.04) (.78)
-------- ------- -------
(2.04) (1.36) (1.17)
-------- ------- -------
$ 13.25 $13.29 $14.41
======== ======= =======
16.07% 1.93% 17.48%
$ 10,397 $3,218 $ 990
$ 6,918 $2,090 $ 100
1.41% 1.28% 1.31%(c)
1.16% 1.03% 1.06%(c)
2.29% 2.72% 2.69%(c)
230% 256% 50%
</TABLE>

See Notes to Financial Statements

108
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Financial Highlights (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Class B
----------------
Six Months Ended
March 31, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 13.17
--------
Income from investment operations:
Net investment income .13
Net realized and unrealized gain (loss) on investment
transactions 1.32
--------
Total from investment operations 1.45
--------
Less distributions:
Dividends from net investment income (.18)
Distributions from net realized gains (.69)
--------
Total distributions (.87)
--------
Net asset value, end of period $ 13.75
========

TOTAL RETURN(d): 11.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 13,221
Average net assets (000) $ 11,957
Ratios to average net assets:
Expenses, including distribution fees 2.10%(c)
Expenses, excluding distribution fees 1.10%(c)
Net investment income 1.80%(c)
Portfolio turnover rate 112%
</TABLE>

See Notes to Financial Statements

109
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Financial Highlights (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------------------------
Year Ended September 30, November 7, 1996(a)
------------------------------------------ through September 30,
1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 13.22 $14.34 $13.40
-------- ------- -------
.19 .27 .19(b)
1.69 (.14) 1.92
-------- ------- -------
1.88 .13 2.11
-------- ------- -------
(.19) (.21) (.39)
(1.74) (1.04) (.78)
-------- ------- -------
(1.93) (1.25) (1.17)
-------- ------- -------
$ 13.17 $13.22 $14.34
======== ======= =======
15.12% 1.10% 16.91%
$ 10,979 $3,038 $ 213
$ 7,018 $1,285 $ 71
2.16% 2.03% 2.06%(c)
1.16% 1.03% 1.06%(c)
1.54% 1.95% 1.94%(c)
230% 256% 50%
</TABLE>

See Notes to Financial Statements

110
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Financial Highlights (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Class C
----------------
Six Months Ended
March 31, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 13.17
--------
Income from investment operations:
Net investment income .14
Net realized and unrealized gain (loss) on investment
transactions 1.45
--------
Total from investment operations 1.59
--------
Less distributions:
Dividends from net investment income (.18)
Distributions from net realized gains (.69)
--------
Total distributions (.87)
--------
Net asset value, end of period $ 13.89
========

TOTAL RETURN(d): 11.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 1,647
Average net assets (000) $ 1,372
Ratios to average net assets:
Expenses, including distribution fees 2.10%(c)
Expenses, excluding distribution fees 1.10%(c)
Net investment income 1.81%(c)
Portfolio turnover rate 112%
</TABLE>

------------------------------
(a) Commencement of offering of Class C shares.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.

See Notes to Financial Statements

111
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Financial Highlights (Unaudited) Cont'd.

<TABLE>
<CAPTION>
Class C
---------------------------------------------------------------------------------------
Year Ended September 30, November 7, 1996(a)
------------------------------------------ through September 30,
1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C>
$ 13.22 $14.34 $13.40
-------- ------- -------
.19 .48 .13(b)
1.69 (.35) 1.98
-------- ------- -------
1.88 .13 2.11
-------- ------- -------
(.19) (.21) (.39)
(1.74) (1.04) (.78)
-------- ------- -------
(1.93) (1.25) (1.17)
-------- ------- -------
$ 13.17 $13.22 $14.34
======== ======= =======
15.12% 1.10% 16.91%
$ 1,117 $ 284 $ 5
$ 674 $ 118 $ 1
2.16% 2.03% 2.06%(c)
1.16% 1.03% 1.06%(c)
1.54% 2.04% 1.94%(c)
230% 256% 50%
</TABLE>

See Notes to Financial Statements

112
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class Z
----------------
Six Months Ended
March 31, 2000
------------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 13.27
----------------
Income from investment operations:
Net investment income .19
Net realized and unrealized gain (loss) on investment
transactions 1.33
----------------
Total from investment operations 1.52
----------------
Less distributions:
Dividends from net investment income (.31)
Distributions from net realized gains (.69)
----------------
Total distributions (1.00)
----------------
Net asset value, end of period $ 13.79
================

TOTAL RETURN(d): 11.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $135,936
Average net assets (000) $128,771
Ratios to average net assets:
Expenses, including distribution fees 1.10%(c)
Expenses, excluding distribution fees 1.10%(c)
Net investment income 2.80%(c)
Portfolio turnover rate 112%
</TABLE>

--------------------------------
(a) Net of expense subsidy.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total return for periods of less than a full
year are not annualized.

See Notes to Financial Statements

113
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The Prudential Investment Portfolios, Inc. Prudential Active
Balanced Fund
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class Z
------------------------------------------------------------------------------------------------------------
Year Ended September 30,
------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 13.32 $ 14.45 $ 13.01 $ 12.46 $ 10.92
------------------ ---------------- ---------------- ---------------- ----------------
.35 .38 .39(b) .29(a) .33(a)
1.68 (.12) 2.22 .81 1.54
------------------ ---------------- ---------------- ---------------- ----------------
2.03 .26 2.61 1.10 1.87
------------------ ---------------- ---------------- ---------------- ----------------
(.34) (.35) (.39) (.37) (.29)
(1.74) (1.04) (.78) (.18) (.04)
------------------ ---------------- ---------------- ---------------- ----------------
(2.08) (1.39) (1.17) (.55) (.33)
------------------ ---------------- ---------------- ---------------- ----------------
$ 13.27 $ 13.32 $ 14.45 $ 13.01 $ 12.46
------------------ ---------------- ---------------- ---------------- ----------------
16.32% 2.12% 21.34% 9.11% 17.66%
$124,250 $161,838 $158,672 $153,588 $133,352
$130,052 $177,443 $154,199 $142,026 $104,821
1.16% 1.03% 1.06% 1.00%(a) 1.00%(a)
1.16% 1.03% 1.06% 1.00%(a) 1.00%(a)
2.54% 2.99% 2.94% 3.09%(a) 3.53%(a)
230% 256% 50% 51% 30%
</TABLE>

See Notes to Financial Statements

114
<PAGE>

Prudential Active Balanced Fund

Prudential Mutual Fund Family

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

STOCK FUNDS
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Stock Index Fund
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund

Asset Allocation/Balanced Funds
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund

GLOBAL FUNDS
Global Stock Funds
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Global Utility Fund, Inc.
Target Funds
International Equity Fund

Global Bond Funds
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.

115
<PAGE>

www.prudential.com (800) 225-1852

BOND FUNDS
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Target Funds
Total Return Bond Fund

Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.

Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series

Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund

Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

116

<PAGE>

Prudential Active Balanced Fund

Getting the Most From Your Prudential Mutual Fund

When you invest through Prudential Mutual Funds, you receive financial advice
from a Prudential Securities Financial Advisor or Pruco Securities registered
representative. Your advisor or representative can provide you with the
following services:
There's No Reward Without Risk; but Is This Risk Worth It?

Your financial advisor or registered representative can help you match the
reward you seek with the risk you can tolerate. Risk can be difficult to
gauge--sometimes even the simplest investments bear surprising risks. The
educated investor knows that markets seldom move in just one direction. There
are times when a market sector or asset class will lose value or provide little
in the way of total return. Managing your own expectations is easier with help
from someone who understands the markets and who knows you!
Keeping Up With the Joneses
A financial advisor or registered representative can help you wade through the
numerous available mutual funds to find the ones that fit your individual
investment profile and risk tolerance. While the newspapers and popular
magazines are full of advice about investing, they are aimed at generic groups
of people or representative individuals--not at you personally. Your financial
advisor or registered representative will review your investment objectives with
you. This means you can make financial decisions based on the assets and
liabilities in your current portfolio and your risk tolerance--not just based on
the current investment fad.
Buy Low, Sell High
Buying at the top of a market cycle and selling at the bottom are among the most
common investor mistakes. But sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or worried
about your investment, and should remind you that you're investing for the long
haul.

117
<PAGE>

www.prudential.com (800) 225-1852

For More Information

Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852

Directors
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
Robin B. Smith
John R. Strangfeld
Louis A. Weil, III
Clay T. Whitehead

Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
David R. Odenath, Jr., Vice President
Grace C. Torres, Treasurer
Marguerite E.H. Morrison, Secretary
Stephen M. Ungerman, Assistant Treasurer
William V. Healey, Assistant Secretary

Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077

Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777

Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077

Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171

Transfer Agent
Prudential Mutual Fund Services LLC
194 Wood Avenue South
Iselin, NJ 08830

Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036

Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795

Fund Symbols NASDAQ CUSIP
Class A -- 74437E883
Class B -- 74437E875
Class C -- 74437E867
Class Z PABFX 74437E859

The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.

The accompanying financial statements as of March 31, 2000, were not audited
and, accordingly, no opinion is expressed on them.

118
<PAGE>

(LOGO)

BULK RATE
U.S. POSTAGE
PAID
Permit 6807
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Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852

MF185E2 74437E883 74437E875 74437E867 74437E859

(LOGO) Printed on Recycled Paper

119
<PAGE>

A Message from the Fund's President September 17, 1999
(PHOTO)
Dear Shareholder,
Your Prudential Balanced Fund's return of 10.37% (Class A shares) was slightly
ahead of the Lipper Average for the 12 months ending July 31, 1999, supported by
the very strong performance of its growth stock holdings over that period. Not
only does the Fund invest in stocks, bonds and money market instruments, its
stock component includes both value and growth stock investment styles. This
further diversification helps reduce the potential volatility of its returns--a
prime objective for balanced funds--while helping its overall performance.

Tapping our combined strengths
Prudential Balanced Fund is one of several mutual funds we offer that combine
the expertise of portfolio managers who have different investment styles or
specialize in different areas of the financial markets. We do this to make it
easier for investors to have a properly diversified portfolio and achieve more
consistent returns over time. With value and growth styles vying in 1999 for
superior returns, it has become increasingly important to have a well-
diversified asset allocation strategy. Moreover, bonds keep their value better
in a steep bear market such as we saw in August 1998.

Our newly reorganized Fixed Income Group illustrates how important we believe it
is to have investment specialists. Earlier in the year, we integrated
Prudential's retail and institutional portfolio managers. This integrated group
now invests approximately $135 billion in assets, making it one of the three
largest fixed-income money managers in the country. To utilize these integrated
resources more effectively, the group has been organized into teams, each
specializing in a different sector of the fixed-income market. The Corporate
Sector team will now be responsible for the day-to-day management of the bond
portion of your Prudential Balanced Fund.

Sticking with your asset allocation strategy
A well-diversified asset allocation strategy helps lessen the effects of market
volatility, provided the strategy remains in place. Therefore, while it is a
good practice to rebalance holdings, when necessary, to keep your asset
allocation consistent with your long-term objectives and risk tolerance,
investors should avoid making rash decisions. Generally speaking, long-term
investment success comes from maintaining an established strategy during both
market highs and market lows.

Thank you for your continued confidence in Prudential mutual funds. I firmly
believe that combining resources, when appropriate, will help us deliver quality
service and performance to all our shareholders.

Sincerely,

John R. Strangfeld
President
Prudential Balanced Fund

1
<PAGE>

Portfolio Managers' Report
(PHOTOS)
Warren Spitz; Jeff Rose, CFA; and
Steven Kellner, Team Leader of the
Corporate Sector Team--
Fund Managers

Investment Goals and Style
The Balanced Fund invests in a diversified portfolio of stocks, bonds and money
market instruments, with a target range of 50% to 60% for stocks, 30% to 40% for
bonds, and 5% to 15% for cash. It buys stocks and bonds primarily of larger,
more mature companies, but also some smaller, faster-growing companies. It may
invest up to 25% of its assets in bonds rated below investment grade, commonly
known as junk bonds. These are subject to greater credit risk, but also may
provide greater returns. The Fund's objective is to achieve a high total
investment return consistent with moderate risk. There can be no assurance that
the Fund's investment objective will be achieved.

Performance Review
Market trends and asset allocation
Our reporting period included a financial crisis in August 1998, when a Russian
currency devaluation and debt default prompted a steep drop in both stock and
bond markets. Our bonds helped stabilize our return during that period, although
they held back our performance over the full 12 months because stock markets
rebounded sharply. The impact was mitigated by our low bond allocation compared
with our normal target. Investor confidence was hit again in January, when
Brazil devalued its currency and its economy slowed. Growth stocks held up
better than value stocks, and recovered more rapidly through these
uncertainties. To maintain our balanced strategy, we shifted funds from the
rising growth-stock portfolio to the less-expensive value stocks. In April 1999,
investors regained their confidence in global growth, and our value stocks moved
ahead swiftly. Then we rebalanced by shifting funds from value to growth.
Rebalancing moves such as these increase the likelihood we will buy low and sell
high.

Growth stocks
Technology companies led the market by a large margin. Although Internet-
related companies were very popular--more than was justified by their earning
prospects, we think--we achieved strong returns without taking on the risk of
new companies with expensive stocks. Our technology holdings focused on firms
with established businesses in the computing industry, but whose markets are
growing enormously with the rise of the Internet and with new types of
telecommunications service. We had substantial holdings in several companies
with exceptionally high stock returns, including JDS Uniphase (up 262%), EMC
(147%), Oracle (115%), Cisco (95%), and Intel (64%). One of our largest growth
holdings was in the related telecommunications services industry--MCI WorldCom
(up 56%). In a rapidly changing and bitterly competitive industry, we believe it
to be the most likely winner.

We also benefited from our selection of financial companies. This was not an
exceptional year for the industry, but our holdings performed very well,
particularly two banks that focused on their credit card businesses. We took
some profits on our MBNA (up 29%) and Providian (74%) shares, but they remained
among our larger holdings on July 31, 1999.

Pharmaceuticals, including our drug holdings, were the weak growth sector in the
stock market. They had become expensive and suffered when investors moved to
cheaper stocks,

2
<PAGE>

but our comparative performance benefited because we held less than a benchmark
weight in drug companies.

Value stocks
Although value stocks picked up strongly in April and May 1999, through most of
our reporting period they continued to suffer from uncertainty about global
economic growth. Investors preferred companies with established growth records,
and value stocks trailed.

Industrials were the best-performing value stocks. We did particularly well with
our substantial holdings in Alcoa (up 76%). It is the dominant aluminum
producer, and both the economic recovery in Asia and the trend to lighter metals
in cars suggest that demand will surge. The consolidation of three of its
competitors in August 1999 will help prevent the construction of new capacity.
Among chemicals, our largest holding was Dow Chemical (up 42%). In August, after
the end of our reporting period, Dow announced the purchase of Union Carbide for
$9.3 billion in stock. This strengthens Dow in a period of industry
consolidation. Geon (up 39%) was also among our largest holdings.

Our consumer-related stocks had mixed results. Of our retailers, Sears Roebuck
and Kmart had negative returns over our reporting period, but our substantial
holding in Limited returned about 73%. We had two home builders, including a
very substantial commitment to Hanson PLC (up 80%). Although our auto stocks
lagged the market, Ford spun off to its shareholders its financial subsidiary
Associates First Capital (which we sold) and General Motors spun off Delphi
Automotive Systems. Both Delphi and GM may benefit from Delphi's increased
entrepreneurial efforts. Our tobacco companies--Nabisco Group, Philip Morris,
and RJ Reynolds--also happen to be expanding food companies, but their stock
prices have been dominated by tobacco-related legal problems. They hurt our
performance.

Performance at a Glance

Cumulative Total Returns1 As of 7/31/99

One Five Ten Since
Year Years Years Inception2

Class A 10.37% 78.44% N/A 181.99%
Class B 9.44 71.77 162.93% 190.21
Class C 9.44 71.30 N/A 71.30
Class Z 10.63 N/A N/A 48.97
Lipper Balanced Fund Avg.3 9.57 103.64 201.30 ***

Average Annual Total Returns1 As of 6/30/99

One Five Ten Since
Year Years Years Inception2

Class A 4.04% 12.05% N/A 11.27%
Class B 3.68 12.23 10.80% 9.68
Class C 6.59 N/A N/A 11.89
Class Z 9.78 N/A N/A 13.46

Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.

1 Source: Prudential Investments Fund Management LLC and Lipper, Inc. The Fund
charges a maximum front-end sales charge of 5% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of 5%,
4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically convert
to Class A shares, on a quarterly basis, approximately seven years after
purchase. Class C shares are subject to a front-end sales charge of 1% and a
CDSC of 1% for 18 months. Class C shares bought before November 2, 1998, have a
1% CDSC if sold within one year. Class Z shares are not subject to a sales
charge or distribution and service (12b-1) fees.

2 Inception dates: Class A, 1/22/90; Class B, 9/15/87; Class C, 8/1/94; Class Z,
3/1/96.

3 Lipper average returns are for all funds in each share class for the one-,
five-, and ten-year periods in the Balanced Fund category.

*** Lipper Since Inception returns are 211.61% for Class A, 253.09% for Class B,
103.90% for Class C, and 57.83% for Class Z, based on all funds in each share
class.
-------------------------------------------------------------------------------

3
<PAGE>

Review Cont'd.
We have a large commitment to hospital management companies and HMOs because we
believe the aging U.S. population means larger markets for their services.
However, the healthcare sector is currently going through growing pains centered
on government reimbursements. It was strongly out of favor, and our
holdings--focused on Columbia HCA Healthcare and HCR Manor Care-- depressed our
return. We consider the current low prices a buying opportunity for our value
strategy. We added Tenet Healthcare and Humana, among others.

We also had a substantial investment in financial companies--including our real
estate holdings--which reduced our return. Financials were hurt by the
uncertainty in the markets and may recover with the global economy.

Bonds
The bond market also had a "flight to quality" in 1998. Our bond holdings
suffered because our corporate bonds fell more than most. Although we made up
some ground when corporates bounced back in 1999, we finished behind our
benchmark.

Looking Ahead
The U.S. economy is growing robustly, and corporate earnings are generally
increasing. However, growth requires capital investment, and this is the kind of
environment that pushes up interest rates. When interest rates rise, stocks
suffer if their profit projections are based on heavy investment for growth or
if their share prices are based on the assumption that profits will grow rapidly
for a long time. Investors are willing to pay more for future earnings when
interest rates are low. Technology stocks often fit this description, so they
tend to suffer along with bond prices. We would be looking for buying
opportunities in technology should rising interest rates bring down share
prices. Our value stock holdings still are priced below growth stocks with
comparable profit potential. We see no need to change their composition until
that gap is closed.

We have invested less in bonds than our normal position. This would shelter our
return should interest rates rise. If they do, we may increase our bond holdings
afterward. We also would increase them if stock prices rise significantly or if
the anticipated global upturn is delayed or aborted because these events would
threaten stock returns. We have a focus on corporate bonds, which we believe to
be good value in today's environment of rising profits: the extra yield on
corporate bonds comes with very little additional credit risk.

Five Largest Value Holdings
Expressed as a percentage of net assets as of 7/31/99

Alcoa, Inc. 2.0%
Metals--Nonferrous
Dow Chemical Co. 1.4
Chemicals
Hanson PLC ADR 1.3
Construction
McDermott International 1.2
Oil & Gas Equipment & Svcs.
Geon Co. 1.2
Chemicals

Five Largest Growth Holdings
Expressed as a percentage of net assets as of 7/31/99

Tyco International Ltd. 1.3%
Diversified Conglomerate
JDS Uniphase Corp. 1.2
Electrical Equipment
MCI WorldCom, Inc. 1.0
Telecommunications
Cisco Systems, Inc. 1.0
Networking
Enron Corp. 1.0
Oil & Gas Equipment & Svcs.

Portfolio Composition
Expressed as a percentage of net assets as of 7/31/99

Stocks... 62.2%
Bonds 29.3
Cash & Equivalents 8.5
-------------------------------------------------------------------------------

4
<PAGE>

Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------

Shares Description Value (Note1)

-----------------------------------------------------------------
LONG-TERM INVESTMENTS--91.0%
COMMON STOCKS--62.2%
-----------------------------------------------------------------
Advertising--1.1%
127,800 Interpublic Group of Companies, Inc. $ 5,367,600
143,300 Young & Rubicam Inc. 6,493,281
-------------
11,860,881
-----------------------------------------------------------------
Airlines--1.1%
144,100 AMR Corp.(a) 9,348,487
65,300 USAirways Group, Inc.(a) 2,326,313
-------------
11,674,800
-----------------------------------------------------------------
Automobiles--1.6%
117,909 Delphi Automotive Systems Corp. 2,122,362
100,600 Ford Motor Co. 4,891,675
168,700 General Motors Corp. 10,280,156
-------------
17,294,193
-----------------------------------------------------------------
Banks--1.2%
59,500 Bank One Corp. 3,246,469
93,600 Chase Manhattan Corp. 7,195,500
75,900 Wells Fargo Co. 2,960,100
-------------
13,402,069
-----------------------------------------------------------------
Beverages--1.2%
90,800 Coca-Cola Enterprises, Inc. 2,650,225
232,700 PepsiCo, Inc. 9,104,388
58,400 The Pepsi Bottling Group, Inc. 1,379,700
-------------
13,134,313
-----------------------------------------------------------------
Chemicals--3.0%
401,600 Agrium, Inc. (Canada) 3,572,622
120,700 Dow Chemical Co. 14,966,800
429,300 Geon Co. 13,147,312
84,000 Lyondell Chemical Co. 1,533,000
-------------
33,219,734
Computer Software & Services--3.0%
35,000 America Online, Inc.(a) $ 3,329,375
86,400 BMC Software, Inc.(a) 4,654,800
132,800 EMC Corp.(a) 8,042,700
106,800 Microsoft Corp.(a) 9,164,775
194,850 Oracle Corp.(a) 7,416,478
-------------
32,608,128
-----------------------------------------------------------------
Construction--2.1%
330,100 Hanson PLC (ADR) (United Kindgom) 14,854,500
228,100 U.S. Home Corp.(a) 7,840,937
-------------
22,695,437
-----------------------------------------------------------------
Consulting
21,249 Gartner Group, Inc.(a) 459,502
-----------------------------------------------------------------
Diversfied Consumer Products--2.2%
127,400 Avon Products, Inc. 5,796,700
73,200 Colgate-Palmolive Co. 3,614,250
64,700 Gillette Co. 2,834,669
69,700 Illinois Tool Works, Inc. 5,179,581
72,200 Procter & Gamble Co. 6,534,100
-------------
23,959,300
-----------------------------------------------------------------
Diversified Operations--2.8%
81,950 General Electric Co. 8,932,550
141,000 JDS Uniphase Corp.(a) 12,742,875
366,500 Nabisco Group Holdings Corp. 6,871,875
126,500 Tomkins PLC (ADR) (United Kingdom) 2,284,906
-------------
30,832,206
-----------------------------------------------------------------
Electrical Services--1.2%
110,000 AES Corp.(a) 6,600,000
154,500 Texas Utilities Co. 6,556,594
-------------
13,156,594

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

5
<PAGE>

Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------

Shares Description Value (Note1)

-----------------------------------------------------------------
Electronics--3.6%
142,000 Altera Corp.(a) $ 5,147,500
31,000 Broadcom Corp.(a) 3,735,500
150,300 Intel Corp. 10,370,700
72,700 LSI Logic Corp.(a) 3,657,719
307,300 Mattel, Inc. 7,221,550
107,200 Motorola, Inc. 9,782,000
-------------
39,914,969
-----------------------------------------------------------------
Financial Services--3.4%
136,330 Bear Stearns Co., Inc. 5,768,463
75,000 Federal National Mortgage Association 5,175,000
13,500 Goldman Sachs Group, Inc. 868,219
87,300 Lehman Brothers Holdings, Inc. 4,692,375
360,850 MBNA Corp. 10,284,225
112,500 Providian Financial Corp. 10,237,500
-------------
37,025,782
-----------------------------------------------------------------
Foods--0.5%
124,300 Bestfoods 6,059,625
-----------------------------------------------------------------
Health Care Services/Hospital Management--2.1%
390,300 Columbia/HCA Healthcare Corp. 8,684,175
387,900 HCR Manor Care, Inc.(a) 7,903,462
199,900 Humana, Inc.(a) 2,173,913
20,542 LifePoint Hospitals, Inc.(a) 202,852
203,100 Tenet Healthcare Corp.(a) 3,643,106
20,542 Triad Hospitals, Inc.(a) 216,975
-------------
22,824,483
-----------------------------------------------------------------
Hotels & Leisure--0.1%
9,235 Interstate Hotels Corp.(a) 38,095
277,053 Wyndham International, Inc.(a) 1,177,475
-------------
1,215,570
-----------------------------------------------------------------
Insurance--2.2%
86,625 American International Group, Inc. 10,059,328
56,800 Chubb Corp. $ 3,397,350
89,100 SAFECO Corp. 3,391,369
185,800 Selective Insurance Group, Inc. 3,669,550
106,500 Torchmark Corp. 3,501,187
-------------
24,018,784
-----------------------------------------------------------------
Machinery--0.9%
50,500 Applied Materials, Inc.(a) 3,632,844
29,400 Commercial Intertech Corp. 431,813
191,000 Flowserve Corp. 3,354,437
87,000 United Dominion Industries, Ltd.
(Canada) 2,142,375
-------------
9,561,469
-----------------------------------------------------------------
Media--1.9%
256,900 CBS Corp.(a) 11,287,544
75,800 Clear Channel Communications, Inc.(a) 5,272,837
165,500 Infinity Broadcasting Corp.(a) 4,561,594
-------------
21,121,975
-----------------------------------------------------------------
Medical Products & Services--1.8%
79,150 Cardinal Health, Inc. 5,401,987
143,700 Tyco International Ltd. 14,037,694
-------------
19,439,681
-----------------------------------------------------------------
Medical Technology--1.1%
164,900 Abbott Laboratories 7,080,394
163,200 IMS Health, Inc. 4,549,200
-------------
11,629,594
-----------------------------------------------------------------
Metals-Nonferrous--3.3%
356,400 Alcoa Inc. 21,339,450
143,500 Reynolds Metals Co. 8,125,688
237,300 UCAR International Inc.(a) 6,303,281
-------------
35,768,419
-----------------------------------------------------------------
Mining--0.7%
338,900 Newmont Mining Corp. 6,269,650
79,600 Stillwater Mining Co.(a) 1,800,950
-------------
8,070,600

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

6
<PAGE>

Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------

Shares Description Value (Note1)

-----------------------------------------------------------------
Networking--1.0%
175,500 Cisco Systems, Inc.(a) $ 10,902,938
1,200 Juniper Networks, Inc.(a) 194,925
-------------
11,097,863
-----------------------------------------------------------------
Oil & Gas Equipment & Services--6.9%
172,300 Anadarko Petroleum Corp. 6,579,706
99,100 Baker Hughes, Inc. 3,449,919
112,200 Burlington Resources, Inc. 4,957,838
127,600 Enron Corp. 10,869,925
71,100 Exxon Corp. 5,643,562
106,536 KeySpan Corp. 2,956,374
477,300 McDermott International, Inc. 13,453,894
270,400 Noble Affiliates, Inc. 7,909,200
438,700 Pioneer Natural Resources Co. (a) 5,099,887
468,600 Western Gas Resources, Inc. 7,731,900
157,800 Williams Companies, Inc. 6,637,462
-------------
75,289,667
-----------------------------------------------------------------
Paper & Forest Products--1.1%
225,900 Longview Fibre Co. 3,684,994
376,000 Louisiana-Pacific Corp. 8,248,500
-------------
11,933,494
-----------------------------------------------------------------
Pharmaceuticals--1.7%
134,500 Bristol-Myers Squibb Co. 8,944,250
101,400 Merck & Co., Inc. 6,863,512
96,900 Pfizer, Inc. 3,288,544
-------------
19,096,306
-----------------------------------------------------------------
Publishing--0.3%
76,300 New York Times Co. 2,999,544
-----------------------------------------------------------------
Real Estate Investment Trust--1.4%
327,600 Crescent Real Estate Equities Co. 7,207,200
217,500 Vornado Realty Trust 7,694,062
-------------
14,901,262
Restaurants--0.7%
172,800 McDonald's Corp. $ 7,203,600
-----------------------------------------------------------------
Retail--2.8%
101,000 CVS Corp. 5,024,750
25,300 Dillard's, Inc. 779,556
320,600 Kmart Corp.(a) 4,648,700
213,800 Sears Roebuck & Co. 8,658,900
251,400 The Limited, Inc. 11,485,838
-------------
30,597,744
-----------------------------------------------------------------
Steel - Producers--1.2%
183,700 AK Steel Holding Corp. 4,144,731
361,500 British Steel PLC (ADR) (United
Kingdom) 9,489,375
-------------
13,634,106
-----------------------------------------------------------------
Telecommunications--1.7%
826 AT&T Corp. 42,901
53,700 Lucent Technologies Inc. 3,493,856
139,200 MCI WorldCom, Inc.(a) 11,484,000
99,800 Telecomunicacoes Brasileiras SA
(ADR) (Brazil)(a) 3,715,025
-------------
18,735,782
-----------------------------------------------------------------
Tobacco--0.7%
130,500 Philip Morris Co., Inc. 4,861,125
122,166 R.J. Reynolds Tobacco Holdings, Inc. 3,344,294
-------------
8,205,419
-----------------------------------------------------------------
Tools--0.3%
97,600 Snap-on, Inc. 3,416,000
-----------------------------------------------------------------
Waste Management--0.3%
107,700 Waste Management, Inc. 2,753,081
-------------
Total common stocks
(cost $593,181,463) 680,811,976
-------------

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

7
<PAGE>

Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

---------------------------------------------------------------------
DEBT OBLIGATIONS--28.8%
CORPORATE BONDS--22.5%
---------------------------------------------------------------------
Aerospace--0.2%
Baa3 $ 900 Northrop-Grumman Corp.,
7.875%, 3/1/26 $ 876,204
Baa1 1,300 Raytheon Co., Note,
6.50%, 7/15/05 1,271,101
--------------
2,147,305
---------------------------------------------------------------------
Airlines--0.8%
Continental Airlines,
Inc.,
Notes,
Ba2 1,730 8.00%, 12/15/05 1,641,459
Aa3 1,426 7.46%, 4/1/15 1,418,193
Baa3 5,000 United Airlines, Inc.,
10.67%, 5/1/04 5,606,700
--------------
8,666,352
---------------------------------------------------------------------
Asset Backed Securities--2.1%
Aaa 3,000 California
Infrastructure, PG&E,
6.32%, 9/25/05 2,973,750
Aaa 5,000 Citibank Credit Card
Master Trust,
6.10%, 5/15/08 4,786,150
Aaa 5,000 MBNA Master Credit
Card Trust,
5.90%, 8/15/11 4,685,690
Aa3 11,000 Team Fleet Financing
Corp.,
7.35%, 5/15/03 11,061,875
--------------
23,507,465
---------------------------------------------------------------------
Automobiles--1.4%
Ford Motor Co.,
A1 3,000 6.375%, 2/1/29 2,555,100
A1 600 7.45%, 7/16/31 585,906
Ba1 $ 2,775 Lear Corp., Sr. Note,
7.96%, 5/15/05 $ 2,747,250
Baa3 2,000 Navistar International
Corp., Sr. Note,
7.00%, 2/1/03 1,950,000
Baa1 7,700 TRW, Inc., Note,
6.45%, 6/15/01 7,656,687
--------------
15,494,943
---------------------------------------------------------------------
Banks--1.0%
A1 3,900 Bank Nova Scotia NY,
6.50%, 7/15/07 3,837,844
Aa3 500 Bayer Hypo-Vereinsbank,
8.74%, 6/30/31 484,297
Aaa 1,950 Bayerische Landesbank,
5.875%, 12/1/08 1,786,493
Baa2 3,000 Capital One Bank, Sr.
Note,
7.08%, 10/30/01 3,019,590
A1 2,100 National Australia Bank
Ltd.,
6.40%, 12/10/07 2,062,284
--------------
11,190,508
---------------------------------------------------------------------
Beverages--0.1%
Baa2 600 Coca Cola Bottling Co.,
6.375%, 5/1/09 555,918
---------------------------------------------------------------------
Broadcasting--0.1%
Liberty Media Corp.,
Notes,
Baa3 400 7.875%, 7/15/09 398,750
Baa3 700 8.50%, 7/15/29 700,219
--------------
1,098,969

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

8
<PAGE>

Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
------------------------------------------------------------------------------

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

----------------------------------------------------------------------
Cable & Pay Television Systems--0.7%
Baa2 $ 2,000 British Sky Broadcasting
Group,
6.875%, 2/23/09 $ 1,805,040
Ba3 2,000 Century Communications
Corp., Sr. Note,
9.75%, 2/15/02 2,040,000
Baa2 2,000 Comcast Cable
Communications,
8.375%, 5/1/07 2,116,400
CSC Holdings, Inc.,
Sr. Notes,
Ba2 700 7.875%, 12/15/07 688,100
Ba2 900 7.25%, 7/15/08 848,817
------------
7,498,357
----------------------------------------------------------------------
Captive Finance--1.2%
A1 5,000 Ford Motor Credit Co.,
Note,
7.75%, 3/15/05 5,152,100
A2 5,000 Sears Roebuck Acceptance
Corp., Note,
6.38%, 10/7/02 4,973,750
Aa1 3,000 Toyota Motor Credit
Corp., Note,
5.625%, 11/13/03 2,883,750
------------
13,009,600
----------------------------------------------------------------------
Chemicals--0.5%
Ba3 2,000 ISP Holdings, Inc.,
Sr. Note,
9.75%, 2/15/02 2,050,000
Ba3 650 Lyondell Chemical Co.,
9.625%, 5/1/07 659,750
Rohm & Haas Co., Notes,
A3 800 6.95%, 7/15/04 802,904
A3 500 7.40%, 7/15/09 503,555

A3 1,000 7.85%, 7/15/29 1,006,120
------------
5,022,329
Computer Software & Services--0.1%
Baa1 $ 600 Sun Microsystems Inc.,
Sr. Note,
7.65%, 8/15/09 $ 597,282
----------------------------------------------------------------------
Construction--0.3%
A3 3,000 Hanson PLC
7.375%, 1/15/03 3,060,780
----------------------------------------------------------------------
Containers--0.2%
Ba1 2,100 Owens Illinois Inc.,
7.50%, 5/15/10 1,983,324
----------------------------------------------------------------------
Diversified Operations--0.3%
Baa1 900 Cox Enterprises Inc.,
6.625%, 6/14/02 892,458
Baa3 1,400 Seagram (J.) & Sons
Inc.,
5.79%, 4/15/01 1,382,920
Baa1 600 Tyco International Ltd.,
6.875%, 1/15/29 536,184
------------
2,811,562
----------------------------------------------------------------------
Electrical Services--0.3%
Ba1 800 AES Corp., Sr. Note,
9.50%, 6/1/09 816,000
Ba3 1,300 CMS Energy Corp.,
Sr. Note,
8.00%, 7/1/01 1,298,180
A3 900 Edison Mission Energy
Co.,
Sr. Note,
7.73%, 6/15/09 903,006
Baa3 800 Utilicorp United Inc.,
Sr. Note,
7.00%, 7/15/04 793,776
------------
3,810,962
----------------------------------------------------------------------
Financial Services--1.0%
Baa3 1,650 Capital One Financial
Corp., Note,
7.25%, 5/1/06 1,571,625
A1 3,700 Dresdner Funding Trust,
8.15%, 6/30/31 3,436,745

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

9
<PAGE>

Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
------------------------------------------------------------------------------

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

---------------------------------------------------------------------
Financial Services (cont'd.)
Aa3 $ 95 FMR Corp.,
7.57%, 6/15/29 $ 92,470
A3 800 Heller Financial, Inc.,
Note,
6.00%, 3/19/04 766,560
A1 4,500 International Lease
Finance Corp., Note,
5.90%, 3/12/03 4,374,540
Baa1 1,250 Sanwa Finance,
8.35%, 7/15/09 1,233,398
------------
11,475,338
---------------------------------------------------------------------
Foods--0.7%
Aa3 1,600 Archer Daniels Midland
Co.,
6.625%, 5/1/29 1,434,000
Kroger Co., Sr. Notes,
Baa3 1,800 6.34%, 6/1/01 1,794,375
Baa3 3,400 6.375%, 3/1/08 3,169,140
Baa3 1,000 7.25%, 6/1/09 990,625
Baa3 250 7.70%, 6/1/29 242,969
------------
7,631,109
---------------------------------------------------------------------
Hotels & Leisure--0.7%
Baa3 5,000 Royal Caribbean Cruises
Ltd., Sr. Note,
8.25%, 4/1/05 5,157,150
Ba1 3,500 Starwood Hotels &
Resorts, Inc., Note,
6.75%, 11/15/03 3,292,870
------------
8,450,020
---------------------------------------------------------------------
Insurance--0.2%
Ba3 1,900 Conseco Finance Trust,
8.796%, 4/1/27 1,736,106
A2 950 Marsh And Mclennan
Co., Inc., Sr. Note,
6.625%, 6/15/04 942,219
------------
2,678,325
Investment Banking--2.0%
A1 $ 1,300 Goldman Sachs Group
LP, Note,
5.56%, 1/11/01 $ 1,285,050
Lehman Brothers
Holdings, Inc., Notes,
Baa1 3,565 6.625%, 4/1/04 3,468,139
Baa1 1,370 6.625%, 2/5/06 1,304,555
Aa3 15,000 Salomon, Inc.,
7.30%, 5/15/02 15,300,300
------------
21,358,044
---------------------------------------------------------------------
Media--0.8%
Baa3 6,500 News America Holdings
Inc.,
6.70%, 5/21/04 6,283,672
Baa3 2,000 Time Warner, Inc.,
8.11%, 8/15/06 2,093,100
Baa2 550 United News & Media PLC,
Note,
7.25%, 7/1/04 545,655
------------
8,922,427
---------------------------------------------------------------------
Oil & Gas Equipment & Services--0.5%
Baa2 3,500 BJ Services Co.,
Sr. Note,
7.00%, 2/1/06 3,377,255
Baa3 1,000 El Paso Energy Corp.,
Sr. Note,
6.625%, 7/15/01 997,500
Baa1 1,400 Sonat Inc., Note,
7.625%, 7/15/11 1,388,058
------------
5,762,813
---------------------------------------------------------------------
Paper & Forest Products--0.4%
Baa2 2,000 Fort James Corp., Note,
6.23%, 3/15/01 1,980,980
Baa2 4,800 (b) Scotia Pacific Co.,
7.71%, 1/20/28 2,880,000
------------
4,860,980

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

10
<PAGE>

Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
------------------------------------------------------------------------------

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

---------------------------------------------------------------------
Real Estate Investment Trust--0.7%
Baa1 $ 800 Duke Realty Ltd., Sr.
Note,
7.30%, 6/30/03 $ 801,625
ERP Operating, LP,
Notes,
A3 5,000 6.15%, 9/15/00 4,977,000
A3 400 7.10%, 6/23/04 394,840
A3 2,000 6.63%, 4/13/15 1,901,460
------------
8,074,925
---------------------------------------------------------------------
Retail--1.3%
A3 3,525 Dayton Hudson Corp.,
Note,
6.40%, 2/15/03 3,469,904
Federated Dept. Stores,
Inc., Sr. Notes,
Baa2 2,500 8.125%, 10/15/02 2,594,400
Baa2 2,500 8.50%, 6/15/03 2,614,375
Ba1 5,000 Kmart Corp.,
8.125%, 12/1/06 5,050,000
------------
13,728,679
---------------------------------------------------------------------
Telecommunications--2.4%
A2 7,000 AT&T Corp.,
9.25%, 4/15/02 7,477,960
Baa1 600 Cable & Wireless
Communication, Note,
6.75%, 12/1/08 614,040
A2 900 Electric Lightwave Inc.,
Note,
6.05%, 5/15/04 863,487
Ba1 3,000 LCI International Inc.,
7.25%, 6/15/07 2,945,790
A2 3,000 Lucent Technologies,
Inc.,
6.45%, 3/15/29 2,691,840
MCI WorldCom, Inc.,
Sr. Notes,
A3 1,300 6.125%, 8/15/01 1,292,057
A3 3,000 6.95%, 8/15/28 2,769,570
Ba1 2,400 Qwest Communications
Int'l., Inc., Sr.
Note,
7.50%, 11/1/08 2,376,000
Baa1 2,500 Sprint Capital Corp.,
6.875%, 11/15/28 2,247,875
Telecomunicaciones de
Puerto Rico, Notes,
Baa2 $ 1,800 6.65%, 5/15/06 $ 1,735,272
Baa2 1,400 6.80%, 5/15/09 1,336,790
------------
26,350,681
---------------------------------------------------------------------
Transportation/Trucking/Shipping--0.5%
Baa1 5,000 Norfolk Southern Corp.,
Note,
6.95%, 5/1/02 5,029,350
---------------------------------------------------------------------
Utilities--1.9%
Baa3 4,500 Calenergy Co., Inc.,
Sr. Note,
6.96%, 9/15/03 4,438,125
Cleveland Electric
Illuminating, Notes,
Ba1 3,000 7.19%, 7/1/00 3,009,000
Ba1 2,000 7.67%, 7/1/04 2,051,200
A2 525 Hydro-Quebec,
7.50%, 4/1/16 532,434
Niagara Mohawk Power Corp.,
Baa2 4,500 7.375%, 8/1/03 4,570,965
Baa2 2,000 8.00%, 6/1/04 2,062,640
A2 600 Pennsylvania Electric
Co.,
Sr. Note,
5.75%, 4/1/04 575,766
Baa3 3,000 Western Massachusetts
Electric Co.,
7.375%, 7/1/01 3,026,400
------------
20,266,530
---------------------------------------------------------------------
Waste Management--0.1%
Ba1 1,000 Waste Management Inc.,
Note,
6.125%, 7/15/01 993,320
------------
Total corporate bonds
(cost $252,578,867) 246,038,197
------------

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

11
<PAGE>

Portfolio of Investments as of July 31, 1999 PRUDENTIAL BALANCED FUND
------------------------------------------------------------------------------

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

--------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--5.3%
United States Treasury Bonds,
$ 10,000 8.125%, 8/15/19 $ 11,943,700
8,400 8.125%, 8/15/21 10,120,656
3,600 6.75%, 8/15/26 3,806,424
2,700 6.375%, 8/15/27 2,729,106
8,435 5.25%, 11/15/28 7,359,538
United States Treasury Notes,
250 5.25%, 5/15/04 244,375
5,530 7.50%, 2/15/05 5,913,616
225 6.50%, 5/15/05 230,344
4,900 6.50%, 10/15/06 5,014,856
3,150 4.75%, 11/15/08 2,874,375
8,060 5.50%, 5/15/09 7,818,200
--------------
Total U.S. government
securities
(cost $59,635,048) 58,055,190
--------------
------------------------------------------------------------
FOREIGN GOVERNMENT BONDS--1.0%
Republic of Columbia,
(Columbia)
Ba2 700 9.75%, 4/23/09 581,000
Republic of Panama,
(Panama)
Ba1 1,700 4.00%, 7/17/14 1,243,125
Republic of Philippines,
(Philippines)
Ba1 700 8.875%, 4/15/08 666,197
Republic of Poland,
(Poland)
Baa3 1,950 4.00%, 10/27/24 1,258,969
Republic of Quebec,
(Canada)
A2 2,050 7.50%, 7/15/23 2,059,614
United Mexican States,
(Mexico)
Ba2 2,500 10.375%, 2/17/09 2,493,750
Ba2 3,500 5.875%, 12/31/19 2,861,250
--------------
Total foreign government
(cost $11,984,268) 11,163,905
--------------
Total debt obligations
(cost $324,198,183) 315,257,292
--------------

Units
WARRANTS(a)
5,384 United Mexican States,
(Mexico)
expiring 12/31/03 $ 0
--------------
Total long-term investments
(cost $917,379,646) 996,069,268
--------------
SHORT-TERM INVESTMENTS--8.6%
CORPORATE BONDS--0.5%
------------------------------------------------------------

Moody's Principal
Rating Amount
(Unaudited) (000)
Financial Services
NR 5,000 Advanta Corp.,
7.25%, 8/16/99
(cost $5,020,600) 5,002,250
------------------------------------------------------------
REPURCHASE AGREEMENT--8.1%
88,651 Joint Repurchase Agreement Account,
5.062%, 8/2/99,
(cost $88,651,000; Note 5) 88,651,000
--------------
Total short-term
investments
(cost $93,671,600) 93,653,250
--------------
------------------------------------------------------------
Total Investments--99.6%
(cost $1,011,051,246; Note 4) 1,089,722,518
Other assets in excess of
liabilities--0.4% 4,572,639
--------------
Net Assets--100% $1,094,295,157
==============

---------------
(a) Non-income producing security.
(b) Indicates a restricted security; the cost of such security is $4,800,000.
The value $2,880,000 is approximately 0.3% of net assets.
ADR--American Depository Receipt.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current SAI contains a description of Moody's and Standard & Poor's
ratings.
--------------------------------------------------------------------------------
See Notes to Financial Statements.

12
<PAGE>

Statement of Assets and Liabilities PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------

Assets July 31, 1999

Investments, at value (cost $1,011,051,246).................... $1,089,722,518
Dividends and interest receivable.............................. 7,316,101
Receivable for investments sold................................ 3,971,492
Receivable for Fund shares sold................................ 599,821
Prepaid expenses............................................... 41,412
--------------
Total assets................................................ 1,101,651,344
--------------
Liabilities
Bank overdraft................................................. 3,546
Payable for investments purchased.............................. 3,746,264
Payable for Fund shares reacquired............................. 1,937,177
Management fee payable......................................... 622,019
Distribution fee payable....................................... 511,434
Withholding tax payable........................................ 46,389
Accrued expenses............................................... 489,358
--------------
Total liabilities........................................... 7,356,187
--------------
Net Assets..................................................... $1,094,295,157
==============

Net assets were comprised of:
Shares of beneficial interest, at par....................... $ 865,981
Paid-in capital in excess of par............................ 954,247,146
--------------
955,113,127
Undistributed net investment income......................... 1,780,283
Accumulated net realized gain on investments................ 58,730,475
Net unrealized appreciation on investments.................. 78,671,272
--------------
Net assets, July 31, 1999...................................... $1,094,295,157
==============

Class A:
Net asset value and redemption price per share
($516,281,302 / 40,791,363 shares of beneficial
interest issued and outstanding)......................... $ 12.66
Maximum sales charge (5% of offering price)................. .67
Maximum offering price to public............................ $ 13.33
Class B:
Net asset value, offering price and redemption price per
share
($445,945,802 / 35,375,883 shares of beneficial interest
issued and outstanding).................................. $ 12.61
Class C:
Net asset value and redemption price per share
($9,939,455 / 788,518 shares of beneficial interest
issued and outstanding).................................. $ 12.61
Sales charge (1% of offering price)......................... .13
Offering price to public.................................... $ 12.74
Class Z:
Net asset value, offering price and redemption price per
share
($122,128,598 / 9,642,323 shares of beneficial interest
issued and outstanding).................................. $ 12.67

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

13
<PAGE>

PRUDENTIAL BALANCED FUND
Statement of Operations
------------------------------------------------------------

Year Ended
Net Investment Income July 31, 1999

Income
Interest (net of foreign withholding taxes
of $12,675)............................. $ 28,877,963
Dividends (net of foreign withholding taxes
of $143,613)............................ 10,364,081
-------------
Total income............................ 39,242,044
-------------
Expenses
Management fee............................. 7,246,989
Distribution fee--Class A.................. 1,234,793
Distribution fee--Class B.................. 4,900,715
Distribution fee--Class C.................. 95,349
Transfer agent's fees and expenses......... 2,379,000
Custodian's fees and expenses.............. 200,000
Reports to shareholders.................... 200,000
Registration fees.......................... 120,000
Legal fees................................. 41,000
Audit fees................................. 30,000
Insurance.................................. 24,000
Trustees' fees and expenses................ 21,500
Miscellaneous.............................. 20,434
-------------
Total expenses.......................... 16,513,780
-------------
Net investment income......................... 22,728,264
-------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Net
realized gain (loss) on:
Investment transactions.................... 59,535,086
Financial futures transactions............. (565,613)
Foreign currency transactions.............. 2,262
-------------
58,971,735
Net change in unrealized appreciation on
investments................................ 24,344,289
-------------
Net gain on investments....................... 83,316,024
-------------
Net Increase in Net Assets
Resulting from Operations..................... $ 106,044,288
=============

PRUDENTIAL BALANCED FUND
Statement of Changes in Net Assets
------------------------------------------------------------

Increase (Decrease) Year Ended July 31,
in Net Assets 1999 1998

Operations
Net investment income....... $ 22,728,264 $ 26,293,673
Net realized gain on
investments and foreign
currency transactions.... 58,971,735 155,549,803
Net change in unrealized
appreciation
(depreciation) of
investments.............. 24,344,289 (126,216,321)
-------------- --------------
Net increase in net assets
resulting from
operations............... 106,044,288 55,627,155
-------------- --------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A.................. (11,600,552) (12,700,788)
Class B.................. (7,501,189) (10,437,329)
Class C.................. (147,713) (148,597)
Class Z.................. (3,085,601) (3,608,837)
-------------- --------------
(22,335,055) (26,895,551)
-------------- --------------
Distributions from net
realized gains on
investment transactions
Class A.................. (33,667,951) (57,771,866)
Class B.................. (35,854,241) (69,878,157)
Class C.................. (670,807) (920,721)
Class Z.................. (7,850,486) (14,427,869)
-------------- --------------
(78,043,485) (142,998,613)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares
sold..................... 174,931,450 195,965,154
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 95,452,760 160,126,884
Cost of shares reacquired... (341,670,552) (341,566,835)
-------------- --------------
Net increase (decrease) in
net assets from Fund
shares transactions...... (71,286,342) 14,525,203
-------------- --------------
Total decrease................. (65,620,594) (99,741,806)
-------------- --------------
Net Assets
Beginning of year.............. 1,159,915,751 1,259,657,557
-------------- --------------
End of year(a)................. $1,094,295,157 $1,159,915,751
============== ==============

---------------
(a) Includes undistributed net
investment income of:...... $ 1,780,283 $ 1,384,812
-------------- --------------

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

14
<PAGE>

Notes to Financial Statements PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------
Prudential Balanced Fund (the 'Fund') is registered under the Investment Company
Act of 1940, as a diversified, open-end, management investment company. The Fund
was organized as an unincorporated business trust in Massachusetts on February
23, 1987. The investment objective of the Fund is to achieve a high total
investment return consistent with moderate risk. The Fund invests in a
diversified portfolio of money market instruments, debt obligations and equity
securities. The ability of issuers of debt securities held by the Fund to meet
their obligations may be affected by economic developments in a specific
country, industry or region.
------------------------------------------------------------
Note 1. Accounting Policies

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

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

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

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

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

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

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

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

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

Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability or
the level of governmental supervision and regulation of foreign securities
markets.

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

15
<PAGE>

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

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

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

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

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

Dividends and Distributions: The Fund expects to pay dividends of net investment
income quarterly and make distributions at least annually of any net capital
gains. Dividends and distributions are recorded on the ex-dividend date.

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

Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with American Institute of Certified
Public Accountants, Statement of Position 93-2: Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect of applying this statement was
to increase undistributed net investment income by $2,262, decrease accumulated
net realized gain on investments by $9,863,628 and increase paid-in capital in
excess of par by $9,861,366 for redemptions utilized as distributions for
federal income tax purposes and due to realized and recognized currency gains
during the year ended July 31, 1999. Net realized gains and net assets were not
affected by this change.
------------------------------------------------------------
Note 2. Agreements

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

The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .65 of 1% of the Fund's average daily net assets.

The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS') which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Fund compensates PIMS for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred. The distribution fees were accrued daily and payable monthly. No
distribution or service fees were paid to PIMS as distributor of the Class Z
shares of the Fund.

Pursuant to the Class A, B and C Plans, the Fund compensated PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the year ended July 31,
1999.

PIMS has advised the Fund that it received approximately $203,800 in front-end
sales charges resulting from sales of Class A shares during the year ended July
31, 1999 and from sales of Class C shares during the period November 2, 1998
through July 31, 1999. From these fees, PIMS paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.

16
<PAGE>

Notes to Financial Statements PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------
PIMS has advised the Fund that for the year ended July 31, 1999, it received
approximately $643,200 and $6,600 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders, respectively.

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

Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended July 31, 1999, the
Fund incurred fees of approximately $1,972,000 for the services of PMFS. As of
July 31, 1999, approximately $157,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also include certain
out-of-pocket expenses paid to nonaffiliates.
------------------------------------------------------------
Note 4. Portfolio Securities

Purchases and sales of investment securities of the Fund, other than short-term
investments, for the fiscal year ended July 31, 1999, were $1,035,947,839 and
$1,165,891,789, respectively, which includes purchases and sales of U.S.
government obligations of $370,240,327 and $374,027,633, respectively.

The cost basis of investments for federal income tax purposes as of July 31,
1999 was $1,013,119,580 and accordingly, net unrealized appreciation of
investments for federal income tax purposes was $76,602,938 (gross unrealized
appreciation--$136,842,332; gross unrealized depreciation--$60,239,394).

Note 5. Joint Repurchase Agreement Account

The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Government or federal agency obligations. As of July 31, 1999, the Fund
had a 13.9% undivided interest in repurchase agreements in the joint account.
The undivided interest for the Fund represented $88,651,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefor was as follows:

Bear, Stearns & Co. Inc., 5.06%, in the principal amount of $180,000,000,
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest is $183,904,910.

Deutsche Bank Securities Inc., 5.06%, in the principal amount of $96,548,000,
repurchase price $96,588,711, due 8/2/99. The value of the collateral including
accrued interest is $98,479,006.

Salomon Smith Barney Inc., 5.06%, in the principal amount of $180,000,000,
repurchase price $180,075,900, due 8/2/99. The value of the collateral including
accrued interest is $184,504,113.

Warburg Dillon Read LLC, 5.07%, in the principal amount of $180,000,000,
repurchase price $180,076,050, due 8/2/99. The value of the collateral including
accrued interest is $183,604,710.
------------------------------------------------------------
Note 6. Capital

The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending upon
the period of time the shares are held. Prior to November 2, 1998, Class C
shares were sold with a contingent deferred sales charge of 1% during the first
year. Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualified to purchase Class A
shares at net asset value. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.

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

17
<PAGE>

Notes to Financial Statements PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------
Transactions in shares of beneficial interest for the years ended July 31, 1999
and July 31, 1998 were as follows:

<TABLE>
<CAPTION>
Class A Shares Amount
---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1999:
Shares sold....................... 5,888,331 $ 72,630,854
Shares issued in reinvestment of
dividends and distributions..... 3,548,537 42,190,816
Shares reacquired................. (10,211,802) (126,616,025)
----------- -------------
Net decrease in shares outstanding
before conversion............... (774,934) (11,794,355)
Shares issued upon conversion from
Class B......................... 3,108,715 37,656,869
----------- -------------
Net increase in shares
outstanding..................... 2,333,781 $ 25,862,514
=========== =============
Year ended July 31, 1998:
Shares sold....................... 3,967,817 $ 52,091,809
Shares issued in reinvestment of
dividends and distributions..... 5,263,433 64,754,657
Shares reacquired................. (9,908,242) (129,373,980)
----------- -------------
Net decrease in shares outstanding
before conversion............... (676,992) (12,527,514)
Shares issued upon conversion from
Class B......................... 3,632,745 46,694,238
----------- -------------
Net increase in shares
outstanding..................... 2,955,753 $ 34,166,724
=========== =============

Class B
----------------------------------
Year ended July 31, 1999:
Shares sold....................... 4,593,047 $ 56,428,035
Shares issued in reinvestment of
dividends and distributions..... 3,520,532 41,558,742
Shares reacquired................. (12,029,878) (147,746,960)
----------- -------------
Net decrease in shares outstanding
before conversion............... (3,916,299) (49,760,183)
Shares reacquired upon conversion
into Class A.................... (3,122,676) (37,656,869)
----------- -------------
Net decrease in shares
outstanding..................... (7,038,975) $ (87,417,052)
----------- -------------
----------- -------------
Year ended July 31, 1998:
Shares sold....................... 5,179,076 $ 67,414,895
Shares issued in reinvestment of
dividends and distributions..... 6,244,089 76,307,531
Shares reacquired................. (10,219,280) (133,027,987)
----------- -------------
Net increase in shares outstanding
before conversion............... 1,203,885 10,694,439
Shares reacquired upon conversion
into Class A.................... (3,615,791) (46,694,238)
----------- -------------
Net decrease in shares
outstanding..................... (2,411,906) $ (35,999,799)
=========== =============
<CAPTION>
Class C Shares Amount
---------------------------------- ----------- -------------
<S> <C> <C>
Year ended July 31, 1999:
Shares sold....................... 311,461 $ 3,843,335
Shares issued in reinvestment of
dividends and distributions..... 65,181 770,023
Shares reacquired................. (319,838) (3,923,655)
----------- -------------
Net increase in shares
outstanding..................... 56,804 $ 689,703
=========== =============
Year ended July 31, 1998:
Shares sold....................... 323,478 $ 4,203,230
Shares issued in reinvestment of
dividends and distributions..... 84,293 1,030,457
Shares reacquired................. (178,945) (2,326,256)
----------- -------------
Net increase in shares
outstanding..................... 228,826 $ 2,907,431
=========== =============

Class Z
----------------------------------
Year ended July 31, 1999:
Shares sold....................... 3,393,149 $ 42,029,226
Shares issued in reinvestment of
dividends and distributions..... 918,694 10,933,179
Shares reacquired................. (5,089,268) (63,383,912)
----------- -------------
Net decrease in shares
outstanding..................... (777,425) $ (10,421,507)
=========== =============
Year ended July 31, 1998:
Shares sold....................... 5,472,022 $ 72,255,220
Shares issued in reinvestment of
dividends and distributions..... 1,463,704 18,034,239
Shares reacquired................. (5,753,738) (76,838,612)
----------- -------------
Net increase in shares
outstanding..................... 1,181,988 $ 13,450,847
=========== =============
</TABLE>

18
<PAGE>

Financial Highlights PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended July 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 12.63 $ 14.01 $ 11.85 $ 12.04 $ 11.12
-------- -------- -------- -------- --------
Income from investment operations
Net investment income................ .29 .33 .34 .31 .34
Net realized and unrealized gain on
investment transactions........... .92 .29 2.96 .28 1.11
-------- -------- -------- -------- --------
Total from investment
operations..................... 1.21 .62 3.30 .59 1.45
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income............................ (.29) (.34) (.36) (.29) (.33)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.89) (1.66) (.78) (.49) (.20)
-------- -------- -------- -------- --------
Total distributions............... (1.18) (2.00) (1.14) (.78) (.53)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 12.66 $ 12.63 $ 14.01 $ 11.85 $ 12.04
======== ======== ======== ======== ========
TOTAL RETURN(a):..................... 10.37% 5.05% 29.09% 4.89% 13.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $516,281 $485,690 $497,461 $262,096 $119,829
Average net assets (000)............. $493,917 $493,828 $306,717 $246,609 $ 69,754
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.17% 1.19% 1.17% 1.20% 1.22%
Expenses, excluding distribution
fees........................... .92% .94% .92% .95% .97%
Net investment income............. 2.34% 2.51% 2.84% 2.53% 2.90%
For Class A, B, C and Z shares:
Portfolio turnover rate........... 103% 144% 140% 97% 201%
</TABLE>
---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.

19
<PAGE>

Financial Highlights PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended July 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 12.57 $ 13.96 $ 11.80 $ 12.00 $ 11.09
-------- -------- -------- -------- --------
Income from investment operations
Net investment income................ .20 .24 .26 .21 .26
Net realized and unrealized gain on
investment transactions........... .92 .27 2.95 .28 1.10
-------- -------- -------- -------- --------
Total from investment
operations..................... 1.12 .51 3.21 .49 1.36
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income............................ (.19) (.24) (.27) (.20) (.25)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.89) (1.66) (.78) (.49) (.20)
-------- -------- -------- -------- --------
Total distributions............... (1.08) (1.90) (1.05) (.69) (.45)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 12.61 $ 12.57 $ 13.96 $ 11.80 $ 12.00
======== ======== ======== ======== ========
TOTAL RETURN(a):..................... 9.44% 4.28% 28.24% 4.05% 12.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $445,946 $533,354 $625,715 $420,465 $392,291
Average net assets (000)............. $490,071 $578,432 $431,425 $437,792 $409,419
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.92% 1.94% 1.92% 1.95% 1.97%
Expenses, excluding distribution
fees........................... .92% .94% .92% .95% .97%
Net investment income............. 1.60% 1.76% 2.09% 1.78% 2.34%
</TABLE>
---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.

20
<PAGE>

Financial Highlights PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Class C Class Z
----------------------------------------------------- ---------------------
August 1,
1994(a)
Year Ended July 31, through Year Ended July 31,
--------------------------------------- July 31, ---------------------
1999 1998 1997 1996 1995 1999 1998
------ ------ ------ ------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $12.57 $13.96 $11.80 $12.00 $ 11.12 $ 12.64 $ 14.01
------ ------ ------ ------ --------- -------- --------
Income from investment operations
Net investment income................ .20 .24 .26 .21 .21 .33 .37
Net realized and unrealized gain
(loss) on investment
transactions...................... .92 .27 2.95 .28 1.12 .91 .29
------ ------ ------ ------ --------- -------- --------
Total from investment
operations..................... 1.12 .51 3.21 .49 1.33 1.24 .66
------ ------ ------ ------ --------- -------- --------
Less distributions
Dividends from net investment
income............................ (.19) (.24) (.27) (.20) (.25) (.32) (.37)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.89) (1.66) (.78) (.49) (.20) (.89) (1.66)
------ ------ ------ ------ --------- -------- --------
Total distributions............... (1.08) (1.90) (1.05) (.69) (.45) (1.21) (2.03)
------ ------ ------ ------ --------- -------- --------
Net asset value, end of period....... $12.61 $12.57 $13.96 $11.80 $ 12.00 $ 12.67 $ 12.64
====== ====== ====== ====== ========= ======== ========
TOTAL RETURN(b):..................... 9.44% 4.28% 28.24% 4.05% 12.49% 10.63% 5.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $9,939 $9,201 $7,023 $3,525 $ 3,046 $122,129 $131,671
Average net assets (000)............. $9,535 $8,175 $4,790 $2,444 $ 920 $121,398 $128,358
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.92% 1.94% 1.92% 1.95% 2.04%(d) .92% .94%
Expenses, excluding distribution
fees........................... .92% .94% .92% .95% 1.04%(d) .92% .94%
Net investment income............. 1.60% 1.76% 2.09% 1.78% 2.20%(d) 2.60% 2.76%
</TABLE>

<TABLE>
<CAPTION>
March 1,
1996(c)
through
July 31,
1997 1996
-------- --------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.85 $12.16
-------- --------
Income from investment operations
Net investment income................ .46 .13
Net realized and unrealized gain
(loss) on investment
transactions...................... 2.87 (.28)
-------- --------
Total from investment
operations..................... 3.33 (.15)
-------- --------
Less distributions
Dividends from net investment
income............................ (.39) (.16)
Distributions from net realized gains
on investment and foreign currency
transactions...................... (.78) --
-------- --------
Total distributions............... (1.17) (.16)
-------- --------
Net asset value, end of period....... $ 14.01 $11.85
======== ========
TOTAL RETURN(b):..................... 29.39% (1.24)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $129,459 $4,015
Average net assets (000)............. $ 99,391 $4,217
Ratios to average net assets:
Expenses, including distribution
fees........................... .92% .95%(d)
Expenses, excluding distribution
fees........................... .92% .95%(d)
Net investment income............. 3.12% 2.72%(d)
</TABLE>
---------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Commencement of offering of Class Z shares.
(d) Annualized.
--------------------------------------------------------------------------------

21
<PAGE>

Report of Independent Accountants PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Balanced Fund:

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Balanced Fund (the
'Fund') at July 31, 1999, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the three years in the period then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at July
31, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying financial highlights for
each of the two years in the period ended July 31, 1996 were audited by other
independent accountants, whose opinion dated September 16, 1996 was unqualified.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
September 20, 1999

Tax Information (Unaudited) PRUDENTIAL BALANCED FUND
--------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (July 31, 1999) as to the federal tax status of dividends
and distributions paid by the Fund during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended July 31, 1999, dividends paid from
net investment income were $.293 per share for Class A shares, $.193 per share
for Class B and Class C shares and $.323 per share for Class Z shares, which are
taxable as ordinary income. In addition, the Fund paid to Class A, B, C and Z
shares a short-term capital gain distribution of $.21, which is taxable as
ordinary income and a long-term capital gain distribution of $.68. The Fund
utilized redemptions as distributions in the amount of $.048 and $.065 per Class
A, Class B, Class C and Class Z shares of short-term capital gains and long-term
capital gains, respectively.

We also wish to advise you that 17.74% of the dividends paid from ordinary
income in the fiscal year ended July 31, 1999 qualified for the corporate
dividends received deduction available to corporate tax payers.

We are required by Massachusetts, Missouri and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders. Please be advised that 9.05% of the dividends paid from
ordinary income in the fiscal year ended July 31, 1999 qualify for each of these
states' tax exclusion.

In January 2000, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV
as to the federal tax status of the dividends and distributions received by you
in calendar year 1999.

________________________________________________________________________________

22
<PAGE>

Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--or other financial materials-- and
stumbled across a word that you don't understand?