Statement of Additional Information
                              dated August 1, 1995
                      (as supplemented on August 7, 1995)
 
     Prudential Tax-Free Money Fund, Inc. (the Fund), is an open-end diversified
management investment company whose investment objective is to attain for
investors the highest level of current income that is exempt from federal income
taxes, consistent with liquidity and the preservation of capital. The Fund will
invest in short-term tax-exempt debt securities of state and local governments.
There can be no assurance that the Fund's investment objective will be achieved.
See "Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.
 
     This Statement of Additional Information is not a prospectus. It is
intended to be read in conjunction with the Fund's Prospectus, dated August 1,
1995. A copy of the Prospectus may be obtained from the Fund at the address or
telephone number noted above.
 
                               TABLE OF CONTENTS
 


                                                                                        Cross-reference
                                                                                        to page in
                                                                               Page     Prospectus
                                                                               ----     ---------------
                                                                                  
General Information..........................................................  B-2      13
Investment Objective and Policies............................................  B-2      6
Investment Restrictions......................................................  B-5      9
    
Directors and Officers.......................................................  B-6      9
Manager......................................................................  B-8      9
Distributor..................................................................  B-10     9
Portfolio Transactions and Brokerage.........................................  B-11     11
Purchase and Redemption of Fund Shares.......................................  B-12     13
Shareholder Investment Account...............................................  B-13     19
Net Asset Value..............................................................  B-15     11
Calculation of Yield.........................................................  B-15     6
Taxes, Dividends and Distributions...........................................  B-16     12
Custodian and Transfer and Dividend Disbursing Agent, and Independent
Accountants..................................................................  B-17     11
Financial Statements.........................................................  B-18     --
Report of Independent Accountants............................................  B-26     --
Appendix A--Description of Tax-Exempt Security Ratings.......................  A-1      --

 
--------------------------------------------------------------------------------
103B                                                                     4440076
 


 
                              GENERAL INFORMATION
 
     At a meeting of shareholders held on May 2, 1995, Board of Directors
approved an amendment to the Fund's Articles of Incorporation to change the
Fund's name from Prudential-Bache Tax-Free Money Fund Inc. to Prudential
Tax-Free Money Fund, Inc.

 
                       INVESTMENT OBJECTIVE AND POLICIES
 
     The investment objective of the Fund is to attain for investors the highest
level of current income that is exempt from federal income taxes, consistent
with liquidity and the preservation of capital. The Fund will seek to achieve
its investment objective by investing in a diversified portfolio of short-term
debt obligations issued by states, territories and possessions of the United
States and by the District of Columbia, and their political subdivisions, duly
constituted authorities and corporations, the interest from which is
wholly-exempt from federal income tax in the opinion of bond counsel to the
issuer. Such securities are generally known as "Municipal Bonds" or
"Municipal Notes." Interest on certain Municipal Bonds and Municipal Notes may
be a preference item for purposes of the federal alternative minimum tax. See
"Taxes, Dividends & Distributions." There can be no assurance that the Fund's
investment objective will be achieved.
 
     The investment policies of the Fund other than its investment objective and
those described under "Investment Restrictions" may be changed by the Board of
Directors of the Fund without shareholder approval.
 
Municipal Bonds and Notes
 
     Municipal Bonds. Municipal Bonds are generally issued to obtain funds for
various public purposes, including construction of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. They may also be issued to refund outstanding
obligations, to meet general operating expenses or to obtain funds to lend to
other public institutions and facilities. Municipal Bonds also include bonds
issued by or on behalf of public authorities in order to obtain funds with which
to provide privately operated housing facilities, sports facilities, pollution
control facilities, convention or trade show facilities, industrial, port or
parking facilities and facilities for water supply, gas, electricity or waste
disposal. These bonds typically are revenue bonds and generally do not carry the
pledge of the issuer's credit.
 
     Municipal Bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenues derived from a particular facility or class of
facilities or from the proceeds of a special excise tax or other specific
revenue source but not from the general taxing power.
 
     Municipal Notes. Municipal Notes are short-term obligations generally with
a maturity, at the time of issuance, ranging from six months to three years. The
principal types of Municipal Notes include tax anticipation notes, bond
anticipation notes and revenue anticipation notes. Municipal Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues,
are usually general obligations of the issuing municipality or agency.
 
     Municipal Notes also include tax-exempt or municipal commercial paper,
which is likely to be issued to meet seasonal working capital needs of a
municipality or interim construction financing and to be paid from general
revenues of the municipality or refinanced with long-term debt. In most cases
municipal commercial paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.

   
     The Fund will treat an investment in a municipal security refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "governmental securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded securities, except to the extent there
are amounts in excess of funds necessary for such debt service, (iii) principal
and interest on the escrowed securities will be sufficient to satisfy all
scheduled principal, interest and any premiums on the refunded securities and a
verification report prepared by a party acceptable to a nationally recognized
statistical rating agency, or counsel to the holders of the refunded securities,
so verifies, (iv) the escrow agreement provides that the issuer of the refunded
securities grants and assigns to the escrow agent, for the equal and ratable
benefit of the holders of the refunded securities, an express first lien on,
pledge of and perfected security interest in the escrowed securities and the
interest income thereon, (v) the escrow agent had no lien of any type with
respect to the escrowed securities for payment of its fees or expenses except to
the extent there are excess securities, as described in (ii) above. The Fund
will not, however, invest more than 25% of its total assets in pre-refunded
bonds of the same municipal issuer.
    
 
     Variable Rate and Floating Rate Securities. The interest rates payable on
certain Municipal Bonds and Municipal Notes are not fixed and may fluctuate
based upon changes in market rates. Municipal Bonds and Notes of this type are
called "variable rate" or "floating rate" obligations. The interest rate
payable on a variable rate obligation is adjusted at predesignated intervals and
that payable on a floating rate obligation is adjusted whenever there is a
change in the market rate of interest on which the interest rate payable is
based. Other features of these obligations typically include the right of the
Fund to demand, in some cases, at specified intervals of less


                                      B-2
 




than one year or, in other cases, upon not less than seven days' notice,
prepayment of the principal amount of the obligation prior to its stated
maturity (a demand feature). In addition, the issuer may have the right, at
similar intervals or upon similar notice, to prepay the principal amount prior
to maturity. The principal benefit of variable and floating rate obligations is
that the interest rate adjustment minimizes changes in the market value of the
obligations. As a result, the purchase of such obligations should enhance the
ability of the Fund to maintain a stable net asset value per share (see Net
Asset Value) and to sell an obligation prior to maturity at a price
approximating the full principal amount of the obligation. The payment of
principal and interest by issuers of certain Municipal Bonds and Notes purchased
by the Fund may be guaranteed by letters of credit or other credit facilities
offered by banks or other financial institutions. Such guarantees will be
considered in determining whether a Municipal Bond or Note meets the Fund's
investment quality requirements.
 
     Puts. The Fund may purchase Municipal Bonds or Notes together with the
right to resell the Municipal Bonds or Notes to the seller at an agreed-upon
price or yield within a specified period prior to the maturity date of the Bonds
or Notes. Such a right to resell is commonly known as a "put" or "tender
option," and the aggregate price which the Fund pays for Municipal Bonds or
Notes with puts or tender options is higher than the price which otherwise would
be paid for the Bonds or Notes. Consistent with the Fund's investment objective
and subject to the supervision of the Board of Directors, the primary purpose of
this practice is to permit the Fund to be fully invested in securities the
interest on which is exempt from federal income taxes 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's policy is generally to exercise the
puts or tender options on their expiration date when the exercise price is
higher than the current market price for related Municipal Bonds or Notes. 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
Fund's investment adviser 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 investment adviser
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's portfolio.
 
     The Fund values Municipal Bonds and Notes which are subject to puts or
tender options at amortized cost; no value is assigned to the put or tender
option. The cost of the put or tender option is carried as an unrealized loss
from the time of purchase until it is exercised or expires. The value of the put
or tender option is dependent on the ability of the put writer to meet its
obligation of repurchase, and it is the Fund's general policy to enter into put
or tender option transactions only with such brokers, dealers or other financial
institutions which present minimal credit risks. There is a credit risk
associated with the purchase of puts or tender options in that the broker,
dealer or financial institution might default on its obligation to repurchase an
underlying security. The Fund has received a ruling of the Internal Revenue
Service to the effect that the Fund will be considered the owner of the
Municipal Bonds or Notes subject to the puts or tender options so that the
interest on the Bonds or Notes will be tax-exempt income to the Fund.
 
     When-Issued and Delayed Delivery Securities. Municipal Bonds and Notes are
frequently offered on a when-issued or delayed delivery basis. When so offered,
the price and coupon rate are fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one week of the purchase
of Municipal Notes and within one month of the purchase of Municipal Bonds. The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. The securities so purchased are subject to market fluctuation
and, during the period between purchase and settlement, no interest accrues to
the purchaser. While securities may be sold prior to the settlement date, the
Fund intends to purchase such securities with the purpose of actually acquiring
them unless a sale would be desirable for investment reasons. At the time the
Fund makes the commitment to purchase a Municipal Bond or Note on a when-issued
or delayed delivery basis, it will record the transaction and reflect the value
of the Bond or Note in determining its net asset value. The Fund will also
establish a segregated account with its custodian bank in which it will maintain
cash and other Municipal Bonds or Notes equal in value to commitments for
when-issued or delayed delivery securities. Such Municipal Bonds or Notes will
either mature on or about the settlement date or will be Bonds or Notes as to
which the Fund has a put exercisable on or about the settlement date. If the
Fund chooses to dispose of the right to acquire a when-issued or delayed
delivery security prior to the settlement date, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. The Fund does not believe that its net asset value or net
investment income will be adversely affected by its purchase of Municipal Bonds
or Notes on a when-issued or delayed delivery basis. The Fund may invest in
when-issued or delayed delivery securities without other limitation.

 
                                      B-3
 


 
Illiquid Securities
 
     The Fund may not invest more than 10% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
 
     In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or 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, commercial paper and municipal lease obligations for which there
is a readily available market will not be deemed to be illiquid. The investment
adviser will monitor the liquidity of such restricted securities subject to the
supervision of the Board of Directors. In reaching liquidity decisions, the
investment adviser will consider, inter alia, the following factors: (1) the
frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). With respect to municipal lease obligations, the
investment adviser will also consider: (1) the willingness of the municipality
to continue, annually or biannually, to appropriate funds for payment of the
lease; (2) the general credit quality of the municipality and the essentiality
to the municipality of the property covered by the lease; (3) in the case of
unrated municipal lease obligations, an analysis of factors similar to that
performed by nationally recognized statistical rating organizations in
evaluating the credit quality of a municipal lease obligation, including (i)
whether the lease can be cancelled; (ii) if applicable, what assurance there is
that the assets represented by the lease can be sold; (iii) the strength of the
lessee's general credit (e.g., its debt, administrative, economic and financial
characteristics); (iv) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an event of nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the investment adviser. With respect to commercial paper that is
issued in reliance on Section 4(2) of the Securities Act (1) 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 (2) it must not be "traded flat" (i.e., without
accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.

     Other Matters. For purposes of diversification under the Investment Company
Act of 1940, as amended (the Investment Company Act), the identification of the
issuer of Municipal Bonds or Notes depends on the terms and conditions of the
obligation. If the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those of the government
creating the subdivision, and the obligation is backed only by the assets and
revenues of the subdivision, such subdivision would be regarded as the sole
issuer. Similarly, in the case of a private activity revenue bond or pollution
control revenue bond, if the bond is backed only by the assets and revenues of
the nongovernmental user, the nongovernmental user would be regarded as the sole
issuer. If in either case the creating government or another entity guarantees
an obligation, the guarantee would be regarded as a separate security and
treated as an issue of such government or entity.

                                      B-4
 


 
Portfolio Turnover
 
     Portfolio turnover rate is defined as the lesser of the amount of the
securities purchased or securities sold, excluding all securities whose maturity
or expiration date at the time of acquisition was one year or less, divided by
the average monthly value of such securities owned during the year. Because the
Fund's portfolio will contain only securities maturing within one year, the Fund
does not expect to have a turnover rate as so defined. However, because of the
short-term nature of the Fund's portfolio, it expects to have substantial
amounts of portfolio transactions. The Fund does not expect to pay any material
amounts of brokerage commissions, but transaction costs exist in the form of
spreads between bid and asked price.
 
                            INVESTMENT RESTRICTIONS
 
     The following investment restrictions are fundamental policies. Fundamental
policies are those which cannot be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities. A "majority of the
Fund's outstanding voting securities," when used in this Statement of
Additional Information, means the lesser of (1) 67% of the Fund's voting shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or represented by proxy, or (2) more than 50% of the Fund's
outstanding voting shares.
 
     The Fund may not:
 
     (1) Invest more than 5% of the market or other fair value of its total
assets in the securities of any one issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or instrumentalities
or secured by such obligations). See "Municipal Bonds and Notes" under
"Investment Objective and Policies" for definition of an issuer.
 
     (2) Make short sales of securities.
 
     (3) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio securities.
 
     (4) Borrow money, except that the Fund may borrow for temporary purposes in
amounts not exceeding 5% of the market or other fair value (taken at the lower
of cost or current value) of its total assets (not including the amount
borrowed). Any such borrowings will be made only from banks. Secured temporary
borrowings may take the form of reverse repurchase agreements, pursuant to which
the Fund would sell portfolio securities for cash and simultaneously agree to
repurchase them at a specified date for the same amount of cash plus an interest
component. The Fund would maintain, in a segregated account with its custodian,
liquid assets equal in value to the amount owed.
 
     (5) Pledge its assets or assign or otherwise encumber them in excess of 10%
of its assets (taken at market or other fair value at the time of pledging) and
then only to secure borrowings effected within the limitations set forth in
restriction (4).
 
     (6) Engage in the underwriting of securities.
 
     (7) Purchase or sell real estate mortgage loans, although it may purchase
Municipal Bonds or Notes secured by interests in real estate.
 
     (8) Make loans of money or securities. The purchase of a portion of an
issue of publicly distributed debt securities is not considered the making of a
loan.
 
     (9) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
 
     (10) Invest for the purpose of exercising control or management of another
company.
 
     (11) Purchase industrial revenue bonds if, as a result of such purchase,
more than 5% of total Fund assets would be invested in industrial revenue bonds
where payment of principal and interest are the responsibility of companies with
less than three years of operating history.
 
     Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
 
     In order to comply with certain state "blue sky" restrictions, the Fund
will not as a matter of operating policy:
 
     1. Invest more than 10% of its total assets in repurchase agreements which
have a maturity of longer than seven days or in other illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Securities
eligible for resale in accordance with Rule 144A under the Securities Act of
1933, privately placed

                                      B-5
 



commercial paper and Municipal Lease Obligations that have legal or contractual
restrictions on resale but have a readily available market will not be
considered illiquid for purposes of this limitation if determined to be liquid
by the Board of Directors. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period.

     2. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
 
     3. Purchase the securities of any one issuer if any officer or director of
the Fund or the Manager or Subadviser owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and directors who own
more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
 
                             DIRECTORS AND OFFICERS
 


     Name, Address         Position With                      Principal Occupations
        and Age                 Fund                           During Past 5 Years
-----------------------    --------------    --------------------------------------------------------
                                       
Delayne Dedrick Gold       Director          Marketing and Management Consultant.
(57)
c/o Prudential Mutual
Fund Management, Inc.
One Seaport Plaza
New York, NY

Arthur Hauspurg (69)       Director          Trustee and former President, Chief Executive Officer
c/o Prudential Mutual                          and Chairman of the Board of Consolidated Edison
Fund Management, Inc.                          Company of New York, Inc.; Director of COMSAT Corp.
One Seaport Plaza
New York, NY

Stephen P. Munn (53)       Director          Chairman (since January 1994), Director and President
101 So. Salina Street                          (since 1988) and Chief Executive Officer
Syracuse, NY                                   (1988-December 1993) of Carlisle Companies
                                               Incorporated.

*Richard A. Redeker        Director          President, Chief Executive Officer and Director (since
(51)                                           October 1993); Prudential Mutual Fund Management, Inc.
One Seaport Plaza                              (PMF); Executive Vice President, Director and Member
New York, NY                                   of the Operating Committee (since October 1993) of
                                               Prudential Securities; Director (since October 1993)
                                               of Prudential Securities Group, Inc. (PSG); Executive
                                               Vice President, The Prudential Investment Corporation
                                               (since July 1994); Director of Prudential Mutual Fund
                                               Distributors, Inc. (PMFD) (since January 1994) and
                                               Prudential Mutual Fund Services, Inc. (PMFS); Formerly
                                               Senior Executive Vice President and Director of Kemper
                                               Financial Services, Inc. (September 1978-September
                                               1993); Director of The Global Government Plus Fund,
                                               Inc., The Global Total Return Fund, Inc. and The High
                                               Yield Income Fund, Inc.

Louis A. Weil, III (54)    Director          Publisher and Chief Executive Officer, Phoenix
120 E. Van Buren                               Newspapers, Inc. (since August 1991); Director of
Phoenix, AZ                                    Central Newspapers, Inc. (since September 1991); prior
                                               thereto, Publisher of Time Magazine (May 1989-March
                                               1991); formerly, President, Publisher and Chief
                                               Executive Officer of The Detroit News (February
                                               1986-August 1989); formerly member of the Advisory
                                               Board, Chase Manhattan Bank-Westchester; Director of
                                               The Global Government Plus Fund, Inc.

David W. Drasnin (58)      Vice President    Vice President and Branch Manager of Prudential
39 Public Square                               Securities.
Suite 500
Wilkes-Barre, PA


 
                                      B-6
 


 


     Name, Address         Position With                      Principal Occupations
        and Age                 Fund                           During Past 5 Years
-----------------------    --------------    --------------------------------------------------------
                                       
Robert F. Gunia (48)       Vice President    Chief Administrative Officer (since July 1990), Director
One Seaport Plaza                              (since January 1989), Executive Vice President,
New York, NY                                   Treasurer and Chief Financial Officer (since June
                                               1987) of PMF; Senior Vice President (since March 1987)
                                               of Prudential Securities; Executive Vice President,
                                               Treasurer and Comptroller (since March 1991) of
                                               Prudential Mutual Fund Distributors, Inc. and Director
                                               (since June 1987) of Prudential Mutual Fund Services,
                                               Inc.; Vice President and Director of The Asia Pacific
                                               Fund, Inc. (since May 1989).

Grace Torres (35)          Treasurer and     First Vice President (since March 1994) of PMF; First
One Seaport Plaza          Principal           Vice President (since March 1994) of PSI. Prior
New York, NY               Financial and       thereto, Vice President, Bankers Trust Company.
                           Accounting
                           Officer

Stephen M. Ungerman (42)   Assistant         First Vice President of Prudential Mutual Fund
One Seaport Plaza          Treasurer           Management, Inc. (since February 1993). Prior thereto,
New York, NY                                   Senior Tax Manager at Price Waterhouse (since 1981).


S. Jane Rose (49)          Secretary         Senior Vice President (since January 1991), Senior
One Seaport Plaza                              Counsel (since June 1987) and First Vice President
New York, NY                                   (June 1987-December 1990) of PMF; Senior Vice
                                               President and Senior Counsel of Prudential Securities
                                               (since July 1992); formerly Vice President and
                                               Associate General Counsel of Prudential Securities.

Ronald Amblard (37)        Assistant         First Vice President (since January 1994), and Associate
One Seaport Plaza          Secretary           General Counsel (since January 1992) of PMF; Vice
New York, NY                                   President and Associate General Counsel of Prudential
                                               Securities (since January 1992); formerly, Assistant
                                               General Counsel (August 1988-December 1991); Associate
                                               Vice President (January 1989-December 1990) and Vice
                                               President (January 1991-December 1993) of PMF.
---------------
* "Interested" director, as defined in the Investment Company Act by reason of their affiliation
with Prudential Securities or PMF.

 
     Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities Incorporated (Prudential Securities or PSI) or Prudential
Mutual Fund Distributors, Inc.
 
     The officers conduct and supervise the daily business operations of the
Fund, while the directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general
policy.
 
     The Fund pays each of its directors who is not an affiliated person of PMF
or The Prudential Investment Corporation (PIC) annual compensation of $6,000, in
addition to certain out-of-pocket expenses. The Chairman of the Audit Committee
receives an additional $200 per year.
 
     Directors may receive their Director's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee in installments which accrue interest at
a rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury
Bills at the beginning of each calendar quarter or, pursuant to an exemptive
order of the Securities and Exchange Commission (SEC), at the daily rate of
return of the Fund (the Fund rate). Payment of the interest so accrued is also
deferred and accruals become payable at the option of the Director. The Fund's
obligation to make payments of deferred Directors' fees, together with interest
thereon, is a general obligation of the Fund.
 
     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 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr. Hauspurg is
scheduled to retire on December 31, 1999.
 
     Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
 
     The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1994 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's board

                                      B-7
 



and that of all other funds managed by Prudential Mutual Fund Management, Inc.
(Fund Complex) for the calendar year ended December 31, 1994.
 
                               Compensation Table
 


                                                                                                        Total
                                                               Pension or                            Compensation
                                                               Retirement                             From Fund
                                               Aggregate     Benefits Accrued     Estimated Annual     and Fund
                                             Compensation     As Part of Fund      Benefits Upon     Complex Paid
           Name and Position                  From Fund          Expenses            Retirement      to Directors
------------------------------------------   ------------    -----------------   -----------------   -------------
                                                                                          
Delayne Dedrick Gold--Director                 $6,200            None                  N/A            $185,000(24/43)*
Arthur Hauspurg--Director                      $6,000            None                  N/A            $ 37,500(5/7)*
Stephen P. Munn--Director                      $6,000            None                  N/A            $ 40,000(6/8)*
Louis A. Weil, III--Director                   $6,000            None                  N/A            $ 97,500(12/17)*
------------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to which aggregate compensation relates.

 
     As of May 12, 1995, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
 
     As of May 12, 1995, Prudential Securities was the record holder for other
beneficial owners of 412,508,520 shares (or 94%) of the outstanding common stock
of the Fund. In the event of any meetings of shareholders, Prudential Securities
will forward, or cause the forwarding of, proxy materials to the beneficial
owners for which it is the record holder.
 
                                    MANAGER
 
     The manager of the Fund is Prudential Mutual Fund Management, Inc., One
Seaport Plaza, New York, New York 10292 (PMF or the Manager). PMF serves as
manager of the other investment companies that, together with the Fund, comprise
the "Prudential Mutual Funds." See "How the Fund is Managed" in the
Prospectus. As of June 30, 1995, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $49
billion. According to the Investment Company Institute, as of December 31, 1994,
the Prudential Mutual Funds were the 12th largest family of mutual funds in the
United States.
 
     PMF is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
 
     Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's corporate affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Fund's custodian, and Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), the Fund's transfer and dividend disbursing agent.
The management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.

     For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets up to $750
million, .425 of 1% of the Fund's average daily net assets between $750 million
and a $1.5 billion and .375 of 1% in excess of $1.5 billion. The fee is computed
daily and payable monthly. The Management Agreement provides that, in the event
the expenses of the Fund (including the fees payable to PMF, but excluding
interest, taxes, brokerage commissions, distribution fees and litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business) for any fiscal year exceed the lowest
applicable annual expense limitation established and enforced pursuant to the
statutes or regulations of any jurisdiction in which shares of the Fund are then
qualified for offer and sale, the compensation due to PMF will be reduced by the
amount of such excess. Reductions in excess of the total compensation payable to
PMF will be paid by PMF to the Fund. No such reductions were required during the
fiscal year ended December 31, 1994. Currently, the Fund believes that the most
restrictive expense limitation of state securities commissions is 2 1/2% of the
Fund's average daily net assets up to $30 million, 2% of the Fund's average
daily net assets from $30 million to $100 million and 1 1/2% of the excess over
$100 million.
 
                                      B-8
 


 
     In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
 
     (a) the salaries and expenses of its and the Fund's personnel except the
fees and expenses of Directors who are not affiliated persons of PMF or the
Fund's investment adviser;
 
     (b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund, as described below; and
 
     (c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to a subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).
 
     Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated with the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the Fund's
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of the Fund's legal counsel and independent
accountants, (e) brokerage commissions and any issue or transfer taxes
chargeable to the Fund in connection with its securities and futures
transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade association of which the Fund
is a member, (h) the cost of stock certificates representing and/or
non-negotiable share deposit receipts evidencing shares of the Fund, (i) the
cost of fidelity and liability insurance, (j) the fees and expenses involved in
registering and maintaining registration of the Fund and of its shares with the
SEC and registering the Fund and qualifying its shares under state securities
laws, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders, (l) litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course of
the Fund's business, and (m) distribution fees.
 
     The Management Agreement provides that PMF will not be liable for any error
of judgment or any loss suffered by the Fund in connection with the matters to
which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement
provides that it will continue in effect for a period of more than two years
from its execution only so long as such continuance is specifically approved at
least annually in accordance with the requirements of the Investment Company
Act. The Management Agreement was last approved by the Board of Directors of the
Fund, including a majority of the Directors who are not parties to the agreement
or interested persons of such parties as defined in the Investment Company Act,
on May 2, 1995, and was approved by the shareholders of the Fund on April 28,
1988.
 
     For the fiscal years ended December 31, 1994, 1993 and 1992, the Fund paid
management fees to PMF of $3,222,405, $3,632,856 and $3,347,940, respectively.
 
     PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PIC furnish investment advisory services in connection with the management of
the Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PMF continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises PIC's
performance of such services. PIC is reimbursed by PMF for the reasonable costs
and expenses incurred by the PIC in furnishing services to PMF.
 
     PIC maintains a credit unit which provides credit analysis and research on
tax-exempt fixed-income securities. The portfolio manager consults routinely
with the credit unit in managing the Fund's portfolio. The credit unit reviews
on an ongoing basis issuers of tax-exempt fixed-income obligations, including
prospective purchases and portfolio holdings of the Fund. Credit analysts have
broad access to research and financial reports, data retrieval services and
industry analysts. They review financial and operating statements supplied by
state and local governments and other issuers of municipal securities to
evaluate revenue projections and the financial soundness of municipal issuers.
They study the impact of economic and political developments on state and local
governments, evaluate industry sectors and meet periodically with public
officials and other representatives of state and local governments and other
tax-exempt issuers to discuss such matters as budget projections, debt policy,
the strength of the regional economy and, in the case of revenue bonds, the
demand for facilities. They also make site inspections to review specific
projects and to evaluate the progress of construction or the operation of a
facility.
 
     The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the directors who are not parties to such contract or
interested persons of such parties as defined in the Investment Company Act, on
May 2, 1995, and was approved by the shareholders of the Fund on April 28, 1988.
 
                                      B-9
 


 
     The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days' nor less than 30
days' written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
 
     The Manager and the Subadviser 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, 1994. Its primary business is to offer a full range of products and
services in three areas: insurance, investments and home ownership for
individuals and families; health-care management and other benefit programs for
employees of companies and members of groups; and asset management for
institutional clients and their associates. Prudential (together with its
subsidiaries) employs nearly 100,000 persons worldwide, and maintains a sales
force of approximately 19,000 agents, 3,400 insurance brokers and 6,000
financial advisors. It insures or provides other financial services to more than
50 million people worldwide. Prudential is a major issuer of annuities,
including variable annuities. Prudential seeks to develop innovative products
and services to meet consumer needs in each of its business areas. The
Prudential has been engaged in the insurance business since 1875. In July 1994,
Institutional Investor ranked The Prudential the second largest institutional
money manager of the 300 largest money management organizations in the United
States as of December 31, 1993.

DISTRIBUTOR
 
     Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Fund. It is a corporation
organized under the laws of the State of Delaware and a wholly-owned subsidiary
of PMF.
 
Distribution and Service Plan
 
     Under the Fund's Distribution and Service Plan (the Plan) and the
Distribution Agreement with PMFD, the Fund pays PMFD, as distributor, a
distribution fee of .125 of 1% of the average daily net assets of the Fund,
computed daily and payable monthly. See "How the Fund is Managed--Distributor"
in the Prospectus.
 
     For the fiscal year ended December 31, 1994, PMFD incurred distribution
expenses in the aggregate of $805,601, all of which was recovered through the
distribution fee paid by the Fund to PMFD. It is estimated that all this amount
was spent on commission credits to Prudential Securities and Prusec for payments
of account servicing fees to financial advisers and an allocation of overhead
and other branch office distribution-related expenses. The term "overhead and
other branch office distribution-related expenses" represents (a) the expenses
of operating Prudential Securities' and Prusec's branch offices in connection
with the sale of Fund shares including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares, and (d) other incidental expenses relating to
branch promotion of Fund sales.
 
     The Plan continues 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
Fund and who have no direct or indirect financial interest in the operation of
the Plan (as defined in the Investment Company Act), cast in person at a meeting
called for the purpose of voting on such continuance. The Plan may be terminated
at any time, without penalty, by the vote of a majority of the Directors who are
not interested persons or by the vote of the holders of a majority of the
outstanding voting securities of the Fund on not more than 60 days' written
notice to any other party to the Plan. The Plan may not be amended to increase
materially the amounts to be spent by the Fund thereunder without shareholder
approval, and all material amendments are required to be approved by the Board
of Directors in the manner described above. The Plan will automatically
terminate in the event of its assignment.
 
     Pursuant to the Plan, the Directors will be provided with, and will review,
at least quarterly, a written report of the distribution expenses incurred on
behalf of the Fund by PMFD. The report will include an itemization of the
distribution expenses and the purpose of such expenditures. In addition, as long
as the Plan remains in effect, the selection and nomination of directors who are
not interested persons of the Fund shall be committed to the Directors who are
not interested persons of the Fund or a committee thereof.
 
     On May 2, 1995, the Board of Directors, including a majority of Directors
who are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Plan (the Rule 12b-1 Directors), at a
meeting called for the purpose of voting on the Plan, approved amendments to the
Plan changing it from a reimbursement type plan to a compensation type plan.
Pursuant to Rule 12b-1, the Plan was last approved by the Board of Directors,
including a majority of the Rule 12b-1 Directors, in person at a meeting called
for such purpose on May 2, 1995, and, as amended, was approved by the
shareholders of the Fund on July 19, 1995.
 
     On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns

                                      B-10
 



and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
 
     On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
 
     On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance. PSI
shall report any allegations or instances of criminal conduct and material
improprieties to the new director. The new director will submit compliance
reports which shall identify all such allegations or instances of criminal
conduct and material improprieties every three months for a three-year period.
 
                      PORTFOLIO TRANSACTIONS AND BROKERAGE
 
     The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in
this section includes the "Subadviser." Fixed-income 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.
The Fund will not deal with Prudential Securities in any transaction in which
Prudential Securities acts as principal. Purchases and sales of securities on a
securities exchange, while infrequent, will be effected through brokers who
charge a commission for their services. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law,
Prudential Securities.
 
     In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of the policy of obtaining most favorable price and efficient
execution, the Manager will consider research and investment services provided
by brokers or dealers who effect or are parties to portfolio transactions of the
Fund, the Manager or the Manager's other clients. Such research and investment
services are those which brokerage houses customarily provide to institutional
investors and include statistical and economic data and research reports on
particular municipalities and industries. Such services are used by the Manager
in connection with all of its investment activities, and some of such services
obtained in connection with the execution of transactions for the Fund may be
used in managing other investment accounts. Conversely, brokers furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund, and the services
furnished by such brokers may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker based on the quality and quantity of execution
services provided by the broker in light of generally prevailing rates. The
Manager is authorized to pay higher commissions on brokerage
 
                                      B-11
 



transactions for the Fund to brokers other than Prudential Securities in order
to secure the research and investment services described above, subject to the
primary consideration of obtaining the most favorable price and efficient
execution in the circumstances and subject to review by the Fund's Board of
Directors from time to time as to the extent and continuation of this practice.
The allocation of orders among brokers and the commission rates paid are
reviewed periodically.
 
     Subject to the above considerations, the Manager may use Prudential
Securities as a broker for the Fund. In order for Prudential Securities to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by Prudential Securities must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
This standard would allow Prudential Securities to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction. Furthermore, the Board of Directors of
the Fund, including a majority of the Directors who are not "interested"
directors, has adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to Prudential Securities are
consistent with the foregoing standard. Brokerage transactions with Prudential
Securities are also subject to such fiduciary standards as may be imposed upon
Prudential Securities by applicable law.
 
     The Fund paid no brokerage commissions for the years ended December 31,
1994, 1993 and 1992.
 
                     PURCHASE AND REDEMPTION OF FUND SHARES
 
How To Purchase Shares
 
     The Fund's shares are sold, without a sales charge, on a continuing basis
on each business day at their net asset value next determined (see "How the
Fund Values its Shares" in the Prospectus) after a purchase order becomes
effective. Shares of the Fund may be purchased by investors directly through
Prudential Mutual Fund Services, Inc. (PMFS), or by Prudential Securities
clients through an account at Prudential Securities. Shares may also be
purchased through Pruco Securities Corporation (Prusec). Prudential Securities
clients who hold Fund shares through Prudential Securities may benefit through
administrative conveniences afforded them as Prudential Securities clients, but
may be subject to certain additional restrictions imposed by Prudential
Securities. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
 
How To Redeem Shares
 
     The Fund effects redemption orders received by PMFS by 4:30 P.M., New York
time, on each business day at the net asset value determined as of 4:30 P.M.,
New York time. General information concerning redemption of shares is found in
the Prospectus under "Shareholder Guide--How to Sell Your Shares."
 
     Investors who purchase shares directly from PMFS may use the following
procedures:
 
     Check Redemption. At a shareholder's request, State Street Bank and Trust
Company (State Street) will establish a personal checking account for the
shareholder. Checks drawn on this account can be made payable to the order of
any person in any amount greater than $500. The payee of the check may cash or
deposit it like any other check drawn on a bank. When such check is presented to
State Street for payment, State Street presents the check to the Fund as
authority to redeem a sufficient number of shares in the shareholder's account
to cover the amount of the check. This enables the shareholder to continue
earning daily dividends until the check is cleared. Canceled checks are returned
to the shareholder by State Street.
 
     Shareholders are subject to State Street's rules and regulations governing
such checking accounts, including the right of State Street not to honor checks
in amounts exceeding the value of the shareholder's account at the time the
check is presented for payment.
 
     Shares for which certificates have been issued are not available for
redemption to cover checks. A shareholder should be certain that adequate shares
for which certificates have not been issued are in his or her account to cover
the amount of the check. Also, shares purchased by check are not available to
cover checks until 15 calendar days after receipt of the purchase check by PMFS.
See "Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus. If
insufficient shares are in the account, or if the purchase was made by check
within 10 calendar days, the check will be returned marked "insufficient
funds." Since the dollar value of an account is constantly changing, it is not
possible for a shareholder to determine in advance the total value of his or her
account so as to write a check for the redemption of the entire account.
 
     PMFS reserves the right to impose a service charge to establish a checking
account and to order checks. State Street, the Fund and PMFS have reserved the
right to modify this checking account privilege or to place a charge for each
check presented for payment for any individual account or for all accounts in
the future.

                                      B-12
 


 
     The Fund, PMFS or State Street may terminate Check Redemption at any time
upon 30 days' notice to participating shareholders. To receive further
information, contact Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, NJ 08906-5010.
 
     Expedited Redemption. In order to use Expedited Redemption, a shareholder
may so designate at the time the initial application form is filed, or at a
later date. Once the Expedited Redemption authorization form has been completed,
the signature(s) on the authorization form guaranteed as set forth below and the
Form returned to PMFS, requests for redemption may be made by telegraph, letter
or telephone. The proceeds of redeemed shares in the amount of $1,000 or more
are transmitted by wire to the shareholder's account at a domestic commercial
bank which is a member of the Federal Reserve System. Proceeds of less than
$1,000 are forwarded by check to the shareholder's designated bank account. The
minimum amount that may be redeemed by Expedited Redemption is $200, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account may be redeemed. The Fund does not
forward redemption proceeds with respect to shares purchased by check until 15
calendar days after receipt of the purchase check by PMFS.
 
     To request Expedited Redemption by telephone, a shareholder should call
PMFS at 800-225-1852. Calls must be received by PMFS before 4:30 P.M., New York
time in order for the redemption to be effective on that day. Requests by letter
should be addressed to Prudential Mutual Funds Services, Inc., at the address
set forth above.
 
     Each shareholder's signature on the authorization form must be guaranteed
by: (a) a commercial bank which is a member of the Federal Deposit Insurance
Corporation; (b) a trust company; or (c) a member firm of a domestic securities
exchange. Guarantees must be signed by an authorized signatory of the bank,
trust company or member firm, and "Signature Guaranteed" should appear with
the signature. Signature guarantees by savings banks, savings and loan
associations and notaries will not be accepted. PMFS may request further
documentation from corporations, executors, administrators, trustees or
guardians. In order to change the name of the commercial bank or account
designated to receive redemption proceeds, it is necessary to execute a new
Expedited Redemption authorization form and submit it to PMFS at the address set
forth above. See "Shareholder Guide--How to Sell Your Shares" in the
Prospectus for additional information on Expedited Redemption.
 
     Regular Redemption. Shareholders may redeem their shares by sending to
PMFS, at the address set forth above, a written request, accompanied by duly
endorsed share certificates, if issued. All written requests for redemption, and
any share certificates, must be endorsed by the shareholder with signature
guaranteed, as described above under "Expedited Redemption." PMFS may request
further documentation from corporations, executors, administrators, trustees or
guardians. Redemption proceeds are sent to a shareholder's address by check.
 
                         SHAREHOLDER INVESTMENT ACCOUNT
 
     Upon the initial purchase of shares of the Fund, a Shareholder Investment
Account is established for each investor under which a record of the share held
is maintained by the Transfer Agent. If a share certificate is desired, it must
be requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the account at any time. There is no
charge to the investor for issuance of a certificate. Whenever a transaction
takes place in the Shareholder Investment Account, the shareholder will be
mailed a statement showing the transaction and the status of such account.
 
Procedure for Multiple Accounts
 
     Special procedures have been designed for banks and other institutions that
wish to open multiple accounts. An institution may open a single master account
by filing an Application and Order Form with PMFS, signed by personnel
authorized to act for the institution. Individual sub-accounts may be opened at
the time the master account is opened by listing them, or they may be added at a
later date by written advice or by filing forms supplied by PMFS. Procedures are
available to identify sub-accounts by name and number within the master account
name. The investment minimums described in the Prospectus under "Shareholder
Guide--How to Buy Shares of the Fund" are applicable to the aggregate amounts
invested by a group, and not to the amount credited to each sub-account.
 
     PMFS provides each institution with a written confirmation for each
transaction in a sub-account and, to each institution on a monthly basis, a
statement which sets forth for each master account its share balance and income
earned for the month. In addition, each institution receives a statement for
each individual account setting forth transactions in the sub-account for the
year-to-date, the total number of shares owned as of the dividend payment date
and the dividends paid for the current month, as well as for the year-to-date.
For further information on the sub-accounting system and procedures, contact
PMFS.
 
Automatic Reinvestment of Dividends and Distributions
 
     For the convenience of investors, all dividends and distributions are
automatically invested in full and fractional shares of the Fund at net asset
value. An investor may direct the Transfer Agent in writing not less than 5 full
business days prior to the payable date to have subsequent dividends and/or
distributions sent in cash rather than invested. In the case of recently
purchased shares for which
 
                                      B-13
 



registration instructions have not been received on the record date, cash
payment will be made directly to the dealer. Any shareholder who receives a cash
payment representing a dividend or distribution may reinvest such dividend or
distribution at net asset value by returning the check or the proceeds to the
Transfer Agent within 30 days after the payment date. Such investment will be
made at the net asset value per share next determined after receipt of the check
or proceeds by the Transfer Agent.
 
Exchange Privilege
 
     The Fund makes available to its shareholders the privilege of exchanging
their shares for shares of certain other Prudential Mutual Funds, including one
or more specified money market funds, subject in each case to the minimum
investment requirements of such funds. Class A shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form plus the applicable sales charge. An exchange will be
treated as a redemption and purchase for tax purposes. Shares may be exchanged
for shares of another fund only if shares of such fund may legally be sold under
applicable state laws.
 
     It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
 
     Shareholders of the Fund may exchange their shares for Class A shares of
the Prudential Mutual Funds and shares of the money market funds specified
below.
 
     The following money market funds participate in the Class A Exchange
Privilege:
 
       Prudential California Municipal Fund
          (California Money Market Series)
 
       Prudential Government Securities Trust
          (Money Market Series)
          (U.S. Treasury Money Market Series)

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

        Prudential MoneyMart Assets

        Prudential Tax-Free Money Fund, Inc.
 
     Shareholders of the Fund may not exchange their shares for Class B or Class
C shares of the Prudential Mutual Funds or shares of Prudential Special Money
Market Fund a money market fund, except that shares acquired prior to January
22, 1990 subject to a contingent deferred sales charge may be exchanged for
Class B shares.
 
     Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
 
Automatic Savings Accumulation Plan (ASAP)
 
     Under ASAP, an investor may arrange to have a fixed amount automatically
invested in Fund shares each month by authorizing his or her bank account or
Prudential Securities Account (not including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants.
 
     Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
 
     In addition, an investor may direct the Transfer Agent to redeem on a
monthly or other periodic basis specified amounts (minimum of $100) of shares of
the Fund and invest the proceeds of such redemptions in shares of any Prudential
Mutual Fund pursuant to the "Exchange Privilege" or the "Class B and Class C
Purchase Privilege."

                                      B-14
 


 
Systematic Withdrawal Plan
 
     A withdrawal plan is available for shareholders having shares of the Fund
held through Prudential Securities or the Transfer Agent. Such withdrawal plan
provides for monthly or quarterly checks in any amount, except as provided
below, up to the value of the shares in the shareholder's account.
 
     In the case of shares held through the Transfer Agent, (i) a $10,000
minimum account value applies, (ii) withdrawals may not be for less than $100
and (iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and

fractional shares at net asset value on shares held under this plan. See
"Shareholder Investment Account--Automatic Reinvestment of Dividends and
Distributions" above.
 
     Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The plan may be terminated at any
time, and the Distributor reserves the right to initiate a fee of up to $5 per
withdrawal, upon 30 days' written notice to the shareholder.
 
     Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted. Furthermore, each withdrawal constitutes a
redemption of shares, and any gain or loss realized must be recognized for
federal income tax purposes. 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.
 
                                NET ASSET VALUE
 
     The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding.
 
     The Fund uses the amortized cost method to determine the value of its
portfolio securities. The amortized cost method involves valuing a security at
its cost and amortizing any discount or premium over the period until maturity.
The method does not take into account unrealized capital gains and losses which
may result from the effect of fluctuating interest rates on the market value of
the security.
 
     The Fund maintains a dollar-weighted average portfolio maturity of 90 days
or less, purchases instruments having remaining maturities of thirteen months or
less and invests only in securities determined by the investment adviser under
the supervision of the Board of Directors to present minimal credit risks and to
be of "eligible quality" in accordance with regulations of the SEC. The Board
has established procedures designed to stabilize, to the extent reasonably
possible, the Fund's price per share as computed for the purpose of sales and
redemptions at $1.00. Such procedures include review of the Fund's portfolio
holdings by the Board of Directors, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value calculated by using
available market quotations deviates from $1.00 per share based on amortized
cost. The extent of any deviation will be examined by the Board of Directors. If
such deviation exceeds 1/2 of 1%, the Board will promptly consider what action,
if any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, the Board will take such corrective action
which it regards as necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, the withholding of dividends, redemptions of shares
in kind, or the use of available market quotations to establish a net asset
value per share.
 
     The Fund will calculate its net asset value at 4:30 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 series shares have been received or days
on which changes in the value of the Fund's securities do not affect net asset
value.
 
                              CALCULATION OF YIELD
 
     The Fund will prepare a current quotation of yield from time to time. The
yield quoted will be the simple annualized yield for an identified seven
calendar day period. The yield calculation will be based on a hypothetical
account having a balance of exactly one share at the beginning of the seven-day
period. The base period return will be the change in the value of the
hypothetical account during the seven-day period, including dividends declared
on any shares purchased with dividends on the share but excluding any capital
changes. The yield will vary as interest rates and other conditions affecting
money market instruments change. Yield also depends on the quality, length of
maturity and type of instruments in the Fund's portfolio, and its operating
expenses. The Fund may also prepare an effective annual yield computed by
compounding the unannualized seven-day period return as follows: by adding 1 to
the unannualized 7-day period return, raising the sum to a power equal to 365
divided by 7, and subtracting 1 from the result.
 
     Effective yield = [(base period return + 1)365/7]-1 
 
                                      B-15
 



     The Fund may also calculate the tax equivalent yield over a 7-day period.
The tax equivalent yield will be determined by first computing the current yield
as discussed above. The Fund will then determine what portion of the yield is
attributable to securities, the income of which is exempt for federal income tax
purposes. This portion of the yield will then be divided by one minus 39.6% (the
assumed maximum tax rate for individual taxpayers not subject to Alternative
Minimum Tax) and then added to the portion of the yield that is attributable to
other securities.
 
     Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Donoghue's Money Fund Report, The Bank Rate Monitor,
other industry publications, business periodicals, rating services and market
indices.
 
     The Fund's yield fluctuates, and an annualized yield quotation is not a
representation by the Fund as to what an investment in the Fund will actually
yield for any given period. Yield for the Fund will vary based on a number of
factors including changes in market conditions, the level of interest rates and
the level of Fund income and expenses.
 
                       TAXES, DIVIDENDS AND DISTRIBUTIONS
 
     The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended ("Internal Revenue Code"). Qualification as a regulated
investment company under the Internal Revenue Code requires, among other things,
that the Fund (a) derive at least 90% of its annual gross income (without offset
for losses from the sale or other disposition of securities or foreign
currencies) from interest, payments with respect to securities loans, dividends
and gains from the sale or other disposition of securities or foreign currencies
and certain financial futures, options and forward contracts thereon; (b) derive
less than 30% of its annual gross income from gains from the sale or other
disposition of securities or options thereon held for less than three months;
and (c) diversify its holdings so that, at the end of each quarter of the
taxable year, (i) at least 50% of the market 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 Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities). In addition, in order not to be
subject to federal income tax on amounts distributed to shareholders, the Fund
must distribute to its shareholders as ordinary dividends at least 90% of its
net investment income and net short-term capital gains in excess of its net
long-term capital losses earned in each year.
 
     The Fund generally will be subject to a nondeductible excise tax of 4% to
the extent that it does not meet certain minimum distribution requirements as of
the end of each calendar year. The Fund intends to make timely distributions of
the Fund's income in compliance with these requirements. As a result, it is
anticipated that the Fund will not be subject to the excise tax.
 
     The Fund intends to invest its assets so that dividends payable from net
tax-exempt interest income will qualify as exempt-interest dividends and be
excluded from a shareholder's gross income under the Internal Revenue Code. In
order for its dividends to qualify as tax-exempt income, (i) at least 50 percent
of the value of the total assets of the Fund at the close of each quarter of its
taxable year must consist of certain tax-exempt government obligations and (ii)
the Fund must designate the dividend as an exempt-interest dividend in a written
notice mailed to shareholders not later than sixty days after the end of its
taxable year.
 
     Exempt-interest dividends attributable to interest on certain "private
activity" tax-exempt obligations are a preference item for purposes of
computing the alternative minimum tax for both individuals and corporations.
Moreover, interest on tax-exempt obligations, whether or not private activity
bonds, that are held by corporations will be taken into account (i) in
determining the alternative minimum tax imposed on 75% of the excess of adjusted
current earnings over alternative minimum taxable income, (ii) in calculating
the environmental tax equal to 0.12 percent of a corporation's modified
alternative minimum taxable income in excess of $2 million, and (iii) in
determining the foreign branch profits tax imposed on the effectively connected
earnings and profits (with adjustments) of United States branches of foreign
corporations. The Fund plans to avoid to the extent possible investing in
private activity obligations.
 
     Interest on indebtedness incurred or continued by a shareholder, whether a
corporation or an individual, to purchase or carry shares of the Fund is not
deductible. Shareholders who have held their shares for six months or less may
be subject to a disallowance of losses from the sale or exchange of those shares
to the extent of any exempt-interest dividends received by the shareholder with
respect to the shares and if such losses are not disallowed, they will be
treated as long-term capital losses to the extent of any distribution of
long-term capital gains received by the shareholder with respect to such shares.
Moreover, any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the disposition, such as pursuant to a
dividend reinvestment in shares. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Entities or persons
who are "substantial users" (or related persons) of facilities financed by
private activity bonds should consult their tax advisers before purchasing
shares of the Fund.
 
     The Fund does not expect to realize long-term capital gains or losses.

                                      B-16
 


 
     The Fund may be subject to state or local tax in certain other states where
it is deemed to be doing business. Further, in those states which have income
tax laws, the tax treatment of the Fund and of shareholders of the Fund with
respect to distributions by the Fund may differ from federal tax treatment. The
exemption of interest income for federal income tax purposes may not result in
similar exemption under the laws of a particular state or local taxing
authority. The Fund will report annually to its shareholders the percentage and
source, on a state-by-state basis, of interest income on Municipal Bonds
received by the Fund during the preceding year and on other aspects of the
federal income tax status of distributions made by the Fund.
 
     Pennsylvania Personal Property Tax. The Fund has obtained a written letter
of determination from the Pennsylvania Department of Revenue that the Fund is
subject to the Pennsylvania foreign franchise tax upon initiating its intended
business activities in Pennsylvania. Accordingly, Fund shares are believed to be
exempt from Pennsylvania personal property taxes. The Fund anticipates that it
will continue such business activities but reserves the right to suspend them at
any time, resulting in the termination of the exemption.
 
             CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT,
                          AND INDEPENDENT ACCOUNTANTS
 
     State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to agreements with the Fund.
 
     Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New
Jersey 08837 (PMFS), serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions, and related
functions. For these services, PMFS receives an annual fee per shareholder
account, a new account set-up fee for each manually-established account and a
monthly inactive zero balance account fee per shareholder account. PMFS is also
reimbursed for its out-of-pocket expenses, including but not limited to postage,
stationery, printing, allocable communications expenses and other costs. For the
fiscal year ended December 31, 1994, the Fund incurred fees of $369,953 for the
services of PMFS.
 
     Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
 
                                      B-17



PRUDENTIAL TAX-FREE MONEY FUND       Portfolio of Investments
                                            December 31, 1994


  Moody's     Principal
   Rating      Amount                                   Value
(Unaudited)     (000)          Description (a)        (Note 1)
                                           
                           ALASKA--2.7%
                           Valdez Alaska Marine
                             Term. Rev. Arco
                             Trans. Proj.,
                             T.E.C.P.,
                           3.65%, 1/17/95, Ser.
A-1*           $ 13,000      94A..................  $ 13,000,000
                                                    ------------
                           ARIZONA--2.1%
                           Maricopa Cnty. Ind.
                             Dev. Auth., Grand
                             Canyon
                             University, F.R.W.D.,
SP1+*            10,000    5.55%, 1/5/95..........    10,000,000
                                                    ------------
                           CALIFORNIA--5.4%
                           California Higher Ed.
                             Ln . Auth. Inc.,
                             Student
                             Ln. Rev., A.N.N.M.T.
                           3.60%, 5/1/95, Ser.
VMIG1            15,750      87A..................    15,750,000
                           California St. R.A.W.,
                             F.R.W.D.S.,
                           5.78%, 1/5/95, Ser.
VMIG1             2,200      94A..................     2,200,000
                           5.73%, 1/5/95, Ser.
SP1*              8,126      94C-10...............     8,125,941
                                                    ------------
                                                      26,075,941
                                                    ------------
                           COLORADO--5.6%
                           Colorado Hlth. Facs.
                             Auth. Rev.
                           Frasier Meadows Manor,
                             F.R.W.D.,
                           5.55%, 1/5/95, Ser.
NR               10,000      94...................    10,000,000
                           Colorado Hsg. Fin.
                             Auth.,
                           Eagle Trust,
                             F.R.W.D.S.,
                           5.73%, 1/5/95, Ser.
A-1*             17,335      94C..................    17,335,000
                                                    ------------
                                                      27,335,000
                                                    ------------
                           CONNECTICUT--5.8%
                           Connecticut St. Hsg.
                             Fin. Auth.,
                           Hsg. Mtg. Fin. Auth.
                             Prog., A.N.N.M.T.,
                           4.40%, 11/15/95, Ser.
VMIG1          $  7,100      93E-1................  $  7,096,907
                           4.40%, 11/15/95, Ser.
VMIG1            10,000      94E-1................    10,000,000
                           Connecticut St. Spec.
                             Assmt.,
                             Unemployment
                             Compensation Rev.,
                             A.N.N.M.T.,
                           3.85%, 7/1/95, Ser.
VMIG1            11,000      93C..................    11,000,000
                                                    ------------
                                                      28,096,907
                                                    ------------
                           DISTRICT OF COLUMBIA--1.8%
                           Dist. of Columbia Hsg.
                             Fin. Agcy.,
                           Carmel Plaza, F.R.W.D.,
                           5.50%, 1/5/95, Ser.
VMIG1          $  8,830      91...................     8,830,000
                                                    ------------
                           FLORIDA--2.6%
                           Putnam Cnty. Dev. Auth.
                             Seminole Electric
                             Proj., S.E.M.O.T.,
                             Ser. 84H-4
A-1*             12,500    3.75%, 3/15/95.........    12,500,000
                                                    ------------
                           GEORGIA--5.3%
                           Cobb Cnty. Dev. Auth.
                             Rev.,
                           Inst. of Nuclear Pwr.,
                             F.R.W.D.,
                           5.65%, 1/4/95, Ser.
NR                7,255      92...................     7,255,000
                           Fulton Cnty. Dev. Auth.
                             Ind.
                             Rev., Siemen's Energy
                             Inc.,
                             F.R.W.D.,
                           5.75%, 1/5/95, Ser.
VMIG1             7,750      94...................     7,750,000
                           Fulton Cnty. Dev. Auth.
                             Rev.,
                           Robert W. Woodruff Art
                             Ctr. Inc., F.R.W.D.,
                           5.70%, 1/5/95, Ser.
NR               10,700      93...................    10,700,000
                                                    ------------
                                                      25,705,000
                                                    ------------

 
                                    B-18     See Notes to Financial Statements.
 


PRUDENTIAL TAX-FREE MONEY FUND


  Moody's     Principal
   Rating      Amount                                   Value
(Unaudited)     (000)          Description (a)        (Note 1)

                                           
                           IDAHO--2.1%
                           Idaho St., T.A.N.,
                           4.50%, 6/29/95, Ser.
MIG1           $ 10,000      94...................  $ 10,032,110
                                                    ------------
                           ILLINOIS--10.5%
                           Hazel Crest Vlg. Rev.,
                           Waterford Estates
                             Proj., F.R.W.D.,
                           5.65%, 1/6/95, Ser.
VMIG1             7,500      92A..................     7,500,000
                           Illinois Dev. Fin.
                             Auth.,
                           Orleans Multifamily
                             Hsg. Rev., F.R.W.D.,
                           5.65%, 1/6/95, Ser.
A-1*             14,020      92...................    14,020,000
                           Illinois St. Gen.
                             Oblig. Cert.,
                           4.75%, 4/17/95, Ser.
MIG1             10,000      94...................    10,015,100
                           Wheeling Multifamily
                             Hsg.
                             Rev., Woodland Creek
                             II, F.R.W.D.,
                           5.55%, 1/6/95, Ser.
SP-1*             9,655      90...................     9,655,000
                           Woodridge Dupage
                             Cntys.,
                           Multifamily Hsg. Rev.
                             Rfdg., Hinsdale Terr.
                             Apts., F.R.W.D.,
                           5.65%, 1/6/95, Ser.
A-1+*            10,000      90...................    10,000,000
                                                    ------------
                                                      51,190,100
                                                    ------------
                           KANSAS--0.9%
                           Kansas City Poll. Ctrl.
                             Rev.,
                             General Motors Corp.
                             Proj., F.R.W.D.,
                           6.00%, 1/4/95, Ser.
VMIG2             4,350      85...................     4,350,000
                                                    ------------
                           KENTUCKY--3.0%
                           Clark Cnty. Poll. Ctrl.
                             Rev.,
                           Eastern Kentucky Pwr.,
                             S.E.M.O.T.,
                           3.75%, 4/17/95, Ser.
A-1*             14,740      J2...................    14,737,854
                                                    ------------
                           LOUISIANA--2.2%
                           East Baton Rouge Parish
                           Louisiana Poll. Ctrl.
                             Rev., Exxon Proj.,
                             T.E.C.P.,
                           3.70%, 1/30/95, Ser.
P1               10,900      89...................    10,900,000
                                                    ------------
                           MAINE--4.3%
                           Biddeford Res. Rec.
                             Rev.,
                           Energy Rec. Co. Proj.,
                             F.R.M.D.,
                           3.70%, 1/3/95, Ser.
VMIG1          $ 21,000      85...................  $ 21,000,000
                                                    ------------
                           MICHIGAN--7.2%
                           Grand Rapids Econ. Dev.
                             Corp., Ind. Dev. Rev.
                             Rfdg., F.R.W.D.,
                           5.70%, 1/5/95, Ser.
NR                7,500      92...................     7,500,000
                           Michigan Mun. Bond
                             Auth.
                             Rev., R.A.N.,
                           4.25%, 5/5/95, Ser.
SP-1*             7,000      94A..................     7,017,217
                           4.75%, 7/20/95, Ser.
SP-1*            20,700      94B..................    20,781,777
                                                    ------------
                                                      35,298,994
                                                    ------------
                           MINNESOTA--5.7%
                           Minnesota Gen. Oblig.,
                           F.R.W.D.S.,
                           5.85%, 1/5/95, Ser.
NR                5,778      6....................     5,778,316
                           Minnetonka Multifamily
                             Hsg.
                             Rev., Cliffs
                             Ridgedale Proj.,
                             F.R.W.D.,
                           5.55%, 1/6/95, Ser.
A-1*              6,900      85A..................     6,900,000
                           St Louis Hlth. Care
                             Facs.
                             Trust Cert.,
                             F.R.W.D.S.,
                           5.65%, 1/6/95, Ser.
NR               15,000      93...................    15,000,000
                                                    ------------
                                                      27,678,316
                                                    ------------
                           MISSOURI--1.6%
                           St. Louis Land
                             Clearance Auth.
                           Redev. Auth. Pkg.
                             Facs., Rev.,
                             S.E.M.M.T.,
                           3.75%, 3/15/95, Ser.
VMIG1             8,000      89...................     8,000,000
                                                    ------------
                           NEBRASKA--1.8%
                           Nebraska Invest. Fin.
                             Auth.,
                             Briarhurst Candletree
                             Proj.,
                             S.E.M.M.T.,
                           4.10%, 4/1/95, Ser.
A-1*              8,995      85...................     8,995,000
                                                    ------------

 
                                    B-19     See Notes to Financial Statements.
 


PRUDENTIAL TAX-FREE MONEY FUND


  Moody's     Principal
   Rating      Amount                                   Value
(Unaudited)     (000)          Description (a)        (Note 1)

                                           
                           NEW YORK--0.5%
                           New York St. Gen.
                             Oblig., T.E.C.P.,
                           3.85%, 2/16/95, Ser.
P-1            $  2,500      P....................  $  2,500,000
                                                    ------------
                           NORTH CAROLINA--1.5%
                           Rockingham Cnty. Ind.
                             Facs.,
                           Poll. Ctrl. Rev.,
                             Phillip
                             Morris Proj.,
                             F.R.W.D.,
P1                7,200    5.65%, 1/4/95..........     7,200,000
                                                    ------------
                           OHIO--2.6%
                           Ohio St. Wtr. Dev.
                             Auth. Rev.,
                           Gen. Motors Corp.
                             Proj., F.R.W.D.,
                           5.95%, 1/4/95, Ser.
VMIG2             4,160      85...................     4,160,000
                           Toledo-Lucas Cnty.,
                           Convntn. & Visitors
                             Bureau, M.T.H.O.T.,
                           3.90%, 1/1/95, Ser.
VMIG1             8,300      88...................     8,300,000
                                                    ------------
                                                      12,460,000
                                                    ------------
                           OKLAHOMA--6.8%
                           Oklahoma Cnty. Ind.
                             Auth. Rev., Baptist
                             Gen. Conv.,
                             S.E.M.M.T.,
VMIG1            15,000    4.00%, 3/1/95..........    15,000,000
                           Oklahoma Sch. Dist.
                             Cash Mgmt.,
                           5.30%, 6/30/95, Ser.
NR                9,000      94...................     9,042,756
                           Tulsa Pkg. Auth. Rev.,
                           Williams Ctr. Proj.,
                             S.E.M.M.T.,
                           4.35%, 5/15/95, Ser.
VMIG1             9,265      87A..................     9,265,000
                                                    ------------
                                                      33,307,756
                                                    ------------
                           OREGON--1.8%
                           Klamath Falls Elec.
                             Rev.,
                           Salt Caves
                             Hydroelectric,
                             A.N.N.M.T.,
                           3.75%, 5/2/95, Ser.
SP-1+*            8,800      86C..................     8,800,000
                                                    ------------
                           PENNSYLVANIA--2.7%
                           Philadelphia T.R.A.N.,
                           4.75%, 6/15/95, Ser.
MIG1           $  7,000      94-95B...............  $  7,025,928
                           Southeastern
                             Pennsylvania Trans.
                             Auth. Rev.,
                           4.60%, 6/1/95, Ser.
Aa3               6,000      94...................     6,000,000
                                                    ------------
                                                      13,025,928
                                                    ------------
                           TENNESSEE--1.9%
                           Memphis Hlth. Edl. &
                             Hsg. Fac. Brd.,
                           Multifamily Hsg. Rev.,
                             F.R.W.D.,
                           5.65%, 1/6/95, Ser.
VMIG2             9,320      89...................     9,320,000
                                                    ------------
                           TEXAS--6.9%
                           Gulf Coast Wst. Disp.
                             Auth.
                           Poll. Ctrl. Rev., Exxon
                             Corp. Proj.,
                             T.E.C.P.,
                           3.55%, 1/23/95, Ser.
P1               14,700      89...................    14,700,000
                           San Antonio Elec. & Gas
                             Rev., T.E.C.P.,
                           3.55%, 1/18/95, Ser.
P-1               6,000      A....................     6,000,000
                           3.65%, 3/6/95, Ser.
P-1               5,600      A....................     5,600,000
                           Southeast Texas Hsg.
                             Fin. Corp., Banc One,
                             Tax Exempt
                             Trust, F.R.W.D.S.,
                           5.65%, 1/5/95, Ser.
Aaa               7,395      91D..................     7,395,000
                                                    ------------
                                                      33,695,000
                                                    ------------
                           VIRGINIA--1.3%
                           Chesterfield Cnty. Ind.
                             Dev. Auth., Phillip
                             Morris Proj.,
                             F.R.W.D.,
P-1               6,500    5.65%, 1/4/95..........     6,500,000
                                                    ------------
                           WASHINGTON--2.6%
                           Washington Public Pwr.
                             Supply,
                           F.R.W.D.S.,
                           5.85%, 1/5/95, Ser.
NR               12,631      5....................    12,631,332
                                                    ------------

 
                                    B-20     See Notes to Financial Statements.
 


PRUDENTIAL TAX-FREE MONEY FUND


  Moody's     Principal
   Rating      Amount                                   Value
(Unaudited)     (000)          Description (a)        (Note 1)

                                           
                           WISCONSIN--1.6%
                           Wisconsin Hsg. & Econ.
                             Dev.
                             Auth., Home Ownership
                             Rev., Q.T.R.O.T.,
                           3.95%, 3/1/95, Ser.
Aaa            $  7,970      87B..................  $  7,970,000
                                                    ------------
                           Total Investments--100.8%
                           (amortized cost
                             $491,135,238; Note
                             1)...................   491,135,238
                           Liabilities in excess
                             of other
                             assets--(0.8%).......    (3,844,788)
                                                    ------------
                           Net Assets--100%.......  $487,290,450
                                                    ------------
                                                    ------------

 
(a) The following abbreviations are used in portfolio descriptions:
    A.N.N.M.T.--Annual Mandatory Tender
    F.R.M.D.--Floating Rate (Monthly) Demand Note**
    F.R.W.D.--Floating Rate (Weekly) Demand Note**
    F.R.W.D.S.--Floating Rate (Weekly) Demand Note Synthetic
    M.T.H.O.T.--Monthly Optional Tender
    R.A.N.--Revenue Anticipation Note
    R.A.W.--Revenue Anticipation Warrant
    S.E.M.M.T.--Semi-Annual Mandatory Tender
    S.E.M.O.T.--Semi-Monthly Tender Offer
    T.A.N.--Tax Anticipation Note
    T.E.C.P.--Tax-Exempt Commercial Paper
    T.R.A.N.--Tax & Revenue Anticipation Note
    Q.T.R.O.T.--Quarterly Tax & Reserve Optional Tender
 * Standard & Poor's Rating.
** For purposes of amortized cost valuation, the maturity date of these
   instruments is considered to be the later of the next date on which the
   security can be redeemed at par, or the next date on which the rate of
   interest is adjusted.
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 and Poor's ratings.
                                    B-21     See Notes to Financial Statements.
 


 PRUDENTIAL TAX-FREE MONEY FUND
 Statement of Assets and Liabilities


Assets                                                                                   December 31, 1994
                                                                                         -----------------
                                                                                      
Investments, at value.................................................................     $ 491,135,238
Receivable for investments sold.......................................................        13,695,199
Receivable for Fund shares sold.......................................................         8,308,888
Interest receivable...................................................................         4,274,530
Prepaid expenses......................................................................            12,191
                                                                                         -----------------
    Total assets......................................................................       517,426,046
                                                                                         -----------------
Liabilities
Payable for investments purchased.....................................................        16,215,208
Payable for Fund shares reacquired....................................................        13,117,717
Dividends payable.....................................................................           250,617
Due to Manager........................................................................           236,591
Accrued expenses......................................................................           181,439
Bank overdraft........................................................................           102,923
Due to Distributor....................................................................            31,101
                                                                                         -----------------
    Total liabilities.................................................................        30,135,596
                                                                                         -----------------
Net Assets............................................................................     $ 487,290,450
                                                                                         -----------------
                                                                                         -----------------
Net assets were comprised of:
  Common stock, $.01 par value........................................................     $   4,873,717
  Paid-in capital in excess of par....................................................       482,416,733
                                                                                         -----------------
  Net assets, December 31, 1994.......................................................     $ 487,290,450
                                                                                         -----------------
                                                                                         -----------------
Net asset value, offering price and redemption price per share ($487,290,450 /
  487,384,729 shares of common stock issued and outstanding; 
   3 billion shares authorized).......................................................             $1.00
                                                                                         -----------------
                                                                                         -----------------

 
See Notes to Financial Statements.
                                      B-22
 


 PRUDENTIAL TAX-FREE MONEY FUND
 Statement of Operations


                                         Year Ended
                                         December 31,
Net Investment Income                       1994
                                         -----------
                                      
Income
  Interest.............................  $19,409,932
                                         -----------
Expenses
  Management fee.......................    3,222,405
  Distribution fee.....................      805,601
  Transfer agent's fees and expenses...      405,000
  Custodian's fees and expenses........      100,000
  Registration fees....................       75,000
  Franchise taxes......................       70,000
  Audit fee............................       48,000
  Reports to shareholders..............       45,000
  Directors' fees......................       30,200
  Insurance............................       21,000
  Legal fees...........................       20,000
  Miscellaneous........................        2,355
                                         -----------
    Total expenses.....................    4,844,561
                                         -----------
Net investment income..................   14,565,371
                                         -----------
Net Increase in Net Assets
Resulting from Operations..............  $14,565,371
                                         -----------
                                         -----------

 
 PRUDENTIAL TAX-FREE MONEY FUND
 Statement of Changes in Net Assets


                            Year Ended December 31,
Increase (Decrease)    ----------------------------------
in Net Assets               1994               1993
                       ---------------    ---------------
                                    
Operations
  Net investment
  income.............  $    14,565,371    $    13,369,060
  Net realized gain
    on securities
    transactions.....               --                237
                       ---------------    ---------------
  Net increase in net
    assets resulting
    from
    operations.......       14,565,371         13,369,297
                       ---------------    ---------------
Dividends to
  shareholders.......      (14,565,371)       (13,369,297)
                       ---------------    ---------------
Fund share
  transactions (at
  $1.00 per share)
  Net proceeds from
    shares
    subscribed.......    1,984,509,938      2,398,092,847
  Net asset value of
    shares issued to
    shareholders in
    reinvestment of
    dividends........       13,746,715         12,745,371
  Cost of shares
    reacquired.......   (2,112,588,085)    (2,423,549,007)
                       ---------------    ---------------
Net decrease in net
  assets from Fund
  share
  transactions.......     (114,331,432)       (12,710,789)
                       ---------------    ---------------
Total decrease.......     (114,331,432)       (12,710,789)
Net Assets
Beginning of year....      601,621,882        614,332,671
                       ---------------    ---------------
End of year..........  $   487,290,450    $   601,621,882
                       ---------------    ---------------
                       ---------------    ---------------

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

                                      B-23
 


 PRUDENTIAL TAX-FREE MONEY FUND
 Notes to Financial Statements
   Prudential-Bache Tax-Free Money Fund, Inc., doing business as Prudential
Tax-Free Money Fund (the "Fund"), is registered under the Investment Company
Act of 1940 as a diversified, open-end management investment company. The
investment objective of the Fund is to attain the highest level of current
income that is exempt from federal income taxes, consistent with liquidity and
preservation of capital. The Fund will invest in short-term tax-exempt debt
securities of state and local governments. The ability of the issuers of the
securities held by the Fund to meet their obligations may be affected by
economic or political developments in a specific state, industry or region.
                              
Note 1. Accounting            The following is a summary
Policies                      of significant accounting poli-
                              cies followed by the Fund in 
the preparation of its financial statements.
Securities Valuation: Portfolio securities are valued at amortized cost, which
approximates market value. The amortized cost method of valuation involves
valuing a security at its cost on the date of purchase and thereafter assuming a
constant amortization to maturity of any discount or premium.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on an identified cost basis. Interest income is recorded on an
accrual basis. The cost of portfolio securities for federal income tax purposes
is substantially the same as for financial reporting purposes.
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 net income to its shareholders. For this
reason and because substantially all the Fund's gross income consists of
tax-exempt interest, no federal income tax provision is required.
Dividends: The Fund declares dividends daily from net investment income. Payment
of dividends is made monthly.
                              
Note 2. Agreements            The Fund has a management
                              agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with Prudential
Investment Corporation ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.

   The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the Fund's average daily net assets up to $750
million, .425 of 1% of the next $750 million of average daily net assets and
 .375 of 1% of average daily net assets in excess of $1.5 billion.

   The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. ("PMFD"). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Fund's average
daily net assets. PMFD pays various broker-dealers, including Prudential
Securities Incorporated ("PSI") and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers. PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are
(indirect) wholly-owned subsidiaries of The Prudential Insurance Company of
America.
                              
Note 3. Other                 Prudential Mutual Fund Ser-
Transactions With             vices, Inc. ("PMFS"), a 
Affiliates                    wholly-owned subsidiary of 
                              PMF, serves as the Fund's transfer agent and
during the year ended December 31, 1994, the Fund incurred fees of $369,953 for
the services of PMFS. As of December 31, 1994, approximately $59,600 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 non-affiliates.
                                      B-24
 


 PRUDENTIAL TAX-FREE MONEY FUND
 Financial Highlights


                                                                               Year Ended December 31,
                                                              ----------------------------------------------------------
                                                                 1994         1993        1992        1991        1990
                                                              ----------    --------    --------    --------    --------
                                                                                                 
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.........................    $    1.00    $   1.00    $   1.00    $   1.00    $   1.00
Net investment income and realized gains...................         .023        .018        .026        .041        .053
Dividends and distributions to shareholders................        (.023)      (.018)      (.026)      (.041)      (.053)
                                                              ----------    --------    --------    --------    --------
Net asset value, end of year...............................    $    1.00    $   1.00    $   1.00    $   1.00    $   1.00
                                                              ----------    --------    --------    --------    --------
                                                              ----------    --------    --------    --------    --------
TOTAL RETURN:#.............................................         2.31%       1.86%       2.63%       4.22%       5.42%
Ratios/Supplemental Data:
Net assets, end of year (000)..............................    $ 487,290    $601,622    $614,333    $616,867    $700,859
Average net assets (000)...................................    $ 644,481    $726,571    $669,588    $725,844    $701,869
Ratios to average net assets:
  Expenses, including distribution fee.....................          .75%        .74%        .74%        .75%        .74%
  Expenses, excluding distribution fee.....................          .63%        .62%        .62%        .63%        .61%
  Net investment income....................................         2.26%       1.84%       2.60%       4.15%       5.30%

 
---------------
   # Total return is calculated assuming a purchase of shares on the first 
     day and a sale on the last day of each period reported and includes 
     reinvestment of dividends and distributions.

See Notes to Financial Statements.
                                      B-25
 


                        REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Prudential Tax-Free Money 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 Tax-Free Money Fund
("the Fund") at December 31, 1994, 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 five 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
December 31, 1994 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 21, 1995


                                      B-26
 


 
                                   APPENDIX A
                   DESCRIPTION OF TAX-EXEMPT SECURITY RATINGS
 
Corporate and Tax-Exempt Bond Ratings
 
     The four highest ratings of Moody's Investors Service, Inc. ("Moody's")
for tax-exempt and corporate bonds are Aaa, Aa, A and Baa. Bonds rated Aaa are
judged to be of the "best quality." The rating of Aa is assigned to bonds
which are of "high quality by all standards," but as to which margins of
protection or other elements make long-term risks appear somewhat larger than
Aaa rated bonds. The Aaa and Aa rated bonds comprise what are generally known as
"high grade bonds." Bonds which are rated A by Moody's possess many favorable
investment attributes and are considered "upper medium grade obligations."
Factors giving security to principal and interest of A rated bonds are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future. Bonds rated Baa are considered as "medium
grade" obligations. 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. Moody's
applies numerical modifiers "1", "2", and "3" in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier "1" indicates that the security ranks in the higher end of its
generic rating category; the modifier "2" indicates a mid-range ranking; and
the modifier "3" indicates that the issue ranks in the lower end of its
generic rating category. The foregoing ratings for tax-exempt bonds are
sometimes presented in parentheses preceded with a "con" indicating the bonds
are rated conditionally. Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed or (d) payments to which some
other limiting condition attaches. Such parenthetical rating denotes the
probable credit stature upon completion of construction or elimination of the
basis of the condition.
 
     The four highest ratings of Standard & Poor's Ratings Group ("Standard &
Poor's") for tax-exempt and corporate bonds are AAA, AA, A and BBB. Bonds rated
AAA bear the highest rating assigned by Standard & Poor's to a debt obligation
and indicate an extremely strong capacity to pay principal and interest. Bonds
rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree. Bonds rated A have a strong
capacity to pay principal and interest, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions. The BBB rating, which is the lowest "investment grade" security
rating by Standard & Poor's, indicates an adequate capacity to pay principal and
interest. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this category than
for bonds in the A category. The foregoing ratings are sometimes followed by a
"p" indicating that the rating is provisional. A provisional rating assumes
the successful completion of the project being financed by the bonds being rated
and indicates that payment of debt service requirements is largely and entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
 
Tax-Exempt Note Ratings
 
     The ratings of Moody's for tax-exempt notes are MIG 1, MIG 2, MIG 3 and MIG
4. Notes bearing the designation MIG 1 are judged to be of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both. Notes bearing the designation MIG 2 are judged to be of
high quality, with margins of protection ample although not so large as in the
preceding group. Notes bearing the designation MIG 3 are judged to be of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Market access for refinancing, in
particular, is likely to be less well established. Notes bearing the designation
MIG 4 are judged to be of adequate quality, carrying specific risk but having
protection commonly regarded as required of an investment security and not
distinctly or predominantly speculative.
 
     The ratings of Standard & Poor's for municipal notes issued on or after
July 29, 1984 are "SP-1", "SP-2" and "SP-3." Prior to July 29, 1984,
municipal notes carried the same symbols as municipal bonds. The designation
"SP-1" indicates a very strong capacity to pay principal and interest. A "+"
is added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to
pay principal and interest while an "SP-3" designation indicates speculative
capacity to pay principal and interest.
 
Corporate and Tax-Exempt Commercial Paper Ratings
 
     Moody's and Standard & Poor's rating grades for commercial paper, set forth
below, are applied to Municipal Commercial Paper as well as taxable commercial
paper.
 
                                      A-1
 


 
     Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1, superior capacity; Prime-2, strong capacity; and
Prime-3, acceptable capacity.
 
     Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues assigned A ratings
are regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 and 3 to indicate the
relative degree of safety. The "A-1" designation indicates the degree of
safety regarding timely payment is very strong. A "+" designation is applied
to those issues rated "A-1" which possess an overwhelming degree of safety.
The "A-2" designation indicates that capacity for timely payment is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1." The "A-3" designation indicates that the capacity for
timely payment is satisfactory. Such issues, however, are somewhat more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Issues rated "B" are regarded as having only
an adequate capacity for timely payment and such capacity may be impaired by
changing conditions or short-term adversities.
 
                                      A-2