SURVIVORSHIP. Pruco Life of New Jersey Variable Appreciable Account. Pruco Life Insurance Company of New Jersey (in New Jersey and New York)

Transcription

1 Pruco Life of New Jersey Variable Appreciable Account Pruco Life Insurance Company of New Jersey (in New Jersey and New York) SURVIVORSHIP V A R I A B L E U N I V E R S A L L I F E PROSPECTUS MAY 1, 2002

2 PROSPECTUS May 1, 2002 PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT SURVIVORSHIP VARIABLE UNIVERSAL LIFE This prospectus describes an individual flexible premium survivorship variable universal life insurance contract (the "Contract"), offered by Pruco Life Insurance Company of New Jersey ( Pruco Life of New Jersey, "us," "we," or "our"). Pruco Life of New Jersey is an indirect, wholly-owned subsidiary of The Prudential Insurance Company of America. The Contract provides life insurance coverage on two insureds with a death benefit payable on the second death. Investment Choices Survivorship Variable Universal Life offers a wide variety of investment choices, including 36 variable investment options that invest in mutual funds managed by these leading asset managers: Prudential Investments LLC A I M Advisors, Inc. American Century Investment Management, Inc. Franklin Advisers, Inc. Janus Capital Management LLC MFS Investment Management 7 T. Rowe Price International, Inc. For a complete list of the 36 available variable investment options and their investment objectives, see The Funds, page 8. You may also choose to invest your Contract's premiums and its earnings in the fixed-rate option which pays a guaranteed interest rate. See The Fixed-Rate Option, page 13. This prospectus describes the Contract generally and the Pruco Life of New Jersey Variable Appreciable Account (the "Account"). The attached prospectuses for the Funds, and their related statements of additional information describe the investment objectives and the risks of investing in the Fund portfolios. Pruco Life of New Jersey may add additional investment options in the future. Please read this prospectus and keep it for future reference. The Securities and Exchange Commission ("SEC") maintains a Web site ( that contains material incorporated by reference and other information regarding registrants that file electronically with the SEC. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. The Contract may be purchased through registered representatives located in banks and other financial institutions. An investment in the Contract is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or any other governmental agency and may lose value. An investment is also not a condition to the provision or term of any banking service or activity. The participating bank is not a registered broker-dealer and is not affiliated with Pruco Securities Corporation. Pruco Life Insurance Company of New Jersey 213 Washington Street Newark, New Jersey Telephone: (800)

3 35263(&786&217(176 Page DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS...1 INTRODUCTION AND SUMMARY...2 Brief Description of the Contract...2 Charges...2 Types of Death Benefit...5 Premium Payments...6 Refund...6 GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY, PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT...7 Pruco Life Insurance Company of New Jersey...7 The Pruco Life of New Jersey Variable Appreciable Account...7 The Funds...8 Voting Rights...13 The Fixed-Rate Option...13 Which Investment Option Should Be Selected?...14 DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS...14 Charges and Expenses...14 Requirements for Issuance of a Contract...19 Short-Term Cancellation Right or "Free-Look"...19 Types of Death Benefit...19 Changing the Type of Death Benefit...20 Contract Date...21 Premiums...21 Allocation of Premiums...22 Death Benefit Guarantee...23 Transfers...24 Dollar Cost Averaging...25 Auto-Rebalancing...25 How a Contract s Cash Surrender Value Will Vary...26 How a Type A (Fixed) Contract s Death Benefit Will Vary...26 How a Type B (Variable) Contract s Death Benefit Will Vary...27 Surrender of a Contract...28 Withdrawals...29 Decreases in Basic Insurance Amount...29 When Proceeds Are Paid...30 Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums...30 Contract Loans...32 Sale of the Contract and Sales Commissions...33 Tax Treatment of Contract Benefits...33 Lapse and Reinstatement...36 Legal Considerations Relating to Sex-Distinct Premiums and Benefits...36 Other General Contract Provisions...36 Riders...37 Substitution of Fund Shares...37 Reports to Contract Owners...38 State Regulation...38 Experts...38 Litigation and Regulatory Proceedings...38

4 Additional Information...39 Financial Statements...39 DIRECTORS AND OFFICERS...40 FINANCIAL STATEMENTS OF THE PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT...A1 FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY...B1

5 '(),1,7,2162)63(&,$/7(50686(',17+, (&786 accumulated net payments The actual premium payments you make accumulated at an effective annual rate of 4%, less any withdrawals you make, accumulated at an effective annual rate of 4%. attained age An insured s age on the Contract date plus the number of years since then. basic insurance amount The amount of life insurance as shown in the Contract, not including riders. Also referred to as face amount. cash value An amount equal to the Contract Fund minus surrender charges. cash surrender value The amount payable to the Contract owner upon surrender of the Contract. It is equal to the Contract Fund minus any Contract debt and minus surrender charges. Also referred to in the Contract as Net Cash Value. Contract The Pruco Life of New Jersey Survivorship Variable Universal Life policy described in this prospectus. Contract anniversary The same date as the Contract date in each later year. Contract date The date the Contract is effective, as specified in the Contract. Contract debt The principal amount of all outstanding loans plus any interest accrued thereon. Contract Fund The total amount credited to a specific Contract. On any date it is equal to the sum of the amounts in all the variable investment options and the fixed-rate option, and the principal amount of any Contract debt plus any interest earned thereon. Contract month A month that starts on the Monthly date. Contract owner[s] You. Unless a different owner is named in the application, the owners of the Contract are the insureds jointly or the survivor of them. If the Contract is owned jointly, the exercise of rights under the Contract must be made by both jointly. Contract year A year that starts on the Contract date or on a Contract anniversary. death benefit If the Contract is not in default, this is the amount we will pay upon the second death of two insureds, assuming no Contract debt. fixed-rate option An investment option under which Pruco Life of New Jersey guarantees that interest will be added to the amount invested at a rate declared periodically in advance. Funds Mutual funds with separate portfolios. One or more of the available Fund portfolios may be chosen as an underlying investment for the Contract. issue age An insured's age as of the Contract date. Lifetime Death Benefit Guarantee period The lifetime of the Contract, during which time the Lifetime Death Benefit Guarantee is available if sufficient premiums are paid and there is no outstanding loan. See Death Benefit Guarantee, page 23. Limited Death Benefit Guarantee period the period until age 75 of the younger insured or 10 years after issue, whichever comes later, during which time the Limited Death Benefit Guarantee is available if sufficient premiums are paid and there is no outstanding loan. The period applicable to your Contract is shown on the Contract data pages. See Death Benefit Guarantee, page 23. Monthly date The Contract date and the same date in each subsequent month. Pruco Life Insurance Company of New Jersey Pruco Life of New Jersey, us, we, our. The company offering the Contract. separate account Amounts under the Contract that are allocated to the variable investment options held by us in a separate account called the Pruco Life of New Jersey Variable Appreciable Account. The separate account is set up apart from all of the general assets of Pruco Life Insurance Company of New Jersey. valuation period The period of time from one determination of the value of the amount invested in a variable investment option to the next. Such determinations are made when the net asset values of the portfolios of the Funds are calculated, which is generally at 4:00 p.m. Eastern time on each day during which the New York Stock Exchange is open. variable investment options The portfolios of the mutual funds available under this Contract, whose shares are held in the separate account. you The owner[s] of the Contract. 1

6 ,1752'8&7,21$1'6800$5< This Summary provides a brief overview of the more significant aspects of the Contract. We provide further detail in the subsequent sections of this prospectus and in the Contract. %ULHI'HVFULSWLRQRIWKH&RQWUDFW The Pruco Life of New Jersey Survivorship Variable Universal Life Contract is a flexible premium variable universal life insurance policy. It is issued by Pruco Life Insurance Company of New Jersey. The Contract provides life insurance coverage, with a death benefit payable upon the second death of two insureds. If the Contract is not in default, the amount we will pay will be the death benefit determined as of the date of the second death reduced by any Contract debt. See Contract Loans, page 32. A significant element of the Contract is the Contract Fund. The Contract Fund represents the value of your Contract and changes every business day. A broad objective of the Contract is to provide benefits that will increase in value if favorable investment results are achieved. You may invest premiums in one or more of the 36 available variable investment options or in the fixed-rate option. Your Contract Fund value changes every day depending upon the change in value of the particular investment options that you have selected. Although the value of your Contract Fund will increase if there is favorable investment performance in the variable investment options you select, investment returns in the variable investment options are NOT guaranteed. There is a risk that investment performance will be unfavorable and that the value of your Contract Fund will decrease. The risk will be different, depending upon which investment options you choose. See Which Investment Option Should Be Selected?, page 14. If you select the fixed-rate option, Pruco Life of New Jersey credits your account with a declared rate or rates of interest. You assume the risk that the rate may change, although it will never be lower than an effective annual rate of 4%. Variable life insurance contracts are unsuitable as short-term savings vehicles. Loans will negate any guarantee against lapse and may result in adverse tax consequences. See Death Benefit Guarantee, page 23, and Tax Treatment of Contract Benefits, page 33. The replacement of life insurance is generally not in your best interest. In most cases, if you require additional coverage, the benefits of your existing contract can be protected by purchasing additional insurance or a supplemental contract. If you are considering replacing a contract, you should compare the benefits and costs of supplementing your existing contract with the benefits and costs of purchasing the Contract described in this prospectus and you should consult with a qualified tax adviser. This prospectus may only be offered in jurisdictions in which the offering is lawful. No person is authorized to make any representations in connection with this offering other than those contained in this prospectus and in the prospectuses and statements of additional information for the Funds. &KDUJHV The following chart outlines the components of your Contract Fund and the adjustments which may be made including the maximum charges which may be deducted from each premium payment and from the amounts held in the designated investment options. These charges are largely designed to cover insurance costs and risks as well as sales and administrative expenses. The maximum charges shown in the chart, as well as the current lower charges, are fully described under Charges and Expenses, page 14. 2

7 3UHPLXP3D\PHQW less a charge of up to 7.5% of the premiums paid for taxes attributable to premiums. less a charge for sales expenses during the first five contract years at a rate of up to 12%; after the fifth contract year, we may charge up to 4%.,QYHVWHG3UHPLXP$PRXQW To be invested in one or a combination of: 36 variable investment options The fixed-rate option &RQWUDFW)XQG On the Contract Date, the Contract Fund is equal to the invested premium amount minus any of the charges described below which may be due on that date. Thereafter, the value of the Contract Fund changes daily. 'DLO\&KDUJHV We deduct management fees and expenses from the Fund assets. See Underlying Portfolio Expenses chart, below. We deduct a daily mortality and expense risk charge, equivalent to an effective annual rate of up to 0.9%, from assets in the variable investment options. 0RQWKO\&KDUJHV During the first five years, we reduce the Contract Fund by a monthly administrative charge of $10.00 per Contract plus up to $0.10 per $1,000 of basic insurance amount; after the first five Contract years, we charge $10.00 per Contract plus up to $0.05 per $1,000 of the basic insurance amount. We deduct a cost of insurance ("COI") charge. If the Contract includes riders, we deduct rider charges from the Contract Fund. If the rating class of an insured results in an extra charge, we will deduct that charge from the Contract Fund. We reserve the right to deduct a charge to cover federal, state or local taxes imposed upon the operations of the Account. 3RVVLEOH$GGLWLRQDO&KDUJHV We will assess contingent deferred sales and administrative charges (surrender charges) if the Contract is surrendered. We may charge up to $8 per $1,000 of basic insurance amount if you surrender your Contract. This charge is level for the first five years and declines monthly until it reaches zero at the end of the 10th Contract year. We assess an administrative processing charge of up to $25 for any withdrawals. We reserve the right to charge up to $25 for each basic insurance amount decrease, although no such charge is currently being made. We assess an administrative processing charge of up to $25 for each transfer exceeding 12 in any Contract year. 3

8 The Prudential Series Fund, Inc. Portfolios 8QGHUO\LQJ3RUWIROLR([SHQVHV Investment Advisory Fee Other Expenses 12b-1 Fees Total Contractual Expenses Total Actual Expenses* Conservative Balanced 0.55% 0.03% N/A 0.58% 0.58% Diversified Bond 0.40% 0.04% N/A 0.44% 0.44% Equity 0.45% 0.04% N/A 0.49% 0.49% Flexible Managed 0.60% 0.04% N/A 0.64% 0.64% Global 0.75% 0.09% N/A 0.84% 0.84% High Yield Bond 0.55% 0.05% N/A 0.60% 0.60% Jennison 0.60% 0.04% N/A 0.64% 0.64% Money Market 0.40% 0.03% N/A 0.43% 0.43% Stock Index 0.35% 0.04% N/A 0.39% 0.39% Value 0.40% 0.04% N/A 0.44% 0.44% SP Aggressive Growth Asset Allocation (1) 0.84% 0.90% N/A 1.74% 1.04% SP AIM Aggressive Growth 0.95% 2.50% N/A 3.45% 1.07% SP AIM Core Equity 0.85% 1.70% N/A 2.55% 1.00% SP Alliance Large Cap Growth 0.90% 0.67% N/A 1.57% 1.10% SP Alliance Technology 1.15% 2.01% N/A 3.16% 1.30% SP Balanced Asset Allocation (1) 0.75% 0.52% N/A 1.27% 0.92% SP Conservative Asset Allocation (1) 0.71% 0.35% N/A 1.06% 0.87% SP Davis Value 0.75% 0.28% N/A 1.03% 0.83% SP Deutsche International Equity 0.90% 2.37% N/A 3.27% 1.10% SP Growth Asset Allocation (1) 0.80% 0.66% N/A 1.46% 0.97% SP INVESCO Small Company Growth 0.95% 1.89% N/A 2.84% 1.15% SP Jennison International Growth 0.85% 1.01% N/A 1.86% 1.24% SP Large Cap Value 0.80% 1.18% N/A 1.98% 0.90% SP MFS Capital Opportunities 0.75% 2.29% N/A 3.04% 1.00% SP MFS Mid-Cap Growth 0.80% 1.31% N/A 2.11% 1.00% SP PIMCO High Yield 0.60% 0.48% N/A 1.08% 0.82% SP PIMCO Total Return 0.60% 0.22% N/A 0.82% 0.76% SP Prudential U.S. Emerging Growth 0.60% 0.81% N/A 1.41% 0.90% SP Small/Mid Cap Value 0.90% 0.66% N/A 1.56% 1.05% SP Strategic Partners Focused Growth 0.90% 1.71% N/A 2.61% 1.01% * Reflects fee waivers, reimbursement of expenses, and expense reductions, if any. 4

9 Portfolios 8QGHUO\LQJ3RUWIROLR([SHQVHV Investment Advisory Fee 5 Other Expenses 12b-1 Fees Total Contractual Expenses Total Actual Expenses* AIM Variable Insurance Funds AIM V.I. Premier Equity Fund - Series I shares 0.60% 0.25% N/A 0.85% 0.85% American Century Variable Portfolios, Inc. (2) VP Value Fund 0.97% 0.00% N/A 0.97% 0.97% Franklin Templeton Variable Insurance Products Trust (3) Franklin Small Cap Fund - Class % 0.31% 0.25% 1.09% 1.01% Janus Aspen Series (4) Growth Portfolio - Institutional Shares 0.65% 0.01% N/A 0.66% 0.66% MFS 7 Variable Insurance Trust K (5) Emerging Growth Series 0.75% 0.12% N/A 0.87% 0.86% T. Rowe Price International Series, Inc. (6) International Stock Portfolio 1.05% 0.00% N/A 1.05% 1.05% * Reflects fee waivers, reimbursement of expenses, and expense reductions, if any. (1) Prudential Series Fund, Inc. Each Asset Allocation Portfolio invests shares in other Fund Portfolios. The Advisory Fees for the Asset Allocation Portfolios are the product of a blend of the Advisory Fees of those other Fund Portfolios, plus 0.05% annual advisory fee payable to PI. (2) American Century Variable Portfolios, Inc. The Investment Advisory Fees include ordinary expenses of managing and operating the Fund, except brokerage expenses, taxes, interest, fees and expenses of the independent directors (including legal counsel fees), and extraordinary expenses. The Fund has a stepped fee schedule. As a result, the Fund s management fee rate decreases as the Fund s assets increase. (3) Franklin Templeton Variable Insurance Products Trust The manager has agreed in advance to make an estimated reduction of 0.08% of its fee to reflect reduced services resulting from the Fund s investment in a Franklin Templeton money fund. This reduction is required by the Fund s Board of Trustees and an order by the Securities and Exchange Commission. (4) Janus Aspen Series The table reflects expenses for the fiscal year ended December 31, All expenses are shown without the effect of any offset arrangements. (5) MFS Variable Insurance Trust SM An expense offset arrangement with the Fund s custodian resulted in a reduction in Other Expenses by 0.01% and is reflected in the Total Actual Expenses. (6) T. Rowe Price International Series, Inc. The Investment Advisory Fees include ordinary recurring operating expenses of the Funds. The expenses relating to the Funds, other than those of the Series Fund have been provided to Pruco Life of New Jersey by the Funds. Pruco Life of New Jersey has not independently verified them. 7\SHVRI'HDWK%HQHILW There are two types of death benefit available: Type A (fixed) death benefit and Type B (variable) death benefit. You may choose a Type A death benefit under which the cash surrender value varies daily with investment experience, and the death benefit you initially chose does not change. However, the Contract Fund may grow to a point where the death benefit may increase and vary with investment experience. You may choose a Type B death benefit under which the cash surrender value and the death benefit both vary with investment experience. For either type of death benefit, as long as the Contract is in-force, the death

10 benefit will never be less than the basic insurance amount shown in your Contract. See Types of Death Benefit, page 19. 3UHPLXP3D\PHQWV The Contract is a flexible premium contract - there are no scheduled premiums. Except for the minimum initial premium, and subject to a minimum of $25 per subsequent payment ($15 for premiums made by electronic fund transfer), you choose the timing and amount of premium payments. The Contract will remain in-force if the Contract Fund is sufficient to cover the charges, including surrender charges. Paying insufficient premiums, poor investment results, or the taking of loans or withdrawals from the Contract will increase the possibility that the Contract will lapse. However, if the accumulated premiums you pay, less withdrawals, are high enough, and you have no Contract debt, Pruco Life of New Jersey guarantees that your Contract will not lapse even if investment experience is very unfavorable and the Contract Fund drops below zero. There are two guarantees available, one that lasts for the lifetime of the Contract and one that lasts for a stated, reasonably lengthy period. The guarantee for the life of the Contract requires higher premium payments. See Premiums, page 21, Death Benefit Guarantee, page 23 and Lapse and Reinstatement, page 36. You should discuss your billing options with your Pruco Life of New Jersey representative when you apply for the Contract. See Premiums, page 21. 5HIXQG For a limited time, you may return your Contract for a refund in accordance with the terms of its "free-look" provision. See Short-Term Cancellation Right or "Free-Look," page 19. For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1. 6

11 *(1(5$/,1)250$7,21$%287358&2/,)(,1685$1&(&203$1<2)1(:-(56(<358&2/,)( 2)1(:-(56(<9$5,$%/($335(&,$%/($&&2817 $1'7+(9$5,$%/(,19(670(17237,216 $9$,/$%/(81'(57+(&2175$&7 3UXFR/LIH,QVXUDQFH&RPSDQ\RI1HZ-HUVH\ Pruco Life Insurance Company of New Jersey ("Pruco Life of New Jersey", us, we, or our ) is a stock insurance company, organized in 1982 under the laws of the State of New Jersey. It is licensed to sell life insurance and annuities only in the States of New Jersey and New York. These Contracts are not offered in any state where the necessary approvals have not been obtained. Pruco Life of New Jersey is an indirect, wholly-owned subsidiary of The Prudential Insurance Company of America ( Prudential ), a New Jersey stock life insurance company that has been doing business since Prudential is an indirect, wholly-owned subsidiary of Prudential Financial, Inc. ( Prudential Financial ), a New Jersey insurance holding company. As Pruco Life of New Jersey s ultimate parent, Prudential Financial exercises significant influence over the operations and capital structure of Pruco Life of New Jersey and Prudential. However, neither Prudential Financial, Prudential, nor any other related company has any legal responsibility to pay amounts that Pruco Life of New Jersey may owe under the contract or policy. 7KH3UXFR/LIHRI1HZ-HUVH\9DULDEOH$SSUHFLDEOH$FFRXQW We have established a separate account, the Pruco Life of New Jersey Variable Appreciable Account (the "Account"), to hold the assets that are associated with the Contracts. The Account was established on January 13, 1984 under New Jersey law and is registered with the Securities and Exchange Commission ( SEC ) under the Investment Company Act of 1940 as a unit investment trust, which is a type of investment company. The Account meets the definition of a "separate account" under the federal securities laws. The Account holds assets that are segregated from all of Pruco Life of New Jersey's other assets. Pruco Life of New Jersey is also the legal owner of the assets in the Account. Pruco Life of New Jersey will maintain assets in the Account with a total market value at least equal to the reserve and other liabilities relating to the variable benefits attributable to the Account. These assets may not be charged with liabilities which arise from any other business Pruco Life of New Jersey conducts. In addition to these assets, the Account's assets may include funds contributed by Prudential to commence operation of the Account and may include accumulations of the charges Pruco Life of New Jersey makes against the Account. From time to time these additional assets will be transferred to Pruco Life of New Jersey s general account. Pruco Life of New Jersey will consider any possible adverse impact the transfer might have on the Account before making any such transfer. The obligations to Contract owners and beneficiaries arising under the Contract are general corporate obligations of Pruco Life of New Jersey. Currently, you may invest in one or a combination of 36 available variable investment options. When you choose a variable investment option, we purchase shares of a mutual fund which are held as an investment for that option. We hold these shares in the separate account. The division of the separate account of Pruco Life of New Jersey that invests in a particular mutual fund is referred to in your Contract as the subaccount. Pruco Life of New Jersey may add additional variable investment options in the future. The Account s financial statements begin on page A1. 7

12 7KH)XQGV Listed below are the mutual funds (the Funds ) in which the variable investment options invest, the investment objectives, and investment advisers. Each of the Funds has a separate prospectus that is provided with this prospectus. You should read the Fund prospectus before you decide to allocate assets to the variable investment option using that Fund. There is no assurance that the investment objectives of the Funds will be met. The Prudential Series Fund, Inc. (the "Series Fund"): Conservative Balanced Portfolio: The investment objective is a total investment return consistent with a conservatively managed diversified portfolio. The Portfolio invests in a mix of equity securities, debt obligations and money market instruments. Diversified Bond Portfolio: The investment objective is a high level of income over a longer term while providing reasonable safety of capital. The Portfolio normally invests at least 80% of its investable assets in higher grade debt obligations and high quality money market investments. Equity Portfolio: The investment objective is capital appreciation. The Portfolio normally invests at least 80% of its investable assets in common stocks of major established corporations as well as smaller companies that we believe offer attractive prospects of appreciation. Flexible Managed Portfolio: The investment objective is a high total return consistent with an aggressively managed diversified portfolio. The Portfolio invests in a mix of equity securities, debt obligations and money market instruments. Global Portfolio: The investment objective is long-term growth of capital. The Portfolio invests primarily in common stocks (and their equivalents) of foreign and U.S. companies. High Yield Bond Portfolio: The investment objective is a high total return. The Portfolio normally invests at least 80% of its investable assets in high yield/high risk debt securities. Jennison Portfolio (formerly Prudential Jennison Portfolio): The investment objective is long-term growth of capital. The Portfolio invests primarily in equity securities of major, established corporations that we believe offer above-average growth prospects. Money Market Portfolio: The investment objective is maximum current income consistent with the stability of capital and the maintenance of liquidity. The Portfolio invests in high quality short-term money market instruments issued by the U.S. government or its agencies, as well as domestic and foreign corporations and banks. Stock Index Portfolio: The investment objective is investment results that generally correspond to the performance of publicly-traded common stocks. The Portfolio attempts to duplicate the price and yield of the Standard & Poor s 500 Composite Stock Price Index (the S&P 500 ) by investing at least 80% of its investable assets in S&P 500 stocks. Value Portfolio: The investment objective is capital appreciation. The Portfolio invests primarily in stocks that are trading below their underlying asset value, cash generating ability, and overall earnings and earnings growth. SP Aggressive Growth Asset Allocation Portfolio: The investment objective is capital appreciation. The Portfolio invests primarily in large cap equity portfolios, international portfolios, and small/mid-cap equity portfolios. 8

13 SP AIM Aggressive Growth Portfolio: The investment objective is to achieve long-term growth of capital. The Portfolio invests primarily in the common stocks of companies whose earnings the advisers expect to grow more than 15% per year. SP AIM Core Equity Portfolio (formerly SP AIM Growth and Income Portfolio): The investment objective is growth of capital with a secondary objective of current income. The Portfolio invests as least 80% of its investable assets plus any borrowings made for investment purposes in securities of established companies that have long-term above-average growth earnings and dividends, and growth companies that the Portfolio managers believe have the potential for above-average growth earnings and dividends. SP Alliance Large Cap Growth Portfolio: The investment objective is growth of capital. The Portfolio will pursue aggressive investment policies by investing at least 80% of the Portfolio s investable assets in stocks of companies considered to have large capitalizations. SP Alliance Technology Portfolio: The investment objective is growth of capital. The Portfolio normally invests at least 80% of its investable assets in securities of companies that use technology extensively in the development of new or improved products or processes. SP Balanced Asset Allocation Portfolio: The investment objective is to provide a balance between current income and growth of capital. The Portfolio invests primarily in fixed income portfolios, large cap equity portfolios, small/mid-cap equity portfolios, and international equity portfolios. SP Conservative Asset Allocation Portfolio: The investment objective is to provide current income with low to moderate capital appreciation. The Portfolio invests primarily in fixed income portfolios, large cap equity portfolios, and small/mid-cap equity portfolios. SP Davis Value Portfolio: The investment objective is growth of capital. The Portfolio invests primarily in common stock of U.S. companies with market capitalizations of at least $5 billion. SP Deutsche International Equity Portfolio: The investment objective is to invest for long-term capital appreciation. The Portfolio normally invests at least 80% of its investable assets in the stocks and other equity securities of companies in developed countries outside the United States. SP Growth Asset Allocation Portfolio: The investment objective is to provide long-term growth of capital with consideration also given to current income. The Portfolio invests at least 80% of its investable assets in large-cap equity portfolios, fixed income portfolios, international equity portfolios, and small/mid-cap equity portfolios. SP INVESCO Small Company Growth Portfolio: The investment objective is long-term capital growth. The Portfolio invests at least 80% of its investable assets in small-capitalization companies - those which are included in the Russell 2000 Growth Index at the time of purchase, or if not included in that index, have market capitalizations of $2.5 billion or below at the time of purchase. SP Jennison International Growth Portfolio: The investment objective is long-term growth of capital. Under normal circumstances, the Portfolio invests at least 65% of its total assets in the common stock of large to medium-sized foreign companies operating or based in at least five different countries. SP Large Cap Value Portfolio: The investment objective is long-term growth of capital. The Portfolio normally invests at least 80% of its investable assets in securities of companies with large market capitalizations (those with market capitalizations similar to companies in the Standard & Poor s 500 Composite Stock Price Index or the Russell 1000 Index). SP MFS Capital Opportunities Portfolio: The investment objective is capital appreciation. The Portfolio invests, under normal market conditions, at least 65% of its net assets in common stocks and related securities, such as preferred stocks, convertible securities, and depositary receipts for those securities. 9

14 SP MFS Mid-Cap Growth Portfolio: The investment objective is long-term capital growth. The Portfolio invests, under normal market conditions, at least 80% of its investable assets in common stocks and related securities, such as preferred stocks, convertible securities, and depositary receipts for those securities. SP PIMCO High Yield Portfolio: The investment objective is maximum total return, consistent with preservation of capital and prudent investment management. Under normal circumstances, the Portfolio invests at least 80% of its investable assets in a diversified portfolio of high yield securities ( junk bonds ) rated below investment grade, but rated at least B by Moody s Investor Service, Inc. or Standard & Poor s Ratings Group, and investment grade fixed income instruments. SP PIMCO Total Return Portfolio: The investment objective is to seek maximum total return, consistent with preservation of capital and prudent investment management. Under normal circumstances, the Portfolio invests at least 65% of its assets in a diversified portfolio of fixed income instruments of varying maturities. SP Prudential U.S. Emerging Growth Portfolio: The investment objective is long-term capital appreciation. The Portfolio normally invests at least 80% of its investable assets in equity securities of small and medium sized U.S. companies that the adviser believes have the potential for above-average growth. SP Small/Mid Cap Value Portfolio: The investment objective is long-term growth of capital. The Portfolio normally invests at least 80% of its investable assets in securities of companies with small to medium market capitalizations. SP Strategic Partners Focused Growth Portfolio: The investment objective is long-term growth of capital. The Portfolio normally invests at least 65% of its total assets in equity-related securities of U.S. companies that the adviser believes to have strong capital appreciation potential. Prudential Investments LLC ( PI ), an indirect wholly-owned subsidiary of Prudential Financial, serves as the overall investment adviser for the Series Fund. PI will furnish investment advisory services in connection with the management of the Series Fund portfolios under a manager-of-managers approach. Under this structure, PI is authorized to select (with approval of the Series Fund s independent directors) one or more sub-advisers to handle the actual day-to-day investment management of each Portfolio. PI s business address is 100 Mulberry Street, Gateway Center Three, Newark, New Jersey Jennison Associates LLC ( Jennison ), also an indirect wholly-owned subsidiary of Prudential Financial, serves as the sole sub-adviser for the Global Portfolio, the Jennison Portfolio, the SP Jennison International Growth Portfolio, and the SP Prudential U.S. Emerging Growth Portfolio. Jennison serves as a sub-adviser for a portion of the assets of the Equity Portfolio, the Value Portfolio, and the SP Strategic Partners Focused Growth Portfolio. Jennison s business address is 466 Lexington Avenue, New York, New York Prudential Investment Management, Inc. ( PIM ), also an indirect wholly-owned subsidiary of Prudential Financial, serves as the sole sub-adviser for the Conservative Balanced, the Diversified Bond, the Flexible Managed, the High Yield Bond, the Money Market, and the Stock Index Portfolios. PIM s business address is 100 Mulberry Street, Gateway Center Two, Newark, New Jersey A I M Capital Management, Inc. ("A I M Capital") serves as the sub-adviser to the SP AIM Aggressive Growth Portfolio and the SP AIM Core Equity Portfolio. A I M Capital's principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas

15 Alliance Capital Management, L.P. ("Alliance") serves as the sub-adviser to the SP Alliance Large Cap Growth Portfolio, the SP Alliance Technology Portfolio, and the SP Strategic Partners Focused Growth Portfolio. The sub-adviser is located at 1345 Avenue of the Americas, New York, New York Davis Selected Advisers, L.P. ( Davis ) serves as the sub-adviser to the SP Davis Value Portfolio. The sub-adviser is located at 2429 East Elvira Road, Suite 101, Tucson, Arizona Deutsche Asset Management, Inc. ( Deutsche ), formerly known as Morgan Grenfell, Inc., serves as a subadviser to the SP Deutsche International Equity Portfolio and as a sub-adviser for a portion of the assets of the Value Portfolio. It is expected that under normal circumstances, Deutsche will manage approximately 25% of the Value Portfolio. Deutsche is a wholly-owned subsidiary of Deutsche Bank AG. Deutsche s business address is 280 Park Avenue, New York, New York Fidelity Management & Research Company ("FMR") serves as the sub-adviser to the SP Large Cap Value Portfolio and the SP Small/Mid Cap Value Portfolio. The address of FMR is 82 Devonshire Street, Boston, Massachusetts GE Asset Management Incorporated ( GEAM ), serves as a sub-adviser for a portion of the assets of the Equity Portfolio. It is expected that under normal circumstances GEAM will manage approximately 25% of the Portfolio. GEAM s ultimate parent is General Electric Company. GEAM s business address is 3003 Summer Street, Stamford, Connecticut INVESCO Funds Group, Inc. ("INVESCO') serves as the sub-adviser to the SP INVESCO Small Company Growth Portfolio. INVESCO's principal business address is 7800 East Union Avenue, Denver, Colorado Massachusetts Financial Services Company ("MFS") serves as the sub-adviser for the SP MFS Capital Opportunities Portfolio and the SP MFS Mid-Cap Growth Portfolio. The principal business address for MFS is 500 Boylston Street, Boston, Massachusetts Pacific Investment Management Company LLC ( PIMCO ) acts as the sub-adviser for the SP PIMCO High Yield Portfolio and the SP PIMCO Total Return Portfolio. PIMCO is a subsidiary of PIMCO Advisors L.P. PIMCO s principal business address is 840 Newport Center Drive, Newport Beach, California Salomon Brothers Asset Management, Inc. ( Salomon ), serves as a sub-adviser for a portion of the assets of the Equity Portfolio. It is expected that under normal circumstances Salomon will manage approximately 25% of the Portfolio. Salomon is a part of the global asset management arm of Citigroup, Inc. which was formed in 1998 as a result of the merger of Travelers Group and Citicorp, Inc. Salomon s business address is 388 Greenwich Street, New York, New York Victory Capital Management, Inc. ( Victory ), serves as a sub-adviser for a portion of the assets of the Value Portfolio. It is expected that under normal circumstances Victory will manage approximately 25% of the Portfolio. Victory is a wholly-owned subsidiary of KeyCorp, Inc. Victory s business address is 127 Public Square, Cleveland, Ohio As an investment adviser, PI charges the Series Fund a daily investment management fee as compensation for its services. PI pays each sub-adviser out of the fee that PI receives from the Series Fund. See Deductions from Portfolios, page 15. AIM Variable Insurance Funds: AIM V.I. Premier Equity Fund - Series I shares (formerly AIM V.I. Value Fund). Seeks to achieve long-term growth of capital. Income is a secondary objective. 11

16 A I M Advisors, Inc. ("AIM") is the investment adviser for this fund. The principal business address for AIM is 11 Greenway Plaza, Suite 100, Houston, Texas American Century Variable Portfolios, Inc.: American Century VP Value Fund. Seeks long-term capital growth with income as a secondary objective. The Fund seeks to achieve its objective by investing primarily in equity securities of wellestablished companies with intermediate-to-large market capitalizations that are believed by management to be undervalued at the time of purchase. American Century Investment Management, Inc. ("ACIM") is the investment adviser for this fund. ACIM s principal business address is American Century Tower, 4500 Main Street, Kansas City, Missouri The principal underwriter of the Fund is American Century Investment Services, Inc., located at 4500 Main Street, Kansas City, Missouri Franklin Templeton Variable Insurance Products Trust: Franklin Small Cap Fund Class 2. Seeks long-term capital growth. Under normal market conditions, the Fund will invest at least 80% of its net assets in the equity securities of U.S. small capitalization (small cap) companies. Franklin Advisers, Inc. (Advisers) is the fund s investment manager. The principal business address for Franklin Advisers, Inc. is 777 Mariners Island Boulevard, San Mateo, California Janus Aspen Series: Growth Portfolio- Institutional Shares. Seeks long-term growth of capital in a manner consistent with the preservation of capital. The Portfolio normally invests in common stocks of larger, more established companies. Janus Capital Management LLC is the investment adviser and is responsible for the day-to-day management of the portfolio and other business affairs of the portfolio. Janus Capital Corporation's principal business address is 100 Fillmore Street, Denver, Colorado MFS Variable Insurance Trust K : Emerging Growth Series. Seeks long-term growth of capital. The Series invests, under normal market conditions, at least 65% of its total assets in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts of those securities, of emerging growth companies. MFS Investment Management 7 ( Massachusetts Financial Management Company ), a Delaware corporation, is the investment adviser to this MFS Series. The principal business address for the Massachusetts Financial Services Company is 500 Boylston Street, Boston, Massachusetts T. Rowe Price International Series, Inc.: International Stock Portfolio. Seeks long-term growth of capital through investments primarily in common stocks of established, non-u.s. companies. T. Rowe Price International, Inc. is the investment manager for this fund. The principal business address for T. Rowe Price International, Inc. is 100 East Pratt Street, Baltimore, Maryland

17 The investment advisers for the Funds charge a daily investment management fee as compensation for their services. These fees are described in the table in the Introduction and Summary section, see page 4, and are more fully described in the prospectus for each Fund. In the future it may become disadvantageous for both variable life insurance and variable annuity contract separate accounts to invest in the same underlying mutual funds. Although neither of the companies that invest in the Funds nor the Funds currently foresee any such disadvantage, the Board of Directors for each Fund intends to monitor events in order to identify any material conflict between variable life insurance and variable annuity contract owners and to determine what action, if any, should be taken. Material conflicts could result from such things as: (1) changes in state insurance law; (2) changes in federal income tax law; (3) changes in the investment management of any portfolio of the Funds; or (4) differences between voting instructions given by variable life insurance and variable annuity contract owners. An affiliate of each of the Funds may compensate Pruco Life of New Jersey based upon an annual percentage of the average assets held in the Fund by Pruco Life of New Jersey under the Contracts. These percentages may vary by Fund and/or Portfolio, and reflect administrative and other services we provide. 9RWLQJ5LJKWV We are the legal owner of the Fund shares associated with the variable investment options. However, we vote the shares in the Fund according to voting instructions we receive from Contract owners. We will mail you a proxy, which is a form you need to complete and return to us to tell us how you wish us to vote. When we receive those instructions, we will vote all of the shares we own on your behalf in accordance with those instructions. We will vote the shares for which we do not receive instructions and shares that we own, in the same proportion as the shares for which instructions are received. We may change the way your voting instructions are calculated if it is required by federal or state regulation. Should the applicable federal securities laws or regulations, or their current interpretation, change so as to permit Pruco Life of New Jersey to vote shares of the Funds in its own right, it may elect to do so. 7KH)L[HG5DWH2SWLRQ Because of exemptive and exclusionary provisions, interests in the fixed-rate option under the Contract have not been registered under the Securities Act of 1933 and the general account has not been registered as an investment company under the Investment Company Act of Accordingly, interests in the fixed-rate option are not subject to the provisions of these Acts, and Pruco Life of New Jersey has been advised that the staff of the SEC has not reviewed the disclosure in this prospectus relating to the fixed-rate option. Any inaccurate or misleading disclosure regarding the fixed-rate option may, however, be subject to certain generally applicable provisions of federal securities laws. You may choose to invest, either initially or by transfer, all or part of your Contract Fund to a fixed-rate option. This amount becomes part of Pruco Life of New Jersey s general account. The general account consists of all assets owned by Pruco Life of New Jersey other than those in the Account and in other separate accounts that have been or may be established by Pruco Life of New Jersey. Subject to applicable law, Pruco Life of New Jersey has sole discretion over the investment of the general account assets, and Contract owners do not share in the investment experience of those assets. Instead, Pruco Life of New Jersey guarantees that the part of the Contract Fund allocated to the fixed-rate option will accrue interest daily at an effective annual rate that Pruco Life of New Jersey declares periodically, but not 13

18 less than an effective annual rate of 4%. Pruco Life of New Jersey is not obligated to credit interest at a rate higher than an effective annual rate of 4%, although we may do so. Transfers from the fixed-rate option may be subject to strict limits. See Transfers, page 24. The payment of any cash surrender value attributable to the fixed-rate option may be delayed up to six months. See When Proceeds are Paid, page 30. :KLFK,QYHVWPHQW2SWLRQ6KRXOG%H6HOHFWHG" Historically, for investments held over relatively long periods, the investment performance of common stocks has generally been superior to that of short or long-term debt securities, even though common stocks have been subject to much more dramatic changes in value over short periods of time. Accordingly, the Equity, Global, Jennison, Stock Index, Value, AIM, American Century, Franklin Templeton, Janus, MFS, or T. Rowe Price Portfolios may be desirable options if you are willing to accept such volatility in your Contract values. Each of these equity portfolios involves different investment risks, policies, and programs. See The Funds, page 8, for additional equity portfolios available under the Contract and their specific investment objectives. You may prefer the somewhat greater protection against loss of principal (and reduced chance of high total return) provided by the Diversified Bond Portfolio, the SP PIMCO High Yield Portfolio, and the SP PIMCO Total Return Portfolio. You may want even greater safety of principal and may prefer the Money Market Portfolio or the fixed-rate option, recognizing that the level of short-term rates may change rather rapidly. If you are willing to take risks and possibly achieve a higher total return, you may prefer the High Yield Bond Portfolio, recognizing that the risks are greater for lower quality bonds with normally higher yields. You may wish to obtain diversification by relying on Prudential s judgment for an appropriate asset mix by choosing the Conservative Balanced Portfolio, the Flexible Managed Portfolio, the SP Aggressive Growth Asset Allocation Portfolio, the SP Balanced Asset Allocation Portfolio, the SP Conservative Asset Allocation Portfolio, or the SP Growth Asset Allocation Portfolio. You may wish to divide your invested premium among two or more of the Portfolios. Your choice should take into account your willingness to accept investment risks, how your other assets are invested, and what investment results you may experience in the future. You should consult your Pruco Life of New Jersey representative from time to time about the choices available to you under the Contract. Pruco Life of New Jersey recommends against frequent transfers among the several investment options. Experience generally indicates that "market timing" investing, particularly by non-professional investors, is likely to prove unsuccessful. '(7$,/(',1)250$7,21) (&7,9( &2175$&72:1(56 &KDUJHVDQG([SHQVHV The total amount invested at any time in the Contract Fund consists of the sum of the amount credited to the variable investment options, the amount allocated to the fixed-rate option, and the principal amount of any Contract loan plus the amount of interest credited to the Contract upon that loan. See Contract Loans, page 32. Most charges, although not all, are made by reducing the Contract Fund. This section provides a more detailed description of each charge that is described briefly in the chart on page 2. In several instances we will use the terms "maximum charge" and "current charge." The "maximum charge," in each instance, is the highest charge that Pruco Life of New Jersey is entitled to make under the 14

19 Contract. The "current charge" is the lower amount that Pruco Life of New Jersey is now charging. However, if circumstances change, we reserve the right to increase each current charge, up to the maximum charge, without giving any advance notice. Deductions from Premium Payments (a) We charge up to 7.5% from each premium for taxes attributable to premiums. For these purposes, "taxes attributable to premiums" shall include any federal, state or local income, premium, excise, business or any other type of tax (or component thereof) measured by or based upon the amount of premium received by Pruco Life of New Jersey. That charge is currently made up of two parts, which currently equal a total of 3.75% of the premiums received. The first part is a charge for state and local premium-based taxes. The current charge for this first part is 2.5% of the premium and is Pruco Life of New Jersey s estimate of the average burden of state taxes generally. The rate applies uniformly to all policyholders without regard to state of residence. This amount may be more than Pruco Life of New Jersey actually pays. The second part is for federal income taxes measured by premiums, and it is currently equal to 1.25% of the premium. We believe that this charge is a reasonable estimate of an increase in Pruco Life of New Jersey s federal income taxes resulting from a 1990 change in the Internal Revenue Code. It is intended to recover this increased tax. During 2001 and 2000, Pruco Life of New Jersey received a total of approximately $78,000 and $55,000, respectively, in taxes attributable to premiums. (b) We may deduct up to 12% of premiums paid in the first five Contract years for sales expenses. This charge is reduced to 4% of premiums paid in subsequent Contract years. This charge, often called a "sales load", is deducted to compensate us for the costs of selling the Contracts, including commissions, advertising and the printing and distribution of prospectuses and sales literature. Part of those costs related to sales are also recovered by surrender charges. See Surrender Charges, page 19. Currently, we deduct 12% of premiums paid in the first five Contract years up to the amount of the Sales Load Target Premium and 4% of premiums paid in excess of this amount. For both Type A (fixed) death benefit and Type B (variable) death benefit Contracts, the Sales Load Target Premium is defined as the Lifetime Premium for a Type A death benefit, excluding any premiums for riders or extra risk charges. We deduct 4% of the premiums paid in Contract years six through 10, and 2% of premiums paid thereafter. See Premiums, page 21. Attempting to structure the timing and amount of premium payments to reduce the potential sales load may increase the risk that your Contract will lapse without value. Delaying the payment of premium amounts to later years will adversely affect the Death Benefit Guarantee if the accumulated premium payments do not reach the accumulated values shown under your Contract's Death Benefit Guarantee Values. See Death Benefit Guarantee, page 23. In addition, there are circumstances where payment of premiums that are too large may cause the Contract to be characterized as a Modified Endowment Contract, which could be significantly disadvantageous. See Tax Treatment of Contract Benefits, page 33. During 2001 and 2000, Pruco Life of New Jersey received a total of approximately $203,000 and $131,000, respectively, in sales charges. Deductions from Portfolios An investment advisory fee is deducted daily from each portfolio of the Funds at a rate, on an annualized basis, ranging from 0.35% for the Series Fund Stock Index Portfolio to 1.15% for the SP Alliance Technology Portfolio. The expenses incurred in conducting the investment operations of the portfolios (such as custodian fees and preparation and distribution of annual reports) are paid out of the portfolio's income. These expenses also vary from portfolio to portfolio. 15

20 The total expenses of each portfolio for the year ended December 31, 2001, expressed as a percentage of the average assets during the year, are shown below: The Prudential Series Fund, Inc. Portfolios 7RWDO3RUWIROLR([SHQVHV Investment Advisory Fee Other Expenses 12b-1 Fees Total Contractual Expenses Total Actual Expenses* Conservative Balanced 0.55% 0.03% N/A 0.58% 0.58% Diversified Bond 0.40% 0.04% N/A 0.44% 0.44% Equity 0.45% 0.04% N/A 0.49% 0.49% Flexible Managed 0.60% 0.04% N/A 0.64% 0.64% Global 0.75% 0.09% N/A 0.84% 0.84% High Yield Bond 0.55% 0.05% N/A 0.60% 0.60% Jennison 0.60% 0.04% N/A 0.64% 0.64% Money Market 0.40% 0.03% N/A 0.43% 0.43% Stock Index 0.35% 0.04% N/A 0.39% 0.39% Value 0.40% 0.04% N/A 0.44% 0.44% SP Aggressive Growth Asset Allocation (1) 0.84% 0.90% N/A 1.74% 1.04% SP AIM Aggressive Growth 0.95% 2.50% N/A 3.45% 1.07% SP AIM Core Equity 0.85% 1.70% N/A 2.55% 1.00% SP Alliance Large Cap Growth 0.90% 0.67% N/A 1.57% 1.10% SP Alliance Technology 1.15% 2.01% N/A 3.16% 1.30% SP Balanced Asset Allocation (1) 0.75% 0.52% N/A 1.27% 0.92% SP Conservative Asset Allocation (1) 0.71% 0.35% N/A 1.06% 0.87% SP Davis Value 0.75% 0.28% N/A 1.03% 0.83% SP Deutsche International Equity 0.90% 2.37% N/A 3.27% 1.10% SP Growth Asset Allocation (1) 0.80% 0.66% N/A 1.46% 0.97% SP INVESCO Small Company Growth 0.95% 1.89% N/A 2.84% 1.15% SP Jennison International Growth 0.85% 1.01% N/A 1.86% 1.24% SP Large Cap Value 0.80% 1.18% N/A 1.98% 0.90% SP MFS Capital Opportunities 0.75% 2.29% N/A 3.04% 1.00% SP MFS Mid-Cap Growth 0.80% 1.31% N/A 2.11% 1.00% SP PIMCO High Yield 0.60% 0.48% N/A 1.08% 0.82% SP PIMCO Total Return 0.60% 0.22% N/A 0.82% 0.76% SP Prudential U.S. Emerging Growth 0.60% 0.81% N/A 1.41% 0.90% SP Small/Mid Cap Value 0.90% 0.66% N/A 1.56% 1.05% SP Strategic Partners Focused Growth 0.90% 1.71% N/A 2.61% 1.01% * Reflects fee waivers, reimbursement of expenses, and expense reductions, if any. 16

21 Portfolios 7RWDO3RUWIROLR([SHQVHV Investment Advisory Fee Other Expenses 12b-1 Fees Total Contractual Expenses Total Actual Expenses* AIM Variable Insurance Funds AIM V.I. Premier Equity Fund - Series I shares 0.60% 0.25% N/A 0.85% 0.85% American Century Variable Portfolios, Inc. (2) VP Value Fund 0.97% 0.00% N/A 0.97% 0.97% Franklin Templeton Variable Insurance Products Trust (3) Franklin Small Cap Fund - Class % 0.31% 0.25% 1.09% 1.01% Janus Aspen Series (4) Growth Portfolio - Institutional Shares 0.65% 0.01% N/A 0.66% 0.66% MFS 7 Variable Insurance Trust K (5) Emerging Growth Series 0.75% 0.12% N/A 0.87% 0.86% T. Rowe Price International Series, Inc. (6) International Stock Portfolio 1.05% 0.00% N/A 1.05% 1.05% * Reflects fee waivers, reimbursement of expenses, and expense reductions, if any. (1) Prudential Series Fund, Inc. Each Asset Allocation Portfolio invests shares in other Fund Portfolios. The Advisory Fees for the Asset Allocation Portfolios are the product of a blend of the Advisory Fees of those other Fund Portfolios, plus 0.05% annual advisory fee payable to PI. (2) American Century Variable Portfolios, Inc. The Investment Advisory Fees include ordinary expenses of managing and operating the Fund, except brokerage expenses, taxes, interest, fees and expenses of the independent directors (including legal counsel fees), and extraordinary expenses. The Fund has a stepped fee schedule. As a result, the Fund s management fee rate decreases as the Fund s assets increase. (3) Franklin Templeton Variable Insurance Products Trust The manager has agreed in advance to make an estimated reduction of 0.08% of its fee to reflect reduced services resulting from the Fund s investment in a Franklin Templeton money fund. This reduction is required by the Fund s Board of Trustees and an order by the Securities and Exchange Commission. (4) Janus Aspen Series The table reflects expenses for the fiscal year ended December 31, All expenses are shown without the effect of any offset arrangements. (5) MFS Variable Insurance Trust SM An expense offset arrangement with the Fund s custodian resulted in a reduction in Other Expenses by 0.01% and is reflected in the Total Actual Expenses. (6) T. Rowe Price International Series, Inc. The Investment Advisory Fees include ordinary recurring operating expenses of the Funds. The expenses relating to the Funds, other than those of the Series Fund, have been provided to Pruco Life of New Jersey by the Funds. Pruco Life of New Jersey has not independently verified them. Daily Deduction from the Contract Fund Each day we deduct a charge from the assets of each of the variable investment options in an amount equivalent to an effective annual rate of 0.9%. This charge is intended to compensate Pruco Life of New Jersey for assuming mortality and expense risks under the Contract. The mortality risk assumed is that the insureds may live for shorter periods of time than Pruco Life of New Jersey estimated when it determined what mortality charge to make. The expense risk assumed is that expenses incurred in issuing and administering the Contract will be greater than Pruco Life of New Jersey estimated in fixing its administrative charges. This charge is not assessed against amounts allocated to the fixed-rate option. 17

22 During 2001 and 2000, Pruco Life of New Jersey received a total of approximately $17,000 and $3,000, respectively, in mortality and expense risk charges. Monthly Deductions from Contract Fund Pruco Life of New Jersey deducts the following monthly charges proportionately from the dollar amounts held in each of the chosen investment option[s]. a) An administrative charge based on the basic insurance amount is deducted. The charge is intended to compensate us for things like processing claims, keeping records and communicating with Contract owners. Currently, we charge the following: generally, if the average issue age of the insureds is less than 40 in the first five Contract years, we deduct $10 per Contract plus $0.07 per $1,000 of basic insurance amount; if the average issue age of the insureds is 40 or greater in the first five Contract years, we deduct $10 per Contract plus $0.08 per $1,000 of basic insurance amount; in all subsequent years, we deduct $10 per Contract plus $0.01 per $1,000 of basic insurance amount. Pruco Life of New Jersey reserves the right, however, to charge up to $10 per Contract plus $0.10 per $1,000 of basic insurance amount in the first five Contract years and $10 per Contract plus $0.05 per $1,000 of basic insurance amount in subsequent years. During 2001 and 2000, Pruco Life of New Jersey received a total of approximately $111,000 and $24,000, respectively, in monthly administrative charges. b) A cost of insurance ("COI") charge is deducted. Upon the second death of two insureds, the amount payable to the beneficiary (assuming there is no Contract debt) is larger than the Contract Fund - significantly larger if both insureds died in the early years of the Contract. The cost of insurance charges collected from all Contract owners enables Pruco Life of New Jersey to pay this larger death benefit. The maximum COI charge is determined by multiplying the "net amount at risk" under a Contract (the amount by which the Contract s death benefit exceeds the Contract Fund) by maximum COI rates. The maximum COI rates are based upon both insureds current attained age, sex, smoking status, and extra rating class, if any. c) You may add one or more of several riders to the Contract. Some riders are charged for separately. If you add such a rider to the basic Contract, additional charges will be deducted. d) If an insured is in a substandard risk classification (for example, a person in a hazardous occupation), additional charges will be deducted. e) A charge may be deducted to cover federal, state or local taxes (other than taxes attributable to premiums described above) that are imposed upon the operations of the Account. At present no such taxes are imposed and no charge is made. The earnings of the Account are taxed as part of the operations of Pruco Life of New Jersey. Currently, no charge is being made to the Account for Pruco Life of New Jersey s federal income taxes, other than the 1.25% charge for federal income taxes measured by premiums. See Deductions from Premium Payments, page 15. Pruco Life of New Jersey reviews the question of a charge to the Account for Company federal income taxes periodically. We may make such a charge in the future for any federal income taxes that would be attributable to the Contracts. 18

23 Surrender Charge We will assess a surrender charge if, during the first 10 Contract years, the Contract lapses, is surrendered, or in some instances, the basic insurance amount is decreased. See Changing the Type of Death Benefit, page 20, Withdrawals, page 29, and Decreases in Basic Insurance Amount, page 29. This charge is deducted to cover sales costs and administrative costs, such as: the cost of processing applications, conducting examinations, determining insurability and the insured s rating class, and establishing records. We may charge up to $8 per $1,000 of basic insurance amount if you surrender your Contract. Currently, we charge $5 per $1,000 of basic insurance amount. This charge is level for the first five Contract years and declines monthly until it reaches zero at the end of the 10th Contract year. During 2001 and 2000, Pruco Life of New Jersey received a total of approximately $9,000 and $0, respectively, from surrendered or lapsed Contracts. Transaction Charges (a) We currently charge an administrative processing fee equal to the lesser of $25 or 2% of the withdrawal amount in connection with each withdrawal. (b) We reserve the right to charge an administrative processing fee of up to $25 made in connection with each decrease in basic insurance amount. We currently do not make such a charge. (c) We currently charge an administrative processing fee of $25 for each transfer exceeding 12 in any Contract year. 5HTXLUHPHQWVIRU,VVXDQFHRID&RQWUDFW You may apply for a minimum basic insurance amount of $250,000. The Contract may be issued on two insureds each between the ages of 18 and 90. Pruco Life of New Jersey requires evidence of insurability on each insured which may include a medical examination before issuing any Contract. Non-smokers are offered more favorable cost of insurance rates than smokers. Pruco Life of New Jersey charges a higher cost of insurance rate and/or an additional amount if an extra mortality risk is involved. These are the current underwriting requirements. We reserve the right to change them on a non-discriminatory basis. 6KRUW7HUP&DQFHOODWLRQ5LJKWRU)UHH/RRN Generally, you may return the Contract for a refund within 10 days after you receive it. You can request a refund by mailing or delivering the Contract to the representative who sold it or to the Home Office specified in the Contract. A Contract returned according to this provision shall be deemed void from the beginning. You will then receive a refund of all premium payments made, plus or minus any change due to investment experience. However, if applicable law so requires, you will receive a refund of all premium payments made with no adjustment for investment experience. For information on how premium payments are allocated during the free-look period, see Allocation of Premiums, page 22. 7\SHVRI'HDWK%HQHILW You may select either a Type A (fixed) or a Type B (variable) death benefit. Generally, a Contract with a Type A (fixed) death benefit has a death benefit equal to the basic insurance amount. This type of death benefit does not vary with the investment performance of the investment options you selected, except in certain circumstances. See How a Type A (Fixed) Contract s Death Benefit Will Vary, page 26. The payment of additional premiums and favorable investment results of the investment options to which the assets are allocated will generally increase the cash surrender value. See How a Contract s Cash Surrender Value Will Vary, page 26. A Contract with a Type B (variable) death benefit has a death benefit which will generally equal the basic insurance amount plus the Contract Fund. Since the Contract Fund is a part of the death benefit, favorable 19

24 investment performance and payment of additional premiums generally result in an increase in the death benefit, as well as in the cash surrender value. Over time, however, the increase in the cash surrender value will be less than under a Contract with a fixed death benefit. This is because, given two Contracts with the same basic insurance amount and equal Contract Funds, generally the cost of insurance charge for a Contract with a Type B death benefit will be greater. See How a Contract s Cash Surrender Value Will Vary, page 26 and How a Type B (Variable) Contract s Death Benefit Will Vary, page 27. Unfavorable investment performance will result in decreases in the cash surrender value and may result in decreases in the death benefit. As long as the Contract is not in default and there is no Contract debt, the death benefit may not fall below the basic insurance amount stated in the Contract. In choosing a death benefit type, you should also consider whether you intend to use the withdrawal feature. Contract owners with a Type A (fixed) death benefit should note that any withdrawal may result in a reduction of the basic insurance amount and possible surrender charges. In addition, we will not allow you to make a withdrawal that will decrease the basic insurance amount below the minimum basic insurance amount. See Withdrawals, page 29. The way in which the cash surrender values and death benefits will change depends significantly upon the investment results that are actually achieved. &KDQJLQJWKH7\SHRI'HDWK%HQHILW This Contract has two types of death benefit, Type A (fixed) or Type B (variable). You may change the type of death benefit, subject to Pruco Life of New Jersey s approval. Currently, Pruco Life of New Jersey does not require a medical examination. Except as stated below, we will adjust the basic insurance amount so that the death benefit immediately after the change will remain the same as the death benefit immediately before the change. If you are changing your Contract's death benefit from Type A to Type B, we will reduce the basic insurance amount by the amount in your Contract Fund on the date the change takes place. The basic insurance amount after the change may not be lower than the minimum basic insurance amount applicable to the Contract. If you are changing your Contract s death benefit from Type B to Type A, we will increase the basic insurance amount by the amount in your Contract Fund on the date the change takes place. This is illustrated in the following chart. &KDQJLQJWKH'HDWK %HQHILWIURP 7\SH$7\SH% )L[HG 9DULDEOH &KDQJLQJWKH'HDWK %HQHILWIURP 7\SH%7\SH$ 9DULDEOH )L[HG %DVLF,QVXUDQFH $PRXQW $300,000 $250,000 $300,000 $350,000 &RQWUDFW)XQG $50,000 $50,000 $50,000 $50,000 'HDWK%HQHILW $300,000 $300,000 $350,000 $350,000 * assuming there is no Contract debt Changing your Contract s type of death benefit from Type A to Type B during the first 10 Contract years may result in the assessment of surrender charges. In addition, we reserve the right to make an administrative processing charge of up to $25 for any decrease in basic insurance amount, although we do not currently do so. See Charges and Expenses, page 14. To request a change, fill out an application for change which can be obtained from your Pruco Life of New 20

25 Jersey representative or a Home Office. If the change is approved, we will recompute the Contract s charges and appropriate tables and send you new Contract data pages. We may ask that you send us your Contract before making the change. There may be circumstances under which a change in the death benefit type may cause the Contract to be classified as a Modified Endowment Contract, which could be significantly disadvantageous. See Tax Treatment of Contract Benefits, page 33. &RQWUDFW'DWH When the first premium payment is paid with the application for a Contract, the Contract date will ordinarily be the later of the application date or the medical examination date. If the first premium is not paid with the application, the Contract date will be the date on which the first premium is paid and the Contract is delivered. Under certain circumstances, we may allow the Contract to be backdated for the purpose of lowering one or both insureds issue ages, but only to a date not earlier than six months prior to the application date. This may be advantageous for some Contract owners as a lower issue age may result in lower current charges. For a Contract that is backdated, we will credit the initial premium as of the date of receipt and will deduct any charges due on or before that date. 3UHPLXPV The Contract is a flexible premium contract. The minimum initial premium is due on or before the Contract date. Thereafter, you decide when you would like to make premium payments and, subject to a $25 minimum, in what amounts. However, the minimum premium payment is $15 for premiums made by electronic fund transfer. We may require an additional premium if adjustments to premium payments exceed the minimum initial premium or there are Contract Fund charges due on or before the payment date. We reserve the right to refuse to accept any payment that increases the death benefit by more than it increases the Contract Fund. See How a Type A (Fixed) Contract s Death Benefit Will Vary, page 26 and How a Type B (Variable) Contract s Death Benefit Will Vary, page 27. There are circumstances under which the payment of premiums in amounts that are too large may cause the Contract to be characterized as a Modified Endowment Contract, which could be significantly disadvantageous. See Tax Treatment of Contract Benefits, page 33. If we receive the first premium payment on or before the Contract date, we will credit the invested premium amount to the Contract Fund on the Contract date. If we receive the first premium payment after the Contract date, we will credit the premium amount to the Contract Fund on the payment receipt date. Once the minimum initial premium payment is made, there are no required premiums. However, there are several types of "premiums" which are described below. Understanding them may help you understand how the Contract works. Minimum initial premium C the premium needed to start the Contract. There is no insurance under the Contract unless the minimum initial premium is paid. Target Premium C the premiums that, if paid at the beginning of each Contract year, will keep the Contract in-force during the full Limited Death Benefit Guarantee period regardless of investment performance, assuming no loans or withdrawals. For a Contract with no riders or extra risk charges, these premiums will be level. Payment of Target Premiums at the beginning of each Contract year is one way to achieve the Limited Death Benefit Guarantee Values shown on the Contract data pages. At the end of the Limited Death Benefit Guarantee period, continuation of the Contract will depend on the Contract Fund having sufficient money to cover all charges or meeting the conditions of the Lifetime Death Benefit Guarantee. See Death Benefit Guarantee, page 23. These Target Premiums will be higher for a Contract with a Type B (variable) death benefit than for a Contract with a Type A (fixed) death benefit. When you purchase a Contract, your Pruco Life of New Jersey representative can tell you the amount[s] of the Target Premium. 21

26 It is possible, in some instances, to pay a lower premium (the Short-Term Premium ) than the Target Premium. These Short-Term Premiums, if paid at the beginning of each Contract year, will keep the Contract in-force only during the first five years of the Limited Death Benefit Guarantee period regardless of investment performance, and assuming no loans or withdrawals. As is the case with the Target Premium, for a Contract with no riders or extra risk charges, these premiums will be level. Payment of Short-Term Premiums at the beginning of each of the first five Contract years is one way to achieve the Limited Death Benefit Guarantee Values shown on the Contract data pages, but only for the first five Contract years. At the end of the first five years, continuation of the Contract will depend on the Contract Fund having sufficient money to cover all charges or meeting the conditions of the Lifetime Death Benefit Guarantee or the Limited Death Benefit Guarantee. See Death Benefit Guarantee, page 23. When you purchase a Contract, your Pruco Life of New Jersey representative can tell you the amount[s] of the Short-Term Premium. This Contract may not be suitable for those who can afford to pay only the Short-Term Premium. Lifetime Premium C the premiums that, if paid at the beginning of each Contract year, will keep the Contract in-force during the lifetime of the insureds regardless of investment performance, assuming no loans or withdrawals. These Lifetime Premiums will be higher for a Contract with a Type B (variable) death benefit than for a Contract with a Type A (fixed) death benefit. As is the case with the Target Premium, for a Contract with no riders or extra risk charges, these premiums will be level. Payment of Lifetime Premiums at the beginning of each Contract year is one way to achieve the Lifetime Death Benefit Guarantee Values shown on the Contract data pages. See Death Benefit Guarantee, page 23. When you purchase a Contract, your Pruco Life of New Jersey representative can tell you the amount[s] of the Lifetime Premium. We can bill you annually, semi-annually, or quarterly for an amount you select. Because the Contract is a flexible premium contract, there are no scheduled premium due dates. When you receive a premium notice, you are not required to pay this amount. The Contract will remain in-force if: (1) the Contract Fund is sufficient to pay monthly charges including surrender charges; or (2) you have paid sufficient premiums on an accumulated basis to meet the Death Benefit Guarantee conditions and there is no Contract debt. You may also pay premiums automatically through pre-authorized monthly transfers from a bank checking account. If you elect to use this feature, you choose the day of the month on which premiums will be paid and the amount of the premiums paid. We will then draft from your account the same amount on the same date each month. When you apply for the Contract, you should discuss with your Pruco Life of New Jersey representative how frequently you would like to be billed (if at all) and for what amount. $OORFDWLRQRI3UHPLXPV On the Contract date, Pruco Life of New Jersey deducts the charge for sales expenses and the charge for taxes attributable to premiums from the initial premium. Also on the Contract date, the remainder of the initial premium and any other premium received during the short-term cancellation right ( free-look ) period, will be allocated to the Money Market investment option and the first monthly deductions are made. At the end of the free-look period, these funds will be transferred out of the Money Market investment option and allocated among the variable investment options and/or the fixed-rate option according to your most current allocation request. See Short-Term Cancellation Right or Free-Look, page 19. The transfer from the Money Market investment option immediately following the free-look period will not be counted as one of your 12 free transfers described below. If the first premium is received before the Contract date, there will be a period during which the Contract owner s initial premium will not be invested. The charge for sales expenses and the charge for taxes attributable to premiums also apply to all subsequent premium payments; the remainder will be invested as of the end of the valuation period when received at a Home Office in accordance with the allocation you previously designated. Provided the Contract is not in default, you may change the way in which subsequent premiums are allocated by giving 22

27 written notice to a Home Office or by telephoning a Home Office, provided you are enrolled to use the Telephone Transfer System. There is no charge for reallocating future premiums. All percentage allocations must be in whole numbers. For example, 33% can be selected but 33a% cannot. Of course, the total allocation to all selected investment options must equal 100%. 'HDWK%HQHILW*XDUDQWHH Although you decide what premium amounts you wish to pay, sufficient premium payments, on an accumulated basis, will guarantee that your Contract will not lapse and a death benefit will be paid upon the second death of two insureds. This will be true even if, because of unfavorable investment experience, your Contract Fund value drops to zero. Withdrawals may adversely affect the status of the guarantee. A contract loan will negate any guarantee, regardless of the value of your accumulated net payments. See Withdrawals, page 29 and Contract Loans, page 32. You should consider how important the Death Benefit Guarantee is to you when deciding what premium amounts to pay into the Contract. We offer two levels of death benefit guarantees: (1) Limited Death Benefit Guarantee, and (2) Lifetime Death Benefit Guarantee. For purposes of determining if a Death Benefit Guarantee is in effect, we calculate two sets of values: (1) Limited Death Benefit Guarantee Values, and (2) Lifetime Death Benefit Guarantee Values. These are values used solely to determine if a Death Benefit Guarantee is in effect. They are not cash values that you can realize by surrendering the Contract, nor are they payable death benefits. The Limited Death Benefit Guarantee Values apply until age 75 of the younger insured, or 10 years after issue, whichever is later. Correspondingly, the Lifetime Death Benefit Guarantee Values are shown for the lifetime of the Contract. In addition, the Contract data pages show Limited and Lifetime Death Benefit Guarantee Values as of Contract anniversaries. Values for non-anniversary Monthly dates will reflect the number of months elapsed between Contract anniversaries. The Limited Death Benefit Guarantee Values for the first five years are the end-of-year accumulations of premiums at 4% annual interest assuming Short-Term Premiums are paid at the beginning of each Contract year. The Limited Death Benefit Guarantee Values after five years are the end-of-year accumulations of premiums at 4% annual interest assuming Target Premiums are paid at the beginning of each Contract year (including years one through five). The Lifetime Death Benefit Guarantee Values are the end-of-year accumulations of premiums at 4% annual interest assuming Lifetime Premiums are paid at the beginning of each Contract year. Short-Term, Target, and Lifetime Premiums are premium levels that, if paid at the beginning of each Contract year, correspond to the Limited (first five years only), Limited (all years of the Limited Death Benefit Guarantee period), and Lifetime Death Benefit Guarantee Values, respectively (assuming no withdrawals or loans). If you want a death benefit guarantee to last longer than five years, you should expect to pay at least the Target Premium. See Premiums, page 21. Paying the Short-Term, Target, or Lifetime Premiums at the start of each Contract year is one way of reaching the Death Benefit Guarantee Values; they are certainly not the only way. At the Contract date, and on each Monthly date, we calculate your Contract s "Accumulated Net Payments" as of that date. Accumulated Net Payments equal the premiums you paid, accumulated at an effective annual rate of 4%, less withdrawals also accumulated at 4%. At each Monthly date within the Limited Death Benefit Guarantee period (including years one through five), we will compare your Accumulated Net Payments to the Limited Death Benefit Guarantee Value as of that date. After the Limited Death Benefit Guarantee period, we will compare your Accumulated Net Payments to the Lifetime Death Benefit Guarantee Value as of that date. If your Accumulated Net Payments equal or exceed the applicable (Limited or Lifetime) Death Benefit Guarantee Value and there is no Contract debt, then the Contract is kept in-force, regardless of the amount in the Contract Fund. 23

28 Here is a table of Short-Term, Target, or Lifetime Premiums (to the nearest dollar) for sample cases. The examples assume the insureds are a male and a female, both the same age, both smokers, with no extra risk or substandard ratings, and no riders added to the Contract. For those who qualify for more favorable underwriting classes, the premiums may be lower than those shown on the chart, and for those who are classified as substandard, the premiums may be higher. Age of both insureds at issue Type of Death Benefit Chosen Basic Insurance Amount - $250,000 Illustrative Annual Premiums Short-Term Premium corresponding to the Limited Death Benefit Guarantee Values (first five years only) Target Premium corresponding to the Limited Death Benefit Guarantee Values Lifetime Premium corresponding to the Lifetime Death Benefit Guarantee Values 40 Type A (Fixed) $1,137 $2,697 $3, Type B (Variable) $1,137 $3,456 $11, Type A (Fixed) $3,766 $6,358 $8, Type B (Variable) $3,766 $7,613 $27, Type A (Fixed) $21,803 $26,238 $28, Type B (Variable) $21,803 $33,321 $71,153 You should consider carefully the value of maintaining the Death Benefit Guarantee. If you desire the Death Benefit Guarantee for the full Limited Death Benefit Guarantee period, you may prefer to pay at least the Target Premium in all years, rather than paying the lower Short-Term Premium in the first five years. If you pay only enough premium to meet the Limited Death Benefit Guarantee Values in the first five years, you will need to pay more than the Target Premium at the beginning of the sixth year in order to continue the guarantee after the first five years of the Limited Death Benefit Guarantee period. If you desire the Death Benefit Guarantee for lifetime protection, you may prefer to pay generally higher premiums in all years, rather than trying to make such payments on an as needed basis. For example, if you pay only enough premium to meet the Limited Death Benefit Guarantee Values, a substantial amount may be required to meet the Lifetime Death Benefit Guarantee Values in order to continue the guarantee at the end of the Limited Death Benefit Guarantee period. In addition, it is possible that the payment required to continue the guarantee after the Limited Death Benefit Guarantee period could exceed the premium payments allowed to be paid without causing the Contract to become a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 33. The Death Benefit Guarantee allows considerable flexibility as to the timing of premium payments. Your Pruco Life of New Jersey representative can supply sample illustrations of various premium amount and frequency combinations that correspond to the Death Benefit Guarantee Values. 7UDQVIHUV You may, up to 12 times in each Contract year, transfer amounts from one variable investment option to another variable investment option or to the fixed-rate option without charge. Additional transfers may be made during each Contract year, but only with our consent. There is an administrative charge of up to $25 for each transfer made exceeding 12 in any Contract year. All or a portion of the amount credited to a variable investment option may be transferred. Transfers will not be made until the end of the "free-look" period. See Short-Term Cancellation Right or Free-Look, page

29 Only one transfer from the fixed-rate option will be permitted during the Contract year. The maximum amount which may be transferred out of the fixed-rate option each year is the greater of (a) 25% of the amount in the fixed-rate option; and (b) $2,000. Pruco Life of New Jersey may change these limits in the future. We may waive these restrictions for limited periods of time in a non-discriminatory way, (e.g., when interest rates are declining). Transfers among variable investment options will take effect as of the end of the valuation period in which a proper transfer request is received at a Home Office. The request may be in terms of dollars, such as a request to transfer $10,000 from one variable investment option to another, or may be in terms of a percentage reallocation among variable investment options. In the latter case, as with premium reallocations, the percentages must be in whole numbers. You may transfer amounts by proper written notice to a Home Office or by telephone, provided you are enrolled to use the Telephone Transfer System. You will automatically be enrolled to use the Telephone Transfer System unless the Contract is jointly owned or you elect not to have this privilege. Telephone transfers may not be available on Contracts that are assigned (see Assignment, page 36), depending on the terms of the assignment. We will use reasonable procedures, such as asking you to provide certain personal information provided on your application for insurance, to confirm that instructions given by telephone are genuine. We will not be held liable for following telephone instructions that we reasonably believe to be genuine. Pruco Life of New Jersey cannot guarantee that you will be able to get through to complete a telephone transfer during peak periods such as periods of drastic economic or market change. The Contract was not designed for professional market timing organizations, other organizations, or individuals using programmed, large, or frequent transfers. A pattern of exchanges that coincides with a market timing strategy may be disruptive to the investment option or to the disadvantage of other contract owners. If such a pattern were to be found, we may modify your right to make transfers by restricting the number, timing, and amount of transfers. We also reserve the right to prohibit transfer requests made by an individual acting under a power of attorney on behalf of more than one contract owner. 'ROODU&RVW$YHUDJLQJ We are currently offering a feature called Dollar Cost Averaging ("DCA"). Under this feature, either fixed dollar amounts or a percentage of the amount designated for use under the DCA option will be transferred periodically from the Money Market investment option into other investment options available under the Contract, excluding the fixed-rate option. You may choose to have periodic transfers made monthly or quarterly. DCA transfers will not begin until the end of the "free-look" period. See Short-Term Cancellation Right or "Free-Look", page 19. Each automatic transfer will take effect as of the end of the valuation period on the date coinciding with the periodic timing you designate provided the New York Stock Exchange is open on that date. If the New York Stock Exchange is not open on that date, or if the date does not occur in that particular month, the transfer will take effect as of the end of the valuation period which immediately follows that date. Automatic transfers will continue until: (1) $50 or less remains of the amount designated for Dollar Cost Averaging, at which time the remaining amount will be transferred; or (2) you give us notification of a change in DCA allocation or cancellation of the feature. Currently, there is no charge for using the Dollar Cost Averaging feature. We reserve the right to change this practice, modify the requirements, or discontinue the feature. $XWR5HEDODQFLQJ As an administrative practice, we are currently offering a feature called Auto-Rebalancing. This feature allows you to automatically rebalance variable investment option assets at specified intervals based on percentage allocations that you choose. For example, suppose your initial investment allocation of variable investment options X and Y is split 40% and 60%, respectively. Then, due to investment results, that split changes. You may instruct that those assets be rebalanced to your original or different allocation 25

30 percentages. Auto-Rebalancing is not available until the end of the "free-look" period. See Short-Term Cancellation Right or "Free-Look", page 19. Auto-Rebalancing can be performed on a quarterly, semi-annual or annual basis. Each rebalance will take effect as of the end of the valuation period on the date coinciding with the periodic timing you designate provided the New York Stock Exchange is open on that date. If the New York Stock Exchange is not open on that date, or if the date does not occur in that particular month, the transfer will take effect as of the end of the valuation period which immediately follows that date. The fixed-rate option cannot participate in this administrative procedure. Currently, a transfer that occurs under the Auto-Rebalancing feature is not counted towards the 12 free transfers permitted each Contract year. We reserve the right to change this practice, modify the requirements, or discontinue the feature. +RZD&RQWUDFWV&DVK6XUUHQGHU9DOXH:LOO9DU\ You may surrender the Contract for its cash surrender value. The Contract s cash surrender value on any date will be the Contract Fund value minus any Contract debt and minus any applicable surrender charges. See Contract Loans, page 32. The Contract Fund value changes daily, reflecting: (1) increases or decreases in the value of the variable investment options; (2) interest credited on any amounts allocated to the fixed-rate option; (3) interest credited on any loan; and (4) by the daily asset charge for mortality and expense risks assessed against the variable investment options. The Contract Fund value also changes to reflect the receipt of premium payments and the monthly deductions described under Charges and Expenses, page 14. Upon request, Pruco Life of New Jersey will tell you the cash surrender value of your Contract. It is possible for the cash surrender value of a Contract to decline to zero because of unfavorable investment performance. The tables on pages T1 through T4 of this prospectus illustrate approximately what the cash surrender values would be for representative Contracts paying Target Premium amounts (see Premiums, page 21), assuming hypothetical uniform investment results in the Fund portfolios. Two of the tables assume current charges will be made throughout the lifetime of the Contract and two tables assume maximum charges will be made. See Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums, page 30. +RZD7\SH$)L[HG&RQWUDFWV'HDWK%HQHILW:LOO9DU\ As described earlier, there are two types of death benefit available under the Contract: Type A, a fixed death benefit and Type B, a variable death benefit. The Type B death benefit varies according to changes in the Contract Fund while the Type A death benefit does not, unless it must be increased to comply with the Internal Revenue Code s definition of life insurance. Under the Type A (fixed) Contract, the death benefit is generally equal to the basic insurance amount, before any reduction of Contract debt. See Contract Loans, page 32. If the Contract is kept in-force for several years, depending on how much premium you pay, and/or if investment performance is reasonably favorable, the Contract Fund may grow to the point where Pruco Life of New Jersey will increase the death benefit in order to ensure that the Contract will satisfy the Internal Revenue Code s definition of life insurance. Assuming no Contract debt, the death benefit of a Type A (fixed) Contract will always be the greater of: (1) the basic insurance amount; and (2) the Contract Fund before the deduction of any monthly charges due on that date, multiplied by the attained age factor that applies. 26

31 A listing of attained age factors can be found on your Contract data pages. The latter provision ensures that the Contract will always have a death benefit large enough to be treated as life insurance for tax purposes under current law. The following table illustrates at different ages how the attained age factor affects the death benefit for different Contract Fund amounts. The table assumes a $1,000,000 Type A Contract was issued when the younger insured was age 35 and there is no Contract debt. 7\SH$)L[HG'HDWK%HQHILW IF THEN WKH \RXQJHU LQVXUHGLV DJH DQGWKH &RQWUDFW )XQGLV WKH DWWDLQHG DJHIDFWRU LV WKH&RQWUDFW )XQG PXOWLSOLHGE\ WKHDWWDLQHG DJHIDFWRULV DQGWKH 'HDWK %HQHILWLV $100,000 $200,000 $300, ,000 1,140,000 1,710,000 $1,000,000 $1,140,000* $1,710,000* $300,000 $400,000 $600, ,000 1,120,000 1,680,000 $1,000,000 $1,120,000* $1,680,000* $600,000 $700,000 $800, ,000 1,050,000 1,200,000 $1,000,000 $1,050,000* $1,200,000* * Note that the death benefit has been increased to comply with the Internal Revenue Code s definition of life insurance. At this point, any additional premium payment will increase the death benefit by more than it increases the Contract Fund. This means, for example, that if the younger insured has reached the age of 60, and the Contract Fund is $400,000, the death benefit will be $1,120,000, even though the basic insurance amount is $1,000,000. In this situation, for every $1 increase in the Contract Fund, the death benefit will be increased by $2.80. We reserve the right to refuse to accept any premium payment that increases the death benefit by more than it increases the Contract Fund. If we exercise this right, it may in certain situations result in the loss of the Death Benefit Guarantee. +RZD7\SH%9DULDEOH&RQWUDFWV'HDWK%HQHILW:LOO9DU\ Under the Type B (variable) Contract, the death benefit will never be less than the basic insurance amount, before any reduction of Contract debt, but will also vary, immediately after it is issued, with the investment results of the selected investment options. The death benefit may be further increased to ensure that the Contract will satisfy the Internal Revenue Code s definition of life insurance. Assuming no Contract debt, the death benefit of a Type B (variable) Contract will always be the greater of: (1) the basic insurance amount plus the Contract Fund before the deduction of any monthly charges due on that date; and (2) the Contract Fund before the deduction of any monthly charges due on that date, multiplied by the attained age factor that applies. 27

32 For purposes of determining the death benefit, if the Contract Fund is less than zero, we will consider it to be zero. A listing of attained age factors can be found on your Contract data pages. The latter provision ensures that the Contract will always have a death benefit large enough to be treated as life insurance for tax purposes under current law. The following table illustrates various attained age factors and Contract Funds and the corresponding death benefits. The table assumes a $1,000,000 Type B Contract was issued when the younger insured was age 35 and there is no Contract debt. 7\SH%9DULDEOH'HDWK%HQHILW IF THEN WKH \RXQJHU LQVXUHG LVDJH DQGWKH &RQWUDFW )XQGLV WKH DWWDLQHG DJH IDFWRULV WKH&RQWUDFW )XQG PXOWLSOLHGE\ WKHDWWDLQHG DJHIDFWRULV DQGWKH 'HDWK %HQHILWLV $100,000 $200,000 $300, ,000 1,140,000 1,710,000 $1,100,000 $1,200,000 $1,710,000* $300,000 $400,000 $600, ,000 1,120,000 1,680,000 $1,300,000 $1,400,000 $1,680,000* $600,000 $700,000 $800, ,000 1,050,000 1,200,000 $1,600,000 $1,700,000 $1,800,000 * Note that the death benefit has been increased to comply with the Internal Revenue Code s definition of life insurance. At this point, any additional premium payment will increase the death benefit by more than it increases the Contract Fund. This means, for example, that if the younger insured has reached the age of 60, and the Contract Fund is $600,000, the death benefit will be $1,680,000, even though the basic insurance amount is $1,000,000. In this situation, for every $1 increase in the Contract Fund, the death benefit will be increased by $2.80. We reserve the right to refuse to accept any premium payment that increases the death benefit by more than it increases the Contract Fund. If we exercise this right, it may in certain situations result in the loss of the Death Benefit Guarantee. 6XUUHQGHURID&RQWUDFW A Contract may be surrendered for its cash surrender value (or for a fixed reduced paid-up insurance benefit in New York State) while one or both of the insureds is living. To surrender a Contract, you must deliver or mail it, together with a written request in a form that meets Pruco Life of New Jersey s needs, to a Home Office. The cash surrender value of a surrendered Contract will be determined as of the end of the valuation period in which such a request is received in the Home Office. Surrender of a Contract may have tax consequences. See Tax Treatment of Contract Benefits, page 33. Fixed reduced paid-up insurance (available in New York State only) provides paid-up insurance, the amount of which will be paid when the second insured dies. There will be cash values and loan values. 28

33 The loan interest rate for fixed reduced paid-up insurance is 5%. Upon surrender of the Contract, the amount of fixed reduced paid-up insurance depends upon the net cash value and the insured s issue age, sex, smoker/non-smoker status, and the length of time since the Contract date. :LWKGUDZDOV Under certain circumstances, you may withdraw a portion of the Contract's cash surrender value without surrendering the Contract. You must ask for a withdrawal on a form that meets our needs. The cash surrender value after withdrawal may not be less than or equal to zero after deducting: (a) any charges associated with the withdrawal and (b) an amount sufficient to cover the Contract Fund deductions for two monthly dates following the date of the withdrawal. The amount withdrawn must be at least $500. There is an administrative processing fee for each withdrawal equal to the lesser of $25 or 2% of the withdrawal amount. An amount withdrawn may not be repaid except as a premium subject to the applicable charges. Upon request, we will tell you how much you may withdraw. Withdrawal of the cash surrender value may have tax consequences. See Tax Treatment of Contract Benefits, page 33. Whenever a withdrawal is made, the death benefit payable will immediately be reduced by at least the amount of the withdrawal. For a Contract with a Type B death benefit, this will not change the basic insurance amount. However, under a Contract with a Type A death benefit, the resulting reduction in death benefit usually requires a reduction in the basic insurance amount. We will send you new Contract data pages showing these changes. We may also deduct a surrender charge from the Contract Fund. See Decreases in Basic Insurance Amount, page 29. No withdrawal will be permitted under a Contract with a Type A death benefit if it would result in a basic insurance amount of less than the minimum basic insurance amount. It is important to note, however, that if the basic insurance amount is decreased at any time during the life of the Contract, there is a possibility that the Contract might be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 33. Before making any withdrawal which causes a decrease in basic insurance amount, you should consult with your Pruco Life of New Jersey representative. When a withdrawal is made, the Contract Fund is reduced by the sum of the cash withdrawn, the withdrawal fee, and any applicable surrender charge. An amount equal to the reduction in the Contract Fund will be withdrawn proportionally from the investment options unless you direct otherwise. Withdrawal of the cash surrender value increases the risk that the Contract Fund may be insufficient to provide Contract benefits. If such a withdrawal is followed by unfavorable investment experience, the Contract may go into default. Withdrawals may also affect whether a Contract is kept in-force under the Death Benefit Guarantee. This is because, for purposes of determining whether a lapse has occurred, Pruco Life of New Jersey treats withdrawals as a return of premium. Therefore, withdrawals decrease the accumulated net payments. See Death Benefit Guarantee, page 23. 'HFUHDVHVLQ%DVLF,QVXUDQFH$PRXQW As described earlier, you may make a withdrawal (see Withdrawals, page 29). You also have the additional option of decreasing the basic insurance amount of your Contract without withdrawing any cash surrender value. Contract owners who conclude that, because of changed circumstances, the amount of insurance is greater than needed, will be able to decrease their amount of insurance protection and the monthly deductions for the cost of insurance without decreasing their current cash surrender value. The cash surrender value of the Contract on the date of the decrease will not change, except that an administrative processing fee of up to $25 and a surrender charge may be deducted. If we ask you to, you must send us your Contract to be endorsed. The Contract will be amended to show the new basic insurance amount, charges, values in the appropriate tables and the effective date of the decrease. If you decrease your basic insurance amount to an amount equal to or greater than the Surrender Charge Threshold shown in your Contract, we will not impose a surrender charge. The Surrender Charge 29

34 Threshold is the lowest basic insurance amount since issue. If you decrease your basic insurance amount below this threshold, we will subtract the new basic insurance amount from the threshold amount. We will then multiply the surrender charge (see Surrender Charge, page 19) by the lesser of this difference and the amount of the decrease and divide by the threshold amount. The result is the maximum surrender charge we will deduct from the Contract Fund as a result of this transaction. The minimum permissible decrease for your Contract is shown under Contract Limitations in your Contract data pages. The basic insurance amount after the decrease may not be lower than the minimum basic insurance amount. No reduction will be permitted if it would cause the Contract to fail to qualify as "life insurance" for purposes of Section 7702 of the Internal Revenue Code. The basic insurance amount cannot be restored to any greater amount once a decrease has taken effect. It is important to note, however, that if the basic insurance amount is decreased at any time during the life of the Contract, there is a possibility that the Contract might be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 33. Before requesting any decrease in basic insurance amount, you should consult with your Pruco Life of New Jersey representative. :KHQ3URFHHGV$UH3DLG Pruco Life of New Jersey will generally pay any death benefit, cash surrender value, loan proceeds or withdrawal within seven days after all the documents required for such a payment are received at a Home Office. Other than the death benefit, which is determined as of the date of the second death, the amount will be determined as of the end of the valuation period in which the necessary documents are received at a Home Office. However, Pruco Life of New Jersey may delay payment of proceeds from the variable investment options and the variable portion of the death benefit due under the Contract if the disposal or valuation of the Account s assets is not reasonably practicable because the New York Stock Exchange is closed for other than a regular holiday or weekend, trading is restricted by the SEC, or the SEC declares that an emergency exists. With respect to the amount of any cash surrender value allocated to the fixed-rate option, Pruco Life of New Jersey expects to pay the cash surrender value promptly upon request. However, Pruco Life of New Jersey has the right to delay payment of such cash value for up to six months (or a shorter period if required by applicable law). Any payable death benefit will be credited with interest from the date of death in accordance with applicable law.,ooxvwudwlrqv RI &DVK 6XUUHQGHU 9DOXHV 'HDWK %HQHILWV DQG $FFXPXODWHG3UHPLXPV The following four tables (pages T1 through T4) show how a Contract s death benefit and cash surrender values change with the investment experience of the Account. They are "hypothetical" because they are based, in part, upon several assumptions, which are described below. All four tables assume the following: a Contract with a basic insurance amount of $1,000,000 bought by a 55 year old male Preferred Non- Smoker and a 50 year old female Preferred Best, with no extra risks and no extra benefit riders added to the Contract. the Target Premium amount (see Premiums, page 21) is paid on each Contract anniversary and no loans are taken. the Contract Fund has been invested in equal amounts in each of the 36 portfolios of the Funds and no portion of the Contract Fund has been allocated to the fixed-rate option. The first table (page T1) assumes a Type A (fixed) Contract has been purchased and the second table (page T2) assumes a Type B (variable) Contract has been purchased. Both assume the current charges 30

35 will continue indefinitely. The third and fourth tables (pages T3 and T4) are based upon the same assumptions except it is assumed the maximum contractual charges have been made from the beginning. See Charges and Expenses, page 14. Under the Type B Contract the death benefit changes to reflect investment returns. Under the Type A Contract, the death benefit increases only if the Contract Fund becomes large enough that an increase in the death benefit is necessary for the Contract to satisfy the Internal Revenue Code s definition of life insurance. See Types of Death Benefit, page 19. There are four assumptions, shown separately, about the average investment performance of the portfolios. The first is that there will be a uniform 0% gross rate of return with the average value of the Contract Fund uniformly adversely affected by very unfavorable investment performance. The other three assumptions are that investment performance will be at a uniform gross annual rate of 4%, 8% and 12%. Actual returns will fluctuate from year to year. In addition, death benefits and cash surrender values would be different from those shown if investment returns averaged 0%, 4%, 8% and 12% but fluctuated from those averages throughout the years. Nevertheless, these assumptions help show how the Contract values will change with investment experience. The first column in the following four tables (pages T1 through T4) shows the Contract year. The second column, to provide context, shows what the aggregate amount would be if the premiums had been invested to earn interest, after taxes, at 4% compounded annually. The next four columns show the death benefit payable in each of the years shown for the four different assumed investment returns. The last four columns show the cash surrender value payable in each of the years shown for the four different assumed investment returns. A gross return (as well as the net return) is shown at the top of each column. The gross return represents the combined effect of investment income and capital gains and losses, realized or unrealized, of the portfolios before any reduction is made for investment advisory fees or other Fund expenses. The net return reflects average total annual expenses of the 36 portfolios of 0.86%, and the daily deduction from the Contract Fund of 0.9% per year. Thus, gross returns of 0%, 4%, 8% and 12% are the equivalent of net returns of -1.76%, 2.24%, 6.24% and 10.24%, respectively. The actual fees and expenses of the portfolios associated with a particular Contract may be more or less than 0.86% and will depend on which variable investment options are selected. The death benefits and cash surrender values shown reflect the deduction of all expenses and charges both from the Funds and under the Contract. If you are considering the purchase of a variable life insurance contract from another insurance company, you should not rely upon these tables for comparison purposes. A comparison between two tables, each showing values for a 55 year old man and a 50 year old woman, may be useful for a 55 year old man and a 50 year old woman, but would be inaccurate if made for insureds of other ages, sex, or rating classes. Your Pruco Life of New Jersey representative can provide you with a hypothetical illustration for your own age, sex, and rating class. 31

36 ILLUSTRATIONS SURVIVORSHIP VARIABLE UNIVERSAL LIFE FIXED INSURANCE AMOUNT MALE ISSUE AGE 55, PREFERRED NONSMOKER FEMALE ISSUE AGE 50, PREFERRED BEST $1,000,000 BASIC INSURANCE AMOUNT $12, ANNUAL PREMIUM PAYMENT USING CURRENT CONTRACTUAL CHARGES Death Benefit (1) Cash Surrender Value (1) End of Policy Year Premiums Accumulated at 4% Interest Per Year 0% Gross (-1.76% Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of 4% Gross (2.24% Net) 8% Gross (6.24% Net) 12% Gross (10.24% Net) 0% Gross (-1.76% Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of 4% Gross (2.24% Net) 8% Gross (6.24% Net) 12% Gross (10.24% Net) 1 $ 12,684 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 4,020 $ 4,408 $ 4,796 $ 5,184 2 $ 25,876 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 12,870 $ 14,014 $ 15,190 $ 16,397 3 $ 39,595 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 21,544 $ 23,816 $ 26,213 $ 28,739 4 $ 53,863 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 30,040 $ 33,811 $ 37,897 $ 42,318 5 $ 68,702 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 38,354 $ 43,997 $ 50,276 $ 57,252 6 $ 84,134 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 49,273 $ 57,219 $ 66,294 $ 76,638 7 $ 100,183 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 59,970 $ 70,668 $ 83,201 $ 97,861 8 $ 116,875 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 70,437 $ 84,337 $ 101,042 $ 121,095 9 $ 134,234 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 80,656 $ 98,207 $ 119,854 $ 146, $ 152,288 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 90,615 $ 112,270 $ 139,683 $ 174, $ 253,983 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 132,407 $ 181,557 $ 252,663 $ 355, $ 377,711 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,315,915 $ 166,627 $ 255,039 $ 402,178 $ 648, $ 528,244 $ 1,000,000 $ 1,000,000 $ 1,048,012 $ 1,940,999 $ 192,352 $ 332,457 $ 602,306 $ 1,115, $ 711,392 $ 1,000,000 $ 1,000,000 $ 1,310,436 $ 2,807,724 $ 198,153 $ 404,962 $ 862,129 $ 1,847, $ 934,218 $ 1,000,000 $ 1,000,000 $ 1,621,801 $ 4,049,188 $ 168,340 $ 462,683 $ 1,192,500 $ 2,977, $ 1,205,321 $ 1,000,000 $ 1,000,000 $ 1,987,844 $ 5,817,427 $ 59,967 $ 482,596 $ 1,603,100 $ 4,691, $ 1,535,159 $ 0 (2) $ 1,000,000 $ 2,374,064 $ 8,180,845 $ 0 (2) $ 322,752 $ 2,064,404 $ 7,113, $ 1,936,457 $ 0 $ 0 (2) $ 2,741,580 $11,162,338 $ 0 $ 0 (2) $ 2,636,135 $10,733,017 (1) Assumes no Contract loan has been made. (2) Based on a gross return of 0%, the Contract would go into default in policy year 42. Based on a gross return of 4%, the Contract would go into default in policy year 48. The hypothetical investment rates of return shown above and elsewhere in this prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors including the investment allocations made by an owner, prevailing interest rates, and rate of inflation. The Death Benefit and Cash Surrender Value for a contract would be different from those shown if the actual rates of return average 0%, 4%, 8%, and 12% over a period of years but also fluctuated above or below those averages for individual contract years. No representations can be made by Pruco Life of New Jersey or the Series Fund that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. T1

37 SURVIVORSHIP VARIABLE UNIVERSAL LIFE VARIABLE INSURANCE AMOUNT MALE ISSUE AGE 55, PREFERRED NONSMOKER FEMALE ISSUE AGE 50, PREFERRED BEST $1,000,000 BASIC INSURANCE AMOUNT $14, ANNUAL PREMIUM PAYMENT USING CURRENT CONTRACTUAL CHARGES Death Benefit (1) Cash Surrender Value (1) End of Policy Year Premiums Accumulated at 4% Interest Per Year 0% Gross (-1.76% Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of 4% Gross (2.24% Net) 8% Gross (6.24% Net) 12% Gross (10.24% Net) 0% Gross (-1.76% Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of 4% Gross (2.24% Net) 8% Gross (6.24% Net) 12% Gross (10.24% Net) 1 $ 15,150 $ 1,010,983 $ 1,011,450 $ 1,011,918 $ 1,012,386 $ 5,983 $ 6,450 $ 6,918 $ 7,386 2 $ 30,906 $ 1,021,760 $ 1,023,144 $ 1,024,566 $ 1,026,027 $ 16,760 $ 18,144 $ 19,566 $ 21,027 3 $ 47,292 $ 1,032,327 $ 1,035,080 $ 1,037,983 $ 1,041,043 $ 27,327 $ 30,080 $ 32,983 $ 36,043 4 $ 64,334 $ 1,042,681 $ 1,047,255 $ 1,052,209 $ 1,057,569 $ 37,681 $ 42,255 $ 47,209 $ 52,569 5 $ 82,057 $ 1,052,818 $ 1,059,667 $ 1,067,286 $ 1,075,749 $ 47,818 $ 54,667 $ 62,286 $ 70,749 6 $ 100,489 $ 1,064,711 $ 1,074,355 $ 1,085,366 $ 1,097,916 $ 60,711 $ 70,355 $ 81,366 $ 93,916 7 $ 119,659 $ 1,076,344 $ 1,089,321 $ 1,104,521 $ 1,122,299 $ 73,344 $ 86,321 $ 101,521 $ 119,299 8 $ 139,595 $ 1,087,706 $ 1,104,553 $ 1,124,802 $ 1,149,108 $ 85,706 $ 102,553 $ 122,802 $ 147,108 9 $ 160,329 $ 1,098,775 $ 1,120,033 $ 1,146,252 $ 1,178,564 $ 97,775 $ 119,033 $ 145,252 $ 177, $ 181,892 $ 1,109,539 $ 1,135,746 $ 1,168,925 $ 1,210,919 $ 109,539 $ 135,746 $ 168,925 $ 210, $ 303,356 $ 1,159,785 $ 1,218,975 $ 1,304,614 $ 1,429,006 $ 159,785 $ 218,975 $ 304,614 $ 429, $ 451,136 $ 1,200,800 $ 1,306,464 $ 1,482,199 $ 1,777,399 $ 200,800 $ 306,464 $ 482,199 $ 777, $ 630,933 $ 1,231,091 $ 1,396,341 $ 1,714,024 $ 2,335,401 $ 231,091 $ 396,341 $ 714,024 $ 1,335, $ 849,683 $ 1,236,207 $ 1,472,032 $ 2,000,799 $ 3,360,945 $ 236,207 $ 472,032 $ 1,000,799 $ 2,211, $ 1,115,827 $ 1,198,034 $ 1,509,656 $ 2,337,657 $ 4,847,155 $ 198,034 $ 509,656 $ 1,337,657 $ 3,564, $ 1,439,631 $ 1,076,826 $ 1,457,718 $ 2,691,572 $ 6,963,978 $ 76,826 $ 457,718 $ 1,691,572 $ 5,616, $ 1,833,588 $ 0 (2) $ 1,099,553 $ 2,845,998 $ 9,793,308 $ 0 (2) $ 99,553 $ 1,845,998 $ 8,515, $ 2,312,897 $ 0 $ 0 (2) $ 2,140,992 $13,410,447 $ 0 $ 0 (2) $ 1,140,992 $12,410,447 (1) Assumes no Contract loan has been made. (2) Based on a gross return of 0%, the Contract would go into default in policy year 42. Based on a gross return of 4%, the Contract would go into default in policy year 46. The hypothetical investment rates of return shown above and elsewhere in this prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors including the investment allocations made by an owner, prevailing interest rates, and rate of inflation. The Death Benefit and Cash Surrender Value for a contract would be different from those shown if the actual rates of return average 0%, 4%, 8%, and 12% over a period of years but also fluctuated above or below those averages for individual contract years. No representations can be made by Pruco Life of New Jersey or the Series Fund that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. T2

38 SURVIVORSHIP VARIABLE UNIVERSAL LIFE FIXED INSURANCE AMOUNT MALE ISSUE AGE 55, PREFERRED NONSMOKER FEMALE ISSUE AGE 50, PREFERRED BEST $1,000,000 BASIC INSURANCE AMOUNT $12, ANNUAL PREMIUM PAYMENT USING MAXIMUM CONTRACTUAL CHARGES Death Benefit (1) Cash Surrender Value (1) End of Policy Year Premiums Accumulated at 4% Interest Per Year 0% Gross (-1.76% Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of 4% Gross (2.24% Net) 8% Gross (6.24% Net) 12% Gross (10.24% Net) 0% Gross (-1.76% Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of 4% Gross (2.24% Net) 8% Gross (6.24% Net) 12% Gross (10.24% Net) (1) 1 $ 12,684 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 303 $ 666 $ 1,030 $ 1,394 2 $ 25,876 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 8,379 $ 9,445 $ 10,540 $ 11,665 3 $ 39,595 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 16,214 $ 18,319 $ 20,540 $ 22,882 4 $ 53,863 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 23,790 $ 27,268 $ 31,039 $ 35,121 5 $ 68,702 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 31,085 $ 36,268 $ 42,042 $ 48,461 6 $ 84,134 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 41,228 $ 48,497 $ 56,809 $ 66,296 7 $ 100,183 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 51,012 $ 60,754 $ 72,188 $ 85,584 8 $ 116,875 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 60,406 $ 73,004 $ 88,182 $ 106,442 9 $ 134,234 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 69,373 $ 85,205 $ 104,792 $ 128, $ 152,288 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 77,868 $ 97,305 $ 122,010 $ 153, $ 253,983 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 102,737 $ 145,509 $ 208,185 $ 300, $ 377,711 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,058,124 $ 100,067 $ 174,002 $ 301,475 $ 521, $ 528,244 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,453,801 $ 39,550 $ 150,522 $ 385,355 $ 835, $ 711,392 $ 0 (2) $ 0 (2) $ 1,000,000 $ 1,882,434 $ 0 (2) $ 0 (2) $ 420,450 $ 1,238, $ 934,218 $ 0 $ 0 $ 1,000,000 $ 2,346,665 $ 0 $ 0 $ 305,195 $ 1,725, $ 1,205,321 $ 0 $ 0 $ 0 (2) $ 2,863,140 $ 0 $ 0 $ 0 (2) $ 2,308, $ 1,535,159 $ 0 $ 0 $ 0 $ 3,504,600 $ 0 $ 0 $ 0 $ 3,047, $ 1,936,457 $ 0 $ 0 $ 0 $ 4,297,338 $ 0 $ 0 $ 0 $ 4,132,056 Assumes no Contract loan has been made. (2) Based on a gross return of 0%, the Contract would go into default in policy year 27. Based on a gross return of 4%, the Contract would go into default in policy year 30. Based on a gross return of 8%, the Contract would go into default in policy year 39. The hypothetical investment rates of return shown above and elsewhere in this prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors including the investment allocations made by an owner, prevailing interest rates, and rate of inflation. The Death Benefit and Cash Surrender Value for a contract would be different from those shown if the actual rates of return average 0%, 4%, 8%, and 12% over a period of years but also fluctuated above or below those averages for individual contract years. No representations can be made by Pruco Life of New Jersey or the Series Fund that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. T3

39 SURVIVORSHIP VARIABLE UNIVERSAL LIFE VARIABLE INSURANCE AMOUNT MALE ISSUE AGE 55, PREFERRED NONSMOKER FEMALE ISSUE AGE 50, PREFERRED BEST $1,000,000 BASIC INSURANCE AMOUNT $14, ANNUAL PREMIUM PAYMENT USING MAXIMUM CONTRACTUAL CHARGES Death Benefit (1) Cash Surrender Value (1) End of Policy Year Premiums Accumulated at 4% Interest Per Year 0% Gross (-1.76% Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of 4% Gross (2.24% Net) 8% Gross (6.24% Net) 12% Gross (10.24% Net) 0% Gross (-1.76% Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of 4% Gross (2.24% Net) 8% Gross (6.24% Net) 12% Gross (10.24% Net) (1) 1 $ 15,150 $ 1,010,178 $ 1,010,617 $ 1,011,057 $ 1,011,498 $ 2,178 $ 2,617 $ 3,057 $ 3,498 2 $ 30,906 $ 1,020,094 $ 1,021,388 $ 1,022,719 $ 1,024,085 $ 12,094 $ 13,388 $ 14,719 $ 16,085 3 $ 47,292 $ 1,029,733 $ 1,032,296 $ 1,035,001 $ 1,037,853 $ 21,733 $ 24,296 $ 27,001 $ 29,853 4 $ 64,334 $ 1,039,075 $ 1,043,318 $ 1,047,917 $ 1,052,894 $ 31,075 $ 35,318 $ 39,917 $ 44,894 5 $ 82,057 $ 1,048,097 $ 1,054,427 $ 1,061,476 $ 1,069,310 $ 40,097 $ 46,427 $ 53,476 $ 61,310 6 $ 100,489 $ 1,058,509 $ 1,067,390 $ 1,077,541 $ 1,089,122 $ 52,109 $ 60,990 $ 71,141 $ 82,722 7 $ 119,659 $ 1,068,510 $ 1,080,410 $ 1,094,371 $ 1,110,720 $ 63,710 $ 75,610 $ 89,571 $ 105,920 8 $ 139,595 $ 1,078,064 $ 1,093,445 $ 1,111,968 $ 1,134,241 $ 74,864 $ 90,245 $ 108,768 $ 131,041 9 $ 160,329 $ 1,087,128 $ 1,106,443 $ 1,130,327 $ 1,159,828 $ 85,528 $ 104,843 $ 128,727 $ 158, $ 181,892 $ 1,095,648 $ 1,119,340 $ 1,149,432 $ 1,187,627 $ 95,648 $ 119,340 $ 149,432 $ 187, $ 303,356 $ 1,127,160 $ 1,178,765 $ 1,254,198 $ 1,364,703 $ 127,160 $ 178,765 $ 254,198 $ 364, $ 451,136 $ 1,127,214 $ 1,213,704 $ 1,361,653 $ 1,615,537 $ 127,214 $ 213,704 $ 361,653 $ 615, $ 630,933 $ 1,065,840 $ 1,185,575 $ 1,433,715 $ 1,943,877 $ 65,840 $ 185,575 $ 433,715 $ 943, $ 849,683 $ 0 (2) $ 1,018,668 $ 1,382,994 $ 2,316,638 $ 0 (2) $ 18,668 $ 382,994 $ 1,316, $ 1,115,827 $ 0 $ 0 (2) $ 1,060,778 $ 2,646,987 $ 0 $ 0 (2) $ 60,778 $ 1,646, $ 1,439,631 $ 0 $ 0 $ 0 (2) $ 2,765,295 $ 0 $ 0 $ 0 (2) $ 1,765, $ 1,833,588 $ 0 $ 0 $ 0 $ 2,344,475 $ 0 $ 0 $ 0 $ 1,344, $ 2,312,897 $ 0 $ 0 $ 0 $ 0 (2) $ 0 $ 0 $ 0 $ 0(2) Assumes no Contract loan has been made. (2) Based on a gross return of 0%, the Contract would go into default in policy year 28. Based on a gross return of 4%, the Contract would go into default in policy year 31. Based on a gross return of 8%, the Contract would go into default in policy year 36. Based on a gross return of 12%, the Contract would go into default in policy year 49. The hypothetical investment rates of return shown above and elsewhere in this prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors including the investment allocations made by an owner, prevailing interest rates, and rate of inflation. The Death Benefit and Cash Surrender Value for a contract would be different from those shown if the actual rates of return average 0%, 4%, 8%, and 12% over a period of years but also fluctuated above or below those averages for individual contract years. No representations can be made by Pruco Life of New Jersey or the Series Fund that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. T4

40 &RQWUDFW/RDQV You may borrow from Pruco Life of New Jersey an amount up to the current "loan value" of your Contract less any existing Contract debt using the Contract as the only security for the loan. The loan value at any time will equal the sum of (a) 90% of the cash value attributable to the variable investment options, and (b) the balance of the cash value, provided the Contract is not in default. A Contract in default has no loan value. The minimum loan amount you may borrow is $500. Interest charged on a loan accrues daily. Interest is due on each Contract anniversary or when the loan is paid back, whichever comes first. If interest is not paid when due, it becomes part of the loan and we will charge interest on it, too. Except in the case of preferred loans, we charge interest at an effective annual rate of 5%. Unless you ask us otherwise, a portion of the amount you may borrow on or after the 10th Contract anniversary will be considered a preferred loan up to an amount equal to the maximum preferred loan amount. The maximum preferred loan amount is the total amount you may borrow minus the total net premiums paid (net premiums equal premiums paid less total withdrawals, if any). If the net premium amount is less than zero, we will, for purposes of this calculation, consider it to be zero. Only new loans borrowed after the 10th Contract anniversary may be considered preferred loans; standard loans will not automatically be converted into preferred loans. Preferred loans are charged interest at an effective annual rate of 4.25%. The Contract debt is the amount of all outstanding loans plus any interest accrued but not yet due. If at any time the Contract debt equals or exceeds the cash value, the Contract will go into default. We will notify you of a 61-day grace period, within which time you may repay all or enough of the loan to obtain a positive cash surrender value and thus keep the Contract in-force for a limited time. If the Contract debt equals or exceeds the cash value and you fail to keep the Contract in-force, the amount of unpaid Contract debt will be treated as a distribution and will be immediately taxable to the extent of gain in the contract. Reinstatement of the contract after lapse will not eliminate the taxable income which we are required to report to the Internal Revenue Service. See Tax Treatment of Contract Benefits, page 33 and Lapse and Reinstatement, page 36. When a loan is made, an amount equal to the loan proceeds is transferred out of the Account and/or the fixed-rate option, as applicable. Unless you ask us to take the loan amount from specific investment options and we agree, the reduction will be made in the same proportions as the loanable amount in each variable investment option and the fixed-rate option bears to the total loanable amount of the Contract. When you take a loan, the amount of the loan continues to be a part of the Contract Fund and is credited with interest at an effective annual rate of 4%. Therefore, the net cost of a standard loan is 1% and the net cost of a preferred loan is 3%. Loans you take against the Contract are ordinarily treated as debt and are not considered distributions subject to tax. However, you should know that the Internal Revenue Service may take the position that the loan should be treated as a distribution for tax purposes because of the relatively low differential between the loan interest rate and the Contract s crediting rate. Distributions are subject to income tax. Were the Internal Revenue Service to take this position, Pruco Life of New Jersey would take reasonable steps to attempt to avoid this result, including modifying the Contract s loan provisions, but cannot guarantee that such efforts would be successful. Any Contract debt will be deducted from the death benefit should the death benefit become payable while a loan is outstanding. Loans from Modified Endowment Contracts may be treated for tax purposes as distributions of income. See Tax Treatment of Contract Benefits, page 33. Any Contract debt will be deducted from the cash value to calculate the cash surrender value should the Contract be surrendered. 32

41 In addition, even if the loan is fully repaid, it may have an effect on future death benefits, because the investment results of the selected investment options will apply only to the amount remaining invested under those options. The longer the loan is outstanding, the greater the effect is likely to be. The effect could be favorable or unfavorable. If investment results are greater than the rate being credited upon the amount of the loan while the loan is outstanding, values under the Contract will not increase as rapidly as they would have if no loan had been made. If investment results are below that rate, Contract values will be higher than they would have been had no loan been made. When you repay all or part of a loan, we will increase the portion of the Contract Fund in the variable investment options by the amount of that repayment, plus the interest credits accrued on the loan since the last transaction date. To do this, we will use your investment allocation for future premium payments as of the loan payment date. We will also decrease the portion of the Contract Fund on which we credit the guaranteed annual interest rate of 4% by the amount of loan you repay. 6DOHRIWKH&RQWUDFWDQG6DOHV&RPPLVVLRQV Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of Prudential Financial, acts as the principal underwriter of the Contract. Prusec, organized in 1971 under New Jersey law, is registered as a broker and dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. Prusec s principal business address is 751 Broad Street, Newark, New Jersey The Contract is sold by registered representatives of Prusec who are also authorized by state insurance departments to do so. The Contract may also be sold through other broker-dealers authorized by Prusec and applicable law to do so. Registered representatives of such other broker-dealers may be paid on a different basis than described below. Commissions are based on a premium value referred to as the Commissionable Target Premium. The Commissionable Target Premium may vary from the Target Premium, depending on the age and rating class of the insureds, any extra risk charges, or additional riders. Generally, representatives will receive a commission of no more than: (1) 50% of the premiums received in the first 12 months following the Contract Date on premiums up to the Commissionable Target Premium amount (see Premiums, page 21); (2) 3% commission on premiums received in the first 12 months following the Contract Date in excess of the Commissionable Target Premium amount; (3) 4% of premiums received in years two through 10; Moreover, trail commissions of % of an amount determined by averaging the Contract Fund less all outstanding loans as of the first and last day of each calendar quarter starting with the second Contract year may be paid. Representatives with less than four years of service may receive compensation on a different basis. Representatives who meet certain productivity or persistency standards may be eligible for additional compensation. 7D[7UHDWPHQWRI&RQWUDFW%HQHILWV This summary provides general information on the federal income tax treatment of the Contract. It is not a complete statement of what the federal income taxes will be in all circumstances. It is based on current law and interpretations, which may change. It does not cover state taxes or other taxes. It is not intended as tax advice. You should consult your own qualified tax adviser for complete information and advice. 33

42 Treatment as Life Insurance. The Contract must meet certain requirements to qualify as life insurance for tax purposes. These requirements include certain definitional tests and rules for diversification of the Contract s investments. For further information on the diversification requirements, see Taxation of the Fund in the statement of additional information for the Series Fund. We believe we have taken adequate steps to insure that the Contract qualifies as life insurance for tax purposes. Generally speaking, this means that: you will not be taxed on the growth of the funds in the Contract, unless you receive a distribution from the Contract, the Contract s death benefit will be income tax free to your beneficiary. Although we believe that the Contract should qualify as life insurance for tax purposes, there are some uncertainties, particularly because the Secretary of Treasury has not yet issued permanent regulations that bear on this question. Accordingly, we reserve the right to make changes -- which will be applied uniformly to all Contract owners after advance written notice -- that we deem necessary to insure that the Contract will qualify as life insurance. Pre-Death Distributions. The tax treatment of any distribution you receive before the insured s death depends on whether the Contract is classified as a Modified Endowment Contract. Contracts Not Classified as Modified Endowment Contracts. If you surrender the Contract or allow it to lapse, you will be taxed on the amount you receive in excess of the premiums you paid less the untaxed portion of any prior withdrawals. For this purpose, you will be treated as receiving any portion of the cash surrender value used to repay Contract debt. In other words, you will immediately have taxable income to the extent of gain in the Contract. Reinstatement of the contract after lapse will not eliminate the taxable income which we are required to report to the Internal Revenue Service. The tax consequences of a surrender may differ if you take the proceeds under an income payment settlement option. Generally, you will be taxed on a withdrawal to the extent the amount you receive exceeds the premiums you paid for the Contract less the untaxed portion of any prior withdrawals. However, under some limited circumstances, in the first 15 Contract years, all or a portion of a withdrawal may be taxed if the Contract Fund exceeds the total premiums paid less the untaxed portions of any prior withdrawals, even if total withdrawals do not exceed total premiums paid. Extra premiums for optional benefits and riders generally do not count in computing the premiums paid for the Contract for the purposes of determining whether a withdrawal is taxable. Loans you take against the Contract are ordinarily treated as debt and are not considered distributions subject to tax. However, there is some risk the Internal Revenue Service might assert that the preferred loan should be treated as a distribution for tax purposes because of the relatively low differential between the loan interest rate and Contract s crediting rate. Were the Internal Revenue Service to take this position, Pruco Life of New Jersey would take reasonable steps to avoid this result, including modifying the Contract s loan provisions. 34

43 Modified Endowment Contracts. The rules change if the Contract is classified as a Modified Endowment Contract. The Contract could be classified as a Modified Endowment Contract if premiums in amounts that are too large are paid or a decrease in the face amount of insurance is made (or a rider removed). The addition of a rider or an increase in the face amount of insurance may also cause the Contract to be classified as a Modified Endowment Contract. You should first consult a qualified tax adviser and your Pruco Life of New Jersey representative if you are contemplating any of these steps. If the Contract is classified as a Modified Endowment Contract, then amounts you receive under the Contract before the insured s death, including loans and withdrawals, are included in income to the extent that the Contract Fund before surrender charges exceeds the premiums paid for the Contract increased by the amount of any loans previously included in income and reduced by any untaxed amounts previously received other than the amount of any loans excludible from income. An assignment of a Modified Endowment Contract is taxable in the same way. These rules also apply to pre-death distributions, including loans and assignments, made during the two-year period before the time that the Contract became a Modified Endowment Contract. Any taxable income on pre-death distributions (including full surrenders) is subject to a penalty of 10 percent unless the amount is received on or after age 59½, on account of your becoming disabled or as a life annuity. It is presently unclear how the penalty tax provisions apply to Contracts owned by businesses. All Modified Endowment Contracts issued by us to you during the same calendar year are treated as a single Contract for purposes of applying these rules. Investor Control. Treasury Department regulations do not provide guidance concerning the extent to which you may direct your investment in the particular variable investment options without causing you, instead of Pruco Life of New Jersey, to be considered the owner of the underlying assets. Because of this uncertainty, Pruco Life of New Jersey reserves the right to make such changes as it deems necessary to assure that the Contract qualifies as life insurance for tax purposes. Any such changes will apply uniformly to affected Contract owners and will be made with such notice to affected Contract owners as is feasible under the circumstances. Withholding. You must affirmatively elect that no taxes be withheld from a pre-death distribution. Otherwise, the taxable portion of any amounts you receive will be subject to withholding. You are not permitted to elect out of withholding if you do not provide a social security number or other taxpayer identification number. You may be subject to penalties under the estimated tax payment rules if your withholding and estimated tax payments are insufficient to cover the tax due. Other Tax Considerations. If you transfer or assign the Contract to someone else, there may be gift, estate and/or income tax consequences. If you transfer the Contract to a person two or more generations younger than you (or designate such a younger person as a beneficiary), there may be Generation Skipping Transfer tax consequences. Deductions for interest paid or accrued on Contract debt or on other loans that are incurred or continued to purchase or carry the Contract may be denied. Your individual situation or that of your beneficiary will determine the federal estate taxes and the state and local estate, inheritance and other taxes due if you or the insured dies. Business-Owned Life Insurance. If a business, rather than an individual, is the owner of the Contract, there are some additional rules. Business Contract owners generally cannot deduct premium payments. Business Contract owners generally cannot take tax deductions for interest on Contract debt paid or accrued after October 13, An exception permits the deduction of interest on policy loans on 35

44 Contracts for up to 20 key persons. The interest deduction for Contract debt on these loans is limited to a prescribed interest rate and a maximum aggregate loan amount of $50,000 per key insured person. The corporate alternative minimum tax also applies to business-owned life insurance. This is an indirect tax on additions to the Contract Fund or death benefits received under business-owned life insurance policies. /DSVHDQG5HLQVWDWHPHQW Pruco Life of New Jersey will determine the value of the cash surrender value on each Monthly date. If the cash surrender value is zero or less, the Contract is in default unless it remains in-force under the Death Benefit Guarantee. See Death Benefit Guarantee, page 23. If the Contract debt ever grows to be equal to or more than the cash surrender value, the Contract will be in default. Should this happen, Pruco Life of New Jersey will send you a notice of default setting forth the payment which we estimate will keep the Contract in-force for three months from the date of default. This payment must be received at a Home Office within the 61-day grace period after the notice of default is mailed or the Contract will end and have no value. If the second death occurs past the grace period, no death benefit is payable. A Contract that lapses with an outstanding Contract loan may have tax consequences. See Tax Treatment of Contract Benefits, page 33. A Contract that ended in default may be reinstated within five years after the date of default if all the following conditions are met: (1) both insureds are alive or one insured is alive and the Contract ended without value after the death of the other insured; (2) you must provide renewed evidence of insurability on any insured who was living when the Contract went into default; (3) submission of certain payments sufficient to bring the Contract up to date and cover all charges and deductions for the next three months; and (4) any Contract debt with interest to date must be restored or paid back. If the Contract debt is restored and the debt with interest would exceed the loan value of the reinstated Contract, the excess must be paid to us before reinstatement. The reinstatement date will be the date we approve your request. We will deduct all required charges from your payment and the balance will be placed into your Contract Fund. If we approve the reinstatement, we will credit the Contract Fund with a refund of that part of any surrender charge deducted at the time of default which would have been charged if the Contract were surrendered immediately after reinstatement. /HJDO &RQVLGHUDWLRQV 5HODWLQJ WR 6H['LVWLQFW 3UHPLXPV DQG %HQHILWV The Contract generally employs mortality tables that distinguish between males and females. Thus, premiums and benefits under Contracts issued on males and females of the same age will generally differ. However, in those states that have adopted regulations prohibiting sex-distinct insurance rates, premiums and cost of insurance charges will be based on male rates, whether the insureds are male or female. In addition, employers and employee organizations considering purchase of a Contract should consult their legal advisers to determine whether purchase of a Contract based on sex-distinct actuarial tables is consistent with Title VII of the Civil Rights Act of 1964 or other applicable law. 2WKHU*HQHUDO&RQWUDFW3URYLVLRQV Assignment. This Contract may not be assigned if the assignment would violate any federal, state or local law or regulation prohibiting sex distinct rates for insurance. Generally, the Contract may not be assigned to an employee benefit plan or program without Pruco Life of New Jersey s consent. Pruco Life of New Jersey assumes no responsibility for the validity or sufficiency of any assignment, and we will not be obligated to comply with any assignment unless we receive a copy at a Home Office. 36

45 Beneficiary. You designate and name your beneficiary in the application. Thereafter, you may change the beneficiary, provided it is in accordance with the terms of the Contract. Should the second insured to die do so with no surviving beneficiary, that insured s estate will become the beneficiary, unless someone other than the insureds owned the Contract. In that case, we will make the Contract owner or the Contract owner s estate the beneficiary. Incontestability. We will not contest the Contract after it has been in-force during the lifetime of both insureds for two years from the issue date. The exceptions are: (1) non-payment of enough premium to pay the required charges; and (2) when any change is made in the Contract that requires Pruco Life of New Jersey s approval and would increase our liability. We will not contest such change after it has been in effect for two years during the lifetime of at least one insured. At the end of the second Contract year we will mail you a notice requesting that you tell us if either insured has died. Failure to tell us of the death of an insured will not avoid a contest, if we have a basis for one, even if premium payments continue to be made. Misstatement of Age or Sex. If an insured s stated age or sex or both are incorrect in the Contract, Pruco Life of New Jersey will adjust each benefit and any amount to be paid, as required by law, to reflect the correct age and sex. Any such benefit will be based on what the most recent deductions from the Contract Fund would have provided at the insured s correct age and sex. Settlement Options. The Contract grants to most owners, or to the beneficiary, a variety of optional ways of receiving Contract proceeds, other than in a lump sum. Any Pruco Life of New Jersey representative authorized to sell this Contract can explain these options upon request. Simultaneous Death. If both insureds die while the Contract is in-force and we find there is lack of sufficient evidence that they died other than simultaneously, we will assume that the older insured died first. Suicide Exclusion. If either insured, whether sane or insane, dies by suicide within two years from the issue date, the Contract will end and we will return the premiums paid. If there is a surviving insured, we will make a new contract available on the life of that insured. The issue age, Contract date, and the insured s underwriting classification will be the same as they are in the Contract. The amount of coverage will be the lesser of (1) the contract s basic insurance amount, and (2) the maximum amount we allow on the Contract date for single life contracts. The new contract will not take effect unless all premiums due since the Contract date are paid within 31 days after we notify you of the availability of the new contract. 5LGHUV Contract owners may be able to obtain extra fixed benefits which may require an additional premium. These optional insurance benefits will be described in what is known as a "rider" to the Contract. Charges applicable to the riders will be deducted from the Contract Fund on each Monthly date. One rider gives insureds the option to exchange the Contract for two new life insurance contracts, one on the life of each insured, in the event of a divorce or if certain changes in tax law occur. Exercise of this option may give rise to taxable income. Another pays an additional amount if both insureds die within a specified number of years. See Tax Treatment of Contract Benefits, page 33. Certain restrictions may apply; they are clearly described in the applicable rider. Any Pruco Life of New Jersey representative authorized to sell the Contract can explain these extra benefits further. Samples of the provisions are available from Pruco Life of New Jersey upon written request. 6XEVWLWXWLRQRI)XQG6KDUHV Although Pruco Life of New Jersey believes it to be unlikely, it is possible that in the judgment of its management, one or more of the portfolios of the Funds may become unsuitable for investment by Contract 37

46 owners because of investment policy changes, tax law changes, or the unavailability of shares for investment. In that event, Pruco Life of New Jersey may seek to substitute the shares of another portfolio or of an entirely different mutual fund. Before this can be done, the approval of the SEC, and possibly one or more state insurance departments, may be required. Contract owners will be notified of any such substitution. 5HSRUWVWR&RQWUDFW2ZQHUV Once each year, Pruco Life of New Jersey will send you a statement that provides certain information pertinent to your own Contract. This statement will detail values, transactions made, and specific Contract data that apply only to your particular Contract. You will also be sent annual and semi-annual reports of the Funds showing the financial condition of the portfolios and the investments held in each portfolio. 6WDWH5HJXODWLRQ Pruco Life of New Jersey is subject to regulation and supervision by the Department of Insurance of the State of New Jersey, which periodically examines its operations and financial condition. It is also subject to the insurance laws and regulations of all jurisdictions in which it is authorized to do business. Pruco Life of New Jersey is required to submit annual statements of its operations, including financial statements, to the insurance departments of the various jurisdictions in which it does business to determine solvency and compliance with local insurance laws and regulations. In addition to the annual statements referred to above, Pruco Life of New Jersey is required to file with New Jersey and other jurisdictions a separate statement with respect to the operations of all its variable contract accounts, in a form promulgated by the National Association of Insurance Commissioners. ([SHUWV The financial statements of Pruco Life of New Jersey as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 and the financial statements of the Survivorship Variable Universal Life Subaccounts of the Account as of December 31, 2001 and for each of the three years in the period then ended included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP s principal business address is 1177 Avenue of the Americas, New York, New York Actuarial matters included in this prospectus have been examined by Pamela A. Schiz, MAAA, FSA, Vice President and Actuary of Prudential, whose opinion is filed as an exhibit to the registration statement. /LWLJDWLRQDQG5HJXODWRU\3URFHHGLQJV We are subject to legal and regulatory actions in the ordinary course of our businesses, including class actions. Pending legal and regulatory actions include proceedings specific to our practices and proceedings generally applicable to business practices in the industries in which we operate. In certain of these lawsuits, large and/or indeterminate amounts are sought, including punitive or exemplary damages. Beginning in 1995, regulatory authorities and customers brought significant regulatory actions and civil litigation against Pruco Life of New Jersey and Prudential involving individual life insurance sales practices. In 1996, Prudential, on behalf of itself and many of its life insurance subsidiaries, including Pruco Life of New Jersey, entered into settlement agreements with relevant insurance regulatory authorities and plaintiffs in the principal life insurance sales practices class action lawsuit covering policyholders of individual 38

47 permanent life insurance policies issued in the United States from 1982 to Pursuant to the settlements, the companies agreed to various changes to their sales and business practices controls, to a series of fines, and to provide specific forms of relief to eligible class members. Virtually all claims by class members filed in connection with the settlements have been resolved and virtually all aspects of the remediation program have been satisfied. As of December 31, 2001 Prudential and/or Pruco Life of New Jersey remained a party to approximately 44 individual sales practices actions filed by policyholders who opted out of the class action settlement relating to permanent life insurance policies issued in the United States between 1982 and In addition, there were 19 sales practices actions pending that were filed by policyholders who were members of the class and who failed to opt out of the class action settlement. Prudential and Pruco Life of New Jersey believed that those actions are governed by the class settlement release and expects them to be enjoined and/or dismissed. Additional suits may be filed by class members who opted out of the class settlements or who failed to opt out but nevertheless seek to proceed against Prudential and/or Pruco Life of New Jersey. A number of the plaintiffs in these cases seek large and/or indeterminate amounts, including punitive or exemplary damages. Some of these actions are brought on behalf of multiple plaintiffs. It is possible that substantial punitive damages might be awarded in any of these actions and particularly in an action involving multiple plaintiffs. Prudential has indemnified Pruco Life of New Jersey for any liabilities incurred in connection with sales practices litigation covering policyholders of individual permanent life insurance policies issued in the United States from 1982 to Pruco Life of New Jersey s litigation is subject to many uncertainties, and given the complexity and scope, the outcomes cannot be predicted. It is possible that the results of operations or the cash flow of Pruco Life of New Jersey in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters. Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters should not have a material adverse effect on Pruco Life of New Jersey s financial position. $GGLWLRQDO,QIRUPDWLRQ Pruco Life of New Jersey has filed a registration statement with the SEC under the Securities Act of 1933, relating to the offering described in this prospectus. This prospectus does not include all of the information set forth in the registration statement. Certain portions have been omitted pursuant to the rules and regulations of the SEC. The omitted information may, however, be obtained from the SEC's Public Reference Section at 450 Fifth Street, N.W., Washington, D.C , or by telephoning (800) SEC-0330, upon payment of a prescribed fee. To reduce costs, we now generally send only a single copy of prospectuses and shareholder reports to each household ("householding"), in lieu of sending a copy to each contract owner that resides in the household. You should be aware that you can revoke or "opt out" of householding at any time by calling Further information may also be obtained from Pruco Life of New Jersey. The address and telephone number are set forth on the inside front cover of this prospectus. )LQDQFLDO6WDWHPHQWV The financial statements of the Account should be distinguished from the financial statements of Pruco Life of New Jersey, which should be considered only as bearing upon the ability of Pruco Life of New Jersey to meet its obligations under the Contracts. 39

48 ',5(&7256$1'2)),&(56 The directors and major officers of Pruco Life of New Jersey, listed with their principal occupations during the past 5 years, are shown below. ',5(&72562)358&2/,)(2)1(:-(56(< JAMES J. AVERY, JR., Vice Chairman and Director President, Prudential Individual Life Insurance since 1998; prior to 1998: Senior Vice President, Chief Actuary and CFO, Prudential Individual Insurance Group. VIVIAN L. BANTA, President, Chairman, and Director - Executive Vice President, Individual Financial Services, U.S. Consumer Group since 2000; 1998 to 1999: Consultant, Individual Financial Services; prior to 1998: Consultant, Morgan Stanley. RICHARD J. CARBONE, Director Senior Vice President and Chief Financial Officer since HELEN M. GALT, Director Company Actuary, Prudential since JEAN D. HAMILTON, Director Executive Vice President, Prudential Institutional since 1998; prior to 1998: President, Diversified Group. RONALD P. JOELSON, Director Senior Vice President, Prudential Asset, Liability and Risk Management since 1999; prior to 1999: President, Guaranteed Products, Prudential Institutional. DAVID R. ODENATH, JR., Director President, Prudential Investments since 1999; prior to 1999: Senior Vice President and Director of Sales, Investment Consulting Group, PaineWebber. 2)),&(56:+2$5(127',5(&7256 SHAUN M. BYRNES, Senior Vice President Senior Vice President, Director of Mutual Funds, Annuities and UITs, Prudential Investments since 2001; 2000 to 2001: Senior Vice President, Director of Research, Prudential Investments; 1999 to 2000: Senior Vice President, Director of Mutual Funds, Prudential Investments; prior to 1999: Vice President, Mutual Funds, Prudential Investments. C. EDWARD CHAPLIN, Treasurer Senior Vice President and Treasurer, Prudential since 2000; prior to 2000, Vice President and Treasurer, Prudential. THOMAS F. HIGGINS, Senior Vice President Vice President, Annuity Services, Prudential Individual Financial Services since 1999; 1998 to 1999: Vice President, Mutual Funds, Prudential Individual Financial Services; prior to 1998: Principal, Mutual Fund Operations, The Vanguard Group. CLIFFORD E. KIRSCH, Chief Legal Officer and Secretary Chief Counsel, Variable Products, Prudential Law Department since ANDREW J. MAKO, Executive Vice President Vice President, Finance, U.S. Consumer Group since 1999; prior to 1999: Vice President, Business Performance Management Group. ESTHER H. MILNES, Senior Vice President Vice President and Chief Actuary, Prudential Individual Life Insurance since 1999; prior to 1999: Vice President and Actuary, Prudential Individual Insurance Group. 40

49 JAMES M. O CONNOR, Senior Vice President and Actuary Vice President, Guaranteed Products since 2001; 1998 to 2000: Corporate Vice President, Guaranteed Products; prior to 1998: Corporate Actuary, Prudential Investments. SHIRLEY H. SHAO, Senior Vice President and Chief Actuary Vice President and Associate Actuary, Prudential since WILLIAM J. ECKERT, IV, Vice President and Chief Accounting Officer Vice President and IFS Controller, Prudential Enterprise Financial Management since 2000; 1999 to 2000: Vice President and Individual Life Controller, Prudential Enterprise Financial Management; prior to 1999: Vice President, Accounting, Enterprise Financial Management. The business address of all directors and officers of Pruco Life of New Jersey is 213 Washington Street, Newark, New Jersey PLNJ directors and officers are elected annually. 41

50 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF NET ASSETS December 31, 2001 SUBACCOUNTS Prudential Prudential Prudential Prudential Money Diversified Prudential Flexible Conservative Market Bond Equity Managed Balanced Portfolio Portfolio Portfolio Portfolio Portfolio ASSETS Investment in The Prudential Series Fund, Inc. Portfolios and non-prudential administered funds, at net asset value [Note 3] $ 7,981,122 $ 25,729,790 $146,419,642 $205,957,982 $101,514,906 Net Assets $ 7,981,122 $ 25,729,790 $146,419,642 $205,957,982 $101,514,906 NET ASSETS, representing: Accumulation units [Note 9] $ 7,981,122 $ 25,729,790 $146,419,642 $205,957,982 $101,514,906 $ 7,981,122 $ 25,729,790 $146,419,642 $205,957,982 $101,514,906 Units outstanding ,851,492 7,429,898 20,140,307 45,114,814 26,398,112 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A1

51 SUBACCOUNTS (Continued) Prudential Prudential T.Rowe Price Janus High Yield Stock Prudential Prudential Prudential International AIM V.I. Aspen Bond Index Value Global Jennison Stock Value Growth Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Fund Portfolio $ 32,793,243 $ 92,150,788 $ 13,504,837 $ 57,396,780 $ 19,499,321 $ 83,418 $ 317,423 $ 404,665 $ 32,793,243 $ 92,150,788 $ 13,504,837 $ 57,396,780 $ 19,499,321 $ 83,418 $ 317,423 $ 404,665 $ 32,793,243 $ 92,150,788 $ 13,504,837 $ 57,396,780 $ 19,499,321 $ 83,418 $ 317,423 $ 404,665 $ 32,793,243 $ 92,150,788 $ 13,504,837 $ 57,396,780 $ 19,499,321 $ 83,418 $ 317,423 $ 404,665 14,583,273 38,188,985 2,639,394 33,173,812 8,388, , , ,910 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A2

52 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF NET ASSETS December 31, 2001 SUBACCOUNTS MFS Emerging Growth Series Portfolio American Century VP Value Fund Franklin Small Cap Fund Prudential SP Alliance Large Cap Growth Portfolio Prudential SP Davis Value Portfolio ASSETS Investment in The Prudential Series Fund, Inc. Portfolios and non-prudential administered funds, at net asset value [Note 3] $ 130,698 $ 59,547 $ 144,449 $ 6,650 $ 32,256 Net Assets $ 130,698 $ 59,547 $ 144,449 $ 6,650 $ 32,256 NET ASSETS, representing: Accumulation units [Note 9] $ 130,698 $ 59,547 $ 144,449 $ 6,650 $ 32,256 $ 130,698 $ 59,547 $ 144,449 $ 6,650 $ 32,256 Units outstanding ,113 44, ,031 6,897 33,445 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A3

53 Prudential SP Small/Mid Cap Value Portfolio Prudential SP INVESCO Small Company Growth Portfolio Prudential SP PIMCO Total Return Portfolio SUBACCOUNTS (Continued) Prudential SP PIMCO High Yield Portfolio Prudential SP Large Cap Value Portfolio Prudential SP AIM Growth and Income Portfolio Prudential SP MFS Capital Opportunities Portfolio Prudential SP Strategic Partners Focused Growth Portfolio $ 14,750 $ 1,325 $ 31,427 $ 9,929 $ 697 $ 1,178 $ 497 $ 1,821 $ 14,750 $ 1,325 $ 31,427 $ 9,929 $ 697 $ 1,178 $ 497 $ 1,821 $ 14,750 $ 1,325 $ 31,427 $ 9,929 $ 697 $ 1,178 $ 497 $ 1,821 $ 14,750 $ 1,325 $ 31,427 $ 9,929 $ 697 $ 1,178 $ 497 $ 1,821 14,971 1,356 29,749 9, , ,961 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A4

54 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF NET ASSETS December 31, 2001 SUBACCOUNTS Prudential SP MFS Mid Cap Growth Portfolio SP Prudential US Emerging Growth Portfolio Prudential SP AIM Aggressive Growth Portfolio Prudential SP Alliance Technology Portfolio Prudential SP Conservative Asset Allocation Portfolio ASSETS Investment in The Prudential Series Fund, Inc Portfolios and non-prudential administered funds, at net asset value [Note 3] $ 5,847 $ 12,843 $ 260 $ 1,472 $ 425 Net Assets $ 5,847 $ 12,843 $ 260 $ 1,472 $ 425 NET ASSETS, representing: Accumulation units [Note 9] $ 5,847 $ 12,843 $ 260 $ 1,472 $ 425 $ 5,847 $ 12,843 $ 260 $ 1,472 $ 425 Units outstanding ,253 13, , SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A5

55 SUBACCOUNTS (Continued) Prudential SP Balance Asset Allocation Portfolio Prudential SP Growth Asset Allocation Portfolio Prudential SP Jennison International Growth Portfolio Prudential SP Deutsche International Equity Portfolio $ 22 $ 770 $ 11,180 $ 5,197 $ 22 $ 770 $ 11,180 $ 5,197 $ 22 $ 770 $ 11,180 $ 5,197 $ 22 $ 770 $ 11,180 $ 5, ,453 5,882 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A6

56 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 2001, 2000 and 1999 SUBACCOUNTS 01/01/2001 to 12/31/2001 Prudential Money Market Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/2001 Prudential Diversified Bond Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/1999 INVESTMENT INCOME Dividend income $ 311,620 $ 440,102 $ 362,423 $ 1,551,331 $ 1,453,002 $ 0 EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 4A] ,910 43,718 44, , , ,104 Reimbursement for excess expenses [Note 4D] (2,325) (2,905) (1,825) (10,110) (11,804) (6,334) NET EXPENSES ,585 40,813 42, , , ,770 NET INVESTMENT INCOME (LOSS) , , ,686 1,409,601 1,325,784 (137,770) NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received ,919 67,535 Realized gain (loss) on shares redeemed ,815 53,547 41,756 Net change in unrealized gain (loss) on investments , ,982 (295,317) NET GAIN (LOSS) ON INVESTMENTS , ,448 (186,026) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 268,035 $ 399,289 $ 319,686 $ 1,540,249 $ 2,048,232 $ (323,796) SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A7

57 SUBACCOUNTS (Continued) 01/01/2001 to 12/31/2001 Prudential Prudential Prudential Equity Flexible Managed Conservative Balanced Portfolio Portfolio Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/ /01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/ /01/2000 to 12/31/ /01/1999 to 12/31/1999 $ 1,282,928 $ 3,310,665 $ 3,250,226 $ 7,986,177 $ 8,423,889 $ 11,143 $ 3,518,834 $ 4,041,954 $ 4,689, ,931 1,052,093 1,150,889 1,309,601 1,448,957 1,509, , , ,530 (152,606) (165,294) (158,561) (490,928) (539,155) (544,224) (177,587) (202,407) (190,933) 775, , , , , , , , , ,603 2,423,866 2,257,898 7,167,504 7,514,087 (953,894) 3,052,055 3,550,977 4,161,976 8,232,241 28,254,310 22,859,279 3,084,677 3,321,644 2,827,339 1,082, , ,398 (276,033) 5,712,248 5,681,025 (359,305) 1,182,171 1,322,321 (22,178) 573, ,439 (28,252,361) (31,851,882) (9,060,032) (23,428,493) (16,361,667) 14,382,751 (6,728,564) (5,935,872) 1,388,838 (20,296,153) 2,114,676 19,480,272 (20,703,121) (11,857,852) 18,532,411 (5,668,735) (4,538,879) 2,834,675 $ (19,788,550) $ 4,538,542 $ 21,738,170 $ (13,535,617) $ (4,343,765) $ 17,578,517 $ (2,616,680) $ (987,902) $ 6,996,651 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A8

58 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 2001, 2000 and 1999 SUBACCOUNTS 01/01/2001 to 12/31/2001 Prudential High Yield Bond Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/2001 Prudential Stock Index Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/1999 INVESTMENT INCOME Dividend income $ 3,949,700 $ 3,549,924 $ 85,549 $ 935,452 $ 761,936 $ 767,914 EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 4A] , , , , , ,707 Reimbursement for excess expenses [Note 4D] NET EXPENSES , , , , , ,707 NET INVESTMENT INCOME (LOSS) ,754,260 3,367,669 (108,034) 455, , ,207 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received ,402,695 3,072, ,749 Realized gain (loss) on shares redeemed.. (129,005) (102,471) (217,380) 242, ,918 4,605,818 Net change in unrealized gain (loss) on investments (4,326,984) (5,925,033) 1,589,321 (17,922,602) (13,317,734) 8,162,150 NET GAIN (LOSS) ON INVESTMENTS.... (4,455,989) (6,027,504) 1,371,941 (12,277,357) (9,626,406) 13,744,717 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (701,729) $ (2,659,835) $ 1,263,907 $ (11,821,898) $ (9,386,415) $ 14,068,924 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A9

59 SUBACCOUNTS (Continued) 01/01/2001 to 12/31/2001 Prudential Prudential Prudential Value Global Jennison Portfolio Portfolio Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/ /01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/ /01/2000 to 12/31/ /01/1999 to 12/31/1999 $ 214,768 $ 255,532 $ 273,914 $ 215,564 $ 589,378 $ 295,800 $ 35,503 $ 21,894 $ 22,451 80,796 67,287 71, , , , , ,538 81, ,796 67,287 71, , , , , ,538 81, , , ,475 (154,931) 98,263 (116,089) (97,391) (175,644) (59,208) 1,268, ,397 1,332,460 14,209,672 5,399, , ,333 4,317, , ,503 19, ,341 (137,203) 546,962 1,889,924 (2,463,081) 22, ,823 (1,776,579) 524,291 (422,725) (26,692,302) (21,942,646) 25,916,670 (3,214,381) (11,283,218) 4,732,816 (35,794) 1,438,161 1,154,076 (12,619,833) (15,996,614) 28,325,256 (5,467,129) (6,942,435) 5,811,659 $ 98,178 $ 1,626,406 $ 1,356,551 $ (12,774,764) $ (15,898,351) $ 28,209,167 $ (5,564,520) $ (7,118,079) $ 5,752,451 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A10

60 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 2001, 2000 and 1999 SUBACCOUNTS T.Rowe Price International Stock Portfolio 01/01/2001 to 12/31/ /01/2000* to 12/31/ /01/2001 to 12/31/2001 AIM V.I. Value Fund 05/01/2000* to 12/31/ /01/2001 to 12/31/2001 Janus Aspen Growth Portfolio 05/01/2000* to 12/31/2000 INVESTMENT INCOME Dividend income $ 1,781 $ 27 $ 422 $ 404 $ 276 $ 14 EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 4A] , , Reimbursement for excess expenses [Note 4D] NET EXPENSES , , NET INVESTMENT INCOME (LOSS) , (2,245) (552) (2,871) (3) NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received ,409 14, Realized gain (loss) on shares redeemed.. (705) (789) (4,794) (478) (4,405) (17) Net change in unrealized gain (loss) on investments (20,517) (265) (42,641) (78,145) (115,101) (1,353) NET GAIN (LOSS) ON INVESTMENTS.... (21,222) (924) (41,026) (64,550) (118,748) (1,370) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (20,126) $ (912) $ (43,271) $ (65,102) $ (121,619) $ (1,373) * Date subaccounts became available (Note 1) SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A11

61 SUBACCOUNTS (Continued) MFS Emerging Growth Series Portfolio American Century VP Value Fund Franklin Small Cap Fund Prudential SP Alliance Large Cap Growth Portfolio Prudential SP Davis Value Portfolio Prudential SP Small/Mid Cap Value Portfolio Prudential SP INVESCO Small Company Growth Portfolio 01/01/2001 to 12/31/ /01/2000* to 12/31/ /29/2001 to 12/31/ /01/2001 to 12/31/ /01/2000* to 12/31/ /12/2001* to 12/31/ /12/2001* to 12/31/ /12/2001* to 12/31/ /12/2001* to 12/31/2001 $ 0 $ 0 $ 0 $ 497 $ 0 $ 0 $ 32 $ 11 $ (646) (156) (117) (316) (57) (3) 0 0 5, (6,878) (390) 25 (2,055) (50) (21,850) (14,321) 5,663 (10,713) (2,730) (23,208) (14,711) 5,688 (12,768) (2,780) $ (23,854) $ (14,867) $ 5,571 $ (13,084) $ (2,837) $ 91 $ 906 $ 129 $ 16 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A12

62 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 2001, 2000 and 1999 SUBACCOUNTS Prudential SP PIMCO Total Return Prudential SP PIMCO High Yield Portfolio Prudential SP Large Cap Value Prudential SP AIM Growth and Income Prudential SP MFS Capital Opportunities Prudential SP Strategic Partners Focused Growth Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio 08/06/2001* to 12/31/ /06/2001* to 12/31/ /06/2001* to 12/31/ /06/2001* to 12/31/ /12/2001* to 12/31/ /06/2001* to 12/31/2001 INVESTMENT INCOME Dividend income $ 377 $ 157 $ 0 $ 0 $ 0 $ 0 EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 5A] Reimbursement for excess expenses [Note 5D] NET EXPENSES NET INVESTMENT INCOME (LOSS) NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received Realized gain (loss) on shares redeemed Net change in unrealized gain (loss) on investments (729) (135) NET GAIN (LOSS) ON INVESTMENTS.... (69) (135) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 284 $ 17 $ 5 $ 5 $ 7 $ 16 * Date subaccounts became available (Note 1) SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A13

63 SUBACCOUNTS (Continued) Prudential SP MFS Mid Cap Growth SP Prudential U.S. Emerging Growth Prudential SP AIM Aggressive Growrth Prudential SP Alliance Technology Prudential SP Conservative Asset Allocation Prudential SP Balanced Asset Allocation Prudential SP Growth Asset Allocation Prudential SP Jennison International Growth Prudential SP Deutsche International Equity Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio 02/12/2001* to 12/31/ /06/2001* to 12/31/ /12/2001* to 12/31/ /12/2001* to 12/31/ /06/2001* to 12/31/ /06/2001* to 12/31/ /06/2001* to 12/31/ /06/2001* to 12/31/ /12/2001* to 12/31/2001 $ 0 $ 0 $ 0 $ 0 $ 4 $ 0 $ 0 $ 0 $ (6) (3) (2) (2) (38) (38) $ 354 $ 60 $ 3 $ (38) $ 6 $ 0 $ 7 $ 0 $ 117 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A14

64 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 2001, 2000 and 1999 SUBACCOUNTS 01/01/2001 to 12/31/2001 Prudential Money Market Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/2001 Prudential Diversified Bond Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/1999 OPERATIONS Net investment income (loss) $ 268,035 $ 399,289 $ 319,686 $ 1,409,601 $ 1,325,784 $ (137,770) Capital gains distributions received ,919 67,535 Realized gain (loss) on shares redeemed ,815 53,547 41,756 Net change in unrealized gain (loss) on investments , ,982 (295,317) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS , , ,686 1,540,249 2,048,232 (323,796) CONTRACT OWNER TRANSACTIONS Contract Owner Net Payments ,330,932 1,417,335 18,255 1,033, , ,236 Policy Loans (119,774) (451,268) (182,692) (600,783) (823,629) (553,832) Policy Loan Repayments and Interest , , , , , ,659 Surrenders, Withdrawals and Death Benefits (373,531) (530,444) (433,849) (793,289) (794,828) (1,188,933) Net Transfers From (To) Other Subaccounts or Fixed Rate Option..... (21,357,864) (748,090) 252, ,320 (105,737) (351,534) Withdrawal and Other Charges (299,681) (234,773) (231,397) (600,202) (535,298) (571,355) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS ,912 (432,790) (373,180) (298,892) (897,739) (1,670,759) TOTAL INCREASE (DECREASE) IN NET ASSETS ,947 (33,501) (53,494) 1,241,357 1,150,493 (1,994,555) NET ASSETS Beginning of year ,387,175 7,420,676 7,474,170 24,488,433 23,337,940 25,332,495 End of year $ 7,981,122 $ 7,387,175 $ 7,420,676 $ 25,729,790 $ 24,488,433 $ 23,337,940 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A15

65 SUBACCOUNTS (Continued) 01/01/2001 to 12/31/2001 Prudential Prudential Prudential Equity Flexible Managed Conservative Balanced Portfolio Portfolio Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/ /01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/ /01/2000 to 12/31/ /01/1999 to 12/31/1999 $ 507,603 $ 2,423,866 $ 2,257,898 $ 7,167,504 $ 7,514,087 $ (953,894) $ 3,052,055 $ 3,550,977 $ 4,161,976 8,232,241 28,254,310 22,859,279 3,084,677 3,321,644 2,827,339 1,082, , ,398 (276,033) 5,712,248 5,681,025 (359,305) 1,182,171 1,322,321 (22,178) 573, ,439 (28,252,361) (31,851,882) (9,060,032) (23,428,493) (16,361,667) 14,382,751 (6,728,564) (5,935,872) 1,388,838 (19,788,550) 4,538,542 21,738,170 (13,535,617) (4,343,765) 17,578,517 (2,616,680) (987,902) 6,996,651 7,170,174 6,903, ,980 14,979,604 14,061,606 4,963,270 7,421,780 7,155,408 2,955,315 (4,223,901) (5,748,041) (5,865,015) (5,716,384) (6,167,119) (7,384,636) (2,385,300) (2,686,924) (2,889,851) 4,514,428 4,060,348 5,452,661 5,732,813 5,589,669 7,010,849 2,372,140 2,275,856 2,927,288 (8,325,637) (7,764,547) (7,992,313) (12,388,245) (12,338,277) (10,727,647) (5,670,009) (5,277,744) (5,619,206) (811,488) (18,619,709) (3,629,986) (1,302,894) (7,239,375) (4,161,991) (495,252) (3,856,084) (2,179,539) (4,653,648) (4,763,451) (5,119,578) (8,718,191) (9,108,467) (9,811,225) (4,483,120) (4,635,229) (4,974,621) (6,330,072) (25,932,086) (16,669,251) (7,413,297) (15,201,963) (20,111,380) (3,239,761) (7,024,717) (9,780,614) (26,118,622) (21,393,544) 5,068,919 (20,948,914) (19,545,728) (2,532,863) (5,856,441) (8,012,619) (2,783,963) 172,538, ,931, ,862, ,906, ,452, ,985, ,371, ,383, ,167,929 $146,419,642 $172,538,264 $193,931,808 $205,957,982 $226,906,896 $246,452,624 $101,514,906 $107,371,347 $115,383,966 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A16

66 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 2001, 2000 and 1999 SUBACCOUNTS 01/01/2001 to 12/31/2001 Prudential High Yield Bond Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/2001 Prudential Stock Index Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/1999 OPERATIONS Net investment income (loss) $ 3,754,260 $ 3,367,669 $ (108,034) $ 455,459 $ 239,991 $ 324,207 Capital gains distributions received ,402,695 3,072, ,749 Realized gain (loss) on shares redeemed.. (129,005) (102,471) (217,380) 242, ,918 4,605,818 Net change in unrealized gain (loss) on investments (4,326,984) (5,925,033) 1,589,321 (17,922,602) (13,317,734) 8,162,150 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (701,729) (2,659,835) 1,263,907 (11,821,898) (9,386,415) 14,068,924 CONTRACT OWNER TRANSACTIONS Contract Owner Net Payments , , ,400 1,305,448 1,662, ,738 Policy Loans (178,056) (118,636) (145,200) (894,245) (1,030,955) (768,138) Policy Loan Repayments and Interest , , , , , ,476 Surrenders, Withdrawals and Death Benefits (282,162) (446,020) (164,918) (1,030,476) (1,876,277) (1,093,052) Net Transfers From (To) Other Subaccounts or Fixed Rate Option ,861,724 (618,028) (3,734,139) 16,553,115 14,910,332 (6,699,608) Withdrawal and Other Charges (289,706) (283,224) (332,102) (994,900) (944,712) (876,437) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS ,061,470 (1,003,756) (3,840,159) 15,678,096 13,278,038 (7,959,021) TOTAL INCREASE (DECREASE) IN NET ASSETS ,359,741 (3,663,591) (2,576,252) 3,856,198 3,891,623 6,109,903 NET ASSETS Beginning of year ,433,502 32,097,093 34,673,345 88,294,590 84,402,967 78,293,064 End of year $ 32,793,243 $ 28,433,502 $ 32,097,093 $ 92,150,788 $ 88,294,590 $ 84,402,967 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A17

67 SUBACCOUNTS (Continued) 01/01/2001 to 12/31/2001 Prudential Prudential Prudential Value Global Jennison Portfolio Portfolio Portfolio 01/01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/ /01/2000 to 12/31/ /01/1999 to 12/31/ /01/2001 to 12/31/ /01/2000 to 12/31/ /01/1999 to 12/31/1999 $ 133,972 $ 188,245 $ 202,475 $ (154,931) $ 98,263 $ (116,089) $ (97,391) $ (175,644) $ (59,208) 1,268, ,397 1,332,460 14,209,672 5,399, , ,333 4,317, , ,503 19, ,341 (137,203) 546,962 1,889,924 (2,463,081) 22, ,823 (1,776,579) 524,291 (422,725) (26,692,302) (21,942,646) 25,916,670 (3,214,381) (11,283,218) 4,732,816 98,178 1,626,406 1,356,551 (12,774,764) (15,898,351) 28,209,167 (5,564,520) (7,118,079) 5,752, , ,515 93, ,779 (36,670) (1,977,776) 2,438,873 1,004, ,991 (252,264) (231,609) (299,074) (202,114) (228,803) (156,604) (699,421) (876,131) (541,040) 288, , , , , , , , ,520 (501,908) (320,926) (501,214) (346,712) (747,884) (19,903) (1,202,046) (825,690) (548,558) 717,608 (492,258) (548,343) (102,232) 3,209,197 (5,578,438) (5,759,410) 13,062,339 12,249,824 (372,741) (305,866) (331,274) (487,951) (517,820) (418,808) (687,525) (646,100) (318,494) 495,595 (608,629) (1,276,431) (485,148) 1,820,468 (7,980,585) (5,415,459) 12,220,981 12,184, ,773 1,017,777 80,120 (13,259,912) (14,077,883) 20,228,582 (10,979,979) 5,102,902 $ 17,936,694 12,911,064 11,893,287 11,813,167 70,656,692 84,734,575 64,505,993 30,479,300 25,376,398 7,439,704 $ 13,504,837 $ 12,911,064 $ 11,893,287 $ 57,396,780 $ 70,656,692 $ 84,734,575 $ 19,499,321 $ 30,479,300 $ 25,376,398 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A18

68 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 2001, 2000 and 1999 SUBACCOUNTS T.Rowe Price International Stock Portfolio 01/01/2001 to 12/31/ /01/2000* to 12/31/ /01/2001 to 12/31/2001 AIM V.I. Value Fund 05/01/2000* to 12/31/ /01/2001 to 12/31/2001 Janus Aspen Growth Portfolio 05/01/2000 to 12/31/2000* OPERATIONS Net investment income (loss) $ 1,096 $ 12 $ (2,245) $ (552) $ (2,871) $ (3) Capital gains distributions received ,409 14, Realized gain (loss) on shares redeemed.. (705) (789) (4,794) (478) (4,405) (17) Net change in unrealized gain (loss) on investments (20,517) (265) (42,641) (78,145) (115,101) (1,353) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (20,126) (912) (43,271) (65,102) (121,619) (1,373) CONTRACT OWNER TRANSACTIONS Contract Owner Net Payments , , ,202 4,423 Policy Loans Policy Loan Repayments and Interest Surrenders, Withdrawals and Death Benefits (1,044) Net Transfers From (To) Other Subaccounts or Fixed Rate Option ,201 6,692 28, , ,073 15,791 Withdrawal and Other Charges (2,808) (167) (6,414) (1,845) (15,554) (278) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS ,877 6,579 43, , ,721 19,936 TOTAL INCREASE (DECREASE) IN NET ASSETS ,751 5,667 (119) 317, ,102 18,563 NET ASSETS Beginning of year , , ,563 0 End of year $ 83,418 $ 5,667 $ 317,423 $ 317,542 $ 404,665 $ 18,563 * Date subaccounts became available (Note 1) SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A19

69 SUBACCOUNTS (Continued) MFS Emerging Growth Series Portfolio 01/01/2001 to 12/31/ /01/2000* to 12/31/2000 American Century VP Value Fund 06/29/2001* to 12/31/ /01/2001 to 12/31/2001 Franklin Small Cap Fund 05/01/2000* to 12/31/2000 Prudential SP Alliance Large Cap Growth Portfolio 02/12/2001* to 12/31/2001 Prudential SP Davis Value Portfolio 02/12/2001* to 12/31/2001 Prudential SP Small/Mid Cap Value Portfolio 02/12/2001* to 12/31/2001 Prudential SP INVESCO Small Company Growth Portfolio 02/12/2001* to 12/31/2001 $ (646) $ (156) $ (117) $ (316) $ (57) $ (3) $ 8 $ 8 $ 0 5, (6,878) (390) 25 (2,055) (50) (21,850) (14,321) 5,663 (10,713) (2,730) (23,854) (14,867) 5,571 (13,084) (2,837) , ,199 (51) (654) 0 0 (728) ,065 70,208 54, ,202 15,638 6,389 31,057 14,339 1,297 (4,733) (795) (671) (6,513) (377) (117) (253) (225) (7) 99,981 69,438 53, ,160 15,210 6,559 31,350 14,621 1,309 76,127 54,571 59, ,076 12,373 6,650 32,256 14,750 1,325 54, , $ 130,698 $ 54,571 $ 59,547 $ 144,449 $ 12,373 $ 6,650 $ 32,256 $ 14,750 $ 1,325 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A20

70 FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 2001, 2000 and 1999 Prudential SP PIMCO Total Return Portfolio 08/06/2001* to 12/31/2001 Prudential SP PIMCO High Yield Portfolio 08/06/2001* to 12/31/2001 Prudential SP Large Cap Value Fund 08/06/2001* to 12/31/2001 SUBACCOUNTS Prudential SP AIM Growth and Income Portfolio 08/06/2001* to 12/31/2001 Prudential SP MFS Capital Opportunities Portfolio 02/12/2001* to 12/31/2001 Prudential SP Strategic Partners Focused Growth Portfolio 08/06/2001* to 12/31/2001 OPERATIONS Net investment income (loss) $ 353 $ 152 $ 0 $ 0 $ 0 $ 0 Capital gains distributions received Realized gain (loss) on shares redeemed Net change in unrealized gain (loss) on investments (729) (135) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS CONTRACT OWNER TRANSACTIONS Contract Owner Net Payments , (57) Policy Loans Policy Loan Repayments and Interest Surrenders, Withdrawals and Death Benefits Net Transfers From (To) Other Subaccounts or Fixed Rate Option... 28,317 9, , ,861 Withdrawal and Other Charges (433) (134) (43) (34) 0 1 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS ,143 9, , ,805 TOTAL INCREASE (DECREASE) IN NET ASSETS ,427 9, , ,821 NET ASSETS Beginning of year End of year $ 31,427 $ 9,929 $ 697 $ 1,178 $ 497 $ 1,821 * Date subaccounts became available SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A21

71 SUBACCOUNTS (Continued) Prudential SP MFS Mid Cap Growth Portfolio 02/12/2001* to 12/31/2001 SP Prudential U.S. Emerging Growth Portfolio 08/06/2001* to 12/31/2001 Prudential SP AIM Aggressive Growth Portfolio 02/12/2001* to 12/31/2001 Prudential SP Alliance Technology Portfolio 02/12/2001* to 12/31/2001 Prudential SP Conservative Asset Allocation Portfolio 08/06/2001* to 12/31/2001 Prudential SP Balanced Asset Allocation Portfolio 08/06/2001* to 12/31/2001 Prudential SP Growth Asset Allocation Portfolio 08/06/2001* to 12/31/2001 Prudential SP Jennison International Growth Portfolio 08/06/2001* to 12/31/2001 Prudential SP Deutsche International Equity Portfolio 02/12/2001* to 12/31/2001 $ (6) $ (3) $ 0 $ 0 $ 4 $ 0 $ 0 $ (2) $ (2) (38) (38) (30) ,526 12, , ,151 5,175 (34) (151) (12) (7) (49) 0 0 (65) (104) 5,493 12, , ,180 5,080 5,847 12, , ,180 5, $ 5,847 $ 12,843 $ 260 $ 1,472 $ 425 $ 22 $ 770 $ 11,180 $ 5,197 SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A23 THROUGH A31 A22

72 NOTES TO FINANCIAL STATEMENTS OF THE SURVIVORSHIP VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF PRUCO LIFE OF NEW JERSEY VARIABLE APPRECIABLE ACCOUNT December 31, 2001 Note 1: General Pruco Life of New Jersey Variable Appreciable Account (the Account ) was established on January 13, 1984 under New Jersey law as a separate investment account of Pruco Life Insurance Company of New Jersey ( Pruco Life of New Jersey ) which is a wholly-owned subsidiary of Pruco Life Insurance Company (an Arizona domiciled company) and is indirectly wholly-owned by The Prudential Insurance Company of America ( Prudential ). The assets of the Account are segregated from Pruco Life of New Jersey s other assets. Proceeds from the purchases of Pruco Life of New Jersey Variable Appreciable Life ( VAL ), Pruco Life of New Jersey PRUvider Variable Appreciable Life ( PRUvider ), Pruco Life of New Jersey PruSelect III ( PSEL III ), Pruco Life of New Jersey Survivorship Variable Universal Life ( SVUL ) and Pruco Life of New Jersey PruLife Custom Premier ( VUL ) contracts are invested in the Account. The Account is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. The Account is a funding vehicle for individual variable life insurance contracts. Each contract offers the option to invest in various subaccounts, each of which invests in either a corresponding portfolio of The Prudential Series Fund, Inc. (the Series Fund ) or one of the non-prudential administered funds. Investment options vary by contract. Options available to the SVUL contracts which invest in a corresponding portfolio of the Series Fund are: Prudential Money Market Portfolio, Prudential Diversified Bond Portfolio, Prudential Equity Portfolio, Prudential Flexible Managed Portfolio, Prudential Conservative Balanced Portfolio, Prudential High Yield Bond Portfolio, Prudential Stock Index Portfolio, Prudential Value Portfolio, Prudential Global Portfolio, Prudential Jennison Portfolio, Prudential SP Alliance Large Cap Growth Portfolio, Prudential SP Davis Value Portfolio, Prudential SP Small/Mid Cap Value Portfolio, Prudential SP INVESCO Small Company Growth Portfolio, Prudential SP PIMCO Total Return Portfolio, Prudential SP PIMCO High Yield Portfolio, Prudential SP Large Cap Value Fund, Prudential SP AIM Growth And Income Portfolio, Prudential SP MFS Capital Opportunities Portfolio, Prudential SP Strategic Partners Focused Growth Portfolio, Prudential SP MFS Mid-Cap Growth Portfolio, SP Prudential U.S. Emerging Growth Portfolio, Prudential SP AIM Aggressive Growth Portfolio, Prudential SP Alliance Technology Portfolio, Prudential SP Conservative Asset Allocation Portfolio, Prudential SP Balance Asset Allocation Portfolio, Prudential SP Growth Asset Allocation Portfolio, Prudential SP Aggressive Growth Asset Allocation Portfolio, Prudential SP Jennison International Growth Portfolio, Prudential SP Deutsche International Equity Portfolio. The options available to the SVUL contracts which invests in a corresponding portfolio of the non-prudential administered funds are: T. Rowe Price International Stock Portfolio, AIM V.I. Value Fund, Janus Aspen Growth Portfolio, MFS Emerging Growth Series, American Century VP Value Fund, Franklin Small Cap Fund. These financial statements relate only to the subaccounts available to the SVUL contract owners. The Series Fund is a diversified open-end management investment company, and is managed by Prudential. A23

73 Note 2: Significant Accounting Policies The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. Investments The investments in shares of the Series Fund or the non-prudential administered funds are stated at the net asset values of the respective portfolios, which value their investment securities at fair value. Security Transactions Realized gains and losses on security transactions are reported on an average cost basis. Purchase and sale transactions are recorded as of the trade date of the security being purchased or sold. Distributions Received Dividend and capital gain distributions received are reinvested in additional shares of the Series Fund or the non-prudential administered funds and are recorded on the ex-dividend date. Note 3: Investment Information for The Pruco Life Variable Universal Account The net asset value per share for each portfolio of the Series Fund, or the non-prudential administered funds, the number of shares (rounded) of each portfolio held by the subaccounts and the aggregate cost of investments in such shares at December 31, 2001 were as follows: PORTFOLIOS Prudential Money Market Portfolio Prudential Diversified Bond Portfolio Prudential Equity Portfolio Prudential Flexible Managed Portfolio Prudential Conservative Balanced Portfolio Number of shares (rounded): 798,112 2,264,946 7,145,907 13,925,489 7,415,260 Net asset value per share: $ $ $ $ $ Cost: $ 7,981,122 $ 24,585,047 $ 160,335,993 $ 223,598,372 $ 105,305,620 PORTFOLIOS (Continued) Prudential High Yield Bond Portfolio Prudential Stock Index Portfolio Prudential Value Portfolio Prudential Global Portfolio Prudential Jennison Portfolio Number of shares (rounded): 6,072,823 2,912, ,039 3,753,877 1,050,044 Net asset value per share: $ 5.40 $ $ $ $ Cost: $ 43,538,862 $ 97,425,814 $ 14,049,009 $ 73,255,255 $ 27,263,419 T.Rowe Price International Stock Portfolio AIM V.I. Value Fund PORTFOLIOS (Continued) Janus Aspen Growth Portfolio MFS Emerging Growth Series Fund American Century VP Value Fund Number of shares (rounded): 7,273 13,594 20,355 7,269 8,004 Net asset value per share: $ $ $ $ $ 7.44 Cost: $ 104,200 $ 438,209 $ 521,119 $ 166,869 $ 53,884 A24

74 Note 3: Investment Information for The Pruco Life Variable Universal Account (Continued) Franklin Small Cap Fund Prudential SP Alliance Large Cap Growth Portfolio PORTFOLIOS (Continued) Prudential SP Davis Value Portfolio Prudential SP Small/Mid Cap Value Portfolio Prudential SP INVESCO Small Company Growth Portfolio Number of shares (rounded): 8, ,568 1, Net asset value per share: $ $ 7.31 $ 9.04 $ $ 6.94 Cost: $ 157,892 $ 6,556 $ 31,359 $ 14,629 $ 1,309 PORTFOLIOS (Continued) Prudential SP PIMCO Total Return Portfolio Prudential SP PIMCO High Yield Portfolio Prudential SP Large Cap Value Portfolio Prudential SP AIM Growth and Income Portfolio Prudential SP MFS Capital Opportunities Portfolio Number of shares (rounded): 2,937 1, Net asset value per share: $ $ 9.81 $ 9.44 $ 6.51 $ 7.01 Cost: $ 32,156 $ 10,064 $ 692 $ 1,173 $ 490 Prudential SP Strategic Partners Focused Growth Portfolio Prudential SP MFS Mid Cap Growth Portfolio PORTFOLIOS (Continued) SP Prudential U.S. Emerging Growth Portfolio Prudential SP AIM Aggressive Growth Portfolio Prudential SP Alliance Technology Portfolio Number of shares (rounded): , Net asset value per share: $ 6.73 $ 7.62 $ 6.89 $ 6.49 $ 5.71 Cost: $ 1,805 $ 5,488 $ 12,780 $ 257 $ 1,510 Prudential SP Conservative Asset Allocation Portfolio Prudential SP Balanced Asset Allocation Portfolio PORTFOLIOS (Continued) Prudential SP Growth Asset Allocation Portfolio Prudential SP Jennison International Growth Portfolio Prudential SP Deutsche International Equity Portfolio Number of shares (rounded): , Net asset value per share: $ 9.77 $ 9.02 $ 8.27 $ 5.45 $ 7.35 Cost: $ 423 $ 22 $ 763 $ 11,178 $ 5,078 A25

75 Note 4: Charges and Expenses A. Mortality Risk and Expense Risk Charges The mortality risk and expense risk charges, at effective annual rates of up to 0.60%, 0.90%, 0.50%, 0.90% and 0.45% are applied daily against the net assets of VAL, PRUvider, PSEL III, SVUL and VUL contract owners held in each subaccount, respectively. Mortality risk is that contract owners may not live as long as estimated and expense risk is that the cost of issuing and administering the policies may exceed related charges by Pruco Life of New Jersey. Pruco Life of New Jersey currently intends to charge only 0.20% on PSEL III contracts but reserves the right to make the full 0.50% charge. For VUL contracts Pruco Life of New Jersey intends to charge only 0.25% but reserves the right to charge 0.45%. B. Deferred Sales Charge A deferred sales charge is imposed upon surrenders of certain VAL, PRUvider, SVUL and VUL contracts to compensate Pruco Life of New Jersey for sales and other marketing expenses. The amount of any sales charge will depend on the number of years that have elapsed since the contract was issued. No sales charge will be imposed after the tenth year of the contract. No sales charge will be imposed on death benefits. C. Partial Withdrawal Charge A charge is imposed by Pruco Life of New Jersey on partial withdrawals of the cash surrender value. A charge equal to the lesser of $15 or 2% and $25 or 2% will be made in connection with each partial withdrawal of the cash surrender value of a VAL or PRUvider contract and PSEL III, SVUL or VUL contract, respectively. D. Expense Reimbursement The Account is reimbursed by Pruco Life of New Jersey for expenses in excess of 0.40% of the VAL product s average daily net assets incurred by the Money Market, Diversified Bond, Equity, Flexible Managed and Conservative Balanced Portfolios of the Series Fund. E. Cost of Insurance and Other Related Charges Contract owner contributions are subject to certain deductions prior to being invested in the Account. The deductions are for (1) transaction costs which are deducted from each premium payment to cover premium collection and processing costs; (2) state premium taxes; and (3) sales charges which are deducted in order to compensate Pruco Life of New Jersey for the cost of selling the contract. Contracts are also subject to monthly charges for the costs of administering the contract and to compensate Pruco Life of New Jersey for the guaranteed minimum death benefit risk. Note 5: Taxes Pruco Life of New Jersey is taxed as a life insurance company as defined by the Internal Revenue Code. The results of operations of the Account form a part of Prudential s consolidated federal tax return. Under current federal law, no federal income taxes are payable by the Account. As such, no provision for tax liability has been recorded in these financial statements. A26

76 Note 6: Unit Activity Transactions in units (including transfers among subaccounts) for the years ended December 31, 2001, 2000 and 1999 were as follows: SUBACCOUNTS Prudential Money Market Portfolio Prudential Diversified Bond Portfolio Contract Owner Contributions: 22,696,520 1,942,266 1,394,252 1,661, ,886 1,817,938 Contract Owner Redemptions: (22,442,074) (2,035,300) (1,583,513) (1,731,229) (981,340) (2,374,019) Prudential Equity Portfolio SUBACCOUNTS (Continued) Prudential Flexible Managed Portfolio Contract Owner Contributions: 1,813,281 1,560,425 1,053,096 4,626,015 4,041,146 2,928,417 Contract Owner Redemptions: (2,562,975) (4,722,060) (3,213,126) (6,104,009) (6,990,317) (6,981,723) Prudential Conservative Balanced Portfolio SUBACCOUNTS (Continued) Prudential High Yield Bond Portfolio Contract Owner Contributions: 2,671,759 2,331,679 2,742,649 2,461, ,372 10,923,909 Contract Owner Redemptions: (3,426,688) (4,008,763) (5,207,302) (389,368) (680,602) (12,518,142) Prudential Stock Index Portfolio SUBACCOUNTS (Continued) Prudential Value Portfolio Contract Owner Contributions: 27,486,019 3,205,888 10,650,541 16,981, , ,150 Contract Owner Redemptions: (5,200,149) (910,208) (12,168,789) (16,748,332) (430,110) (494,521) Prudential Global Portfolio SUBACCOUNTS (Continued) Prudential Jennison Portfolio Contract Owner Contributions: 666,932 1,770,930 31,717,854 2,004,849 4,440,077 4,934,733 Contract Owner Redemptions: (876,609) (1,120,283) (35,712,959) (4,034,561) (1,064,529) (810,425) T.Rowe Price International Stock Portfolio SUBACCOUNTS (Continued) AIM V.I. Value Fund Janus Aspen Growth Portfolio Contract Owner Contributions: 123,969 21,479 72, , ,427 22,488 Contract Owner Redemptions: (6,136) (14,967) (20,166) (2,142) (23,687) (318) MFS Emerging Growth Series Portfolio SUBACCOUNTS (Continued) American Century VP Value Portfolio Franklin Small Cap Fund Prudential SP Alliance Large Cap Portfolio Contract Owner Contributions: 189,069 68,452 44, ,823 14,932 7,020 Contract Owner Redemptions: (37,887) (2,521) (529) (25,322) (402) (124) A27

77 Note 6: Unit Activity (Continued) SUBACCOUNTS (Continued) Prudential SP Davis Value Fund Prudential SP Small/Mid Cap Value Portfolio Prudential SP INVESCO Small Growth Portfolio Prudential SP PIMCO Total Return Portfolio Prudential SP PIMCO High Yield Portfolio Prudential SP Large Cap Value Portfolio Contract Owner Contributions: 33,713 15,200 1,364 32,979 9, Contract Owner Redemptions: (267) (229) (8) (3,230) (131) (46) Prudential SP AIM Growth and Income Portfolio Prudential SP MFS Capital Opportunities Portfolio SUBACCOUNTS (Continued) Prudential SP Strategic Partners Growth Portfolio Prudential SP MFS Mid Cap Growth Portfolio SP Prudential U.S. Emerging Growth Portfolio Prudential SP AIM Aggressive Growth Portfolio Contract Owner Contributions: 1, ,960 6,292 14, Contract Owner Redemptions: (37) 0 1 (39) (168) (14) Prudential SP Alliance Technology Portfolio Prudential SP Conservative Asset Allocation Portfolio SUBACCOUNTS (Continued) Prudential SP Balanced Asset Allocation Portfolio Prudential SP Growth Asset Allocation Portfolio Prudential SP Jennison International Growth Portfolio Prudential SP Deutsche International Equity Portfolio Contract Owner Contributions: 1, ,527 6,005 Contract Owner Redemptions: (8) (54) 0 0 (73) (123) Note 7: Purchases and Sales of Investments The aggregate costs of purchases and proceeds from sales of investments in the Series Fund and the non- Prudential administered funds for the year ended December 31, 2001 were as follows: SUBACCOUNTS Prudential Money Market Portfolio Prudential Diversified Bond Portfolio Prudential Equity Portfolio Prudential Flexible Managed Portfolio Prudential Conservative Balanced Portfolio Purchases $ 21,036,175 $ 1,025,078 $ 827,693 $ 1,684,205 $ 936,662 Sales $ (20,753,848) $ (1,465,700) $ (7,933,091) $ (9,916,175) $ (4,643,202) SUBACCOUNTS (Continued) Prudential High Yield Bond Portfolio Prudential Stock Index Portfolio Prudential Value Portfolio Prudential Global Portfolio Prudential Jennison Portfolio Purchases $ 5,431,285 $ 24,627,575 $ 21,059,036 $ 340,997 $ 1,391,642 Sales $ (565,254) $ (9,429,473) $ (20,644,238) $ (1,196,640) $ (6,939,996) SUBACCOUNTS (Continued) T.Rowe Price International Stock Portfolio AIM V.I. Value Fund Janus Aspen Growth Portfolio MFS Emerging Growth Series Portfolio American VP Century Value Fund Purchases $ 102,471 $ 59,472 $ 522,953 $ 126,708 $ 54,482 Sales $ (5,280) $ (18,988) $ (18,379) $ (27,374) $ (623) A28

78 Note 7: Purchases and Sales of Investments (Continued) Franklin Small Cap Fund Prudential SP Alliance Large Cap Growth Portfolio SUBACCOUNTS (Continued) Prudential SP Davis Value Portfolio Prudential SP Small/Mid Cap Value Portfolio Prudential SP INVESCO Small Company Growth Portfolio Purchases $ 162,377 $ 6,594 $ 31,369 $ 14,658 $ 1,312 Sales $ (18,031) $ (38) $ (43) $ (39) $ (3) SUBACCOUNTS (Continued) Prudential SP PIMCO Total Return Portfolio Prudential SP PIMCO High Yield Portfolio Prudential SP Large Cap Value Portfolio Prudential SP AIM Growth and Income Portfolio Prudential SP MFS Capital Opportunities Portfolio Purchases $ 34,407 $ 9,925 $ 693 $ 1,187 $ 490 Sales $ (3,287) $ (18) $ (0) $ (14) $ (0) Prudential SP Strategic Partners Focused Growth Portfolio Prudential SP MFS Mid Cap Growth Portfolio SUBACCOUNTS (Continued) SP Prudential U.S. Emerging Growth Portfolio Prudential SP AIM Aggressive Growth Portfolio Prudential SP Alliance Technology Portfolio Purchases $ 1,805 $ 5,509 $ 12,795 $ 258 $ 1,513 Sales $ (0) $ (21) $ (15) $ (1) $ (3) SUBACCOUNTS (Continued) Prudential SP Conservative Asset Allocation Portfolio Prudential SP Balanced Asset Allocation Portfolio Prudential SP Growth Asset Allocation Portfolio Prudential SP Jennison International Growth Portfolio Prudential SP Deutsche Equity Portfolio Purchases $ 423 $ 22 $ 763 $ 11,187 $ 5,119 Sales $ (4) $ 0 $ (0) $ (9) $ (42) Note 8: Related Party Transactions Prudential and its affiliates perform various services on behalf of the mutual fund company that administers the series fund in which the Account invests and may receive fees for the services performed. These services include, among other things, shareholder communications, preparation, postage, fund transfer agency and various other record keeping and customer service functions. A29

79 Note 9: Financial Highlights Pruco Life of New Jersey sells a number of variable life insurance products that are funded by the Account. These products have unique combinations of features and fees that are charged against the contract owner s account balance. Differences in the fee structures result in a variety of unit values, expense ratios and total returns. The following table was developed by determining which products offered by Pruco Life of New Jersey and funded by the Account have the lowest and highest total return. Only product designs within each subaccount that had units outstanding throughout the respective periods were considered when determining the lowest and highest total return. The summary may not reflect the minimum and maximum contract charges offered by the Pruco Life of New Jersey as contract owners may not have selected all available and applicable contract options as discussed in note 4. Units (000s) At December 31, 2001 For the year ended December 31, 2001 Unit Fair Value Lowest to Highest Net Assets (000s) Investment* Income Ratio Expense Ratio** Lowest to Highest Total Return*** Lowest to Highest Prudential Money Market ,851 $ to $ $7, %.20% to.90% 3.17% to 3.88% Prudential Diversified Bond ,430 $ to $ $25, %.25% to.90% 6.22% to 6.38% Prudential Equity ,140 $ to $ $146, %.25% to.90% 11.97% to 11.62% Prudential Flexible Managed ,115 $ to $ $205, %.35% to.90% 6.52% to 6.01% Prudential Conservative Balanced ,398 $ to $ $101, %.40% to.90% 2.88% to 2.41% Prudential Value ,639 $ to $ $13, %.20% to.90% 2.95% to 2.66% Prudential High Yield Bond ,583 $ to $ $32, %.25% to.90% 1.30% to 1.03% Prudential Stock Index ,189 $ to $ $92, %.25% to.90% 12.83% to 12.23% Prudential Global ,174 $ to $ $57, %.25% to.90% 18.34% to 18.10% Prudential Jennison ,389 $ to $ $19, %.25% to.90% 18.97% to 18.73% T.Rowe Price International Stock $ to $ $ %.90% to.90% 22.91% to 22.91% AIM V.I. Value Fund $ to $ $ %.20% to.90% 12.74% to 12.74% Janus Aspen Growth $ to $ $ %.90% to.90% 25.41% to 25.41% MFS Emerging Growth Series $ to $ $ %.20% to.90% 34.07% to 34.07% American Century VP Value June 29, $ to $ $ %.90% to.90% 3.68% to 3.68% Franklin Small Cap Fund $ to $ $ %.20% to.90% 16.00% to 16.00% Prudential SP Alliance Large Cap Growth February 12, $ to $ $7 0.00%.25% to.90% 8.20% to 8.20% Prudential SP Davis Value February 12, $ to $ $ %.25% to.90% 6.12% to 6.12% Prudential SP Small/Mid Cap Value February 12, $ to $ $ %.25% to.90% 3.84% to 3.84% Prudential SP INVESCO Small Company Growth February 12, $ to $ $1 0.00%.25% to.25% 1.90% to 1.90% Prudential SP PIMCO Total Return August 6, $ to $ $ %.20% to.90% 8.40% to 8.40% Prudential SP PIMCO High Yield August 6, $ to $ $ %.25% to.90% 1.27% to 1.51% Prudential SP Large Cap Value August 6, $ to $ $1 0.06%.25% to.25% 4.05% to 4.05% Prudential SP AIM Growth & Income August 6, $ to $ $1 0.00%.25% to.25% 6.82% to 6.82% Prudential SP MFS Capital Opportunities February 12, $ to $ $0 0.77%.25% to.25% 19.57% to 19.57% Prudential SP Strategic Partners Focused Growth August 6, $ to $ $2 0.00%.25% to.25% 6.11% to 6.11% Prudential SP MFS Mid Cap Growth February 12, $ to $ $6 0.00%.25% to.90% 12.01% to 12.01% SP Prudential U.S. Emerging Growth February 12, $ to $ $ %.25% to.90% 11.06% to 11.06% Prudential SP AIM Aggressive Growth February 12, $ to $ $0 0.00%.25% to.25% 11.64% to 11.64% Prudential SP Alliance Technology February 12, $ to $ $1 0.00%.25% to.25% 14.83% to 14.83% A30

80 Note 9: Financial Highlights (Continued) Units (000s) At December 31, 2001 For the year ended December 31, 2001 Unit Fair Value Lowest to Highest Net Assets (000s) Investment* Income Ratio Expense Ratio** Lowest to Highest Total Return*** Lowest to Highest Prudential SP Conservative Asset Allocation August 6, $ to $ $0 8.40%.25% to.25% 0.66% to 0.66% Prudential SP Balanced Asset Allocation August 6, $ to $ $0 0.00%.25% to.25% 0.93% to 0.97% Prudential SP Growth Asset Allocation August 6, $ to $ $1 0.00%.25% to.25% 2.79% to 2.79% Prudential SP Jennison International Growth August 6, $ to $ $ %.25% to.90% 9.43% to 9.43% Prudential SP Deutsche International Equity February 12, $ to $ $5 0.00%.25% to.90% 16.41% to 16.41% *** These amounts represent the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest. *** These ratios represent the annualized contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund are excluded. *** These amounts represent the total return for the periods indicated, including changes in the value of the underlying fund, and reflect deductions for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. The total return is calculated for the year ended December 31, 2001 or from the effective date of the subaccount through the end of the reporting period. Investment options with a date notation indicate the effective date of that investment option in the Account. Product designs within a subaccount with an effective date during 2001 were excluded from the range of total returns. A31

81 REPORT OF INDEPENDENT ACCOUNTANTS To the Contract Owners of the Survivorship Variable Universal Life Subaccounts of Pruco Life of New Jersey Variable Appreciable Account and the Board of Directors of the Pruco Life Insurance Company of New Jersey In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of each of the Survivorship Variable Universal Life Subaccounts (as defined in Note 1) of Pruco Life of New Jersey Variable Appreciable Account at December 31, 2001, and the results of each of their operations and the changes in each of their net assets for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of the Pruco Life Insurance Company of New Jersey; 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 auditing standards generally accepted in the United States of America, 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 of the 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 fund shares owned at December 31, 2001 with the transfer agents of the investee mutual funds, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York April 15, 2002 A32

82 Pruco Life Insurance Company and Subsidiary Consolidated Statements of Financial Position December 31, 2001 and 2000 (In Thousands) ASSETS Fixed maturities Available for sale, at fair value (amortized cost, 2001: $3,935,472; 2000:$3,552,244) $ 4,024,893 $ 3,561,521 Held to maturity, at amortized cost (fair value, 2000: $320,634) - 324,546 Equity securities - available for sale, at fair value (cost, 2001: $173; 2000: $13,446) ,804 Commercial loans on real estate 8,190 9,327 Policy loans 874, ,374 Short-term investments 215, ,815 Other long-term investments 84,342 83,738 Total investments 5,207,475 5,048,125 Cash and cash equivalents 374, ,071 Deferred policy acquisition costs 1,159,830 1,132,653 Accrued investment income 77,433 82,297 Reinsurance recoverable 300,697 31,568 Receivables from affiliates 33,074 51,586 Other assets 20,134 29,445 Separate Account assets 14,920,584 16,230,264 TOTAL ASSETS $ 22,093,412 $ 23,059,009 LIABILITIES AND STOCKHOLDER S EQUITY Liabilities Policyholders account balances $ 3,947,690 $ 3,646,668 Future policy benefits and other policyholder liabilities 808, ,862 Cash collateral for loaned securities 190, ,849 Securities sold under agreements to repurchase 80, ,098 Income taxes payable 266, ,795 Other liabilities 228, ,891 Separate Account liabilities 14,920,584 16,230,264 Total liabilities 20,441,933 21,226,427 Contingencies (See Footnote 12) Stockholder s Equity Common stock, $10 par value; 1,000,000 shares, authorized; 250,000 shares, issued and outstanding 2,500 2,500 Paid-in-capital 466, ,748 Retained earnings 1,147,665 1,361,924 Accumulated other comprehensive income (loss): Net unrealized investment gains 34,718 4,730 Foreign currency translation adjustments (152) (3,320) Accumulated other comprehensive income 34,566 1,410 Total stockholder s equity 1,651,479 1,832,582 TOTAL LIABILITIES AND STOCKHOLDER S EQUITY $ 22,093,412 $ 23,059,009 See Notes to Consolidated Financial Statements B- 1

83 Pruco Life Insurance Company and Subsidiary Consolidated Statements of Operations and Comprehensive Income Years Ended December 31, 2001, 2000 and 1999 (In Thousands) REVENUES Premiums $ 90,868 $ 121,921 $ 98,976 Policy charges and fee income 490, , ,425 Net investment income 343, , ,821 Realized investment losses, net (60,476) (20,679) (32,545) Asset management fees 7,897 71,160 60,392 Other income 4,962 2,503 1,397 Total revenues 877, , ,466 BENEFITS AND EXPENSES Policyholders benefits 256, , ,042 Interest credited to policyholders account balances 195, , ,852 General, administrative and other expenses 382, , ,041 Total benefits and expenses 834, , ,935 Income from operations before income taxes 42, ,928 85,531 Income tax (benefit) provision (25,255) 54,432 29,936 NET INCOME 67, ,496 55,595 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities, net of reclassification adjustment 29,988 33,094 (38,266) Foreign currency translation adjustments 3,168 (993) (742) Other comprehensive income (loss) 33,156 32,101 (39,008) TOTAL COMPREHENSIVE INCOME $ 100,738 $ 135,597 $ 16,587 See Notes to Consolidated Financial Statements B- 2

84 Pruco Life Insurance Company and Subsidiary Consolidated Statements of Changes in Stockholder s Equity Years Ended December 31, 2001, 2000 and 1999 (In Thousands) Common stock Paid-incapital Retained earnings Accumulated other comprehensive income (loss) Total stockholder s equity Balance, January 1, 1999 $ 2,500 $ 439,582 $ 1,202,833 $ 8,317 $ 1,653,232 Net income ,595-55,595 Change in foreign currency translation adjustments, net of taxes (742) (742) Change in net unrealized investment losses, net of reclassification adjustment and taxes (38,266) (38,266) Balance, December 31, , ,582 1,258,428 (30,691) 1,669,819 Net income , ,496 Contribution from Parent - 27, ,166 Change in foreign currency translation adjustments, net of taxes (993) (993) Change in net unrealized investment losses, net of reclassification adjustment and taxes ,094 33,094 Balance, December 31, , ,748 1,361,924 1,410 1,832,582 Net income ,582-67,582 Policy credits issued to eligible policyholders - - (128,025) - (128,025) Dividends to Parent - - (153,816) - (153,816) Change in foreign currency translation adjustments, net of taxes ,168 3,168 Change in net unrealized investment gains, net of reclassification adjustment and taxes ,988 29,988 Balance, December 31, 2001 $ 2,500 $ 466,748 $ 1,147,665 $ 34,566 $ 1,651,479 See Notes to Consolidated Financial Statements B- 3

85 Pruco Life Insurance Company and Subsidiary Consolidated Statements of Cash Flows Years Ended December 31, 2001, 2000 and 1999 (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 67,582 $ 103,496 $ 55,595 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Policy charges and fee income (54,970) (72,275) (83,961) Interest credited to policyholders account balances 195, , ,852 Realized investment losses, net 60,476 20,679 32,545 Amortization and other non-cash items (49,594) (48,141) 75,037 Change in: Future policy benefits and other policyholders liabilities 105,368 73, ,743 Accrued investment income 4,864 (13,380) (7,803) Receivable from/payable to affiliate 18,512 (24,907) (66,081) Policy loans (40,645) (63,022) (25,435) Deferred policy acquisition costs (100,281) (69,868) (201,072) Income taxes payable/receivable 38,839 90,195 (47,758) Other, net (38,114) 51,011 18,974 Cash Flows From (Used in) Operating Activities 208, ,138 (12,364) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale/maturity of: Fixed maturities: Available for sale 2,653,798 2,273,789 3,076,848 Held to maturity - 64,245 45,841 Equity securities 482 1,198 5,209 Commercial loans on real estate 1,137 1,182 6,845 Other long-term investments - 15, Payments for the purchase of: Fixed maturities: Available for sale (2,961,861) (2,782,541) (3,452,289) Held to maturity - - (24,170) Equity securities (184) (11,134) (5,110) Other long-term investments (130) (6,917) (39,094) Cash collateral for loaned securities, net 4,174 98,513 14,000 Securities sold under agreement to repurchase, net (23,383) 82,947 (28,557) Short-term investments, net (12,766) (118,418) 92,199 Cash Flows Used In Investing Activities (338,733) (382,097) (307,893) CASH FLOWS FROM FINANCING ACTIVITIES: Policyholders account deposits 1,456,668 2,409,399 3,457,158 Policyholders account withdrawals (1,313,300) (1,991,363) (3,091,565) Cash dividend to Parent (26,048) - - Cash provided to affiliate (65,476) - - Cash Flows (Used in) From Financing Activities 51, , ,593 Net increase in Cash and cash equivalents (78,886) 254,077 45,336 Cash and cash equivalents, beginning of year 453, , ,658 CASH AND CASH EQUIVALENTS, END OF YEAR $ 374,185 $ 453,071 $ 198,994 SUPPLEMENTAL CASH FLOW INFORMATION Income taxes (received) paid $ (46,021) $ (14,832) $ 55,144 NON-CASH TRANSACTIONS DURING THE YEAR Dividend paid with fixed maturities $ 81,952 $ - $ - Taiwan branch dividend paid with net assets/liabilities $ 45,816 $ - $ - Policy credits issued to eligible policyholders $ 128,025 $ - $ - Contribution from Parent $ - $ 27,166 $ - See Notes to Consolidated Financial Statements B- 4

86 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 1. BUSINESS Pruco Life Insurance Company ( the Company ) is a stock life insurance company, organized in 1971 under the laws of the state of Arizona. The Company is licensed to sell individual life insurance, variable life insurance, term life insurance, variable and fixed annuities, and a non-participating guaranteed interest contract ( GIC ) called Prudential Credit Enhanced GIC ( PACE ) in the District of Columbia, Guam and in all states and territories except New York. The Company also had marketed individual life insurance through its branch office in Taiwan. The branch office was transferred to an affiliated Company on January 31, 2001, as described in Footnote 14. The Company has one wholly owned subsidiary, Pruco Life Insurance Company of New Jersey ( PLNJ ). PLNJ is a stock life insurance company organized in 1982 under the laws of the state of New Jersey. It is licensed to sell individual life insurance, variable life insurance, term life insurance, fixed and variable annuities only in the states of New Jersey and New York. Another wholly owned subsidiary, The Prudential Life Insurance Company of Arizona ( PLICA ) was dissolved on September 30, All assets and liabilities were transferred to the Company. PLICA had no new business sales in 2000 or The Company is a wholly owned subsidiary of The Prudential Insurance Company of America ( Prudential ), an insurance company founded in 1875 under the laws of the state of New Jersey. On December 18, 2001 ( the date of demutualization ) Prudential converted from a mutual life insurance company to a stock life insurance company and became an indirect wholly owned subsidiary of Prudential Financial, Inc. (the Holding Company ). The demutualization was completed in accordance with Prudential s Plan of Reorganization, which was approved by the Commissioner of the New Jersey Department of Banking and Insurance in October Prudential intends to make additional capital contributions to the Company, as needed, to enable it to comply with its reserve requirements and fund expenses in connection with its business. Generally, Prudential is under no obligation to make such contributions and its assets do not back the benefits payable under the Company s policyholder contracts. During 2000, a capital contribution of $27.2 million resulted from the forgiveness of an intercompany receivable. The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities engaged in marketing insurance products, and individual and group annuities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ( GAAP ). The Company has extensive transactions and relationships with Prudential and other affiliates, as more fully described in Footnote 14. Due to these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, in particular deferred policy acquisition costs ( DAC ) and future policy benefits, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Investments Fixed maturities classified as available for sale are carried at estimated fair value. Fixed maturities that the Company has both the intent and ability to hold to maturity are stated at amortized cost and classified as held to maturity. The amortized cost of fixed maturities is written down to estimated fair value if a decline in value is considered to be other than temporary. Unrealized gains and losses on fixed maturities available for sale, including the effect on deferred policy acquisition costs and policyholders account balances that would result from the realization of unrealized gains and losses are included in a separate component of equity, Accumulated other comprehensive income (loss), net of income taxes. Equity securities, available for sale, comprised of common and non-redeemable preferred stock, are carried at estimated fair value. The associated unrealized gains and losses, the effects on deferred policy acquisition costs and on policyholders account balances that would result from the realization of unrealized gains and losses, are included in a separate component of equity, Accumulated other comprehensive income (loss), net of income taxes. B- 5

87 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Commercial loans on real estate are stated primarily at unpaid principal balances, net of unamortized discounts and an allowance for losses. The allowance for losses includes a loan specific reserve for impaired loans and a portfolio reserve for incurred but not specifically identified losses. Impaired loans include those loans for which it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate, or at the fair value of the collateral if the loan is collateral dependent. Interest received on impaired loans, including loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as revenue, according to management's judgment as to the collectibility of principal. Management discontinues accruing interest on impaired loans after the loans are 90 days delinquent as to principal or interest, or earlier when management has serious doubts about collectibility. When a loan is recognized as impaired, any accrued but uncollectible interest is reversed against interest income of the current period. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where the payment of interest has been interrupted for a substantial period, a regular payment performance has been established. The portfolio reserve for incurred but not specifically identified losses considers the Company's past loan loss experience, the current credit composition of the portfolio, historical credit migration, property type diversification, default and loss severity statistics and other relevant factors. Policy loans are carried at unpaid principal balances. Short-term investments, consisting of highly liquid debt instruments other than those held in Cash and cash equivalents, with a maturity of twelve months or less when purchased, are carried at amortized cost, which approximates fair value. Other long-term investments represent the Company s investments in joint ventures and partnerships in which the Company does not exercise control, derivatives held for purposes other than trading, and investments in the Company s own Separate Accounts. Joint ventures and partnerships are recorded using the equity method of accounting, reduced for other than temporary declines in value. The Company s investment in the Separate Accounts is carried at estimated fair value. The Company s net income from investments in joint ventures and partnerships is generally included in Net investment income. Realized investment losses, net are computed using the specific identification method. Costs of fixed maturity and equity securities are adjusted for impairments considered to be other than temporary. Impairment adjustments are included in Realized investment gains (losses), net. Factors considered in evaluating whether a decline in value is other than temporary are: 1) whether the decline is substantial; 2) the Company s ability and intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value; 3) the duration and extent to which the market value has been less than cost; and 4) the financial condition and near-term prospects of the issuer. Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments, and other debt issues with a maturity of three months or less when purchased. Deferred policy acquisition costs The costs that vary with and that are related primarily to the production of new insurance and annuity business are deferred to the extent that they are deemed recoverable from future profits. Such costs include commissions, costs of policy issuance and underwriting, and variable field office expenses. Deferred policy acquisition costs are subject to recognition testing at the time of policy issue and recoverability and premium deficiency testing at the end of each accounting period. Deferred policy acquisition costs, for certain products, are adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in Accumulated other comprehensive income (loss). Policy acquisition costs related to interest-sensitive and variable life products and certain investment-type products are deferred and amortized over the expected life of the contracts (periods ranging from 25 to 30 years) in proportion to estimated gross profits arising principally from investment results, mortality and expense margins, and surrender charges based on historical and anticipated future experience, which is updated periodically. The effect of changes to estimated gross profits on unamortized deferred acquisition costs is reflected in General and administrative expenses in the period such estimated gross profits are revised. B- 6

88 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred policy acquisition costs related to non-participating term insurance are amortized over the expected life of the contracts in proportion to premium income. For guaranteed investment contracts, acquisition costs are expensed as incurred. Prudential and the Company have offered programs under which policyholders, for a selected product or group of products, can exchange an existing policy or contract issued by Prudential or the Company for another form of policy or contract. These transactions are known as internal replacements. If the new policies have terms that are substantially similar to those of the earlier policies, the DAC is retained with respect to the new policies and amortized over the life of the new policies. If the terms of the new policies are not substantially similar to those of the former policy, the unamortized DAC on the surrendered policies is immediately charged to expense. Securities loaned Securities loaned are treated as financing arrangements and are recorded at the amount of cash received as collateral. The Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of securities loaned on a daily basis with additional collateral obtained as necessary. Non-cash collateral received is not reflected in the consolidated statements of financial position because the debtor typically has the right to redeem the collateral on short notice. Substantially all of the Company s securities loaned are with large brokerage firms. Securities sold under agreements to repurchase Securities sold under agreements to repurchase are treated as financing arrangements and are carried at the amounts at which the securities will be subsequently reacquired, including accrued interest, as specified in the respective agreements. Assets to be repurchased are the same, or substantially the same, as the assets transferred and the transferor, through right of substitution, maintains the right and ability to redeem the collateral on short notice. The market value of securities to be repurchased is monitored and additional collateral is obtained, where appropriate, to protect against credit exposure. Securities lending and securities repurchase agreements are used to generate net investment income and facilitate trading activity. These instruments are short-term in nature (usually 30 days or less). Securities loaned are collateralized principally by U.S. Government and mortgage-backed securities. Securities sold under repurchase agreements are collateralized principally by cash. The carrying amounts of these instruments approximate fair value because of the relatively short period of time between the origination of the instruments and their expected realization. Separate Account Assets and Liabilities Separate Account assets and liabilities are reported at estimated fair value and represent segregated funds which are invested for certain policyholders and other customers. The assets consist of common stocks, fixed maturities, real estate related securities, and short-term investments. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. The investment income and gains or losses for Separate Accounts generally accrue to the policyholders and are not included in the Consolidated Statements of Operations and Comprehensive Income. Mortality, policy administration and surrender charges on the accounts are included in Policy charges and fee income. Separate Accounts represent funds for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the policyholders, with the exception of the Pruco Life Modified Guaranteed Annuity Account. The Pruco Life Modified Guaranteed Annuity Account is a non-unitized Separate Account, which funds the Modified Guaranteed Annuity Contract and the Market Value Adjustment Annuity Contract. Owners of the Pruco Life Modified Guaranteed Annuity and the Market Value Adjustment Annuity Contracts do not participate in the investment gain or loss from assets relating to such accounts. Such gain or loss is borne, in total, by the Company. Contingencies Amounts related to contingencies are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the matter that are reasonably estimable and, if so, they are included in the accrual. B- 7

89 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Insurance Revenue and Expense Recognition Premiums from insurance policies are generally recognized when due. Benefits are recorded as an expense when they are incurred. For traditional life insurance contracts, a liability for future policy benefits is recorded using the net level premium method. For individual annuities in payout status, a liability for future policy benefits is recorded for the present value of expected future payments based on historical experience. Amounts received as payment for interest-sensitive life, individual annuities and guaranteed investment contracts are reported as deposits to Policyholders account balances. Revenues from these contracts reflected as Policy charges and fee income consist primarily of fees assessed during the period against the policyholders account balances for mortality charges, policy administration charges and surrender charges. Benefits and expenses for these products include claims in excess of related account balances, expenses of contract administration, interest credited and amortization of deferred policy acquisition costs. Premiums, benefits and expenses are stated net of reinsurance ceded to other companies. Estimated reinsurance recoverables and the cost of reinsurance are recognized over the life of the reinsured policies using assumptions consistent with those used to account for the underlying policies. Foreign Currency Translation Adjustments Assets and liabilities of the Taiwan branch are translated to U.S. dollars at the exchange rate in effect at the end of the period. Revenues, benefits and other expenses are translated at the average rate prevailing during the period. Cumulative translation adjustments arising from the use of differing exchange rates from period to period are charged or credited directly to Other comprehensive income (loss). The cumulative effect of changes in foreign exchange rates are included in Accumulated other comprehensive income (loss). Asset Management Fees Through December 31, 2000, the Company received asset management fee income from policyholder account balances invested in The Prudential Series Funds ( PSF ), which are a portfolio of mutual fund investments related to the Company s Separate Account products (refer to Note 14). In addition, the Company receives fees from policyholder account balances invested in funds managed by companies other than Prudential. Asset management fees are recognized as income as earned. Derivative Financial Instruments Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or the value of securities or commodities. Derivative financial instruments used by the Company include swaps, futures, forwards and option contracts and may be exchange-traded or contracted in the over-the-counter market. See Note 11 for a discussion of the Company s use of derivative financial instruments and the related accounting and reporting treatment for such instruments. Income Taxes The Company and its subsidiary are members of the consolidated federal income tax return of Prudential and file separate company state and local tax returns. Pursuant to the tax allocation arrangement with Prudential, total federal income tax expense is determined on a separate company basis. Members with losses record tax benefits to the extent such losses are recognized in the consolidated federal tax provision. Deferred income taxes are generally recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to that portion that is expected to be realized. New Accounting Pronouncements In September 2000, the Financial Accounting Standards Board ( FASB ) issued Statement of Financial Accounting Standards ( SFAS ) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities a replacement of FASB Statement No The Company has adopted the provisions of SFAS No. 140 relating to transfers and extinguishments of liabilities which are effective for periods occurring after March 31, The adoption did not have an effect on the results of operations of the Company. B- 8

90 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the Company account for all business combinations in the scope of the statement using the purchase method. SFAS No. 142 requires that an intangible asset acquired either individually or with a group of other assets shall initially be recognized and measured based on fair value. An intangible asset with a finite life is amortized over its useful life to the reporting entity; an intangible asset with an indefinite useful life, including goodwill, is not amortized. All intangible assets shall be tested for impairment in accordance with the statement. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, goodwill and intangible assets acquired after June 30, 2001 are subject immediately to the nonamortization and amortization provisions of this statement. As of December 31, 2001, The Company does not have any goodwill or intangible assets. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 eliminated the requirement that discontinued operations be measured at net realizable value or that entities include losses that have not yet occurred. SFAS No. 144 eliminated the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. An impairment for assets that are not considered to be disposed of is recognized only if the carrying amounts of long-lived assets are not recoverable and exceed their fair values. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations and cash flows that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. Reclassifications Certain amounts in the prior years have been reclassified to conform to the current year presentation. B- 9

91 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 3. INVESTMENTS Fixed Maturities and Equity Securities: The following tables provide additional information relating to fixed maturities and equity securities as of December 31: Amortized Cost 2001 Gross Gross Unrealized Unrealized Gains Losses (In Thousands) Estimated Fair Value Fixed Maturities Available For Sale U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 303,606 $ 1,496 $ 1,648 $ 303,454 Foreign Government Bonds 27,332 2,122-29,454 Corporate Securities 3,594, ,186 28,834 3,681,738 Mortgage-backed Securities 10, ,247 Total Fixed Maturities Available For Sale $ 3,935,472 $ 119,964 $ 30,543 $ 4,024,893 Equity Securities Available For Sale $ 173 $ 220 $ 18 $ 375 Amortized Cost 2000 Gross Gross Unrealized Unrealized Gains Losses (In Thousands) Estimated Fair Value Fixed Maturities Available For Sale U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 309,609 $ 7,888 $ 17 $ 317,480 Foreign Government Bonds 136,133 8, ,706 Corporate Securities 3,075,023 43,041 49,538 3,068,526 Mortgage-backed Securities 31, ,809 Total Fixed Maturities Available For Sale $ 3,552,244 $ 59,352 $ 50,075 $ 3,561,521 Fixed Maturities Held To Maturity Corporate Securities $ 324,546 $ 1,500 $ 5,412 $ 320,634 Total Fixed Maturities Held To Maturity $ 324,546 $ 1,500 $ 5,412 $ 320,634 Equity Securities Available For Sale $ 13,446 $ 197 $ 2,839 $ 10,804 B- 10

92 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 3. INVESTMENTS (continued) The amortized cost and estimated fair value of fixed maturities, by contractual maturities at December 31, 2001 is shown below: Available For Sale Amortized Estimated Fair Cost Value (In Thousands) Due in one year or less $ 802,235 $ 821,790 Due after one year through five years 1,841,097 1,885,535 Due after five years through ten years 1,026,709 1,045,693 Due after ten years 255, ,628 Mortgage-backed securities 10,148 10,247 Total $ 3,935,472 $ 4,024,893 Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations. Proceeds from the sale of fixed maturities available for sale during 2001, 2000, and 1999, were $2,380.4 million, $2,103.6 million, and $2,950.4 million, respectively. Gross gains of $40.3 million, $15.3 million, $13.1 million, and gross losses of $47.7 million, $33.9 million, and $31.1 million, were realized on those sales during 2001, 2000, and 1999, respectively. Proceeds from the maturity of fixed maturities available for sale during 2001, 2000, and 1999, were $273.4 million, $170.2 million, and $126.5 million, respectively. Writedowns for impairments which were deemed to be other than temporary for fixed maturities were $53.5 million, $12.3 million, and $11.2 million, for the years 2001, 2000 and 1999, respectively. Due to the adoption of FAS 133, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001, the entire portfolio of fixed maturities classified as held to maturity were transferred to the available for sale category. The aggregate amortized cost of the securities was $324.5 million. Unrealized investment losses of $2.5 million, net of tax were recorded in Accumulated Other Comprehensive income (loss) at the time of transfer. During 2000, certain securities classified as held to maturity were transferred to the available for sale portfolio. These actions were taken as a result of a significant deterioration in credit worthiness. The aggregate amortized cost of the securities transferred was $6.6 million. Gross unrealized investment losses of $0.3 million were recorded in Accumulated Other Comprehensive income (loss) at the time of transfer. Prior to transfer, impairments related to these securities, if any, were included in realized investment losses, net. During the year ended December 31, 1999, there were no securities classified as held to maturity that were transferred. During the years ended December 31, 2001, 2000, and 1999, there were no securities classified as held to maturity that were sold. Commercial Loans on Real Estate The Company s commercial loans on real estate were collateralized by the following property types at December 31: (In Thousands) Retail Stores $ 4, % $ 5, % Industrial Buildings 3, % 3, % Net Carrying Value $ 8, % $ 9, % The concentration of commercial loans are in the states of Washington (47%), New Jersey (44%), and North Dakota (9%). B- 11

93 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 3. INVESTMENTS (continued) Special Deposits and Restricted Assets Fixed maturities of $2.9 million and $8.0 million at December 31, 2001 and 2000, respectively, were on deposit with governmental authorities or trustees as required by certain insurance laws. Equity securities restricted as to sale were $.2 million at December 31, 2001 and 2000, respectively. Other Long-Term Investments The Company s Other long-term investments of $84.3 million and $83.7 million as of December 31, 2001 and 2000, respectively, are comprised of joint ventures and limited partnerships, the Company s investment in the Separate Accounts and certain derivatives for other than trading. Joint ventures and limited partnerships totaled $35.8 million and $34.3 million at December 31, 2001 and 2000, respectively. The Company s share of net income from the joint ventures was $1.6 million, $.9 million, and $.3 million, for the years ended December 31, 2001, 2000 and 1999, respectively, and is reported in Net investment income. The Company s investment in the Separate Accounts was $44.0 million and $46.9 million at December 31, 2001 and 2000, respectively. Investment Income and Investment Gains and Losses Net investment income arose from the following sources for the years ended December 31: (In Thousands) Fixed Maturities - Available For Sale $ 279,477 $ 237,042 $ 188,236 Fixed Maturities - Held To Maturity - 26,283 29,245 Equity Securities Available For Sale Commercial Loans On Real Estate 905 1,010 2,825 Policy Loans 48,149 45,792 42,422 Short-Term Investments and Cash Equivalents 24,253 29,582 19,208 Other 6,021 16,539 4,432 Gross Investment Income 358, , ,368 Less: Investment Expenses (15,238) (18,347) (9,547) Net Investment Income $ 343,638 $ 337,919 $ 276,821 Realized investment losses, net including charges for other than temporary reductions in value, for the years ended December 31, were from the following sources: (In Thousands) Fixed Maturities - Available For Sale $ (60,924) $ (34,600) $ (29,192) Fixed Maturities - Held To Maturity - (212) 102 Equity Securities Available For Sale (56) Derivatives (1,396) 15,039 (1,557) Other 1,900 (1,177) (2,290) Realized Investment Losses, Net $ (60,476) $ (20,679) $ (32,545) Securities Pledged to Creditors The Company pledges investment securities it owns to unaffiliated parties through certain transactions including securities lending, securities sold under agreements to repurchase, and futures contracts. At December 31, 2001 and 2000, the carrying value of fixed maturities available for sale pledged to third parties as reported in the Consolidated Statements of Financial Position were $265.2 million and $287.8 million, respectively. B- 12

94 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 3. INVESTMENTS (continued) Net Unrealized Investment Gains (Losses) Net unrealized investment gains (losses) on securities available for sale are included in the Consolidated Statements of Financial Position as a component of Accumulated other comprehensive income (loss). Changes in these amounts include reclassification adjustments to exclude from Other Comprehensive income (loss), those items that are included as part of Net income for a period that also had been part of Other Comprehensive income (loss) in earlier periods. The amounts for the years ended December 31, net of tax, are as follows: Unrealized Gains(Losses) On Investments Deferred Policy Acquisition Costs Policyholders Account Balances (In Thousands) Deferred Income Tax (Liability) Benefit Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains(Losses) Balance, January 1, 1999 $ 25,169 $ (13,115) $ 2,680 $ (4,832) $ 9,902 Net investment gains(losses) on investments arising during the period (138,268) ,785 (90,483) Reclassification adjustment for gains(losses) included in net income 28, (9,970) 18,728 Impact of net unrealized investment gains(losses) on deferred policy acquisition - 53,407 - (16,283) 37,124 costs Impact of net unrealized investment gains(losses) on policyholders account - - (5,712) 2,077 (3,635) balances Balance, December 31, 1999 (84,401) 40,292 (3,032) 18,777 (28,364) Net investment gains(losses) on investments arising during the period 56, (21,539) 35,168 Reclassification adjustment for gains(losses) included in net income 34, (13,039) 21,290 Impact of net unrealized investment gains(losses) on deferred policy acquisition - (39,382) - 14,177 (25,205) costs Impact of net unrealized investment gains(losses) on policyholders account - - 2,877 (1,036) 1,841 balances Balance, December 31, , (155) (2,660) 4,730 Net investment gains(losses) on investments arising during the period 22, (7,922) 14,085 Reclassification adjustment for gains(losses) included in net income 60, (21,953) 39,027 Impact of net unrealized investment gains(losses) on deferred policy acquisition - (41,223) - 14,840 (26,383) costs Impact of net unrealized investment gains(losses) on policyholders account - - 5,092 (1,833) 3,259 balances Balance, December 31, 2001 $ 89,622 $ (40,313) $ 4,937 $ (19,528) $ 34,718 B- 13

95 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 4. DEFERRED POLICY ACQUISITION COSTS The balances of and changes in deferred policy acquisition costs as of and for the years ended December 31, are as follows: (In Thousands) Balance, Beginning of Year $ 1,132,653 $ 1,062,785 $ 861,713 Capitalization of Commissions, Sales and Issue Expenses 295, , ,373 Amortization (156,092) (129,049) (96,451) Change In Unrealized Investment (Gains) Losses (41,223) (39,382) 53,407 Foreign Currency Translation 1,773 (4,023) 1,743 Transfer of Taiwan branch balance to an affiliated company (73,104) - - Balance, End of Year $ 1,159,830 $ 1,132,653 $ 1,062, POLICYHOLDERS LIABILITIES Future policy benefits and other policyholder liabilities at December 31, are as follows: (In Thousands) Life Insurance Domestic $ 500,974 $ 429,825 Life Insurance Taiwan 260, ,272 Individual Annuities 32,423 31,817 Group Annuities 14,201 14,948 $ 808,230 $ 702,862 Life insurance liabilities include reserves for death benefits. Annuity liabilities include reserves for annuities that are in payout status. The following table highlights the key assumptions generally utilized in calculating these reserves: Product Mortality Interest Rate Estimation Method Life Insurance - Domestic Variable and Interest-Sensitive Life Insurance - Domestic Term Insurance Life Insurance - International Individual Annuities Group Annuities Generally rates guaranteed in calculating cash surrender values Best estimate plus a provision for adverse deviation Generally the Taiwan standard table plus a provision for adverse deviation Mortality table varies based on the issue year of the contract. Current table (for 1998 & later issues) is the Annuity 2000 Mortality Table with certain modifications 1950 & 1971 Group Annuity Mortality Table with certain modifications 2.5% to 11.25% Net level premium based on non-forfeiture interest rate 6.5% to 6.75% Net level premium plus a provision for adverse deviation 6.25% to 7.5% Net level premium plus a provision for adverse deviation. 6.25% to 11.0% Present value of expected future payments based on historical experience 14.75% Present value of expected future payments based on historical experience B- 14

96 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements Policyholders account balances at December 31, are as follows: (In Thousands) Interest-Sensitive Life Contracts $ 1,976,710 $ 1,886,714 Individual Annuities 976, ,996 Guaranteed Investment Contracts 994, ,958 $ 3,947,690 $ 3,646,668 Policyholders account balances for interest-sensitive life, individual annuities, and guaranteed investment contracts are equal to policy account values plus unearned premiums. The policy account values represent an accumulation of gross premium payments plus credited interest less withdrawals, expenses and mortality charges. Certain contract provisions that determine the policyholder account balances are as follows: Product Interest Rate Withdrawal / Surrender Charges Interest Sensitive Life Contracts 3.0% to 6.75 % Various up to 10 years Individual Annuities 3.0% to 16.0% 0% to 7% for up to 9 years Guaranteed Investment Contracts 4.32% to 8.03% Subject to market value withdrawal provisions for any funds withdrawn other than for benefit responsive and contractual payments B- 15

97 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 6. REINSURANCE The Company participates in reinsurance, with Prudential and other companies, in order to provide greater diversification of business, provide additional capacity for future growth and limit the maximum net loss potential arising from large risks. Reinsurance ceded arrangements do not discharge the Company or the insurance subsidiary as the primary insurer. Ceded balances would represent a liability of the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. The likelihood of a material reinsurance liability reassumed by the Company is considered to be remote. The affiliated reinsurance agreements, including the Company s reinsurance of all its Taiwanese business, are described further in Note 14. Reinsurance amounts included in the Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, are as follows: (In Thousands) Domestic: Reinsurance premiums ceded affiliated $ (9,890) $ (7,641) $ (5,630) Reinsurance premiums ceded unaffiliated (13,399) (2,475) - Policyholders benefits ceded 10,803 3,558 3,140 Taiwan after the transfer: Reinsurance premiums ceded -affiliated (82,433) - - Policyholders benefits ceded-affiliated 12, Taiwan before the transfer: Reinsurance premiums ceded affiliated (107) (1,573) (1,252) Reinsurance premiums ceded -unaffiliated (167) (2,830) (1,745) Policyholders benefits ceded 71 1,914 1,088 Reinsurance premiums assumed 162 1,671 1,778 Reinsurance recoverables, included in the Company s Consolidated Statements of Financial Position at December 31, were as follows: (In Thousands) Domestic Life Insurance - affiliated $ 11,014 $ 8,765 Domestic Life Insurance - unaffiliated 14,850 2,037 Other Reinsurance - affiliated 14,201 14,948 Taiwan Life Insurance-affiliated 260,632 - Taiwan Life Insurance-unaffiliated - 5,818 $ 300,697 $ 31,568 The gross and net amounts of life insurance in force at December 31, were as follows: (In Thousands) Life Insurance Face Amount In Force $ 84,317,628 $ 66,327,999 $ 54,954,680 Ceded To Other Companies (25,166,264) (7,544,363) (2,762,319) Net Amount of Life Insurance In Force $ 59,151,364 $ 58,783,636 $ 52,192,361 B- 16

98 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 7. EMPLOYEE BENEFIT PLANS Pension and Other Postretirement Plans The Company had a non-contributory defined benefit pension plan that covered substantially all of its Taiwanese employees. The pension plan was transferred to an affiliate on January 31, 2001 as described in Note 14. This plan was established as of September 30, 1998 and the projected benefit obligation and related expenses at December 31, 2000 were not material to the Consolidated Statements of Financial Position or results of operations for the years presented. All other employee benefit costs are allocated to the Company by Prudential in accordance with the service agreement described in Footnote INCOME TAXES The components of income taxes for the years ended December 31, are as follows: (In Thousands) Current Tax Expense (Benefit): U.S. $ (100,946) $ 8,588 $ (14,093) State and Local 1, Foreign Total (98,956) 8,661 (13,700) Deferred Tax Expense (Benefit): U.S. 76,155 43,567 42,320 State and Local (2,454) 2,204 1,316 Total 73,701 45,771 43,636 Total Income Tax Expense $ (25,255) $ 54,432 $ 29,936 The income tax expense for the years ended December 31, differs from the amount computed by applying the expected federal income tax rate of 35% to income from operations before income taxes for the following reasons: (In Thousands) Expected Federal Income Tax Expense $ 14,814 $ 55,275 $ 29,936 State and Local Income Taxes (382) 1,457 1,101 Non taxable investment income (38,693) (6,443) (1,010) Incorporation of Taiwan Branch (1,774) - - Other 780 4,143 (91) Total Income Tax Expense $ (25,255) $ 54,432 $ 29,936 B- 17

99 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 8. INCOME TAXES (continued) Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table: (In Thousands) Deferred Tax Assets Insurance Reserves $ 43,317 $ 100,502 State Net Operating Losses 5,642 1,400 Other 9,309 8,610 Deferred Tax Assets 58, ,512 Deferred Tax Liabilities Deferred Acquisition Costs 324, ,023 Net Unrealized Gains on Securities 32,264 2,389 Investments 20,644 19,577 Deferred Tax Liabilities 376, ,989 Net Deferred Tax Liability $ 318,722 $ 235,477 Management believes that based on its historical pattern of taxable income, the Company and its subsidiary will produce sufficient income in the future to realize its deferred tax assets. Adjustments to the valuation allowance will be made if there is a change in management s assessment of the amount of the deferred tax asset that is realizable. At December 31, 2001 and 2000, the Company and its subsidiary had no federal operating loss carryforwards for tax purposes. At December 31, 2001 and December 31, 2000, the Company had state operating loss carryforwards for tax purposes of $369 million and $91 million, which expire by 2021 and 2020, respectively. The Internal Revenue Service (the Service ) has completed all examinations of the consolidated federal income tax returns through The Service has examined the years 1993 through Discussions are being held with the Service with respect to proposed adjustments. Management, however, believes there are adequate defenses against, or sufficient reserves to provide for such adjustments. The Service has completed its examination of 1996 and has begun its examination of 1997 through STATUTORY NET INCOME AND SURPLUS The Company is required to prepare statutory financial statements in accordance with accounting practices prescribed or permitted by the Arizona Department of Insurance and the New Jersey Department of Banking and Insurance. Statutory accounting practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis. Statutory net income (loss) of the Company amounted to $71.5 million, $(50.5) million, and $(82.3) million for the years ended December 31, 2001, 2000, and 1999, respectively. Statutory surplus of the Company amounted to $728.7 million and $849.6 million at December 31, 2001 and 2000, respectively. In March 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance ( Codification ), which replaces the current Accounting Practices and Procedures manual as the NAIC s primary guidance on statutory accounting as of January 1, Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in certain areas. The Company has adopted the Codification guidance effective January 1, As a result of these changes, the Company reported an increase to statutory surplus of $88 million, primarily relating to the recognition of deferred tax assets. B- 18

100 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values presented below have been determined using available market information and by applying valuation methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. Estimated fair values may not be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair values. The following methods and assumptions were used in calculating the estimated fair values (for all other financial instruments presented in the table, the carrying value approximates estimated fair value). Fixed maturities and Equity securities Estimated fair values for fixed maturities and equity securities, other than private placement securities, are based on quoted market prices or estimates from independent pricing services. Generally, fair values for private placement securities are estimated using a discounted cash flow model which considers the current market spreads between the U.S. Treasury yield curve and corporate bond yield curve, adjusted for the type of issue, its current credit quality and its remaining average life. The estimated fair value of certain non-performing private placement securities is based on amounts estimated by management. Commercial loans on real estate The estimated fair value of the portfolio of commercial loans on real estate is primarily based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the current market spread for a similar quality loan. Policy loans The estimated fair value of policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical loan repayment patterns. Investment contracts For guaranteed investment contracts, estimated fair values are derived using discounted projected cash flows, based on interest rates being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. For individual deferred annuities and other deposit liabilities, fair value approximates carrying value. Derivative financial instruments Refer to Note 11 for the disclosure of fair values on these instruments. B- 19

101 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) The following table discloses the carrying amounts and estimated fair values of the Company s financial instruments at December 31: Financial Assets: Carrying Value Estimated Carrying Fair Value Value (In Thousands) Estimated Fair Value Fixed Maturities: Available For Sale $ 4,024,893 $ 4,024,893 $ 3,561,521 $ 3,561,521 Fixed Maturities: Held To Maturity , ,634 Equity Securities ,804 10,804 Commercial Loans on Real Estate 8,190 10,272 9,327 10,863 Policy Loans 874, , , ,460 Short-Term Investments 215, , , ,815 Cash and Cash Equivalents 374, , , ,071 Separate Account Assets 14,920,584 14,920,584 16,230,264 16,230,264 Financial Liabilities: Investment Contracts 2,003,265 2,053,259 1,762,794 1,784,767 Cash Collateral for Loaned Securities 190, , , ,849 Securities Sold Under Repurchase Agreements 80,715 80, , ,098 Separate Account Liabilities 14,920,584 14,920,584 16,230,264 16,230, DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS Adoption of Statement of Financial Accounting Standards No. 133 The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities as amended, on January 1, The adoption of this statement did not have a material impact on the results of operations of the Company. Accounting for Derivatives and Hedging Activities Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or the value of securities or commodities. Derivative financial instruments used by the Company include swaps, futures, forwards and option contracts and may be exchange-traded or contracted in the over-the-counter market. Derivatives may be held for trading purposes or held for purposes other than trading. All of the Company s derivatives are held for purposes other than trading. Derivatives held for purposes other than trading are used to seek to reduce exposure to interest rates and foreign currency risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. Other than trading derivatives are also used to manage the characteristics of the Company s asset/liability mix, and to manage the interest rate and currency characteristics of invested assets. Derivatives held for purposes other than trading are recognized on the Consolidated Statements of Financial Position at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability or unrecognized firm commitment ( fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ( cash flow hedge), (3) a foreign currency or cash flow hedge ( foreign currency hedge), (4) a hedge of a net investment in a foreign operation, or (5) a derivative that does not qualify for hedge accounting. As of December 31, 2001, none of the Company s derivatives qualify for hedge accounting treatment. B- 20

102 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 11. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued) If a derivative does not qualify for hedge accounting, it is recorded at fair value in Other long-term investments or Other liabilities in the Consolidated Statements of Financial Position, and changes in fair value are included in earnings without considering changes in fair value of the hedged assets or liabilities. See Types of Derivative Instruments for further discussion of the classification of derivative activity in current earnings. Types of Derivative Instruments Interest Rate Swaps The Company uses interest rate swaps to reduce market risk from changes in interest rates and to manage interest rate exposures arising from mismatches between assets and liabilities. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. The fair value of swap agreements is estimated based on proprietary pricing models or market quotes. If the criteria for hedge accounting are not met, the swap agreements are accounted for at fair value with changes in fair value reported in Realized investment losses, net in the Consolidated Statement of Operations. During the period that interest rate swaps are outstanding, net receipts or payments are include in Net investment income in the Consolidated Statement of Operations. Futures and Options The Company uses exchange-traded Treasury futures and options to reduce market risk from changes in interest rates, and to manage the duration of assets and the duration of liabilities supported by those assets. In exchange-traded futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which are determined by the value of designated classes of Treasury securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures and options with regulated futures commissions merchants who are members of a trading exchange. The fair value of futures and options is based on market quotes. Treasury futures move substantially in value as interest rates change and can be used to either modify or hedge existing interest rate risk. This strategy protects against the risk that cash flow requirements may necessitate liquidation of investments at unfavorable prices resulting from increases in interest rates. This strategy can be a more cost effective way of temporarily reducing the Company s exposure to a market decline than selling fixed income securities and purchasing a similar portfolio when such a decline is believed to be over. If futures meet hedge accounting criteria, changes in their fair value are deferred and recognized as an adjustment to the carrying value of the hedged item. Deferred gains or losses from the hedges for interest-bearing financial instruments are amortized as a yield adjustment over the remaining lives of the hedged item. Futures that do not qualify as hedges are carried at fair value with changes in value reported in Realized investment losses, net. When the Company anticipates a significant decline in the stock market which will correspondingly affect its diversified portfolio, it may purchase put index options where the basket of securities in the index is appropriate to provide a hedge against a decrease in the value of the equity portfolio or a portion thereof. This strategy effects an orderly sale of hedged securities. When the Company has large cash flows which it has allocated for investment in equity securities, it may purchase call index options as a temporary hedge against an increase in the price of the securities it intends to purchase. This hedge permits such investment transactions to be executed with the least possible adverse market impact. Option premium paid or received is reported as an asset or liability and amortized into income over the life of the option. If options meet the criteria for hedge accounting, changes in their fair value are deferred and recognized as an adjustment to the hedged item. Deferred gains or losses from the hedges for interest-bearing financial instruments are recognized as an adjustment to interest income or expense of the hedged item. If the options do not meet the criteria for hedge accounting, they are fair valued, with changes in fair value reported in current period earnings. B- 21

103 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 11. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued) Currency Derivatives The Company uses currency swaps to reduce market risk from changes in currency values of investments denominated in foreign currencies that the Company either holds or intends to acquire and to manage the currency exposures arising from mismatches between such foreign currencies and the US Dollar. Under currency swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date. If currency swaps are effective as hedges of foreign currency translation and transaction exposures, gains or losses are recorded in a manner similar to the hedged item. If currency swaps do not meet hedge accounting criteria, gains or losses from those derivatives are recognized in Realized investment (losses) gains, net. The table below summarizes the Company s outstanding positions by derivative instrument types as of December 31, 2001 and All amounts presented have been classified as other than trading based on management s intent at the time of contract and throughout the life of the contract. Other than Trading Derivatives December 31, 2001 and 2000 (In Thousands) Non-Hedge Accounting Notional Carrying Value Notional Estimated Fair Value Estimated Fair Value Carrying Value Swap Instruments Interest Rate Asset $ 9,470 $ 638 $ 638 $ 9,470 $ 327 $ 327 Liability Currency Asset 24,785 3,858 3, Liability Future Contracts US Treasury Futures Asset 76, ,800 3,530 3,530 Liability 64, ,900 1,067 1,067 Hedge Accounting Swap Instruments Currency Asset ,326 1,633 2,155 Liability B- 22

104 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 11. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued) Credit Risk The current credit exposure of the Company s derivative contracts is limited to the fair value at the reporting date. Credit risk is managed by entering into transactions with creditworthy counterparties and obtaining collateral where appropriate and customary. The Company also attempts to minimize its exposure to credit risk through the use of various credit monitoring techniques. All of the net credit exposure for the Company from derivative contracts are with investment grade counterparties. As of December 31, 2001, 86% of notional consisted of interest rate derivatives, and 14% of notional consisted of foreign currency derivatives. 12. CONTINGENCIES AND LITIGATION Prudential and the Company are subject to legal and regulatory actions in the ordinary course of their businesses, including class actions. Pending legal and regulatory actions include proceedings relating to aspects of the businesses and operations that are specific to the Company and Prudential and that are typical of the businesses in which the Company and Prudential operate. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Beginning in 1995, regulatory authorities and customers brought significant regulatory actions and civil litigation against the Company and Prudential involving individual life insurance sales practices. In 1996, Prudential, on behalf of itself and many of its life insurance subsidiaries including the Company entered into settlement agreements with relevant insurance regulatory authorities and plaintiffs in the principal life insurance sales practices class action lawsuit covering policyholders of individual permanent life insurance policies issued in the United States from 1982 to Pursuant to the settlements, the companies agreed to various changes to their sales and business practices controls, to a series of fines, and to provide specific forms of relief to eligible class members. Virtually all claims by class members filed in connection with the settlements have been resolved and virtually all aspects of the remediation program have been satisfied. While the approval of the class action settlement is now final, Prudential and the Company remain subject to oversight and review by insurance regulators and other regulatory authorities with respect to its sales practices and the conduct of the remediation program. The U.S. District Court has also retained jurisdiction as to all matters relating to the administration, consummation, enforcement and interpretation of the settlements. As of December 31, 2001, Prudential and/or the Company remained a party to approximately 44 individual sales practices actions filed by policyholders who opted out of the class action settlement relating to permanent life insurance policies issued in the United States between 1982 and In addition, there were 19 sales practices actions pending that were filed by policyholders who were members of the class and who failed to opt out of the class action settlement. Prudential and the Company believe that those actions are governed by the class settlement release and expects them to be enjoined and/or dismissed. Additional suits may be filed by class members who opted out of the class settlements or who failed to opt out but nevertheless seek to proceed against Prudential and/or the Company. A number of the plaintiffs in these cases seek large and/or indeterminate amounts, including punitive or exemplary damages. Some of these actions are brought on behalf of multiple plaintiffs. It is possible that substantial punitive damages might be awarded in any of these actions and particularly in an action involving multiple plaintiffs. Prudential has indemnified the Company for any liabilities incurred in connection with sales practices litigation covering policyholders of individual permanent life insurance policies issued in the United States from 1982 to The Company s litigation is subject to many uncertainties, and given the complexity and scope, the outcomes cannot be predicted. It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters. Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters should not have a material adverse effect on the Company s financial position. B- 23

105 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 13. DIVIDENDS The Company is subject to Arizona law which limits the amount of dividends that insurance companies can pay to stockholders. The maximum dividend which may be paid in any twelve month period without notification or approval is limited to the lesser of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, the Company would not be permitted a dividend distribution until December 29, During 2001, the Company received approval from the Arizona Department of Insurance to pay an extraordinary dividend to Prudential of $108 million. 14. RELATED PARTY TRANSACTIONS The Company has extensive transactions and relationships with Prudential and other affiliates. It is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. Expense Charges and Allocations All of the Company s expenses are allocations or charges from Prudential or other affiliates. These expenses can be grouped into the following categories: general and administrative expenses, retail distribution expenses and asset management fees. The Company s general and administrative expenses are charged to the Company using allocation methodologies based on business processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential to process transactions on behalf of the Company. Prudential and the Company operate under service and lease agreements whereby services of officers and employees (except for those agents employed directly by the Company in Taiwan), supplies, use of equipment and office space are provided by Prudential. The Company is allocated estimated distribution expenses from Prudential s retail agency network for both its domestic life and annuity products. The Company has capitalized the majority of these distribution expenses as deferred policy acquisition costs. Beginning April 1, 2000, Prudential and the Company agreed to revise the estimate of allocated distribution expenses to reflect a market based pricing arrangement. In accordance with a profit sharing agreement with Prudential that was in effect through December 31, 2000, the Company received fee income from policyholder account balances invested in the Prudential Series Funds ( PSF ). These revenues were recorded as Asset management fees in the Consolidated Statements of Operations and Comprehensive Income. The Company was charged an asset management fee by Prudential Global Asset Management ( PGAM ) and Jennison Associates LLC ( Jennison ) for managing the PSF portfolio. These fees are a component of general, administrative and other expenses. On September 29, 2000, the Board of Directors for the Prudential Series Fund, Inc. ( PSFI ) adopted resolutions to terminate the existing management agreement between PSFI and Prudential, and has appointed another subsidiary of Prudential as the fund manager for the PSF. The change was approved by the shareholders of PSF during early 2001 and effective January 1, The Company no longer receives fees associated with the PSF. In addition, the Company will no longer incur the asset management expense from PGAM and Jennison associated with the PSF. Corporate Owned Life Insurance The Company has sold three Corporate Owned Life Insurance ( COLI ) policies to Prudential. The cash surrender value included in Separate Accounts was $647.2 million and $685.9 million at December 31, 2001 and December 31, 2000, respectively. The fees received related to the COLI policies were $7.0 million and $9.6 million for the years ending December 31, 2001 and B- 24

106 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements 14. RELATED PARTY TRANSACTIONS (continued) Reinsurance The Company currently has four reinsurance agreements in place with Prudential and affiliates. Specifically, the Company has a reinsurance Group Annuity Contract, whereby the reinsurer, in consideration for a single premium payment by the Company, provides reinsurance equal to 100% of all payments due under the contract. In addition, there are two yearly renewable term agreements in which the Company may offer and the reinsurer may accept reinsurance on any life in excess of the Company s maximum limit of retention. The Company is not relieved of its primary obligation to the policyholder as a result of these reinsurance transactions. These agreements had no material effect on net income for the periods ended December 31, 2001 or The fourth agreement, which is new for 2001, is described in the following paragraphs. On January 31, 2001, the Company transferred all of its assets and liabilities associated with the Company s Taiwan branch including Taiwan s insurance book of business to an affiliated Company, Prudential Life Insurance Company of Taiwan Inc. ( Prudential of Taiwan ), a wholly owned subsidiary of the Holding Company. The mechanism used to transfer this block of business in Taiwan is referred to as a full acquisition and assumption transaction. Under this mechanism, the Company is jointly liable with Prudential of Taiwan for two years from the giving of notice to all obligees for all matured obligations and for two years after the maturity date of not-yet-matured obligations. Prudential of Taiwan is also contractually liable, under indemnification provisions of the transaction, for any liabilities that may be asserted against the Company. The transfer of the insurance related assets and liabilities was accounted for as a longduration coinsurance transaction under accounting principles generally accepted in the United States. Under this accounting treatment, the insurance related liabilities remain on the books of the Company and an offsetting reinsurance recoverable is established. As part of this transaction, the Company made a capital contribution to Prudential of Taiwan in the amount of the net equity of the Company s Taiwan branch as of the date of transfer. In July 2001, the Company dividended its interest in Prudential of Taiwan to Prudential. Premiums and benefits ceded for the period ending December 31, 2001 from the Taiwan coinsurance agreement were $82.4 million and $12.9 million, respectively. Debt Agreements In July 1998, the Company established a revolving line of credit facility of up to $500 million with Prudential Funding LLC, a wholly owned subsidiary of Prudential. There is no outstanding debt relating to this credit facility as of December 31, 2001 or December 31, B- 25

107 Report of Independent Accountants To the Board of Directors and Stockholder of Pruco Life Insurance Company In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Pruco Life Insurance Company (a wholly-owned subsidiary of The Prudential Insurance Company of America) and its subsidiary at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 21, 2002 B- 26

108 The Prudential Series Fund, Inc. SP Mid Cap Growth Portfolio Prospectus dated May 1, 2002 Supplement dated December 16, 2002 Effective December 16, 2002, Calamos Asset Management, Inc. will replace Massachusetts Financial Services Company (MFS) as subadviser to the SP Mid Cap Growth Portfolio (formerly, SP MFS Mid Cap Growth Portfolio). The following replaces the discussion of MFS in the section of the prospectus titled How the Fund is Managed Portfolio Managers: Calamos Asset Management, Inc. ( Calamos ) is the subadviser to the SP Mid-Cap Growth Portfolio. Calamos, a registered investment advisor, is a wholly-owned subsidiary of Calamos Holdings, Inc. As of October 31, 2002, Calamos managed approximately $11.7 billion in assets for institutions, individuals, investment companies and hedge funds. Calamos address is 1111 E. Warrenville Road, Naperville, Illinois John P. Calamos, Chief Executive Officer and President of Calamos, Nick P. Calamos, Chief Investment Officer and Executive Vice President of Calamos, and John P. Calamos, Jr., Executive Vice President of Calamos, manage the SP Mid Cap Growth Portfolio. Each has been with Calamos since John P. Calamos and Nick P. Calamos have managed money together at Calamos or a related entity for nearly 20 years. PSFSUP5

109 The Prudential Series Fund, Inc. Supplement dated December 13, 2002 to Prospectus dated May 1, 2002 Value Portfolio The following amends the sections of the prospectus entitled How the Portfolios Invest Investment Objectives and Policies, How the Fund Is Managed Investment Sub-Advisers, and How the Fund is Managed Portfolio Managers: Effective as of the close of business on December 12, 2002, Jennison Associates LLC is responsible for managing 100% of the Portfolio s assets. The portfolio managers for the Portfolio are Tom Kolefas and Bradley Goldberg. Bradley Goldberg has announced his intention to retire effective December 31, Following Mr. Goldberg s retirement, Mr. Kolefas will continue as the portfolio manager for the Portfolio. Equity Portfolio The following amends the section of the prospectus entitled How the Fund is Managed Portfolio Managers: Bradley Goldberg has announced his intention to retire effective December 31, Following Mr. Goldberg s retirement, the portion of the Portfolio managed by Jennison Associates LLC will continue to be managed by Tom Kolefas. PSFSUP6

110 The Prudential Series Fund, Inc. Supplement dated October 18, 2002 Prospectus dated May 1, 2002 SP PIMCO High Yield Portfolio Effective immediately, Raymond G. Kennedy will replace Benjamin L. Trosky as portfolio manager. The following replaces the section titled How the Fund is Managed Portfolio Managers: The Portfolio is managed by Raymond G. Kennedy. Mr. Kennedy is a Managing Director of PIMCO, and he joined PIMCO as a credit analyst in Prior to joining PIMCO, Mr. Kennedy was associated with the Prudential Insurance Company of America as a private placement asset manager. SP MFS Capital Opportunities Portfolio Effective immediately, S. Irfan Ali and Kenneth J. Enright, CFA, will serve as co-portfolio managers of the SP MFS Capital Opportunities Portfolio replacing Maura Shaughnessy. The following replaces the section titled How the Fund is Managed Portfolio Managers: The Portfolio is managed by S. Irfan Ali and Kenneth J. Enright. Mr. Ali is a Senior Vice President and portfolio manager of the MFS Strategic Growth portfolios. He joined MFS as a research analyst in 1993 and earned his M.B.A. from the Harvard Business School. Mr. Enright is a Senior Vice President and portfolio manager of the MFS Strategic Value portfolios and assists on the team managed MFS Total Return portfolios. He joined MFS in 1986 as a research analyst and earned his M.B.A. from Babson College. PSFSUP4

111 The Prudential Series Fund, Inc. Supplement dated September 19, 2002 to Prospectus and Statement of Additional Information, dated May 1, 2002 SP AIM Core Equity Portfolio The following supplements the sections of the prospectus entitled Investment Objectives and Principal Strategies, and How the Portfolios Invest Investment Objectives and Policies: The Portfolio s investment objective is growth of capital. The Portfolio s secondary objective of current income is deleted. SP Deutsche International Equity Portfolio The following supplements the sections of the prospectus entitled Investment Objectives and Principal Strategies, How The Portfolios Invest Investment Objectives and Policies, How The Fund Is Managed Investment Sub-Advisers, and How The Fund Is Managed Portfolio Managers: Effective September 30, 2002, Deutsche Asset Management Investment Services Limited (DeAMIS) is the sub-adviser to the Portfolio. DeAMIS is a wholly owned subsidiary of Deutsche Bank AG. As of June 30, 2002 DeAMIS total assets under management were $5.667 billion. DeAMIS address is One Appold Street, London EC2A 2UU. The following portfolio managers are responsible for the day-to-day management of the Portfolio s investments: Alexander Tedder, Managing Director of DeAMIS and Co-Manager of the Portfolio Head of EAFE Equity Portfolio Selection Team Joined DeAMIS in 1994 as a portfolio manager Was a European analyst ( ) and representative ( ) for Schroeders 12 years of investment experience Fluent in German, French, Italian and Spanish Masters in Economics and Business Administration from Freiburg University Clare Brody, Director of DeAMIS and Co-Manager of the Portfolio Joined DeAMIS in years of investment industry experience Chartered Financial Analyst B.S., Cornell University Stuart Kirk, Vice President of DeAMIS and Co-Manager of the Portfolio Joined Deutsche Bank AG, Paris Branch in 1995 Seven years of investment industry experience Asia-Pacific analyst M.A. from Cambridge University PSFSUP3

112 Marc Slendebroek,Vice President of DeAMIS and Co-Manager of the Portfolio Portfolio manager for EAFE Equities: London Joined Deutsche Asset Management Americas, Inc. (formerly, Zurich Scudder Investments, Inc.) in 1994 after five years of experience as equity analyst at Kleinwort Benson Securities and at Enskilda Securities Fluent in English, Dutch, German, Swedish and Norwegian M.A. from University of Leiden, Netherlands Joseph DeSantis, Managing Director of DeAMIS and Co-Manager of the Portfolio Oversees all equity portfolio managers based in the Americas region Joined Deutsche Asset Management, Inc. (formerly, Zurich Scudder Investments, Inc.) in 2000 Chief Investment Officer at Chase Trust Bank in Tokyo, Japan, a division of Chase Global Asset Management and Mutual Funds ( ) Head of International Equities at Chase in New York ( ) Positions as a portfolio manager at Chase and as the founder and later Investment Strategist at Strategic Research International, Inc. B.A. from the University of Cincinnati The following supplements the section of the Statement of Additional Information entitled Investment Management And Distribution Arrangements Investment Management Arrangements: Deutsche Asset Management Investment Services Limited (DeAMIS) is the subadviser to the SP Deutsche International Equity Portfolio. All references to Deutsche Asset Management, Inc. and/or DAMI with respect to the SP Deutsche International Equity Portfolio are hereby deleted and replaced accordingly.

113 The Prudential Series Fund, Inc. Supplement dated August 29, 2002 to Prospectus, dated May 1, 2002 SP Alliance Large Cap Growth Portfolio The following supplements the section of the prospectus entitled How the Portfolios Invest Investment Objectives and Policies: The Portfolio usually invests in about companies, with the 25 most highly regarded of these companies generally constituting approximately 70% of the Portfolio s investable assets. Alliance seeks to gain positive returns in good markets while providing some measure of protection in poor markets. SP MFS Mid-Cap Growth Portfolio The following supplements the section of the prospectus entitled Portfolio Managers: The Portfolio is managed by a team. MFS Senior Vice President Mark Regan, who had been a co-manager for the Portfolio, retired effective June 30, David Sette-Ducati will continue as a member of the management team. Eric Fischman joined the management team during April Mr. Fischman is a Senior Vice President of MFS. Mr. Fischman joined MFS as a research analyst during 2000 and was named a portfolio manager in April He earned an M.B.A. degree from Columbia Business School in 1998, a law degree from Boston University School of Law, and a bachelor s degree from Cornell University. From 1998 to 2000, Mr. Fischman served as an equity research analyst at State Street Research. Prior to that, he served as an equity research analyst at Dreyfus Corporation. Mr. Fischman also holds the Chartered Financial Analyst (CFA) designation. SP INVESCO Small Company Growth Portfolio The following supplements the section of the Prospectus entitled Portfolio Managers: The following individuals are primarily responsible for the day-to-day management of the Portfolio s holdings: Stacie L. Cowell, a senior vice president of INVESCO, is the lead portfolio manager of the Portfolio. Before joining INVESCO in 1997, Stacie was senior equity analyst with Founders Asset Management and a capital markets and trading analyst with Chase Manhattan Bank in New York. She is a CFA charterholder. Stacie holds an M.S. in Finance from the University of Colorado and a B.A. in Economics from Colgate University. Cameron Cooke is the co-portfolio manager of the Portfolio. Mr. Cooke joined the investment division of INVESCO in Prior to joining INVESCO, Cameron was a senior equity analyst at Wells Capital Management. Mr. Cooke holds a B.A. in economics from the University of North Carolina at Chapel Hill. PSFSUP1

114 SP PIMCO High Yield Portfolio SP PIMCO Total Return Portfolio Diversified Conservative Growth Portfolio The following supplements the section of the prospectus entitled How the Portfolios Invest Investment Objectives and Policies: Each Portfolio may invest in swap agreements, including interest rate, credit default, currency exchange rate and total return swaps. Each Portfolio may also invest in preferred stock, and may invest in debt from emerging markets. Each Portfolio may invest in event-linked bonds. Jennison Portfolio The following supplements the section of the Prospectus entitled How the Portfolios Invest Investment Objectives and Policies: The Portfolio may invest in equity swap agreements. Diversified Conservative Growth Portfolio The following supplements the section of the Prospectus entitled How the Portfolios Invest Investment Objectives and Policies: The Portfolio may enter into short sales of securities. No more than 25% of the Portfolio s net assets may be used as collateral or segregated for purposes of securing a short sale obligation.

115 AIM VARIABLE INSURANCE FUNDS AIM V.I. AGGRESSIVE GROWTH FUND (Series I shares) Supplement dated June 28, 2002 to the Prospectus dated May 1, 2002 Effective July 1, 2002, the following paragraph replaces in its entirety the first paragraph under the heading FUND MANAGEMENT - Portfolio Managers on page 3 of the prospectus: The advisor uses a team approach to investment management. The individual members of the team (co-managers) who are primarily responsible for the management of the fund s portfolio are: Robert M. Kippes (lead manager), Senior Portfolio Manager, who has been responsible for the fund since 1998 and has been associated with the advisor and/or its affiliates since Ryan E. Crane, Senior Portfolio Manager, who has been responsible for the fund since 1999 and has been associated with the advisor and/or its affiliates since Jay K. Ruchin, Portfolio Manager, who has been responsible for the fund since 2000 and has been associated with the advisor and/or its affiliates since From 1996 to 1998, he was an associate equity analyst for Prudential Securities. They are assisted by the Mid Cap Growth Team. More information on the fund s management team may be found on our website ( AIM VARIABLE INSURANCE FUNDS AIM V.I. CORE EQUITY FUND (Series I shares) Supplement dated July 1, 2002 to the Prospectus dated May 1, 2002 Effective September 30, 2002, the following paragraph replaces in its entirety the first paragraph under the heading INVESTMENT OBJECTIVES AND STRATEGIES - AIM V.I. Core Equity Fund (formerly, AIM V.I. Growth and Income Fund) on page 1 of the prospectus: The fund s primary investment objective is growth of capital. Effective July 1, 2002, the following paragraph replaces in its entirety the first paragraph under the heading FUND MANAGEMENT - Portfolio Managers on page 3 of the prospectus: Ronald S. Sloan (lead manager), Senior Portfolio Manager, who has been responsible for the fund since 2002 and has been associated with the advisor and/or its affiliates since From 1993 to 1998, he was President of Verissimo Research and Management, Inc. Michael Yellen, Senior Portfolio manager, who has been responsible for the fund since 2002 and has been associated with the advisor and/or its affiliates since They are assisted by the Mid Cap Core Team. More information on the fund s management team may be found on our website ( PSFSUP2 Ed. 7/2002

116 The Prudential Series Fund, Inc. Prospectus May 1, 2002 Conservative Balanced Portfolio Diversified Bond Portfolio Equity Portfolio Flexible Managed Portfolio Global Portfolio High Yield Bond Portfolio Jennison Portfolio Money Market Portfolio Stock Index Portfolio Value Portfolio SP Aggressive Growth Asset Allocation Portfolio SP AIM Aggressive Growth Portfolio SP AIM Core Equity Portfolio SP Alliance Large Cap Growth Portfolio SP Alliance Technology Portfolio SP Balanced Asset Allocation Portfolio SP Conservative Asset Allocation Portfolio SP Davis Value Portfolio SP Deutsche International Equity Portfolio SP Growth Asset Allocation Portfolio SP INVESCO Small Company Growth Portfolio SP Jennison International Growth Portfolio SP Large Cap Value Portfolio SP MFS Capital Opportunities Portfolio SP MFS Mid-Cap Growth Portfolio SP PIMCO High Yield Portfolio SP PIMCO Total Return Portfolio SP Prudential U.S. Emerging Growth Portfolio SP Small/Mid-Cap Value Portfolio SP Strategic Partners Focused Growth Portfolio As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved the Fund s shares nor has the SEC determined that this prospectus is complete or accurate. It is a criminal offense to state otherwise. A particular Portfolio may not be available under the variable life insurance or variable annuity contract which you have chosen. The prospectus of the specific contract which you have chosen will indicate which Portfolios are available and should be read in conjunction with this prospectus.

117 Table of Contents 1 RISK/RETURN SUMMARY 1 Investment Objectives and Principal Strategies 12Principal Risks 16 Evaluating Performance 45 HOW THE PORTFOLIOS INVEST 45 Investment Objectives and Policies 45 Conservative Balanced Portfolio 46 Diversified Bond Portfolio 47 Equity Portfolio 48 Flexible Managed Portfolio 50 Global Portfolio 50 High Yield Bond Portfolio 51 Jennison Portfolio 52Money Market Portfolio 53 Stock Index Portfolio 54 Value Portfolio 55 SP AIM Aggressive Growth Portfolio 56 SP AIM Core Equity Portfolio 58 SP Alliance Large Cap Growth Portfolio 59 SP Alliance Technology Portfolio 60 SP Asset Allocation Portfolios 61 SP Aggressive Growth Asset Allocation Portfolio 62SP Balanced Asset Allocation Portfolio 62SP Conservative Asset Allocation Portfolio 63 SP Growth Asset Allocation Portfolio 63 SP Davis Value Portfolio 64 SP Deutsche International Equity Portfolio 67 SP INVESCO Small Company Growth Portfolio 67 SP Jennison International Growth Portfolio 69 SP Large Cap Value Portfolio 70 SP MFS Capital Opportunities Portfolio 71 SP MFS Mid-Cap Growth Portfolio 72SP PIMCO High Yield Portfolio 73 SP PIMCO Total Return Portfolio 75 SP Prudential U.S. Emerging Growth Portfolio 77 SP Small/Mid-Cap Value Portfolio 78 SP Strategic Partners Focused Growth Portfolio

118 Table of Contents (continued) 81 OTHER INVESTMENTS AND STRATEGIES 81 ADRs 81 Convertible Debt and Convertible Preferred Stock 81 Derivatives 81 Dollar Rolls 81 Equity Swaps 81 Forward Foreign Currency Exchange Contracts 81 Futures Contracts 82Interest Rate Swaps 82Joint Repurchase Account 82Loans and Assignments 82Mortgage-related Securities 82Options 83 Real Estate Investment Trusts 83 Repurchase Agreements 83 Reverse Repurchase Agreements 83 Short Sales 83 Short Sales Against-the-Box 83 When-Issued and Delayed Delivery Securities 84 HOW THE FUND IS MANAGED 84 Board of Directors 84 Investment Adviser 85 Investment Sub-Advisers 87 Portfolio Managers 94 HOW TO BUY AND SELL SHARES OF THE FUND 95 Net Asset Value 96 Distributor 96 OTHER INFORMATION 96 Federal Income Taxes 97 Monitoring for Possible Conflicts 97 FINANCIAL HIGHLIGHTS (For more information see back cover) 2

119 RISK/RETURN SUMMARY This prospectus provides information about The Prudential Series Fund, Inc. (the Fund), which consists of 36 separate portfolios (each, a Portfolio). The Fund offers two classes of shares in each Portfolio: Class I and Class II. Class I shares are sold only to separate accounts of The Prudential Insurance Company of America and its affiliates (Prudential) as investment options under variable life insurance and variable annuity contracts (the Contracts). (A separate account keeps the assets supporting certain insurance contracts separate from the general assets and liabilities of the insurance company.) Class II shares are offered only to separate accounts of non-prudential insurance companies for the same types of Contracts. Not every Portfolio is available under every Contract. The prospectus for each Contract lists the Portfolios currently available through that Contract. This section highlights key information about each Portfolio available under your Contract. Additional information follows this summary and is also provided in the Fund s Statement of Additional Information (SAI). INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES The following summarizes the investment objectives, principal strategies and principal risks for each of the Portfolios. We describe the terms listed as principal risks on page 12. While we make every effort to achieve the investment objective for each Portfolio, we can t guarantee success and it is possible that you could lose money. Conservative Balanced Portfolio The Portfolio s investment objective is total investment return consistent with a conservatively managed diversified portfolio. This Portfolio may be appropriate for an investor who wants diversification with a relatively lower risk of loss than that associated with the Flexible Managed Portfolio (see below). To achieve our objective, we invest in a mix of equity securities, debt obligations and money market instruments. Up to 30% of the Portfolio s total assets may be invested in foreign securities. We may invest a portion of the Portfolio s assets in high-yield/high-risk debt securities, which are riskier than high-grade securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk credit risk foreign investment risk high yield risk interest rate risk market risk management risk Diversified Bond Portfolio The Portfolio s investment objective is a high level of income over a longer term while providing reasonable safety of capital. This means we look for investments that we think will provide a high level of current income, but which are not expected to involve a substantial risk of loss of capital through default. To achieve our objective, we normally invest at least 80% of the Portfolio s investable assets (net assets plus any borrowings made for investment purposes) in high-grade debt obligations and high-quality money market investments. We may purchase securities that are issued outside the U.S. by foreign or U.S. issuers. In addition, we may invest a portion of the Portfolio s assets in high-yield/high-risk debt securities, which are riskier than high-grade securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: credit risk foreign investment risk high yield risk interest rate risk management risk

120 Equity Portfolio The Portfolio s investment objective is long-term growth of capital. To achieve our objective, we normally invest at least 80% of the Portfolio s investable assets (net assets plus any borrowings made for investment purposes) in common stocks of major established corporations as well as smaller companies that we believe offer attractive prospects of appreciation. The Portfolio may invest up to 30% of its total assets in foreign securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk market risk management risk Flexible Managed Portfolio The Portfolio s investment objective is a high total return consistent with an aggressively managed diversified portfolio. This Portfolio may be appropriate for an investor who wants diversification and is willing to accept a relatively high level of loss in an effort to achieve greater appreciation. To achieve our objective, we invest in a mix of equity securities, debt obligations and money market instruments. The Portfolio may invest in foreign securities. A portion of the debt portion of the Portfolio may be invested in high-yield/high-risk debt securities, which are riskier than high-grade securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk credit risk foreign investment risk high yield risk interest rate risk market risk management risk Global Portfolio The Portfolio s investment objective is long-term growth of capital. To achieve this objective, we invest primarily in common stocks (and their equivalents) of foreign and U.S. companies. Generally, we invest in at least three countries, including the U.S., but we may invest up to 35% of the Portfolio s assets in companies located in any one country other than the U.S. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk market risk management risk High Yield Bond Portfolio The Portfolio s investment objective is a high total return. In pursuing our objective, we normally invest at least 80% of the Portfolio s investable assets (net assets plus any borrowings made for investment purposes) in high-yield/high-risk debt securities. Such securities have speculative characteristics and are riskier than high-grade securities. The Portfolio may invest up to 20% of its total assets in foreign debt obligations. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. 2

121 Principal Risks: credit risk foreign investment risk high yield risk interest rate risk market risk management risk Jennison Portfolio (formerly, Prudential Jennison Portfolio) The Portfolio s investment objective is to achieve long-term growth of capital. To achieve this objective, we invest primarily in equity securities of major, established corporations that we believe offer above-average growth prospects. The Portfolio may invest up to 30% of its total assets in foreign securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk management risk market risk Money Market Portfolio The Portfolio s investment objective is maximum current income consistent with the stability of capital and the maintenance of liquidity. To achieve our objective, we invest in high-quality short-term money market instruments issued by the U.S. government or its agencies, as well as by corporations and banks, both domestic and foreign. The Portfolio will invest only in instruments that mature in thirteen months or less, and which are denominated in U.S. dollars. While we make every effort to achieve our objective, we can t guarantee success. Principal Risks: credit risk interest rate risk management risk An investment in the Money Market Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Portfolio seeks to maintain a net asset value of $10 per share, it is possible to lose money by investing in the Portfolio. Principal Risks: company risk credit risk derivatives risk foreign investment risk industry/sector risk interest rate risk management risk market risk Stock Index Portfolio The Portfolio s investment objective is investment results that generally correspond to the performance of publicly-traded common stocks. To achieve our objective, we attempt to duplicate the price and yield of the Standard & Poor s 500 Composite Stock Price Index (S&P 500) by investing at least 80% of the Portfolio s investable assets (net assets plus any borrowings made for investment purposes) in S&P 500 stocks. The S&P 500 represents 3

122 more than 70% of the total market value of all publicly-traded common stocks and is widely viewed as representative of publicly-traded common stocks as a whole. The Portfolio is not managed in the traditional sense of using market and economic analyses to select stocks. Rather, the portfolio manager purchases stocks in proportion to their weighting in the S&P 500. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk market risk Value Portfolio The Portfolio s investment objective is capital appreciation. To achieve our objective, we invest primarily in common stocks that are undervalued those stocks that are trading below their underlying asset value, cash generating ability and overall earnings and earnings growth. We normally invest at least 65% of the Portfolio s total assets in the common stock and convertible securities of companies that we believe will provide investment returns above those of the Standard & Poor s 500 Composite Stock Price Index (S&P 500) or the New York Stock Exchange (NYSE) Composite Index. Most of our investments will be securities of large capitalization companies. The Portfolio may invest up to 25% of its total assets in real estate investment trusts (REITs) and up to 30% of its total assets in foreign securities. There is a risk that value stocks can perform differently from the market as a whole and other types of stocks and can continue to be undervalued by the markets for long periods of time. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk credit risk foreign investment risk interest rate risk market risk SP Aggressive Growth Asset Allocation Portfolio The SP Aggressive Growth Asset Allocation Portfolio seeks capital appreciation by investing in large cap equity Portfolios, international Portfolios, and small/mid-cap equity Portfolios. Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. The SP Aggressive Growth Asset Allocation Portfolio invests in shares of the following Fund Portfolios: a large capitalization equity component (approximately 40% of the Portfolio, invested in shares of the SP Davis Value Portfolio (20% of Portfolio), the SP Alliance Large Cap Growth Portfolio (10% of Portfolio), and the Jennison Portfolio (10% of Portfolio)); and an international component (approximately 35% of the Portfolio, invested in shares of the SP Jennison International Growth Portfolio (17.5% of Portfolio) and the SP Deutsche International Equity Portfolio (17.5% of Portfolio)); and a small/mid-capitalization equity component (approximately 25% of the Portfolio, invested in shares of the SP Small/Mid-Cap Value Portfolio (12.5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (12.5% of Portfolio)). For more information on the underlying Portfolios, please refer to their investment summaries included in this prospectus. SP AIM Aggressive Growth Portfolio The Portfolio s investment objective is to achieve long-term growth of capital. The Portfolio seeks to meet this objective by investing primarily in the common stocks of companies whose earnings the portfolio managers expect to 4

123 grow more than 15% per year. Growth stocks usually involve a higher level of risk than value stocks, because growth stocks tend to attract more attention and more speculative investments than value stocks. On behalf of the Portfolio, A I M Capital Management, Inc. will invest in securities of small- and medium-sized growth companies, may invest up to 25% of its total assets in foreign securities and may invest up to 25% of its total assets in real estate investment trusts (REITs). While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk liquidity risk management risk market risk SP AIM Core Equity Portfolio (formerly, SP AIM Growth and Income Portfolio) The Portfolio s primary investment objective is growth of capital with a secondary objective of current income. The Portfolio seeks to meet these objectives by investing at least 80% of its investable assets (net assets plus any borrowings made for investment purposes) in equity securities, including convertible securities of established companies that have long-term above-average growth in earnings and dividends, and growth companies that the portfolio managers believe have the potential for above-average growth in earnings and dividends. In complying with this 80% requirement, the Portfolio s investments may include synthetic instruments. Synthetic instruments are investments that have economic characteristics similar to the Portfolio s direct investments and may include warrants, futures, options, exchange-traded funds and ADRs. A I M Capital Management, Inc. considers whether to sell a particular security when they believe the security no longer has that potential or the capacity to generate income. The Portfolio may invest up to 20% of its total assets in foreign securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk credit risk derivatives risk foreign investment risk interest rate risk leveraging risk liquidity risk management risk market risk SP Alliance Large Cap Growth Portfolio The Portfolio s investment objective is growth of capital by pursuing aggressive investment policies. The Portfolio normally invests at least 80% of the Portfolio s investable assets (net assets plus any borrowings made for investment purposes) in stocks of companies considered to have large capitalizations (i.e., similar to companies included in the S&P 500 Index). Up to 15% of the Portfolio s total assets may be invested in foreign securities. Unlike most equity funds, the Portfolio focuses on a relatively small number of intensively researched companies. Alliance Capital Management, L.P. ( Alliance ) selects the Portfolio s investments from a research universe of more than 500 companies that have strong management, superior industry positions, excellent balance sheets, and superior earnings growth prospects. Alliance, Alliance Capital and their logos are registered marks of Alliance Capital Management, L.P. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk management risk market risk 5

124 SP Alliance Technology Portfolio The Portfolio s objective is growth of capital. The Portfolio normally invests at least 80% of its investable assets (net assets plus any borrowings made for investment purposes) in securities of companies that use technology extensively in the development of new or improved products or processes. Within this framework, the Portfolio may invest in any company and industry and in any type of security with potential for capital appreciation. It invests in well-known, established companies or in new or unseasoned companies. The Portfolio also may invest in debt securities and up to 25% of its total assets in foreign securities. In addition, technology stocks, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall stock market. The Portfolio may invest up to 25% of its total assets in foreign securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. This Portfolio is advised by Alliance Capital Management, L.P. Principal Risks: company risk credit risk foreign investment risk industry/sector risk interest rate risk liquidity risk management risk market risk SP Balanced Asset Allocation Portfolio The SP Balanced Asset Allocation Portfolio seeks to provide a balance between current income and growth of capital by investing in fixed income Portfolios, large cap equity Portfolios, small/mid-cap equity Portfolios, and international equity Portfolios. Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. The SP Balanced Asset Allocation Portfolio invests in shares of the following Portfolios: a fixed income component (approximately 40% of the Portfolio, invested in shares of the SP PIMCO Total Return Portfolio (25% of Portfolio) and the SP PIMCO High Yield Portfolio (15% of Portfolio)); and a large capitalization equity component (approximately 35% of the Portfolio, invested in shares of the SP Davis Value Portfolio (17.5% of Portfolio), the SP Alliance Large Cap Growth Portfolio (8.75% of Portfolio), and the Jennison Portfolio (8.75% of Portfolio)); and a small/mid capitalization equity component (approximately 15% of the Portfolio, invested in shares of the SP Small/Mid-Cap Value Portfolio (7.5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (7.5% of Portfolio)); and an international component (approximately 10% of the Portfolio, invested in shares of the SP Jennison International Growth Portfolio (5% of Portfolio) and the SP Deutsche International Equity Portfolio (5% of Portfolio)). For more information on the underlying Portfolios, please refer to their investment summaries included in this prospectus. SP Conservative Asset Allocation Portfolio The SP Conservative Asset Allocation Portfolio seeks to provide current income with low to moderate capital appreciation by investing in fixed income Portfolios, large cap equity Portfolios, and small/mid-cap equity Portfolios. Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. The SP Conservative Asset Allocation Portfolio invests in shares of the following Portfolios: a fixed income component (approximately 60% of the Portfolio, invested in shares of the SP PIMCO Total Return Portfolio (40% of Portfolio) and the SP PIMCO High Yield Portfolio (20% of Portfolio)); and 6

125 a large capitalization equity component (approximately 30% of the Portfolio, invested in shares of the SP Davis Value Portfolio (15% of Portfolio), the SP Alliance Large Cap Growth Portfolio (7.5% of Portfolio), and the Jennison Portfolio (7.5% of Portfolio)); and a small/mid capitalization equity component (approximately 10% of the Portfolio, invested in shares of the SP Small/Mid-Cap Value Portfolio (5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (5% of Portfolio)). For more information on the underlying Portfolios, please refer to their investment summaries included in this prospectus. SP Davis Value Portfolio SP Davis Value Portfolio s investment objective is growth of capital. The Portfolio invests primarily in common stock of U.S. companies with market capitalizations of at least $5 billion. The portfolio managers use the investment philosophy of Davis Selected Advisers, L.P. to select common stocks of quality, overlooked growth companies at value prices and to hold them for the long-term. They look for companies with sustainable growth rates selling at modest price-earnings multiples that they hope will expand as other investors recognize the company s true worth. The portfolio managers believe that if you combine a sustainable growth rate with a gradually expanding multiple, these rates compound and can generate returns that could exceed average returns earned by investing in large capitalization domestic stocks. They consider selling a company if the company no longer exhibits the characteristics that they believe foster sustainable long-term growth, minimize risk and enhance the potential for superior long-term returns. There is a risk that Value Stocks can perform differently from the market as a whole and other types of stocks and can continue to be undervalued by the markets for long periods of time. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk liquidity risk management risk market risk SP Deutsche International Equity Portfolio The Portfolio s investment objective is to invest for long-term capital appreciation. The Portfolio normally invests at least 80% of its investable assets (net assets plus borrowings made for investment purposes) in the stocks and other equity securities of companies in developed countries outside the United States. The Portfolio seeks to achieve its goal by investing primarily in companies in developed foreign countries. The companies are selected by an extensive tracking system plus the input of experts from various financial disciplines. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. This Portfolio is advised by Deutsche Asset Management Inc. (DAMI) Principal Risks: company risk foreign investment risk management risk market risk SP Growth Asset Allocation Portfolio The SP Growth Asset Allocation Portfolio seeks to provide long-term growth of capital with consideration also given to current income, by investing in large-cap equity Portfolios, fixed income Portfolios, international equity Portfolios, and small/mid-cap equity Portfolios. Pertinent risks are those associated with each Portfolio in which this Portfolio invests. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. 7

126 The Growth Asset Allocation Portfolio invests in shares of the following Portfolios: a large capitalization equity component (approximately 45% of the Portfolio, invested in shares of the SP Davis Value Portfolio (22.5% of Portfolio), the SP Alliance Large Cap Growth Portfolio (11.25% of Portfolio), and the Jennison Portfolio (11.25% of Portfolio)); and a fixed income component (approximately 20% of the Portfolio, invested in shares of the SP PIMCO High Yield Portfolio (10% of Portfolio) and the SP PIMCO Total Return Portfolio (10% of Portfolio)); and an international component (approximately 20% of the Portfolio, invested in shares of the SP Jennison International Growth Portfolio (10% of Portfolio) and the SP Deutsche International Equity Portfolio (10% of Portfolio)); and a small/mid capitalization equity component (approximately 15% of the Portfolio, invested in shares of the SP Small/Mid-Cap Value Portfolio (7.5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (7.5% of Portfolio)). For more information on the underlying Portfolios, please refer to their investment summaries included in this prospectus. SP INVESCO Small Company Growth Portfolio The Portfolio seeks long-term capital growth. Under normal circumstances, the Portfolio will invest at least 80% of its investable assets (net assets plus any borrowings made for investment purposes) in small-capitalization companies those which are included in the Russell 2000 Growth Index at the time of purchase, or if not included in that index, have market capitalizations of $2.5 billion or below at the time of purchase. Investments in small, developing companies carry greater risk than investments in larger, more established companies. Developing companies generally face intense competition, and have a higher rate of failure than larger companies. On the other hand, large companies were once small companies themselves, and the growth opportunities of some small companies may be quite high. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. This Portfolio is advised by INVESCO Funds Group, Inc. Principal Risks: company risk management risk market risk SP Jennison International Growth Portfolio The Portfolio s investment objective is long-term growth of capital. The Portfolio seeks to achieve this objective by investing in equity-related securities of foreign issuers. This means the Portfolio looks for investments that Jennison Associates LLC thinks will increase in value over a period of years. To achieve its objective, the Portfolio invests primarily in the common stock of large and medium-sized foreign companies. Under normal circumstances, the Portfolio invests at least 65% of its total assets in common stock of foreign companies operating or based in at least five different countries. The Portfolio looks primarily for stocks of companies whose earnings are growing at a faster rate than other companies. These companies typically have characteristics such as above average growth in earnings and cash flow, improving profitability, strong balance sheets, management strength and strong market share for its products. The Portfolio also tries to buy such stocks at attractive prices in relation to their growth prospects. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk market risk 8

127 SP Large Cap Value Portfolio The Portfolio s investment objective is long-term growth of capital. The portfolio s investment strategy includes normally investing at least 80% of its investable assets (net assets plus any borrowings made for investment purposes) in securities of companies with large market capitalizations (those with market capitalizations similar to companies in the Standard & Poor s 500 Composite Stock Price Index or the Russell 1000 Index). The Portfolio normally invests its assets primarily in common stocks. The Portfolio invests in securities of companies that Fidelity Management & Research Company (FMR) believes are undervalued in the marketplace in relation to factors such as assets, earnings, growth potential or cash flow in relation to securities of other companies in the same industry (stocks of these companies are often called value stocks). The Portfolio invests in domestic and foreign issuers. The Portfolio uses fundamental analysis of each issuer s financial condition, its industry position and market and economic conditions, along with statistical models to evaluate growth potential, valuation, liquidity and investment risk, to select investments. There is a risk that value stocks can perform differently from the market as a whole and other types of stocks and can continue to be undervalued by the markets for long periods of time. An investment in this Portfolio, like any Portfolio, is not a deposit of a bank, and is not insured by the Federal Deposit Insurance Corporation or any other government agency. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk management risk market risk SP MFS Capital Opportunities Portfolio The Portfolio s investment objective is capital appreciation. The Portfolio invests, under normal market conditions, at least 65% of its net assets in common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts for those securities. The Portfolio focuses on companies which Massachusetts Financial Services Company (MFS) believes have favorable growth prospects and attractive valuations based on current and expected earnings or cash flow. The Portfolio s investments may include securities listed on a securities exchange or traded in the over-the-counter markets. MFS uses a bottom-up, as opposed to a top-down, investment style in managing the Portfolio. This means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive position and management s abilities) performed by the Portfolio s portfolio manager and MFS s large group of equity research analysts. The Portfolio may invest in foreign securities (including emerging market securities), through which it may have exposure to foreign currencies. The Portfolio may engage in active and frequent trading to achieve its principal investment strategies. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. High portfolio turnover results in higher transaction costs and can affect the Portfolio s performance. Principal Risks: company risk foreign investment risk management risk market risk portfolio turnover risk SP MFS Mid-Cap Growth Portfolio The Portfolio s investment objective is long-term growth of capital. The Portfolio invests, under normal market conditions, at least 80% of its investable assets (net assets plus any borrowings made for investment purposes) in common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts for those securities. These securities typically are of medium market capitalizations, which Massachusetts Financial Services Company (MFS) believes have above-average growth potential. Medium market capitalization companies are defined by the Portfolio as companies with market capitalizations equaling or exceeding $250 million but not exceeding the top of the Russell Midcap Growth Index range at the time of the 9

128 Portfolio s investment. This Index is a widely recognized, unmanaged index of mid-cap common stock prices. Companies whose market capitalizations fall below $250 million or exceed the top of the Russell Midcap Growth Index range after purchase continue to be considered medium-capitalization companies for purposes of the Portfolio s 80% investment policy. The Portfolio s investments may include securities listed on a securities exchange or traded in the over-the-counter markets. MFS uses a bottom-up, as opposed to a top-down, investment style in managing the Portfolio. This means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive position and management s abilities) performed by the portfolio manager and MFS s large group of equity research analysts. The Portfolio is a non-diversified mutual fund portfolio. This means that the Portfolio may invest a relatively high percentage of its assets in a small number of issuers. The Portfolio may invest in foreign securities (including emerging markets securities). The Portfolio is expected to engage in active and frequent trading to achieve its principal investment strategies. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk management risk market risk portfolio turnover risk SP PIMCO High Yield Portfolio The investment objective of the Portfolio is to seek maximum total return, consistent with preservation of capital and prudent investment management. The Portfolio seeks to achieve its investment objective by investing under normal circumstances at least 80% of its investable assets (net assets plus any borrowings made for investment purposes) in a diversified portfolio of high yield/high risk securities rated below investment grade but rated at least B by Moody s Investor Service, Inc. (Moody s) or Standard & Poor s Ratings Group (S&P), or, if unrated, determined by Pacific Investment Management Company (PIMCO) to be of comparable quality. The remainder of the Portfolio s assets may be invested in investment grade fixed income instruments. The average duration of the Portfolio normally varies within a two- to six-year time frame based on PIMCO s forecast for interest rates. The Portfolio may invest without limit in U.S. dollar-denominated securities of foreign issuers. The Portfolio may invest up to 15% of its assets in euro-denominated securities. The Portfolio normally will hedge at least 75% of its exposure to the euro to reduce the risk of loss due to fluctuations in currency exchange rates. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: credit risk derivatives risk foreign investment risk high yield risk interest rate risk leveraging risk liquidity risk management risk market risk mortgage risk SP PIMCO Total Return Portfolio The investment objective of the Portfolio is to seek maximum total return, consistent with preservation of capital and prudent investment management. The Portfolio seeks to achieve its investment objective by investing under normal circumstances at least 65% of its assets in a diversified portfolio of fixed income instruments of varying maturities. The average portfolio duration of this Portfolio normally varies within a three- to six-year time frame based on PIMCO s forecast for interest rates. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. 10

129 Principal Risks: credit risk derivatives risk interest rate risk management risk SP Prudential U.S. Emerging Growth Portfolio The Portfolio s investment objective is long-term capital appreciation, which means that the Portfolio seeks investments whose price will increase over several years. The Portfolio normally invests at least 80% of its investable assets (net assets plus any borrowings made for investment purposes) in equity securities of small and medium-sized U.S. companies that Jennison Associates LLC believes have the potential for above-average growth. The Portfolio also may use derivatives for hedging or to improve the Portfolio s returns. The Portfolio may actively and frequently trade its portfolio securities. High portfolio turnover results in higher transaction costs and can affect the Portfolio s performance. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk management risk market risk SP Small/Mid-Cap Value Portfolio The Portfolio s investment objective is long-term growth of capital. The Portfolio s investment strategy includes normally investing at least 80% of its investable assets (net assets plus any borrowings made for investment purposes) in securities of companies with small to medium market capitalizations (those with market capitalizations similar to companies in the S&P Small Cap 600 or the Russell 2000 for small market capitalization and the S&P MidCap 400 or the Russell Midcap Index for medium market capitalization). The Portfolio normally invests its assets primarily in common stocks. The Portfolio invests in securities of companies that Fidelity Management & Research Company (FMR) believes are undervalued in the marketplace in relation to factors such as assets, earnings, growth potential or cash flow, or in relation to securities of other companies in the same industry, (stocks of these companies are often called value stocks). The Portfolio invests in domestic and foreign issuers. The Portfolio uses fundamental analysis of each issuer s financial condition, its industry position and market and economic conditions, along with statistical models to evaluate growth potential, valuation, liquidity and investment risk to select investments. There is a risk that value stocks can perform differently from the market as a whole and other types of stocks and can continue to be undervalued by the markets for long periods of time. An investment in this Portfolio, like any Portfolio, is not a deposit of a bank, and is not insured by the Federal Deposit Insurance Corporation or any other government agency. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Principal Risks: company risk foreign investment risk liquidity risk management risk market risk SP Strategic Partners Focused Growth Portfolio The Portfolio s investment objective is long-term growth of capital. This means the Portfolio seeks investments whose price will increase over several years. The Portfolio normally invests at least 65% of its total assets in equityrelated securities of U.S. companies that the adviser believes to have strong capital appreciation potential. The Portfolio s strategy is to combine the efforts of two investment advisers and to invest in the favorite stock selection ideas of three portfolio managers (two of whom invest as a team). Each investment adviser to the Portfolio utilizes a growth style to select approximately 20 securities. The portfolio managers build a portfolio with stocks in which they 11

130 have the highest confidence and may invest more than 5% of the Portfolio s assets in any one issuer. The Portfolio is nondiversified, meaning it can invest a relatively high percentage of its assets in a small number of issuers. Investing in a nondiversified portfolio, particularly a portfolio investing in approximately 40 equity-related securities, involves greater risk than investing in a diversified portfolio because a loss resulting from the decline in the value of one security may represent a greater portion of the total assets of a nondiversified portfolio. The Portfolio may actively and frequently trade its portfolio securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. This Portfolio is advised by Jennison Associates LLC and Alliance Capital Management, L.P. Principal Risks: company risk foreign investment risk management risk market risk portfolio turnover risk PRINCIPAL RISKS Although we try to invest wisely, all investments involve risk. Like any mutual fund, an investment in a Portfolio could lose value, and you could lose money. The following summarizes the principal risks of investing in the Portfolios. Company risk. The price of the stock of a particular company can vary based on a variety of factors, such as the company s financial performance, changes in management and product trends, and the potential for takeover and acquisition. This is especially true with respect to equity securities of smaller companies, whose prices may go up and down more than equity securities of larger, more established companies. Also, since equity securities of smaller companies may not be traded as often as equity securities of larger, more established companies, it may be difficult or impossible for a Portfolio to sell securities at a desirable price. Foreign securities have additional risks, including exchange rate changes, political and economic upheaval, the relative lack of information about these companies, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards. Credit risk. Debt obligations are generally subject to the risk that the issuer may be unable to make principal and interest payments when they are due. There is also the risk that the securities could lose value because of a loss of confidence in the ability of the borrower to pay back debt. Non-investment grade debt also known as high-yield bonds and junk bonds have a higher risk of default and tend to be less liquid than higher-rated securities. Derivatives risk. Derivatives are financial contracts whose value depends on, or is derived from, the value of an underlying asset, interest rate or index. The Portfolios typically use derivatives as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. A Portfolio may also use derivatives for leverage, in which case their use would involve leveraging risk. A Portfolio s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks described elsewhere, such as liquidity risk, interest rate risk, market risk, credit risk and management risk. They also involve the risk of mispricing or improper valuation and the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. A Portfolio investing in a derivative instrument could lose more than the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances. Foreign investment risk. Investing in foreign securities generally involves more risk than investing in securities of U.S. issuers. Foreign investment risk includes the specific risks described below. Currency risk. Changes in currency exchange rates may affect the value of foreign securities held by a Portfolio and the amount of income available for distribution. If a foreign currency grows weaker relative to the U.S. dollar, the value of securities denominated in that foreign currency generally decreases in terms of U.S. dollars. If a Portfolio does not correctly anticipate changes in exchange rates, its share price could decline as a result. In addition, certain hedging activities may cause the Portfolio to lose money and could reduce the amount of income available for distribution. 12

131 Emerging market risk. To the extent that a Portfolio invests in emerging markets to enhance overall returns, it may face higher political, information, and stock market risks. In addition, profound social changes and business practices that depart from norms in developed countries economies have sometimes hindered the orderly growth of emerging economies and their stock markets in the past. High levels of debt may make emerging economies heavily reliant on foreign capital and vulnerable to capital flight. Foreign market risk. Foreign markets, especially those in developing countries, tend to be more volatile than U.S. markets and are generally not subject to regulatory requirements comparable to those in the U.S. Because of differences in accounting standards and custody and settlement practices, investing in foreign securities generally involves more risk than investing in securities of U.S. issuers. Information risk. Financial reporting standards for companies based in foreign markets usually differ from those in the United States. Since the numbers themselves sometimes mean different things, the sub-advisers devote much of their research effort to understanding and assessing the impact of these differences upon a company s financial conditions and prospects. Liquidity risk. Stocks that trade less can be more difficult or more costly to buy, or to sell, than more liquid or active stocks. This liquidity risk is a factor of the trading volume of a particular stock, as well as the size and liquidity of the entire local market. On the whole, foreign exchanges are smaller and less liquid than the U.S. market. This can make buying and selling certain shares more difficult and costly. Relatively small transactions in some instances can have a disproportionately large effect on the price and supply of shares. In certain situations, it may become virtually impossible to sell a stock in an orderly fashion at a price that approaches an estimate of its value. Political developments. Political developments may adversely affect the value of a Portfolio s foreign securities. Political risk. Some foreign governments have limited the outflow of profits to investors abroad, extended diplomatic disputes to include trade and financial relations, and imposed high taxes on corporate profits. Regulatory risk. Some foreign governments regulate their exchanges less stringently, and the rights of shareholders may not be as firmly established. High yield risk. Portfolios that invest in high yield securities and unrated securities of similar credit quality (commonly known as junk bonds ) may be subject to greater levels of interest rate, credit and liquidity risk than Portfolios that do not invest in such securities. High yield securities are considered predominantly speculative with respect to the issuer s continuing ability to make principal and interest payments. An economic downturn or period of rising interest rates could adversely affect the market for high yield securities and reduce a Portfolio s ability to sell its high yield securities (liquidity risk). Industry/sector risk. Portfolios that invest in a single market sector or industry can accumulate larger positions in single issuers or an industry sector. As a result, the Portfolio s performance may be tied more directly to the success or failure of a smaller group of portfolio holdings. Interest rate risk. Fixed income securities are subject to the risk that the securities could lose value because of interest rate changes. For example, bonds tend to decrease in value if interest rates rise. Debt obligations with longer maturities sometimes offer higher yields, but are subject to greater price shifts as a result of interest rate changes than debt obligations with shorter maturities. Leveraging risk. Certain transactions may give rise to a form of leverage. Such transactions may include, among others, reverse repurchase agreements, loans of portfolio securities, and the use of when-issued, delayed delivery or forward commitment contracts. The use of derivatives may also create leveraging risks. To mitigate leveraging risk, a sub-adviser can segregate liquid assets or otherwise cover the transactions that may give rise to such risk. The use of leverage may cause a Portfolio to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, may cause a Portfolio to be more volatile than if the Portfolio had not been leveraged. This is because leveraging tends to exaggerate the effect of any increase or decrease in the value of a Portfolio s securities. 13

132 Liquidity risk. Liquidity risk exists when particular investments are difficult to purchase or sell. A Portfolio s investments in illiquid securities may reduce the returns of the Portfolio because it may be unable to sell the illiquid securities at an advantageous time or price. Portfolios with principal investment strategies that involve foreign securities, derivatives or securities with substantial market and/or credit risk tend to have the greatest exposure to liquidity risk. Management risk. Actively managed investment portfolios are subject to management risk. Each sub-adviser will apply investment techniques and risk analyses in making investment decisions for the Portfolios, but there can be no guarantee that these will produce the desired results. Market risk. Common stocks are subject to market risk stemming from factors independent of any particular security. Investment markets fluctuate. All markets go through cycles and market risk involves being on the wrong side of a cycle. Factors affecting market risk include political events, broad economic and social changes, and the mood of the investing public. You can see market risk in action during large drops in the stock market. If investor sentiment turns gloomy, the price of all stocks may decline. It may not matter that a particular company has great profits and its stock is selling at a relatively low price. If the overall market is dropping, the values of all stocks are likely to drop. Generally, the stock prices of large companies are more stable than the stock prices of smaller companies, but this is not always the case. Smaller companies often offer a smaller range of products and services than large companies. They may also have limited financial resources and may lack management depth. As a result, stocks issued by smaller companies may fluctuate in value more than the stocks of larger, more established companies. Mortgage risk. A Portfolio that purchases mortgage related securities is subject to certain additional risks. Rising interest rates tend to extend the duration of mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, a Portfolio that holds mortgage-related securities may exhibit additional volatility. This is known as extension risk. In addition, mortgage-related securities are subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can reduce the returns of a Portfolio because the Portfolio will have to reinvest that money at the lower prevailing interest rates. Portfolio turnover risk. A Portfolio s investments may be bought and sold relatively frequently. A high turnover rate may result in higher brokerage commissions and taxable capital gain distributions to a Portfolio s shareholders. * * * For more information about the risks associated with the Portfolios, see How the Portfolios Invest Investment Risks. * * * 14

133 EVALUATING PERFORMANCE Conservative Balanced Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS 10 YEARS Class I shares 2.02% 5.69% 7.55% S&P 500** 11.88% 10.70% 12.93% Conservative Balanced Custom Blended Index*** 2.22% 8.81% 9.81% Lipper Average**** 2.87% 8.04% 9.19% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. *** The Conservative Balanced Custom Blended Index consists of the Standard & Poor s 500 Composite Stock Price Index (50%), the Lehman Aggregate Bond Index (40%) and the T-Bill 3 Month Blend (10%). These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Prudential Investments LLC. **** The Lipper/Variable Insurance Products (VIP) Balanced Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of product charges. Source: Lipper, Inc. 15

134 Diversified Bond Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a market index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS 10 YEARS Class I shares 6.98% 6.27% 6.92% Lehman Aggregate Bond Index** 8.44% 7.43% 7.23% Lipper Average*** 7.57% 6.44% 7.07% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Lehman Aggregate Bond Index is comprised of more than 5,000 government and corporate bonds. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. *** The Lipper Variable Insurance Products (VIP) Corporate Debt BBB Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of product charges. Source: Lipper, Inc. 16

135 Equity Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS 10 YEARS SINCE CLASS II INCEPTION (5/3/99) Class I shares 11.18% 7.06% 12.09% Class II shares 11.57% 3.75% S&P 500** 11.88% 10.70% 12.93% 4.31% Russell 1000 Index*** 20.42% 8.27% 10.79% Lipper Average**** 13.03% 7.94% 11.14% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. *** The Russell 1000 Index consists of the 1000 largest securities in the Russell 3000 Index. The Russell 3000 Index consists of the 3000 largest companies, as determined by market capitalization. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Large Cap Core Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. Source: Lipper, Inc. 17

136 Flexible Managed Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a market index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS 10 YEARS Class I shares 5.68% 5.43% 8.27% S&P 500** 11.88% 10.70% 12.93% Flexible Managed Custom Blended Index*** 4.00% 9.26% 10.52% Lipper Average**** 5.27% 7.95% 9.62% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. *** The Flexible Managed Custom Blended Index consists of the S&P 500 (60%), the Lehman Aggregate Bond Index (35%) and the T-Bill 3-month Blend (5%). The returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. Source Prudential Investments LLC. **** The Lipper Variable Insurance Products (VIP) Flexible Portfolio Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. Source: Lipper, Inc. 18

137 Global Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a market index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS 10 YEARS Class I shares 17.64% 6.11% 9.39% MSCI World Index** 16.82% 5.37% 8.06% Lipper Average*** 15.28% 6.38% 9.57% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Morgan Stanley Capital International World Index (MSCI World Index) is a weighted index comprised of approximately 1,500 companies listed on the stock exchanges of the U.S.A., Europe, Canada, Australia, New Zealand and the Far East. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. *** The Lipper Variable Insurance Products (VIP) Global Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. Source: Lipper, Inc. 19

138 High Yield Bond Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a market index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS 10 YEARS Class I shares 0.44% 1.28% 6.64% Lehman High Yield Index** 5.28% 3.11% 7.58% Lipper Average*** 1.13% 1.60% 6.59% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Lehman High Yield Index is made up of over 700 noninvestment grade bonds. The index is an unmanaged index that includes the reinvestment of all interest but does not reflect the payment of transaction costs and advisory fees associated with an investment in the Portfolio. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. *** The Lipper Variable Insurance Products (VIP) High Current Yield Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. Source: Lipper, Inc. 20

139 Jennison Portfolio (formerly, Prudential Jennison Portfolio) A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS SINCECLASS I INCEPTION (4/25/95) SINCECLASS II INCEPTION (2/10/00) Class I shares 18.25% 11.70% 14.66% Class II shares 18.60% 21.45% S&P 500** 11.88% 10.70% 14.66% 8.50% Russell 1000 Growth Index*** 20.42% 8.27% 12.90% Lipper Average**** 21.88% 8.75% 12.70% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. Companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell 1000 Growth Index consists of those securities included in the Russell 1000 Index that have a greater-than-average growth orientation. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 21

140 Money Market Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a group of similar mutual funds. Past performance does not assure that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS 10 YEARS Class I shares 4.22% 5.24% 4.80% Lipper Average** 3.73% 4.96% 4.54% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Lipper Variable Insurance Products (VIP) Money Market Average is calculated by Lipper Analytical Services, Inc., and reflects the investment return of certain portfolios underlying variable life and annuity products. These returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. Source: Lipper, Inc. 7-Day Yield* (as of 12/31/01) Money Market Portfolio 1.89% Average Money Market Fund** 1.45% * The Portfolio s yield is after deduction of expenses and does not include Contract charges. ** Source: imoneynet, Inc. As of 12/31/01, based on the imoneynet First and Second Tier General Purpose Retail Universe. 22

141 Stock Index Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS 10 YEARS Class I shares 12.05% 10.47% 12.61% S&P 500** 11.88% 10.70% 12.93% Lipper Average*** 12.22% 10.37% 12.53% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. *** The Lipper Variable Insurance Products (VIP) S&P 500 Index Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. Source: Lipper, Inc. 23

142 Value Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how returns can change from year to year and by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR 5 YEARS 10 YEARS Class I Shares 2.08% 11.18% 13.14% S&P 500** 11.88% 10.70% 12.93% Russell 1000 Value Index*** 5.59% 11.13% 14.13% Lipper Large Cap Value Funds Average**** 5.98% 8.68% 12.38% Lipper Multi Cap Value Funds Average**** 0.22% 9.81% 11.17% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. Returns shown are for Class I shares only. Returns are not shown for Class II shares, because Class II shares have not yet been in existence for a full calendar year (Class II inception date: 5/14/01). Returns for Class II shares would have been lower than for Class I due to higher expenses. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. *** The Russell 1000 Value Index consists of those securities included in the Russell 1000 Index that have a lessthan-average growth orientation. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Large Cap Value Funds Average and Multi Cap Value Funds Average are calculated by Lipper Analytical Services, Inc. and reflect the return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. Although Lipper classifies the Portfolio within the Multi Cap Value Funds Average, the returns for the Large Cap Value Funds Average is also shown, because the management of the portfolios included in the Large Cap Value Funds Average are more consistent with the management of the Portfolio. 24

143 SP Aggressive Growth Asset Allocation Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 17.92% 18.84% S&P 500** 11.88% 15.32% Aggressive Growth AA Custom Blended Index*** 12.46% 16.17% Lipper Average**** 12.94% 15.14% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Aggressive Growth AA Custom Blended Index consists of the Russell 1000 Value Index (20%), the Russell 1000 Growth Index (20%), the Russell 2500 Value Index (12.5%), the Russell Mid-Cap Growth Index (12.5%), and the MSCI EAFE Index (35%). These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: **** The Lipper Variable Insurance Products (VIP) Multi-Cap Core Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 25

144 SP AIM Aggressive Growth Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 24.53% 28.74% Russell 2500 Index** 1.22% 2.00% Russell 2500 Growth Index*** 10.75% 23.14% Lipper Average**** 23.31% 32.40% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Russell 2500 Index measures the performance of the 500 smallest companies in the Russell 1000 Index and all 2000 companies included in the Russell 2000 Index. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell 2500 Growth Index measures the performance of the 2,500 smallest companies in the Russell 3000 Index, which represents approximately 16% of the total market capitalization of the Russell 3000 Index. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Mid-Cap Growth Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 26

145 SP AIM Core Equity Portfolio (formerly, SP AIM Growth and Income Portfolio) A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I Shares 22.68% 28.53% S&P 500** 11.88% 15.32% Russell 1000 Index*** 12.45% 16.74% Lipper Large Cap Growth Funds Average**** 21.88% 28.52% Lipper Large Cap Core Funds Average**** 13.03% 15.58% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell 1000 Index consists of the 1000 largest companies included in the Russell 3000 Index. The Russell 3000 Index consists of the 3000 largest companies, as determined by market capitalization. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds Average and Large Cap Core Funds Average are calculated by Lipper Analytical Services, Inc. and reflects the return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Although Lipper classifies the Portfolio within the Large Cap Growth Funds Average, the returns for the Large Cap Core Funds Average is also shown, because the management of the portfolios included in the Large Cap Core Funds Average is more consistent with the management of the Portfolio. 27

146 SP Alliance Large Cap Growth Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 14.47% 21.71% Russell 1000 Index** 12.45% 16.74% Russell 1000 Growth Index*** 20.42% 31.26% Lipper Large Cap Growth Funds Average**** 21.88% 28.52% Lipper Multi-Cap Core Funds Average**** 12.94% 15.14% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Russell 1000 Index consists of the 1000 largest companies in the Russell 3000 Index. The Russell 3000 Index consists of the 3000 largest companies, as determined by market capitalization. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell 1000 Growth Index consists of those securities included in the Russell 1000 Index that have a greater-than-average growth orientation. These returns do not include the effect of investment management expenses. The returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. **** The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds Average and Multi-Cap Core Funds Average are calculated by Lipper Analytical Services, Inc. and reflects the return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Although Lipper classifies the Portfolio within the Multi-Cap Core Funds Average, the returns for the Large Cap Growth Funds Average is also shown, because the management of the portfolios included in the Large Cap Growth Funds average is more consistent with the management of the Portfolio. 28

147 SP Alliance Technology Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 25.07% 35.49% S&P 500** 11.88% 15.32% S&P Supercomposite 1500 Technology Index*** 22.16% 39.58% Lipper Average**** 21.29% 27.50% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Standard & Poor s Supercomposite 1500 Technology Index is a capitalization-weighted index designed to measure the performance of the technology component of the S&P 500 Index. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Specialty/Miscellaneous Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 29

148 SP Balanced Asset Allocation Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with market indexes and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 5.99% 5.79% S&P 500** 11.88% 15.32% Balanced AA Custom Blended Index*** 2.97% 5.95% Lipper Average**** 2.87% 2.87% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Balanced AA Custom Blended Index consists of the Russell 1000 Value Index (17.5%), the Russell 1000 Growth Index (17.5%), the Russell 2500 Value Index (7.5%), the Russell Mid-Cap Growth Index (7.5%), the Lehman Brothers Aggregate Bond Index (25%), the Lehman Brothers Intermediate BB Index (15%) and the MSCI EAFE Index (10%). These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Prudential Investments LLC. **** The Lipper Variable Insurance Products (VIP) Balanced Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar monthend return. Source: Lipper, Inc. 30

149 SP Conservative Asset Allocation Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with market indexes and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 0.23% 0.47% S&P 500** 11.88% 15.32% Conservative AA Custom Blended Index*** 1.68% 0.63% Lipper Average**** 0.28% 0.70% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Conservative AA Custom Blended Index consists of the Russell 1000 Value Index (15%), the Russell 1000 Growth Index (15%), the Russell 2500 Value Index (5%), the Lehman Brothers Aggregate Bond Index (40%), the Lehman Brothers Intermediate BB Index (20%) and the Russell Mid-Cap Growth Index (5%). These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Prudential Investments LLC. **** The Lipper Variable Insurance Products (VIP) Income Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar monthend return. Source: Lipper, Inc. 31

150 SP Davis Value Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 10.46% 7.08% Russell 1000 Value Index** 5.59% 1.76% Lipper Average*** 5.98% 1.00% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Russell 1000 Value Index consists of those companies in the Russell 1000 Index that have a less-thanaverage growth orientation. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Lipper Variable Insurance Products (VIP) Large-Cap Value Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 32

151 SP Deutsche International Equity Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 22.07% 21.12% MSCI EAFE Index** 21.44% 19.33% Lipper Average*** 21.48% 20.77% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Morgan Stanley Capital International (MSCI) Europe, Australia, Far East (EAFE) Index is a weighted, unmanaged index of performance that reflects stock price movements in Europe, Australasia, and the Far East. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Lipper Variable Insurance Products (VIP) International Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 33

152 SP Growth Asset Allocation Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with market indexes and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 11.77% 12.60% S&P 500** 11.88% 15.32% Growth AA Custom Blended Index*** 8.47% 11.50% Lipper Average**** 12.94% 15.14% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Growth AA Custom Blended Index consists of the Russell 1000 Value Index (22.5%), the Russell 1000 Growth Index (22.5%), the Russell 2500 Value Index (7.5%), the Russell Mid-Cap Growth Index (7.5%), the Lehman Brothers Aggregate Bond Index (10%), the Lehman Brothers Intermediate BB Index (10%) and the MSCI EAFE Index (20%). These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Prudential Investments LLC. **** The Lipper Variable Insurance Products (VIP) Multi-Cap Core Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 34

153 SP INVESCO Small Company Growth Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 17.18% 24.90% Russell 2000 Index** 2.49% 3.69% Russell 2000 Growth Index*** 9.23% 22.74% Lipper Average**** 12.40% 21.64% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell 2000 Growth Index consists of those companies in the Russell 2000 Index that have a greater-thanaverage growth orientation. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Small-Cap Growth Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 35

154 SP Jennison International Growth Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) 1 YEAR SINCE CLASS I INCEPTION (9/22/00) SINCE CLASS II INCEPTION (10/4/00) Class I shares 35.64% 37.67% Class II shares 35.92% 37.67% MSCI EAFE Index** 21.44% 19.33% 19.33% Lipper Average*** 21.48% 20.77% 20.77% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Morgan Stanley Capital International (MSCI) Europe, Australia, Far East (EAFE) Index is a weighted, unmanaged index of performance that reflects stock price movements in Europe, Australia, and the Far East. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, inc. *** The Lipper Variable Insurance Products (VIP) International Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 36

155 SP Large Cap Value Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 8.65% 3.34% Russell 1000 Index** 12.45% 16.74% Russell 1000 Value Index*** 5.59% 1.76% Lipper Average**** 5.98% 4.97% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Russell 1000 Index measures the performance of the 1000 largest companies in the Russell 3000 Index. The Russell 3000 index consists of the 3000 largest U.S. companies, as determined by total market capitalization. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell 1000 Value Index measures the performance of those Russell 1000 companies that have a lessthan-average growth orientation. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Large Cap Value Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 37

156 SP MFS Capital Opportunities Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I Shares 23.28% 24.15% S&P 500** 11.88% 15.32% Russell 1000 Index*** 12.45% 16.74% Lipper Multi-Cap Core Funds Average**** 12.94% 15.14% Lipper Large Cap Core Funds Average**** 13.03% 15.58% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell 1000 Index consists of the 1000 largest companies included in the Russell 3000 Index. The Russell 3000 Index consists of the 3000 largest companies, as determined by market capitalization. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Multi-Cap Core Funds Average and Large Cap Core Funds Average are calculated by Lipper Analytical Services, Inc. and reflects the return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Although Lipper classifies the Portfolio within the Multi-Cap Core Funds Average, the returns for the Large Cap Core Funds Average is also shown, because the management of the portfolios included in the Large Cap Core Funds Average is more consistent with the management of the Portfolio. 38

157 SP MFS Mid-Cap Growth Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 20.93% 18.29% Russell MidCap Index** 5.62% 7.27% Russell MidCap Growth Index*** 20.15% 32.41% Lipper Average**** 23.31% 31.98% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Russell MidCap Index consists of the 800 smallest securities in the Russell 1000 Index, as ranked by total market capitalization. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell MidCap Growth Growth Index consists of those securities included in the Russell MidCap Index that have a greater-than-average growth orientation. These returns do not include the effect of investment management expenses. The returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. ****The Lipper Variable Insurance Products (VIP) Mid Cap Growth Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. 39

158 SP PIMCO High Yield Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a market index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 3.97% 4.66% Lehman Brothers Intermediate BB Corporate Index** 10.17% 7.99% Lipper Average*** 1.13% 3.78% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Lehman Brothers Intermediate BB Corporate Index is an unmanaged index comprised of various fixed-income securities rated BB. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Lipper Variable Insurance Products (VIP) High Current Yield Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 40

159 SP PIMCO Total Return Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a market index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 8.66% 11.03% Lehman Brothers Aggregate Bond Index** 8.44% 10.28% Lipper Average*** 5.76% 5.98% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Lehman Brothers Aggregate Bond Index is an unmanaged index comprised of more than 5,000 government and corporate bonds. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Lipper Variable Insurance Products (VIP) General Bond Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. 41

160 SP Prudential U.S. Emerging Growth Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE CLASS I INCEPTION 1 YEAR (9/22/00) Class I Shares 17.78% 25.26% S&P MidCap 400 Index** 0.62% 3.57% Russell Midcap Growth Index*** 20.15% 32.41% Lipper Multi-Cap Growth Funds Average**** 26.81% 35.76% Lipper Mid Cap Growth Funds Average**** 23.31% 31.98% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. Returns shown are for Class I shares only. Returns are not shown for Class II shares, because Class II shares have not yet been in existence for a full calendar year (Class II inception date: 7/9/01). Returns for Class II shares would have been lower than for Class I due to higher expenses. ** The Standard & Poor s MidCap 400 Composite Stock Price Index (S&P MidCap 400) an unmanaged index of 400 domestic stocks chosen for market size, liquidity and industry group representation gives a broad look at howmid-cap stock prices have performed. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell Midcap Growth Index consists of those securities in the Russell Midcap Index that have a greaterthan-average growth orientation. The Russell Midcap Index consists of the 800 smallest securities in the Russell 1000 Index, as ranked by total market capitalization. These returns do not include the effect of investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Multi-Cap Growth Funds Average and Mid Cap Growth Funds Average are calculated by Lipper Analytical Services, Inc. and reflect the return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar month-end return. Although Lipper classifies the Portfolio within the Multi-Cap Growth Funds Average, the returns for the Mid Cap Growth Fund Average is also shown, because the management of the portfolios included in the Mid Cap Growth Funds Average is more consistent with the management of the Portfolio. 42

161 SP Small/Mid-Cap Value Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE INCEPTION 1 YEAR (9/22/00) Class I shares 3.11% 11.42% Russell 2500 Index** 1.22% 2.00% Russell 2500 Value Index*** 9.73% 15.05% Lipper Average**** 7.33% 11.96% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. ** The Russell 2500 Index consists of the smallest 500 securities in the Russell 1000 Index and all 2000 securities in the Russell 2000 Index. The Russell 1000 Index consists of the 1000 largest securities in the Russell 3000 Index, and the Russell 2000 Index consists of the smallest 2000 securities in the Russell 3000 Index. The Russell 3000 Index consists of the 3000 largest U.S. companies, as determined by total market capitalization. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell 2500 Value Index measures the performance of Russell 2500 companies with higher price-to-book ratios. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Mid-Cap Value Funds is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar monthend return. Source: Lipper, Inc. 43

162 SP Strategic Partners Focused Growth Portfolio A number of factors including risk can affect how the Portfolio performs. The bar chart and table below demonstrate the risk of investing in the Portfolio by showing how the Portfolio s average annual returns compare with a stock index and a group of similar mutual funds. Past performance does not mean that the Portfolio will achieve similar results in the future. * These annual returns do not include Contract charges. If Contract charges were included, the annual returns would have been lower than those shown. See the accompanying Contract prospectus. Average Annual Returns* (as of 12/31/01) SINCE CLASS I INCEPTION 1 YEAR (9/22/00) Class I shares 15.32% 26.64% S&P 500** 11.88% 15.32% Russell 1000 Growth Index*** 20.42% 31.26% Lipper Average**** 22.94% 28.52% * The Portfolio s returns are after deduction of expenses and do not include Contract charges. Returns shown are for Class I shares only. Returns are not shown for Class II shares, because Class II shares have not yet been in existence for a full calendar year (Class II inception date: 1/12/01). Returns for Class II shares would have been lower than for Class I due to higher expenses. ** The Standard & Poor s 500 Composite Stock Price Index (S&P 500) an unmanaged index of 500 stocks of large U.S. companies gives a broad look at howstock prices have performed. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. *** The Russell 1000 Growth Index consists of those Russell 1000 securities that have a greater-than-average growth orientation. The Russell 1000 Index consists of the 1000 largest securities in the Russell 3000 Index. The Russell 3000 Index consists of the 3000 largest U.S. securities, as determined by total market capitalization. These returns do not include the effect of any investment management expenses. These returns would have been lower if they included the effect of these expenses. The Since Inception return reflects the closest calendar month-end return. Source: Lipper, Inc. **** The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds is calculated by Lipper Analytical Services, Inc. and reflects the investment return of certain portfolios underlying variable life and annuity products. The returns are net of investment fees and fund expenses but not product charges. These returns would have been lower if they included the effect of these charges. The Since Inception return reflects the closest calendar monthend return. Source: Lipper, Inc. 44

163 HOW THEPORTFOLIOS INVEST Investment Objectives and Policies We describe each Portfolio s investment objective and policies below. We describe certain investment instruments that appear in bold lettering below in the section entitled Other Investments and Strategies. Although we make every effort to achieve each Portfolio s objective, we can t guarantee success and it is possible that you could lose money. Unless otherwise stated, each Portfolio s investment objective is a fundamental policy that cannot be changed without shareholder approval. The Board of Directors can change investment policies that are not fundamental. An investment in a Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Conservative Balanced Portfolio The investment objective of this Portfolio is to seek a total investment return consistent with a conservatively managed diversified portfolio. Balanced Portfolio We invest in equity, debt and money market securities in order to achieve diversification. We seek to maintain a conservative blend of investments that will have strong performance in a down market and solid, but not necessarily outstanding, performance in up markets. This Portfolio may be appropriate for an investor looking for diversification with less risk than that of the Flexible Managed Portfolio, while recognizing that this reduces the chances of greater appreciation. To achieve our objective, we invest in a mix of equity and equity-related securities, debt obligations and money market instruments. We adjust the percentage of Portfolio assets in each category depending on our expectations regarding the different markets. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. We will vary how much of the Portfolio s assets are invested in a particular type of security depending on how we think the different markets will perform. Under normal conditions, we will invest within the ranges shown below: Asset Type Minimum Normal Maximum Stocks 15% 50% 75% Debt obligations and money market securities 25% 50% 85% The equity portion of the Portfolio is generally managed as an index fund, designed to mirror the holdings of the Standard & Poor s 500 Composite Stock Price Index. For more information about the index and index investing, see the investment summary for Stock Index Portfolio included in this prospectus. Debt securities in general are basically written promises to repay a debt. There are numerous types of debt securities which vary as to the terms of repayment and the commitment of other parties to honor the obligations of the issuer. Most of the securities in the debt portion of this Portfolio will be rated investment grade. This means major rating services, like Standard & Poor s Ratings Group (S&P) or Moody s Investors Service, Inc. (Moody s), have rated the securities within one of their four highest rating categories. The Portfolio also invests in high quality money market instruments. The Portfolio may also invest in lower-rated securities, which are riskier and are considered speculative. These securities are sometimes referred to as junk bonds. We may also invest in instruments that are not rated, but which we believe are of comparable quality to the instruments described above. The Portfolio s investment in debt securities may include investments in mortgage-related securities. The Portfolio may invest up to 30% of its total assets in foreign equity and debt securities that are not denominated in the U.S. dollar. Up to 20% of the Portfolio s total assets may be invested in debt securities that are issued outside the 45

164 U.S. by foreign or U.S. issuers, provided the securities are denominated in U.S. dollars. For these purposes, we do not consider American Depositary Receipts (ADRs) as foreign securities. In response to adverse market conditions or when restructuring the Portfolio, we may temporarily invest up to 100% of the Portfolio s total assets in money market instruments. Investing heavily in these securities limits our ability to achieve our investment objective, but can help to preserve the value of the Portfolio s assets when the markets are unstable. We may also invest in fixed and floating rate loans (secured or unsecured) arranged through private negotiations between a corporation which is the borrower and one or more financial institutions that are the lenders. Generally, these types of investments are in the form of loans or assignments. We may also use alternative investment strategies including derivatives to try to improve the Portfolio s returns, protect its assets or for short-term cash management. We may: purchase and sell options on equity securities, debt securities, stock indexes and foreign currencies; purchase and sell exchange-traded fund shares; purchase and sell stock index, interest rate, interest rate swap and foreign currency futures contracts and options on those contracts; enter into forward foreign currency exchange contracts; and purchase securities on a when-issued or delayed delivery basis. The Portfolio may also enter into short sales. No more than 25% of the Portfolio s net assets may be used as collateral or segregated for purposes of securing a short sale obligation. The Portfolio may also enter into short sales againstthe-box. We may also use interest rate swaps in the management of the fixed-income portion of the Portfolio. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund and other affiliated funds in a joint repurchase account under an order obtained from the SEC. The Portfolio may invest in equity and/or debt securities issued by Real Estate Investment Trusts (REITs). We may also invest in reverse repurchase agreements and dollar rolls in the management of the fixed-income portion of the Portfolio. The Portfolio will not use more than 30% of its net assets in connection with reverse repurchase transactions and dollar rolls. Diversified Bond Portfolio The investment objective of this Portfolio is a high level of income over a longer term while providing reasonable safety of capital. This means we look for investments that we think will provide a high level of current income, but which are not expected to involve a substantial risk of loss of capital through default. To achieve our objective, we normally invest at least 80% of the Portfolio s investable assets in intermediate and long term debt obligations that are rated investment grade and high-quality money market investments. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Our Strategy In general, the value of debt obligations moves in the opposite direction as interest rates if a bond is purchased and then interest rates go up, newer bonds will be worth more relative to existing bonds because they will have a higher rate of interest. We will adjust the mix of the Portfolio s short-term, intermediate and long term debt obligations in an attempt to benefit from price appreciation when interest rates go down and to incur smaller declines when rates go up. Debt obligations, in general, are basically written promises to repay a debt. The terms of repayment vary among the different types of debt obligations, as do the commitments of other parties to honor the obligations of the issuer of the security. The types of debt obligations in which we can invest include U.S. government securities, mortgage-related securities and corporate bonds. Usually, at least 80% of the Portfolio s investable assets will be invested in debt securities that are investment grade. This means major rating services, like Standard and Poor s Ratings Group (S&P) or Moody s Investor Service, Inc.- 46

165 (Moody s), have rated the securities within one of their four highest rating categories. The Portfolio may continue to hold a debt obligation if it is downgraded below investment grade after it is purchased or if it is no longer rated by a major rating service. We may also invest up to 20% of the Portfolio s investable assets in lower rated securities which are riskier and considered speculative. These securities are sometimes referred to as junk bonds. We may also invest in instruments that are not rated, but which we believe are of comparable quality to the instruments described above. The Portfolio may invest without limit in debt obligations issued or guaranteed by the U.S. government and government-related entities. An example of a debt security that is backed by the full faith and credit of the U.S. government is an obligation of the Government National Mortgage Association (Ginnie Mae). In addition, we may invest in U.S. government securities issued by other government entities, like the Federal National Mortgage Association (Fannie Mae) and the Student Loan Marketing Association (Sallie Mae) which are not backed by the full faith and credit of the U.S. government. Instead, these issuers have the right to borrow from the U.S. Treasury to meet their obligations. The Portfolio may also invest in the debt securities of other government-related entities, like the Farm Credit System, which depend entirely upon their own resources to repay their debt. We may invest up to 20% of the Portfolio s total assets in debt securities issued outside the U.S. by U.S. or foreign issuers whether or not such securities are denominated in the U.S. dollar. The Portfolio may also invest in convertible debt and convertible and preferred stocks and non-convertible preferred stock of any rating. The Portfolio will not acquire any common stock except by converting a convertible security or exercising a warrant. No more than 10% of the Portfolio s total assets will be held in common stocks, and those will usually be sold as soon as a favorable opportunity arises. The Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions to earn income. We may also invest in loans or assignments arranged through private negotiations between a corporation which is the borrower and one or more financial institutions that are the lenders. Under normal conditions, the Portfolio may invest a portion of its assets in high-quality money market instruments. In response to adverse market conditions or when restructuring the Portfolio, we may temporarily invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in these securities limits our ability to achieve our investment objective, but can help to preserve the value of the Portfolio s assets when the markets are unstable. We may also use alternative investment strategies including derivatives to try to improve the Portfolio s returns, protect its assets or for short-term cash management. We may: purchase and sell options on debt securities; purchase and sell interest rate and interest rate swap futures contracts and options on those contracts; invest in forward foreign currency exchange contracts; and purchase securities on a when-issued or delayed delivery basis. The Portfolio may also enter into short sales. No more than 25% of the Portfolio s net assets may be used as collateral or segregated for purposes of securing a short sale obligation. The Portfolio may also enter into short sales against-the-box. We may also use interest rate swaps in the management of the Portfolio. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. The Portfolio may also invest up to 30% of its net assets in reverse repurchase agreements and dollar rolls. The Portfolio will not use more than 30% of its net assets in connection with reverse repurchase transactions and dollar rolls. Equity Portfolio The investment objective of this Portfolio is capital appreciation. This means we seek investments that we believe will provide investment returns above broadly based market indexes. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. 47

166 Blend Approach In deciding which stocks to buy, our portfolio managers use a blend of investment styles. That is, we invest in stocks that may be undervalued given the company s earnings, assets, cash flow and dividends and also invest in companies experiencing some or all of the following: a price/earnings ratio lower than earnings per share growth, strong market position, improving profitability and distinctive attributes such as unique marketing ability, strong research and development, new product flow, and financial strength. To achieve our investment objective, we normally invest at least 80% of the Portfolio s investable assets in common stocks of major established corporations as well as smaller companies. 20% of the Portfolio s investable assets may be invested in short, intermediate or long-term debt obligations, convertible and nonconvertible preferred stock and other equity-related securities. Up to 5% of these investable assets may be rated below investment grade. These securities are considered speculative and are sometimes referred to as junk bonds. Up to 30% of the Portfolio s total assets may be invested in foreign securities, including money market instruments, equity securities and debt obligations. For these purposes, we do not consider American Depositary Receipts (ADRs) as foreign securities. Under normal circumstances, the Portfolio may invest a portion of its assets in money market instruments. In addition, we may temporarily invest up to 100% of the Portfolio s assets in money market instruments in response to adverse market conditions or when we are restructuring the portfolio. Investing heavily in these securities limits our ability to achieve our investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. We may also use alternative investment strategies including derivatives to try to improve the Portfolio s returns, protect its assets or for short-term cash management. We may: purchase and sell options on equity securities, stock indexes and foreign currencies; purchase and sell stock index and foreign currency futures contracts and options on these futures contracts; enter into forward foreign currency exchange contracts; and purchase securities on a when-issued or delayed delivery basis. The Portfolio may also enter into short sales against-the-box. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. The Portfolio may invest in equity and/ or debt securities of Real Estate Investment Trusts (REITs). Jennison Associates LLC is responsible for managing approximately 50% of the Portfolio s assets. GE Asset Management Inc. and Salomon Brothers Asset Management Inc. are each responsible for managing approximately 25% of the Portfolio s assets. Flexible Managed Portfolio The investment objective of this Portfolio is to seek a high total return consistent with an aggressively managed diversified portfolio. Balanced Portfolio We invest in equity, debt and money market securities in order to achieve diversification in a single Portfolio. We seek to maintain a more aggressive mix of investments than the Conservative Balanced Portfolio. This Portfolio may be appropriate for an investor looking for diversification who is willing to accept a relatively high level of loss in an effort to achieve greater appreciation. To achieve our objective, we invest in a mix of equity and equity-related securities, debt obligations and money market instruments. We adjust the percentage of Portfolio assets in each category depending on our expectations regarding the different markets. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. 48

167 Generally, we will invest within the ranges shown below: Asset Type Minimum Normal Maximum Stocks 25% 60% 100% Fixed income securities 0% 40% 75% The equity portion of the Fund is generally managed under an enhanced index style. Under this style, the portfolio managers utilize a quantitative approach in seeking to out-perform the Standard & Poor s 500 Composite Stock Price Index and to limit the possibility of significantly under-performing that index. The stock portion of the Portfolio will be invested in a broadly diversified portfolio of stocks generally consisting of large and mid-size companies, although it may also hold stocks of smaller companies. We will invest in companies and industries that, in our judgment, will provide either attractive long-term returns, or are desirable to hold in the Portfolio to manage risk. Most of the securities in the fixed income portion of this Portfolio will be investment grade. However, we may also invest up to 25% of this portion of the Portfolio in debt securities rated as low as BB, Ba or lower by a major rating service at the time they are purchased. These high-yield or junk bonds are riskier and considered speculative. We may also invest in instruments that are not rated, but which we believe are of comparable quality to the instruments described above. The fixed income portion of the Portfolio may also include loans or assignments in the form of loan participations and mortgage-related securities. The Portfolio may also invest up to 30% of its total assets in foreign equity and debt securities that are not denominated in the U.S. dollar. In addition, up to 20% of the Portfolio s total assets may be invested in debt securities that are issued outside of the U.S. by foreign or U.S. issuers provided the securities are denominated in U.S. dollars. For these purposes, we do not consider American Depositary Receipts (ADRs) as foreign securities. In response to adverse market conditions or when we are restructuring the Portfolio, we may temporarily invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in these securities limits our ability to achieve our investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. The Portfolio may also invest in Real Estate Investment Trusts (REITs). We may also use alternative investment strategies including derivatives to try to improve the Portfolio s returns, protect its assets or for short-term cash management. We may: purchase and sell options on equity securities, debt securities, stock indexes, and foreign currencies; purchase and sell exchange-traded fund shares; purchase and sell stock index, interest rate, interest rate swap and foreign currency futures contracts and options on those contracts; enter into forward foreign currency exchange contracts; and purchase securities on a when-issued or delayed delivery basis. The Portfolio may also enter into short sales. No more than 25% of the Portfolio s net assets may be used as collateral or segregated for purposes of securing a short sale obligation. The Portfolio may also enter into short sales againstthe-box. The Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions to earn income. We may also use interest rate swaps in the management of the fixed income portion of the Portfolio. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. We may also invest in reverse repurchase agreements and dollar rolls in the management of the fixed-income portion of the Portfolio. The Portfolio will not use more than 30% of its net assets in connection with reverse repurchase transactions and dollar rolls. 49

168 Global Portfolio The investment objective of this Portfolio is long-term growth of capital. To achieve this objective, we invest primarily in equity and equity-related securities of foreign and U.S. companies. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Global Investing This Portfolio is intended to provide investors with the opportunity to invest in companies located throughout the world. Although we are not required to invest in a minimum number of countries, we intend generally to invest in at least three countries, including the U.S. However, in response to market conditions, we can invest up to 35% of the Portfolio s total assets in any one country other than the U.S. (The 35% limitation does not apply to U.S. investments). When selecting stocks, we use a growth approach which means we look for companies that have above-average growth prospects. In making our stock picks, we look for companies that have had growth in earnings and sales, high returns on equity and assets or other strong financial characteristics. Often, the companies we choose have superior management, a unique market niche or a strong new product. The Portfolio may invest up to 100% of its assets in money market instruments in response to adverse market conditions or when we are restructuring the Portfolio. Investing heavily in these securities limits our ability to achieve our investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. We may also use alternative investment strategies including derivatives to try to improve the Portfolio s returns, protect its assets or for short-term cash management. We may: purchase and sell options on equity securities, stock indexes and foreign currencies; purchase and sell futures contracts on stock indexes, debt securities, interest rate indexes and foreign currencies and options on these futures contracts; enter into forward foreign currency exchange contracts; and purchase securities on a whenissued or delayed delivery basis. The Portfolio may invest in equity swaps. The Portfolio may also lend its portfolio securities to brokers, dealers and other financial institutions to earn income. The Portfolio may also enter into short sales against-the-box. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. The portfolio may invest in equity and/ or debt securities issued by Real Estate Investment Trusts (REITs). High Yield Bond Portfolio The investment objective of this Portfolio is a high total return. In pursuing our objective, we invest in high yield/high risk debt securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. 50

169 High Yield/High Risk Lower rated and comparable unrated securities tend to offer better yields than higher rated securities with the same maturities because the issuer s financial condition may not have been as strong as that of higher rated issuers. Changes in the perception of the creditworthiness of the issuers of lower rated securities tend to occur more frequently and in a more pronounced manner than for issuers of higher rated securities. Normally, we will invest at least 80% of the Portfolio s investable assets in medium to lower rated debt securities. These high-yield or junk bonds are riskier than higher rated bonds and are considered speculative. The Portfolio may invest up to 20% of its total assets in U.S. dollar denominated debt securities issued outside the U.S. by foreign and U.S. issuers. The Portfolio may also acquire common and preferred stock, debt securities and convertible debt and preferred stock. We may also invest in loans or assignments arranged through private negotiations between a corporation which is the borrower and one or more financial institutions that are the lenders. Under normal circumstances, the Portfolio may invest in money market instruments. In response to adverse market conditions or when we are restructuring the Portfolio, we may temporarily invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in these securities limits our ability to achieve our investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. We may also use alternative investment strategies including derivatives to try to improve the Portfolio s returns, protect its assets or for short-term cash management. We may: purchase and sell options on debt securities; purchase and sell interest rate and interest rate swap futures contracts and options on these futures contracts; and purchase securities on a when-issued or delayed delivery basis. The Portfolio may invest in PIK bonds. The Portfolio may also enter into short sales. No more than 25% of the Portfolio s net assets may be used as collateral or segregated for purposes of securing a short sale obligation. The Portfolio may also enter into short sales againstthe-box. We may also use interest rate swaps in the management of the Portfolio. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. The Portfolio may use up to 30% of its net assets in connection with reverse repurchase agreements and dollar rolls. Jennison Portfolio (formerly, Prudential Jennison Portfolio) The investment objective of this Portfolio is to achieve long-term growth of capital. This means we seek investments whose price will increase over several years. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Investment Strategy We seek to invest in equity securities of established companies with above-average growth prospects. We select stocks on a company-by-company basis using fundamental analysis. In making our stock picks, we look for companies that have had growth in earnings and sales, high returns on equity and assets or other strong financial characteristics. Often, the companies we choose have superior management, a unique market niche or a strong new product. In pursuing our objective, we normally invest 65% of the Portfolio s total assets in common stocks and preferred stocks of companies with capitalization in excess of $1 billion. For the balance of the Portfolio, we may invest in common stocks, preferred stocks and other equityrelated securities of companies that are undergoing changes in management, product and/or marketing dynamics which we believe have not yet been reflected in reported earnings or recognized by investors. 51

170 In addition, we may invest in debt securities and mortgage-related securities. These securities may be rated as low as Baa by Moody s or BBB by S&P (or if unrated, of comparable quality in our judgment). The Portfolio may also invest in obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities. Up to 30% of the Portfolio s assets may be invested in foreign equity and equity-related securities. For these purposes, we do not consider American Depositary Receipts (ADRs) as foreign securities. In response to adverse market conditions or when restructuring the Portfolio, we may invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in these securities limits our ability to achieve our investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. We may also use alternative investment strategies including derivatives to try to improve the Portfolio s returns, protect its assets or for short-term cash management. We may: purchase and sell options on equity securities, stock indexes and foreign currencies; purchase and sell stock index and foreign currency futures contracts and options on those futures contracts; enter into forward foreign currency exchange contracts; and purchase securities on a when-issued or delayed delivery basis. The Portfolio may also lend its portfolio securities to brokers, dealers and other financial institutions to earn income. The Portfolio may also enter into short sales against-the-box. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. The Portfolio may invest in equity and/ or debt securities issued by Real Estate Investment Trusts (REITs). Money Market Portfolio The investment objective of this Portfolio is to seek the maximum current income that is consistent with stability of capital and maintenance of liquidity. This means we seek investments that we think will provide a high level of current income. While we make every effort to achieve our objective, we can t guarantee success. Steady Net Asset Value The net asset value for the Portfolio will ordinarily remain issued at $10 per share because dividends are declared and reinvested daily. The price of each share remains the same, but when dividends are declared the value of your investment grows. We invest in a diversified portfolio of short-term debt obligations of the U.S. government, its agencies and instrumentalities, as well as commercial paper, asset backed securities, funding agreements, certificates of deposit, floating and variable rate demand notes, notes and other obligations issued by banks, corporations and other companies (including trust structures), and obligations issued by foreign banks, companies or foreign governments. We make investments that meet the requirements of specific rules for money market mutual funds, such as Investment Company Act Rule 2a-7. As such, we will not acquire any security with a remaining maturity exceeding thirteen months, and we will maintain a dollar-weighted average portfolio maturity of 90 days or less. In addition, we will comply with the diversification, quality and other requirements of Rule 2a-7. This means, generally, that the instruments that we purchase present minimal credit risk and are of eligible quality. Eligible quality for this purpose means a security is: (i) rated in one of the two highest short-term rating categories by at least two major rating services (or if only one major rating service has rated the security, as rated by that service); or (ii) if unrated, of comparable quality in our judgment. All securities that we purchase will be denominated in U.S. dollars. Commercial paper is short-term debt obligations of banks, corporations and other borrowers. The obligations are usually issued by financially strong businesses and often include a line of credit to protect purchasers of the obligations. An asset-backed security is a loan or note that pays interest based upon the cash flow of a pool of assets, such as mortgages, loans and credit card receivables. Funding agreements are contracts issued by insurance companies that 52

171 guarantee a return of principal, plus some amount of interest. When purchased by money market funds, funding agreements will typically be short-term and will provide an adjustable rate of interest. Certificates of deposit, time deposits and bankers acceptances are obligations issued by or through a bank. These instruments depend upon the strength of the bank involved in the borrowing to give investors comfort that the borrowing will be repaid when promised. We may purchase debt securities that include demand features, which allow us to demand repayment of a debt obligation before the obligation is due or matures. This means that longer term securities can be purchased because of our expectation that we can demand repayment of the obligation at a set price within a relatively short period of time, in compliance with the rules applicable to money market mutual funds. The Portfolio may also purchase floating rate and variable rate securities. These securities pay interest at rates that change periodically to reflect changes in market interest rates. Because these securities adjust the interest they pay, they may be beneficial when interest rates are rising because of the additional return the Portfolio will receive, and they may be detrimental when interest rates are falling because of the reduction in interest payments to the Portfolio. The securities that we may purchase may change over time as new types of money market instruments are developed. We will purchase these new instruments, however, only if their characteristics and features follow the rules governing money market mutual funds. We may also use alternative investment strategies to try to improve the Portfolio s returns, protect its assets or for short-term cash management. There is no guarantee that these strategies will work, that the instruments necessary to implement these strategies will be available or that the Portfolio will not lose money. We may purchase securities on a when-issued or delayed delivery basis. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. The Portfolio may use up to 10% of its net assets in connection with reverse repurchase agreements. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Portfolio seeks to preserve the value of an investment at $10 per share, it is possible to lose money by investing in the Portfolio. Stock Index Portfolio The investment objective of this Portfolio is to achieve investment results that generally correspond to the performance of publicly-traded common stocks. To achieve this goal, we attempt to duplicate the performance of the Standard & Poor s 500 Composite Stock Price Index (S&P 500 Index). While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. S&P 500 Index We attempt to duplicate the performance of the S&P 500 Index, a market-weighted index which represents more than 70% of the market value of all publicly-traded common stocks. Under normal conditions, we attempt to invest in all 500 stocks represented in the S&P 500 Index in proportion to their weighting in the S&P 500 Index. We will normally invest at least 80% of the Portfolio s investable assets in S&P 500 Index stocks, but we will attempt to remain as fully invested in the S&P 500 Index stocks as possible in light of cash flow into and out of the Portfolio. To manage investments and redemptions in the Portfolio, we may temporarily hold cash or invest in high-quality money market instruments. To the extent we do so, the Portfolio s performance will differ from that of the S&P 500 Index. We 53

172 attempt to minimize differences in the performance of the Portfolio and the S&P 500 Index by using stock index futures contracts, options on stock indexes and options on stock index futures contracts. The Portfolio will not use these derivative securities for speculative purposes or to hedge against a decline in the value of the Portfolio s holdings. We may also use alternative investment strategies to try to improve the Portfolio s returns or for short-term cash management. The Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions to earn income. There is no guarantee that these strategies will work, that the instruments necessary to implement these strategies will be available or that the Portfolio will not lose money. We may: purchase and sell options on stock indexes; purchase and sell stock futures contracts and options on those futures contracts; and purchase and sell exchange-traded fund shares. The Portfolio may also enter into short sales and short sales against-the-box. No more than 5% of the Portfolio s total assets may be used as collateral or segregated for purposes of securing a short sale obligation. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. The Portfolio may invest in equity and/ or debt securities issued by Real Estate Investment Trusts (REITs). A stock s inclusion in the S&P 500 Index in no way implies S&P s opinion as to the stock s attractiveness as an investment. The portfolio is not sponsored, endorsed, sold or promoted by S&P. S&P makes no representations regarding the advisability of investing in the portfolio. Standard & Poor s, Standard & Poor s 500 and 500 are trademarks of McGrawHill. Value Portfolio The investment objective of this Portfolio is to seek capital appreciation. This means we focus on stocks that are undervalued those stocks that are trading below their underlying asset value, cash generating ability, and overall earnings and earnings growth. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Contrarian Approach To achieve our value investment strategy, we generally take a strong contrarian approach to investing. In other words, we usually buy stocks that are out of favor and that many other investors are selling, and we attempt to invest in companies and industries before other investors recognize their true value. Using these guidelines, we focus on long-term performance, not short-term gain. We will normally invest at least 65% of the Portfolio s total assets in equity and equity-related securities. Most of our investments will be securities of large capitalization companies. When deciding which stocks to buy, we look at a company s earnings, balance sheet and cash flow and then at how these factors impact the stock s price and return. We also buy equity-related securities like bonds, corporate notes and preferred stock that can be converted into a company s common stock or other equity security. Up to 35% of the Portfolio s total assets may be invested in other debt obligations including non-convertible preferred stock. When acquiring these types of securities, we usually invest in obligations rated A or better by Moody s or S&P. We may also invest in obligations rated as low as CC by Moody s or Ca by S&P. These securities are considered speculative and are sometimes referred to as junk bonds. We may also invest in instruments that are not rated, but which we believe are of comparable quality to the instruments described above. Up to 30% of the Portfolio s total assets may be invested in foreign securities, including money market instruments, equity securities and debt obligations. For these purposes, we do not consider American Depositary Receipts (ADRs) as foreign securities. Under normal circumstances, the Portfolio may invest up to 35% of its total assets in high-quality money market instruments. In response to adverse market conditions or when we are restructuring the Portfolio, we may temporarily 54

173 invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in these securities limits our ability to achieve our investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. We may also use alternative investment strategies including derivatives to try to improve the Portfolio s returns, protect its assets or for short-term cash management. The Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions to earn income. We may: purchase and sell options on equity securities, stock indexes and foreign currencies; purchase and sell stock index and foreign currency futures contracts and options on these futures contracts; enter into forward foreign currency exchange contracts; and purchase securities on a when-issued or delayed delivery basis. The Portfolio may also enter into short sales against-the-box. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. The Portfolio may invest in equity and/ or debt securities issued by Real Estate Investment Trusts (REITs). Jennison Associates LLC is responsible for managing approximately 50% of the Portfolio s assets. Victory Capital Management Inc. (formerly, Key Asset Management Inc.) and Deutsche Asset Management, Inc. (DAMI) are each responsible for managing approximately 25% of the Portfolio s assets. SP AIM Aggressive Growth Portfolio The Portfolio s investment objective is to achieve long-term growth of capital. This investment objective is nonfundamental, meaning that we can change the objective without seeking a vote of contractholders. The Portfolio seeks to meet this objective by investing principally in securities of companies whose earnings the portfolio managers expect to grow more than 15% per year. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Aggressive Growth Stock Investing The Portfolio invests primarily in the common stock of small and medium-sized companies that are anticipated to have excellent prospects for long-term growth of earnings. The Portfolio will invest in small- and medium-sized growth companies. The portfolio managers focus on companies they believe are likely to benefit from new or innovative products, services or processes as well as those that have experienced above-average, long-term growth in earnings and have excellent prospects for future growth. The portfolio managers consider whether to sell a particular security when any of those factors materially changes. The Portfolio may invest up to 25% of its total assets in foreign securities. In anticipation of or in response to adverse market conditions, for cash management purposes, or for defensive purposes, the Portfolio may temporarily hold all or a portion of its assets in cash, money market instruments, shares of affiliated money market funds, bonds or other debt securities. The Portfolio may borrow for emergency or temporary purposes. As a result, the Portfolio may not achieve its investment objective. The Portfolio may purchase and sell stock index futures contracts and related options on stock index futures, and may purchase and sell futures contracts on foreign currencies and related options on foreign currency futures contracts. The Portfolio may invest up to 25% of its total assets in Real Estate Investment Trusts (REITs), and the Portfolio may invest in the securities of other investment companies to the extent otherwise permissible under the Investment Company Act of 1940, and the rules, regulations and orders promulgated thereunder. The Portfolio also may invest in preferred stock, convertible debt, convertible preferred stock, forward foreign currency exchange contracts, restricted securities, repurchase agreements, reverse repurchase agreements and dollar rolls, warrants, when-issued and delayed delivery securities, options on stock and debt securities, options on stock indexes, 55

174 options on foreign currencies, and may loan portfolio securities. The Portfolio may also invest in equity-linked derivative products designed to replicate the composition and performance of particular indices. Examples of such products include S&P Depositary Receipts, World Equity Benchmark Series, NASDAQ 100 tracking shares, Dow Jones Industrial Average Instruments and Optimised Portfolios as Listed Securities. Investments in equity-linked derivatives involve the same risks associated with a direct investment in the types of securities included in the indices such products are designed to track. There can be no assurance that the trading price of the equity-linked derivatives will equal the underlying value of the basket of securities purchased to replicate a particular index or that such basket will replicate the index. Investments in equity-linked derivatives may constitute investment in other investment companies. The Portfolio may invest in U.S. Government securities and may make short sales against-the-box (no more than 10% of the Portfolio s total assets may be deposited or pledged as collateral for short sales at any one time). The Portfolio is managed by A I M Capital Management, Inc. SP AIM Core Equity Portfolio (formerly, SP AIM Growth and Income Portfolio) The Portfolio s investment objective is growth of capital with a secondary objective of current income. This investment objective is non-fundamental, meaning that we can change the objective without seeking a vote of contractholders. The Portfolio seeks to meet its objective by investing, normally, at least 80% of investible assets in equity securities, including convertible securities, of established companies that have long-term above-average growth in earnings and dividends, and growth companies that the portfolio managers believe have the potential for above-average growth in earnings and dividends. In complying with this 80% requirement, the Portfolio s investments may include synthetic instruments. Synthetic instruments are investments that have economic characteristics similar to the Portfolio s direct investments, and may include warrants, futures, options, exchange-traded funds and ADRs. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Growth And Income Investing This Portfolio invests in a wide variety of equity securities and debt securities in an effort to achieve both capital appreciation as well as current income. The Portfolio may invest in corporate debt securities. Corporations issue debt securities of various types, including bonds and debentures (which are long-term), notes (which may be shortor long-term), bankers acceptances (indirectly secured borrowings to facilitate commercial transactions) and commercial paper (short-term unsecured notes). The Portfolio may also invest in convertible securities whose values will be affected by market interest rates, the risk that the issuer may default on interest or principal payments and the value of the underlying common stock into which these securities may be converted. Specifically, since these types of convertible securities pay fixed interest and dividends, their values may fall if interest rates rise and rise if market interest rates fall. Additionally, an issuer may have the right to buy back certain of the convertible securities at a time and price that is unfavorable to the Portfolio. The values of fixed rate income securities tend to vary inversely with changes in interest rates, with longer-term securities generally being more volatile than shorter-term securities. Corporate securities frequently are subject to call provisions that entitle the issuer to repurchase such securities at a predetermined price prior to their stated maturity. In the event that a security is called during a period of declining interest rates, the Portfolio may be required to reinvest the proceeds in securities having a lower yield. In addition, in the event that a security was purchased at a premium over the call price, the Portfolio will experience a capital loss if the security is called. Adjustable rate corporate debt securities may have interest rate caps and floors. The Portfolio may invest in securities issued or guaranteed by the United States government or its agencies or instrumentalities. These include Treasury securities (bills, notes, bonds and other debt securities) which differ only in their interest rates, maturities and times of issuance. U.S. Government agency and instrumentality securities include securities which are supported by the full faith and credit of the U.S., securities that are supported by the right of the agency to borrow from the U.S. Treasury, securities that are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality and securities that are supported only by 56

175 the credit of such agencies. While the U.S. Government may provide financial support to such U.S. governmentsponsored agencies or instrumentalities, no assurance can be given that it always will do so. The U.S. government, its agencies and instrumentalities do not guarantee the market value of their securities. The values of such securities fluctuate inversely to interest rates. To the extent consistent with its investment objective and policies, the Portfolio may invest in equity and/or debt securities issued by Real Estate Investment Trusts (REITs). Such investments will not exceed 25% of the total assets of the Portfolio. To the extent that the Portfolio has the ability to invest in REITs, it could conceivably own real estate directly as a result of a default on the securities it owns. The Portfolio, therefore, may be subject to certain risks associated with the direct ownership of real estate including difficulties in valuing and trading real estate, declines in the value of real estate, risks related to general and local economic condition, adverse change in the climate for real estate, environmental liability risks, increases in property taxes and operating expense, changes in zoning laws, casualty or condemnation losses, limitations on rents, changes in neighborhood values, the appeal of properties to tenants, and increases in interest rates. The Portfolio may hold up to 20% of its assets in foreign securities. Such investments may include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and other securities representing underlying securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. The Portfolio has authority to deal in foreign exchange between currencies of the different countries in which it will invest either for the settlement of transactions or as a hedge against possible variations in the foreign exchange rates between those currencies. This may be accomplished through direct purchases or sales of foreign currency, purchases of futures contracts with respect to foreign currency (and options thereon), and contractual agreements to purchase or sell a specified currency at a specified future date (up to one year) at a price set at the time of the contract. Such contractual commitments may be forward contracts entered into directly with another party or exchange-traded futures contracts. The Portfolio may purchase and sell options on futures contracts or forward contracts which are denominated in a particular foreign currency to hedge the risk of fluctuations in the value of another currency. For the purpose of realizing additional income, the Portfolio may make secured loans of portfolio securities amounting to not more than % of its total assets. The Portfolio may invest in reverse repurchase agreements with banks. The Portfolio may employ reverse repurchase agreements (i) for temporary emergency purposes, such as to meet unanticipated net redemptions so as to avoid liquidating other portfolio securities during unfavorable market conditions; (ii) to cover short-term cash requirements resulting from the timing of trade settlements; or (iii) to take advantage of market situations where the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. The Portfolio may purchase securities of unseasoned issuers. Securities in such issuers may provide opportunities for long term capital growth. Greater risks are associated with investments in securities of unseasoned issuers than in the securities of more established companies because unseasoned issuers have only a brief operating history and may have more limited markets and financial resources. As a result, securities of unseasoned issuers tend to be more volatile than securities of more established companies. The Portfolio may invest in other investment companies to the extent permitted by the Investment Company Act, and rules and regulations thereunder, and if applicable, exemptive orders granted by the SEC. The Portfolio may purchase and sell stock index futures contracts and related options on stock index futures, and may purchase and sell futures contracts on foreign currencies and related options on foreign currency futures contracts. The Portfolio may invest in the securities of other investment companies to the extent otherwise permissible under the Investment Company Act of 1940, and the rules, regulations and orders promulgated thereunder. The Portfolio also may invest in preferred stock, convertible debt, convertible preferred stock, forward foreign currency exchange contracts, restricted securities, repurchase agreements, reverse repurchase agreements and dollar rolls, warrants, when-issued and delayed delivery securities, options on stock and debt securities, options on stock indexes, options on foreign currencies, and may loan portfolio securities. The Portfolio may also invest in equity- 57

176 linked derivative products designed to replicate the composition and performance of particular indices. Examples of such products include S&P Depositary Receipts, World Equity Benchmark Series, NASDAQ 100 tracking shares, Dow Jones Industrial Average Instruments and Optimised Portfolios as Listed Securities. Investments in equity-linked derivatives involve the same risk associated with a direct investment in the types of securities included in the indices such products are designed to track. There can be no assurance that the trading price of the equity-linked derivatives will equal the underlying value of the basket of securities purchased to replicate a particular index or that such basket will replicate the index. Investments in equity-linked derivatives may constitute investment in other investment companies. This Portfolio may invest in U.S. Government securities, and short sales against-the-box (no more than 10% of the Portfolio s total assets may be deposited or pledged as collateral for short sales at any one time). In anticipation of or in response to adverse market conditions, for cash management purposes, or for defensive purposes, the Portfolio may temporarily hold all or a portion of its assets in cash, money market instruments, shares of affiliated money market funds, bonds or other debt securities. The Portfolio may borrow for emergency or temporary purposes. As a result, the Portfolio may not achieve its investment objective. The Portfolio is managed by A I M Capital Management, Inc. SP Alliance Large Cap Growth Portfolio The investment objective of this Portfolio is growth of capital by pursuing aggressive investment policies. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Large Cap Growth The Portfolio usually invests in about companies, with the 25 most highly regarded of these companies generally constituting approximately 80% of the Portfolio s investable assets. Alliance seeks to gain positive returns in good markets while providing some measure of protection in poor markets. During market declines, while adding to positions in favored stocks, the Portfolio becomes somewhat more aggressive, gradually reducing the number of companies represented in its portfolio. Conversely, in rising markets, while reducing or eliminating fully-valued positions, the Portfolio becomes somewhat more conservative, gradually increasing the number of companies represented in the portfolio. Through this approach, Alliance seeks to gain positive returns in good markets while providing some measure of protection in poor markets. The Portfolio also may invest up to 20% of its investable assets in convertible debt and convertible preferred stock and up to 15% of its total assets in equity securities of non-u.s. companies. The Portfolio will invest in special situations from time to time. A special situation arises when, in the opinion of Alliance, the securities of a particular company will, within a reasonably estimable period of time, be accorded market recognition at an appreciated value solely by reason of a development particularly or uniquely applicable to that company, and regardless of general business conditions or movements of the market as a whole. Developments creating special situations might include, among other, liquidations, reorganizations, recapitalizations or mergers, material litigation, technological breakthroughs and new management or management policies. Although large and well-known companies may be involved, special situations often involve much greater risk than is inherent in ordinary investment securities. Among the principal risks of investing in the Portfolio is market risk. Because the Portfolio invests in a smaller number of securities than many other equity funds, your investment has the risk that changes in the value of a single security may have a more significant effect, either negative or positive, on the Portfolio s net asset value. 58

177 The Portfolio seeks long-term growth of capital by investing predominantly in the equity securities of a limited number of large, carefully selected, high-quality U.S. companies that are judged likely to achieve superior earnings growth. As a matter of fundamental policy, the Portfolio normally invests at least 85% of its total assets in the equity securities of U.S. companies. The Portfolio is thus atypical from most equity mutual funds in its focus on a relatively small number of intensively researched companies. The Portfolio is designed for those seeking to accumulate capital over time with less volatility than that associated with investment in smaller companies. Alliance s investment strategy for the Portfolio emphasizes stock selection and investment in the securities of a limited number of issuers. Alliance relies heavily upon the fundamental analysis and research of its large internal research staff, which generally follows a primary research universe of more than 500 companies that have strong management, superior industry positions, excellent balance sheets and superior earnings growth prospects. An emphasis is placed on identifying companies whose substantially above average prospective earnings growth is not fully reflected in current market valuations. In managing the Portfolio, Alliance seeks to utilize market volatility judiciously (assuming no change in company fundamentals), striving to capitalize on apparently unwarranted price fluctuations, both to purchase or increase positions on weakness and to sell or reduce overpriced holdings. The Portfolio normally remains nearly fully invested and does not take significant cash positions for market timing purposes. Alliance normally invests at least 80% of the Portfolio s investable assets in stocks of companies considered to have large capitalizations (i.e., similar to companies included in the S&P 500 Index). The Portfolio also may: invest up to 15% of its total assets in foreign securities; purchase and sell exchange-traded index options and stock index futures contracts; write covered exchange-traded call options on its securities of up to 15% of its total assets, and purchase and sell exchange-traded call and put options on common stocks written by others of up to, for all options, 10% of its total assets; make short sales against-the-box of up to 15% of its net assets; and invest up to 10% of its total assets in illiquid securities. The Portfolio may invest in a wide variety of equity securities including large cap stocks, convertible and preferred securities, warrants and rights. The Portfolio may also invest in foreign securities, including foreign equity securities, and other securities that represent interests in foreign equity securities, such as European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). The Portfolio may invest in American Depositary Receipts (ADRs), which are not subject to the 15% limitation on foreign securities. The Portfolio may also invest in derivatives and in short term investments, including money market securities, short term U.S. government obligations, repurchase agreements, commercial paper, banker s acceptances and certificates of deposit. In response to adverse market conditions or when restructuring the Portfolio, Alliance may invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in these securities limits the ability to achieve the investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. The Portfolio is managed by Alliance Capital Management, L.P. SP Alliance Technology Portfolio The Portfolio emphasizes growth of capital and invests for capital appreciation. Current income is only an incidental consideration. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. 59

178 A Technology Focus This Portfolio normally invests at least 80% of its investable assets in technology. The Portfolio invests primarily in securities of companies expected to benefit from technological advances and improvements (i.e., companies that use technology extensively in the development of new or improved products or processes). The Portfolio will normally have at least 80% of its investable assets invested in the securities of these companies. The Portfolio normally will have substantially all of its assets invested in equity securities, but it also invests in debt securities offering an opportunity for price appreciation. The Portfolio will invest in listed and unlisted securities, in U.S. securities, and up to 25% of its total assets in foreign securities. The Portfolio may seek income by writing listed call options. The Portfolio s policy is to invest in any company and industry and in any type of security with potential for capital appreciation. It invests in well-known and established companies and in new and unseasoned companies. The Portfolio also may: write covered call options on its securities of up to 15% of its total assets and purchase exchange-listed call and put options, including exchange-traded index put options of up to, for all options, 10% of its total assets; invest up to 10% of its total assets in warrants; invest up to 15% of its net assets in illiquid securities; and make loans of portfolio securities of up to 30% of its total assets. Because the Portfolio invests primarily in technology companies, factors affecting those types of companies could have a significant effect on the Portfolio s net asset value. In addition, the Portfolio s investments in technology stocks, especially those of small, less-seasoned companies, tend to be more volatile than the overall market. The Portfolio s investments in debt and foreign securities have credit risk and foreign risk. In response to adverse market conditions or when restructuring the Portfolio, Alliance may invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in these securities limits the ability to achieve the investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. The Portfolio is managed by Alliance Capital Management, L.P. SP Asset Allocation Portfolios There are four Asset Allocation Portfolios, entitled SP Aggressive Growth Asset Allocation Portfolio, SP Balanced Asset Allocation Portfolio, SP Conservative Asset Allocation Portfolio, and SP Growth Asset Allocation Portfolio. The investment objective of each of the Portfolios is to obtain the highest potential total return consistent with the specified level of risk tolerance. The definition of risk tolerance level is not a fundamental policy and, therefore, can be changed by the Fund s Board of Directors at any time. While each Portfolio will try to achieve its objective, we can t guarantee success and it is possible that you could lose money. The Asset Allocation Portfolios are designed for: the investor who wants to maximize total return potential, but lacks the time, or expertise to do so effectively; the investor who does not want to watch the financial markets in order to make periodic exchanges among Portfolios; and the investor who wants to take advantage of the risk management features of an asset allocation program. The investor chooses an Asset Allocation Portfolio by determining which risk tolerance level most closely corresponds to the investor s individual planning needs, objectives and comfort. 60

179 Each Asset Allocation Portfolio invests its assets in shares of underlying Portfolios according to the target percentages indicated in the Portfolio descriptions below. Periodically, we will rebalance each Asset Allocation Portfolio to bring the Portfolio s holdings in line with those target percentages. The manager expects that the rebalancing will occur on a monthly basis, although the rebalancing may occur less frequently. In addition, the manager will review the target percentages annually. Based on its evaluation the target percentages may be adjusted. Such adjustments will be reflected in the annual update to this prospectus. With respect to each of the four Asset Allocation Portfolios, Prudential Investments LLC reserves the right to alter the percentage allocations indicated below and/or the underlying Fund Portfolios in which the Asset Allocation Portfolio invests if market conditions warrant. Although we will make every effort to meet each Asset Allocation Portfolio s investment objective, we can t guarantee success. The performance of each Asset Allocation Portfolio depends on how its assets are allocated and reallocated between the underlying Portfolios. A principal risk of investing in each Asset Allocation Portfolio is that Prudential Investments LLC will make less than optimal decisions regarding allocation of assets in the underlying Portfolios. Because each of the Asset Allocation Portfolios invests all of its assets in underlying Portfolios, the risks associated with each Asset Allocation Portfolio are closely related to the risks associated with the securities and other investments held by the underlying Portfolios. The ability of each Asset Allocation Portfolio to achieve its investment objective will depend on the ability of the underlying Portfolios to achieve their investment objectives. Each Asset Allocation Portfolio is managed by Prudential Investments LLC. SP Aggressive Growth Asset Allocation Portfolio An Asset Allocation Portfolio Investing Fully in Equity Portfolios This Portfolio aggressively seeks capital appreciation by investing in large cap equity Portfolios, international Portfolios, and small/mid-cap equity Portfolios. The SP Aggressive Growth Asset Allocation Portfolio invests in shares of the following Fund Portfolios: a large capitalization equity component (approximately 40% of the Portfolio, invested in shares of the SP Davis Value Portfolio (20% of Portfolio), the SP Alliance Large Cap Growth Portfolio (10% of Portfolio), and the Jennison Portfolio (10% of Portfolio)); and an international component (approximately 35% of the Portfolio, invested in shares of the SP Jennison International Growth Portfolio (17.5% of Portfolio) and the SP Deutsche International Equity Portfolio (17.5% of Portfolio)); and a small/mid capitalization equity component (approximately 25% of the Portfolio, invested in shares of the SP Small/Mid-Cap Value Portfolio (12.5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (12.5% of Portfolio)). For more information on the underlying Portfolios, please refer to the descriptions of each Portfolio s investment objectives and policies included in this prospectus. 61

180 SP Balanced Asset Allocation Portfolio A Balance Between Current Income And Capital Appreciation This Portfolio seeks to balance current income and growth of capital by investing in fixed income Portfolios, large cap equity Portfolios, small/mid-cap equity Portfolios, and international equity Portfolios. The SP Balanced Asset Allocation Portfolio invests in shares of the following Portfolios: a fixed income component (approximately 40% of the Portfolio, invested in shares of the SP PIMCO Total Return Portfolio (25% of Portfolio) and the SP PIMCO High Yield Portfolio (15% of Portfolio)); and a large capitalization equity component (approximately 35% of the Portfolio, invested in shares of the SP Davis Value Portfolio (17.5% of Portfolio), the SP Alliance Large Cap Growth Portfolio (8.75% of Portfolio), and the Jennison Portfolio (8.75% of Portfolio)); and a small/mid capitalization equity component (approximately 15% of the Portfolio, invested in shares of the SP Small/Mid-Cap Value Portfolio (7.5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (7.5% of Portfolio)); and an international component (approximately 10% of the Portfolio, invested in shares of the SP Jennison International Growth Portfolio (5% of Portfolio) and the SP Deutsche International Equity Portfolio (5% of Portfolio)). For more information on the underlying Portfolios, please refer to the description of each Portfolio s investment objectives and policies included in this prospectus. SP Conservative Asset Allocation Portfolio An Asset Allocation Portfolio Investing Primarily In Fixed Income Portfolios This Portfolio is invested in fixed income, large cap equity, and small/mid-cap equity Portfolios. The SP Conservative Asset Allocation Portfolio invests in shares of the following Portfolios: a fixed income component (approximately 60% of the Portfolio, invested in shares of the SP PIMCO Total Return Portfolio (40% of Portfolio) and the SP PIMCO High Yield Portfolio (20% of Portfolio)); and a large capitalization equity component (approximately 30% of the Portfolio, invested in shares of the SP Davis Value Portfolio (15% of Portfolio), the SP Alliance Large Cap Growth Portfolio (7.5% of Portfolio), and the Jennison Portfolio (7.5% of Portfolio)); and a small/mid capitalization equity component (approximately 10% of the Portfolio, invested in shares of the SP Small/Mid-Cap Value Portfolio (5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (5% of Portfolio)). For more information on the underlying Portfolios, please refer to the description of each Portfolio s investment objectives and policies included in this prospectus. 62

181 SP Growth Asset Allocation Portfolio An Asset Allocation Portfolio Investing Primarily In Equity Portfolios This Portfolio seeks to provide long-term growth of capital with consideration also given to current income. The Growth Asset Allocation Portfolio invests in shares of the following Portfolios: a large capitalization equity component (approximately 45% of the Portfolio, invested in shares of the SP Davis Value Portfolio (22.5% of Portfolio), the SP Alliance Large Cap Growth Portfolio (11.25% of Portfolio), and the Jennison Portfolio (11.25% of Portfolio)); and a fixed income component (approximately 20% of the Portfolio, invested in shares of the SP PIMCO High Yield Portfolio (10% of Portfolio) and the SP PIMCO Total Return Portfolio (10% of Portfolio)); and an international component (approximately 20% of the Portfolio, invested in shares of the SP Jennison International Growth Portfolio (10% of Portfolio) and the SP Deutsche International Equity Portfolio (10% of Portfolio)); and a small/mid-capitalization equity component (approximately 15% of the Portfolio, invested in shares of the SP Small/Mid-Cap Value Portfolio (7.5% of Portfolio) and the SP Prudential U.S. Emerging Growth Portfolio (7.5% of Portfolio)). For more information on the underlying Portfolios, please refer to the descriptions of each Portfolio s investment objectives and policies included in this prospectus. SP Davis Value Portfolio SP Davis Value Portfolio s investment objective is growth of capital. In keeping with the Davis investment philosophy, the portfolio managers select common stocks that offer the potential for capital growth over the long-term. While we will try to achieve our objective, we can t guarantee success and it is possible that you could lose money. The Davis Back-to-Basics Approach Under the Davis philosophy, Davis seeks to identify companies possessing ten basic characteristics, which Davis believes will foster sustainable long-term growth. The Portfolio invests primarily in common stocks of U.S. companies with market capitalizations of at least $5 billion, but it may also invest in foreign companies and U.S. companies with smaller capitalizations. COMMON STOCKS What They Are. Common stock represents ownership of a company. How They Pick Them. The Davis investment philosophy stresses a back-to-basics approach: they use extensive research to buy growing companies at value prices and hold on to them for the long-term. Over the years, Davis Selected Advisers has developed a list of ten characteristics that they believe foster sustainable long-term growth, minimize risk and enhance the potential for superior long-term returns. While very few companies have all ten, Davis searches for those possessing several of the characteristics that are listed below. Why They Buy Them. SP Davis Value Portfolio buys common stock to take an ownership position in companies with growth potential, and then holds that position long enough to realize the benefits of growth. 63

182 The Portfolio may also invest in foreign securities, primarily as a way of providing additional opportunities to invest in quality overlooked growth stocks. Investment in foreign securities can also offer the Portfolio the potential for economic diversification. WHAT DAVIS LOOKS FOR IN A COMPANY 1. First-Class Management. The Davis investment philosophy believes that great companies are created by great managers. In visiting companies, they look for managers with a record of doing what they say they are going to do. 2. Management Ownership. Just as they invest heavily in their own portfolios, they look for companies where individual managers own a significant stake. 3. Strong Returns on Capital. They want companies that invest their capital wisely and reap superior returns on those investments. 4. Lean Expense Structure. Companies that can keep costs low are able to compete better, especially in difficult times. A low cost structure sharply reduces the risk of owning a company s shares. 5. Dominant or Growing Market Share in a Growing Market. A company that is increasing its share of a growing market has the best of both worlds. 6. Proven Record as an Acquirer. When an industry or market downturn occurs, it is a good idea to own companies that can take advantage of attractive prices to expand operations through inexpensive acquisitions. 7. Strong Balance Sheet. Strong finances give a company staying power to weather difficult economic cycles. 8. Competitive Products or Services. Davis invests in companies with products that are not vulnerable to obsolescence. 9. Successful International Operations. A proven ability to expand internationally reduces the risk of being tied too closely to the U.S. economic cycle. 10. Innovation. The savvy use of technology in any business, from a food company to an investment bank, can help reduce costs and increase sales. Other Securities and Investment Strategies The Portfolio invests primarily in the common stock of large capitalization domestic companies. There are other securities in which the Portfolio may invest, and investment strategies which the Portfolio may employ, but they are not principal investment strategies. The Portfolio may invest in equity and/or debt securities issued by Real Estate Investment Trusts (REITs). The Portfolio uses short-term investments to maintain flexibility while evaluating long-term opportunities. The Portfolio also may use short-term investments for temporary defensive purposes; in the event the portfolio managers anticipate a decline in the market values of common stock of large capitalization domestic companies, they may reduce the risk by investing in short-term securities until market conditions improve. Unlike common stocks, these investments will not appreciate in value when the market advances. In such a circumstance, the short-term investments will not contribute to the Portfolio s investment objective. The Portfolio is managed by Davis Selected Advisers, L.P. SP Deutsche International Equity Portfolio The Portfolio seeks long-term capital appreciation. Under normal circumstances, the Portfolio invests at least 80% of its investable assets in the stocks and other securities with equity characteristics of companies in developed countries outside the United States. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. 64

183 International Equities From Developed Countries The Portfolio invests primarily in the stocks of companies located in developed foreign countries that make up the MSCI EAFE Index, plus Canada. The Portfolio also may invest in emerging markets securities. The Portfolio invests for capital appreciation, not income; any dividend or interest income is incidental to the pursuit of that goal. The Portfolio invests for the long term. The Portfolio employs a strategy of growth at a reasonable price. The Portfolio seeks to identify companies outside the United States that combine strong potential for earnings growth with reasonable investment value. Such companies typically exhibit increasing rates of profitability and cash flow, yet their share prices compare favorably to other stocks in a given market and to their global peers. In evaluating stocks, the Portfolio considers factors such as sales, earnings, cash flow and enterprise value. Enterprise value is a company s market capitalization plus the value of its net debt. The Portfolio further considers the relationship between these and other quantitative factors. Together, these indicators of growth and value may identify companies with improving prospects before the market in general has taken notice. Principal Investments Almost all the companies in which the Portfolio invests are based in the developed foreign countries that make up the MSCI EAFE Index, plus Canada. The Portfolio may also invest a portion of its assets in companies based in the emerging markets of Latin America, the Middle East, Europe, Asia and Africa if it believes that its return potential more than compensates for the extra risks associated with these markets. Under normal market conditions investment in emerging markets is not considered to be a central element of the Portfolio s strategy. Typically, the Portfolio will not hold more than 15% of its net assets in emerging markets. The Portfolio may invest in a variety of debt securities, equity securities, and other instruments, including convertible securities, warrants, foreign securities, options (on stock, debt, stock indices, foreign currencies, and futures), futures contracts, forward foreign currency exchange contracts, interest rate swaps, loan participations, reverse repurchase agreements, dollar rolls, when-issued and delayed delivery securities, short sales, and illiquid securities. We explain each of these instruments in detail in the Statement of Additional Information. Investment Process Company research lies at the heart of Deutsche Asset Management Inc. s (DAMI s) investment process, as it does with many stock mutual fund portfolios. Several thousand companies are tracked to arrive at the approximately 100 stocks the Portfolio normally holds. But the process brings an added dimension to this fundamental research. It draws on the insight of experts from a range of financial disciplines regional stock market specialists, global industry specialists, economists and quantitative analysts. They challenge, refine and amplify each other s ideas. Their close collaboration is a critical element of the investment process. Temporary Defensive Position. The Portfolio may from time to time adopt a temporary defensive position in response to extraordinary adverse political, economic or stock market events. The Portfolio may invest up to 100% of its assets in U.S. or foreign government money market investments, or other short-term bonds that offer comparable safety, if the situation warranted. To the extent the Portfolio might adopt such a position over the course of its duration, the Portfolio may not meet its goal of long-term capital appreciation. Primary Risks Market Risk. Although individual stocks can outperform their local markets, deteriorating market conditions might cause an overall weakness in the stock prices of the entire market. Stock Selection Risk. A risk that pervades all investing is the risk that the securities an investor has selected will not perform to expectations. To minimize this risk, DAMI monitors each of the stocks in the Portfolio according to three basic quantitative criteria. They subject a stock to intensive review if: its rate of price appreciation begins to trail that of its national stock index; 65

184 the financial analysts who follow the stock, both within DAMI and outside, cut their estimates of the stock s future earnings; or the stock s price approaches the downside target set when they first bought the stock (and may since have modified to reflect changes in market and economic conditions). In this review, DAMI seeks to learn if the deteriorating performance accurately reflects deteriorating prospects or if it merely reflects investor overreaction to temporary circumstances. Foreign Stock Market Risk. From time to time, foreign capital markets have exhibited more volatility than those in the United States. Trading stocks on some foreign exchanges is inherently more difficult than trading in the United States for reasons including: Political Risk. Some foreign governments have limited the outflow of profits to investors abroad, extended diplomatic disputes to include trade and financial relations, and imposed high taxes on corporate profits. While these political risks have not occurred recently in the major countries in which the Portfolio invests, DAMI analyzes countries and regions to try to anticipate these risks. Information Risk. Financial reporting standards for companies based in foreign markets differ from those in the United States. Since the numbers themselves sometimes mean different things, DAMI devotes much of its research effort to understanding and assessing the impact of these differences upon a company s financial conditions and prospects. Liquidity Risk. Stocks that trade less can be more difficult or more costly to buy, or to sell, than more liquid or active stocks. This liquidity risk is a factor of the trading volume of a particular stock, as well as the size and liquidity of the entire local market. On the whole, foreign exchanges are smaller and less liquid than the U.S. market. This can make buying and selling certain shares more difficult and costly. Relatively small transactions in some instances can have a disproportionately large effect on the price and supply of shares. In certain situations, it may become virtually impossible to sell a stock in an orderly fashion at a price that approaches an estimate of its value. Regulatory Risk. Some foreign governments regulate their exchanges less stringently, and the rights of shareholders may not be as firmly established. In an effort to reduce these foreign stock market risks, the Portfolio diversifies its investments, just as you may spread your investments among a range of securities so that a setback in one does not overwhelm your entire strategy. In this way, a reversal in one market or stock need not undermine the pursuit of long-term capital appreciation. Currency Risk. The Portfolio invests in foreign securities denominated in foreign currencies. This creates the possibility that changes in foreign exchange rates will affect the value of foreign securities or the U.S. dollar amount of income or gain received on these securities. DAMI seeks to minimize this risk by actively managing the currency exposure of the Portfolio. Emerging Market Risk. To the extent that the Portfolio does invest in emerging markets to enhance overall returns, it may face higher political, information, and stock market risks. In addition, profound social changes and business practices that depart from norms in developed countries economies have hindered the orderly growth of emerging economies and their stock markets in the past. High levels of debt tend to make emerging economies heavily reliant on foreign capital and vulnerable to capital flight. For all these reasons, the Portfolio carefully limits and balances its commitment to these markets. Secondary Risks Small Company Risk. Although the Portfolio generally invests in the shares of large, well-established companies, it may occasionally take advantage of exceptional opportunities presented by small companies. Such opportunities pose unique risks. Small company stocks tend to experience steeper price fluctuations down as well as up than the stocks of larger companies. A shortage of reliable information the same information gap that creates opportunity in small company investing can also pose added risk. Industrywide reversals have had a greater impact on small companies, since they lack a large company s financial resources. Finally, small company stocks are typically less liquid than large company stocks; when things are going poorly, it is harder to find a buyer for a small company s shares. 66

185 Pricing Risk. When price quotations for securities are not readily available, they are valued by the method that most accurately reflects their current worth in the judgment of the Board. This procedure implies an unavoidable risk, the risk that our prices are higher or lower than the prices that the securities might actually command if we sold them. The Portfolio is managed by Deutsche Asset Management, Inc. (DAMI). SP INVESCO Small Company Growth Portfolio The Portfolio seeks long-term capital growth. Most holdings are in small-capitalization companies. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. A Small-Cap Stock Portfolio The Portfolio generally invests primarily in the stocks of companies with small market capitalizations. INVESCO is primarily looking for companies in the accelerated developing stages of their life cycles, which are currently priced below INVESCO s estimation of their potential, have earnings which may be expected to grow faster than the U.S. economy in general, and/or offer earnings growth of sales, new products, management changes, or structural changes in the economy. The Portfolio may invest up to 25% of its assets in securities of non-u.s. issuers. Securities of Canadian issuers and ADRs are not subject to this 25% limitation. Under normal circumstances, the Portfolio will invest at least 80% of its investable assets in small-capitalization companies those which are included in the Russell 2000 Growth Index at the time of purchase, or if not included in that index, have market capitalizations of $2.5 billion or below at the time of purchase. Although not a principal investment, the Portfolio may use derivatives. A derivative is a financial instrument whose value is derived, in some manner, from the price of another security, index, asset or rate. Derivatives include options and futures contracts, among a wide range of other instruments. Although not a principal investment, the Portfolio may invest in options and futures contracts. Options and futures contracts are common types of derivatives that the Portfolio may occasionally use to hedge its investments. An option is the right to buy or sell a security or other instrument, index or commodity at a specific price on or before a specific date. A futures contract is an agreement to buy or sell a security or other instrument, index or commodity at a specific price on a specific date. Although not a principal investment, the Portfolio may invest in repurchase agreements. In addition, the Portfolio may invest in debt securities, ADRs, convertible securities, junk bonds, warrants, forward foreign currency exchange contracts, interest rate swaps, when-issued and delayed delivery securities, short sales against-the-box, U.S. government securities, Brady Bonds, and illiquid securities. The Portfolio may lend its portfolio securities. In response to adverse market conditions or when restructuring the Portfolio, INVESCO may invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in these securities limits the ability to achieve the investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. The Portfolio is managed by INVESCO Funds Group, Inc. SP Jennison International Growth Portfolio The investment objective of the Portfolio is to seek long-term growth of capital. The Portfolio seeks to achieve its objective through investment in equity-related securities of foreign companies. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. 67

186 A Foreign Stock Growth Portfolio The Portfolio seeks long-term growth by investing in the common stock of foreign companies. The Portfolio generally invests in about 60 securities of issuers located in at least five different foreign countries. This means the Portfolio seeks investments primarily the common stock of foreign companies that will increase in value over a period of years. A company is considered to be a foreign company if it satisfies at least one of the following criteria: its securities are traded principally on stock exchanges in one or more foreign countries; it derives 50% or more of its total revenue from goods produced, sales made or services performed in one or more foreign countries; it maintains 50% or more of its assets in one or more foreign countries; it is organized under the laws of a foreign country; or its principal executive office is located in a foreign country. The Portfolio invests in about 60 securities of primarily non-u.s. growth companies whose shares appear attractively valued on a relative and absolute basis. The Portfolio looks for companies that have above-average actual and potential earnings growth over the long term and strong financial and operational characteristics. The Portfolio selects stocks on the basis of individual company research. Thus, country, currency and industry weightings are primarily the result of individual stock selections. Although the Portfolio may invest in companies of all sizes, the Portfolio typically focuses on large and medium sized companies. Under normal conditions, the Portfolio intends to invest at least 65% of its total assets in the equity-related securities of foreign companies in at least five foreign countries. The Portfolio may invest anywhere in the world, including North America, Western Europe, the United Kingdom and the Pacific Basin, but generally not the U.S. The principal type of equity-related security in which the Portfolio invests is common stock. In addition to common stock, the Portfolio may invest in other equity-related securities that include, but are not limited to, preferred stock, rights that can be exercised to obtain stock, warrants and debt securities or preferred stock convertible or exchangeable for common or preferred stock and master limited partnerships. The Portfolio may also invest in ADRs, which we consider to be equity-related securities. In deciding which stocks to purchase for the Portfolio, Jennison looks for growth companies that have both strong fundamentals and appear to be attractively valued relative to their growth potential. Jennison uses a bottom-up approach in selecting securities for the Portfolio, which means that they select stocks based on individual company research, rather than allocating by country or sector. In researching which stocks to buy, Jennison looks at a company s basic financial and operational characteristics as well as compare the company s stock price to the price of stocks of other companies that are its competitors, absolute historic valuation levels for that company s stock, its earnings growth and the price of existing portfolio holdings. Another important part of Jennison s research process is to have regular contact with management of the companies that they purchase in order to confirm earnings expectations and to assess management s ability to meet its stated goals. Although the Portfolio may invest in companies of all sizes, it typically focuses on large and medium sized companies. Generally, Jennison looks for companies that have one or more of the following characteristics: actual and potential growth in earnings and cash flow; actual and improving profitability; strong balance sheets; management strength; and strong market share for the company s products. In addition, Jennison looks for companies whose securities appear to be attractively valued relative to: each company s peer group; absolute historic valuations; and existing holdings of the Portfolio. Generally, they consider selling a security when there is an identifiable change in a company s fundamentals or when expectations of future earnings growth become fully reflected in the price of that security. The Portfolio may invest in bonds, money market instruments and other fixed income obligations. Generally, the Portfolio will purchase only Investment-Grade fixed income investments. This means the obligations have received one of the four highest quality ratings determined by Moody s Investors Service, Inc. (Moody s), or Standard & Poor s Ratings Group (S&P), or one of the other nationally recognized statistical rating organizations (NRSROs). Obligations rated in the fourth category (Baa for Moody s or BBB for S&P) have speculative characteristics and are subject to a greater risk of loss of principal and interest. On occasion, the Portfolio may buy instruments that are not rated, but that are of comparable quality to the investment-grade bonds described above. 68

187 In response to adverse market, economic or political conditions, the portfolio may temporarily invest up to 100% of its assets in money market instruments or in the stock and other equity-related securities of U.S. companies. Investing heavily in money market instruments limits the ability to achieve capital appreciation, but may help to preserve the portfolio s assets when global or international markets are unstable. When the portfolio is temporarily invested in equityrelated securities of U.S. companies, the portfolio may achieve capital appreciation, although not through investment in foreign companies. We may also use alternative investment strategies including derivatives to try to improve the Portfolio s returns, protect its assets or for short-term cash management. We may: purchase and sell options on equity securities, stock indexes and foreign currencies; purchase and sell futures contracts on stock indexes, debt securities, interest rate indexes and foreign currencies and options on these futures contracts; enter into forward foreign currency exchange contracts; purchase securities on a when-issued or delayed delivery basis; and borrow up to 33-1/3% of the value of the Portfolio s total assets. The Portfolio may also enter into short sales against-the-box. The Portfolio may also enter into repurchase agreements. The Portfolio may participate with certain other Portfolios of the Fund in a joint repurchase account under an order obtained from the SEC. This Portfolio is managed by Jennison Associates LLC. SP Large Cap Value Portfolio The investment objective of the SP Large Cap Value Portfolio is long-term growth of capital. The Portfolio is managed by Fidelity Management & Research Company (FMR). The Portfolio normally invests at least 80% of the Portfolio s investable assets in securities of companies with large market capitalizations. The Portfolio normally invests its assets primarily in common stocks. A Large-Cap Value Portfolio The Portfolio is managed by Fidelity Management and Research Company. The Portfolio normally invests at least 80% of its investable assets in securities of companies with large market capitalizations. The Portfolio normally invests its assets primarily in common stocks. Although a universal definition of large market capitalization companies does not exist, FMR generally defines large market capitalization companies as those whose market capitalization is similar to the market capitalization of companies in the S&P 500 or the Russell A company s market capitalization is based on its current market capitalization or its market capitalization at the time of the Portfolio s investment. Companies whose capitalization is below this level after purchase continue to be considered to have large market capitalizations for purposes of the 80% policy. FMR invests the Portfolio s assets in companies that it believes are undervalued in the marketplace in relation to factors such as the company s assets, earnings, growth potential, or cash flow, or in relation to securities of other companies in the same industry. Companies with these characteristics tend to have lower than average price/earnings (P/E) or price/book (P/B) ratios. The stocks of these companies are often called value stocks. FMR may invest the Portfolio s assets in securities of foreign issuers in addition to securities of domestic issuers. FMR relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market factors. Factors considered include growth potential, earnings estimates, and management. These securities may then be analyzed using statistical models to further evaluate growth potential, valuation, liquidity and investment risk. In buying and selling securities for the Portfolio, FMR invests for the long term and selects those securities it believes offer strong opportunities for the long-term growth of capital and are attractively valued. 69

188 The Portfolio primarily invests in equity securities which represent an ownership interest, or the right to acquire an ownership interest, in an issuer. Different types of equity securities provide different voting and dividend rights and priority in the event of the bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, convertible securities, and warrants. FMR may use various techniques, such as buying and selling futures contracts, and exchange traded funds to increase or decrease the Portfolio s exposure to changing security prices or other factors that affect security values. If FMR s strategies do not work as intended, the Portfolio may not achieve its objective. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Many factors affect the Portfolio s performance. The Portfolio s share price changes daily based on changes in market conditions and interest rates and in response to other economic, political or financial developments. The Portfolio s reaction to these developments will be affected by the types of the securities in which the Portfolio invests, the financial condition, industry and economic sector, and geographic location of an issuer, and the Portfolio s level of investment in the securities of that issuer. When you sell units corresponding to shares of the Portfolio, they could be worth more or less than what you paid for them. In addition to company risk, derivatives risk, foreign investment risk, leveraging risk, liquidity risk, management risk, and market risk, the following factor can significantly affect the Portfolio s performance: Value stocks can react differently to issuer, political, market and economic developments than the market as a whole and other types of stocks. Value stocks tend to be inexpensive relative to their earnings or assets compared to other types of stocks. However, value stocks can continue to be inexpensive for long periods of time and may not ever realize their full value. In response to market, economic, political or other conditions, FMR may temporarily use a different investment strategy for defensive purposes. If FMR does so, different factors could affect the Portfolio s performance and the Portfolio may not achieve its investment objective. The Portfolio is managed by Fidelity Management and Research Company. SP MFS Capital Opportunities Portfolio The Portfolio invests, under normal market conditions, at least 65% of its total assets in common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts for those securities. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Capital Opportunities In Both U.S. and Foreign Stocks The Portfolio invests primarily in stocks, convertible securities, and depositary receipts of companies in both the United States and in foreign countries. The portfolio focuses on companies which Massachusetts Financial Services Company (MFS) believes have favorable growth prospects and attractive valuations based on current and expected earnings or cash flow. The Portfolio s investments may include securities listed on a securities exchange or traded in the over-the-counter markets. MFS uses a bottom-up, as opposed to a top-down, investment style in managing the Portfolio. This means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive position and management s abilities) performed by the portfolio manager and MFS large group of equity research analysts. The Portfolio may invest in foreign securities (including emerging market securities), through which it may have exposure to foreign currencies. The Portfolio may engage in active and frequent trading to achieve its principal investment strategies. Generally, the Portfolio will invest no more than (i) 35% of its net assets in foreign securities and (ii) 15% in lower rated bonds, and the Portfolio will not lend more than 30% of the value of its securities. The Portfolio can invest in a wide variety of debt and equity securities, including corporate debt, lower-rated bonds, U.S. Government securities, variable and floating rate obligations, zero coupon bonds, deferred interest bonds, PIK 70

189 bonds, Brady Bonds, depositary receipts, forward contracts, futures contracts, investment company securities, options (on currencies, futures, securities and stock indices), repurchase agreements, mortgage dollar rolls, restricted securities, short sales, short sales against-the-box, warrants, and when-issued and delayed delivery securities. The Portfolio may lend its securities. The Portfolio may invest in equity and/or debt securities issued by Real Estate Investment Trusts (REITs). The Portfolio also may assume a temporary defensive position. In response to adverse market conditions or when restructuring the Portfolio, MFS may invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in these securities limits the ability to achieve the investment objective, but can help to preserve the Portfolio s assets when the markets are unstable. The Portfolio is managed by Massachusetts Financial Services Company (MFS). SP MFS Mid-Cap Growth Portfolio The Portfolio s investment objective is long-term growth of capital. While we make every effort to achieve our objective, we can t guarantee success and it is possible you could lose money. A Mid-Cap Growth Stock Portfolio The Portfolio invests primarily in companies with market capitalizations equaling or exceeding $250 million but not exceeding the top of the Russell Midcap Growth Index range at the time of purchase. The Portfolio invests, under normal market conditions, at least 80% of its investable assets in common stocks and related securities, such as preferred stocks, convertible securities and depositary receipts for those securities, of companies with medium market capitalization which Massachusetts Financial Services Company (MFS) believes have above-average growth potential. Medium market capitalization companies are defined by the Portfolio as companies with market capitalizations equaling or exceeding $250 million but not exceeding the top of the Russell Midcap Growth Index range at the time of the Portfolio s investment. This Index is a widely recognized, unmanaged index of mid-cap common stock prices. Companies whose market capitalizations fall below $250 million or exceed the top of the Russell Midcap Growth Index range after purchase continue to be considered medium-capitalization companies for purposes of the fund s 80% investment policy. As of December 28, 2001, the top of the Russell Midcap Growth Index range was approximately $15.7 billion. The Portfolio s investments may include securities listed on a securities exchange or traded in the overthe-counter markets. MFS uses a bottom-up, as opposed to a top-down, investment style in managing the Portfolio. This means that securities are selected based upon fundamental analysis (such as an analysis of earnings, cash flows, competitive position and management s abilities) performed by the portfolio manager and MFS s large group of equity research analysts. The Portfolio is a non-diversified mutual fund portfolio. This means that the Portfolio may invest a relatively high percentage of its assets in a small number of issuers. As a result, the Portfolio s performance may be tied more closely to the success or failure of a smaller group of Portfolio holdings. The Portfolio may invest in foreign securities (including emerging markets securities) through which it may have exposure to foreign currencies. The Portfolio is expected to engage in active and frequent trading to achieve its principal investment strategies. Generally, the Portfolio will invest no more than (i) 20% of its net assets in foreign securities and (ii) 10% in lower rated bonds, and the Portfolio will not lend more than 30% of the value of its securities. The Portfolio may invest in a variety of debt securities, equity securities, and other instruments, including corporate debt, lower-rated bonds, U.S. government securities, variable and floating rate obligations, zero coupon bonds, deferred interest bonds, PIK bonds, depository receipts, emerging markets equity securities, forward contracts, futures contracts, investment company securities, options (on currencies, futures, securities, and stock indices), repurchase agreements, restricted securities, short sales, short sales against-the-box, short-term debt, warrants, and when-issued and delayed delivery securities. The Portfolio may borrow for temporary purposes, and lend its portfolio securities. In response to adverse market conditions or when restructuring the Portfolio, MFS may invest up to 100% of the Portfolio s assets in money market instruments. Investing heavily in the securities limits the ability to achieve the investment objective, but can help to preserve the Portfolio s assets when markets are unstable. 71

190 The Portfolio is managed by Massachusetts Financial Services Company (MFS). SP PIMCO High Yield Portfolio The investment objective of the Portfolio is a high total return. Under normal circumstances, the Portfolio invests at least 80% of its investable assets in high yield/high risk bonds. A High-Yield, High-Risk Bond Portfolio The Portfolio invests primarily in high-yield, high-risk bonds, also known as junk bonds. The Portfolio may invest up to 15% of its assets in derivative instruments, such as options, futures contracts or swap agreements. The Portfolio may also invest in mortgage-related securities or asset-backed securities. The Portfolio may seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as buy backs or dollar rolls). The total return sought by the Portfolio consists of income earned on the Portfolio s investments, plus capital appreciation, if any, which generally arises from decreases in interest rates or improving credit fundamentals for a particular sector or security. In selecting securities for the Portfolio, PIMCO develops an outlook for interest rates, currency exchange rates and the economy; analyzes credit and call risks, and uses other security selection techniques. The proportion of a Portfolio s assets committed to investment in securities with particular characteristics (such as quality, sector, interest rate or maturity) varies based on PIMCO s outlook for the U.S. economy and the economies of other countries in the world, the financial markets and other factors. PIMCO attempts to identify areas of the bond market that are undervalued relative to the rest of the market. PIMCO identifies these areas by grouping bonds into the following sectors: money markets, governments, corporates, mortgages, asset-backed and international. Sophisticated proprietary software then assists in evaluating sectors and pricing specific securities. Once investment opportunities are identified, PIMCO will shift assets among sectors depending upon changes in relative valuations and credit spreads. There is no guarantee that PIMCO s security selection techniques will produce the desired results. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. The Portfolio may also invest in Brady Bonds, which are described below in the section on the SP PIMCO Total Return Portfolio. Securities rated lower than Baa by Moody s Investors Service, Inc. (Moody s) or lower than BBB by Standard & Poor s Ratings Services ( S&P ) are sometimes referred to as high yield or junk bonds. Investing in high yield securities involves special risks in addition to the risks associated with investments in higher-rated fixed income securities. While offering a greater potential opportunity for capital appreciation and higher yields, high yield securities typically entail greater potential price volatility and may be less liquid than higher-rated securities. High yield securities may be regarded as predominantly speculative with respect to the issuer s continuing ability to meet principal and interest payments. They may also be more susceptible to real or perceived adverse economic and competitive industry conditions than higher-rated securities. The Portfolio may invest in inflation-indexed bonds, which are described below in the section on the SP PIMCO Total Return Portfolio. The Portfolio may invest in convertible debt and convertible preferred stock securities. The Portfolio may also enter into, or acquire participations in, delayed funding loans and revolving credit facilities, which are described in the section on SP PIMCO Total Return Portfolio. For the purpose of achieving income, each Portfolio may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. 72

191 The Portfolio may make short sales as part of its overall portfolio management strategies or to offset a potential decline in value of a security. The Portfolio may purchase securities which it is eligible to purchase on a when-issued or delayed delivery basis, and may make contracts to purchase such securities for a fixed price at a future date beyond normal settlement time (forward commitments). The Portfolio may enter into repurchase agreements. The Portfolio may enter into reverse repurchase agreements and dollar rolls, subject to a Portfolio s limitations on borrowings. The Portfolio may invest in event-linked bonds, which are described in the section below on the SP PIMCO Total Return Portfolio. The Portfolio may invest up to 15% of its net assets in illiquid securities. The Portfolio may invest up to 10% of its assets in securities of other investment companies, such as closed-end management investment companies, or in pooled accounts or other investment vehicles which invest in foreign markets. As a shareholder of an investment company, a Portfolio may indirectly bear service and other fees which are in addition to the fees the Portfolio pays its service providers. For temporary or defensive purposes, the Portfolio may invest without limit in U.S. debt securities, including taxable securities and short-term money market securities, when PIMCO deems it appropriate to do so. When the Portfolio engages in such strategies, it may not achieve its investment objective. The Portfolio is managed by Pacific Investment Management Company LLC (PIMCO). SP PIMCO Total Return Portfolio The Portfolio invests primarily in investment grade debt securities. It may also invest up to 10% of its assets in high yield/high risk securities (also known as junk bonds ) rated B or higher by Moody s or S&P or, if unrated, determined by PIMCO to be of comparable quality. An Investment Grade Bond Portfolio The Portfolio invests primarily in investment grade debt securities, including foreign debt securities, but may invest some of its assets in high yield bonds. The Portfolio may invest up to 20% of its assets in securities denominated in foreign currencies, and may invest beyond this limit in U.S. dollar-denominated securities of foreign issuers. The Portfolio will normally hedge at least 75% of its exposure to foreign currency to reduce the risk of loss due to fluctuations in currency exchange rates. The Portfolio may invest all of its assets in derivative instruments, such as options, futures contracts or swap agreements, or in mortgage- or asset-backed securities. The Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions to earn income. The Portfolio may seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as buy backs or dollar rolls). The total return sought by the Portfolio consists of income earned on the Portfolio s investments, plus capital appreciation, if any, which generally arises from decreases in interest rates or improving credit fundamentals for a particular sector or security. In selecting securities for a Portfolio, PIMCO develops an outlook for interest rates, currency exchange rates and the economy; analyzes credit and call risks, and uses other security selection techniques. The proportion of a Portfolio s assets committed to investment in securities with particular characteristics (such as quality, sector, interest rate or maturity) varies based on PIMCO s outlook for the U.S. economy and the economies of other countries in the world, the financial markets and other factors. 73

192 PIMCO attempts to identify areas of the bond market that are undervalued relative to the rest of the market. PIMCO identifies these areas by grouping bonds into the following sectors: money markets, governments, corporates, mortgages, asset-backed and international. Sophisticated proprietary software then assists in evaluating sectors and pricing specific securities. Once investment opportunities are identified, PIMCO will shift assets among sectors depending upon changes in relative valuations and credit spreads. There is no guarantee that PIMCO s security selection techniques will produce the desired results. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. The Portfolio may invest in Brady Bonds, which are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with a debt restructuring. Investments in Brady Bonds may be viewed as speculative. Brady Bonds acquired by the Portfolio may be subject to restructuring arrangements or to requests for new credit, which may cause the Portfolio to suffer a loss of interest or principal on any of its holdings. The Portfolio may invest in inflation-indexed bonds, which are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal. The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation, real interest rates may rise, leading to a decrease in value of inflationindexed bonds. Short-term increases in inflation may lead to a decline in value. Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity. The Portfolio may invest in convertible debt and convertible preferred stock. The Portfolio may invest in mortgage-related securities or other asset-backed securities. The Portfolio may also enter into, or acquire participations in, delayed funding loans and revolving credit facilities, in which a lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. These commitments may have the effect of requiring a Portfolio to increase its investment in a company at a time when it might not otherwise decide to do so (including at a time when the company s financial condition makes it unlikely that such amounts will be repaid). To the extent that a Portfolio is committed to advance additional Portfolios, it will segregate assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Directors in an amount sufficient to meet such commitments. Delayed loans and revolving credit facilities are subject to credit, interest rate and liquidity risk and the risks of being a lender. For the purpose of achieving income, each Portfolio may lend its portfolio securities to brokers, dealers, and other financial institutions provided a number of conditions are satisfied, including that the loan is fully collateralized. The Portfolio may make short sales as part of its overall portfolio management strategies or to offset a potential decline in value of a security. The Portfolio may use interest rate swaps in the management of the Portfolio. The Portfolio may purchase securities which it is eligible to purchase on a when-issued or delayed delivery basis, and may make contracts to purchase such securities for a fixed price at a future date beyond normal settlement time (forward commitments). The Portfolio may enter into repurchase agreements. The Portfolio may enter into reverse repurchase agreements and dollar rolls. The Portfolio may invest in event-linked bonds, which are fixed income securities for which the return of principal and payment of interest is contingent on the non-occurrence of a specific trigger event, such as a hurricane, earthquake, or other physical or weather-related phenomenon. If a trigger event occurs, a Portfolio may lose a portion or all of its 74

193 principal invested in the bond. Event-linked bonds often provide for an extension of maturity to process and audit loss claims where a trigger event has, or possibly has, occurred. An extension of maturity may increase volatility. Eventlinked bonds may also expose the Portfolio to certain unanticipated risks including credit risk, adverse regulatory or jurisdictional interpretations, and adverse tax consequences. Event-linked bonds may also be subject to liquidity risk. The Portfolio may invest up to 15% of its net assets in illiquid securities. The Portfolio may invest up to 10% of its assets in securities of other investment companies, such as closed-end management investment companies, or in pooled accounts or other investment vehicles which invest in foreign markets. As a shareholder of an investment company, the Portfolio may indirectly bear service and other fees which are in addition to the fees the Portfolio pays its service providers. For temporary or defensive purposes, the Portfolio may invest without limit in U.S. debt securities, including taxable securities and short-term money market securities, when PIMCO deems it appropriate to do so. When the Portfolio engages in such strategies, it may not achieve its investment objective. The Portfolio is managed by Pacific Investment Management Company LLC (PIMCO). SP Prudential U.S. Emerging Growth Portfolio The Portfolio s investment objective is long-term capital appreciation. This means the Portfolio seeks investments whose price will increase over several years. While we make every effort to achieve its objective, we can t guarantee success and it is possible that you could lose money. A Small/Medium-Sized Stock Portfolio The Portfolio invests primarily in the stocks of small and medium-sized companies with the potential for aboveaverage growth. In deciding which equities to buy, the Portfolio uses what is known as a growth investment style. This means the Portfolio invests in companies that it believes could experience superior sales or earnings growth. In pursuing this objective, the Portfolio normally invests at least 80% of the Portfolio s investable assets in equity securities of small and medium-sized U.S. companies with the potential for above-average growth. The Portfolio considers small and medium-sized companies to be those with market capitalizations that are less than the largest capitalization of the Standard and Poor s Mid-Cap 400 Stock Index as of the end of a calendar quarter. As of December 31, 2001, this number was $10.5 billion. We use the market capitalization measurements used by S&P at time of purchase. In addition to buying equities, the Portfolio may invest in other equity-related securities. Equity-related securities include American Depositary Receipts (ADRs); common stocks; nonconvertible preferred stocks; warrants and rights that can be exercised to obtain stock; investments in various types of business ventures, including partnerships and joint ventures; Real Estate Investment Trusts (REITs); and similar securities. The Portfolio also may buy convertible debt securities and convertible preferred stock. These are securities that the Portfolio can convert into the company s common stock or some other equity security. The Portfolio will only invest in investment-grade convertible securities. Generally, the Portfolio considers selling a security when, in the opinion of the investment adviser, the stock has experienced a fundamental disappointment in earnings; it has reached an intermediate-term price objective and its outlook no longer seems sufficiently promising; a relatively more attractive stock emerges; or the stock has experienced adverse price movements. The Portfolio can invest up to 20% of investable assets in equity securities of companies with larger or smaller market capitalizations than previously noted. The Portfolio may participate in the initial public offering (IPO) market. IPO investments may increase the Portfolio s total returns. As the Portfolio s assets grow, the impact of IPO investments will decline, which may reduce the Portfolio s total returns. 75

194 The Portfolio can invest up to 35% of total assets in foreign securities, including stocks and other equity-related securities, money market instruments and other investment-grade fixed-income securities of foreign issuers, including those in developing countries. For purposes of the 35% limit, the Portfolio does not consider ADRs and other similar receipts or shares to be foreign securities. The Portfolio can invest up to 20% of investable assets in investment-grade corporate or government obligations. Investment-grade obligations are rated in one of the top four long-term quality ratings by a major rating service (such as Baa/BBB or better by Moody s Investors Service, Inc. or Standard & Poor s Ratings Group, respectively). The Portfolio also may invest in obligations that are not rated, but which it believes to be of comparable quality. Obligations rated in the fourth category (Baa/BBB) have speculative characteristics. These lower-rated obligations are subject to a greater risk of loss of principal and interest. Generally, fixed-income securities provide a fixed rate of return, but provide less opportunity for capital appreciation than investing in stocks. The Portfolio will purchase money market instruments only in one of the two highest short-term quality ratings of a major rating service. In response to adverse market, economic or political conditions, the Portfolio may temporarily invest up to 100% of the Portfolio s assets in cash or money market instruments. Investing heavily in these securities limits the Portfolio s ability to achieve capital appreciation, but can help to preserve its assets when the equity markets are unstable. The Portfolio may also use repurchase agreements. The Portfolio may enter into foreign currency forward contracts to protect the value of its portfolio against future changes in the level of currency exchange rates. The Portfolio may enter into such contracts on a spot, that is, cash, basis at the rate then prevailing in the currency exchange market or on a forward basis, by entering into a forward contract to purchase or sell currency. The Portfolio may use various derivative strategies to try to improve its returns or protect its assets. The Portfolio cannot guarantee that these strategies will work, that the instruments necessary to implement these strategies will be available or that the Portfolio will not lose money. The Portfolio may invest in securities issued by agencies of the U.S. Government or instrumentalities of the U.S. Government. These obligations, including those which are guaranteed by Federal agencies or instrumentalities, may or may not be backed by the full faith and credit of the United States. Obligations of the Government National Mortgage Association (GNMA), the Farmers Home Administration and the Small Business Administration are backed by the full faith and credit of the United States. In the case of securities not backed by the full faith and credit of the United States, the Portfolio must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States if the agency or instrumentality does not meet its commitments. Securities in which the Portfolio may invest which are not backed by the full faith and credit of the United States include obligations such as those issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association, the Student Loan Marketing Association, Resolution Funding Corporation and the Tennessee Valley Authority, each of which has the right to borrow from the U.S. Treasury to meet its obligations, and obligations of the Farm Credit System, the obligations of which may be satisfied only by the individual credit of the issuing agency. FHLMC investments may include collateralized mortgage obligations. The Portfolio may invest in mortgage-backed securities, including those which represent undivided ownership interests in pools of mortgages. The U.S. Government or the issuing agency or instrumentality guarantees the payment of interest on and principal of these securities. However, the guarantees do not extend to the yield or value of the securities nor do the guarantees extend to the yield or value of the Portfolio s shares. These securities are in most cases pass-through instruments, through which the holders receive a share of all interest and principal payments from the mortgages underlying the securities, net of certain fees. The Portfolio may purchase and write (that is, sell) put and call options on securities, stock indexes and currencies that are traded on U.S. or foreign securities exchanges or in the over-the-counter market to seek to enhance return or to protect against adverse price fluctuations in securities in the Portfolio s portfolio. These options will be on equity securities, financial indexes (for example, S&P 500 Composite Stock Price Index) and foreign currencies. The Portfolio may write put and call options to generate additional income through the receipt of premiums, purchase put options in an effort to protect the value of securities (or currencies) that it owns against a decline in market value and purchase call options in an effort to protect against an increase in the price of securities (or currencies) it intends to purchase. 76

195 The Portfolio may purchase and sell financial futures contracts and options thereon which are traded on a commodities exchange or board of trade to reduce certain risks of its investments and to attempt to enhance return in accordance with regulations of the Commodity Futures Trading Commission (CFTC). The Portfolio also follows certain policies when it borrows money (the Portfolio can borrow up to 20% of the value of its total assets); lends its securities to others (the Portfolio can lend up to % of the value of its total assets, including collateral received in the transaction); and holds illiquid securities (the Portfolio may hold up to 15% of its net assets in illiquid securities, including securities with legal or contractual restrictions on resale, those without a readily available market and repurchase agreements with maturities longer than seven days). Portfolio Turnover As a result of the strategies described above, the Portfolio may have an annual portfolio turnover rate of up to 200%. Portfolio turnover is generally the percentage found by dividing the lesser of portfolio purchases or sales by the monthly average value of the portfolio. High portfolio turnover (100% or more) results in higher brokerage commissions and other transaction costs and can affect the Portfolio s performance. The Portfolio is managed by Jennison Associates LLC. SP Small/Mid-Cap Value Portfolio The investment objective of the SP Small/Mid-Cap Value Portfolio is long-term growth of capital. The Portfolio is managed by Fidelity Management & Research Company (FMR). The Portfolio normally invests at least 80% of its investable assets in securities of companies with small to medium market capitalizations. A Small/Mid-Cap Value Portfolio The Portfolio normally invests at least 80% of its investable assets in companies with small to medium market capitalizations. The Portfolio normally invests its assets primarily in common stocks. Although universal definitions of small and medium market capitalization does not exist, FMR generally defines small and medium market capitalization companies as those whose market capitalizations is similar to the market capitalization of companies in the S&P Small Cap 600 or the Russell 2000, and the S&P MidCap 400 or the Russell Midcap, respectively. A company s market capitalization is based on its current market capitalization or its market capitalization at the time of the Portfolio s investment. Companies whose capitalization is above this level after purchase continue to have a small or medium market capitalization for purposes of the 80% policy. The size of companies in each index changes with market conditions, and the composition of each index. FMR may also invest the Portfolio s assets in companies with larger market capitalizations. FMR invests the Portfolio s assets in companies that it believes are undervalued in the marketplace in relation to factors such as the company s assets, earnings, or growth potential, or cash flow, or in relation to securities of other companies in the same industry. Companies with these characteristics tend to have lower than average price/earnings (P/E) or price/book (P/B) ratios. The stocks of these companies are often called value stocks. FMR may invest the Portfolio s assets in securities of foreign issuers in addition to securities of domestic issuers. FMR relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market factors. Factors considered include growth potential, earnings estimates and management. These securities may then be analyzed using statistical models to further evaluate growth potential, valuation, liquidity and investment risk. In buying and selling securities for the Portfolio, FMR invests for the long term and selects those securities it believes offer strong opportunities for the long-term growth of capital and are attractively valued. 77

196 The Portfolio invests primarily in equity securities, which represent an ownership interest, or the right to acquire an ownership interest, in an issuer. Different types of equity securities provide different voting and dividend rights and priority in the event of the bankruptcy of the issuer. Equity securities include common stocks, preferred stocks, convertible securities, and warrants. FMR may use various techniques, such as buying and selling futures contracts and exchange traded funds, to increase or decrease the Portfolio s exposure to changing security prices or other factors that affect security values. The Portfolio may invest in equity and/or debt securities issued by Real Estate Investment Trusts (REITs). If FMR s strategies do not work as intended, the Portfolio may not achieve its objective. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. Many factors affect the Portfolio s performance. The Portfolio s share price changes daily based on changes in market conditions and interest rates and in response to other economic, political, or financial developments. The Portfolio s reaction to these developments will be affected by the types of securities in which the Portfolio invests, the financial condition, industry and economic sector, and geographic location of an issuer, and the Portfolio s level of investment in the securities of that issuer. When you sell units corresponding to shares of the Portfolio, they could be worth more or less than what you paid for them. In addition to company risk, derivatives risk, foreign investment risk, leveraging risk, liquidity risk, management risk, and market risk, the following factors can significantly affect the Portfolio s performance: The value of securities of smaller, less well-known issuers can be more volatile than that of larger issuers and can react differently to issuer, political, market and economic developments than the market as a whole and other types of stocks. Smaller issuers can have more limited product lines, markets and financial resources. Value stocks can react differently to issuer, political, market and economic developments than the market as a whole and other types of stocks. Value stocks tend to be inexpensive relative to their earnings or assets compared to other types of stocks. However, value stocks can continue to be inexpensive for long periods of time and may not ever realize their full value. In response to market, economic, political or other conditions, FMR may temporarily use a different investment strategy for defensive purposes. If FMR does so, different factors could affect the Portfolio s performance and the Portfolio may not achieve its investment objective. SP Strategic Partners Focused Growth Portfolio In pursuing its objective of long-term growth of capital, the Portfolio normally invests at least 65% of its total assets in equity-related securities of U.S. companies that are believed to have strong capital appreciation potential. While we make every effort to achieve our objective, we can t guarantee success and it is possible that you could lose money. A Growth Stock Portfolio The Portfolio normally invests at least 65% of its total assets in the equity-related securities of U.S. companies that are believed to have strong capital appreciation potential. The Portfolio is managed according to a growth investment style. The Portfolio s strategy is to combine the efforts of two investment advisers and to invest in the favorite stock selection ideas of three portfolio managers (two of whom invest as a team). Each investment adviser to the Portfolio utilizes a growth style to select approximately 20 securities. The portfolio managers build a portfolio with stocks in which they have the highest confidence and may invest more than 5% of the Portfolio s assets in any one issuer. The Portfolio may actively and frequently trade its portfolio securities. The Portfolio is a non-diversified mutual fund portfolio. This means that the Portfolio may invest in a relatively high percentage of net assets in a small number of issuers. Investing in a nondiversified mutual fund, particularly a fund investing in approximately 40 equity-related securities, involves greater risk than investing in a diversified fund because a loss resulting from the decline in the value of one security may represent a greater portion of the total assets of a nondiversified fund. 78

197 The primary equity-related securities in which the Portfolio invests are common stocks. Generally, each investment adviser will consider selling or reducing a stock position when, in their opinion, the stock has experienced a fundamental disappointment in earnings; it has reached an intermediate-term price objective and its outlook no longer seems sufficiently promising; a relatively more attractive stock emerges; or the stock has experienced adverse price movement. A price decline of a stock does not necessarily mean that an investment adviser will sell the stock at that time. During market declines, either investment adviser may add to positions in favored stocks, which can result in a somewhat more aggressive strategy, with a gradual reduction of the number of companies in which the adviser invests. Conversely, in rising markets, either investment adviser may reduce or eliminate fully valued positions, which can result in a more conservative investment strategy, with a gradual increase in the number of companies represented in the adviser s portfolio segment. In deciding which stocks to buy, each investment adviser uses what is known as a growth investment style. This means that each adviser will invest in stocks they believe could experience superior sales or earnings growth. In addition to common stocks in which the Portfolio primarily invests, equity-related securities include nonconvertible preferred stocks; convertible debt and convertible preferred stock; American Depository Receipts (ADRs); warrants and rights that can be exercised to obtain stock; investments in various types of business ventures, including partnerships and joint ventures; Real Estate Investment Trusts (REITs); and similar securities. The Portfolio may buy common stocks of companies of every size small-, medium- and large-capitalization although its investments are mostly in medium- and large-capitalization stocks. The Portfolio intends to be fully invested, holding less than 5% of its total assets in cash under normal market conditions. Under normal conditions, there will be an approximately equal division of the Portfolio s assets between the two investment advisers. All daily cash inflows (that is, purchases and reinvested distributions) and outflows (that is, redemptions and expense items) will usually be divided between the two investment advisers as the portfolio manager deems appropriate. There will be a periodic rebalancing of each segment s assets to take account of market fluctuations in order to maintain the approximately equal allocation. As a consequence, the manager may allocate assets from the portfolio segment that has appreciated more to the other. Alliance Capital Management s portfolio manager, Alfred Harrison, utilizes the fundamental analysis and research of Alliance s large internal research staff. In selecting stocks for the Portfolio, he emphasizes stock selection and investment in a limited number of companies that have strong management, superior industry positions, excellent balance sheets and the ability to demonstrate superior earnings growth. Jennison Associates portfolio managers, Spiros Segalas and Kathleen McCarragher, invest in mid-size and large companies experiencing some or all of the following: high sales growth, high unit growth, high or improving returns on assets and equity and a strong balance sheet. These companies generally trade at high prices relative to their current earnings. Reallocations may result in additional costs since sales of securities may result in higher portfolio turnover. Also, because each investment adviser selects portfolio securities independently, it is possible that a security held by one portfolio segment may also be held by the other portfolio segment of the Portfolio or that the two advisers may simultaneously favor the same industry. Prudential Investments LLC will monitor the overall portfolio to ensure that any such overlaps do not create an unintended industry concentration. In addition, if one investment adviser buys a security as the other adviser sells it, the net position of the Portfolio in the security may be approximately the same as it would have been with a single portfolio and no such sale and purchase, but the Portfolio will have incurred additional costs. The portfolio manager will consider these costs in determining the allocation of assets. The portfolio manager will consider the timing of reallocation based upon the best interests of the Portfolio and its shareholders. To maintain the Portfolio s federal income tax status as a regulated investment company, Jennison Associates also may have to sell securities on a periodic basis. The Portfolio may invest up to 20% of its total assets in foreign securities, including stocks and other equity-related securities, money market instruments and other fixed-income securities of foreign issuers. The Portfolio does not consider ADRs and other similar receipts or shares to be foreign securities. 79

198 The Portfolio may temporarily hold cash or invest in high-quality foreign or domestic money market instruments pending investment of proceeds from new sales of Portfolio shares or to meet ordinary daily cash needs subject to the policy of normally investing at least 65% of the Portfolio s assets in equity-related securities. In response to adverse market, economic, political or other conditions, the Portfolio may temporarily invest up to 100% of its assets in money market instruments. Investing heavily in these securities limits the ability to achieve the investment objective, but can help to preserve the Portfolio s assets when the equity markets are unstable. The Portfolio may use repurchase agreements. The Portfolio may purchase and write (that is, sell) put and call options on securities indexes that are traded on U.S. or foreign securities exchanges or in the over-the-counter market to try to enhance return or to hedge the Portfolio s portfolio. The Portfolio may write covered put and call options to generate additional income through the receipt of premiums, purchase put options in an effort to protect the value of a security that it owns against a decline in market value and purchase call options in an effort to protect against an increase in the price of securities it intends to purchase. The Portfolio also may purchase put and call options to offset previously written put and call options of the same series. The Portfolio will write only covered options. The Portfolio may purchase and sell stock index futures contracts and related options on stock index futures. The Portfolio may purchase and sell futures contracts on foreign currencies and related options on foreign currency futures contracts. The Portfolio may invest in securities issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the full faith and credit of the United States. Some are supported only by the credit of the issuing agency. The Portfolio will also use futures contracts and options on futures contracts for certain bona fide hedging, return enhancement and risk management purposes. The Portfolio may purchase put and call options and write (that is, sell) covered put and call options on futures contracts that are traded on U.S. and foreign exchanges. The Portfolio may use short sales. The Portfolio may use various derivatives to try to improve the Portfolio s returns. The Portfolio may use hedging techniques to try to protect the Portfolio s assets. We cannot guarantee that these strategies will work, that the instruments necessary to implement these strategies will be available, or that the Portfolio will not lose money. The Portfolio also follows certain policies when it borrows money (the Portfolio can borrow up to % of the value of its total assets); lends its securities to others for cash management purposes (the Portfolio can lend up to % ofthe value of its total assets including collateral received in the transaction); and holds illiquid securities (the Portfolio may hold up to 15% of its net assets in illiquid securities, including securities with legal or contractual restrictions on resale, those without a readily available market and repurchase agreements with maturities longer than seven days). The Portfolio is subject to certain investment restrictions that are fundamental policies, which means they cannot be changed without shareholder approval. For more information about these restrictions, see the SAI. It is not a principal strategy of the Portfolio to actively and frequently trade its portfolio securities to achieve its investment objective. Nevertheless, the Portfolio may have an annual portfolio turnover rate of up to 200%. Portfolio turnover is generally the percentage found by dividing the lesser of portfolio purchases and sales by the monthly average value of the portfolio. High portfolio turnover (100% or more) results in higher brokerage commissions and other costs and can affect the Portfolio s performance. The Portfolio is managed by Jennison Associates LLC and Alliance Capital Management, L.P. * * * The Statement of Additional Information which we refer to as the SAI contains additional information about the Portfolios. To obtain a copy, see the back cover page of this prospectus. * * * 80

199 OTHER INVESTMENTS AND STRATEGIES As indicated in the description of the Portfolios above, we may use the following investment strategies to increase a Portfolio s return or protect its assets if market conditions warrant. ADRs are certificates representing the right to receive foreign securities that have been deposited with a U.S. bank or a foreign branch of a U.S. bank. Convertible Debt and Convertible Preferred Stock A convertible security is a security for example, a bond or preferred stock that may be converted into common stock of the same or different issuer. The convertible security sets the price, quantity of shares and time period in which it may be so converted. Convertible stock is senior to a company s common stock but is usually subordinated to debt obligations of the company. Convertible securities provide a steady stream of income which is generally at a higher rate than the income on the company s common stock but lower than the rate on the company s debt obligations. At the same time, they offer through their conversion mechanism the chance to participate in the capital appreciation of the underlying common stock. The price of a convertible security tends to increase and decrease with the market value of the underlying common stock. Derivatives A derivative is an investment instrument that derives its price, performance, value, or cash flow from one or more underlying securities or other interests. Derivatives involve costs and can be volatile. With derivatives, the investment adviser tries to predict whether the underlying investment a security, market index, currency, interest rate or some other benchmark will go up or down at some future date. We may use derivatives to try to reduce risk or to increase return consistent with a Portfolio s overall investment objective. The investment adviser will consider other factors (such as cost) in deciding whether to employ any particular strategy, or use any particular instrument. Any derivatives we use may not fully offset a Portfolio s underlying positions and this could result in losses to the Portfolio that would not otherwise have occurred. Dollar Rolls Dollar rolls involve the sale by the Portfolio of a security for delivery in the current month with a promise to repurchase from the buyer a substantially similar but not necessarily the same security at a set price and date in the future. During the roll period, the Portfolio does not receive any principal or interest on the security. Instead, it is compensated by the difference between the current sales price and the price of the future purchase, as well as any interest earned on the cash proceeds from the original sale. Equity Swaps In an equity swap, the Portfolio and another party agree to exchange cash flow payments that are based on the performance of equities or an equity index. Forward Foreign Currency Exchange Contracts A foreign currency forward contract is an obligation to buy or sell a given currency on a future date at a set price. When a Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when a Portfolio anticipates the receipt in a foreign currency of dividends or interest payments on a security which it holds, the Portfolio may desire to lock-in the U.S. dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. By entering into a forward contract for a fixed amount of dollars, for the purchase or sale of the amount of foreign currency involved in the underlying transactions, the Portfolio will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or received. At the maturity of a forward contract, a Portfolio may either sell the security and make delivery of the foreign currency or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract with the same currency trader obligating it to purchase, on the same maturity date, the same amount of the foreign currency. Futures Contracts A futures contract is an agreement to buy or sell a set quantity of an underlying product at a future date, or to make or receive a cash payment based on the value of a securities index. When a futures contract is entered into, each party deposits with a futures commission merchant (or in a segregated account) approximately 5% of the contract amount. This is known as the initial margin. Every day during the futures contract, either the buyer or the futures commission merchant will make payments of variation margin. In other words, if the value of the underlying security, index or interest rate increases, then the buyer will have to add to the margin account so that the account 81

200 balance equals approximately 5% of the value of the contract on that day. The next day, the value of the underlying security, index or interest rate may decrease, in which case the borrower would receive money from the account equal to the amount by which the account balance exceeds 5% of the value of the contract on that day. A stock index futures contract is an agreement between the buyer and the seller of the contract to transfer an amount of cash equal to the daily variation margin of the contract. No physical delivery of the underlying stocks in the index is made. Interest Rate Swaps In an interest rate swap, the Portfolio and another party agree to exchange interest payments. For example, the Portfolio may wish to exchange a floating rate of interest for a fixed rate. We would enter into that type of a swap if we think interest rates are going down. Joint Repurchase Account In a joint repurchase transaction, uninvested cash balances of various Portfolios are added together and invested in one or more repurchase agreements. Each of the participating Portfolios receives a portion of the income earned in the joint account based on the percentage of its investment. Loans and Assignments Loans are privately negotiated between a corporate borrower and one or more financial institutions. The Portfolio acquires interests in loans directly (by way of assignment from the selling institution) or indirectly (by way of the purchase of a participation interest from the selling institution. Purchasers of loans depend primarily upon the creditworthiness of the borrower for payment of interest and repayment of principal. If scheduled interest or principal payments are not made, the value of the instrument may be adversely affected. Interests in loans are also subject to additional liquidity risks. Loans are not generally traded in organized exchange markets but are traded by banks and other institutional investors engaged in loan syndications. Consequently, the liquidity of a loan will depend on the liquidity of these trading markets at the time that the Portfolio sells the loan. In assignments, the Portfolio will have no recourse against the selling institution, and the selling institution generally makes no representations about the underlying loan, the borrowers, the documentation or the collateral. In addition, the rights against the borrower that are acquired by the Portfolio may be more limited than those held by the assigning lender. Mortgage-related Securities are usually pass-through instruments that pay investors a share of all interest and principal payments from an underlying pool of fixed or adjustable rate mortgages. We may invest in mortgage-related securities issued and guaranteed by the U.S. government or its agencies like the Federal National Mortgage Association (Fannie Maes) and the Government National Mortgage Association (Ginnie Maes) and debt securities issued (but not guaranteed) by the Federal Home Loan Mortgage Company (Freddie Macs). Private mortgage-related securities that are not guaranteed by U.S. governmental entities generally have one or more types of credit enhancement to ensure timely receipt of payments and to protect against default. Mortgage-related securities include collateralized mortgage obligations, multi-class pass through securities and stripped mortgage-backed securities. A collateralized mortgage-backed obligation (CMO) is a security backed by an underlying portfolio of mortgages or mortgage-backed securities that may be issued or guaranteed by entities such as banks, U.S. governmental entities or broker-dealers. A multi-class pass-through security is an equity interest in a trust composed of underlying mortgage assets. Payments of principal and interest on the mortgage assets and any reinvestment income provide the money to pay debt service on the CMO or to make scheduled distributions on the multi-class pass-through security. A stripped mortgage-backed security (MBS strip) may be issued by U.S. governmental entities or by private institutions. MBS strips take the pieces of a debt security (principal and interest) and break them apart. The resulting securities may be sold separately and may perform differently. MBS strips are highly sensitive to changes in prepayment and interest rates. Options A call option on stock is a short-term contract that gives the option purchaser or holder the right to acquire a particular equity security for a specified price at any time during a specified period. For this right, the option purchaser pays the option seller a certain amount of money or premium which is set before the option contract is entered into. The seller or writer of the option is obligated to deliver the particular security if the option purchaser exercises the option. A put option on stock is a similar contract. In a put option, the option purchaser has the right to sell a particular security to the option seller for a specified price at any time during a specified period. In exchange for this right, the option purchaser pays the option seller a premium. Options on debt securities are similar to stock options except that the option holder has the right to acquire or sell a debt security rather than an equity security. Options on stock indexes 82

201 are similar to options on stocks, except that instead of giving the option holder the right to receive or sell a stock, it gives the holder the right to receive an amount of cash if the closing level of the stock index is greater than (in the case of a call) or less than (in the case of a put) the exercise price of the option. The amount of cash the holder will receive is determined by multiplying the difference between the index s closing price and the option s exercise price, expressed in dollars, by a specified multiplier. Unlike stock options, stock index options are always settled in cash, and gain or loss depends on price movements in the stock market generally (or a particular market segment, depending on the index) rather than the price movement of an individual stock. Real Estate Investment Trusts (REITs) A REIT is a company that manages a portfolio of real estate to earn profits for its shareholders. Some REITs acquire equity interests in real estate and then receive income from rents and capital gains when the buildings are sold. Other REITs lend money to real estate developers and receive interest income from the mortgages. Some REITs invest in both types of interests. Repurchase Agreements In a repurchase transaction, the Portfolio agrees to purchase certain securities and the seller agrees to repurchase the same securities at an agreed upon price on a specified date. This creates a fixed return for the Portfolio. Reverse Repurchase Agreements In a reverse repurchase transaction, the Portfolio sells a security it owns and agrees to buy it back at a set price and date. During the period the security is held by the other party, the Portfolio may continue to receive principal and interest payments on the security. Short Sales In a short sale, we sell a security we do not own to take advantage of an anticipated decline in the stock s price. The Portfolio borrows the stock for delivery and if it can buy the stock later at a lower price, a profit results. Short Sales Against-the-Box A short sale against-the-box means the Portfolio owns securities identical to those sold short. When-Issued and Delayed Delivery Securities With when-issued or delayed delivery securities, the delivery and payment can take place a month or more after the date of the transaction. A Portfolio will make commitments for when- 98 issued transactions only with the intention of actually acquiring the securities. A Portfolio s custodian will maintain in a segregated account, liquid assets having a value equal to or greater than such commitments. If the Portfolio chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any other security, incur a gain or loss. * * * Except for the Money Market Portfolio, each Portfolio also follows certain policies when it borrows money (each Portfolio may borrow up to 5% of the value of its total assets, except that SP Large Cap Value Portfolio and SP Small/ Mid-Cap Value Portfolio may each borrow up to % of their total assets); lends its securities; and holds illiquid securities (a Portfolio may hold up to 15% of its net assets in illiquid securities, including securities with legal or contractual restrictions on resale, those without a readily available market and repurchase agreements with maturities longer than seven days). If the Portfolio were to exceed this limit, the investment adviser would take prompt action to reduce a Portfolio s holdings in illiquid securities to no more than 15% of its net assets, as required by applicable law. A Portfolio is subject to certain investment restrictions that are fundamental policies, which means they cannot be changed without shareholder approval. For more information about these restrictions, see the SAI. The Money Market Portfolio also follows certain policies when it borrows money (the Portfolio may borrow up to 5% of the value of its total assets) and holds illiquid securities (the Portfolio may hold up to 10% of its net assets in illiquid securities, including securities with legal or contractual restrictions on resale, those without a readily available market and repurchase agreements with maturities longer than seven days). If the Portfolio were to exceed this limit, the investment adviser would take prompt action to reduce the Portfolio s holdings in illiquid securities to no more than 10% of its net assets, as required by applicable law. The Portfolio is subject to certain investment restrictions that are fundamental policies, which means they cannot be changed without shareholder approval. For more information about these restrictions, see the SAI. 83

202 We will consider other factors (such as cost) in deciding whether to employ any particular strategy or use any particular instrument. For more information about these strategies, see the SAI, Investment Objectives and Policies of the Portfolios. HOW THEFUND IS MANAGED Board Of Directors The Board of Directors oversees the actions of the Investment Adviser, the sub-advisers and the Distributor and decides on general policies. The Board also oversees the Fund s officers who conduct and supervise the daily business operations of the Fund. Investment Adviser Prudential Investments LLC ( PI ), a wholly-owned subsidiary of Prudential Financial, Inc., serves as the overall investment adviser for the Fund. PI is located at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey PI and its predecessors have served as manager and administrator to investment companies since As of December 31, 2001, PI served as the investment manager to all of the Prudential U.S. and offshore investment companies, and as manager or administrator to closed-end investment companies, with aggregate assets of approximately $100.8 billion. The Fund uses a manager-of-managers structure. Under this structure, PI is authorized to select (with approval of the Fund s independent directors) one or more sub-advisers to handle the actual day-to-day investment management of each Portfolio. PI monitors each sub-adviser s performance through quantitative and qualitative analysis, and periodically reports to the Fund s board of directors as to whether each sub-adviser s agreement should be renewed, terminated or modified. PI also is responsible for allocating assets among the sub-advisers if a Portfolio has more than one sub-adviser. In those circumstances, the allocation for each sub-adviser can range from 0% to 100% of a Portfolio s assets, and PI can change the allocations without board or shareholder approval. The Fund will notify shareholders of any new sub-adviser or any material changes to any existing sub-advisory agreement. 84

203 The following chart lists the total annualized investment advisory fees paid in 2001 with respect to each of the Fund s Portfolios. Total advisory fees as % Portfolio of average net assets Conservative Balanced Diversified Bond Equity Flexible Managed Global High Yield Bond Jennison (formerly, Prudential Jennison) Money Market Stock Index Value SP Aggressive Growth Asset Allocation * SP AIM Aggressive Growth SP AIM Core Equity (formerly, SP AIM Growth and Income) SP Alliance Large Cap Growth SP Alliance Technology SP Balanced Asset Allocation * SP Conservative Asset Allocation * SP Davis Value SP Deutsche International Equity SP Growth Asset Allocation * SP INVESCO Small Company Growth SP Jennison International Growth SP Large Cap Value SP MFS Capital Opportunities SP MFS Mid-Cap Growth SP PIMCO High Yield SP PIMCO Total Return SP Prudential U.S. Emerging Growth SP Small/Mid-Cap Value SP Strategic Partners Focused Growth * Each Asset Allocation Portfolio invests only in shares of other underlying Fund Portfolios. The advisory fees for the Asset Allocation Portfolios are the product of a blend of the advisory fees of the underlying Fund Portfolios, plus a 0.05% annual advisory fee paid to PI. The only advisory fee directly paid by the Asset Allocation Portfolios is the 0.05% fee paid to PI. Investment Sub-Advisers Each Portfolio has one or more sub-advisers providing the day-to-day investment management. PI pays each subadviser out of the fee that PI receives from the Fund. Jennison Associates LLC (Jennison) serves as the sole sub-adviser for the Global Portfolio, the Jennison Portfolio, the SP Jennison International Growth Portfolio, and the SP Prudential U.S. Emerging Growth Portfolio. Jennison serves as a sub-adviser for a portion of the assets of the Equity Portfolio, the Value Portfolio and the SP Strategic Partners Focused Growth Portfolio. Jennison s address is 466 Lexington Avenue, New York, New York Jennison is a wholly owned subsidiary of Prudential Financial, Inc. As of December 31, 2001, Jennison had over $62 billion in assets under management for institutional and mutual fund clients. Prudential Investment Management, Inc. (PIM) serves as the sole sub-adviser for the Conservative Balanced Portfolio, the Diversified Bond Portfolio, the Flexible Managed Portfolio, the High Yield Bond Portfolio, the Money 85

204 Market Portfolio, and the Stock Index Portfolio. PIM is a wholly owned subsidiary of Prudential Financial, Inc. PIM s address is Gateway Center Two, 100 Mulberry Street, Newark, New Jersey A I M Capital Management, Inc. (A I M Capital) serves as sub-adviser to the SP AIM Aggressive Growth Portfolio and the SP AIM Core Equity Portfolio. The firm is located at 11 Greenway Plaza, Suite 100, Houston, Texas The sub-adviser provides investment advisory services to each Portfolio by obtaining and evaluating economic, statistical and financial information and formulating and implementing investment programs. A I M Capital, together with its affiliates, advises or manages approximately 150 investment portfolios as of December 31, 2001, encompassing a broad range of investment objectives. A I M Capital uses a team approach to investment management. As of December 31, 2001, A I M and its affiliates managed approximately $158 billion in assets. Alliance Capital Management, L.P. (Alliance) serves as the sub-adviser to the SP Alliance Technology Portfolio, SP Alliance Large Cap Growth Portfolio and a portion of the SP Strategic Partners Focused Growth Portfolio. The subadviser is located at 1345 Avenue of the Americas, New York, New York Alliance is a leading international investment manager. Alliance s clients are primarily major corporate employee benefit funds, public employee retirement systems, investment companies, foundations and endowment funds. As of December 31, 2001, Alliance managed $455 billion in assets. Davis Selected Advisers, L.P. (Davis) serves as the sub-adviser to the SP Davis Value Portfolio. Davis is located at 2429 East Elvira Road, Suite 101, Tucson, Arizona As of December 31, 2001, Davis managed approximately $41.8 billion in assets. Deutsche Asset Management, Inc. (DAMI) serves as a sub-adviser to the SP Deutsche International Equity Portfolio and as subadviser for approximately 25% of the assets of the Value Portfolio. DAMI is a wholly-owned subsidiary of Deutsche Bank AG. As of December 31, 2001 DAMI s total assets under management exceeded $96.1 billion. DAMI s address is 280 Park Avenue, New York, New York Fidelity Management & Research Company (FMR) is the sub-adviser to the SP Large Cap Value Portfolio and the SP Small/Mid-Cap Value Portfolio. As of December 31, 2001, FMR and its wholly-owned subsidiaries had approximately $912billion in assets under management. The address of FMR is 82Devonshire Street, Boston, Massachusetts GEAsset Management, Incorporated (GEAM) serves as a sub-adviser to approximately 25% of the Equity Portfolio. GEAM s ultimate parent is General Electric Company. Its address is 3003 Summer Street, Stamford, Connecticut As of December 31, 2001, GEAM oversees in excess of $112.2 billion under management. INVESCO Funds Group, Inc. (INVESCO), located at 4350 South Monaco Street, Denver, Colorado 80237, is the subadviser of the SP INVESCO Small Company Growth Portfolio. INVESCO was founded in 1932and as of December 31, 2001, managed almost $35 billion in assets. INVESCO is a subsidiary of AMVESCAP PLC, an international investment management company based in London, with money managers in Europe, North and South America and the Far East. Massachusetts Financial Services Company (MFS), located at 500 Boylston Street, Boston, Massachusetts, acts as the sub-adviser for the SP MFS Capital Opportunities Portfolio and the SP MFS Mid-Cap Growth Portfolio. MFS and its predecessor organizations have a history of money management dating from MFS is an indirect wholly-owned subsidiary of Sun Life Assurance Company of Canada. As of November 30, 2001, MFS managed over $135.3 billion in assets. Pacific Investment Management Company LLC (PIMCO) acts as the sole sub-adviser for the SP PIMCO Total Return Portfolio and the SP PIMCO High Yield Portfolio. PIMCO is located at 840 Newport Center Drive, Newport Beach, California and is a subsidiary of Allianz Dresdner Asset Management of America L.P., formerly PIMCO Advisors L.P. As of December 31, 2001, PIMCO managed over $241 billion in assets. Salomon Brothers Asset Management Inc. (Salomon) serves as sub-adviser for a portion of the assets of the Equity Portfolio. Salomon is part of the global asset management arm of Citigroup Inc., which was formed in 1998 as a result of the merger of Travelers Group and Citicorp Inc. As of December 31, 2001, Salomon managed more than $30 billion in total assets. Salomon s address is 125 Broad Street, New York, New York

205 Victory Capital Management Inc. (Victory) (formerly, Key Asset Management Inc.) serves as a sub-adviser for a portion of the assets of the Value Portfolio. Victory is a wholly-owned subsidiary of KeyCorp, Inc. As of December 31, 2001, Victory s total assets under management exceeded $72 billion. Victory s address is 127 Public Square, Cleveland, Ohio Portfolio Managers An Introductory Note About Prudential Investment Management s Fixed Income Group PIM s Fixed Income Group, which provides portfolio management services to the Conservative Balanced, Diversified Bond, Flexible Managed, High Yield Bond and Money Market Portfolios, manages more than $135 billion for Prudential s retail investors, institutional investors, and policyholders. Senior Managing Director James J. Sullivan heads the Group, which is organized into teams specializing in different market sectors. Top-down, broad investment decisions are made by the Fixed Income Policy Committee, whereas bottom-up security selection is made by the sector teams. Prior to joining PIM in 1998, Mr. Sullivan was a Managing Director in Prudential s Capital Management Group, where he oversaw portfolio management and credit research for Prudential s General Account and subsidiary fixed-income portfolios. He has more than 18 years of experience in risk management, arbitrage trading and corporate bond investing. The Fixed Income Investment Policy Committee is comprised of key senior investment managers, including Fixed Income s Chief Investment Officer and the head of risk management. The Committee uses a top-down approach to investment strategy, asset allocation and general risk management, identifying sectors in which to invest. Conservative Balanced Portfolio and Flexible Managed Portfolio These Portfolios are managed by a team of portfolio managers. M. Stumpp, Ph.D., Senior Managing Director of PIM, has been the lead portfolio manager of the Portfolios since 1994 and is responsible for the overall asset allocation decisions. The Fixed Income segments are managed by the Fixed Income Group of PIM. This Group uses a bottom-up approach, which focuses on individual securities, while staying within the guidelines of the Investment Policy Committee and the Portfolios investment restrictions and policies. In addition, the Credit Research team of analysts supports the sector teams using bottom-up fundamentals, as well as economic and industry trends. Other sector teams may contribute to securities selection when appropriate. The equity portion of the Conservative Balanced Portfolio is managed by M. Stumpp, John Moschberger, and Michael Lenarcic. M. Stumpp s background is discussed above. Mr. Lenarcic is a Managing Director within PIM s Quantitative Management team. Prior to joining the Quantitative Management team in 1985, Mr. Lenarcic was a Vice President at Wilshire Associates, where he was head of the Asset Allocation Division. Mr. Lenarcic holds a B.A. degree from Kent State University and A.M. and Ph.D. degrees in Business Economics from Harvard University. John Moschberger, CFA, is a Vice President of Prudential Investments. Mr. Moschberger joined Prudential in 1980 and has been a portfolio manager since The equity portion of the Flexible Managed Portfolio is managed by M. Stumpp, and James Scott. The background of M. Stumpp is discussed above. James Scott is a Senior Managing Director of PIM s Quantitative Management Group. Mr. Scott has managed balanced and equity portfolios for Prudential s pension plans and several institutional clients since Mr. Scott received a B.A. from Rice University and an M.S. and a Ph.D. from Carnegie Mellon University. Diversified Bond Portfolio The Corporate Team of PIM, headed by Steven Kellner, is primarily responsible for overseeing the day-to-day management of the Portfolio. This team uses a bottom-up approach, which focuses on individual securities, while 87

206 staying within the guidelines of the Investment Policy Committee and the Portfolios investment restrictions and policies. In addition, the Credit Research team of analysts supports the sector teams using bottom-up fundamentals, as well as economic and industry trends. Other sector teams may contribute to securities selection when appropriate. Corporate Team Assets Under Management (as of December 31, 2001): $42 billion. Team Leader: Steven Kellner, CFA. General Investment Experience: 16 years. Portfolio Managers: 7. Average General Investment Experience: 12years, which includes team members with significant mutual fund experience. Sector: U.S. investment-grade corporate securities. Investment Strategy: Focus is on identifying spread, credit quality and liquidity trends to capitalize on changing opportunities in the market. Ultimately, they seek the highest expected return with the least risk. Equity Portfolio Jeffrey Siegel, Bradley Goldberg and David Kiefer are co-managers of the portion of the Portfolio assigned to Jennison. Mr. Siegel has been an Executive Vice President of Jennison since June Previously he was at TIAA-CREF from , where he held positions as a portfolio manager and analyst. Prior to joining TIAA-CREF, Mr. Siegel was an analyst for Equitable Capital Management and held positions at Chase Manhattan Bank and First Fidelity Bank. Mr. Siegel earned a B.A. from Rutgers University. Mr. Goldberg is an Executive Vice President of Jennison, where he also serves as Chairman of the Asset Allocation Committee. Prior to joining Jennison in 1974 he served as Vice President and Group Head in the Investment Research Division of Bankers Trust Company. He earned a B.S. from the University of Illinois and an M.B.A. from New York University. Mr. Goldberg holds a Chartered Financial Analyst (C.F.A.) designation. Mr. Kiefer has been a Senior Vice President of Jennison since September Previously, he was a Managing Director of Prudential Global Asset Management and has been with Prudential since Mr. Kiefer earned a B.S. from Princeton University and an M.B.A. from Harvard Business School. He holds a Chartered Financial Analyst (C.F.A.) designation. Richard Sanderson, Senior Vice President and Director of Investment Research, Domestic Equities, for GEAM, manages the portion of the Equity Portfolio assigned to GEAM. Mr. Sanderson, a Chartered Financial Analyst, has 29 years of asset management experience and has been employed with GEAM for over 5 years, and holds B.A. and M.B.A. degrees from the University of Michigan. Michael Kagan, a Director of Salomon, manages the portion of the Equity Portfolio assigned to Salomon. Mr. Kagan has over 15 years of asset management experience, including experience as an analyst covering the consumer products, aerospace, chemicals, and housing industries. Mr. Kagan received his B.A. from Harvard College and attended the MIT Sloan School of Management. Global Portfolio Daniel Duane and Michelle Picker manage this Portfolio. Mr. Duane has been an Executive Vice President of Jennison since October 2000 and was previously a Managing Director of Prudential Global Asset Management. He has been managing the Portfolio since Prior to joining Prudential, he was with First Investors Asset Management where he was in charge of all global equity investments. He earned a B.A. from Boston College, a Ph.D. from Yale University and an M.B.A. from New York University. He holds a Chartered Financial Analyst (C.F.A.) designation. Michelle Picker has been a Vice President of Jennison since October 2000 and was previously a Vice President of Prudential Investment Management, Inc. Ms. Picker joined Prudential in 1992and has co-managed the Portfolio since October Ms. Picker earned a B.A. from the University of Pennsylvania and an M.B.A. from New York University. She holds a Chartered Financial Analyst (C.F.A.) designation. 88

207 High Yield Bond Portfolio The High Yield Team of PIM, headed by Paul Appleby, is primarily responsible for overseeing the day-to-day management of the fixed income portfolio of the Portfolio. This Team uses a bottom-up approach, which focuses on individual securities, while staying within the guidelines of the Investment Policy Committee and the Portfolio s investment restrictions and policies. In addition, the Credit Research team of analysts supports the sector teams using bottom-up fundamentals, as well as economic and industry trends. Other sector teams may contribute to securities selection when appropriate. High Yield Team Assets Under Management (as of December 31, 2001): $8 billion. Team Leader: Paul Appleby. General Investment Experience: 15 years. Portfolio Managers: 6. Average General Investment Experience: 18 years, which includes team members with significant mutual fund experience. Sector: Below-investment-grade corporate securities. Investment Strategy: The High Yield Team of PIM, headed by Paul Appleby, is primarily responsible for overseeing the day-to-day management of the fixed income portion of the Portfolio assigned to Prudential Investment Management. Focus is generally on bonds with high total return potential, given existing risk parameters. They also seek securities with high current income, as appropriate. The Team uses a relative value approach while staying within the guidelines of the Investment Policy Committee and the Portfolio s investment restrictions and policies. In addition, the Credit Research team of analysts supports the sector teams using bottomup fundamentals, as well as economic and industry trends. Other sector trends may contribute to securities selection when appropriate. Jennison Portfolio This Portfolio has been managed by Spiros Segalas, Michael Del Balso and Kathleen McCarragher of Jennison since Mr. Segalas is a founding member and a Director, President and Chief Investment Officer of Jennison. He has been in the investment business for over 41 years. Mr. Del Balso, a Director and Executive Vice President of Jennison, is also Jennison s Director of Equity Research. He has been part of the Jennison team since 1972when he joined the firm from White, Weld & Company. Mr. Del Balso is a member of the New York Society of Security Analysts. Ms. McCarragher, Director and Executive Vice President of Jennison, is also Jennison s Domestic Equity Investment Strategist. Prior to joining Jennison in 1998, she was a Managing Director and Director of Large Cap Growth Equities at Weiss, Peck & Greer L.L.C. Prior to 1992, Ms. McCarragher served as an analyst, portfolio manager and member of the Investment Committee for State Street Research & Management Company. Money Market Portfolio The Money Market Team of PIM, headed by Joseph Tully, is primarily responsible for overseeing the day-to-day management of the Portfolio. This team uses a bottom-up approach, which focuses on individual securities, while staying within the guidelines of the Investment Policy Committee and the Portfolio s investment restrictions and policies. Money Market Team Assets Under Management (as of December 31, 2001): $52 billion. Team Leader: Joseph Tully. General Investment Experience: 18 years. 89

208 Portfolio Managers: 8. Average General Investment Experience: 12years, which includes team members with significant mutual fund experience. Sector: High-quality short-term debt securities, including both taxable and tax-exempt instruments. Investment Strategy: Focus is on safety of principal, liquidity and controlled risk. Stock Index Portfolio John Moschberger, CFA, Vice President of PIM, has managed this Portfolio since Mr. Moschberger joined Prudential in 1980 and has been a portfolio manager since Value Portfolio Tom Kolefas and Bradley Goldberg are the co-portfolio managers of the portion of the Portfolio assigned to Jennison. Mr. Kolefas has been a Senior Vice President of Jennison since September Previously, he was a Managing Director and Senior Portfolio Manager of Prudential Global Asset Management. He joined Prudential in May 2000 from Loomis Sayles and Company, L.P., where he headed the Large/Mid-Cap Value Team. Prior to 1996, Mr. Kolefas was employed by Mackay Shields Financial as a portfolio manager for five years. Mr. Kolefas earned a B.S. from the Cooper Union School of Engineering and an M.B.A. from New York University and holds the Chartered Financial Analyst (C.F.A.) designation. Mr. Goldberg is an Executive Vice President of Jennison, and also serves as Chairman of the Asset Allocation Committee. He joined Jennison in Prior to joining Jennison, he served as Vice President and Group Head in the Investment Research Division of Bankers Trust Company. He earned a B.S. from the University of Illinois and an M.B.A from the New York University. Mr. Goldberg holds the Chartered Financial Analyst (C.F.A.) designation. James Giblin, a Chartered Financial Analyst, manages the portion of the Portfolio assigned to DAMI. Mr. Giblin joined DAMI in 1995 with 22 years of investment experience, including 15 years as a portfolio manager for Cigna Equity Advisors. He received his B.S. from Pennsylvania State University and an M.B.A. from the Wharton School, University of Pennsylvania. Neil A. Kilbane manages the portion of the Portfolio assigned to Victory. Mr. Kilbane is a Senior Portfolio and Managing Director for Victory, and is a Chartered Financial Analyst. Mr. Kilbane began his investment career with Victory in 1995, and prior to that was employed by Duff & Phelps Investment Management Company and National City Bank. Mr. Kilbane holds a B.S. from Cleveland State University, an M.S. from Kansas State University, and an M.B.A. from Tulsa University. SP AIM Aggressive Growth Portfolio A I M Capital Management, Inc. (A I M Capital) uses a team approach to investment management. The individual members of the team who are primarily responsible for the day-to-day management of the Portfolio are Ryan E. Crane, Portfolio Manager, who has been responsible for the Portfolio since 2000 and has been associated with A I M Capital and/or its affiliates since 1994, Jay K. Rushin, CFA, Portfolio Manager, who has been responsible for the Portfolio since 2001 and has been associated with A I M Capital and/or its affiliates since 1994, and Robert M. Kippes, Senior Portfolio Manager, who has been associated with A I M Capital and/or its affiliates since SP AIM Core Equity Portfolio A I M Capital Management, Inc. (A I M Capital) uses a team approach to investment management. The individual members of the team who are primarily responsible for the day-to-day management of the Portfolio are: Ronald Sloan, Senior Portfolio Manager, joined AIM Capital in 1998 from Verissimo Research and Management, where he served as president since Prior to Verissimo Research and Management, he was partner and executive vice president at Wood Island Associates, Inc./Siebel Capital Management, Inc. from 1981 to Mr. Sloan has been in 90

209 the investment industry since Mr. Sloan holds a B.S. in business administration as well as an M.B.A. from the University of Missouri. He is a Chartered Financial Analyst. Michael Yellen, Portfolio Manager, joined AIM Capital in 1994 from INVESCO (NY), Inc., formerly known as Chancellor LGT Asset Management, Inc., as an investment analyst for health care industries. He also had primary responsibility for the GT Applied Science Fund and the GT Healthcare Fund, both offshore funds, until assuming his present responsibilities with AIM Capital. Mr. Yellen began his career at Franklin Resources, Inc. as a senior securities analyst. Mr. Yellen holds a B.A. from Stanford University. SP Alliance Large Cap Growth Portfolio Alfred Harrison, Director and Vice Chairman of Alliance Capital Management Corporation (ACMC) leads the team managing this Portfolio, with Syed Hasnain, a Senior Portfolio Manager, also being directly involved. Mr. Hasnain joined ACMC after working as a strategist with Merrill Lynch Capital Markets. Previously he was an international economist with Citicorp and a financial analyst at Goldman Sachs & Co. He holds a M. Phil in Finance from Cambridge University, and Sc.B. from Brown University, and studied towards a doctorate at Stanford Business School. Investment experience: 12years. SP Alliance Technology Portfolio Gerald T. Malone manages the SP Alliance Technology Portfolio. Mr. Malone is a Senior Vice President of Alliance Capital Management Corporation (ACMC) and has been associated with ACMC for more than five years. SP Asset Allocation Portfolios For the four Asset Allocation Portfolios, PI invests in shares of other Fund Portfolios according to the percentage allocations discussed in this prospectus. SP Davis Value Portfolio The following individuals provide day-to-day management of the SP Davis Value Portfolio. Christopher C. Davis Responsibilities: President of Davis New York Venture Fund, Inc. Also manages or co-manages other equity funds advised by Davis Selected Advisers. Other Experience: Portfolio Manager of Davis New York Venture Fund since October Assistant Portfolio Manager and research analyst working with Shelby M.C. Davis from September 1989 to September Kenneth Charles Feinberg Responsibilities: Co-Portfolio Manager of Davis New York Venture Fund with Christopher C. Davis since May Also co-manages other equity funds advised by Davis Selected Advisers. 91

210 Other Experience: Research analyst at Davis Selected Advisers since December Assistant Vice President of Investor Relations for Continental Corp. from 1988 to SP Deutsche International Equity Portfolio The following portfolio managers are responsible for the day-to-day management of the Portfolio s investments: Irene Cheng, Manager Director Head of EAFE Portfolio Selection Team Joined firm in 1993 after 10 years of experience as portfolio manager at Blackstone Group and an equity analyst at Sanford C. Bernstein & Co., Inc. BA from Harvard / Radcliffe (1976), MS from MIT (1978) and MBA from Harvard Business School (1980) Alex Tedder, Director Portfolio Manager, EAFE Portfolio Selection Team; Head of International Select Equity strategy Joined the Company in 1994, previously managing European equities and responsible for insurance sector with 4 years of experience at Schroder Investment Management MA from Freiburg University Marc Slendebroek, Vice President Portfolio Manager, EAFE Portfolio Selection Team Joined the Company in 1994 after 5 years of experience as an equity analyst at Kleinwort Benson Securities and at Enskilda Securities MA from University of Leiden, Netherlands Clare Brody, CFA, Director Portfolio Manager, EAFE Portfolio Selection Team Joined the Company in 1993 after 3 years of experience in international investments and corporate finance with Citicorp Securities BSc from Cornell University Stuart Kirk, Associate Director Portfolio Manager, EAFE Portfolio Selection Team Joined the Company in 1995 as analyst and fund manager MA from Cambridge University 92

211 SP INVESCO Small Company Growth Portfolio The following individual is primarily responsible for the day-to-day management of the Portfolio s holdings: Stacie Cowell is the lead portfolio manager of the SP INVESCO Small Company Growth Portfolio and a Chartered Financial Analyst (CFA) who joined INVESCO in She is also a vice president of INVESCO. Before joining the company, she was senior equity analyst with Founders Asset Management and capital markets and trading analyst with Chase Manhattan Bank in New York. She holds a B.A. in Economics from Colgate University and an M.S from the University of Colorado (Boulder). SP Jennison International Growth Portfolio The Portfolio is co-managed by Blair Boyer and Daniel Duane. Mr. Boyer, Executive Vice President of Jennison, has been in the investment business for over 18 years. Prior to joining Jennison in March 1993, he managed international equity portfolios at Arnhold and S. Bleichroeder, Inc. Previously, he was a research analyst and senior portfolio manager at Verus Capital. He earned a B.A. from Bucknell University in 1983 and an M.B.A. from New York University in Mr. Duane has been an Executive Vice President of Jennison since October 2000 and was previously a Managing Director of Prudential Global Asset Management. Prior to joining Prudential, he was in charge of all global equity investments at First Investors Asset Management, managed a portion of TIAA-CREF s global portfolio and was a research analyst at Value Line. He earned a dual A.B. from Boston College, a Ph.D. from Yale University and an M.B.A. from New York University. Mr. Duane also was Fulbright Scholar at the University of Tubingen in Germany. He holds a Chartered Financial Analyst (C.F.A.) designation. SP Large Cap Value Portfolio And SP Small/Mid-Cap Value Portfolio Fidelity Management & Research Company (FMR) is the Portfolios sub-adviser. Robert Macdonald is portfolio manager of the SP Large Cap Value Portfolio and the SP Small/Mid-Cap Value Portfolio. Mr. Macdonald is a senior vice president and portfolio manager for other accounts managed by FMR and its affiliates. He joined FMR in SP MFS Capital Opportunities Portfolio The Portfolio is managed by Maura A. Shaughnessy, a Senior Vice President of Massachusetts Financial Services Company (MFS), who has been employed in the investment management area of MFS since SP MFS Mid-Cap Growth Portfolio The Portfolio is managed by Mark Regan, a Senior Vice President of MFS, who has been employed in the investment management area of MFS since 1989 and David E. Sette-Ducati, a Vice President of MFS, has been employed in the investment management area of MFS since

212 MFS and its predecessor organizations have a history of money management dating from MFS is an indirect wholly-owned subsidiary of Sun Life Assurance Company of Canada. SP PIMCO High Yield Portfolio The Portfolio is managed by Benjamin L. Trosky. Mr. Trosky, Managing Director of PIMCO, joined PIMCO as a portfolio manager in 1990, and has managed fixed income accounts for various institutional clients and funds since that time. SP PIMCO Total Return Portfolio The Portfolio is managed by a portfolio management team led by William H. Gross, Managing Director, Chief Investment Officer and a founding partner of PIMCO. The portfolio management team develops and implements strategy for the Portfolio. SP Prudential U.S. Emerging Growth Portfolio Susan Hirsch, Executive Vice President of Jennison, has managed the retail fund counterpart of this Portfolio since it began. Prior to joining Jennison, Ms. Hirsch was a Managing Director of Prudential Investments, which she joined in July Before that she was employed by Lehman Brothers Global Asset Management from 1986 to 1996 and Delphi Asset Management in She managed growth stock portfolios at both firms. Ms. Hirsch holds a B.S. from Brooklyn College and is a member of the Financial Analysts Federation and the New York Society of Security Analysts. SP Strategic Partners Focused Growth Portfolio Alfred Harrison is portfolio manager for the portion of the Portfolio s assets advised by Alliance. Mr. Harrison joined Alliance in 1978 and is manager of the firm s Minneapolis office. He is Vice Chairman of Alliance Capital Management Corporation. Spiros Segalas and Kathleen McCarragher are co-portfolio managers for the portion of the Portfolio s assets advised by Jennison. Mr. Segalas is a Director, founding member and President and Chief Investment Officer of Jennison. He has been in the investment business for over 41 years. Ms. McCarragher, Director and Executive Vice President of Jennison, is also Jennison s Domestic Equity Investment Strategist. Prior to joining Jennison in 1998, she was a Managing Director and Director of Large Cap Growth Equities at Weiss, Peck & Greer LLC. Prior to 1992, Ms. McCarragher served as an analyst portfolio manager and member of the Investment Committee for State Street Research and Management Company. HOW TO BUY AND SELL SHARES OF THE FUND The Fund offers two classes of shares in each Portfolio Class I and Class II. Each Class participates in the same investments within a given Portfolio, but the Classes differ as far as their charges. Class I shares are sold only to separate accounts of Prudential Insurance Company of America and its affiliates as investment options under certain Contracts. Class II is offered only to separate accounts of non-prudential insurance companies as investment options under certain of their Contracts. Please refer to the accompanying Contract prospectus to see which Portfolios are available through your Contract. The Fund sells its shares to separate accounts issuing variable annuity contracts and variable life insurance policies. To the extent dictated by its agreement with a separate account, the Fund will cooperate with the separate account in monitoring for transactions that are indicative of market timing. In addition, to the extent permitted by applicable laws and agreements, the Fund may cease selling its shares to a separate account to prevent market timing transactions. The way to invest in the Portfolios is through certain variable life insurance and variable annuity contracts. Together with this prospectus, you should have received a prospectus for such a Contract. You should refer to that prospectus for further information on investing in the Portfolios. 94

213 Both Class I and Class II shares of a Portfolio are sold without any sales charge at the net asset value of the Portfolio. Class II shares, however, are subject to an annual distribution or 12b-1 fee of 0.25% and an administration fee of 0.15% of the average daily net assets of Class II. Class I shares do not have a distribution or administration fee. Shares are redeemed for cash within seven days of receipt of a proper notice of redemption or sooner if required by law. There is no redemption charge. We may suspend the right to redeem shares or receive payment when the New York Stock Exchange is closed (other than weekends or holidays), when trading on the New York Stock Exchange is restricted, or as permitted by the SEC. Net Asset Value Any purchase or sale of Portfolio shares is made at the net asset value, or NAV, of such shares. The price at which a purchase or redemption is made is based on the next calculation of the NAV after the order is received in good order. The NAV of each share class of each Portfolio is determined on each day the New York Stock Exchange is open for trading as of the close of the exchange s regular trading session (which is generally 4:00 p.m. New York time). The NYSE is closed on most national holidays and Good Friday. The Fund does not price, and shareholders will not be able to purchase or redeem, the Fund s shares on days when the NYSE is closed but the primary markets for the Fund s foreign securities are open, even though the value of these securities may have changed. Conversely, the Fund will ordinarily price its shares, and shareholders may purchase and redeem shares, on days that the NYSE is open but foreign securities markets are closed. The NAV for each of the Portfolios other than the Money Market Portfolio is determined by a simple calculation. It s the total value of a Portfolio (assets minus liabilities) divided by the total number of shares outstanding. The NAV for the Money Market Portfolio will ordinarily remain at $10 per share. (The price of each share remains the same but you will have more shares when dividends are declared.) To determine a Portfolio s NAV, its holdings are valued as follows: Equity Securities are generally valued at the last sale price on an exchange or NASDAQ, or if there is not a sale on that day, at the mean between the most recent bid and asked prices on that day. If there is no asked price, the security will be valued at the bid price. Equity securities that are not sold on an exchange or NASDAQ are generally valued by an independent pricing agent or principal market maker. A Portfolio may own securities that are primarily listed on foreign exchanges that trade on weekends or other days when the Portfolios do not price their shares. Therefore, the value of a Portfolio s assets may change on days when shareholders cannot purchase or redeem Portfolio shares. All Short-term Debt Securities held by the Money Market Portfolio are valued at amortized cost. Short-term debt securities with remaining maturities of 12months or less held by the Conservative Balanced and Flexible Managed Portfolios are valued on an amortized cost basis. The amortized cost valuation method is widely used by mutual funds. It means that the security is valued initially at its purchase price and then decreases in value by equal amounts each day until the security matures. It almost always results in a value that is extremely close to the actual market value. The Fund s Board of Directors has established procedures to monitor whether any material deviation between valuation and market value occurs and if so, will promptly consider what action, if any, should be taken to prevent unfair results to Contract owners. For each Portfolio other than the Money Market Portfolio, and except as discussed above for the Conservative Balanced and Flexible Managed Portfolios, short-term debt securities, including bonds, notes, debentures and other debt securities, and money market instruments such as certificates of deposit, commercial paper, bankers acceptances and obligations of domestic and foreign banks, with remaining maturities of more than 60 days, for which market quotations are readily available, are valued by an independent pricing agent or principal market maker (if available, otherwise a primary market dealer). Short-term Debt Securities with remaining maturities of 60 days or less are valued at cost with interest accrued or discount amortized to the date of maturity, unless such valuation, in the judgment of PI or a sub-adviser, does not represent fair value. 95

214 Convertible debt securities that are traded in the over-the-counter market, including listed convertible debt securities for which the primary market is believed by PI or a sub-adviser to be over-the-counter, are valued at the mean between the last bid and asked prices provided by a principal market maker (if available, otherwise a primary market dealer). Other debt securities those that are not valued on an amortized cost basis are valued using an independent pricing service. Options on stock and stock indexes that are traded on a national securities exchange are valued at the last sale price on such exchange on the day of valuation or, if there was no such sale on such day, at the mean between the most recently quoted bid and asked prices on such exchange. Futures contracts and options on futures contracts are valued at the last sale price at the close of the commodities exchange or board of trade on which they are traded. If there has been no sale that day, the securities will be valued at the mean between the most recently quoted bid and asked prices on that exchange or board of trade. Forward currency exchange contracts are valued at the cost of covering or offsetting such contracts calculated on the day of valuation. Securities which are valued in accordance herewith in a currency other than U.S. dollars shall be converted to U.S. dollar equivalents at a rate obtained from a recognized bank, dealer or independent service on the day of valuation. Over-the-counter (OTC) options are valued at the mean between bid and asked prices provided by a dealer (which may be the counterparty). A sub-adviser will monitor the market prices of the securities underlying the OTC options with a view to determining the necessity of obtaining additional bid and ask quotations from other dealers to assess the validity of the prices received from the primary pricing dealer. Securities for which no market quotations are available will be valued at fair value by PI under the direction of the Fund s Board of Directors. The Fund also may use fair value pricing if it determines that a market quotation is not reliable based among other things, on events that occur after the quotation is derived or after the close of the primary market on which the security is traded, but before the time that the Fund s NAV is determined. This use of fair value pricing most commonly occurs with securities that are primarily traded outside the U.S., but also may occur with U.S.- traded securities. The fair value of a portfolio security that the Fund uses to determine its NAV may differ from the security s quoted or published price. For purposes of computing the Fund s NAV, we will value the Fund s futures contracts 15 minutes after the close of regular trading on the New York Stock Exchange (NYSE). Except when we fair value securities, we normally value each foreign security held by the Fund as of the close of the security s primary market. Distributor Prudential Investment Management Services LLC (PIMS) distributes the Fund s shares under a Distribution Agreement with the Fund. PIMS principal business address is Gateway Center Three, 100 Mulberry Street, Newark, New Jersey The Fund has adopted a distribution plan under Rule 12b-1 of the Investment Company Act of 1940 covering Class II shares. Under that plan, Class II of each Portfolio pays to PIMS a distribution or 12b-1 fee at the annual rate of 0.25% of the average daily net assets of Class II. This fee pays for distribution services for Class II shares. Because these fees are paid out of the Portfolio s assets on an on-going basis, over time these fees will increase the cost of your investment in Class II shares and may cost you more than paying other types of sales charges. These 12b-1 fees do not apply to Class I. OTHER INFORMATION Federal Income Taxes If you own or are considering purchasing a variable contract, you should consult the prospectus for the variable contract for tax information about that variable contract. You should also consult with a qualified tax adviser for information and advice. The SAI provides information about certain tax laws applicable to the Fund. 96

215 Monitoring For Possible Conflicts The Fund sells its shares to fund variable life insurance contracts and variable annuity contracts and is authorized to offer its shares to qualified retirement plans. Because of differences in tax treatment and other considerations, it is possible that the interest of variable life insurance contract owners, variable annuity contract owners and participants in qualified retirement plans could conflict. The Fund will monitor the situation and in the event that a material conflict did develop, the Fund would determine what action, if any, to take in response. Financial Highlights The financial highlights which follow will help you evaluate the financial performance of each Portfolio available under your Contract. The total return in each chart represents the rate that a shareholder earned on an investment in that share class of the Portfolio, assuming reinvestment of all dividends and other distributions. The charts do not reflect any charges under any variable contract. The information is for Class I shares for the periods indicated, unless otherwise indicated. The information has been audited by PricewaterhouseCoopers LLP, whose unqualified report, along with the financial statements, appears in the annual report, which is available upon request. 97

216 Financial Highlights Conservative Balanced Portfolio Year Ended December 31, Per Share Operating Performance: Net Asset Value, beginning of year... $ $ $ $ $ Income From Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (0.75) (0.65) Total from investment operations... (0.31) (0.06) Less Distributions: Dividends from net investment income... (0.48) (0.56) (0.62) (0.66) (0.76) Distributions from net realized gains... (0.15) (0.11) (0.06) (0.94) (1.81) Distributions in excess of net realized gains... (0.03) Total distributions... (0.63) (0.67) (0.71) (1.60) (2.57) Net Asset Value, end of year... $ $ $ $ $ Total Investment Return:(a)... (2.02)% (0.48)% 6.69% 11.74% 13.45% Ratios/Supplemental Data: Net assets, end of year (in millions)... $3,259.7 $3,714.3 $4,387.1 $4,796.0 $4,744.2 Ratios to average net assets: Expenses % 0.60% 0.57% 0.57% 0.56% Net investment income % 3.79% 4.02% 4.19% 4.48% Portfolio turnover rate % 85% 109% 167% 295% (a) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. Diversified Bond Portfolio Year Ended December 31, Per Share Operating Performance: Net Asset Value, beginning of year... $ $ $ $ $11.07 Income From Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments (0.75) Total from investment operations (0.08) Less Distributions: Dividends from net investment income... (0.71) (0.70) (0.69) (0.83) Distributions from net realized gains... (b) (0.03) (0.04) (0.13) Total distributions... (0.71) (0.70) (0.03) (0.73) (0.96) Net Asset Value, end of year... $ $ $ $ $11.02 Total Investment Return(a) % 9.72% (0.74)% 7.15% 8.57% Ratios/Supplemental Data: Net assets, end of year (in millions)... $1,400.7 $1,269.8 $1,253.8 $1,122.6 $816.7 Ratios to average net assets: Expenses % 0.45% 0.43% 0.42% 0.43% Net investment income % 6.83% 6.25% 6.40% 7.18% Portfolio turnover rate % 139% 171% 199% 224% (a) (b) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported includes reinvestment of dividends and distributions. Less than $0.005 per share. F1

217 Financial Highlights Class I Year Ended December 31, Equity Portfolio Year Ended December 31, Class II May 3, 1999(c) through December 31, 1999 Per Share Operating Performance: Net Asset Value, beginning of period... $ $ $ $ $ $24.51 $28.92 $32.79 Income from Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (2.83) (2.83) 0.26 (0.60) Total from investment operations... (2.65) (2.74) 0.65 (0.32) Less Distributions: Dividends from net investment income... (0.18) (0.51) (0.53) (0.60) (0.70) (0.10) (0.40) (0.34) Distributions in excess of net investment income... (0.02) (0.02) Distributions from net realized gains... (1.18) (4.64) (3.77) (3.64) (1.76) (1.18) (4.64) (3.21) Total distributions... (1.36) (5.17) (4.30) (4.24) (2.46) (1.28) (5.06) (3.55) Net Asset Value, end of period... $ $ $ $ $ $20.49 $24.51 $28.92 Total Investment Return(a)... (11.18)% 3.28% 12.49% 9.34% 24.66% (11.57)% 2.83% (0.68)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $4,615.9 $5,652.7 $6,235.0 $6,247.0 $6,024.0 $ 1.1 $ 1.8 $ 0.3 Ratios to average net assets: Expenses % 0.49% 0.47% 0.47% 0.46% 0.89% 0.91% 0.87%(b) Net investment income % 1.75% 1.72% 1.81% 2.27% 0.45% 1.26% 1.33%(b) Portfolio turnover rate % 78% 9% 25% 13% 153% 78% 9% (a) (b) (c) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for less than a full year are not annualized. Annualized. Commencement of offering of Class II shares. Flexible Managed Portfolio Year Ended December 31, Per Share Operating Performance: Net Asset Value, beginning of year... $ $ $ $ $ Income From Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (1.35) (0.86) Total from investment operations... (0.93) (0.25) Less Distributions: Dividends from net investment income... (0.58) (0.62) (0.59) (0.58) Distributions from net realized gains... (0.23) (0.24) (0.19) (1.85) (3.04) Total distributions... (0.81) (0.86) (0.19) (2.44) (3.62) Net Asset Value, end of year... $ $ $ $ $ Total Investment Return(a)... (5.68)% (1.44)% 7.78% 10.24% 17.96% Ratios/Supplemental Data: Net assets, end of year (in millions)... $3,896.6 $4,463.8 $5,125.3 $5,410.0 $5,490.1 Ratios to average net assets: Expenses % 0.64% 0.62% 0.61% 0.62% Net investment income % 3.22% 3.20% 3.21% 3.02% Portfolio turnover rate % 132% 76% 138% 227% (a) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. F2

218 Financial Highlights Global Portfolio Year Ended December 31, Per Share Operating Performance: Net Asset Value, beginning of year... $ $ $ $17.92 $17.85 Income from Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (3.58) (5.30) Total from investment operations... (3.49) (5.23) Less Distributions: Dividends from net investment income... (0.06) (0.07) (0.16) (0.13) Distributions in excess of net investment income... (0.13) (0.10) (0.12) (0.10) Distributions from net realized gains... (4.77) (1.94) (0.18) (0.93) (0.90) Total distributions... (4.83) (2.14) (0.28) (1.21) (1.13) Net Asset Value, end of year... $ $ $ $21.16 $17.92 Total Investment Return(a)... (17.64)% (17.68)% 48.27% 25.08% 6.98% Ratios/Supplemental Data: Net assets, end of year (in millions)... $ $1,182.1 $1,298.3 $844.5 $638.4 Ratios to average net assets:... Expenses % 0.85% 0.84% 0.86% 0.85% Net investment income % 0.25% 0.21% 0.29% 0.47% Portfolio turnover rate... 67% 95% 76% 73% 70% (a) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. High Yield Bond Portfolio Year Ended December 31, Per Share Operating Performance: Net Asset Value, beginning of year... $ 6.14 $ 7.52$ 7.21 $ 8.14 $ 7.87 Income From Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (0.62) (1.30) (0.46) (0.94) 0.26 Total from Investment operations... (0.04) (0.56) 0.33 (0.17) 1.04 Less Distributions: Dividends from net investment income... (0.70) (0.82) (0.02) (0.76) (0.77) Net Asset Value, end of year... $ 5.40 $ 6.14 $ 7.52$ 7.21 $ 8.14 Total Investment Return(a)... (0.44)% (7.91)% 4.61% (2.36)% 13.78% Ratios/Supplemental Data: Net assets, end of year (in millions)... $655.8 $661.3 $802.2 $789.3 $568.7 Ratios to average net assets: Expenses % 0.60% 0.60% 0.58% 0.57% Net investment income % 10.47% 10.48% 10.31% 9.78% Portfolio turnover rate... 84% 76% 58% 63% 106% (a) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. F3

219 Financial Highlights Jennison Portfolio (formerly, Prudential Jennison Portfolio) Class I Year Ended December 31, Year Ended December 31, 2001 Class II February 10, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ $ $ $ $14.32 $22.88 $34.25 Income From Investment Operations: Net investment income (loss) (0.03) Net realized and unrealized gains (losses) on investments... (4.22) (5.61) (4.25) (7.54) Total from investment operations... (4.18) (5.60) (4.24) (7.57) Less Distributions: Dividends from net investment income... (0.03) (d) (0.05) (0.04) (0.04) (d) (d) Distributions from net realized gains... (0.19) (3.82) (1.40) (0.38) (1.07) (0.19) (3.80) Total distributions... (0.22) (3.82) (1.45) (0.42) (1.11) (0.19) (3.80) Net Asset Value, end of period... $ $ $ $ $17.73 $18.45 $22.88 Total Investment Return(b)... (18.25)% (17.38)% 41.76% 37.46% 31.71% (18.60)% (22.19)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $2,186.9 $2,892.7 $2,770.7 $1,198.7 $495.9 $ 59.6 $ 13.3 Ratios to average net assets: Expenses % 0.64% 0.63% 0.63% 0.64% 1.04% 1.04%(c) Net investment income (loss) % 0.02% 0.17% 0.20% 0.25% (0.19)% (0.39)%(c) Portfolio turnover rate... 86% 89% 58% 54% 60% 86% 89%(e) (a) Commencement of offering of Class II shares. (b) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for less than a full year are not annualized. (c) Annualized. (d) Less than $0.01 per share. (e) Not annualized. Money Market Portfolio Year Ended December 31, Per Share Operating Performance: Net Asset Value, beginning of year... $ $ $ $10.00 $10.00 Income From Investment Operations: Net investment income and realized and unrealized gains Dividend and distributions... (0.41) (0.60) (0.49) (0.52) (0.54) Net Asset Value, end of year... $ $ $ $10.00 $10.00 Total Investment Return(a) % 6.20% 4.97% 5.39% 5.41% Ratios/Supplemental Data: Net assets, end of year (in millions)... $1,501.9 $1,238.2 $1,335.5 $920.2 $657.5 Ratios to average net assets: Expenses % 0.44% 0.42% 0.41% 0.43% Net investment income % 6.03% 4.90% 5.20% 5.28% (a) Total investment return is calculated assuming a purchase on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. F4

220 Financial Highlights Stock Index Portfolio Year Ended December 31, Per Share Operating Performance: Net Asset Value, beginning of year... $ $ $ $ $ Income from Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (5.05) (4.37) Total from investment operations... (4.69) (4.01) Less Distributions: Dividends from net investment income... (0.35) (0.37) (0.43) (0.42) (0.42) Distributions from net realized gains... (1.98) (1.41) (0.53) (0.59) (0.87) Total distributions... (2.33) (1.78) (0.96) (1.01) (1.29) Net Asset Value, end of year... $ $ $ $ $ Total Investment Return(a)... (12.05)% (9.03)% 20.54% 28.42% 32.83% Ratios/Supplemental Data: Net assets, end of year (in millions)... $3,394.1 $4,186.0 $4,655.0 $3,548.1 $2,448.2 Ratios to average net assets: Expenses % 0.39% 0.39% 0.37% 0.37% Net investment income % 0.83% 1.09% 1.25% 1.55% Portfolio turnover rate... 3% 7% 2% 3% 5% (a) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. Class I Value Portfolio Year Ended December 31, Class II May 14, 2001(a) through December 31, 2001 Per Share Operating Performance: Net Asset Value, beginning of period... $ $ $ $ $ $19.79 Income From Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (0.69) (1.03) 6.06 (1.01) Total from investment operations... (0.44) (0.47) 6.67 (0.89) Less Distributions: Dividends from net investment income... (0.30) (0.44) (0.50) (0.59) (0.57) (0.14) Distributions from net realized gains... (1.81) (1.53) (2.41) (1.30) (2.22) (0.85) Total distributions... (2.11) (1.97) (2.91) (1.89) (2.79) (0.99) Net Asset Value, end of period... $ $ $ $ $ $17.91 Total Investment Return(b)... (2.08)% 15.59% 2.52% (2.38)% 36.61% (4.34)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $1,801.4 $1,975.3 $2,024.0 $2,142.3 $2,029.8 $ 1.1 Ratios to average net assets: Expenses % 0.45% 0.42% 0.42% 0.41% 0.84%(c) Net investment income % 2.31% 2.34% 2.54% 2.90% 0.94%(c) Portfolio turnover rate % 85% 16% 20% 38% 175% (a) (b) (c) Commencement of offering of Class II shares. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. F5

221 Financial Highlights SP Aggressive Growth Asset Allocation Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 9.33 $10.00 Income from Investment Operations: Net investment income Net realized and unrealized losses on investments... (1.69) (0.67) Total from investment operations... (1.67) (0.66) Less Distributions: Dividends from net investment income... (0.02) (0.01) Distributions from net realized gains... (0.06) Total distributions... (0.08) (0.01) Net Asset Value, end of period... $ 7.58 $ 9.33 Total Investment Return(b)... (17.92)% (6.65)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 7.5 $ 2.1 Ratios to average net assets: Expenses % 0.05%(c) Net investment income % 0.36%(c) Portfolio turnover rate... 62% 6%(d) (a) (b) (c) (d) Commencement of operations. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Not annualized. SP AIM Aggressive Growth Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 8.60 $ Income from Investment Operations: Net investment loss... (0.04) (0.01) Net realized and unrealized losses on investments... (2.07) (1.39) Total from investment operations... (2.11) (1.40) Net Asset Value, end of period... $ 6.49 $ 8.60 Total Investment Return(b)... (24.53)% (14.00)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 5.7 $ 3.9 Ratios to average net assets:(d) Expenses % 1.07%(c) Net investment loss... (0.73)% (0.40)%(c) Portfolio turnover rate... 87% 16%(e) (a) (b) (c) (d) (e) Commencement of operations. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 3.45% and (3.11)%, respectively, for the year ended December 31, 2001 and 5.57% and (4.90)%, respectively, for the period ended December 31, Not annualized. F6

222 Financial Highlights SP AIM Core Equity Portfolio (formerly, SP AIM Growth and Income Portfolio) Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 8.41 $ Income From Investment Operations: Net investment income (loss)... ( )(f) 0.01 Net realized and unrealized losses on investments... (1.90) (1.59) Total from investment operations... (1.90) (1.58) Less Dividends: Dividends from net investment income... (0.01) Net Asset Value, end of period... $ 6.51 $ 8.41 Total Investment Return(b)... (22.68)% (15.74)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 10.2$ 4.3 Ratios to average net assets:(d) Expenses % 1.00%(c) Net investment income (loss)... (0.02)% 0.26%(c) Portfolio turnover rate... 65% 15%(e) (a) (b) (c) (d) (e) (f) Commencement of operations. Total investment return calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 2.55% and (1.57)%, respectively, for the year ended December 31, 2001 and 5.53% and (4.27)%, respectively, for the period ended December 31, Not annualized. Less than $0.005 per share. F7

223 Financial Highlights SP Alliance Large Cap Growth Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 8.55 $ Income From Investment Operations: Net investment income (loss)... (0.01) 0.01 Net realized and unrealized losses on investments... (1.23) (1.45) Total from investment operations... (1.24) (1.44) Less Distributions: Dividends from net investment income... (0.01) Tax return of capital distributions... (f) Total distributions... (f) (0.01) Net Asset Value, end of period... $ 7.31 $ 8.55 Total Investment Return(b)... (14.47)% (14.44)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 35.9 $ 7.1 Ratios to average net assets:(d) Expenses % 1.10%(c) Net investment income (loss)... (0.08)% 0.44%(c) Portfolio turnover rate... 47% 10%(e) (a) (b) (c) (d) (e) (f) Commencement of operations. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 1.57% and (0.55)%, respectively, for the year ended December 31, 2001 and 4.26% and (2.72)%, respectively, for the period ended December 31, Not annualized. Less than $0.005 per share. F8

224 Financial Highlights SP Alliance Technology Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 7.62$ Income from Investment Operations: Net investment income (loss)... (0.03) 0.01 Net realized and unrealized losses on investments... (1.88) (2.38) Total from investment operations... (1.91) (2.37) Less Distributions: Dividends from net investment income... (0.01) Distributions in excess of net investment income... (b) Total distributions... (0.01) Net Asset Value, end of period... $ 5.71 $ 7.62 Total Investment Return(c)... (25.07)% (23.71)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 7.7 $ 6.1 Ratios to average net assets: (e) Expenses % 1.30%(d) Net investment income (loss)... (0.69)% 0.37%(d) Portfolio turnover rate... 47% 23%(f) (a) Commencement of operations. (b) Less than $0.005 per share. (c) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. (d) Annualized. (e) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 3.16% and (2.53)%, respectively, for the year ended December 31, 2001 and 4.66% and (2.99)%, respectively, for the period ended December 31, (f) Not annualized. SP Balanced Asset Allocation Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 9.80 $10.00 Income from Investment Operations: Net investment income Net realized and unrealized losses on investments... (0.73) (0.20) Total from investment operations... (0.59) (0.14) Less Distributions: Dividends from net investment income... (0.14) (0.06) Distributions from net realized gains... (0.05) Total distributions... (0.19) (0.06) Net Asset Value, end of period... $ 9.02$ 9.80 Total Investment Return(b)... (5.99)% (1.42)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 66.1 $ 3.7 Ratios to average net assets: Expenses % 0.05%(c) Net investment income % 4.89%(c) Portfolio turnover rate... 35% 4%(d) (a) Commencement of operations. (b) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. (c) Annualized. (d) Not annualized. F9

225 Financial Highlights SP Conservative Asset Allocation Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $10.00 $10.00 Income From Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (0.24) (c) Total from investment operations... (0.03) 0.08 Less Distributions: Dividends from net investment income... (0.16) (0.08) Distributions from net realized gains... (0.04) (c) Total distributions... (0.20) (0.08) Net Asset Value, end of period... $ 9.77 $10.00 Total Investment Return(b)... (0.23)% 0.84% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 47.9 $ 1.9 Ratios to average net assets: Expenses % 0.05%(d) Net investment income % 8.07%(d) Portfolio turnover rate... 29% 4%(e) (a) (b) (c) (d) (e) Commencement of operations. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Less than $0.005 per share. Annualized. Not annualized. Year Ended December 31, 2001 SP Davis Value Portfolio September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ $10.00 Income from Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (1.11) 0.15 Total from investment operations... (1.06) 0.17 Less Dividends: Dividends from net investment income... (0.05) (0.02) Net Asset Value, end of period... $ 9.04 $10.15 Total Investment Return(b)... (10.46)% 1.69% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 94.4 $ 12.8 Ratios to average net assets:(d) Expenses % 0.83%(c) Net investment income % 1.48%(c) Portfolio turnover rate... 17% 3%(e) (a) (b) (c) (d) (e) Commencement of operations. Total investment is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income (loss) ratios would have been 1.03% and 0.43%, respectively, for the year ended December 31, 2001 and 3.16% and (0.85)%, respectively, for the period ended December 31, Not annualized. F10

226 Financial Highlights SP Deutsche International Equity Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 9.44 $10.00 Income From Investment Operations: Net investment income Net realized and unrealized losses on investments... (2.09) (0.57) Total from investment operations... (2.04) (0.56) Less Dividends: Dividends from net investment income... (0.05) Net Asset Value, end of period... $ 7.35 $ 9.44 Total Investment Return(c)... (22.07)% (5.20)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 24.7 $ 7.8 Ratios to average net assets:(e) Expenses % 1.10%(d) Net investment income % 0.55%(d) Portfolio turnover rate % 51%(f) (a) (b) (c) (d) (e) (f) Commencement of operations. Less than $0.01 per share. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 3.27% and (1.56)%, respectively, for the year ended December 31, 2001 and 4.21% and (2.56)%, respectively, for the period ended December 31, Not annualized. SP Growth Asset Allocation Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 9.52$10.00 Income from Investment Operations: Net investment income Net realized and unrealized losses on investments... (1.21) (0.49) Total from investment operations... (1.12) (0.46) Less Distributions: Dividends from net investment income... (0.08) (0.02) Distributions from net realized gains... (0.05) Total distributions... (0.13) (0.02) Net Asset Value, end of period... $ $ 9.52 Total Investment Return(b)... (11.77)% (4.56)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 46.8 $ 3.9 Ratios to average net assets: Expenses % 0.05%(c) Net investment income % 2.95%(c) Portfolio turnover rate... 43% 39%(d) (a) (b) (c) (d) Commencement of operations. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized Not annualized. F11

227 Financial Highlights SP INVESCO Small Company Growth Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 8.38 $ Income From Investment Operations: Net investment loss... (0.02) (f) Net realized and unrealized losses on investments... (1.42) (1.62) Total from investment operations... (1.44) (1.62) Net Asset Value, end of period... $ 6.94 $ 8.38 Total Investment Return(b)... (17.18)% (16.20)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 8.4 $ 5.5 Ratios to average net assets:(d) Expenses % 1.15%(c) Net investment loss... (0.28)% (0.10)%(c) Portfolio turnover rate... 83% 29%(e) (a) (b) (c) (d) (e) (f) Commencement of operations. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 2.84% and (1.97)%, respectively, for the year ended December 31, 2001 and 4.00% and (2.95)%, respectively, for the period ended December 31, Not annualized. Less than $0.005 per share. F12

228 Financial Highlights Year Ended December 31, 2001(i) Class I SP Jennison International Growth Portfolio September 22, 2000(a) through December 31, 2000 Year Ended December 31, 2001(i) Class II October 4, 2000(b) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 8.50 $ $ 8.48 $ 9.79 Income from Investment Operations: Net investment income (loss) ( )(g) ( )(g) Net realized and unrealized losses on investments... (3.05) (1.51) (3.04) (1.31) Total from investment operations.. (3.03) (1.50) (3.04) (1.31) Less Distributions: Tax return of capital distributions... (0.02) (0.01) Net Asset Value, end of period... $ 5.45 $ 8.50 $ 5.43 $ 8.48 Total Investment Return(c)... (35.64)% (15.00)% (35.92)% (13.28)% Ratios/Supplemental Data: Net assets, end of period (in millions).. $ 19.9 $ 7.6 $ 14.9 $ 2.7 Ratios to average net assets:(e) Expenses % 1.24%(d) 1.64% 1.64%(d) Net investment income (loss) %(h) 0.51%(d) (0.03)%(h) ( )%(d) Portfolio turnover rate... 86% 12%(f) 86% 12%(f) (a) (b) (c) (d) (e) (f) (g) (h) (i) Commencement of offering of Class I shares. Commencement of offering of Class II shares. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 1.86% and (0.30)%, respectively, for Class I and 2.26% and (0.66)%, respectively, for Class II for the year ended December 31, 2001 and 3.44% and (1.69)%, respectively, for Class I and 3.84% and (2.20)%, respectively, for Class II for the period ended December 31, Not annualized. Less than $0.005 per share. Includes custodian fee credits of 0.12% for Class I and 0.13% for Class II. If the Portfolio had not earned custodian fee credits, the annual net investment income (loss) ratios would have been 0.19% and (0.16)%, respectively, for Class I and Class II for the year ended December 31, Calculated based upon weighted average shares outstanding during the year. F13

229 Financial Highlights Year Ended December 31, 2001 SP Large Cap Value Portfolio September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $10.44 $10.00 Income from Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (0.99) 0.44 Total from investment operations... (0.90) 0.48 Less Distributions: Dividends from net investment income... (0.10) (0.04) Distributions in excess of net investment income... (e) Total distributions... (0.10) (0.04) Net Asset Value, end of period... $ 9.44 $10.44 Total Investment Return(b)... (8.65)% 4.82% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 23.7 $ 3.9 Ratios to average net assets:(d) Expenses % 0.90%(c) Net investment income % 1.60%(c) Portfolio turnover rate... 61% 13%(f) (a) (b) (c) (d) (e) (f) Commencement of operations. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income (loss) ratios would have been 1.98% and 0.10%, respectively, for the year ended December 31, 2001 and 5.47% and (2.97)%, respectively, for the period ended December 31, Less than $0.005 per share. Not annualized. F14

230 Financial Highlights SP MFS Capital Opportunities Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 9.15 $10.00 Income From Investment Operations: Net investment income (loss)... ( )(f) 0.01 Net realized and unrealized losses on investments... (2.13) (0.85) Total from investment operations... (2.13) (0.84) Less Dividends: Dividends from net investment income... (0.01) (0.01) Net Asset Value, end of period... $ 7.01 $ 9.15 Total Investment Return(b)... (23.28)% (8.39)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 8.2 $ 4.3 Ratios to average net assets:(d) Expenses % 1.00%(c) Net investment income (loss)... ( )%(g) 0.40%(c) Portfolio turnover rate... 99% 25%(e) (a) Commencement of operations. (b) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. (c) Annualized. (d) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 3.04% and (2.04)%, respectively, for the year ended December 31, 2001 and 5.48% and (4.08)%, respectively, for the period ended December 31, (e) Not annualized. (f) Less than $0.005 per share. (g) Less than 0.005%. SP MFS Mid-Cap Growth Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $ 9.69 $10.00 Income from Investment Operations: Net investment income (loss)... (0.01) 0.02 Net realized and unrealized losses on investments... (2.01) (0.25) Total from investment operations... (2.02) (0.23) Less Distributions: Dividends from net investment income... (0.01) (0.02) Distributions from net realized gains... (0.04) (0.06) Total distributions... (0.05) (0.08) Net Asset Value, end of period... $ 7.62$ 9.69 Total Investment Return(b)... (20.93)% (2.26)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 15.9 $ 5.6 Ratios to average net assets:(d) Expenses % 1.00%(c) Net investment income (loss)... (0.20)% 1.16%(c) Portfolio turnover rate... 93% 27%(e) (a) Commencement of operations. (b) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. (c) Annualized. (d) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 2.11% and (1.31)%, respectively, for the year ended December 31, 2001 and 4.59% and (2.43)%, respectively, for the period ended December 31, (e) Not annualized. F15

231 Financial Highlights SP PIMCO High Yield Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $10.02$10.00 Income from Investment Operations: Net investment income Net realized and unrealized gains (losses) on investments... (0.21) 0.02 Total from investment operations Less Distributions: Dividends from net investment income... (0.59) (0.16) Distributions from net realized gains... (0.01) Distributions in excess of net realized capital gains... (d) Total distributions... (0.59) (0.17) Net Asset Value, end of period... $ 9.81 $10.02 Total Investment Return(b) % 1.94% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 52.0 $ 8.0 Ratios to average net assets:(e) Expenses % 0.82%(c) Net investment income % 7.78%(c) Portfolio turnover rate % 88%(f) (a) (b) (c) (d) (e) (f) Commencement of operations. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Less than $0.005 per share. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income ratios would have been 1.08% and 7.18%, respectively, for the year ended December 31, 2001 and 3.42% and 5.18%, respectively, for the period ended December 31, Not annualized. F16

232 Financial Highlights SP PIMCO Total Return Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $10.40 $10.00 Income From Investment Operations: Net investment income Net realized and unrealized gains on investments Total from investment operations Less Distributions: Dividends from net investment income... (0.34) (0.11) Distributions from net realized gains... (0.25) (0.01) Total distributions... (0.59) (0.12) Net Asset Value, end of period... $10.70 $10.40 Total Investment Return(b) % 5.18% Ratios/Supplemental Data: Net assets, end of period (in millions)... $147.0 $ 10.7 Ratios to average net assets(d): Expenses % 0.76%(c) Net investment income % 5.94%(c) Portfolio turnover rate % 239%(e) (a) Commencement of operations. (b) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. (c) Annualized. (d) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income ratios would have been 0.82% and 3.63%, respectively, for the year ended December 31, 2001 and 2.73% and 3.97%, respectively, for the period ended December 31, (e) Not annualized. SP Prudential U.S. Emerging Growth Portfolio Class I Class II Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 July 9, 2001(b) through December 31, 2001 Per Share Operating Performance: Net Asset Value, beginning of period... $ 8.38 $ $ 7.56 Income from Investment Operations: Net investment income (loss)... (0.01) 0.01 (0.01) Net realized and unrealized losses on investments... (1.48) (1.62) (0.67) Total from investment operations... (1.49) (1.61) (0.68) Less Dividends: Dividends from net investment income... (0.01) Net Asset Value, end of period... $ 6.89 $ 8.38 $ 6.88 Total Investment Return(c)... (17.78)% (16.11)% (8.99)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 31.2$ 6.4 $ 0.2 Ratios to average net assets:(d) Expenses % 0.90%(e) 1.30%(e) Net investment income (loss)... (0.37)% 0.49%(e) (0.87)%(e) Portfolio turnover rate % 82%(f) 258%(f) (a) Commencement of operations. (b) Commencement of offering of Class II shares. (c) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. (d) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 1.41% and (0.88)%, respectively, for Class I and 1.81% and (1.38)%, respectively, for Class II for the period ended December 31, 2001 and 4.26% and (2.87)%, respectively, for Class I for the period ended December 31, (e) Annualized. (f) Not annualized. F17

233 Financial Highlights SP Small/Mid Cap Value Portfolio Year Ended December 31, 2001 September 22, 2000(a) through December 31, 2000 Per Share Operating Performance: Net Asset Value, beginning of period... $11.13 $10.00 Income From Investment Operations: Net investment income Net realized and unrealized gains on investments Total from investment operations Less Dividends: Dividends from net investment income... (0.11) (b) Net Asset Value, end of period... $11.36 $11.13 Total Investment Return(c) % 11.33% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 47.4 $ 6.1 Ratios to average net assets:(e) Expenses % 1.05%(d) Net investment income % 1.79%(d) Portfolio turnover rate... 89% 18%(f) (a) Commencement of operations. (b) Less than $0.005 per share. (c) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. (d) Annualized. (e) Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment income (loss) ratios would have been 1.56% and 0.57%, respectively, for the year ended December 31, 2001 and 4.84% and (2.00)%, respectively, for the period ended December 31, (f) Not annualized. F18

234 Financial Highlights Year Ended December 31, 2001(h) SP Strategic Partners Focused Growth Portfolio Class I September 22, 2000(a) through December 31, 2000 Class II January 12, 2001(b) through December 31, 2001(h) Per Share Operating Performance: Net Asset Value, beginning of period... $ 7.94 $ $ 8.43 Income From Investment Operations: Net investment income (loss)... (0.01) (g) (0.03) Net realized and unrealized losses on investments... (1.20) (2.06) (1.70) Total from investment operations... (1.21) (2.06) (1.73) Less Distributions: Dividends from net investment income(g)... Net Asset Value, end of period... $ 6.73 $ 7.94 $ 6.70 Total Investment Return(c)... (15.32)% (20.47)% (20.80)% Ratios/Supplemental Data: Net assets, end of period (in millions)... $ 7.7 $ 5.9 $ 2.0 Ratios to average net assets:(e) Expenses % 1.01%(d) 1.41%(d) Net investment income (loss)... (0.16)% 0.18%(d) (0.58)%(d) Portfolio turnover rate % 37%(f) 116%(f) (a) (b) (c) (d) (e) (f) (g) (h) Commencement of offering of Class I shares. Commencement of offering of Class II shares. Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total investment returns for periods of less than one full year are not annualized. Annualized. Net of expense subsidy. If the investment advisor had not subsidized expenses, the annual expense and net investment loss ratios would have been 2.61% and (1.76)%, respectively, for Class I and 3.01% and (2.18)%, respectively, for Class II for the period ended December 31, 2001 and 3.88% and (2.69)%, respectively, for Class I for the period ended December 31, Not annualized. Less than $0.005 per share. Calculated based upon weighted average shares outstanding during the period. F19

235 For more information Additional information about the Fund and each Portfolio can be obtained upon request without charge and can be found in the following documents: Statement of Additional Information (SAI) (incorporated by reference into this prospectus) Annual Report (including a discussion of market conditions and strategies that significantly affected the Portfolios performance during the previous year) Semi-Annual Report To obtain these documents or to ask any questions about the Fund: Call toll-free (800) Write to The Prudential Series Fund, Inc., Gateway Center Three, 100 Mulberry Street, Newark, NJ You can also obtain copies of Fund documents from the Securities and Exchange Commission as follows: By Mail: Securities and Exchange Commission Public Reference Section Washington, DC By Electronic Request: publicinfo@sec.gov (The SEC charges a fee to copy documents.) In Person: Public Reference Room in Washington, DC (For hours of operation, call ) Via the Internet: on the EDGAR Database at SEC File No

236 AIM V.I. PREMIER EQUITY FUND Series I Shares Shares of the fund are currently offered only to insurance company separate accounts. AIM V.I. Premier Equity Fund seeks to achieve long-term growth of capital. Income is a secondary objective. AIM Prospectus May 1, 2002 This prospectus contains important information about the Series I class shares ( Series I shares ) of the fund. Please read it before investing and keep it for future reference. As with all other mutual fund securities, the Securities and Exchange Commission has not approved or disapproved these securities or determined whether the information in this prospectus is adequate or accurate. Anyone who tells you otherwise is committing a crime. An investment in the fund: ) is not FDIC insured; ) may lose value; and ) is not guaranteed by a bank. Invest with DISCIPLINE

237 AIM VARIABLE INSURANCE FUNDS AIM V.I. PREMIER EQUITY FUND (Series I shares) Supplement dated December 31, 2002 to the Prospectus dated May 1, 2002 Effective December 31, 2002, the following paragraph replaces in its entirety the first paragraph under the heading FUND MANAGEMENT Portfolio Managers on page 3 of the prospectus: Evan G. Harrel (lead manager), Senior Portfolio Manager, who has been responsible for the fund since 1998 and has been associated with the advisor and/or its affiliates since From 1994 to 1998, he was Vice President and portfolio manager of Van Kampen American Capital Asset Management, Inc. and portfolio manager for various growth and equity funds. Robert A. Shelton, Senior Portfolio Manager, who has been responsible for the fund since 1997 and has been associated with the advisor and/or its affiliates since They are assisted by the Premier Equity Team. More information on the fund s management team may be found on our website ( AIMSUP2 Ed

238 AIM V.I. PREMIER EQUITY FUND Table of Contents Investment Objectives and Strategies 1 Principal Risks of Investing in the Fund 1 Performance Information 2 Annual Total Returns 2 Performance Table 2 Fund Management 3 The Advisor 3 Advisor Compensation 3 Portfolio Managers 3 Other Information 4 Purchase and Redemption of Shares 4 Pricing of Shares 4 Taxes 4 Dividends and Distributions 4 Share Classes 4 Financial Highlights 5 Obtaining Additional Information Back Cover The AIM Family of Funds, The AIM Family of Funds and Design (i.e., the AIM logo), AIM and Design, AIM, AIM Funds, AIM Funds and Design, AIM Investor, AIM LINK, AIM Institutional Funds, aimfunds.com, La Familia AIM de Fondos, La Familia AIM de Fondos and Design, Invierta con DISCIPLINA and Invest with DISCIPLINE are registered service marks and AIM Bank Connection, AIM Internet Connect, AIM Private Asset Management, AIM Private Asset Management and Design, AIM stylized and/or Design, AIM Alternative Assets and Design, myaim.com, The AIM College Savings Plan, AIM Solo 401(k) and AIM Lifetime America are service marks of A I M Management Group Inc. No dealer, salesperson or any other person has been authorized to give any information or to make any representations other than those contained in this prospectus, and you should not rely on such other information or representations.

239 AIM V.I. PREMIER EQUITY FUND Investment Objectives and Strategies The fund s investment objective is to achieve long-term growth of capital. Income is a secondary objective. The investment objective and policies of the fund may be changed by the Board of Trustees without shareholder approval The fund seeks to meet its objectives by investing, normally, at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities, including convertible securities. In complying with this 80% investment requirement, the fund s investments may include synthetic instruments. Synthetic instruments are investments that have economic characteristics similar to the fund s direct investments, and may include warrants, futures, options, exchange-traded funds and American Depositary Receipts. The fund also may invest in preferred stocks and debt instruments that have prospects for growth of capital. The fund also may invest up to 25% of its total assets in foreign securities. Any percentage limitations with respect to the assets of the fund are applied at the time of purchase. The portfolio managers focus on undervalued equity securities of (1) out-of-favor cyclical growth companies; (2) established growth companies that are undervalued compared to historical relative valuation parameters; (3) companies where there is early but tangible evidence of improving prospects that are not yet reflected in the price of the company s equity securities; and (4) companies whose equity securities are selling at prices that do not reflect the current market value of their assets and where there is reason to expect realization of this potential in the form of increased equity values. The portfolio managers consider whether to sell a particular security when they believe the company no longer fits into any of the above categories. In anticipation of or in response to adverse market or other conditions, or atypical circumstances such as unusually large cash inflows or redemptions, the fund may temporarily hold all or a portion of its assets in cash or the following liquid assets: money market instruments, shares of affiliated money market funds or high-quality debt obligations. As a result, the fund may not achieve its investment objective. For cash management purposes, the fund may also hold a portion of its assets in cash or such liquid assets. A larger cash position or liquid assets could also detract from the achievement of the funds objective(s), but could also reduce the funds exposure in the event of a market downturn. Any percentage limitations with respect to assets of the fund are applied at the time of purchase. Principal Risks of Investing in the Fund There is a risk that you could lose all or a portion of your ) Markets The securities markets of other countries are investment in the fund and that the income you may receive from smaller than U.S. securities markets. As a result, many foreign your investment may vary. The value of your investment in the securities may be less liquid and more volatile than fund will go up and down with the prices of the securities in U.S. securities. which the fund invests. The price of equity securities change in response to many factors, including the historical and prospec- These factors may affect the prices of securities issued by tive earnings of the issuer, the value of its assets, general foreign companies located in developing countries more than economic conditions, interest rates, investor perceptions and those in countries with mature economies. For example, many market liquidity. developing countries have, in the past, experienced high rates of The prices of foreign securities may be further affected by inflation or sharply devaluated their currencies against the other factors, including: U.S. dollar, thereby causing the value of investments in companies located in those countries to decline. Transaction costs are ) Currency exchange rates The dollar value of the fund s often higher in developing countries and there may be delays in foreign investments will be affected by changes in the exchange settlement procedures. rates between the dollar and the currencies in which those To the extent the fund holds cash or liquid assets rather than investments are traded. equity securities, the fund may not achieve its investment ) Political and economic conditions The value of the fund s objective. foreign investments may be adversely affected by political and If the seller of a repurchase agreement in which the fund social instability in their home countries and by changes in invests defaults on its obligation or declares bankruptcy, the fund economic or taxation policies in those countries. may experience delays in selling the securities underlying the repurchase agreement. As a result, the fund may incur losses ) Regulations Foreign companies generally are subject to less arising from decline in the value of those securities, reduced stringent regulations, including financial and accounting conlevels of income and expenses of enforcing its rights. trols, than are U.S. companies. As a result, there generally is less publicly available information about foreign companies than about U.S. companies. 1

240 AIM V.I. PREMIER EQUITY FUND Performance Information The bar chart and table shown below provide an indication of the risks of investing in the fund. The fund s past performance is not necessarily an indication of its future performance. All performance shown assumes the reinvestment of dividends and capital gains. The bar chart and performance table shown do not reflect charges at the separate rate account level; if they did, the performance shown would be lower. ANNUAL TOTAL RETURNS The following bar chart shows changes in the performance of the fund s shares from year to year. 80% % 15.02% 23.69% 32.41% 29.90% % % % /31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 During the periods shown in the bar chart, the highest quarterly return was 27.04% (quarter ended December 31, 1998) and the lowest quarterly return was % (quarter ended September 30, 2001). PERFORMANCE TABLE The following performance table compares the fund s performance to that of a broad-based securities market index. Average Annual Total Returns (for the periods Since Inception ended December 31, 2001) 1 Year 5 Years Inception Date AIM V.I. Premier Equity Fund (12.56)% 9.69% 13.41% 05/05/93 Standard & Poor s 500 Index(1) (11.88)% 10.70% 13.85%(2) 04/30/93(2) (1) The Standard & Poor s 500 Index is an unmanaged index of common stocks frequently used as a general measure of U.S. stock market performance. (2) The average annual total return given is since the date closest to the inception date of the fund s Series I shares. 2

241 AIM V.I. PREMIER EQUITY FUND Fund Management THE ADVISOR A I M Advisors, Inc. (the advisor) serves as the fund s investment advisor. The advisor is located at 11 Greenway Plaza, Suite 100, Houston, Texas The advisor supervises all aspects of the fund s operations and provides investment advisory services to the fund, including obtaining and evaluating economic, statistical and financial information to formulate and implement investment programs for the fund. The advisor has acted as an investment advisor since its organization in Today, the advisor, together with its subsidiaries, advises or manages over 150 investment portfolios, including the fund, encompassing a broad range of investment objectives. ADVISOR COMPENSATION During the fund s fiscal year ended December 31, 2001, the advisor received compensation of 0.60% of the fund s average daily net assets. PORTFOLIO MANAGERS The advisor uses a team approach to investment management. The individual members of the team who are primarily responsible for the day-to-day management of the fund s portfolio are as follows: ) Joel E. Dobberpuhl, Senior Portfolio Manager, who has been responsible for the fund since 1993, and has been associated with the advisor and/or its affiliates since ) Evan G. Harrel, Senior Portfolio Manager, who has been responsible for the fund since 1998 and has been associated with the advisor and/or its affiliates since From 1994 to 1998, he was Vice President and portfolio manager of Van Kampen American Capital Asset Management, Inc. and portfolio manager for various growth and equity funds. ) Robert A. Shelton, Senior Portfolio Manager, who has been responsible for the fund since 1997 and has been associated with the advisor and/or its affiliates since

242 AIM V.I. PREMIER EQUITY FUND Other Information PURCHASE AND REDEMPTION OF SHARES The fund ordinarily effects orders to purchase and redeem shares at the fund s next computed net asset value after it receives an order. Life insurance companies participating in the fund serve as the fund s designee for receiving orders of separate accounts that invest in the fund. Shares of the fund are offered in connection with mixed and shared funding, i.e., to separate accounts of affiliated and unaffiliated life insurance companies funding variable annuity contracts and variable life insurance policies. The fund currently offers shares only to insurance company separate accounts. In the future, the fund may offer them to pension and retirement plans that qualify for special federal income tax treatment. Due to differences in tax treatment and other considerations, the interests of variable contract owners investing in separate accounts investing in the fund, and the interests of plan participants investing in the fund, may conflict. Mixed and shared funding may present certain conflicts of interest. For example, violation of the federal tax laws by one separate account investing in a fund could cause owners of contracts and policies funded through another separate account to lose their tax-deferred status, unless remedial actions were taken. The Board of Trustees of the fund will monitor for the existence of any material conflicts and determine what action, if any, should be taken. A fund s net asset value could decrease if it had to sell investment securities to pay redemption proceeds to a separate account (or plan) withdrawing because of a conflict. PRICING OF SHARES The fund prices its shares based on its net asset value. The fund values portfolio securities for which market quotations are readily available at market value. The fund values short-term investments maturing within 60 days at amortized cost, which approximates market value. The fund values all other securities and assets at their fair value. Securities and other assets quoted in foreign currencies are valued in U.S. dollars based on the prevailing exchange rates on that day. In addition, if, between the time trading ends on a particular security and the close of the customary trading session of the New York Stock Exchange (NYSE), events occur that materially affect the value of the security, the fund may value the security at its fair value as determined in good faith by or under the supervision of the Board of Trustees. The effect of using fair value pricing is that the fund s net asset value will be subject to the judgment of the Board of Trustees or its designee instead of being determined by the market. Because the fund may invest in securities that are primarily listed on foreign exchanges, the value of the fund s shares may change on days when the separate account will not be able to purchase or redeem shares. The fund determines the net asset value of its shares as of the close of the customary trading session of the NYSE on each day the NYSE is open for business. TAXES The amount, timing and character of distributions to the separate account may be affected by special tax rules applicable to certain investments purchased by the fund. Holders of variable contracts should refer to the prospectus for their contracts for information regarding the tax consequences of owning such contracts and should consult their tax advisors before investing. DIVIDENDS AND DISTRIBUTIONS Dividends The fund generally declares and pays dividends, if any, annually to separate accounts of participating life insurance companies. Capital Gains Distributions The fund generally distributes long-term and short-term capital gains, if any, annually to separate accounts of participating life insurance companies. At the election of participating life insurance companies, dividends and distributions are automatically reinvested at net asset value in shares of the fund. SHARE CLASSES The fund has two classes of shares, Series I and Series II. Each class is identical except that Series II has a distribution plan or Rule 12b-1 Plan that is described in the prospectus relating to the Series II shares. 4

243 AIM V.I. PREMIER EQUITY FUND Financial Highlights The financial highlights table is intended to help you understand the fund s financial performance of the fund s Series I shares. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the fund (assuming reinvestment of all dividends and distributions). The table shows the financial highlights for a share of the fund outstanding during each of the fiscal years (or periods) indicated. This information has been audited by Tait, Weller & Baker, whose report, along with the fund s financial statements, is included in the fund s annual report, which is available upon request. Year Ended December 31, 2001 (a) 2000 (a) 1999 (a) Net asset value, beginning of period $ $ $ $ $ Income from investment operations: Net investment income Net gains (losses) on securities (both realized and unrealized) (3.50) (4.94) Total from investment operations (3.44) (4.90) Less distributions: Dividends from net investment income (0.03) (0.04) (0.09) (0.13) (0.19) Distributions from net realized gains (0.48) (1.26) (0.48) (1.13) (0.59) Total distributions (0.51) (1.30) (0.57) (1.26) (0.78) Net asset value, end of period $ $ $ $ $ Total return (b) (12.53)% (14.68)% 29.90% 32.41% 23.69% Ratios/supplemental data: Net assets, end of period (000s omitted) $2,558,120 $2,746,161 $2,383,367 $1,221,384 $690,841 Ratio of expenses to average net assets 0.85% (c) 0.84% 0.76% 0.66% 0.70% Ratio of net investment income to average net assets 0.24% (c) 0.12% 0.20% 0.68% 1.05% Portfolio turnover rate 40% 62% 62% 100% 127% (a) (b) Calculated using average shares outstanding. Total returns do not reflect charges at the separate account level and these changes would reduce total returns for all periods shown. (c) Ratios are based on average daily net assets of $2,590,014,174. 5

244 AIM V.I. PREMIER EQUITY FUND Obtaining Additional Information More information may be obtained free of charge upon request. The Statement of Additional Information (SAI), a current version of which is on file with the Securities and Exchange Commission (SEC), contains more details about the fund and is incorporated by reference into the prospectus (is legally a part of this prospectus). Annual and semiannual reports to shareholders contain additional information about the fund s investments. The fund s annual report also discusses the market conditions and investment strategies that significantly affected the fund s performance during its last fiscal year. If you wish to obtain free copies of the fund s current SAI, please send a written request to A I M Distributors, Inc., 11 Greenway Plaza, Suite 100, Houston, Texas or call (800) You also can review and obtain copies of the fund s SAI, reports and other information at the SEC s Public Reference Room in Washington, DC; on the EDGAR database on the SEC s Internet website ( or, after paying a duplication fee, by sending a letter to the SEC s Public Reference Section, Washington, DC or by sending an electronic mail request to publicinfo@sec.gov. Please call the SEC at for information about the Public Reference Room. AIM V.I. Premier Equity Fund SEC 1940 Act file number: Invest with DISCIPLINE

245 Your American Century prospectus CLASS I May 1, 2002 VP Value Fund The Securities and Exchange Commission has not approved or disapproved these securities or determined if this Prospectus is accurate or complete. Anyone who tells you otherwise is committing a crime. American Century Investment Services, Inc.

246 Table of Contents An Overview of the Fund Fund Performance History Objectives, Strategies and Risks Management Share Price, Distributions and Taxes Multiple Class Information Financial Highlights Throughout this book you ll find definitions of key investment terms and phrases. When you see a word printed in green italics, look for its definition in the margin. This symbol highlights special information and helpful tips.

247 An Overview of the Fund What are the fund s investment objectives? This fund seeks long-term capital growth. Income is a secondary objective. What are the fund s primary investment strategy and principal risks? In selecting stocks for VP Value, the fund managers look for companies whose stock price is less than they believe the company is worth. The managers attempt to purchase the stock of these undervalued companies and hold them until their stock price has increased to, or is higher than, a level the managers believe more accurately reflects the fair value of the company. A more detailed description of the fund s value investment strategy begins on page 4. The fund s principal risks include Market Risk The value of the fund s shares will go up and down based on the performance of the companies whose securities it owns and other factors generally affecting the securities market. Price Volatility The value of the fund s shares may fluctuate significantly in the short term. Principal Loss At any given time your shares may be worth more or less than the price you paid for them. In other words, it is possible to lose money by investing in the funds Style Risk If the fund s investment style is out of favor with the market, the fund s performance may suffer. An investment in the fund is not a bank deposit, and it is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Who may want to invest in the fund? The fund may be a good investment if you are seeking long-term capital growth and income from your investment seeking an equity fund that utilizes a value style of investing comfortable with the risks associated with the fund s investment strategy comfortable with the fund s short-term price volatility Who may not want to invest in the fund? The fund may not be a good investment if you are investing for a short period of time uncomfortable with volatility in the value of your investment 2

248 Fund Performance History Annual Total Returns The following bar chart shows the performance of the fund s Class I shares for each full calendar year in the life of the fund. It indicates the volatility of the fund s historical returns from year to year % 4.81% 12.82% 18.14% 26.08% The performance information on this page is designed to help you see how the fund s returns can vary. Keep in mind that past performance does not predict how the fund will perform in the future. -20% -10% 0% 10% 20% 30% 40% The highest and lowest returns for the period reflected in the bar chart are: Highest Lowest VP Value 18.09% (2Q 1999) % (3Q 1999) Average Annual Total Returns The following table shows the average annual total returns of the fund s Class I shares for the periods indicated. The benchmarks are unmanaged indices that have no operating costs and are included in the table for performance comparison. The S&P 500 is viewed as a broad measure of U.S. Stock performance. The Lipper Multicap Value Index is an index of multicap value funds that have management styles similar to the fund s. For the calendar year ended December 31, year 5 years Life of Fund (1) VP Value 12.82% 11.80% 12.61% S&P 500 Index % 10.70% 12.12% Lipper Multicap Value Index 1.30% 9.73% 10.83% 1 The inception date for VP Value is May 1,

249 Objectives, Strategies and Risks VP Value Fund What are the fund s investment objectives? The fund seeks long-term capital growth. Income is a secondary objective. Nonleveraged means that the fund may not invest in futures contracts when it would be possible to lose more than the fund invested. How does the fund pursue its investment objective? The fund managers look for stocks of companies that they believe are undervalued at the time of purchase. The managers use a value investment strategy that looks for companies that are temporarily out of favor in the market. The managers attempt to purchase the stocks of these undervalued companies and hold them until they have returned to favor in the market and their stock prices have gone up. Companies may be undervalued due to market declines, poor economic conditions, actual or anticipated bad news regarding the issuer or its industry, or because they have been overlooked by the market. To identify these companies, the fund managers look for companies with earnings, cash flows and/or assets that may not be reflected accurately in the companies stock prices or may be outside the companies historical ranges. The fund managers do not attempt to time the market. Instead, under normal market conditions, they intend to keep at least 80% of the fund s assets invested in U.S. equity securities at all times. When the managers believe it is prudent, the fund may invest a portion of its assets in convertible debt securities, equity-equivalent securities, foreign securities, debt securities of companies, debt obligations of governments and their agencies, nonleveraged stock index futures contracts and other similar securities. Stock index futures contracts, a type of derivative security, can help the fund s cash assets remain liquid while performing more like stocks. The fund has a policy governing stock index futures contracts and similar derivative securities to help manage the risk of these types of investments. For example, the fund managers cannot invest in a derivative security if it would be possible for the fund to lose more money than it invested. A complete description of the derivatives policy is included in the Statement of Additional Information. In the event of exceptional market or economic conditions, the fund may, as a temporary defensive measure, invest all or a substantial portion of its assets in cash or short-term debt securities. To the extent the fund assumes a defensive position, it will not be pursuing its objective of capital growth. The fund generally limits its purchase of debt securities to investment-grade obligations, except for convertible debt securities, which may be rated below investment grade. 4

250 What are the principal risks of investing in the fund? The value of the fund s shares depends on the value of the stocks and other securities it owns. The value of the individual securities the fund owns will go up and down depending on the performance of the companies that issued them, general market and economic conditions, and investor confidence. At any given time your shares may be worth more or less than the price you paid for them. In other words, it is possible to lose money by investing in the fund. If the market does not consider the individual stocks purchased by the fund to be undervalued, the value of the fund s shares may not rise as high as other funds and may in fact decline, even if stock prices generally are increasing. Market performance tends to be cyclical, and, in the various cycles, certain investment styles may fall in and out of favor. If the market is not favoring the fund s style, the fund s gains may not be as big as, or its losses may be bigger than, other equity funds using different investment styles. Although the fund managers intend to invest the fund s assets primarily in U.S. stocks, the fund may invest in securities of foreign companies. Foreign investment involves additional risks, including fluctuations in currency exchange rates, less stable political and economic structures, reduced availability of public information, and lack of uniform financial reporting and regulatory practices similar to those that apply in the United States. These factors make investing in foreign securities generally riskier than investing in U.S. stocks. The fund is offered only to insurance companies for the purpose of offering the fund as an investment option under variable annuity or variable life insurance contracts. Although the fund does not foresee any disadvantages to contract owners due to the fact that it offers its shares as an investment medium for both variable annuity and variable life products, the interests of various contract owners participating in the fund might, at some time, be in conflict due to future differences in tax treatment of variable products or other considerations. Consequently, the fund s Board of Directors will monitor events in order to identify any material irreconcilable conflicts that may possibly arise and to determine what action, if any, should be taken in response to such conflicts. If a conflict were to occur, an insurance company separate account might be required to withdraw its investments in the fund, and the fund might be forced to sell securities at disadvantageous prices to redeem such investments. 5

251 Management Who manages the fund? The Board of Directors, investment advisor and fund management team play key roles in the management of the fund. The Board of Directors The Board of Directors oversees the management of the fund and meets at least quarterly to review reports about fund operations. Although the Board of Directors does not manage the fund, it has hired an investment advisor to do so. More than two-thirds of the directors are independent of the fund s advisor; that is, they are not employed by and have no financial interest in the advisor. The Investment Advisor The fund s investment advisor is American Century Investment Management, Inc. The advisor has been managing mutual funds since 1958 and is headquartered at 4500 Main Street, Kansas City, Missouri The advisor is responsible for managing the investment portfolios of the fund and directing the purchase and sale of its investment securities. The advisor also arranges for transfer agency, custody and all other services necessary for the fund to operate. For the services it provided to the fund during the most recent fiscal year, the advisor received a unified management fee of 0.97% of the average net assets of the Class I shares of the fund. The amount of the management fee is calculated daily and paid monthly in arrears. Out of that fee, the advisor paid all expenses of managing and operating the fund except brokerage expenses, taxes, interest, fees and expenses of the independent directors (including legal counsel fees), and extraordinary expenses. A portion of the management fee may be paid by the fund s advisor to unaffiliated third parties who provide recordkeeping and administrative services that would otherwise be performed by an affiliate of the advisor. 6

252 The Fund Management Team The advisor uses a team of portfolio managers, assistant portfolio managers and analysts to manage the fund. The team meets regularly to review portfolio holdings and discuss purchase and sale activity. Team members buy and sell securities for the fund as they see fit, guided by the fund s investment objective and strategy. The portfolio managers on the investment team are identified below: Phillip N. Davidson Mr. Davidson, Senior Vice President and Senior Portfolio Manager,has been a member of the team that manages VP Value since May He joined American Century in September 1993 as a Portfolio Manager. Prior to joining American Century, he spent 11 years at Boatmen s Trust Company in St. Louis and served as Vice President and Portfolio Manager responsible for institutional value equity clients. He has a bachelor s degree in finance and an MBA from Illinois State University. He is a CFA charterholder. Scott A. Moore Mr. Moore, Vice President and Portfolio Manager, has been a member of the team that manages VP Value since October 1996 and Portfolio Manager since February He joined American Century in August 1993 as an Investment Analyst. He has a bachelor s degree in finance from Southern Illinois University and an MBA in finance from the University of Missouri Columbia. He is a CFA charterholder. Fund Performance VP Value has the same management team and investment policies as another fund in the American Century family of funds. The fees and expenses of the funds are expected to be similar, and they will be managed with substantially the same investment objective and strategies. Notwithstanding these general similarities, this fund and the retail fund are separate mutual funds that will have different investment performance. Differences in cash flows into the two funds, the size of their portfolios and specific investments held by the two funds, as well as the additional expenses of the insurance product, will cause performance to differ. Code of Ethics American Century has a Code of Ethics designed to ensure that the interests of fund shareholders come before the interests of the people who manage the fund. Among other provisions, the Code of Ethics prohibits portfolio managers and other investment personnel from buying securities in an initial public offering or profiting from the purchase and sale of the same security within 60 calendar days. In addition, the Code of Ethics requires portfolio managers and other employees with access to information about the purchase or sale of securities by the fund to obtain approval before executing permitted personal trades. Please consult the separate account prospectus for a description of the insurance product through which the fund is offered and its associated fees. Fundamental Investment Policies Fundamental investment policies contained in the Statement of Additional Information and the investment objective of the fund may not be changed without shareholder approval. The Board of Directors may change any other policies and investment strategies. 7

253 Share Price, Distributions and Taxes Purchase and Redemption of Shares For instructions on how to purchase and redeem shares, read the prospectus of your insurance company separate account. Your order will be priced at the net asset value next determined after your request is received in the form required by the insurance company separate account. There are no sales commissions or redemption charges. However, certain sales or deferred sales charges and other charges may apply to the variable annuity or life insurance contracts. Those charges are disclosed in the separate account prospectus. Abusive Trading Practices We do not permit market timing or other abusive trading practices in our funds. Excessive, short-term (market timing) or other abusive trading practices may disrupt portfolio management strategies and harm fund performance. To minimize harm to the fund and its shareholders, we reserve the right to reject any purchase order (including exchanges) from any investor we believe has a history of abusive trading or whose trading, in our judgment, has been or may be disruptive to a fund. In making this judgment, we may consider trading done in multiple accounts under common ownership or control. We also reserve the right to delay delivery of redemption proceeds up to seven days. Modifying or Canceling an Investment Investment instructions are irrevocable. That means that once you have mailed or otherwise transmitted your investment instruction, you may not modify or cancel it. The fund reserves the right to suspend the offering of shares for a period of time, and to reject any specific investment (including a purchase by exchange). Additionally, we may refuse a purchase if, in our judgment, it is of a size that would disrupt the management of the fund. Good order means that your instructions have been received in the form required by American Century. This may include, for example, providing the fund name and account number, the amount of the transaction and all required signatures. Share Price American Century determines the net asset value (NAV) of the fund as of the close of regular trading on the New York Stock Exchange (usually 4 p.m. Eastern time) on each day the Exchange is open. On days when the Exchange is closed (including certain U.S. holidays), we do not calculate the NAV. A fund share s NAV is the current value of the fund s assets, minus any liabilities, divided by the number of fund shares outstanding. If current market prices of securities owned by a fund are not readily available, the advisor may determine their fair value in accordance with procedures adopted by the fund s Board. Trading of securities in foreign markets may not take place every day the Exchange is open. Also, trading in some foreign markets and on some electronic trading networks may take place on weekends or holidays when a fund s NAV is not calculated. So, the value of a fund s portfolio may be affected on days when you can t purchase or redeem shares of the fund. We will price your purchase, exchange or redemption at the NAV next determined after the insurance company separate account receives your transaction request in good order. 8

254 Distributions Federal tax laws require the fund to make distributions to its shareholders in order to qualify as a regulated investment company. Qualification as a regulated investment company means the fund will not be subject to state or federal income tax on amounts distributed. The distributions generally consist of dividends and interest received by a fund, as well as capital gains realized by a fund on the sale of its investment securities. The fund generally pays distributions from net income and capital gains, if any, once a year in March. The fund may make more frequent distributions, if necessary, to comply with Internal Revenue Code provisions. You will participate in fund distributions when they are declared, starting the next business day after your purchase is effective. For example, if you purchase shares on a day that a distribution is declared, you will not receive that distribution. If you redeem shares, you will receive any distribution declared on the day you redeem. If you redeem all shares, we will include any distributions received with your redemption proceeds. All distributions from the fund will be invested in additional shares. Provided that all shareholders agree, the fund may utilize the consent dividend provision of Internal Revenue Code section 565 which treats the income earned by the fund as distributed to the shareholders as of the end of the taxable year. Capital gains are increases in the values of capital assets, such as stock, from the time the assets are purchased. Taxes Consult the prospectus of your insurance company separate account for a discussion of the tax status of your variable contract. 9

255 Multiple Class Information American Century offers three classes of the fund: Class I (the original class), Class II and Class III. The shares offered by this Prospectus are Class I shares. All classes are offered exclusively to insurance companies to fund their obligations under the variable annuity and variable life contracts purchased by their clients. Class I and Class III have the same fees and expenses, with one exception. Class III shares have a 1.0% redemption fee for shares that are redeemed or exchanged within 60 days of purchase. Class II shares have different fees and expenses. The difference in the fee structures between the classes is the result of their separate arrangements for distribution services and not the result of any difference in amounts charged by the advisor for core investment advisory services. Accordingly, the core investment advisory expenses do not vary by class. Different fees and expenses will affect performance. For additional information concerning the other classes of shares not offered by this Prospectus, call us at Except as described below, all classes of shares of the fund have identical voting, dividend, liquidation and other rights, preferences, terms and conditions. The only differences between the classes are (a) each class may be subject to different expenses specific to that class; (b) each class has a different identifying designation or name; (c) each class has exclusive voting rights with respect to matters solely affecting that class; and (d) each class may have different exchange privileges. 10

256 Financial Highlights Understanding the Financial Highlights The table on the next page itemizes what contributed to the changes in share price during the most recently ended fiscal year. It also shows the changes in share price for this period in comparison to changes over the last five fiscal years or less, if the fund is not five years old. On a per-share basis, the table includes as appropriate share price at the beginning of the period investment income and capital gains or losses distributions of income and capital gains paid to investors share price at the end of the period The table also includes some key statistics for the period as appropriate Total Return the overall percentage of return of the fund, assuming the reinvestment of all distributions Expense Ratio the operating expenses of the fund as a percentage of average net assets Net Income Ratio the net investment income of the fund as a percentage of average net assets Portfolio Turnover the percentage of the fund s buying and selling activity The Financial Highlights have been audited by Deloitte & Touche LLP, independent auditors. Their Independent Auditors Report and the financial statements are included in the fund s Annual Report, which is available upon request. 11

257 VP Value Fund Class I For a Share Outstanding Throughout the Years Ended December 31 Per-Share Data Net Asset Value, Beginning of Period $6.67 $5.95 $6.73 $6.93 $5.58 Income From Investment Operations Net Investment Income 0.08 (1) (1) 0.07 Net Realized and Unrealized Gain (Loss) (0.15) Total From Investment Operations (0.07) Distributions From Net Investment Income (0.08) (0.07) (0.07) (0.04) (0.04) From Net Realized Gains. (0.19) (0.64) (0.51) (0.05) Total Distributions (0.08) (0.26) (0.71) (0.55) (0.09) Net Asset Value, End of Period $7.44 $6.67 $5.95 $6.73 $6.93 Total Return (2) 12.82% 18.14% (0.85)% 4.81% 26.08% Ratios/Supplemental Data Ratio of Operating Expenses to Average Net Assets 0.97% 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income to Average Net Assets 1.28% 1.81% 1.40% 1.21% 1.60% Portfolio Turnover Rate 174% 159% 118% 158% 138% Net Assets, End of Period (in thousands) $1,424,235 $672,214 $416,166 $316,624 $188,015 1 Computed using average shares outstanding throughout the year. 2 Total return assumes reinvestment of dividends and capital gains distributions, if any. The total return of the classes may not precisely reflect the class expense differences because of the impact of calculating the net asset values to two decimal places. If net asset values were calculated to three decimal places, the total return differences would more closely reflect the class expense differences. The calculation of net asset values to two decimal places is made in accordance with SEC guidelines and does not result in any gain or loss of value between one class and another. 12

258 Notes 13

259 More information about the fund is contained in these documents. Annual and Semiannual Reports Annual and semiannual reports contain more information about the fund s investments and the market conditions and investment strategies that significantly affected the fund s performance during the most recent fiscal period. Statement of Additional Information (SAI) The SAI contains a more detailed, legal description of the fund s operations, investment restrictions, policies and practices. The SAI is incorporated by reference into this Prospectus. This means that it is legally part of this Prospectus, even if you don t request a copy. You may obtain a free copy of the SAI or annual and semiannual reports, and ask questions about the fund or your accounts, by contacting the insurance company from which you purchased the fund or American Century at the address or telephone numbers listed below. You also can get information about the fund (including the SAI) from the Securities and Exchange Commission (SEC). The SEC charges a duplicating fee to provide copies of this information. In person On the Internet By mail SEC Public Reference Room Washington, D.C. Call for location and hours. EDGAR database at By request at publicinfo@sec.gov SEC Public Reference Section Washington, D.C Investment Company Act File No American Century Investments P.O. Box Kansas City, Missouri or SH-PRS-28991

260 Prospectus Franklin Templeton Variable Insurance Products Trust Class 2 Shares May 1, 2002 As with all fund prospectuses, the SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.