UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

X    ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1998

                                       OR

_    TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

Commission file number 333-18053

                   PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

             (Exact name of Registrant as specified in its charter)


        New Jersey                                               22-2426091
        ----------                                               ----------
     (State or other                                           (IRS Employer 
jurisdiction, incorporation                                  Identification No.)
     or organization)


                 213 Washington Street, Newark, New Jersey 07102
                 -----------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (973) 802-6000
              ----------------------------------------------------
              (Registrant's Telephone Number, including area code)

        Securities registered pursuant to Section 12 (b) of the Act: NONE
        Securities registered pursuant to Section 12 (g) of the Act: NONE

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___

     State the aggregate market value of the voting stock held by non-affiliates
of the registrant: NONE

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock, as of March 15, 1999. Common stock, par value of $5 per
share: 400,000 shares outstanding


<PAGE>


                   PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
                                  (Registrant)

                                      INDEX
                                      -----


Item No.                                                                Page No.
--------                                                                --------

Cover Page                                                                    -

Index                                                                         2

                                     PART I

  1.   Business                                                               3

  2.   Properties                                                             3

  3.   Legal Proceedings                                                      3

  4.   Submission of Matters to a Vote of Security Holders                    3

                                   PART II

  5.   Market for Registrant's Common Equity and Related 
            Stockholders' Matters                                             4

  6.   Selected Financial Data                                                4

  7.   Management's Discussion and Analysis of Financial Position
            and Results of Operations                                         4

  7a.  Quantitative and Qualitative Disclosures About Market Risk            12

  8.   Financial Statements and Supplementary Data                           15

  9.   Changes in and Disagreements with Independent Accountants on
            Accounting and Financial Disclosure                              15

                                  PART III

  10.  Directors and Executive Officers of the Registrant                    16

  11.  Executive Compensation                                                17

  12.  Security Ownership of Certain Beneficial Owners and Management        17

  13.  Certain Relationships and Related Transactions                        17

                                   PART IV

  14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K       18

       Exhibit Index                                                         18

       Signatures                                                            20


                                       2
<PAGE>

                                     PART 1
                                     ------

Item 1.  Business
------------------

Pruco  Life  Insurance  Company  of New  Jersey  (the  Company)  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,
variable  annuities,  and fixed  annuities (the Contracts) only in the states of
New Jersey and New York.

The Company is a wholly owned subsidiary of Pruco Life Insurance  Company (Pruco
Life),  a stock life insurance  company  organized in 1971 under the laws of the
state of Arizona.  Pruco Life,  in turn,  is a wholly  owned  subsidiary  of The
Prudential Insurance Company of America (Prudential), a mutual insurance company
founded in 1875 under the laws of the state of New Jersey. Pruco Life 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,   Pruco  Life  is  under  no   obligation  to  make  such
contributions  and its  assets  do not  back  the  benefits  payable  under  the
Contracts.

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  annuities.  There are
approximately  1,620  stock,  mutual  and other  types of  insurers  in the life
insurance business in the United States.

Item 2.  Properties
-------------------

Not applicable.

Item 3.  Legal Proceedings
--------------------------

Based on complaints about sales practices engaged in by Prudential,  the Company
and agents  appointed by Prudential and the Company,  several  actions have been
brought  against  the  Company on behalf of those  persons  who  purchased  life
insurance  policies.  Prudential has agreed to indemnify the Company for any and
all losses resulting from such litigation.

In the normal course of business,  the Company is subject to various  claims and
assessments.  Management believes the settlement of these matters would not have
a material  effect on the  financial  position or results of  operations  of the
Company.

Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

At the annual meeting of the stockholders  held on June 9, 1998, Pruco Life, the
sole  shareholder  of the  Company,  appointed  the  Board of  Directors  of the
Company. The following are the appointed Board of Directors:

         James J. Avery, Jr.
         William M. Bethke
         Ira J. Kleinman
         Mendel A. Melzer
         Esther H. Milnes
         I. Edward Price


                                       3
<PAGE>

                                     PART II
                                     -------

Item 5. Market for the  Registrant's  Common  Equity and  Related  Stockholders'
--------------------------------------------------------------------------------
Matters
-------

The  Company is a  wholly-owned  subsidiary  of Pruco  Life.  There is no public
market for the Company's common stock.


Item 6.  Selected Financial Data
--------------------------------

<TABLE>
<CAPTION>
                                                  Pruco Life Insurance Company of New Jersey
                                                         For the Years Ended December 31,
                                      -------------------------------------------------------------------
                                                                 (In Thousands)

                                          1998          1997          1996          1995          1994
                                      -----------   -----------   -----------   -----------   -----------
<S>                                   <C>           <C>           <C>           <C>           <C>        
Revenues
    Premiums and other revenue        $    63,347   $    62,773   $    63,963   $    64,457   $    60,091
    Realized investment gains, net          8,446         1,707         1,221         3,592        (8,310)
    Net investment income                  47,032        46,324        43,784        43,530        42,357
                                      -------------------------------------------------------------------

Total revenues                            118,825       110,804       108,968       111,579        94,138

Benefits and expenses
    Current and future benefits and
      claims                               47,327        53,371        48,722        47,695        44,939
    Other expenses                         22,105        27,236        12,848        21,881        23,716
                                      -------------------------------------------------------------------

Total benefits and expenses                69,432        80,607        61,570        69,576        68,655
                                      -------------------------------------------------------------------

Income before income tax provision         49,393        30,197        47,398        42,003        25,483

Income tax provision                       17,570        10,974        15,611        15,002         9,483
                                      -------------------------------------------------------------------

Net income                            $    31,823   $    19,223   $    31,787   $    27,001   $    16,000
                                      ===================================================================

Total assets at period end            $ 2,411,157   $ 2,002,432   $ 1,695,616   $ 1,558,282   $ 1,424,886
                                      ===================================================================

Seperate Account liabilities          $ 1,450,986   $ 1,108,994   $   880,065   $   787,566   $   639,928
                                      ===================================================================
</TABLE>


Item 7. Management's  Discussion and Analysis of Financial  Position and Results
--------------------------------------------------------------------------------
of Operations.
--------------

The following analysis should be read in conjunction with the Notes to Financial
Statements.

The Company markets individual life insurance, variable life insurance, variable
annuities,  and fixed annuities through  Prudential's  sales force in New Jersey
and New York.

The Company  markets its products in the life  insurance and annuity  sectors of
the insurance industry.  These markets are subject to regulatory  oversight with
particular  emphasis  placed on  company  solvency  and sales  practices.  These
markets  are also  subject  to  increasing  competitive  pressures  as the legal
barriers  which  have  historically  segregated  the  markets  of the  financial
services  industry are being  challenged  through both  legislative and judicial
processes.  Regulatory changes have opened the insurance industry to competition
from other financial institutions, particularly banks and mutual funds, that are
positioned  to deliver  competing  investment  products  through  large,  stable
distribution channels.

The Company had $2.4  billion in assets at  December  31, 1998  compared to $2.0
billion at December 31,  1997,  of which $1.5 billion and $1.1 billion were held
in  Separate  Accounts  in 1998  and  1997,  respectively  under  variable  life
insurance  policies  and  variable  annuity  contracts.   The  remaining  assets
consisted  primarily of general account  investments in bonds, policy loans, and
short-term investments.


                                       4
<PAGE>

1.   Results of Operations

Net income for the year ended December 31, 1998 was $31.8  million,  an increase
of $12.6 million or 66% from $19.2 million earned in the year ended December 31,
1997. Net income for the year ended December 31, 1996 was $31.8 million.

(a) 1998 versus 1997

Total  insurance  revenues,  consisting  of premiums and policy  charges and fee
income  increased  $.1  million  for the year ended  December  31, 1998 to $57.6
million from $57.5 million for the year ended  December 31, 1997.  This increase
in  insurance  revenues  is  primarily  attributable  to an increase in sales of
Discovery Select, a variable annuity retirement type product. This has proven to
be a successful  product of the Company's  portfolio  since its  introduction in
January  1997.  However,  these  gains were offset by a decline in the number of
traditional life insurance policies in force in 1998 compared to 1997.

The Company's  net  investment  income  increased $.7 million for the year ended
December  31,  1998 to $47.0  million  from  $46.3  million  for the year  ended
December 31, 1997.  Realized  investment gains, net,  increased $6.7 million for
the year ended  December 31, 1998 to $8.4 million from $1.7 million for the year
ended  December 31, 1997.  Please refer to the section below titled  "Investment
Portfolio and Investment  Strategies" for a discussion of investment  income and
net unrealized investment gains by asset type.

Other income  increased $.5 million for the year ended December 31, 1998 to $5.8
million from $5.3 million for the year ended December 31, 1997. The portfolio of
mutual fund investments  related to the Company's  Separate Account products are
known as The Prudential  Series Fund. The Company receives an allocated  portion
of investment  management fees that Prudential earns from the Prudential  Series
Fund and records these fees in "Other income."

Policyholders'  benefits  decreased $5.7 million for the year ended December 31,
1998 to $28.3 million from $34.0  million for the year ended  December 31, 1997.
This decrease is  attributable  to a favorable  change in reserves due to better
than expected mortality experiences.

Interest  credited to policyholders'  account balances  decreased by $.4 million
for the year ended December 31, 1998 to $19.0 million from $19.4 million for the
year ended  December 31, 1997.  This  decrease is  primarily  attributable  to a
decrease in interest  crediting rates,  partially  offset by increased  interest
credited to policy  loans as well as  increased  fund values due to new sales of
Separate Account products.

Other  operating  costs and expenses  decreased  $5.1 million for the year ended
December 31, 1998 to $22.1 million  compared to $27.2 million for the year ended
December 31, 1997. This decrease is primarily attributable to refinements in the
DAC  amortization  model leading to comparably  lower 1998 expenses.  Offsetting
this decrease was an increase in sales volume of Discovery Select which resulted
in a  corresponding  increase in expenses.  In addition to the  increased  sales
volume,  the Parent company's expense  allocation  methodology  changed in 1998,
resulting in increased expenses allocated to the Company.

Investment Portfolio and Investment Strategies

The  Company's   investment   portfolio   supports  its  insurance  and  annuity
liabilities and other  obligations to customers for which it assumes  investment
related  risks.  The portfolio was comprised of total  investments  amounting to
$816.2 million at December 31, 1998, versus $772.1 million at December 31, 1997.
A diversified  portfolio of publicly traded bonds, private placement investments
and short term  investments  is managed  under  strategies  intended to maintain
optimal asset mix consistent with current and anticipated cash flow requirements
of the related obligations.

The asset  management  strategy for the portfolio is set in  accordance  with an
investment policy statement  developed and coordinated within the Company by the
Portfolio Management Group, agreed to by senior management,  and approved by the
Board of  Directors.  In  managing  the  investment  portfolio,  the  long  term
objective is to generate favorable  investment  results through  asset-liability
management, strategic and tactical asset allocation and asset manager selection.
Asset mix  strategies are  constrained  by the need to match asset  structure to
product liabilities, considering the underlying income and


                                       5
<PAGE>

return  characteristics  of  investment  alternatives  and  seeking  to  closely
approximate  the  interest  rate  sensitivity  of the asset  portfolio  with the
estimated  interest  rate  sensitivity  of the  product  liabilities.  Asset mix
strategies  also  include  maintenance  of broad  diversification  across  asset
classes, issuers and sectors; effective utilization of capital while maintaining
liquidity  believed  to be  adequate  to  satisfy  cash flow  requirements;  and
achievement of competitive performance. The major categories of invested assets,
quality across the portfolio,  and recent activities to manage the portfolio are
discussed below.

Fixed Maturities

The fixed  maturity  portfolio is  diversified  across  maturities,  sectors and
issuers.  The Company has  classified  all  securities as "available  for sale".
Fixed maturities  totaled $622.9 million,  an increase of $30.6 million compared
to December  31,  1997.  The  increase  is  primarily  attributable  to a higher
beginning of year asset base.

<TABLE>
<CAPTION>
                                               1998                                        1997
                              --------------------------------------      ----------------------------------------
                                                              Net                                          Net
                              Amortized     Estimated     Unrealized      Amortized      Estimated      Unrealized
                                Cost        Fair Value       Gains           Cost        Fair Value       Gains
                              ---------     ----------    ----------      ---------      ----------     ----------
                                                             (In Thousands)
<S>                           <C>            <C>            <C>            <C>            <C>            <C>     
Fixed maturities -
     available for sale
Publicly traded               $537,339       $541,874       $  4,535       $575,110       $582,315       $  7,205
Privately traded                80,419         81,116            697          9,999         10,046             47
                              --------       --------       --------       --------       --------       --------
Total                         $617,758       $622,990       $  5,232       $585,109       $592,361       $  7,252
                              ========       ========       ========       ========       ========       ========
</TABLE>


At December 31, 1998,  the net  unrealized  capital gains on the fixed  maturity
portfolio  totaled $5.2  million  compared to $7.3 million at December 31, 1997.
The decrease is primarily due to the effect of a higher level of sales activity,
offset in part by the effect of lower interest rates.

At  December  31,  1998,  the  Company's  holdings  of private  placement  fixed
maturities  totaled $81.1 million and constituted 13% of total fixed  maturities
compared to $10.0 million  representing 2% in 1997. These investments  generally
offer higher yields than comparable quality public market  securities,  increase
the  diversification of the portfolio,  and contain tighter covenant  protection
than public securities.

Gross investment income was relatively  unchanged from year to year, despite the
increase in the average size of the fixed maturity  portfolio from 1997 to 1998.
Realized gains  increased by $4.7 million from 1997 primarily due to the sale of
fixed  maturities  during a period of declining  interest rates. The table below
presents a summary of investment results from fixed maturity investments.


                                                   Year Ended December 31,
                                                  1998               1997
                                                 -------           -------
                                                       (In Thousands)

     Gross investment income                     $39,478           $37,563

     Yield (1)                                      6.94%             6.97%

     Realized capital gains                      $ 6,360           $ 1,707

(1) Yields are determined by dividing gross investment  income by the average of
quarter-end asset carrying values,  excluding  unrealized gains and losses, less
one-half of gross investment income.




                                       6
<PAGE>

Credit Quality

The  following  table  describes  the  credit  quality  of  the  fixed  maturity
portfolio,  based on ratings  assigned by the National  Association of Insurance
Commissioners  ("NAIC") or Standard & Poor's Corporation,  an independent rating
agency :

<TABLE>
<CAPTION>
                                        December 31, 1998                                      December 31, 1997
                          -----------------------------------------------       -----------------------------------------------
          Standard &      Amortized                  Estimated                  Amortized                  Estimated
NAIC        Poor's          Cost           %         Fair Value       %            Cost          %         Fair Value       %
----    ---------------   ---------       ----       ----------      ----       ---------       ----       ----------      ---- 
                                                                     (In Thousands)
<S>     <C>                <C>            <C>         <C>            <C>         <C>            <C>         <C>            <C>  
1       AAA to AA-         $303,209       49.1%       $306,693       49.2%       $310,409       53.0%       $313,746       53.0%
2       BBB+ to BBB-        286,640       46.4         287,888       46.2         254,084       43.4         257,024       43.4
3       BB+ to BB-           27,134        4.4          27,692        4.5          20,616        3.6          21,591        3.6
4       B+ to B-                704        0.1             638        0.1              --         --              --         --
5       CCC or lower             71         --              79         --              --         --              --         --
6       In or near default       --         --              --         --              --         --              --         --
                           --------                   --------                   --------                   --------
Total                      $617,758                   $622,990                   $585,109                   $592,361
                           ========                   ========                   ========                   ========
</TABLE>

The fixed maturity  portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 95% and 96% of the
portfolio at December 31, 1998 and 1997, respectively, based on fair value.

The Company  continually  reviews  fixed  maturities  and  identifies  potential
problem  assets  which  require  additional  monitoring.   The  Company  defines
"problem" fixed maturities as those for which principal and/or interest payments
are in default.  The Company  defines  "potential  problem" fixed  maturities as
assets which are believed to present  default risk  associated  with future debt
service obligations and therefore require more active management. Management has
identified no fixed maturity  investments as problem or potential  problem asset
at December 31, 1998 and 1997.

Portfolio Diversity

The fixed  maturity  portfolio  is broadly  diversified  by type and industry of
issuer.  The greatest industry  concentrations  within the public portfolio were
finance,  manufacturing,  and utilities. While the greatest concentration within
the private  portfolio  was asset  backed  securities.  The total  portfolio  is
summarized below by issuer category:

<TABLE>
<CAPTION>
                                         December 31, 1998              December 31, 1997
                                     ------------------------      -------------------------
                                     Amortized     Estimated        Amortized     Estimated
                                       Cost        Fair Value        Cost         Fair Value
                                     ---------     ----------      ---------      ----------
                                                        (In Thousands)
<S>                                  <C>            <C>            <C>            <C>     
United States government
    securities and obligations       $ 51,663       $ 51,605       $ 42,885       $ 43,222
Mortgage backed securities              1,507          1,505          2,039          2,036
Asset backed secrutities (1)           78,396         79,075          5,076          5,070
Manufacturing                          95,713         96,369         92,805         94,041
Utilities                             101,287        102,487         87,416         88,996
Retail and wholesale                    9,992          9,834              0              0
Finance                               120,084        121,470        221,624        223,900
Services                               78,586         78,727         54,075         54,494
Transportation                         49,695         50,331         40,856         41,717
Other                                  30,835         31,587         38,333         38,885
                                     --------       --------       --------       --------
Total                                $617,758       $622,990       $585,109       $592,361
                                     ========       ========       ========       ========
</TABLE>


(1) The asset backed securities are primarily backed by credit card receivables,
home equity loans, trade receivables and auto loans.




                                       7
<PAGE>

Short-Term Investments

Short-term investments include highly liquid debt instruments such as commercial
paper and are  purchased  with an original  maturity  of twelve  months or less.
These securities are carried at amortized cost, which  approximates  fair value.
As of December 31, 1998,  the  Company's  short-term  investments  totaled $53.8
million  versus $52.5 million at December 31, 1997.  While assets and income are
relatively unchanged,  the short-term yield decreased 210 basis points primarily
due to lower average  interest  rates in 1998 compared to 1997.  The table below
presents  summary  data with  respect  to the  Company's  short-term  investment
positions:


                                                    Year Ended December 31,
                                                    1998             1997
                                                   -------         -------
                                                       (In Thousands)

     Carrying amount at end of period              $53,761         $52,464

     Net investment income                           3,502           3,023

     Yield (1)                                        5.38%           7.48%

(1)  Yields are determined by dividing net  investment  income by the average of
     quarter-end asset carrying values, less one-half of net investment income.


(b) 1997 versus 1996

Total  insurance  revenues,  consisting  of premiums and policy  charges and fee
income,  decreased  $2.4  million for the year ended  December 31, 1997 to $57.5
million from $59.9 million for the year ended  December 31, 1996.  This decrease
in insurance revenues is primarily attributable to a decrease of $2.2 million in
policy  charges  and fee  income.  This is a result of an aging book of business
along with an increased emphasis in the domestic market place on retirement type
products rather than life insurance protection products.

The Company's net  investment  income  increased $2.5 million for the year ended
December  31,  1997 to $46.3  million  from  $43.8  million  for the year  ended
December 31, 1996. Increase in cash flows from insurance  operations and average
assets  as well as the  asset  mix  strategies,  produced  favorable  investment
results  in  1997.  Fixed  maturity  income  increased  in  1997  due to  higher
investment returns as a result of a shift to higher yielding securities.  Income
from short-term  investments  increased  because of higher fixed maturity assets
available to lend to third parties as part of the Company's  securities  lending
program.

Other income increased $1.3 million for the year ended December 31, 1997 to $5.3
million from $4.0 million for the year ended December 31, 1996. This increase is
due a higher level of advisory fees attributable to the Discovery  Preferred and
Discovery Select Separate Account products.

Policyholders'  benefits  increased $5.3 million for the year ended December 31,
1997 to $34.0 million from $28.7  million for the year ended  December 31, 1996.
This increase is attributable to an increase in mortality costs  associated with
the aging book of business.

Other  operating  costs and expenses  increased $14.4 million for the year ended
December 31, 1997 to $27.2 million  compared to $12.8 million for the year ended
December 31, 1996.  The increase  reflects  factors  including the refinement of
estimated  gross profit  margins used to amortize  deferred  policy  acquisition
costs (DAC).  Favorable mortality  experience and reduction in cost of insurance
charges contributed to a change in net amortization.  Also,  increased operating
costs  resulted  from higher sales  activity of Discovery  Select and  Discovery
Preferred  annuity  products,  and  technological  advancements  made in annuity
processing, customer service, and product development.


                                       8
<PAGE>

2.   Liquidity and Capital Resources

The Company's  liquidity  requirements  include the payment of sales commissions
and other underwriting  expenses and the funding of its contractual  obligations
for the life  insurance and annuity  contracts it has in-force.  The Company has
developed  and utilizes a cash flow  projection  system and  regularly  performs
asset/liability  duration  matching in the management of its asset and liability
portfolios.  The Company anticipates funding all its cash requirements utilizing
cash from operations,  normal  investment  maturities and anticipated  calls and
repayments or through short term lending from its affiliate  Prudential  Funding
Corporation (see Item 13 Certain  Relationships & Related  Transactions).  As of
December  31,  1998,  the  Company's  assets  included  $567.5  million of cash,
short-term  investments  and  investment  grade  publicly  traded fixed maturity
securities that could be liquidated if funds were required.

In order to continue to market life insurance and annuity products,  the Company
must meet or exceed  the  statutory  capital  and  surplus  requirements  of the
insurance  departments  of the states in which it conducts  business.  Statutory
accounting  practices  differ  from  generally  accepted  accounting  principles
("GAAP") in two major respects. First, under statutory accounting practices, the
acquisition costs of new business are charged to expense,  while under GAAP they
are  initially  deferred  and  amortized  over a period of time.  Second,  under
statutory accounting practices, the required additions to statutory reserves for
new  business  in  some  cases  may  initially  exceed  the  statutory  revenues
attributable  to  such  business.  These  practices  result  in a  reduction  of
statutory income and surplus at the time of recording new business.

Insurance   companies  are  subject  to  Risk-Based  Capital  (RBC)  guidelines,
monitored by  insurance  regulatory  authorities,  that measure the ratio of the
Company's statutory equity with certain adjustments  ("Adjusted Capital") to its
required capital, based on the risk characteristics of its insurance liabilities
and  investments.  Required  capital is  determined  by statutory  formulae that
consider   risks   related  to  the  type  and  quality  of   invested   assets,
insurance-related  risks associated with the Company's  products,  interest rate
risks,  and general  business risks. The RBC calculations are intended to assist
regulators in measuring the adequacy of the Company's statutory capitalization.

The  Company  considers  RBC  implications  in  its  asset/liability  management
strategies. Each year, the Company conducts a thorough review of the adequecy of
statutory  insurance  reserves and other  actuarial  liabilities.  The review is
performed  to ensure  that the  Company's  statutory  reserves  are  computed in
accordance   with  accepted   actuarial   standards,   reflect  all  contractual
obligations,  meet the  requirements  of state laws and  regulations and include
adequate  provisions  for  any  other  actuarial  liabilities  that  need  to be
established.  All  significant  reserve  changes  are  reviewed  by the Board of
Directors  and are subject to approval by the New Jersey  Department  of Banking
and Insurance.  The Company believes that its statutory  capital is adequate for
its currently anticipated levels of risk as measured by regulatory guidelines.

The National Association of Insurance  Commissioners  recently approved a series
of codified  statutory  accounting  standards for  consideration  by the various
state  regulators.  Certain of the proposed  standards,  if adopted by insurance
regulatory  authorities,  could have an impact on the  measurement  of statutory
capital  which,  in turn,  could  affect RBC ratios of insurance  companies.  If
adopted, implementation could commence with 1999 statutory financial statements.
At the present time, the Company cannot  estimate the potential  impact of these
proposed standards on its RBC position.

3.   Regulatory Environment

The  Company  is  subject  to the laws of the State of New  Jersey as  governing
insurance  companies  and to the  regulations  of the New Jersey  Department  of
Banking & Insurance (the "Insurance Department"). A detailed financial statement
in the  prescribed  form (the "Annual  Statement")  is filed with the  Insurance
Department  each year covering the Company's  operations  for the preceding year
and  its  financial  position  as of the  end of that  year.  Regulation  by the
Insurance  Department  includes  periodic  examination to verify the accuracy of
contract liabilities and reserves.  The Company's books and accounts are subject
to review by the Insurance  Department at all times.  A full  examination of the
Company's  operations is conducted  periodically by the Insurance Department and
under the auspices of the NAIC.

The  Company  is  subject  to  regulation   under  the  insurance  laws  of  all
jurisdictions  in  which it  operates.  The  laws of the  various  jurisdictions
establish  supervisory agencies with broad administrative powers with respect to
various  matters,  including  licensing to transact  business,  overseeing trade
practices,  licensing agents,  approving  contract forms,  establishing  reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for  accumulation  of surrender  values,  prescribing the form and
content of required financial  statements and regulating the type and amounts of
investments permitted. The Company is required to file the Annual Statement with
supervisory agencies in each of the jurisdictions in which it does business, and
its  operations  and accounts are subject to  examination  by these  agencies at
regular intervals.



                                       9
<PAGE>

The NAIC has  adopted  several  regulatory  initiatives  designed to improve the
surveillance  and  financial   analysis  regarding  the  solvency  of  insurance
companies  in  general.   These   initiatives   include  the   development   and
implementation of a risk-based  capital formula for determining  adequate levels
of capital and surplus.  Insurance  companies  are  required to calculate  their
risk-based capital in accordance with this formula and to include the results in
their Annual  Statement.  It is  anticipated  that these  standards will have no
significant effect upon the Company.

Although  the  federal  government  generally  does not  directly  regulate  the
business of insurance,  federal initiatives often have an impact on the business
in a variety of ways.  Certain insurance  products of the Company are subject to
various  federal  securities  laws and  regulations.  In  addition,  current and
proposed federal measures which may significantly  affect the insurance business
include regulation of insurance company solvency,  employee benefit  regulation,
removal of barriers  preventing  banks from engaging in the insurance  business,
tax law changes  affecting  the  taxation  of  insurance  companies  and the tax
treatment of insurance  products and its impact on the relative  desirability of
various personal investment vehicles.


4.   The Year 2000 Issue

Pruco  Life of New  Jersey  utilizes  many of the  same  business  applications,
infrastructure and business partners as Prudential. Prudential has addressed the
Year 2000 issue on an enterprise-wide  basis.  Therefore,  it is not possible to
differentiate  Pruco  Life  of  New  Jersey's  Year  2000  issue  from  that  of
Prudential.  The  accompanying  discussion of the Year 2000 issue reflects steps
taken by Prudential to mitigate the Year 2000 risks.

Many computer  systems are programmed to recognize only the last two digits in a
date. As a result, any computer system that has  date-sensitive  programming may
recognize  a date using "00" as the year 1900  rather  than the year 2000.  This
problem can affect  non-information  technology  systems that  include  embedded
technology,  such as microprocessors included in "infrastructure" equipment used
for  telecommunications  and other services as well as computer systems. If this
anomaly is not  corrected,  the year "00" could  cause  systems to perform  date
comparisons  and  calculations  incorrectly,  which  could  in turn  affect  the
accuracy and compromise the integrity of business records.  Business  operations
could be  interrupted  when companies are unable to process  transactions,  send
invoices, or engage in similar normal business activities.

Prudential  established  a  Company-wide  Program  Office  (CPO) to develop  and
coordinate  an  operating  framework  for the Year 2000  compliance  activities.
Prudential's  CPO structured the Year 2000 program into three major  components:
Business  Applications,  Infrastructure  and  Business  Partners.  The CPO  also
established quality assurance  procedures  including a certification  process to
monitor and evaluate  enterprise-wide progress of each component of Prudential's
program for conversion and upgrading of systems for Year 2000 compliance.

Business Applications

The  scope of the  Business  Applications  component  includes  a wide  range of
computer  systems that directly  support  Prudential's  business  operations and
accounting  systems.  The entire  application  portfolio was analyzed in 1996 to
determine appropriate Year 2000 readiness strategies (i.e., renovate, replace or
retire). Rigorous testing standards have been employed for all applications that
will not be retired,  including  those that are newly  developed  or  purchased.
Application  replacement  and renovation  projects  follow a similar path toward
Year 2000  compliance.  The key project  phases  include Year 2000  analysis and
design,  programming  activities,   testing,  and  implementation.   Replacement
projects  are also  tracked  until the  existing  applications  are removed from
production.

Of  Prudential's   total  application   portfolio,   approximately  70%  of  the
applications are being renovated,  13% are being replaced by Year 2000 compliant
systems,  and the remaining 17% are being retired from  production.  At December
31, 1998, the percentage of business  applications  (based on application count)
at  Prudential  in  the  implementation  phase  for  Year  2000  compliance  for
renovation,  replacement and retirement are 99%, 96% and  99%,respectively.  The
overall completion date for Business Applications is June 1999.


                                       10
<PAGE>

Infrastructure

The scope of Prudential's Year 2000 Infrastructure initiatives include mainframe
computer system hardware and operating  system software,  mid-range  systems and
servers,   telecommunications  equipment,   buildings  and  facilities  systems,
personal computers, and vendor hardware and software.

Although  there  are minor  differences  among  these  various  components,  the
approach to Year 2000 readiness for  Infrastructure  generally  involves  phases
identified as inventory,  assessment,  remediation  activities (e.g.,  upgrading
hardware or software),  testing and implementation.  The overall completion date
for Infrastructure is June 1999.

Business Partners

Prudential's  approach to business partner readiness includes  classification of
each  partner's  status  as  "highly   critical"  or  "less  critical"  and  the
development  of  contingency  plans to  address  the  potential  that a business
partner could experience a Year 2000 failure.  Approximately 30% of Prudential's
business  partners have been identified as highly critical and the remaining 70%
as less  critical.  Project  phases  include  inventory,  risk  assessment,  and
contingency planning activities. All project phases for highly critical business
partner  readiness  were achieved in December  1998;  Prudentail  has an overall
completion date for less critical business partner readiness of June 1999.

The Cost of Year 2000 Readiness

Prudential is funding the Year 2000 program from operating  cash flows.  Some of
the  expenses of  Prudential's  Year 2000  readiness  are  allocated  across its
various  businesses  and  subsidiaries,  including  Pruco  Life  of New  Jersey.
Expenses  related to the Year 2000  initiatives  allocated  to Pruco Life of New
Jersey are part of systems overhead costs to date and are included in Pruco Life
of New  Jersey's  general  and  administrative  expenses.  The Year  2000  costs
allocated to Pruco Life of New Jersey to date are not material to its operations
and financial position.  Moreover,  the forecasted allocated Year 2000 costs are
not expected to have a material impact on Pruco Life of New Jersey's  ability to
meet its contractual commitments.

Year 2000 Risks and Contingency Planning

The major portion of the Prudential's  transactions are of such volume that they
can  only  be  effectively  processed  through  the  use of  automated  systems.
Therefore,  substantially  all of  Prudential's  contingency  plans  include the
ultimate   resolution  of  any  causative   technology   failures  that  may  be
encountered.

Prudential believes that the Business  Application,  Infrastructure and Business
Partners  components  of the Year 2000  project are  substantially  on schedule.
While  management  expects a small  number of the  projects  may not meet  their
targeted  completion  date,  it is  anticipated  that  these  projects  will  be
completed by September 1999 so that any delays, if experienced, would not have a
significant impact on the timing of the project as a whole. During the course of
the Year 2000 program, some discretionary  technology projects have been delayed
in favor of the completion of Year 2000 projects.  However, this impact has been
minimized by Prudential's  strategic decision to outsource most of the Year 2000
renovation work.

While Prudential and its  subsidiaries  believe that they are well positioned to
mitigate  its Year 2000 issue,  this issue,  by its  nature,  contains  inherent
uncertainties,  including  the  uncertainty  of Year  2000  readiness  of  third
parties.  Consequently,  the Company is unable to determine at this time whether
the  consequences  of Year 2000 failures will have a material  adverse effect on
the Company's  results of operations,  liquidity or financial  position.  In the
worst case, it is possible that any technology failure, including an internal or
external  Year 2000  failure,  could  have a  material  impact on the  Company's
results of operations, liquidity, or financial position.

Prudential is enhancing  existing  business  contingency  plans to mitigate Year
2000 risk. Current contingency plans include planned responses to the failure of
specific business applications or infrastructure components. These responses are
being reviewed and expected to be finalized by June 1999 to ensure that they are
workable under the special conditions of a Year 2000 failure. The plans are also
being  updated to reduce the level of  uncertainty  about the Year 2000  problem
including readiness of Prudential's business partners.

The  discussion  of the Year 2000 Issue herein,  and in particular  Prudential's
plans  to  remediate   this  issue  and  the  estimated   costs   thereof,   are
forward-looking   in  nature.   See  cautionary   statement  below  relating  to
forward-looking statements.


                                       11
<PAGE>

5.   Effective New Accounting Pronouncements

Refer to Note 2, "Summary of Significant  Accounting  Policies," of the Notes to
Financial Statements.

6.   Information Concerning Forward-Looking Statements

Certain of the statements contained in Management's  Discussion and Analysis may
be considered forward-looking  statements.  Words such as "expects," "believes,"
"anticipates,"  "intends,"  "plans," or  variations  of such words are generally
part of forward-looking  statements.  Forward-looking  statements are made based
upon   management's   current   expectations  and  beliefs   concerning   future
developments  and their  potential  effects  upon the  Company.  There can be no
assurance  that  future  developments   affecting  the  Company  will  be  those
anticipated by management.  There are certain important factors that could cause
actual results to differ materially from estimates or expectations  reflected in
such forward-looking statements including without limitation, changes in general
economic conditions, including the performance of financial markets and interest
rates; market acceptance of new products and distribution channels; competitive,
regulatory  or tax  changes  that  affect the cost or demand  for the  Company's
products;  and adverse litigation results. While the Company reassesses material
trends  and  uncertainties  affecting  its  financial  position  and  results of
operations,   it  does  not   intend  to  review   or  revise   any   particular
forward-looking   statement  referenced  in  this  Management's  Discussion  and
Analysis in light of future events. The information  referred to above should be
considered by readers when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.

Item 7a.  Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------

As an indirect  subsidiary  of  Prudential,  the Company  benefits from the risk
management strategies implemented by its parent.

Risk management  includes the identification and measurement of various forms of
risk,  establishment  of acceptable risk  thresholds,  and creation of processes
intended to maintain risks within these  thresholds  while  maximizing  returns.
Prudential considers risk management an integral part of its core businesses.

The risks  inherent in the Company's  operations  include  market risk,  product
risk, credit risk, concentration risk, liquidity risk, and operating risk. These
risk categories,  and the Company's  strategies  relative to each, are discussed
below.

The Company's risk monitoring  processes include  preparation and review of risk
reports on a regular basis,  with frequency  based on the purpose of the report.
For example,  reports associated with specific strategies or assets are produced
daily,  while portfolio level reports are typically  semi-monthly or monthly and
high level reports are produced quarterly.

Market  risk is the risk of change in the value of  financial  instruments  as a
result of  changes  in  interest  rates,  currency  exchange  rates,  equity and
commodity prices. To varying degrees, the investment  activities  supporting all
of the Company's products and services generate market risks. These products and
services  include life  insurance and  annuities.  Market risks incurred and the
strategies for managing these risks vary by product.

Insurance  products and  annuities,  incur market risk  primarily in the form of
interest  rate  risk.  This is  controlled  through  asset/liability  management
strategies  that seek to match the interest  rate  sensitivity  of the assets to
that of the  underlying  liabilities,  with  the  objective  of  insulating  the
portfolio's  underlying  capital from market value  changes due to interest rate
movements.  If perfectly  matched,  interest rate  movements will generate asset
market  value  changes  that  offset  changes  in the  value of the  liabilities
relating to the underlying insurance products.

For fee-based  products,  including  variable  contracts and separate  accounts,
investment  risk is  borne  primarily  by the  contractholders  rather  than the
Company (subject to any minimum guarantees). The greatest market-related risk to
the Company for these products is the indirect one that, in the event of sub-par
performance, asset based fee revenues could decline and that competitive factors
could impede the Company's  ability to maintain or grow assets under management.
However,  since this is primarily an operating risk it is not quantified as part
of the Company's analysis of market risk.

The  Company's  exposure  to market  risk  results  from  "other  than  trading"
activities in its insurance businesses.  Market risks in the Company's insurance
business  are  managed   through  an   investment   process  that   incorporates
asset/liability  management  techniques and other risk  management  policies and
limits.  Derivatives,  as discussed further below, are used for hedging purposes
in the asset/liability management process.


                                       12
<PAGE>

Insurance Asset/Liability Management

Interest rate and equity  exposures are maintained  within  established  ranges,
which are subject to  adjustment  based on market  conditions  and the design of
related  insurance  products sold to customers.  Risk  managers,  independent of
portfolio   and   asset   managers,   establish   investment   risk   limits  on
asset/liability  management  and oversee  ongoing  efforts to manage risk within
policy constraints.

The Company uses duration and convexity analyses to measure price sensitivity to
interest rate changes.  Duration  measures the relative  sensitivity of the fair
value of a financial instrument to changes in interest rates. Convexity measures
the rate of change of  duration  with  respect to changes in yield,  recognizing
that the price of a bond is usually  expected  to fall at a slower rate as yield
increases.

While duration and convexity are useful indicators of asset price sensitivity to
interest rate changes,  pricing models used in the portfolio  management process
also  consider  the  effects of  optionality.  This  entails a variety of option
pricing model applications.

The Company also performs  portfolio  stress  testing as part of its  regulatory
cash flow testing in which  interest-sensitive  assumptions (such as asset calls
and prepayments and insurance product contract  persistency) are evaluated under
various severe interest rate environments.  Any shortfalls revealed by cash flow
testing are evaluated to determine  whether there is a need to increase reserves
or adjust portfolio management strategies.

Interest Rate Related Market Risk on Assets

Assets with interest rate risk include fixed  maturities and policy loans which,
in the  aggregate,  comprise 85% of the  Company's  invested  assets  (excluding
assets held in Separate Accounts) as of December 31, 1998.

Interest Rate Related Market Risk on Liabilities

In addition to insurance  reserves,  which are not  measured by the  sensitivity
analysis  below,  the  Company has  policyholder  account  balances  relating to
interest-sensitive  life and annuity  contracts  through  which it is exposed to
interest rate risk.

Interest Rate Sensitivity

Interest  rate  sensitivity  for the indicated  classes of financial  assets and
financial liabilities is assessed using hypothetical test scenarios which assume
both upward and downward 100 basis point parallel shifts in the yield curve from
prevailing  interest rates at December 31, 1998. The following table  summarizes
the potential loss in fair value  associated with a hypothetical 100 basis point
upward  parallel  shift in the yield  curve from  prevailing  interest  rates at
December  31,  1998.  This  scenario  results in the  greatest  net  exposure to
interest rate risk of the hypothetical  scenarios  tested.  The test scenario is
for  illustrative  purposes  only and is not  intended  to reflect  management's
expectations  regarding  future  interest  rates or  performance of fixed income
markets.


                                       13
<PAGE>

In addition, this presentation includes only assets, liabilities and derivatives
required by the Rules and does not include $90 million of insurance liabilities.
Management includes the interest rate sensitivities  implicit in these insurance
liabilities  in  its  internal   measurements   and  believes  these   insurance
liabilities  substantially  offset  the  interest  rate risk  summarized  in the
following table.

                                                      December 31, 1998
                                            ------------------------------------
                                                     Fair Value
                                                     After + 100
                                                     Basis Point    Hypothetical
                                            Fair     Yield Curve     Change in
                                            Value       Shift        Fair Value
                                            ------   -----------    ------------
                                                (Amounts in Millions)
     Financial Assets and Liabilities                               
     with Interest Rate Risk:                                       
                                                                    
     Financial Assets:                                              
                                                                    
     Fixed maturities:                                              
          Available for sale                  623         601            (22)
     Policy loans                             147         138             (9)
                                                                    
     Financial Liabilities:                                         
          Policyholders' account balances    (415)       (418)            (3)
                                                                      ------
     Total estimated potential loss                                      (34)
                                                                      ======
                                                                    
The estimated  changes in fair values of financial  assets shown above relate to
assets invested in support of the Company's  insurance  liabilities,  and do not
include  assets  associated  with  products for which  investment  risk is borne
primarily by the contractholders rather than the Company.

Product Risk is the risk of adverse  results due to deviation of experience from
expected levels reflected in pricing.  The Company, in its insurance and annuity
operations,  sells  traditional  and  interest  sensitive  individual  insurance
products  and annuity  products.  Products  are priced to reflect  the  expected
levels of risk and to allow a margin for adverse deviation.  The level of margin
varies with  product  design and pricing  strategy  with respect to the targeted
market.  The Company  seeks to maintain  underwriting  standards so that premium
charged is consistent with risk assumed on an overall basis. Additionally,  most
of the Company's policies and contracts allow the Company to adjust credits (via
interest  crediting  rates) and/or charges (in contracts  where elements such as
mortality  and expense  charges  are not  guaranteed),  allowing  the Company to
respond to changes in actuarial experience.  The competitive environment is also
an  important  element  in  determining  pricing  elements  including  premiums,
crediting rates and non-guaranteed charges.

Mortality risks,  generally inherent in the Company's products, are incorporated
in pricing based on the Company's  experience (if available and relevant) and/or
industry experience. Mortality studies are performed periodically to compare the
actual  incidence  of death  claims in relation to business in force,  to levels
assumed in pricing and to industry  experience.  Persistency risk represents the
risk that the pattern of policy  surrenders  will deviate from assumed levels so
that policies do not remain in force long enough to allow the Company to recover
its  acquisition  costs.  Certain  products  are  designed,  by use of surrender
charges and other  features,  to discourage  early  surrenders and thus mitigate
this risk to the  Company.  Periodic  studies are  performed  to compare  actual
surrender experience to pricing assumptions and industry experience.

For  fee-based  products in which  investment  risk is borne by the client,  the
Company   retains  the  risk  that  fees  charged  may  not   adequately   cover
administrative expenses. The ability to earn a spread between these fees and the
associated  costs  is  dependent  upon  the  competitive  environment,   product
performance,  the  ability to attract  clients  and  assets,  and the  Company's
control of expense levels.

Credit  Risk is the risk that  counterparties  or issuers may default or fail to
fully honor  contractual  obligations  and is inherent in  investment  portfolio
asset positions including corporate bonds and mortgages,  private placements and
other  lending-type  products,  certain  derivative  transactions,  and  various
investment operations functions.


                                       14
<PAGE>

Limits of exposure by  counterparty,  country and  industry  are in place at the
portfolio  level, and  counterparty  concentration  risk is also reviewed at the
enterprise  level.  Credit  concentration  risks  are  limited  based on  credit
quality, and enterprise-level  concentrations are reviewed on a quarterly basis.
Business group credit analysis units evaluate creditworthiness of counterparties
and  assign  internal  credit  ratings  based on data  from  independent  rating
agencies  and their own  fundamental  analysis.  Additionally,  stress tests and
sensitivity analysis are utilized to estimate the exposure to credit losses from
unusual events.

Liquidity  Risk is the  risk  that  the  Company  will be  unable  to  liquidate
positions at a reasonable  price in order to meet cash flow  requirements  under
various scenarios. As indicated above, the Company's asset/liability  management
strategies  seek to  maintain  asset  positions  that  are  consistent  with the
expected  cash  flow  demands  associated  with its  liabilities  under  various
possible  situations.  Liquidity policies are formally managed at the enterprise
level,  using  various  comparisons  of asset  liquidity to potential  liability
outflows.  The Company  believes that the comparison of its general  account net
liquidity to individual  policy net cash surrender  value is key to the periodic
evaluation of its ability to meet policyholder  claim  requirements,  and stress
tests  are  utilized  to  measure  the  expected   liquidity   situation   under
hypothetical unusual events. The Company believes that its liquidity position is
more than  adequate to meet the expected cash flow demands  associated  with its
liabilities under reasonably possible stress situations.

Operating  Risk is the risk of potential  loss from internal or external  events
such as mismanagement,  fraud,  systems breakdowns,  business  interruption,  or
failure  to  satisfy   legal  or  fiduciary   responsibilities.   All  financial
institutions,  including  the Company,  are exposed to the risk of  unauthorized
activities by employees that are contrary to the internal  controls  designed to
manage such risks.  Legal risk may arise from  inadequate  control over contract
documentation,  marketing  processes,  or other  operations.  Internal  controls
responsive to regulatory,  legal,  credit,  asset stewardship and other concerns
are established at the business unit level for specific lines of business and at
the  enterprise  level for  company-wide  processes.  Controls are  monitored by
business unit management,  internal and external auditors,  and by an enterprise
level Management Internal Control unit, and in certain instances, are subject to
regulatory review.

Following  recent  revelations and negative  publicity  surrounding the issue of
sales  practices,  the Company has  implemented a strategy to emphasize  ethical
conduct in the  recruitment  and  training  of agents and in the sales  process.
Prudential  has also  strengthened  controls  including the  establishment  of a
client  acquisition  program,  in  conjunction  with the  underwriting  process,
intended to  ascertain  the  appropriateness  of  insurance  coverages  sold and
mitigate the risk of inappropriate policy replacement activity.

Another  aspect of operating  risk relates to the  Company's  ability to conduct
transactions  electronically and to gather, process, and disseminate information
and maintain data integrity and  uninterrupted  operations given the possibility
of  unexpected  or  unusual  events.  The  Company  is  implementing  a business
continuation  initiative to address these concerns.  Considerations  relative to
the potential  impact of the Year 2000 on computer  operations,  infrastructural
support, and other matters are discussed above.

Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

Information  required with respect to this Item 8 regarding Financial Statements
and Supplementary  Data is set forth commencing on page F-3 hereof. See Index to
Financial Statements elsewhere in this Annual Report.

Item 9. Changes in and Disagreements with Independent  Accountants on Accounting
--------------------------------------------------------------------------------
and Financial Disclosure
------------------------

Not applicable.


                                       15
<PAGE>

                                    PART III
                                    --------

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

<TABLE>
<CAPTION>
Name                                    Position                                         Age
----                                    --------                                         ---
<S>                       <C>                                                            <C>
James J. Avery, Jr.       Chairman of the Board and Director                             47

I. Edward Price           Vice Chairman of the Board and Director                        56

Esther H. Milnes          President and Director                                         48

James Drozanowski         Senior Vice President                                          56

Frank Marino              Senior Vice President                                          54

Edward A. Minogue         Senior Vice President                                          56

Hwei-Chung Shao           Senior Vice President and Chief Actuary                        44

Dennis G. Sullivan        Principal Financial Officer and Chief Accounting Officer       43

David A. Nachman          Vice President and Comptroller                                 51

Imants Saksons            Vice President                                                 48

William M. Bethke         Director                                                       51

Ira J. Kleinman           Director                                                       51

Mendel A. Melzer          Director                                                       38
</TABLE>


James J. Avery,  Jr.,  age 47 was elected  Chairman of the Board of Directors of
the Company on June 27, 1997. Mr. Avery joined the Prudential  Insurance Company
of America in 1988 and has served as the Senior  Vice  President,  CFO and Chief
Actuary for the Prudential Individual Insurance Group since 1997.

I.  Edward  Price,  age 56,  has been  Senior  Vice  President  and  Actuary  of
Prudential  Individual  Insurance  since 1995.  From 1994 to 1995,  he was Chief
Executive Officer of Prudential  International  Insurance.  From 1993 to 1994 he
was  President of  Prudential  International  Insurance.  Prior to 1993,  he was
Senior Vice President and Company Actuary of Prudential.

Esther H.  Milnes,  age 48, has been Vice  President  and Actuary of  Prudential
Individual  Insurance  Group since 1996.  From 1993 to 1995, she was Senior Vice
President  and Chief Actuary of  Prudential  Insurance  and Financial  Services.
Prior to 1993, she was Vice President and Associate Actuary of Prudential.

James C. Drozanowski,  age 56, has been Vice President and Operations Executive,
Prudential  Individual  Insurance  Group since 1996.  From 1995 to 1996,  he was
President and Chief Executive  Officer of Chase Manhattan Bank, and from 1993 to
1995, he was Vice President,  North America Customer  Services,  Chase Manhattan
Bank. Prior to 1993, he was Operations  Executive,  Global Securities  Services,
Chase Manhattan Bank.

Frank  P.  Marino,  age 54,  has  been  Vice  President,  Policyowner  Relations
Department,  Prudential  Individual Insurance Group since 1996. Prior to 1996 he
was Senior Vice President, Prudential Mutual Fund Services.

Edward A. Minogue, age 56, was elected a Senior Vice President of the Company on
September  1, 1997.  Mr.  Minogue has been a Vice  President  of the  Prudential
Insurance  Company of America since July, 1997. Prior to 1997, Mr. Minogue was a
director of Merrill Lynch, Pierce & Smith, Inc.

Hwei-Chung  Shao,  age 44,  has  been  Vice  President  and  Associate  Actuary,
Prudential.



                                       16
<PAGE>

Dennis G. Sullivan,  age, 43, was elected Principal  Financial Officer and Chief
Accounting  Officer of the Company in March,  1999.  Mr.  Sullivan has been Vice
President  and Deputy  Controller  of  Prudential  since  November  1998.  Prior
thereto,  from January 1998,  Mr.  Sullivan was Vice President and Controller of
ContiFinancial Corporation. From 1997 to 1998, Mr. Sullivan was Deputy Corporate
Controller of Salomon Brothers Inc.. Prior to 1997, he was a director at Salomon
Brothers, Inc..

David A.  Nachman,  age 51, was elected Vice  President and  Comptroller  of the
Company in March,  1999. Mr. Nachman joined the Prudential  Insurance Company of
America in 1973 and has served as Vice  President,  Accounting of The Prudential
since 1992.

Imants  Saksons,  age 48, was elected  Vice  President,  Compliance,  Prudential
Individual  Financial  Services in September,  1998.  Prior to 1998, he was Vice
President, Market Conduct, U.S. Operations, Manulife Financial.

William M. Bethke, age 51, has been President,  Prudential Capital Markets Group
since 1992.

Ira J.  Kleinman,  age 51,  has been Chief  Marketing  and  Product  Development
Officer of Prudential  Individual Insurance Group since 1995. From 1993 to 1995,
he was  President of  Prudential  Select.  From 1992 to 1993, he was Senior Vice
President of Prudential. Prior to 1992, he was Vice President of Prudential.

Mendel A. Melzer,  age 38, has been Chief Investment  Officer,  Mutual Funds and
Annuities,  Prudential  Investments  since 1996;  1995 to 1996:  Chief Financial
Officer of the Money Management Group of Prudential;  1993 to 1995:  Senior Vice
President  and  Chief  Financial  Officer  of  Prudential   Preferred  Financial
Services; Prior to 1993: Managing Director, Prudential Investment Corporation.

Item 11. Executive Compensation
-------------------------------

The following table shows the 1998 annual compensation,  paid by Prudential,  to
each named executive for services provided to the Company. The amounts have been
determined based on each individual's time devoted to the duties as an executive
of the Company.

<TABLE>
<CAPTION>
    Name and Principal                                                                   Other Annual
        Position                  Year            Salary                Bonus            Compensation
----------------------------    --------     ----------------     ----------------     ----------------
<S>                              <C>                  <C>                  <C>                  <C>   
Esther H. Milnes                 1998                 $6,231               $7,894               $    0
President                        1997                  5,598                6,419                    0
                                 1996                  5,417                3,641                    0
</TABLE>


Item 12.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

Not applicable.

Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

Refer to Note 12 in the Notes to the Financial Statements on page F-21.


                                       17
<PAGE>

                                     PART IV
                                     -------

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
-------------------------------------------------------------------------

     (a) (1) and (2) Financial Statements and Schedules of Registrant are listed
     in the accompanying "Index to Financial  Statements and Financial Statement
     Schedules" on page F-1 hereof and are filed as part of this Report.

     (a) (3) Exhibits
             --------

     Regulation S-K
     --------------

     2.   Not applicable.

     3.   Documents Incorporated by Reference

          (i) The  Articles  of  Incorporation  of Pruco  Life of New  Jersey as
          amended March 11, 1983 and the Bylaws of Pruco Life Insurance  Company
          of New Jersey, as amended February 1, 1991 are incorporated  herein by
          reference to Post-Effective Amendment No. 26 to Form S-6, Registration
          No.  2-89780,  filed  April 28,  1997 on behalf of the  Company;  (ii)
          Bylaws  of  Pruco  Life of New  Jersey  as  amended  May 5,  1997  are
          incorporated  herein  by  reference  to Form  10-Q,  Registration  No.
          333-18117-01,  filed August 15, 1997 on behalf of Pruco Life Insurance
          Company of New Jersey.

     4.   Exhibits

          Market-Value   Annuity   Contract,   incorporated   by   reference  to
          Registrant's  Form  S-1  Registration   Statement,   Registration  No.
          333-18053,  filed December 17, 1996, on behalf of Pruco Life Insurance
          Company of New Jersey.

     9.   None.

     10.  None.

     11.  Not applicable.

     12.  Not applicable.

     13.  Not applicable.

     16.  Not applicable.

     18.  None.

     21.  None.

     22.  None.

     23.  Not applicable.

     24.  Powers of Attorney for I. Edward Price,  Esther H. Milnes,  William M.
          Bethke,  Ira Kleinman and Mendel Melzer are  incorporated by reference
          to Form N-4,  Registration No.  333-18117,  filed December 18, 1996 on
          behalf of Pruco Life of New Jersey Flexible  Premium  Variable Annuity
          Account.  A Power of Attorney for James J. Avery,  Jr. is incorporated
          by  reference  to  Post  Effective   Amendment  No.  9  to  Form  S-1,
          Registration No. 33-20018,  filed June 25, 1997 on behalf of the Pruco
          Life of New Jersey Variable Contract Real Property Account.

     27.  Exhibit  27,  Financial  Data  Schedule   appended  to  this  form  in
          accordance with EDGAR instructions.

     99.  The  following  table  presents  sales  and  related  expenses  of the
          Flexible  Premium  Variable  Annuity  Account since July 19, 1995, the
          effective  date  of  the  registration   statement  (SEC  file  number
          333-18053).


                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                                                         For the account(s)
                                                             For the account                  of the
                                                             of the Company              contractholder(s)
                                                    -------------------------------      -----------------
                                                     Aggregate
                                                   offering price       
                                                    of amount
                                                    registered          Amount sold         Amount sold
                                                    ----------          -----------         -----------
                                                                         (000's)

<S>                                                 <C>                  <C>                   <C>  
Flexible Premium Variable Annuity Account *         $ 150,000            $ 18,684              $ 660

Underwriting discounts and commissions **                                   (654)
Other expenses ***                                                          (291)
                                                                        --------
    Total                                                                   (945)
                                                                        --------

Net offering proceeds                                                   $ 17,739
                                                                        ========
</TABLE>

*    Securities are not issued or sold in predetermined units.

**   Amount represents estimated commissions paid to affiliated parties.

***  Amount  represents  estimated general  administrative  expenses paid to the
     parent under service and lease agreement.



                                                     19
<PAGE>


                                   SIGNATURES
                                   ----------

Pursuant to the requirements of Section 13, or 15 (d) of the Securities Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                   PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
                                   (Registrant)


Date:    March 15, 1999            By: /s/ ESTHER H. MILNES
       _________________               _____________________________

                                       Esther H. Milnes
                                       President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                   Title                                       Date
---------                                   -----                                       ----
<S>                                 <C>                                         <C>
           *
_________________________           Chairman of the Board                       March 15, 1999
James J. Avery, Jr.


           *
_________________________           Vice Chairman of the Board                  March 15, 1999
I. Edward Price                     and Director


           *
_________________________           President and Director                      March 15, 1999
Esther H. Milnes


/s/ DENNIS G. SULLIVAN
_________________________           Principal Financial Officer and Chief       March 15, 1999
Dennis G. Sullivan                  Accounting Officer


           *
__________________________          Director                                    March 15, 1999
William M. Bethke


           *
_________________________           Director                                    March 15, 1999
Ira J. Kleinman


           *
_________________________           Director                                    March 15, 1999
Mendel A. Melzer




                                       
                                 * By: /s/ THOMAS C. CASTANO
                                       ___________________________________
                                       Thomas C. Castano
                                       (Attorney-in-Fact)
</TABLE>


                                       20
<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549





                                    FORM 10-K
                                  ANNUAL REPORT





                              FINANCIAL STATEMENTS

                        December 31, 1998, 1997, and 1996










                   PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY


                                       21
<PAGE>

                   PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY


                          INDEX TO FINANCIAL STATEMENTS
                          -----------------------------



Financial Statements                                                    Page No.
--------------------                                                    --------


PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY


Report of Independent Accountants                                            F-2


Financial Statements:


   Statements of Financial Position - December 31, 1998 and 1997             F-3


   Statements of Operations - Years Ended December 31, 1998, 1997, and 1996  F-4


   Statements of Changes in Stockholder's Equity - Years Ended 
      December 31, 1998, 1997, and 1996                                      F-5


   Statements of Cash Flows - Years Ended December 31, 1998, 1997, and 1996  F-6


   Notes to Financial Statements - December 31, 1998, 1997, and 1996         F-7



                                      F-1
<PAGE>

                        Report of Independent Accountants
                        ---------------------------------



To the Board of Directors of
Pruco Life Insurance Company of New Jersey

In our opinion,  the  accompanying  statements  of  finanacial  position and the
related statements of operations, of changes in stockholder's equity and of cash
flows present fairly, in all material respects,  the financial position of Pruco
Life  Insurance  Company of New Jersey at December  31,  1998 and 1997,  and the
results of its  operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.  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 generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.



PricewaterhouseCoopers LLP
New York, New York
February 26, 1999


                                      F-2
<PAGE>

Pruco Life Insurance Company of New Jersey

Statements of Financial Position
December 31, 1998 and 1997 (In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                   1998             1997
                                                                                ----------       ----------
<S>                                                                             <C>              <C>       
ASSETS
Fixed maturities
   Available for sale, at fair value (amortized cost, 1998: $617,758; and
   1997: $585,109)                                                              $  622,990       $  592,361
Policy loans                                                                       139,443          127,306
Short-term investments                                                              53,761           52,464
                                                                                ----------       ----------
        Total investments                                                          816,194          772,131
Cash                                                                                    45                3
Deferred policy acquisition costs                                                  113,923          101,625
Accrued investment income                                                           12,209           14,075
Other assets                                                                        15,379            4,037
Separate Account assets                                                          1,453,407        1,110,561
                                                                                ----------       ----------
TOTAL ASSETS                                                                    $2,411,157       $2,002,432
                                                                                ==========       ==========

LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances                                                 $  413,848       $  402,601
Future policy benefits and other policyholder liabilities                           90,530           85,220
Cash collateral for loaned securities                                               34,424           33,663
Securities sold under agreements to repurchase                                      27,210               --
Income taxes payable                                                                 1,610           12,963
Net deferred income tax liability                                                   23,715           22,188
Payable to affiliate                                                                 3,492            4,307
Other liabilities                                                                   19,489           17,103
Separate Account liabilities                                                     1,450,986        1,108,994
                                                                                ----------       ----------
Total liabilities                                                                2,065,304        1,687,039
Contingencies - (See Note 10)                                                   ----------       ----------
Stockholder's Equity
Common stock, $5 par value;
      400,000 shares, authorized;
      issued and outstanding at
      December 31, 1998 and 1997                                                     2,000            2,000
Paid-in-capital                                                                    125,000          125,000
Retained earnings                                                                  217,260          185,437
Accumulated other comprehensive income                                               1,593            2,956
                                                                                ----------       ----------
Total stockholder's equity                                                         345,853          315,393
                                                                                ----------       ----------
TOTAL LIABILITIES AND
    STOCKHOLDER'S EQUITY                                                        $2,411,157       $2,002,432
                                                                                ==========       ==========
</TABLE>


                                      See Notes to Financial Statements


                                                     F-3
<PAGE>

Pruco Life Insurance Company of New Jersey

Statements of Operations
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                1998             1997             1996
                                                              ---------        ---------        ---------
<S>                                                           <C>              <C>              <C>
REVENUES

Premiums                                                      $   1,345        $   1,105        $   1,345
Policy charges and fee income                                    56,247           56,382           58,571
Net investment income                                            47,032           46,324           43,784
Realized investment gains, net                                    8,446            1,707            1,221
Other income                                                      5,755            5,286            4,047
                                                              ---------        ---------        ---------

Total revenues                                                  118,825          110,804          108,968
                                                              ---------        ---------        ---------

BENEFITS AND EXPENSES

Policyholders' benefits                                          28,342           33,999           28,653
Interest credited to policyholders' account balances             18,985           19,372           20,069
General, administrative and other expenses                       22,105           27,236           12,848
                                                              ---------        ---------        ---------

Total benefits and expenses                                      69,432           80,607           61,570
                                                              ---------        ---------        ---------

Income from operations before income taxes                       49,393           30,197           47,398
                                                              ---------        ---------        ---------

Income taxes
Current                                                          15,309           13,279           12,682
Deferred                                                          2,261           (2,305)           2,929
                                                              ---------        ---------        ---------

Total income taxes                                               17,570           10,974           15,611
                                                              ---------        ---------        ---------

NET INCOME                                                    $  31,823        $  19,223        $  31,787
                                                              =========        =========        =========

Net unrealized investment gains (losses) on securities,
net of reclassification adjustment                               (1,363)             924           (4,556)
                                                              ---------        ---------        ---------

TOTAL COMPREHENSIVE INCOME                                    $  30,460        $  20,147        $  27,231
                                                              =========        =========        =========
</TABLE>


                                      See Notes to Financial Statements


                                                     F-4
<PAGE>

Pruco Life Insurance Company of New Jersey

Statements of Changes in Stockholder's Equity
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                      Accumulated
                                                                                         other            Total
                                         Common          Paid-in-       Retained     comprehensive     stockholder's
                                          stock          capital        earnings         income           equity
                                        ---------       ---------       ---------       ---------        ---------
<S>                                     <C>             <C>             <C>             <C>              <C>      
Balance, January 1, 1996                $   2,000       $ 125,000       $ 134,427       $   6,588        $ 268,015

   Net income                                  --              --          31,787              --           31,787
   Change in net unrealized
      investment gains, net of
      reclassification adjustment              --              --              --          (4,556)          (4,556)
                                        ---------       ---------       ---------       ---------        ---------
Balance, December 31, 1996                  2,000         125,000         166,214           2,032          295,246

   Net income                                  --              --          19,223              --           19,223
   Change in net unrealized
      investment gains, net of
      reclassification adjustment              --              --              --             924              924

                                        ---------       ---------       ---------       ---------        ---------
Balance, December 31, 1997                  2,000         125,000         185,437           2,956          315,393

   Net income                                  --              --          31,823              --           31,823
   Change in net unrealized
      investment gains, net of
      reclassification adjustment              --              --              --          (1,363)          (1,363)
                                        ---------       ---------       ---------       ---------        ---------
Balance, December 31, 1998              $   2,000       $ 125,000       $ 217,260       $   1,593        $ 345,853
                                        =========       =========       =========       =========        =========
</TABLE>

                                         See Notes to Financial Statements


                                                        F-5
<PAGE>

Pruco Life Insurance Company of New Jersey

Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                             1998               1997               1996
                                                                          -----------        -----------        -----------
<S>                                                                       <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                             $    31,823        $    19,223        $    31,787
   Adjustments to reconcile net income to net cash (used in)
   provided by operating activities:
      Policy charges and fee income                                           (10,871)            (7,841)            (9,963)
      Interest credited to policyholders' account balances                     18,985             19,372             20,069
      Realized investment gains, net                                           (8,446)            (1,707)            (1,221)
      Amortization and other non-cash items                                     2,491             (1,046)            10,065
      Change in:
        Future policy benefits and other policyholders' liabilities             5,310              8,981              7,461
        Accrued investment income                                               1,866             (1,167)            (1,329)
        Policy loans                                                          (12,137)           (13,388)           (15,724)
        Separate Accounts                                                        (854)             1,629             (1,335)
        Payable to affiliates                                                    (815)            (1,752)             4,300
        Deferred policy acquisition costs                                     (12,298)             5,340            (10,934)
        Income taxes payable                                                  (11,353)            10,993              1,970
        Deferred income tax liability                                           1,527             (1,987)               366
        Other, net                                                             (8,955)             2,812              4,669
                                                                          -----------        -----------        -----------
Cash Flows (Used in) From Operating Activities                                 (3,727)            39,462             40,181
                                                                          -----------        -----------        -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from the sale/maturity of:
      Fixed maturities:
        Available for sale                                                  1,001,096            645,355            901,775
   Payments for the purchase of:
      Fixed maturities:
        Available for sale                                                 (1,029,988)          (679,709)          (956,483)
   Cash collateral for loaned securities, net                                     761             33,663                 --
   Securities sold under agreements to repurchase, net                         27,210                 --                 --
   Short term investments, net                                                 (1,297)           (35,461)            28,306
                                                                          -----------        -----------        -----------
Cash Flows Used in Investing Activities                                        (2,218)           (36,152)           (26,402)
                                                                          -----------        -----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Policyholders' account balances:
      Deposits                                                                300,536            134,020             16,754
      Withdrawals                                                            (294,549)          (141,255)           (26,605)
                                                                          -----------        -----------        -----------
Cash Flows From (Used in) Financing Activities                                  5,987             (7,235)            (9,851)
                                                                          -----------        -----------        -----------
Net increase (decrease) in Cash                                                    42             (3,925)             3,928
Cash, beginning of year                                                             3              3,928                 --
                                                                          -----------        -----------        -----------
CASH, END OF PERIOD                                                       $        45        $         3        $     3,928
                                                                          ===========        ===========        ===========

SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid                                                         $    27,083        $     1,896        $    11,673
                                                                          ===========        ===========        ===========
</TABLE>


                                              See Notes to Financial Statements


                                                             F-6
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

1.   BUSINESS

Pruco  Life  Insurance  Company  of New  Jersey  (the  Company)  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,
variable  annuities,  and fixed  annuities (the Contracts) only in the states of
New Jersey and New York.

The Company is a wholly owned subsidiary of Pruco Life Insurance  Company (Pruco
Life),  a stock life insurance  company  organized in 1971 under the laws of the
state of Arizona.  Pruco Life,  in turn,  is a wholly  owned  subsidiary  of The
Prudential Insurance Company of America (Prudential), a mutual insurance company
founded in 1875 under the laws of the state of New Jersey. Pruco Life 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,   Pruco  Life  is  under  no   obligation  to  make  such
contributions  and its  assets  do not  back  the  benefits  payable  under  the
Contracts.

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  annuities.  There are
approximately  1,620  stock,  mutual  and other  types of  insurers  in the life
insurance business in the United States.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The  financial  statements  include the  accounts of the  Company,  a stock life
insurance  company.  The financial  statements  have been prepared in accordance
with generally accepted accounting principles ("GAAP").

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  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.  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  participating  annuity
contracts that would result from the realization of unrealized gains and losses,
net  of  income  taxes,  are  included  in  a  separate   component  of  equity,
"Accumulated other comprehensive income."

Policy loans are carried at unpaid principal balances.

Short-term  investments,  consists  primarily of highly liquid debt  instruments
purchased with an original  maturity of twelve months or less and are carried at
amortized cost, which approximates fair value.

Realized  investment gains, net, are computed using the specific  identification
method.  Costs of fixed maturity are adjusted for  impairments  considered to be
other than temporary.

Cash

Cash  includes  cash  on  hand,   amounts  due  from  banks,  and  money  market
instruments.

Deferred Policy Acquisition Costs

The costs which vary with and that are related  primarily to the  production  of
new  insurance  business  are  deferred  to the  extent  that  they  are  deemed
recoverable from future profits.  Such costs include certain commissions,  costs
of policy issuance and underwriting, and certain variable field office expenses.
Deferred policy  acquisition costs are subject to recoverability  testing at the
time of policy issue and loss recognition  testing at the end of each accounting
period.  Deferred  policy  acquisition  costs  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 equity.


                                      F-7
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Acquisition   costs   related   to   interest-sensitive    life   products   and
investment-type  contracts  are deferred and  amortized in  proportion  to total
estimated gross profits arising principally from investment  results,  mortality
and expense  margins and surrender  charges based on historical and  anticipated
future  experience.  Amortization  periods  range from 15 to 30 years.  Deferred
policy  acquisition costs are analyzed to determine if they are recoverable from
future income,  including  investment income. If such costs are determined to be
unrecoverable,  they are  expensed at the time of  determination.  The effect of
revisions to estimated gross profits on unamortized  deferred  acquisition costs
is reflected in earnings in the period such estimated gross profits are revised.

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% of the fair value of the securities.  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  statements  of financial  position.  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.  The Company's policy is to take possession of securities
purchased  under  agreements  to resell.  The market value of  securities  to be
repurchased  is  monitored  and  additional   collateral  is  requested,   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.   Separate   Account  assets  include  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 Statement of  Operations.  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 of New  Jersey  Modified
Guaranteed  Annuity  Account.  The Pruco Life of New Jersey 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 of New  Jersey  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.

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.


                                      F-8
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Amounts received as payment for interest  sensitive life,  investment  contracts
and  variable  annuities  are  reported as deposits to  "Policyholders'  account
balances."  Revenues from these  contracts are reflected as "Policy  charges and
fee income" and consist primarily of fees assessed during the period against the
policyholders'  account balances for mortality  charges,  policy  administration
charges, and surrender charges. In addition, interest earned from the investment
of these account balances is reflected in "Net investment  income." 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.

Other Income

Other income consists  primarily of asset  management fees which are received by
the Company from Prudential for services  Prudential  provides to the Prudential
Series Fund, an underlying investment option of the Separate Accounts.

Derivative Financial Instruments

Derivatives  are  financial  instruments  whose values are derived from interest
rates,  foreign  exchange  rates,  various  financial  indices,  or the value of
securities or commodities.  Derivative financial instruments used by the Company
are futures and can be  exchange-traded  or contracted  in the  over-the-counter
market. The Company uses derivative  financial  instruments to hedge market risk
from changes in interest rates and to alter interest rate or currency  exposures
arising from mismatches between assets and liabilities.  All derivatives used by
the Company are for other than trading purposes.

To qualify as a hedge,  derivatives  must be  designated  as hedges for existing
assets,  liabilities,  firm commitments,  or anticipated  transactions which are
identified  and probable to occur,  and effective in reducing the market risk to
which the Company is  exposed.  The  effectiveness  of the  derivatives  must be
evaluated at the inception of the hedge and throughout the hedge period.

When derivatives  qualify as hedges, the changes in the fair value or cash flows
of the  derivatives  and the hedged items are recognized in earnings in the same
period. If the Company's use of other than trading derivatives does not meet the
criteria to apply hedge  accounting,  the derivatives are recorded at fair value
in "Other liabilities" in the Statements of Financial  Position,  and changes in
their fair value are recognized in earnings in "Realized  investment gains, net"
without considering changes in the hedged assets or liabilities. Cash flows from
other  than  trading  derivative  assets and  liabilities  are  reported  in the
operating activities section in the Statements of Cash Flows.

Income Taxes

The  Company  is a member  of the  consolidated  federal  income  tax  return of
Prudential and files separate  company state and local tax returns.  Pursuant to
the tax allocation  arrangement,  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 June 1996,  the Financial  Accounting  Standards  Board  ("FASB")  issued the
Statement of Financial  Accounting  Standards ("SFAS") No. 125,  "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishments of Liabilities"
("SFAS 125").  The statement  provides  accounting  and reporting  standards for
transfers and servicing of financial assets and  extinguishments  of liabilities
and provides  consistent  standards  for  distinguishing  transfers of financial
assets  that are sales from  transfers  that are  secured  borrowings.  SFAS 125
became effective  January 1, 1997 and was applied  prospectively.  Subsequent to
June 1996,  FASB issued SFAS No. 127 "Deferral of the Effective  Date of Certain
Provisions of SFAS 125" ("SFAS 127"). SFAS 127 delays the implementation of SFAS
125 for one year for  certain  transactions,  including  repurchase  agreements,
dollar rolls, securities lending and similar transactions.  Adoption of SFAS 125
did not have a material impact on the Company's results of operations, financial
position and liquidity.

On January 1, 1999,  the Company  adopted the  American  Institute  of Certified
Public  Accountants  ("AICPA")  Statement  of  Position  97-3,   "Accounting  by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3").
This statement  provides  guidance for determining when an insurance  company or
other enterprise should recognize a liability for  guaranty-fund  assessments as
well as guidance for  measuring the  liability.  The adoption of SOP 97-3 is not
expected  to have a  material  effect on the  Company's  financial  position  or
results of operations.



                                      F-9
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging  Activities" which requires that companies recognize all
derivatives  as either  assets or  liabilities  in the balance sheet and measure
those  instruments at fair value. SFAS No. 133 provides,  if certain  conditions
are met, that a derivative may be specifically  designated as (1) a hedge of the
exposure to changes in the fair value of a  recognized  asset or liability or an
unrecognized firm commitment (fair value hedge),  (2) a hedge of the exposure to
variable  cash flows of a forecasted  transaction  (cash flow  hedge),  or (3) a
hedge  of  the  foreign  currency  exposure  of a net  investment  in a  foreign
operation, an unrecognized firm commitment, an available-for-sale  security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).

SFAS No. 133 does not apply to most traditional  insurance  contracts.  However,
certain  hybrid  contracts  that contain  features  which can affect  settlement
amounts  similarly to derivatives may require separate  accounting for the "host
contract"  and the  underlying  "embedded  derivative"  provisions.  The  latter
provisions would be accounted for as derivatives as specified by the statement.

Under SFAS No. 133,  the  accounting  for changes in fair value of a  derivative
depends on its intended use and designation. For a fair value hedge, the gain or
loss is  recognized  in  earnings  in the  period  of change  together  with the
offsetting loss or gain on the hedged item. For a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income and subsequently  reclassified into earnings when the
forecasted  transaction affects earnings. For a foreign currency hedge, the gain
or loss  is  reported  in  other  comprehensive  income  as part of the  foreign
currency translation  adjustment.  For all other items not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of change.
The Company is required to adopt this statement by the first quarter of 2000 and
is currently assessing the effect of the new standard.

In  October,  1998,  the AICPA  issued  Statement  of  Position  98-7,  "Deposit
Accounting:  Accounting  for Insurance  and  Reinsurance  Contracts  That Do Not
Transfer Insurance Risk," ("SOP 98-7").  This statement provides guidance on how
to  account  for  insurance  and  reinsurance  contracts  that  do not  transfer
insurance  risk. SOP 98-7 is effective for fiscal years beginning after June 15,
1999. The adoption of this  statement is not expected to have a material  effect
on the Company's financial position or results of operations.

Reclassifications

Certain amounts in the prior years have been  reclassified to conform to current
year presentations.


                                      F-10
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

3.   INVESTMENTS


Fixed Maturities

The following tables provide additional information relating to fixed maturities
as of December 31:

<TABLE>
<CAPTION>
                                                                           1998
                                                  -----------------------------------------------------
                                                                  Gross          Gross        Estimated
                                                 Amortized      Unrealized      Unrealized      Fair
                                                    Cost          Gains          Losses         Value
                                                  --------       --------       --------       --------
                                                                    (In Thousands)
<S>                                               <C>            <C>            <C>            <C>     
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies         $ 51,663       $    260       $    318       $ 51,605

Foreign government bonds                            34,744            887            236         35,395

Corporate Securities                               531,351          7,273          2,634        535,990
                                                  --------       --------       --------       --------

Total fixed maturities available for sale         $617,758       $  8,420       $  3,188       $622,990
                                                  ========       ========       ========       ========

<CAPTION>
                                                                           1997
                                                  -----------------------------------------------------
                                                                  Gross          Gross        Estimated
                                                 Amortized      Unrealized      Unrealized      Fair
                                                    Cost          Gains          Losses         Value
                                                  --------       --------       --------       --------
                                                                    (In Thousands)
<S>                                               <C>            <C>            <C>            <C>     
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies         $ 42,885       $    340       $      3       $ 43,222

Foreign government bonds                            38,332            551             --         38,883

Corporate securities                               503,892          6,545            181        510,256
                                                  --------       --------       --------       --------

Total fixed maturities available for sale         $585,109       $  7,436       $    184       $592,361
                                                  ========       ========       ========       ========
</TABLE>


                                      F-11
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

3.   INVESTMENTS (continued)


The amortized cost and estimated fair value of fixed maturities,  categorized by
contractual maturities at December 31, 1998, are shown below:


                                                          Available for Sale
                                                     ---------------------------
                                                     Amortized        Estimated
                                                       Cost           Fair Value
                                                     --------         ----------
                                                           (In Thousands)

Due in one year or less                              $ 13,645           $ 13,767

Due after one year through five years                 269,252            271,525


Due after five years through ten years                255,280            257,992


Due after ten years                                    79,581             79,706
                                                     --------           --------

Total                                                $617,758           $622,990
                                                     ========           ========

Actual maturities will differ from contractual  maturities  because,  in certain
circumstances, issuers have the right to call or prepay obligations.

Proceeds from the sale of fixed maturities available for sale during 1998, 1997,
and 1996 were $990.7 million,  $635.4 million and $854.8 million,  respectively.
Gross gains of $8.8 million,  $2.9 million, and $3.9 million and gross losses of
$1.8 million, $1.2 million, and $3.8 million were realized on those sales during
1998, 1997, and 1996, respectively. Proceeds from maturities of fixed maturities
available  for sale  during  1998,  1997,  and 1996 were  $10.4  million,  $10.0
million, and $47.0 million, respectively.

Writedowns  for  impairments of fixed  maturities  which were deemed to be other
than  temporary  were $.6 million for 1998.  There were no  impairments of fixed
maturities for the years 1997 and 1996.

The  following  table  describes  the  credit  quality  of  the  fixed  maturity
portfolio,  based on ratings  assigned by the National  Association of Insurance
Commissioners  ("NAIC") or Standard & Poor's Corporation,  an independent rating
agency as of December 31, 1998:

                                               Available for Sale
                                         -------------------------------
                                         Amortized            Estimated
                                           Cost               Fair Value
                                         ---------            ----------
       NAIC     Standard & Poor's                  (In Thousands)

         1      AAA to AA-               $ 303,209            $ 306,693

         2      BBB+ to BBB-               286,640              287,888

         3      BB+ to BB-                  27,134               27,692

         4      B+ to B-                       704                  638

         5      CCC or lower                    71                   79

         6      In or near default              --                   --
                                         ---------            ---------

                Total                    $ 617,758            $ 622,990
                                         =========            =========


                                      F-12
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------


3.   INVESTMENTS (continued)


The fixed maturity  portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 95% and 96% of the
portfolio at December 31, 1998 and 1997,  respectively,  based on fair value. As
of both of those dates,  no fixed  maturities in the portfolio were rated "6" by
the NAIC, defined as public and private placement securities which are currently
non-performing or believed subject to default in the near-term.

The Company  continually  reviews  fixed  maturities  and  identifies  potential
problem  assets  which  require  additional  monitoring.   The  Company  defines
"problem" fixed maturities as those for which principal and/or interest payments
are in default.  The Company  defines  "potential  problem" fixed  maturities as
assets which are believed to present  default risk  associated  with future debt
service obligations and therefore require more active management.  No problem or
potential problem fixed maturities were identified in 1998 or 1997.

Special Deposits

Fixed   maturities   of  $.5  million  at  both  December  31,  1998  and  1997,
respectively,  were on deposit  with  governmental  authorities  or  trustees as
required by certain insurance laws.


Investment Income and Investment Gains and Losses

Net  investment  income  arose from the  following  sources  for the years ended
December 31:

<TABLE>
<CAPTION>
                                              1998            1997            1996
                                            --------        --------        --------
                                                         (In Thousands)
<S>                                         <C>             <C>             <C>     
Fixed maturities - available for sale       $ 39,478        $ 37,563        $ 36,193
Policy loans                                   7,350           6,596           5,761
Short-term investments                         3,502           3,023           2,504
Other                                           (842)            333              28
                                            --------        --------        --------
Gross investment income                       49,488          47,515          44,486
Less investment expenses                      (2,456)         (1,191)           (702)
                                            --------        --------        --------
Net investment income                       $ 47,032        $ 46,324        $ 43,784
                                            ========        ========        ========
</TABLE>


Realized  investment  gains,  net,  including  charges for other than  temporary
reductions in value, for the years ended December 31, were as follows:

                                       1998            1997            1996
                                     --------        --------        --------
                                                  (In Thousands)

Realized investment gains            $ 17,957        $  2,898        $  5,232
Realized investment losses             (9,511)         (1,191)         (4,011)
                                     --------        --------        --------

Realized investment gains, net       $  8,446        $  1,707        $  1,221
                                     ========        ========        ========



                                      F-13
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

3.   INVESTMENTS (continued)

Net Unrealized Investment Gains

Net  unrealized  investment  gains on fixed  maturities  available  for sale are
included in the  Statements of Financial  Position as a component of accumulated
other  comprehensive  income.  Changes in these amounts  include  adjustments to
avoid  double-counting in comprehensive  income, items that are included as part
of net  income  for a period  that also  have  been part of other  comprehensive
income in earlier  periods.  The amounts for the years ended December 31, net of
tax, are as follows:

<TABLE>
<CAPTION>
                                                                                   1998           1997           1996
                                                                                  -------        -------        -------
                                                                                              (In Thousands)
<S>                                                                               <C>            <C>            <C>    
Net unrealized investment gains, beginning of year                                $ 2,956        $ 2,032        $ 6,588
Changes in net unrealized investment gains attributable to:
  Investments:
   Net unrealized investment gains on investments arising during the period         3,227          3,228         (6,403)
   Reclassification adjustment for gains included in net income                     4,539          1,109            860
                                                                                  -------        -------        -------
   Change in net unrealized investment gains , net of adjustments                  (1,312)         2,119         (7,263)
Impact of net unrealized investment gains on:
   Future policy benefits                                                              57            216           (776)
   Deferred policy acquisition costs                                                 (108)        (1,411)         3,483
                                                                                  -------        -------        -------
Change in net unrealized investment gains                                          (1,363)           924         (4,556)
                                                                                  -------        -------        -------
Net unrealized investment gains, end of year                                      $ 1,593        $ 2,956        $ 2,032
                                                                                  =======        =======        =======
</TABLE>

Unrealized gains (losses) on investments  arising during the periods reported in
the above table are net of income tax expense  (benefit) of $1.7  million,  $1.7
million and $(3.6)  million for the years ended  December  31, 1998,  1997,  and
1996, respectively.

Reclassification  adjustments  reported  in the above  table for the years ended
December  31,  1998,  1997,  and 1996 are net of income  tax  expense  of $(2.4)
million, $(.6) million and $(.5) million, respectively.

The future  policy  benefits  reported  in the above table are net of income tax
expense  (benefit) of $.03  million,  $0, and $(.4)  million for the years ended
December 31, 1998, 1997 and 1996, respectively.

Deferred  policy  acquisition  costs in the above  tables  for the  years  ended
December  31,  1998,  1997 and 1996 are net of income tax expense  (benefit)  of
$(.06) million, $(.8) million and $2.0 million, respectively.

4.   POLICYHOLDERS' LIABILITIES

Future policy benefits and other policyholder  liabilities at December 31 are as
follows:


                                                    1998                  1997
                                                   -------               -------
                                                           (In Thousands)

Life insurance                                     $85,523               $80,464
Annuities                                            5,007                 4,756
                                                   -------               -------
                                                   $90,530               $85,220
                                                   =======               =======

Life  insurance  liabilities  include  reserves for death and  endowment  policy
benefits. Annuity liabilities include reserves for immediate annuities.


                                      F-14
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

4.   POLICYHOLDERS' LIABILITIES (continued)

The  following  table  highlights  the key  assumptions  generally  utilized  in
calculating these reserves:

<TABLE>
<CAPTION>
        Product                   Mortality                Interest Rate              Estimation Method
----------------------     -----------------------     ----------------------    ---------------------------
<S>                        <C>                            <C>                    <C>
Life insurance             Generally rates                  2.5% to 7.5%         Net level premium based
                           guaranteed in                                         on non-forfeiture
                           calculating                                           interest rate
                           cash surrender values

Individual immediate       1983 Individual Annuity         6.25% to 8.75%        Present value of
annuities                  Mortality Table with                                  expected future payment
                           certain modifications                                 based on historical experience
</TABLE>

Policyholders' account balances at December 31, are as follows:

                                                        1998              1997
                                                      --------          --------
                                                            (In Thousands)

Individual annuities                                  $148,327          $145,120
Interest-sensitive life contracts                      265,521           257,481
                                                      --------          --------
                                                      $413,848          $402,601
                                                      ========          ========


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, mortality charges.

Certain contract provisions that determine the policyholder account balances are
as follows:

<TABLE>
<CAPTION>
           Product                          Interest Rate                 Withdrawal / Surrender Charges
           -------                          -------------                 ------------------------------
<S>                                          <C>                        <C>    
Interest sensitive life contracts            4.0% to 5.4%               Various up to 10 years

Individual annuities                         3.0% to 5.6%               0% to 8% for up to 8 years
</TABLE>


                                      F-15
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

5.   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  subsidiaries  as the primary  insurer,  except for cases  involving a
novation. Ceded balances would represent a liability to 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.

Reinsurance  amounts  included in the Statement of Operations for the year ended
December 31 are below.

                                             1998          1997           1996
                                           -------        -------        -------
                                                      (In Thousands)
Direct Premiums                            $ 1,373        $ 1,117        $ 1,345
  Reinsurance ceded-affiliated                 (28)           (12)            --
                                           -------        -------        -------
Premiums                                   $ 1,345        $ 1,105        $ 1,345
                                           =======        =======        =======
Policyholders' benefits ceded              $    15        $    14        $    13
                                           =======        =======        =======
Reinsurance recoverables, included in "Other assets" in the Company's Statements
of Financial Position,  at December 31 include amounts recoverable on unpaid and
paid losses and were as follows:

                                                           1998             1997
                                                           ----             ----
                                                               (In Thousands)

Life insurance - affiliated                                 $31              $30
                                                            ---              ---
                                                            $31              $30
                                                            ===              ===


                                      F-16
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

6.   INCOME TAXES

The components of income taxes for the years ended December 31, are as follows:

                                          1998           1997            1996
                                        --------       --------        --------
                                                   (In Thousands)
Current tax expense (benefit):
U.S.                                    $ 14,786       $ 12,880        $ 13,589
State and local                              523            399            (907)
                                        --------       --------        --------
Total                                     15,309         13,279          12,682
                                        --------       --------        --------

Deferred tax expense (benefit):
U.S.                                       2,198         (2,305)          2,848
State and local                               63             --              81
                                        --------       --------        --------
Total                                      2,261         (2,305)          2,929
                                        --------       --------        --------

Total income tax expense                $ 17,570       $ 10,974        $ 15,611
                                        ========       ========        ========


The Company's  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:

                                          1998            1997           1996
                                        --------        --------       --------
                                                     (In Thousands)

Expected federal income tax expense     $ 17,288        $ 10,569       $ 16,589
State and local income taxes                 381             259           (537)
Other                                        (99)            146           (441)
                                        --------        --------       --------
Total income tax expense                $ 17,570        $ 10,974       $ 15,611
                                        ========        ========       ========

Deferred  tax assets and  liabilities  at December 31,  resulted  from the items
listed in the following table:

                                                          1998            1997
                                                         -------         -------
                                                             (In Thousands)
Deferred income tax assets:
Insurance reserves                                       $10,016         $ 6,907
Other                                                         --              --
                                                         -------         -------
Deferred tax assets                                      $10,016         $ 6,907
                                                         -------         -------

Deferred income tax liabilities:
Deferred acquisition costs                                28,509          24,725
Net investment gains                                       2,847           4,284
Other                                                      2,375              86
                                                         -------         -------
Deferred tax liabilities                                  33,731          29,095
                                                         -------         -------

Net deferred federal tax liability                       $23,715         $22,188
                                                         =======         =======


                                      F-17
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

6.   INCOME TAXES (continued)

Management  believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its deferred tax
assets after valuation allowance. 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,  1998  and  1997,
respectively,  the Company had no federal or state operating loss  carryforwards
for tax purposes.

The Internal  Revenue Service (the "Service") has completed  examinations of the
consolidated  federal income tax returns  through 1989. The Service has examined
the years 1990 through  1992.  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 begun their  examination of the years 1993 through
1995.


                                      F-18
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

7.   EQUITY

Reconciliation of Statutory Surplus and Net Income

Accounting   practices  used  to  prepare  statutory  financial  statements  for
regulatory  purposes differ in certain  instances from GAAP. The following table
reconciles  the  Company's  statutory  net income and  surplus as of and for the
years ended  December 31,  determined in accordance  with  accounting  practices
prescribed  or permitted by the New Jersey  Department  of Banking and Insurance
with net income and equity determined using GAAP.

<TABLE>
<CAPTION>
                                                                1998            1997             1996
                                                              --------        --------        --------
                                                                             (In Thousands)
<S>                                                           <C>             <C>             <C>     
Statutory net income                                          $ 18,704        $ 18,306        $ 24,774

Adjustments to reconcile to net income on a GAAP basis:
Deferred acquisition costs                                      12,464          (3,170)          5,656
Deferred premium                                                   534             198             221
Insurance liabilities                                             (808)          2,324           4,784
Deferred taxes                                                  (2,261)          2,305          (2,929)
Valuation of investments                                         3,794            (143)           (765)
Other, net                                                        (604)           (597)             46
                                                              --------        --------        --------
GAAP net income                                               $ 31,823        $ 19,223        $ 31,787
                                                              ========        ========        ========
</TABLE>


<TABLE>
<CAPTION>
                                                             1998            1997
                                                          ---------        ---------
                                                                 (In Thousands)
<S>                                                       <C>              <C>      
Statutory surplus                                         $ 252,530        $ 235,958

Adjustments to reconcile to equity on a GAAP basis:
Valuation of investments                                     20,799           18,540
Deferred acquisition costs                                  113,923          101,625
Deferred premium                                             (1,473)          (2,007)
Insurance liabilities                                       (18,141)         (19,120)
Deferred taxes                                              (23,715)         (22,188)
Other, net                                                    1,930            2,585
                                                          ---------        ---------
GAAP stockholder's equity                                 $ 345,853        $ 315,393
                                                          =========        =========
</TABLE>


8.   FAIR VALUE OF FINANCIAL INSTRUMENTS


The estimated fair values  presented below have been determined  using available
information  and valuation  methodologies.  Considerable  judgment is applied in
interpreting  data to develop the  estimates  of fair value.  Accordingly,  such
estimates presented 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 fair values (for all other  financial
instruments  presented in the table, the carrying value  approximates  estimated
fair value).

Fixed maturities

Estimated fair values for fixed  maturities are based on quoted market prices or
estimates from independent pricing services.

Policy loans

Estimated fair value of policy loans is calculated  using a discounted cash flow
model based upon current U.S. Treasury rates and historical loan repayments.


                                      F-19
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

8.   FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)


Policyholders' account balances

Estimated fair values of  policyholders'  account  balances are derived by 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.

Derivative financial instruments

The fair value of futures is estimated  based on market quotes for  transactions
with similar  terms.  The following  table  discloses  the carrying  amounts and
estimated fair values of the Company's financial instruments at December 31, :

<TABLE>
<CAPTION>
                                                      1998                              1997
                                           ---------------------------       ---------------------------
                                           Carrying         Estimated         Carrying         Estimated
                                             Value          Fair Value         Value          Fair Value
                                           ----------       ----------       ----------       ----------
                                                                     (In Thousands)
<S>                                        <C>              <C>              <C>              <C>       
Financial Assets:
Fixed maturities available  for sale       $  622,990       $  622,990       $  592,361       $  592,361
Policy loans                                  139,443          146,504          127,306          126,262
Short-term investments                         53,761           53,761           52,464           52,464
Cash                                               45               45                3                3
Separate Accounts assets                    1,453,407        1,453,407        1,110,561        1,110,561

Financial Liabilities:
Policyholders'
    account balances                       $  413,848       $  414,602       $  402,601       $  401,267
Cash collateral for loaned
    securities                                 61,634           61,634           33,663           33,663
Separate Accounts liabilities               1,450,986        1,450,986        1,108,994        1,108,994
Derivatives                                        --               --               83               83
</TABLE>


9.   DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS

Futures

The Company uses  exchange-traded  Treasury  futures to reduce market risks from
changes in interest rates, to alter mismatches between the duration of assets in
a portfolio and the duration of  liabilities  supported by those assets,  and to
hedge  against  changes  in the  value  of  securities  it owns  or  anticipates
acquiring.  The  Company  enters into  exchange-traded  futures  with  regulated
futures  commissions  merchants who are members of a trading exchange.  The fair
value of futures is  estimated  based on market  quotes for a  transaction  with
similar terms.

Under exchange-traded futures, the Company agrees to purchase a specified number
of contracts with other parties and to post variation margin on a daily basis in
an amount equal to the difference in the daily market values of those contracts.
Futures are  typically  used to hedge  duration  mismatches  between  assets and
liabilities  by  replicating   Treasury   performance.   Treasury  futures  move
substantially  in value  as  interest  rates  change  and can be used to  either
generate  new 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.


                                      F-20
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

9.   DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)

For futures that 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 current  period  earnings.  The fair value of
futures contracts was immaterial at December 31, 1998 and 1997.

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  is  with
investment-grade counterparties.

10.  CONTINGENCIES

Several actions have been brought against the Company on behalf of those persons
who purchased life insurance  policies based on complaints about sales practices
engaged in by Prudential, the Company and agents appointed by Prudential and the
Company.  Prudential  has agreed to indemnify the Company for any and all losses
resulting from such litigation.

In the normal course of business,  the Company is subject to various  claims and
assessments.  Management believes the settlement of these matters would not have
a material  effect on the  financial  position or results of  operations  of the
Company.

11.  DIVIDENDS

The Company is subject to New Jersey law which requires any shareholder dividend
or  distribution  must be filed with the New Jersey  Commissioner  of Insurance.
Cash  dividends  may only be paid  out of  surplus  derived  from  realized  net
profits.

12.  RELATED PARTY TRANSACTIONS

Service Agreements

Prudential  and  Pruco  Life of New  Jersey  operate  under  service  and  lease
agreements  whereby  services  of  officers  and  employees,  supplies,  use  of
equipment  and office  space are provided by  Prudential.  The net cost of these
services allocated to the Company were $23.5 million,  $16.2 million,  and $12.2
million for the years ended  December 31, 1998,  1997,  and 1996,  respectively.
These  costs are treated in a manner  consistent  with the  Company's  policy on
deferred acquisition costs.

Prudential  and Pruco  Life of New  Jersey  have an  agreement  with  respect to
administrative  services for the Prudential  Series Fund. The Company invests in
the various portfolios of the Series Fund through the Separate  Accounts.  Under
this agreement,  Prudential pays compensation to Pruco Life of New Jersey in the
amount  equal to a portion  of the gross  investment  advisory  fees paid by the
Prudential  Series Fund.  The Company  received  from  Prudential  its allocable
shares of such  compensation  in the amount of $5.6 million,  $5.0 million,  and
$3.5  million  during  1998,  1997,  and 1996  respectively,  recorded in "Other
income."


                                      F-21
<PAGE>

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
--------------------------------------------------------------------------------

12.  RELATED PARTY TRANSACTIONS (continued)

Reinsurance

The Company currently has a reinsurance  agreement in place with Prudential (the
reinsurer).  The reinsurance  agreement is a yearly  renewable term agreement 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 years ended December 31, 1998, 1997, and 1996.

Debt Agreements

In July 1998, the Company  established a revolving line of credit  facility with
Prudential Funding Corporation,  a wholly-owned subsidiary of Prudential.  There
is no outstanding debt relating to this credit facility as of December 31, 1998.


                                      F-22