<PAGE>
 
                                               1995
--------------------------------------------------------------------------------
Prudential Acquisition                         Annual
Fund I, L.P.                                   Report

<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                           LETTER TO THE UNITHOLDERS
                      FOR THE YEAR ENDED DECEMBER 31, 1995
 


                                       1
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Partners of Prudential Acquisition Fund I, L.P.
New York, New York
 
We have audited the accompanying statements of financial condition of Prudential
Acquisition Fund, I, L.P. (a Delaware Limited Partnership) as of December 31,
1995 and 1994, and the related statements of operations, changes in partners'
capital and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the General
Partners. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
General Partners, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Prudential Acquisition Fund I, L.P. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
 
Deloitte & Touche LLP
 
March 26, 1996
 
                                       2
 <PAGE>
<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
                       STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                               December 31,
                                                                       -----------------------------
                                                                           1995             1994
<S>                                                                    <C>              <C>
----------------------------------------------------------------------------------------------------
ASSETS
Land                                                                   $ 4,008,121      $ 4,008,121
Buildings and improvements                                              31,122,239       30,859,999
Less: accumulated depreciation                                         (17,417,828 )    (16,214,016 )
Investment in joint venture, net                                         9,057,964       10,792,867
                                                                       ------------     ------------
Property                                                                26,770,496       29,446,971
Cash and cash equivalents                                                  750,153          646,346
Deferred rent                                                              391,978          499,599
Other assets                                                                48,236           16,875
                                                                       ------------     ------------
Total assets                                                           $27,960,863      $30,609,791
                                                                       ------------     ------------
                                                                       ------------     ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable and accrued expenses                                  $   513,226      $   415,871
Tenant security deposits                                                    18,724           16,192
                                                                       ------------     ------------
Total liabilities                                                          531,950          432,063
                                                                       ------------     ------------
Contingencies
Partners' capital
Limited partners (70,124 units issued and outstanding)                  27,428,913       30,177,728
General partners                                                                --               --
                                                                       ------------     ------------
Total partners' capital                                                 27,428,913       30,177,728
                                                                       ------------     ------------
Total liabilities and partners' capital                                $27,960,863      $30,609,791
                                                                       ------------     ------------
                                                                       ------------     ------------
----------------------------------------------------------------------------------------------------
                  The accompanying notes are an integral part of these statements
</TABLE>
 
                                       3

<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                          -------------------------------------------
                                                             1995            1994            1993
<S>                                                       <C>             <C>             <C>
-----------------------------------------------------------------------------------------------------
REVENUES
Rental income                                             $ 2,965,764     $ 3,048,468     $ 2,801,858
Recovery of expenses                                          843,567         944,412       1,026,098
Interest income                                                41,266          18,702           6,881
Joint venture equity income (loss)                           (654,903)        193,516      (7,764,418)
                                                          -----------     -----------     -----------
                                                            3,195,694       4,205,098      (3,929,581)
                                                          -----------     -----------     -----------
EXPENSES
Depreciation and amortization                               1,203,812       1,336,456       1,625,153
Property operating                                          1,283,302       1,294,770       1,380,059
Real estate taxes                                             519,140         524,807         630,672
General and administrative                                    532,600         256,455         240,033
Provision for loss on impairment of assets                         --         770,000              --
                                                          -----------     -----------     -----------
                                                            3,538,854       4,182,488       3,875,917
                                                          -----------     -----------     -----------
Net income (loss)                                         $  (343,160)    $    22,610     $(7,805,498)
                                                          -----------     -----------     -----------
                                                          -----------     -----------     -----------
ALLOCATION OF NET INCOME (LOSS)
Limited partners                                          $  (583,724)    $  (148,813)    $(7,941,836)
                                                          -----------     -----------     -----------
                                                          -----------     -----------     -----------
General partners                                          $   240,564     $   171,423     $   136,338
                                                          -----------     -----------     -----------
                                                          -----------     -----------     -----------
Net loss per limited partnership unit                     $     (8.32)    $     (2.12)    $   (113.25)
                                                          -----------     -----------     -----------
                                                          -----------     -----------     -----------
-----------------------------------------------------------------------------------------------------
</TABLE>
 
                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
                                                              LIMITED        GENERAL
                                                             PARTNERS       PARTNERS         TOTAL
<S>                                           <C>           <C>             <C>           <C>
-----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1992                        $41,038,218     $     --      $41,038,218
Net income (loss)                                            (7,941,836)     136,338       (7,805,498)
Distributions                                                (1,226,992)    (136,338 )     (1,363,330)
                                                            -----------     ---------     -----------
Partners' capital--December 31, 1993                         31,869,390           --       31,869,390
Net income (loss)                                              (148,813)     171,423           22,610
Distributions                                                (1,542,849)    (171,423 )     (1,714,272)
                                                            -----------     ---------     -----------
Partners' capital--December 31, 1994                         30,177,728           --       30,177,728
Net income (loss)                                              (583,724)     240,564         (343,160)
Distributions                                                (2,165,091)    (240,564 )     (2,405,655)
                                                            -----------     ---------     -----------
Partners' capital--December 31, 1995                        $27,428,913     $     --      $27,428,913
                                                            -----------     ---------     -----------
                                                            -----------     ---------     -----------
-----------------------------------------------------------------------------------------------------
                   The accompanying notes are an integral part of these statements
</TABLE>
 
                                       4
<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                          -------------------------------------------
                                                             1995            1994            1993
<S>                                                       <C>             <C>             <C>
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Rental income received                                    $ 3,066,379     $ 3,095,522     $ 2,513,760
Recovery of expenses received                                 848,260         963,285         994,157
Interest received                                              41,266          18,702           6,881
Tenant security deposits received (returned)                    2,532          (2,331)        (16,389)
Real estate taxes paid                                       (519,958)       (524,648)       (626,099)
Property operating expenses paid                           (1,384,557)     (1,165,577)     (1,452,020)
General and administrative expenses paid                     (362,220)       (265,529)       (225,027)
Distributions from joint venture income                            --         193,516              --
                                                          -----------     -----------     -----------
Net cash provided by operating activities                   1,691,702       2,312,940       1,195,263
                                                          -----------     -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized property expenditures                            (262,240)       (344,539)     (1,113,731)
Distributions from joint venture in excess of income        1,080,000         319,484         783,000
                                                          -----------     -----------     -----------
Net cash provided by (used in) investing activities           817,760         (25,055)       (330,731)
                                                          -----------     -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners                                  (2,405,655)     (1,714,272)     (1,363,330)
                                                          -----------     -----------     -----------
Net increase (decrease) in cash and cash equivalents          103,807         573,613        (498,798)
Cash and cash equivalents at beginning of year                646,346          72,733         571,531
                                                          -----------     -----------     -----------
Cash and cash equivalents at end of year                  $   750,153     $   646,346     $    72,733
                                                          -----------     -----------     -----------
                                                          -----------     -----------     -----------
-----------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income (loss)                                         $  (343,160)    $    22,610     $(7,805,498)
                                                          -----------     -----------     -----------
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
Provision for loss on impairment of assets                         --         770,000              --
Depreciation and amortization                               1,203,812       1,336,456       1,625,153
Distributions from joint venture income                            --         193,516              --
Joint venture equity (income) loss                            654,903        (193,516)      7,764,418
Changes in:
Deferred rent                                                 107,621          34,070        (299,856)
Other assets                                                  (31,361)         24,275         (20,183)
Accounts payable and accrued expenses                          97,355         127,860         (46,910)
Tenant security deposits                                        2,532          (2,331)        (21,861)
                                                          -----------     -----------     -----------
Total adjustments                                           2,034,862       2,290,330       9,000,761
                                                          -----------     -----------     -----------
Net cash provided by operating activities                 $ 1,691,702     $ 2,312,940     $ 1,195,263
                                                          -----------     -----------     -----------
                                                          -----------     -----------     -----------
-----------------------------------------------------------------------------------------------------
                   The accompanying notes are an integral part of these statements
</TABLE>
 
                                       5

<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
                         NOTES TO FINANCIAL STATEMENTS
 
A. General
 
   Prudential Acquisition Fund I, L.P. (the ``Partnership''), a Delaware limited
partnership, was formed on February 16, 1983 and will terminate on December 31,
2007 unless ended sooner under the provisions of the Amended and Restated
Partnership Agreement (the ``Partnership Agreement''). The Partnership was
formed to acquire and manage income-producing commercial real estate. The
general partners of the Partnership are Prudential Realty Partnerships, Inc.
(``PRP'') and Prudential-Bache Properties, Inc. (``PBP'') (collectively, the
``General Partners''). At December 31, 1995, the Partnership owns three
properties and has a 54% interest in a joint venture which owns two shopping
centers (the ``Joint Venture'').
 
   The two shopping centers owned by the Joint Venture were sold on March 26,
1996 for a gross sales price of $15,500,000 less costs to sell.
 
   In January 1996, the General Partners mailed to all limited partners a
Consent Solicitation Statement (the ``Statement'') asking for their written
consent to approve (i) a plan of sale of the remaining assets of the Partnership
and (ii) the complete liquidation and dissolution of the Partnership, as more
fully described in the Statement. On March 11, 1996, the limited partners
holding a majority of the Units approved the plan of sale and complete
liquidation and dissolution of the Partnership. Although no time schedule has
been adopted for this plan, the Partnership does expect to begin to actively
market all of its properties in 1996. It is not expected that the Partnership's
eventual total distributions, including sales proceeds, will equal the partners'
initial investments.
 
B. Summary of Significant Accounting Policies
 
Basis of accounting
 
   The books and records of the Partnership are maintained on the accrual basis
of accounting in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires the General Partners to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
   Revenue from tenant operating leases which provide for rental concessions and
scheduled rental increases is recognized on a straight-line basis over the terms
of the leases for the directly-owned properties.
 
Property
 
   Effective December 31, 1995, the Partnership adopted Statement of Financial
Accounting Standards (``SFAS'') No. 121, ``Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.'' Under SFAS No.
121, impairment of properties to be held and used is determined to exist when
estimated amounts recoverable through future operations on an undiscounted basis
are below the properties' carrying value. If a property is determined to be
impaired, it should be recorded at the lower of its carrying value or its
estimated fair value. For properties that are held for sale, SFAS No. 121 states
that they should be recorded at the lower of carrying amount or estimated fair
value less costs to sell and that depreciation should cease. As of December 31,
1995, the properties are accounted for as assets held for sale. The
implementation of SFAS No. 121 did not have a significant impact on the
Partnership's financial position as of December 31, 1995.
 
   The determination of estimated fair value is based, not only upon future cash
flows, which rely upon estimates and assumptions including expense growth,
occupancy and rental rates, but also upon market capitalization and discount
rates as well as other market indicators. The General Partners believe that the
estimates and assumptions used are appropriate in evaluating the carrying amount
of the Partnership's properties. However, changes in market conditions and
circumstances may occur in the near term which would cause these estimates and
assumptions to change, which, in turn, could cause the amounts ultimately
realized upon the sale or other disposition of the properties to differ
materially from their estimated fair value. Such changes may also require
write-downs in the future.
 
   Prior to December 31, 1995, the Partnership carried its property investments
at the lower of depreciated cost or estimated amounts recoverable through future
operations and ultimate disposition of the property. Property investments were
depreciated or amortized using the straight-line method over their estimated
                                       6
 <PAGE>
<PAGE>
economic lives which ranged from 5 to 35 years depending on property type. A
provision for loss on impairment of assets was recorded when estimated amounts
recoverable through future operations and ultimate disposition of the property
on an undiscounted basis were below depreciated cost. However, property
investments were reduced to estimated fair value when the property was
considered to be permanently impaired and the depreciated cost exceeded the
estimated fair value.
 
   Buildings and improvements include furniture and fixtures, tenant
improvements and capitalized leasing costs. Tenant improvements and capitalized
leasing costs were amortized over the lives of their respective leases.
Capitalized leasing costs, net of accumulated amortization, were $371,911 and
$404,520 as of December 31, 1995 and 1994, respectively.
 
Investment in Joint Venture
 
   The Partnership accounts for its investment in the Joint Venture using the
equity method. Costs incurred in the acquisition of the investment
(approximately $83,000) that were in excess of the Partnership's basis in the
Joint Venture are being amortized over an eighteen-year period and are included
in Joint Venture equity income (loss).
 
   The two shopping centers owned by the Joint Venture were sold on March 26,
1996 for a gross sales price of $15,500,000 less costs to sell.
 
Cash and cash equivalents
 
   Cash and cash equivalents include short-term investments with original
maturities of three months or less. They are carried at cost plus accrued
interest, which approximates market value.
 
Income taxes
 
   The Partnership is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from its operations are passed
directly to the individual partners. The Partnership may be subject to other
state and local taxes in jurisdictions in which it operates.
 
Profit and loss allocations and distributions
 
   Pursuant to Section 11 of the Amended Partnership Agreement (effective
January 1, 1987), the General Partners have the right to specially allocate
gross or net income, in certain circumstances, in an amount sufficient to
restore the deficit balances in their capital accounts. Allocations of income
(loss) are 90% to the limited partners and 10% to the General Partners for
financial and tax reporting purposes. To the extent that cash distributions to
the General Partners exceed the 10% allocation of income for tax reporting
purposes (creating an increase in their existing deficit capital balances), the
General Partners will receive a special allocation of additional income for the
difference.
 
   Distributions of cash are made in accordance with the Partnership Agreement
and are allocated 90% to the limited partners and 10% to the General Partners.
Proceeds from the sale of the properties and liquidation of the Partnership will
be distributed in accordance with the Partnership Agreement.
 
C. Property
 
   The Partnership's directly-owned properties are comprised of the following:
 
<TABLE>
<CAPTION>
                                                                      December 31,
                                                              ----------------------------
                                                                  1995            1994
          <S>                                                 <C>              <C>
          --------------------------------------------------------------------------------
          Norwest Center Office Building--
            Rochester, MN                                     $  5,793,788     $ 6,027,741
          Norwalk Industrial Warehouse--
            Norwalk, CA                                          5,967,467       6,222,487
          One Executive Center Office Building--
            Albuquerque, NM                                      5,951,277       6,403,876
                                                              ------------     -----------
                                                              $ 17,712,532     $18,654,104
                                                              ------------     -----------
                                                              ------------     -----------
</TABLE>
 
   In 1994, the properties' carrying value had been reduced to the lower of
depreciated cost or estimated fair value based on third party appraisals. As a
result, a provision for loss on impairment of assets of $770,000 was recorded
for the year ended December 31, 1994. No additional provisions were required in
1995.
 
   Revenues from the Norwest Center in Rochester, Minnesota, a multi-tenant
office building, represented approximately 45%, 46% and 52% of the Partnership's
income from directly-owned properties for the years
                                       7
 <PAGE>
<PAGE>
ended December 31, 1995, 1994 and 1993, respectively. One tenant at this
property, Norwest Bank, N.A., accounted for 26%, 28% and 21% of the revenues of
the Partnership for the years ended December 31, 1995, 1994 and 1993,
respectively. Although the Norwest Bank lease expires in 2012, it contains a
termination option which expires in October 1997.
 
   The Partnership's industrial warehouse facility located in Norwalk,
California was vacant from September 1992 through February 1993; however, a ten
year lease for the entire building was signed March 1, 1993 with Weber
Distribution. Revenues from this property represented approximately 18%, 18% and
13% of the Partnership's income from directly-owned properties for the years
ended December 31, 1995, 1994 and 1993, respectively.
 
   Revenues from One Executive Center, a five-story office building located in
Albuquerque, New Mexico represented approximately 37%, 36% and 35% of the
Registrant's income from directly-owned properties for the years ended December
31, 1995, 1994 and 1993, respectively.
 
D. Income Taxes
 
   The following is a reconciliation of net income (loss) reported for financial
reporting purposes with net income (loss) reported for tax reporting purposes.
 
<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                          -------------------------------------------
<S>                                                       <C>             <C>             <C>
                                                             1995            1994            1993
-----------------------------------------------------------------------------------------------------
Net income (loss) per financial statements                $  (343,160)    $    22,610     $(7,805,498)
                                                          -----------     -----------     -----------
Tax depreciation greater than financial statement
  depreciation                                               (451,170)       (330,406)       (206,387)
Joint Venture financial statement income less
  (greater) than income for tax purposes                      933,103         (64,845)      7,381,933
Bad debt expense (recovery)                                     2,262             485          (2,995)
Lease concessions                                             107,621          34,070        (299,856)
Provision for loss on impairment of assets                         --         770,000              --
                                                          -----------     -----------     -----------
Total adjustments                                             591,816         409,304       6,872,695
                                                          -----------     -----------     -----------
Tax basis net income (loss)                               $   248,656     $   431,914     $  (932,803)
                                                          -----------     -----------     -----------
                                                          -----------     -----------     -----------
</TABLE>
 
   The differences between the tax basis and book basis of partners' capital are
primarily attributable to the cumulative effect of the book-to-tax income (loss)
adjustments and the recording of distributions to partners.
 
E. Leases
 
   The Partnership has noncancellable operating leases at its two office
buildings and warehouse. Future minimum lease receipts at December 31, 1995 due
under these noncancellable leases are as follows:
 
<TABLE>
<S>                  <C>
   1996              $  3,084,648
   1997                 2,311,177
   1998                 1,884,384
   1999                 1,533,335
   2000                 1,335,868
   Thereafter           8,716,643
                     ------------
                     $ 18,866,055
                     ------------
                     ------------
</TABLE>
 
   In addition, certain of the leases require the tenants to reimburse the
Partnership for real estate taxes, insurance costs and other expenses.
 
                                       8
 <PAGE>
<PAGE>
 
F. Investment in Joint Venture
 
   The Partnership has a 54% interest in a Joint Venture with an affiliated
limited partnership. Presented below is summarized financial information for the
Joint Venture.
 
<TABLE>
<CAPTION>
                                                                       December 31,
                                                          ---------------------------------------
                                                                1995                  1994
    <S>                                                   <C>                   <C>
    ---------------------------------------------------------------------------------------------
    Assets
    Land                                                    $   3,835,457         $   4,422,957
    Buildings and improvements                                 27,899,102            29,615,596
    Less: accumulated depreciation                            (16,756,187)          (15,627,896)
                                                          -----------------     -----------------
    Property                                                   14,978,372            18,410,657
    Accounts receivable, net                                      688,279               407,437
    Cash and cash equivalents                                   1,427,420             2,054,578
                                                          -----------------     -----------------
    Total assets                                            $  17,094,071         $  20,872,672
                                                          -----------------     -----------------
                                                          -----------------     -----------------
    Liabilities and partners' capital
    Total liabilities                                       $     326,699         $     901,073
                                                          -----------------     -----------------
    Partners' capital
    Prudential Acquisition Fund I, L.P.                         9,009,238            10,739,520
    Prudential Realty Acquisition Fund II, L.P.                 7,758,134             9,232,079
                                                          -----------------     -----------------
    Total partners' capital                                    16,767,372            19,971,599
                                                          -----------------     -----------------
    Total liabilities and partners' capital                 $  17,094,071         $  20,872,672
                                                          -----------------     -----------------
                                                          -----------------     -----------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                    ---------------------------------------------
                                                       1995             1994             1993
    <S>                                             <C>             <C>              <C>
    ---------------------------------------------------------------------------------------------
    Revenues
    Rental income                                   $ 2,843,407     $  2,613,050     $  2,514,661
    Recovery of expenses                              1,091,276          937,386        1,070,228
    Interest income                                     102,664           62,641           48,230
                                                    -----------     ------------     ------------
                                                      4,037,347        3,613,077        3,633,119
                                                    -----------     ------------     ------------
    Expenses
    Depreciation and amortization                     1,128,291        1,675,411        1,646,412
    Property operating                                1,101,079        1,034,603        1,266,862
    Real estate taxes                                   518,388          427,759          924,126
    General and administrative                          143,816          108,385          115,717
    Provision for loss on impairment of assets        2,350,000               --       14,050,000
                                                    -----------     ------------     ------------
                                                      5,241,574        3,246,158       18,003,117
                                                    -----------     ------------     ------------
    Net income (loss)                               $(1,204,227)    $    366,919     $(14,369,998)
                                                    -----------     ------------     ------------
                                                    -----------     ------------     ------------
</TABLE>
 
   Investment in joint venture and joint venture equity income (loss) include
amortization of $4,620 annually of the Partnership's acquisition costs that were
in excess of the asset basis. Accumulated amortization was $32,338 at December
31, 1995.
 
   Effective December 31, 1995, the Joint Venture adopted Statement of Financial
Accounting Standards (``SFAS'') No. 121, ``Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.'' Under SFAS No.
121, impairment of properties to be held and used is determined to exist when
estimated amounts recoverable through future operations on an undiscounted basis
are below the properties' carrying value. If a property is determined to be
impaired, it should be recorded at the lower of its carrying value or its
estimated fair value. For properties that are held for sale, SFAS No. 121 states
that they should be recorded at the lower of carrying amount or estimated fair
value less cost to sell and depreciation should cease.
 
                                       9
 <PAGE>
<PAGE>
 
   The carrying value of the Joint Venture's properties were reduced by $850,000
during the second quarter of 1995 to reflect an impairment in value resulting
from lease defaults and market indications. In the fourth quarter of 1995, the
Joint Venture recorded a provision for loss on impairment of assets of
$1,500,000 to reflect the estimated net proceeds received from the sale of the
two shopping centers on March 26, 1996.
 
   The Joint Venture's properties were considered to be impaired in 1993 because
declines in net operating income had continued for an extended period of time
and the trend was not expected to change in the foreseeable future. Based on low
rental rates, which continued to decline in comparison to the average rental
rates charged by the competition, significant tenant concessions and oversupply
of retail space in the Joint Venture's submarket, a write-down of $17,150,000
was recorded at December 31, 1993 to reduce the Joint Venture's properties to
estimated fair value based on third party appraisals.
 
G. Related Parties
 
   The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management, registrar, transfer and assignment functions, asset management,
investor communications, printing and other administrative services. The amount
of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. The costs and expenses incurred on behalf of the
Partnership which are reimbursable to the General Partners and their affiliates
are:
 
<TABLE>
<CAPTION>
                                           Year ended December 31,
                                      ----------------------------------
                                        1995         1994         1993
<S>                                   <C>          <C>          <C>
------------------------------------------------------------------------
Prudential Realty Partnership, Inc.
  and affiliates                      $ 87,200     $ 41,500     $ 38,900
Prudential-Bache Properties, Inc.
  and affiliates                       118,400       89,400       92,300
                                      --------     --------     --------
                                      $205,600     $130,900     $131,200
                                      --------     --------     --------
                                      --------     --------     --------
</TABLE>
 
   Expenses payable to the General Partners and their affiliates (which are
included in accrued expenses) as of December 31, 1995 and 1994 are $74,000 and
$41,100, respectively.
 
   In addition, the General Partners and their affiliates perform similar
services for the Joint Venture. The Partnership's allocable share of the costs
and expenses incurred on behalf of the Joint Venture which are reimbursable to
the General Partners and their affiliates were $38,400, $30,900 and $34,400 for
the years ended December 31, 1995, 1994, and 1993, respectively.
 
   Prudential Securities Incorporated (``PSI''), an affiliate of the General
Partners, owns 175 limited partnership units at December 31, 1995.
 
H. Contingencies
 
   On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants. Plaintiffs alleged violation of the federal Racketeer
Influenced and Corrupt Organizations Act (``RICO'') statutes, breach of
fiduciary duty, fraud and deceit, negligence, and demanded an accounting.
Plaintiffs sought unspecified compensatory, punitive and treble damages, and
rescission, including costs and attorneys' fees, but the only relief sought
against the Partnership was an accounting. The Prudential defendants filed a
motion to dismiss on December 22, 1993.
 
   By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, was transferred to a single judge of the United States District
Court for the Southern District of New York and consolidated for pretrial
proceedings under the caption In re Prudential Securities Incorporated Limited
Partnerships Litigation (MDL Docket 1005). On June 8, 1994, plaintiffs in the
transferred cases filed a complaint that consolidated the previously filed
complaints and named as defendants, among others, PSI, certain of its present
and former employees, PRP
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and PBP. The Partnership was not named as a defendant in the consolidated
complaint, but the name of the Partnership was listed as being among the limited
partnerships at issue in the case.
 
   On August 9, 1995 PRP, PBP, PSI and other Prudential defendants entered into
a Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including the Partnership, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI.
 
I. Subsequent Events
 
   In February 1996, a distribution of $623,000 was paid to the partners for the
quarter ended December 31, 1995. Limited partners received a total of $561,000,
which represents $8.00 per unit, and the General Partners received the
remainder.
 
   The two shopping centers owned by the Joint Venture were sold on March 26,
1996 for a gross sales price of $15,500,000 less costs to sell.
 
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                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
Liquidity and Capital Resources
 
   The Partnership has a real estate investment portfolio consisting of two
office buildings, a warehouse and has an equity interest in a joint venture (the
``Joint Venture'') which owned two shopping centers. The two shopping centers
owned by the Joint Venture were sold on March 26, 1996 for a gross sales price
of $15,500,000 less costs to sell. The sale of the property is expected to
result in a significant distribution during the second quarter of 1996.
 
   In January 1996, the General Partners mailed to all limited partners a
Consent Solicitation Statement (the ``Statement'') asking for their written
consent to approve (i) a plan of sale of the remaining assets of the Partnership
and (ii) the complete liquidation and dissolution of the Partnership, as more
fully described in the Statement. As of March 11, 1996, the majority of the
limited partners approved the plan of sale and complete liquidation and
dissolution of the Partnership. There is no specific time schedule for the sale
of the remaining properties or for the liquidation of the Partnership. However,
the Partnership expects to begin to actively market all of its remaining
properties in 1996. It is not expected that the Partnership's eventual total
distributions, including sales proceeds, will equal the partners' initial
investments.
 
   During the year ended December 31, 1995, the Partnership's cash and cash
equivalents increased $104,000 primarily as a result of increased distributions
from the Joint Venture as compared to the prior year. The Joint Venture, in
which the Partnership has a 54% interest, has cash and cash equivalents of
$1,427,000 at December 31, 1995 as compared to $2,055,000 at December 31, 1994.
This amount is anticipated to be sufficient to pay outstanding liabilities, fund
capital expenditures (including leasing commissions and tenant improvements) and
provide additional cash distributions to the Partnership. Cash distributions to
the Partnership from the Joint Venture totalled $1,080,000 and $513,000 for the
years ended December 31, 1995 and 1994, respectively. The level of distributions
of cash from the Joint Venture is impacted by the operating results of its
properties as well as the levels of cash reserves it maintains. The Joint
Venture expended $46,000 for capital improvements during 1995.
 
   In connection with the capital improvements which are discussed in further
detail below, the amount of actual expenditures and their timing will depend on
the success of leasing efforts, the nature and timing of new leases and lease
renewals, ongoing evaluation of the need for the planned improvements and
optimal timing of their implementation as well as the timing of the sale of the
properties.
 
Cash Distributions
 
   Cash distributions paid to the limited partners and General Partners totalled
$2,406,000 and $1,714,000 for the years ended December 31, 1995, and 1994,
respectively, of which the limited partners received $2,165,000 and $1,543,000
($30.88 and $22.00 per unit), respectively, and the General Partners received
the remainder. These amounts represent payments from current and prior
undistributed cash flow from operations of the directly-owned and Joint Venture
properties discussed below in Results of Operations.
 
   In February 1996, cash distributions of $623,000 were paid to the limited
partners and General Partners. Limited partners received $561,000 ($8.00 per
unit) and the General Partners received the remainder.
 
   The amount of cash generated by the Partnership from operations of the
directly-owned properties, the amount expended for capital improvements, and the
amount of reserves set aside for anticipated capital improvements as well as the
timing of the sale of the Partnership's properties could affect the
Partnership's ability to make future distributions to the partners and the
amount of the distributions that may be made.
 
Capital Improvements--Directly-Owned Properties
 
   For the year ended December 31, 1995, the Partnership expended $262,000 on
capital improvements ($208,000 at One Executive Center and $54,000 at Norwest
Center) for tenant improvements, leasing commissions and building improvements
necessary to maintain the properties. For the year ended December 31, 1994 the
Partnership expended $345,000 on capital improvements. Projected capital
expenditures for the directly-owned properties for 1996 are estimated at
$89,000. This includes $54,000 in anticipated tenant improvements and leasing
commissions and $35,000 for improvements necessary to maintain the
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properties. These capital improvements will be funded from either undistributed
cash balances or cash derived from future operations.
 
Capital Improvements--Joint Venture
 
   During 1995, the Joint Venture, in which the Partnership has a 54% interest,
expended $46,000 for capital improvements of which $16,000 represented building
and land improvements and $30,000 represented leasing commissions. Projected
capital expenditures for the Joint Venture for 1996 are estimated at $40,000 for
anticipated tenant improvements and leasing commissions.
 
Results of Operations
 
   The Partnership recorded a net loss of $343,000 for the year ended December
31, 1995. For the years ended December 31, 1994 and 1993, the Partnership
recorded net income of $23,000 and a net loss of $7,805,000, respectively. As
discussed in further detail below, the fluctuations in these amounts were
primarily the result of the timing and magnitude of the provisions for loss on
impairment of assets recorded for the Partnership and Joint Venture properties.
The Partnership's pro rata share of provisions for loss on impairment of assets
recorded for the Joint Venture properties was $1,269,000 and $7,587,000 in 1995
and 1993, respectively. A $770,000 provision for loss on impairment of assets
was recorded in 1994 relating to the directly-owned properties. Fluctuations
between periods in other operating results are discussed below.
 
Directly-Owned Properties
 
   As of December 31, 1995 and 1994, the Norwalk Industrial property in Norwalk,
California was 100% leased. Rental income for 1995 decreased $59,000 as compared
to 1994 primarily as a result of an adjustment in the first quarter of 1994 to
properly reflect the impact of additional free rent concessions given to its
sole tenant. Rental income for 1994 increased $227,000 as compared to 1993 due
to the signing on March 1, 1993 of a ten-year lease for the entire building to a
single tenant, Weber Distribution. Rent receipts began in September 1993 after a
six month free rent period. Operating expenses for 1995 were comparable to 1994.
Operating expenses for 1994 decreased $53,000 as compared to 1993. The vacancy
at the Norwalk property caused property expenses such as utilities and repairs
and maintenance, usually charged to the tenant, to be charged to the Partnership
for the first nine months of 1993.
 
   The Norwest Center property in Rochester, Minnesota was 92% and 92% leased
(88% and 87% occupied) as of December 31, 1995 and 1994, respectively. During
the next twelve months, three leases representing 14% of the leased space are
scheduled to expire. One major tenant at the property, Norwest Bank, has a lease
expiring in 2012 with a termination option which expires in October 1997. Rental
income for 1995 was comparable to 1994 while operating expenses decreased
$40,000 as compared to 1994 due to lower cleaning, utility and professional
fees. Rental income for 1994 decreased $72,000 as compared to 1993 due primarily
to lower occupancy rates while operating expenses increased $26,000 due to an
increase in repairs and maintenance and cleaning expenses.
 
   The One Executive Center office property in Albuquerque, New Mexico was 99%
and 100% leased as of December 31, 1995 and 1994, respectively. During the next
twelve months, four leases representing 9% of the rentable space are scheduled
to expire. Discussions are underway with existing tenants regarding the renewal
of the affected leases. Rental income for the year ended December 31, 1995
decreased $21,000 as compared to 1994 due to the decrease in occupancy.
Operating expenses in 1995 were comparable to 1994. Rental income for the year
ended December 31, 1994 increased $94,000 as compared to 1993 due to increased
rental rates, and operating expenses decreased $16,000 due to lower repairs and
maintenance expenses.
 
   Depreciation and amortization for the years ended December 31, 1995 and 1994
decreased $133,000 and $289,000, respectively, as compared to 1994 and 1993 as
several tenant improvements at One Executive Center became fully depreciated
during 1994. In addition, there was a lower depreciable basis at One Executive
Center in 1995 as a result of an impairment provision recorded in the fourth
quarter of 1994.
 
   Real estate taxes for the year ended December 31, 1995 were comparable to
1994. Real estate taxes for the year ended December 31, 1994 decreased $106,000
as compared to 1993 due to the effect of a successful appeal of the assessed
property value at the Norwalk and Norwest Properties which resulted in tax
refunds in the fourth quarter of 1994.
 
   General and administrative expenses increased $276,000 for the year ended
December 31, 1995 as compared to 1994 mainly due to costs relating to the
preparation and review of the Consent Solicitation
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Statement and increased costs to administer the Partnership. General and
administrative expenses for the year ended December 31, 1994 increased $16,000
as compared to 1993 due to the timing of certain expense accruals recorded in
the respective years.
 
Joint Venture Properties
 
   As of December 31, 1995, Pine Island and Ridge Plaza were 94% and 81% leased
(88% and 71% occupied), respectively, as compared to 93% and 90% leased (93% and
80% occupied) as of December 31, 1994. Over the next twelve months, five leases
representing 7% of the rentable space are scheduled to expire at Pine Island. In
the third quarter of 1994, a new tenant who had signed a ten-year lease notified
the Joint Venture it would not occupy its space (approximately 10% of the leased
space of Ridge Plaza). The tenant is not making payments as required by its
lease. Negotiations continue with the tenant relating to a buy-out of the lease.
Occupancy further dropped at Ridge Plaza by 10% in April 1995 when a tenant was
evicted due to the non-compliance of an operating covenant. There are no
significant leases scheduled to expire in the next twelve months at Ridge Plaza.
A drug store which occupies 5% of the total space in Pine Island was acquired by
another chain in June 1995. The new owner closed the store during the third
quarter; however, it is required under its lease obligations to continue making
payments until expiration of the lease in 2003.
 
   Rental income for the year ended December 31, 1995 increased $230,000
compared to 1994 due to increased occupancy at Pine Island and the expiration of
free rent periods for several tenants during 1994 at Ridge Plaza. Rental income
for the year ended December 31, 1994 increased $98,000 as compared to 1993
mainly due to the increased average rental and occupancy rates at Pine Island.
 
   Property operating expenses for the year ended December 31, 1995 increased
$66,000 as compared to 1994 primarily due to an increase in provisions for
doubtful accounts. Property operating expenses for the year ended December 31,
1994 decreased $232,000 as compared to 1993 primarily due to provisions for
doubtful accounts recorded in 1993.
 
   Real estate taxes for the year ended December 31, 1995 increased $91,000 as
compared to 1994 and decreased $496,000 for the year ended December 31, 1994 as
compared to 1993 due to refunds received for prior periods at both Pine Island
and Ridge Plaza in the fourth quarter of 1994 as a result of a lower assessment
on the properties.
 
   Depreciation and amortization expense for the year ended December 31, 1995
decreased $547,000 as compared to 1994 because a vacated outparcel and related
tenant improvements at Ridge Plaza were demolished to provide additional parking
at the Joint Venture's properties in 1994. Additionally, in the third quarter of
1994, a tenant with a new ten-year lease notified the Joint Venture it would not
occupy its space. Negotiations are ongoing with the tenant relating to a buy-out
of the lease. As a result, depreciation and amortization expense in 1994
includes the write-off of related tenant improvements and leasing commissions of
$108,000. Furthermore, a tenant vacated its space at Pine Island in the third
quarter of 1994, resulting in a write-off of tenant improvements of $154,000.
Depreciation and amortization expense for the year ended December 31, 1994
increased $29,000 as compared to 1993 primarily due to the reasons mentioned
above, offset by the effect of a lower depreciable basis resulting from the
write-down of the Joint Venture properties in 1993.
 
   General and administrative expenses for the year ended December 31, 1995
increased $35,000 as compared to 1994 primarily due to costs relating to the
preparation and review of the Consent Solicitation Statement and increased costs
to administer the Joint Venture.
 
   The carrying value of the Joint Venture's properties were reduced by $850,000
during the second quarter of 1995 to reflect an impairment in value resulting
from lease defaults and market indications. In the fourth quarter of 1995, the
Joint Venture recorded a provision for loss on impairment of assets of
$1,500,000 to reflect the estimated net proceeds received from the sale of the
two shopping centers on March 26, 1996.
 
   The Joint Venture's properties were considered to be impaired in 1993 because
declines in net operating income had continued for an extended period of time
and the trend was not expected to change in the foreseeable future. Based on low
rental rates, which continued to decline in comparison to the average rental
rates charged by the competition, significant tenant concessions and oversupply
of retail space in the Joint Venture's submarket, the General Partners
considered this impairment to be permanent. As a result, the depreciated cost
basis of the properties was reduced to estimated fair value based on third party
appraisals through a write-down of $17,150,000 in 1993.
 
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                               OTHER INFORMATION
 
   The Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:
 
       Prudential Acquisition Fund I, L.P.
        c/o Prudential-Bache Properties, Inc.
        Client Services Department
        P.O. Box 2016
        New York, New York 10272-2016
 
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Peck Slip Station
                                   BULK RATE
P.O. Box 2016
                                  U.S. POSTAGE
New York, NY 10272-2016
                                      PAID
                                 Automatic Mail
 
PAF/17003