PRUDENTIAL DISTRESSED SECURITIES FUND INC, 485APOS, 1999-02-02

PRUDENTIAL DISTRESSED SECURITIES FUND INC
485APOS, 1999-02-02

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As filed with the Securities and Exchange Commission on February 2, 1999

Securities Act Registration No. 333-00203
Investment Company Act Registration No. 811-07491
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]

PRE-EFFECTIVE AMENDMENT NO. [_]

POST-EFFECTIVE AMENDMENT NO. 5 [X]

AND/OR

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 [_]

AMENDMENT NO. 6 [X]

(Check appropriate box or boxes)

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC.

(Exact name of registrant as specified in charter)

GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077

(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973)367-7525

MARGUERITE E.H. MORRISON, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):

[_] immediately upon filing pursuant to paragraph (b)

[_] on (date) pursuant to paragraph (b)

[X] 60 days after filing pursuant to paragraph (a)(1)

[_] on (date) pursuant to paragraph (a)(1)

[_] 75 days after filing pursuant to paragraph (a)(2)

[_] on (date) pursuant to paragraph (a)(2) of Rule
485.

If appropriate, check the following box:

[_] this post-effective amendment designates a new
effective date for a previously filed post-
effective amendment.

Title of Securities Being Registered. . . . Shares of common stock, $.001
par value per share.
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<PAGE>

FUND TYPE:
_________________________________
Stock and Bond

INVESTMENT OBJECTIVE:
_________________________________
Capital appreciation

Prudential Distressed
Securities Fund, Inc.

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PROSPECTUS: FEBRUARY 4, 1999

As with all mutual funds, the
Securities and Exchange
Commission has not approved
the Fund's shares, nor has the
SEC determined that this
prospectus is complete or
accurate. It is a criminal
offense to state otherwise.

[LOGO OF PRUDENTIAL INVESTMENTS APPEARS HERE]
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Table of Contents
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<TABLE>
<S> <C>
1 Risk/Return Summary

1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses

6 How the Fund Invests

6 Investment Objective and Policies
7 Other Investments
9 Derivative Strategies
10 Additional Strategies
11 Investment Risks

15 How the Fund is Managed

15 Manager
15 Investment Adviser
15 Portfolio Managers
15 Distributor
16 Year 2000 Readiness Disclosure

17 Fund Distributions and Tax Issues

17 Distributions
18 Tax Issues
19 If You Sell or Exchange Your Shares

21 How to Buy, Sell and Exchange Shares of the Fund

21 How to Buy Shares
28 How to Sell Your Shares
32 How to Exchange Your Shares

34 Financial Highlights

34 Class A Shares
35 Class B Shares
36 Class C Shares

37 The Prudential Mutual Fund Family

For More Information (Back Cover)
</TABLE>

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

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Risk/Return Summary
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This section highlights key information about the PRUDENTIAL DISTRESSED
SECURITIES FUND, INC., which we refer to as "the Fund." Additional information
follows this summary.

INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

Our investment objective is CAPITAL APPRECIATION. This means we seek
investments that will increase in value. We normally invest at least 65% of the
Fund's total assets in the debt and equity securities of financially troubled
companies and in equity securities of operationally troubled companies. We
consider selling a security if it has increased in value to the point where we
no longer consider it to be undervalued. We also may use short sales, where we
sell a security we don't own when we expect it will decline in value. We can
buy foreign securities, trade claims and loan participations and assignments.
We also may use derivatives. While we make every effort to achieve our
objective, we can't guarantee success.

PRINCIPAL RISKS

Although we try to invest wisely, all investments involve risk. Our investment
in the securities of financially and operationally troubled companies may
result in large losses and/or share price volatility. Since the Fund invests in
equities and debt, there is the risk that the price of a particular security we
own could go down. In addition, the value of the equity markets or a sector of
them could go down. Stock markets are volatile.

The Fund invests in debt obligations which have credit, market and interest
rate risks. Credit risk is the possibility that an issuer of debt obligations
fails to pay the Fund interest or principal. Market risk, which may affect an
industry, a sector or the entire market, is the possibility that the market
value of an investment may move up or down and that its movement may occur
quickly or unpredictably. Interest rate risk refers to the fact that the value
of most bonds will fall when interest rates rise. The longer the maturity and
the lower the credit quality of a bond, the more

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WE INVEST IN . . .
Financially troubled companies are in weak financial condition or bankrupt.
Operationally troubled companies may have poor operating results and are
undervalued or out of favor in comparison to their long-term potential for
growth and income.

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1
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Risk/Return Summary
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likely its value will decline. The Fund may invest more than 35% of its net
assets in high yield debt securities--also known as "junk" bonds--which have a
higher risk of default and tend to be less liquid. In addition, the Fund may
actively and frequently trade its portfolio securities.
The Fund may be subject to litigation risk or be unable to dispose of an
investment because it may get involved in bankruptcy proceedings,
reorganizations and financial restructurings.
Since the Fund invests in foreign securities, there are additional risks.
Foreign markets are often more volatile than U.S. markets. Changes in currency
exchange rates can reduce or increase market performance.

Some of our investment strategies--such as using derivatives, leverage and
short sales--also involve risk. The Fund may use risk management techniques to
try to preserve assets or enhance return. These strategies may present above
average risks. Derivatives may not fully offset the underlying positions and
this could result in losses to the Fund that would not otherwise have occurred.

Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

2
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Risk/Return Summary
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EVALUATING PERFORMANCE

A number of factors--including risk--can affect how the Fund performs. The
following bar chart and table show the Fund's performance since it began. They
demonstrate the risks of investing in the Fund and how returns can change from
year to year. Past performance does not mean that the Fund will achieve similar
results in the future.

ANNUAL RETURNS/1/ (CLASS A SHARES)
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1996

1997 33.18%

1998 -15.39%

BEST QUARTER: 14.40% (3rd quarter of 1997) WORST QUARTER: -19.79% (3rd quarter
of 1998)

1 These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown. Without the
management fee waiver or expense reimbursement, the annual returns would have
been lower, too.

AVERAGE ANNUAL RETURNS/1/ (AS OF 12-31-98)
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<TABLE>
<CAPTION>
1 YR SINCE INCEPTION
<S> <C> <C>
Class A shares (19.62)% .54% (since 3-26-96)
Class B shares (21.11)% .58% (since 3-26-96)
Class C shares (17.94)% 1.28% (since 3-26-96)
Lehman High Yield Bond/2/ 1.60 % 8.56% (since 3-26-96)
S&P 500/3/ 28.60 % 28.69% (since 3-26-96)
Lipper Average/4/ 19.99 % 15.07% (since 3-26-96)
</TABLE>

1 The Fund's returns are after deduction of sales charges and expenses. Without
the management fee waiver or expense reimbursement, the average annual
returns would have been lower.

2 The Lehman Brothers High Yield Bond Index is a weighted index of corporate
securities with one or more years to maturity that are publicly issued, rated
below investment grade and have $50 million or more outstanding. These
returns do not include the effect of any sales charges. These returns would
be lower if they included the effect of sales charges. Source: Lipper Inc.

3 The Standard & Poor's 500 Stock Index (S&P 500)--an unmanaged index of 500
stocks of large U.S. companies--gives a broad look at how stock prices have
performed. These returns do not include the effect of any sales charges.
These returns would be lower if they included the effect of sales charges.
Source: Lipper Inc.

4 The Lipper Average is based on the average return of all mutual funds in the
Lipper Capital Appreciation Fund category and does not include the effect of
any sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper Inc.

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3
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Risk/Return Summary
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FEES AND EXPENSES

This table shows the sales charges, fees and expenses for each share class of
the Fund being offered--Class A, B and C. This table describes the fees and
expenses that you may pay if you buy and hold shares of the Fund. Each share
class has different sales charges--known as loads--and expenses, but represents
an investment in the same fund. Class Z shares are not currently being offered.
For more information about which share class may be right for you, see "How to
Buy, Sell and Exchange Shares of the Fund."

SHAREHOLDER FEES/1/ (PAID DIRECTLY FROM YOUR INVESTMENT)
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum sales charge (load) imposed on 5% None 1%
purchases (as a percentage of offering
price)
Maximum deferred sales charge (load) None 5%/2/ 1%/3/
(as a percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed on None None None
reinvested dividends and other
distributions
Redemption fees None None None
Exchange fee None None None

ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
- -----------------------------------------------------------------------------
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Management fees .75% .75% .75%
+ Distribution and service (12b-1) fees .30%/4/ 1.00% 1.00%
+ Other expenses 2.94% 2.94% 2.94%
= Total annual Fund operating expenses 3.99% 4.69% 4.69%
- Fee waiver or expense reimbursement 2.69% 2.69% 2.69%
= NET EXPENSES 1.30%/5/ 2.00%/5/ 2.00%/5/
</TABLE>

1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.

2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
4 The Distributor of the Fund has voluntarily reduced its distribution and
service fees for Class A shares to .25 of 1% of the average daily net assets
of the Class A shares. This voluntary reduction may be terminated at any time
without notice.

5 For the fiscal year ending November 30, 1999, PIFM has agreed to subsidize
the Fund's operating expenses so that total Fund operating expenses do not
exceed 1.30%, 2.00% and 2.00% of the average net assets for Class A, Class B
and Class C shares, respectively.

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
[GRAPHIC]

4
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Risk/Return Summary
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EXAMPLE

This example will help you compare the fees and expenses of the Fund's
different share classes and compare the cost of investing in the Fund with the
cost of investing in other mutual funds.

The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. The example does not take into
consideration the Manager's agreement to subsidize expenses beyond the first
year. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:

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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $621 $1,406 $2,208 $4,287
Class B shares $703 $1,472 $2,247 $4,389
Class C shares $401 $1,260 $2,226 $4,666
</TABLE>

You would pay the following expenses on the same investment if you did not sell
your shares:

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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $621 $1,406 $2,208 $4,287
Class B shares $203 $1,172 $2,147 $4,389
Class C shares $301 $1,260 $2,226 $4,666
</TABLE>

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5
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How the Fund Invests
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is CAPITAL APPRECIATION. This means we seek
investments that will increase in value. While we make every effort to achieve
our objective, we can't guarantee success.

In pursuing our objective, we normally invest at least 65% of our total
assets in the DEBT and EQUITY SECURITIES of financially troubled companies and
in equity securities of operationally troubled companies. This means that we
focus on companies that we think will react positively to changing economic
conditions or where we think managements will act to overcome adversity, such
as restructuring business operations.

We buy debt and equity securities of companies of every size--small, medium
and large capitalization. The Fund invests in a wide variety of debt and equity
securities. The Fund may invest in equity-related securities, including
convertible securities, convertible and non- convertible preferred stock,
warrants and rights that can be exercised to obtain stock, investments in
various types of business ventures, including partnerships and joint ventures,
and securities--like American Depositary Receipts (ADRs). ADRs are certificates
representing the right to receive foreign securities that have been deposited
with a U.S. bank (or a foreign branch of a U.S. bank).

The Fund will invest in debt obligations. Issuers use bonds and other debt
obligations to borrow money from investors. The issuer pays a fixed or variable
rate of interest to the investor and must repay the amount borrowed at
maturity. Troubled investments may not pay interest or even principal at
maturity. We can invest in corporate, non-corporate or municipal obligations
and also in convertible securities, zero coupon bonds, pay in kind securities
and deferred payment securities. We can also invest in defaulted securities
(obligations rated D by S&P or C by Moody's) and low quality securities which
are speculative, including high-yield or junk bonds (obligations rated below
BBB by S&P or Baa by Moody's). We may

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WE USE A CONTRARIAN APPROACH
To achieve our investment strategy, we generally take a strong contrarian
approach to investing. In other words, we usually buy securities that are out
of favor and that many other investors are selling, and we attempt to invest in
companies and industries before other investors recognize their true value.
Using these guidelines, we focus on long-term performance, not short-term gain.

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

6
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How the Fund Invests
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also invest in obligations that are not rated, but that we believe are of
comparable quality to these obligations. Generally, we consider selling a
security when it has increased in value to the point where it is no longer
undervalued in the opinion of the investment adviser.

For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover
page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.

OTHER INVESTMENTS

We may also make the following investments to try to increase the Fund's
returns or protect its assets if market conditions warrant.

TRADE CLAIMS
The Fund may invest in trade claims which are a right of payment due from
obligations of a bankrupt or troubled company. Trade claims typically are
bought and sold at a discount based on the expected timing and extent of
recovery.

LOAN PARTICIPATIONS AND ASSIGNMENTS

The Fund may invest in fixed and floating rate loans (secured or unsecured)
made to financially troubled companies by banks, insurance companies and
government institutions. The Fund may invest in a portion of a loan
(Participations) and assignments of all or a portion of loans (Assignments).
The Participations and Assignments are high-yield, non-convertible corporate
debt of varying maturities. With Participations, the Fund has the right to
receive payments of principal, interest and fees, which it is due from the
lender conditioned upon the lender's receipt of payment from the borrower. With
Assignments, the Fund has direct rights against the borrower on the loan, but
its rights may be more limited than the lenders'.

MUNICIPAL SECURITIES
The Fund may invest in municipal bonds, including general obligation and
revenue bonds, issued by states, municipalities, local governments and their

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7
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How the Fund Invests
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agencies and authorities. It may also invest in municipal lease obligations,
where interest and principal are payable out of lease payments made by the
party leasing the facilities financed by the issue, and in municipal notes,
including tax, revenue and bond anticipation notes, which are issued to obtain
funds for various public purposes.

FOREIGN SECURITIES

We may invest up to 30% of the Fund's total assets in money market instruments,
fixed-income securities, stock and other equity-related securities of foreign
issuers, including those in developing countries, denominated in U.S. dollars
or foreign currencies. For these purposes, we do not consider ADRs and other
similar receipts or shares to be foreign securities.

MONEY MARKET INSTRUMENTS

Under normal circumstances, the Fund may invest up to 35% of its total assets
in MONEY MARKET INSTRUMENTS, which include the commercial paper of U.S. and
non-U.S. corporations, short-term obligations of U.S. and foreign banks and
short-term obligations issued or guaranteed by the U.S. government or its
agencies. The Fund also may temporarily hold these instruments and U.S.
Treasury securities until it invests the proceeds from new sales of Fund shares
or to meet ordinary daily cash needs. Generally, money market instruments
provide a fixed rate of return, but provide less opportunity for capital
appreciation than stocks. The Fund may invest in commercial paper of
financially or operationally troubled companies.

SHORT SALES
The Fund may use short sales, where it sells a security it does not own, with
the expectation of a decline in the market value of that security. To complete
the transaction, the Fund will borrow the security to make delivery to the
buyer. The Fund must replace the security borrowed by purchasing it at the
market price at the time of replacement. The price at that time may be more or
less than the price at which the Fund sold the security. The Fund is required
to pay the lender any dividends or interest accrued. To borrow the security,
the Fund may pay a premium which would increase the cost of the security sold.

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

8
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How the Fund Invests
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TEMPORARY DEFENSIVE INVESTMENTS

In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in money market instruments.
Investing heavily in these securities limits our ability to achieve capital
appreciation, but may help to preserve the Fund's assets when the equity
markets are unstable.

REPURCHASE AGREEMENTS

The Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.

DERIVATIVE STRATEGIES

We may use alternative investment strategies--including DERIVATIVES--to try to
improve the Fund's returns or protect its assets, although we cannot guarantee
that these strategies will work, that the instruments necessary to implement
these strategies will be available or that the Fund will not lose money.
Derivatives--such as futures, options, foreign currency forward contracts and
options on futures--involve costs and can be volatile. With derivatives, the
investment adviser tries to predict whether the underlying investment--a
security, market index, currency, interest rate or some other benchmark--will
go up or down at some future date. We may use derivatives to try to reduce risk
or to increase return consistent with the Fund's overall investment objective.
The investment adviser will consider other factors (such as cost) in deciding
whether to employ any particular strategy or use any particular instrument. Any
derivatives we use may not match the Fund's underlying holdings.

OPTIONS

The Fund may purchase and sell put and call options on securities, financial
indices and currencies traded on U.S. or foreign securities exchanges or in the
over-the-counter market. An option is the right to buy or sell securities in
exchange for a premium. The options may be on debt or equity securities. The
Fund will sell only covered options.

FUTURES CONTRACTS AND RELATED OPTIONS; FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may purchase and sell financial futures contracts and related options
on debt and equity securities, including U.S. government securities,

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9
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How the Fund Invests
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financial indices and foreign currencies. A futures contract is an agreement to
buy or sell a set quantity of an underlying product at a future date, or to
make or receive a cash payment based on the value of a securities index. The
Fund also may enter into foreign currency forward contracts to protect the
value of its assets against future changes in the level of foreign exchange
rates. A foreign currency forward contract is an obligation to buy or sell a
given currency on a future date and at a set price.

For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks--Risk Management and Return Enhancement
Strategies."

ADDITIONAL STRATEGIES

The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 33 1/3% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 30% of the value of its total assets, including
collateral received in the transaction); and holds ILLIQUID SECURITIES (the
Fund may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions, those without a readily
available market and repurchase agreements with maturities longer than seven
days). The Fund is subject to certain investment restrictions that are
fundamental policies, which means they cannot be changed without shareholder
approval. For more information about these restrictions, see the SAI.

PORTFOLIO TURNOVER

As a result of the strategies described above, the Fund may have an annual
portfolio turnover rate of up to 200%. Portfolio turnover is generally the
percentage found by dividing the lesser of portfolio purchases or sales by the
monthly average value of the portfolio. High portfolio turnover (100% or more)
results in higher brokerage commissions and other transaction costs and can
affect the Fund's performance. It can also result in a greater amount of
distributions as ordinary income rather than long-term capital gains.

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

10
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How the Fund Invests
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INVESTMENT RISKS

As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indices, performance of the Fund can deviate from performance of the indices.
This chart outlines the key risks and potential rewards of the Fund's principal
investments. See, too, "Description of the Fund, Its Investments and Risks" in
the SAI.

INVESTMENT TYPE
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
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DEBT OBLIGATIONS . The Fund's . Regular interest
holdings, share income
Percentage varies price, yield and . Generally more
total return may secure than
fluctuate in stocks since
response to bond companies must
market movements pay their debts
. Credit risk--the before they pay
default of an dividends
issuer would . Most bonds rise
leave the Fund in value when
with unpaid interest rates
interest or fall
principal. The . Junk bonds offer
lower a bond's higher yields
quality, the and higher
higher its potential gains
potential
volatility
. Market risk--the
risk that the
market value of
an investment may
move up or down,
sometimes rapidly
or unpredictably.
Market risk may
affect an
industry, a
sector or the
market as a whole
. Interest rate
risk--the value
of most bonds
will fall when
interest rates
rise. The longer
a bond's maturity
and the lower its
credit quality,
the more its
value typically
falls. It can
lead to price
volatility
. Junk bonds have a
higher risk of
default, tend to
be less liquid
and may be more
difficult to
value

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TROUBLED HOLDINGS . Contractual . Significant
obligations where capital
At least 65% the amount paid appreciation and
and timing are current income
less predictable
than other less
speculative
holdings

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11
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How the Fund Invests
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INVESTMENT TYPE (CONT'D)

% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
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. During an
economic downturn
or recession,
these holdings
are more likely
to decline in
value than other
contractual
obligations

. See Debt
obligations and
Equity securities

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EQUITY SECURITIES . Individual stocks . Historically,
could lose value stocks have
outperformed
other
investments over
the long term
Percentage varies . The equity
markets could go
down, resulting . Generally,
in a decline in economic growth
value of the means higher
Fund's corporate
investments profits, which
. Changes in leads to an
economic or increase in
political stock prices,
conditions, both known as capital
domestic and appreciation
international,
may result in a
decline in value
of the Fund's
investments

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TRADE CLAIMS . See credit risk . A trade claim is
and market risk priced at a
above discount and may
appreciate
significantly
Percentage varies . The amount of the
claim may be
disputed by the
obligor
. Volatile pricing
due to a less
liquid market
with a small
number of buyers
and brokers
. Gains may not
qualify under the
Internal Revenue
Code

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

12
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How the Fund Invests
- --------------------------------------------------------------------------------

INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
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<S> <C> <C>
LOAN . See credit risk . A source of
PARTICIPATIONS and market risk income
AND ASSIGNMENTS above
Percentage varies . The Fund is also . May offer right
subject to credit to receive
risk of the principal,
lender interest and
. No right to fees without as
enforce much risk as a
compliance by the lender
borrower in a
loan
participation
- --------------------------------------------------------------------------------
MUNICIPAL . See credit risk, . Regular interest
SECURITIES market risk and income
Percentage varies interest rate . Most municipal
risk above securities rise
. Revenue bonds are in value when
payable only from interest rates
the revenue of fall
the designated
source

. With municipal
lease
obligations,
municipality may
not appropriate
funds for lease
payments

. May be subject to
political or
natural event
risks
-------------------------------------------------------------------------------
FOREIGN . Foreign markets, . Investors can
SECURITIES economies and participate in
Up to 30% political systems the growth of
may not be as foreign markets
stable as in the and companies
U.S., operating in
particularly those markets
those in
developing . Changing values
countries of foreign
. Currency risk-- currencies
changing values . Opportunities
of foreign for
currencies diversification

. May be less
liquid than U.S.
stocks and bonds

. Differences in
foreign laws,
accounting
standards and
public
information,
custody and
settlement
practices

. Year 2000
conversion may be
more of a problem
for some foreign
issuers
</TABLE>
- --------------------------------------------------------------------------------

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

13
<PAGE>

- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------

INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
DERIVATIVES . Derivatives such . The Fund could
as futures, make money and
options and protect against
foreign currency losses if the
forward contracts investment
may not fully analysis proves
offset the correct
underlying
positions and . Derivatives that
this could result involve leverage
in losses to the could generate
Fund that would substantial
not have gains at low
otherwise cost
occurred
. One way to
Percentage varies . Derivatives used manage the
for risk Fund's
management may risk/return
not have the balance is to
intended effects lock in the
and may result in value of an
losses or missed investment ahead
opportunities of time

. The other party
to a derivatives
contract could
default

. Derivatives that
involve leverage
could magnify
losses

. Certain types of
derivatives
involve costs to
the Fund that can
reduce returns

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

ILLIQUID . May be difficult . May offer a more
SECURITIES to value attractive yield
precisely or potential for
growth than more
Up to 15% of net . May be difficult widely traded
assets to sell at the securities
time or price
desired

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

MONEY MARKET . Limits potential . May preserve the
INSTRUMENTS for capital Fund's assets
appreciation

Up to 100% on a . See credit risk
temporary basis and market risk

</TABLE>

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

14
<PAGE>

- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------

MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077

Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended November 30, 1998, the Fund paid PIFM management fees of .75% of the
Fund's average net assets.

As of December 31, 1998, PIFM served as the Manager to all 46 of the
Prudential Mutual Funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $70.5 billion.

INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.

PORTFOLIO MANAGERS

GEORGE EDWARDS, a Managing Director of Prudential Investments, and PAUL PRICE,
CFA, Vice President of Prudential Investments, are co-managers of the Fund. Mr.
Edwards has managed the Fund since its inception in 1996 and has been employed
at Prudential since 1985. Mr. Edwards has day-to-day responsibility to the high
yield desk. Mr. Price has managed the Fund since 1998 and has been employed at
Prudential since 1987 as an investment professional.

DISTRIBUTOR

Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing
the Fund's Class A, B and C shares and provides certain shareholder support
services. The Fund pays distribution

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

15
<PAGE>

- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------

and other fees to PIMS as compensation for its services for the Class A, B and
C shares. These fees--known as 12b-1 fees--are shown in the "Fees and Expenses"
table.

YEAR 2000 READINESS DISCLOSURE

The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their
computer systems to prepare for the year 2000. The Fund and its Board receive
and have received since early 1998 satisfactory quarterly reports from the
principal service providers as to their preparations for year 2000 readiness,
although there can be no assurance that the service providers (or other
securities market participants) will successfully complete the necessary
changes in a timely manner. Moreover, the Fund at this time has not considered
retaining alternative service providers or directly undertaken efforts to
achieve year 2000 readiness, the latter of which would involve substantial
expenses without an assurance of success.

Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of the securities
held by the Fund.

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

PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC](800) 225-1852

16
<PAGE>

- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.

DISTRIBUTIONS
Because of the Fund's emphasis on financially and operationally troubled
issuers and its investment policies, the Fund is unlikely to receive dividend
income on its portfolio securities. The Fund distributes DIVIDENDS of any net
investment income to shareholders, typically annually. For example, if the Fund
owns ACME Corp. stock and the stock pays a dividend, the Fund will pay out a
portion of this dividend to its shareholders, assuming the Fund's income is
more than its costs and expenses. The dividends you receive from the Fund will
be taxed as ordinary income, whether or not they are reinvested in the Fund.

The Fund also distributes realized net CAPITAL GAINS to shareholders--
typically once a year--which are generated when the Fund sells its assets for a
profit. For example, if the Fund bought 100 shares of ACME Corp. stock for a
total of $1,000 and more than one year later sold the shares for a total of
$1,500, the Fund has net long-term capital gains of $500, which it will pass on
to shareholders (assuming the Fund's total gains are greater than any losses it
may have). Capital gains are taxed differently depending on how long the Fund
holds the security--if a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at ordinary income
rates of up to 39.6%. Different rates apply to corporate shareholders.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you

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

17
<PAGE>

- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

ask us to pay the distributions in cash, we will send you a check if your
account is with the Transfer Agent. Otherwise, if your account is with a broker
you will receive a credit to your account. Either way, the distributions may be
subject to taxes, unless your shares are held in a qualified tax-deferred plan
or account. For more information about automatic reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.

TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own
shares of the Fund as part of a qualified tax-deferred plan or account, your
taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified tax-
deferred plan or account.

Fund distributions are generally taxable to you in the calendar year they are
received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
Corporate shareholders are eligible for the 70% dividends-received deduction
for certain dividends.

WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax
identification number and certifications as to your tax status, and you fail to
do this, we will withhold and pay to the U.S. Treasury 31% of your
distributions and sale proceeds. If you are subject to backup withholding, we
will withhold and pay to the U.S. Treasury 31% of your distributions. Dividends
of net investment income and short-term capital gains paid to a nonresident
foreign shareholder generally will be subject to a U.S. withholding tax of 30%.
This rate may be lower, depending on any tax treaty the U.S. may have with the
shareholder's country.

IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to

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

PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

18
<PAGE>

- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day,
and soon thereafter received a distribution. That is not so because when
dividends are paid out, the value of each share of the Fund decreases by the
amount of the dividend and the market changes (if any) to reflect the payout.
The distribution you receive makes up for the decrease in share value. However,
the timing of your purchase does mean that part of your investment came back to
you as taxable income.

QUALIFIED RETIREMENT PLANS

Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential Mutual Funds that are
suitable for retirement plans offered by Prudential.

IF YOU SELL OR EXCHANGE YOUR SHARES

Capital Gain
+$ (taxes owed)
Receipts or
from Sale
-$ Capital Loss
(offset against gain)

If you sell any shares of the Fund for a profit, you have realized a capital
gain, which is subject to tax unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset cert ain capital gains you have.
Exchanging your shares of the Fund for the shares of another Prudential
Mutual Fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the
taxes described above.

Any gain or loss you may have from selling or exchanging Fund shares will not
be reported on the Form 1099; however, proceeds from the sale or exchange will
be reported on Form 1099-B. Therefore, unless you hold

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

19
<PAGE>

- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------

your shares in a qualified tax-deferred plan or account, you or your financial
adviser should keep track of the dates on which you buy and sell--or exchange--
Fund shares, as well as the amount of any gain or loss on each transaction. For
tax advice, please see your tax adviser.

AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the IRS. For
more information about the automatic conversion of Class B shares, see "Class B
Shares Convert to Class A Shares After Approximately Seven Years" in the next
section.

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

PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

20
<PAGE>

How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Fund
- --------------------------------------------------------------------------------

HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020

To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.

STEP 2: CHOOSE A SHARE CLASS

Individual investors can choose among Class A, Class B and Class C shares of
the Fund. When offered, Class Z shares will be available only to a limited
group of investors.

Multiple share classes let you choose a cost structure that better meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within six years (that is why it is called a Contingent Deferred
Sales Charge, or CDSC), but the operating expenses each year are higher than
the Class A share expenses. With Class C shares, you pay a 1% front-end sales
charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.

When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees

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

21
<PAGE>

. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase

See "How to Sell Your Shares" for a description of the impact of CDSCs.

Share Class Comparison. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you
are entitled to a reduction or waiver of any sales charges.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Minimum purchase $10,000 $10,000 $10,000
amount/1/
Minimum amount for $100 $100 $100
subsequent purchases/1/
Maximum initial 5% of the public None 1% of the public
sales charge offering price offering price
Contingent Deferred None If Sold During: 1% on sales
Sales Charge Year 1 5% made within
(CDSC)/2/ Year 2 4% 18 months of
Year 3 3% purchase/2/
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1%
service (12b-1) fees shown (.25 of 1%
as a percentage of average currently)
net assets/3/
</TABLE>

1 The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum initial
and subsequent investment for purchases made through the Automatic Investment
Plan is $ . For more information, see "Additional Shareholder Services--
Automatic Investment Plan."

2 For more information about the CDSC and how it is calculated, see "How to
Sell Your Shares--Contingent Deferred Sales Charge (CDSC)." Class C shares
bought before November 2, 1998 have a 1% CDSC if sold within one year.

3 These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and may
cost you more than paying other types of sales charges. The service fee for
Class A, Class B and Class C shares is .25 of 1%. The distribution fee for
Class A shares is limited to .30 of 1% (including the .25 of 1% service fee)
and is .75 of 1% for Class B and Class C shares.

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

PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

22
<PAGE>

REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.

Increase the Amount of Your Investment. You can reduce Class A's sales charge
by increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above* None None None
</TABLE>

* If you invest $1 million or more, you can buy only Class A shares.

To satisfy the purchase amounts above, you can:
. invest with an eligible group of related investors;
. buy the Class A shares of two or more Prudential Mutual Funds at the
same time;

. use your RIGHTS OF ACCUMULATION, which allow you to combine the value of
Prudential Mutual Fund shares you already own with the value of the
shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify
for Rights of Accumulation); or
. sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares in
the Fund and other Prudential Mutual Funds within 13 months.

Benefit Plans. Benefit Plans can avoid Class A's initial sales charge if the
Benefit Plan has existing assets of at least $1 million invested in shares of
Prudential Mutual Funds (excluding money market funds other than those acquired
under the exchange privilege) or 250 eligible employees or participants. For
these purposes a Benefit Plan is a pension, profit-sharing

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

23
<PAGE>

or other employee benefit plan qualified under Section 401 of the Internal
Revenue Code, a deferred compensation or annuity plan under Sections 403(b) and
457 of the Internal Revenue Code, a "rabbi" trust or a nonqualified deferred
compensation plan sponsored by an employer that has a tax-qualified benefit
plan with Prudential. Class A shares may also be purchased without a sales
charge by participants who are repaying loans from Benefit Plans where
Prudential (or its affiliates) provides administrative or recordkeeping
services, sponsors the product or provides account services.

Certain Prudential retirement programs--such as PruArray Association Benefit
Plans and PruArray Savings Programs--may also be exempt from Class A's sales
charge. For more information, see the SAI or contact your financial adviser. In
addition, waivers are available to investors in certain programs sponsored by
brokers, investment advisers and financial planners who have agreements with
the Prudential Investments Advisory Group relating to:
. Mutual fund "wrap" asset allocation programs where the sponsor places
Fund trades and charges its clients a management, consulting or other
fee for its services; and
. Mutual fund "supermarket" programs where the sponsor links its
customers' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.

Other Types of Investors. Other investors pay no sales charge, including
certain officers, employees or agents of Prudential and its affiliates,
Prudential Mutual Funds, the subadvisers of the Prudential Mutual Funds and
clients of brokers that have entered into a selected dealer agreement with the
Distributor. To qualify for a reduction or waiver of the sales charge, you must
notify the Transfer Agent or your broker at the time of purchase. For more
information about reducing or eliminating Class A's sales charge, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver of
Initial Sales Charge--Class A Shares."

WAIVING CLASS C'S INITIAL SALES CHARGE
Benefit Plans. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares may also be purchased
without an initial sales charge by participants who are repaying

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

PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

24
<PAGE>

loans from Benefit Plans where Prudential (or its affiliates) provides
administrative or recordkeeping services, sponsors the product or provides
account services.

Prudential Retirement Plans. The initial sales charge will be waived for
purchases of Class C shares by both qualified and nonqualified retirement and
deferred compensation plans participating in a PruArray Plan and other plans if
Prudential also provides administrative or recordkeeping services.

Investments of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. Such purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must:

. purchase your shares through an account at Prudential Securities,

. purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation, or

. purchase your shares through another broker.

This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any
supporting documents it considers to be appropriate.

In connection with the sale of shares, the Manager, the Distributor or one of
their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares and up to 2% of
the purchase price for Class C shares from their own resources.

CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS

If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested
dividends and other distributions. Since the 12b-1 fees for

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

25
<PAGE>

Class A shares are lower than for Class B shares, converting to Class A shares
lowers your Fund expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Conversion Feature--Class B Shares."

STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY

The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is
determined by a simple calculation--it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding.

For example, if the value of the investments held by Fund XYZ (minus its
expenses) is $1,000 and there are 100 shares of Fund XYZ owned by shareholders,
the price of one share of the fund--or the NAV--is $10 ($1,000 divided by 100).
Portfolio securities are valued based upon market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Board. Most national newspapers report the NAVs of
most mutual funds, which allows investors to check the price of mutual funds
daily.

We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. We do
not determine NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of the Fund's
portfolio do not materially affect the NAV.
- --------------------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. bonds
in its portfolio and the price of ACME bonds goes up, while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

26
<PAGE>

WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?

For Class A and Class C shares, you'll pay the public offering price, which is
NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B shares, you will
pay the NAV next determined after we receive your order to purchase (remember,
there are no up-front sales charges for Class B shares). Your broker may charge
you a separate or additional fee for purchases of shares.

STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:

Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date
we determine who receives dividends:

PRUDENTIAL MUTUAL FUND SERVICES LLC

ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015

Automatic Investment Plan. You can make regular purchases of the Fund by having
the funds automatically withdrawn from your bank or brokerage account at
specified intervals.

Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person
business, please contact your financial adviser. If you are interested in
opening a 401(k) or other company-sponsored retirement plan (SIMPLES, SEP
plans, Keoghs, 403(b) plans, pension and profit-sharing

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

27
<PAGE>

plans), your financial adviser will help you determine which retirement plan
best meets your needs. Complete instructions about how to establish and
maintain your plan and how to open accounts for you and your employees will be
included in the retirement plan kit you receive in the mail.

The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and
is not available in all states.

Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.

Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household unless you instruct us or your broker otherwise.

HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer
Agent, the Distributor or your broker receives your order to sell. If your
broker holds your shares, he must receive your order to sell by 4:15 p.m. New
York Time to process the sale on that day. Otherwise, contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC

ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

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<PAGE>

Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by
wire, certified check or cashier's check. Your broker may charge you a separate
or additional fee for sales of shares.

RESTRICTIONS ON SALES

There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the
value of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."

If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records or if you are a business or a
trust and if you hold your shares directly with the Transfer Agent, you may
have to have the signature on your sell order guaranteed by a financial
institution. For more information, see the SAI, "Purchase, Redemption and
Pricing of Fund Shares--Sale of Shares--Signature Guarantee."

CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
. Amounts representing shares you purchased with reinvested dividends and
distributions

. Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares purchased
before November 2, 1998)

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29
<PAGE>

. Amounts representing the cost of shares held beyond the CDSC period (six
years for Class B shares and 18 months for Class C shares)

Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to the amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.

As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares-- which is applied
to shares sold within 18 months of purchase (or one year for Class C shares
purchased before November 2, 1998). For both Class B and Class C shares, the
CDSC is the lesser of the original purchase price or the redemption proceeds.
For purposes of determining how long you've held your shares, all purchases
during the month are grouped together and considered to have been made on the
last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding
any time shares were held in a money market fund.

WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy (with
rights of survivorship), provided the shares were purchased before the
death or disability
. To provide for certain distributions--made without IRS penalty--from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account
. On certain sales from a Systematic Withdrawal Plan

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

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<PAGE>

For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B Shares."

WAIVER OF THE CDSC--CLASS C SHARES

Prudential Retirement Plans. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in a PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account (a group annuity insurance product sponsored by Prudential),
the Guaranteed Insulated Separate Account (a separate account offered by
Prudential) and shares of The Stable Value Fund (an unaffiliated bank
collective fund).

Other Benefit Plans. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which
the broker provides administrative or recordkeeping services.

REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.

SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your
account. We would do this to minimize the Fund's expenses paid by other
shareholders. We will give you 60 days' notice, during which time you can
purchase additional shares to avoid this action. This involuntary sale does not
apply to shareholders who own their shares as part of a 401(k) plan, an IRA or
some other tax-deferred plan or account.

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

31
<PAGE>

90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares
to reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."

RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your
employer or plan trustee, you must arrange for the distribution request to be
signed and sent by the plan administrator or trustee. For additional
information, see the SAI.

HOW TO EXCHANGE YOUR SHARES

You can exchange your shares of the Fund for shares of the same class in
certain other Prudential Mutual Funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential Mutual
Fund, but you can't exchange Class A shares for Class B or Class C shares.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund, Inc. After an exchange, at
redemption the CDSC will be calculated from the first day of the month after
initial purchase, excluding any time shares were held in a money market fund.
We may change the terms of the exchange privilege after giving you 60 days'
notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

32
<PAGE>

There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B shares into a
money market fund, the time you hold the shares in the money market account
will not be counted in calculating the required holding periods for CDSC
liability.

Remember, as we explained in the section entitled "Fund Distributions and Tax
Issues--If You Sell or Exchange Your Shares," exchanging shares is considered a
sale for tax purposes. Therefore, if the shares you exchange are worth more
than you paid for them, you may have to pay capital gains tax. For additional
information about exchanging shares, see the SAI, "Shareholder Investment
Account--Exchange Privilege."

If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares.
We make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a
"taxable event" for federal income tax purposes. This opinion is not binding on
the IRS.

FREQUENT TRADING

Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Fund will
have to invest. When, in our opinion, such activity would have a disruptive
effect on portfolio management, the Fund reserves the right to refuse purchase
orders and exchanges into the Fund by any person, group or commonly controlled
account. The Fund may notify a market timer of rejection of an exchange or
purchase order after the day the order is placed. If the Fund allows a market
timer to trade Fund shares, it may require the market timer to enter into a
written agreement to follow certain procedures and limitations.

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33
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------

The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.

Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.

CLASS A SHARES

The financial highlights for the two years ended November 30, 1998 were audited
by PricewaterhouseCoopers LLP, and the financial highlights for the period
ended November 30, 1996 were audited by other independent auditors, whose
reports were unqualified.

<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 11-30)
- -----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998/5/ 1997/5/ 1996/1/
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.19 $11.85 $12.50
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/2/ .87 .49 .25
Net realized and unrealized gain (loss) on
investment transactions (2.69) 3.23 (.90)
TOTAL FROM INVESTMENT OPERATIONS (1.82) 3.72 (.65)
- -----------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (1.39) (.38) --
Distributions in excess of net investment income (.24)
Distributions from net realized gains (.17) -- --
-------- ------ --------
TOTAL DISTRIBUTIONS (1.80) (.38) --
-------- ------ --------
NET ASSET VALUE, END OF PERIOD $11.57 $15.19 $11.85
TOTAL RETURN/3/ (13.19)% 32.35% (5.20)%
- -----------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996/1/
<S> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $2,629 $1,976 $3,404
Average net assets (000) $2,783 $2,167 $4,391
RATIOS TO AVERAGE NET ASSETS:/2/
Expenses, including distribution fees 1.25% 2.04% 2.76%/4/
Expenses, excluding distribution fees 1.00% 1.79% 2.51%/4/
Net investment income 5.80% 3.73% 2.37%/4/
Portfolio turnover 188% 175% 61%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 3-26-96, when Class A shares were first
offered, through 11-30-96.
2 Net of expense reimbursement.
3 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.
4 Annualized.
5 Calculated based upon weighted average shares outstanding during the year.

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

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<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------

CLASS B SHARES

<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 11-30)
- -----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997/5/ 1996/1/
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.16 $11.79 $12.50
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/2/ .76 .39 .16
Net realized and unrealized gain (loss) on
investment transactions (2.69) 3.24 (.87)
TOTAL FROM INVESTMENT OPERATIONS (1.93) 3.63 (.71)
- -----------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (1.27) (.26) --
Distributions in excess of net investment income (.21)
Distributions from net realized gains (.17) -- --
-------- ------ --------
TOTAL DISTRIBUTIONS (1.65) (.26) --
-------- ------ --------
NET ASSET VALUE, END OF PERIOD $11.58 $15.16 $11.79
TOTAL RETURN/3/ (13.90)% 31.44% (5.68)%
- -----------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996/1/
<S> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $3,477 $5,029 $5,387
Average net assets (000) $4,862 $4,860 $6,650
RATIOS TO AVERAGE NET ASSETS/2/:
Expenses, including distribution fees 2.00% 2.79% 3.51%/4/
Expenses, excluding distribution fees 1.00% 1.79% 2.51%/4/
Net investment income 5.05% 2.98% 1.59%/4/
Portfolio turnover 188% 175% 61%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 3-26-96, when Class B shares were first
offered, through 11-30-96.
2 Net of expense reimbursement.
3 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.
4 Annualized.
5 Calculated based upon weighted average shares outstanding during the year.

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

35
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------

CLASS C SHARES

<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 11-30)
- ---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998/5/ 1997/5/ 1996/1/
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.16 $11.79 $12.50
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/2/ .75 .39 .16
Net realized and unrealized gain (loss) on
investment transactions (2.69) 3.24 (.87)
TOTAL FROM INVESTMENT OPERATIONS (1.94) 3.63 (.71)
- ---------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (1.27) (.26) --
Distributions in excess of net investment
income (.21)
Distributions from net realized gains (.17) -- --
-------- ------ --------
TOTAL DISTRIBUTIONS (1.65) (.26) --
-------- ------ --------
NET ASSET VALUE, END OF PERIOD $11.57 $15.16 $11.79
TOTAL RETURN/3/ (13.90)% 31.44% (5.68)%
- ---------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996/1/
<S> <C> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $853 $831 $1,485
Average net assets (000) $1,011 $1,100 $1,678
RATIOS TO AVERAGE NET ASSETS:/2/
Expenses, including distribution fees 2.00% 2.79% 3.51%/4/
Expenses, excluding distribution fees 1.00% 1.79% 2.51%/4/
Net investment income 5.05% 2.98% 1.71%/4/
Portfolio turnover 188% 175% 61%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 3-26-96, when Class C shares were first
offered, through 11-30-96.
2 Net of expense reimbursement.
3 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods of less than a full year is not
annualized.
4 Annualized.
5 Calculated based upon weighted average shares outstanding during the year.

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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. [GRAPHIC] (800) 225-1852

36
<PAGE>

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The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------

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

Prudential offers a broad range of mutual funds designed to meet your
individual needs. For information about these funds, contact your financial
adviser or call us at (800) 225-1852. Read the prospectus carefully before you
invest or send money.
STOCK FUNDS
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund

Asset Allocation/Balanced Funds
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
GLOBAL FUNDS
GLOBAL STOCK FUNDS
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Index Series Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.

GLOBAL BOND FUNDS
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Global Total Return Fund, Inc.

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37
<PAGE>

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The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------

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

BOND FUNDS
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Structured Maturity Fund, Inc.
Income Portfolio

TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.

TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series

COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund

INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

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PRUDENTIAL EQUITY INCOME FUND [GRAPHIC] (800) 225-1852

38
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FOR MORE INFORMATION
________________________________________________________________

Please read this prospectus before you invest in the Fund and keep it for
future reference. For information or shareholder questions contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
HTTP://WWW.PRUDENTIAL.COM
- --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:

STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)

ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance)

SEMI-ANNUAL REPORT

You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:

By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)

In Person:
Public Reference Room in Washington, DC

(For hours of operation, call (800) SEC-0330)

Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------

CUSIP Numbers:
Class A: 743966-10-3
Class B: 743966-20-2
Class C: 743966-30-1

Investment Company Act File No:
811-07491

Printed on Recycled Paper
[RECYCLE LOGO APPEARS HERE]

MF171A
<PAGE>

PRUDENTIAL DISTRESSED SECURITIES FUND, INC.

Statement of Additional Information dated February 4, 1999

Prudential Distressed Securities Fund, Inc. (the Fund), is an open-end,
diversified, management investment company whose investment objective is
capital appreciation. The Fund seeks to achieve its objective by investing
primarily in debt and equity securities issued by financially troubled or
bankrupt companies (financially troubled issuers) and in equity securities of
companies that in the view of its investment adviser are currently
undervalued, out-of-favor or price-depressed relative to their long term
potential for growth and income (operationally troubled issuers). These
issuers may be experiencing poor operating results. The Fund may engage in
various derivative transactions, including the purchase and sale of put and
call options on securities, stock indices and foreign currencies, the purchase
and sale of foreign currency exchange contracts and transactions involving
futures contracts and related options to hedge its portfolio and to attempt to
enhance return. There can be no assurance that the Fund's investment objective
will be achieved. See "Description of the Fund, Its Investments and Risks."

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

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated February 4, 1999, a copy
of which may be obtained from the Fund upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund History.............................................................. B-2
Description of the Fund, Its Investments and Risks........................ B-2
Investment Restrictions................................................... B-25
Management of the Fund.................................................... B-26
Control Persons and Principal Holders of Securities....................... B-30
Investment Advisory and Other Services.................................... B-30
Brokerage Allocation and Other Practices.................................. B-35
Capital Shares, Other Securities and Organization......................... B-36
Purchase, Redemption and Pricing of Fund Shares........................... B-37
Shareholder Investment Account............................................ B-48
Net Asset Value........................................................... B-53
Taxes, Dividends and Distributions........................................ B-54
Performance Information................................................... B-56
Financial Statements...................................................... B-59
Report of Independent Accountants......................................... B-71
Description of Security Ratings........................................... A-1
Appendix I--General Investment Information................................ I-1
Appendix II--Historical Performance Data.................................. II-1
Appendix III--Information Relating to Prudential.......................... III-1
</TABLE>
- -------------------------------------------------------------------------------
MF171B
<PAGE>

FUND HISTORY

The Fund was incorporated in Maryland on November 30, 1995.

DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS

(A) CLASSIFICATION. The Fund is a diversified, open-end, management investment
company.

(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's investment
objective is capital appreciation. The Fund will seek to achieve its objective
by investing primarily in debt and equity securities of companies that are in
weak financial condition or bankrupt (financially troubled issuers) and in
equity securities of companies that, in the view of its investment adviser,
The Prudential Investment Corporation (PIC), doing business as Prudential
Investments (PI, the Subadviser or the investment adviser), are currently
undervalued, out-of-favor or price-depressed relative to their long term
potential for growth and income (operationally troubled issuers). These
companies may be experiencing poor operating results. Current income is not a
factor in the selection of investments. While the principal investment
policies and strategies for seeking to achieve this objective are described in
the Fund's Prospectus, the Fund may from time to time also use the securities,
instruments, policies and strategies described below in seeking to achieve its
objective. The Fund may not be successful in achieving its objective and you
could lose money.

The Fund is a vehicle for diversification and is not intended to constitute
a balanced investment program. Because of its emphasis on securities of
financially and operationally troubled issuers, the Fund should be considered
speculative and subject to greater investment risks than are assumed by other
investment companies.

Under normal circumstances, the Fund will invest at least 65% of its total
assets in debt and equity securities of financially and operationally troubled
issuers (that is, distressed securities), including defaulted securities and
junk bonds. The Fund has not established any percentage limitations for the
allocation of investments between debt and equity securities. The allocation
of assets between debt and equity securities will be determined by the
investment adviser. With respect to the remainder of its assets, the Fund may
(1) invest in money market instruments, (2) purchase and write (that is, sell)
put and call options on debt and equity securities, stock indices and foreign
currencies, (3) purchase and sell foreign currency exchange contracts, (4)
purchase and sell futures contracts and options thereon (including stock index
futures, futures contracts on U.S. Government securities, foreign currencies
and indices and options thereon) and (5) enter into repurchase agreements. In
addition, the Fund may (a) lend its securities, (b) make short sales, (c)
purchase and sell securities on a when-issued or delayed delivery basis and
(d) borrow money, in all instances subject to the limitations described below.

SECURITIES OF FINANCIALLY AND OPERATIONALLY TROUBLED ISSUERS

Financially troubled issuers include domestic or foreign companies or
institutions in weak financial condition, companies having negative net worth
or substantial capital needs and companies involved in bankruptcy or
reorganization proceedings or financial restructurings. Operationally troubled
issuers are companies experiencing poor operating results that may have no
earnings or severely depressed earnings or have special competitive or product
obsolescence problems.

The Fund will invest in a wide variety of debt and equity securities
involving financially or operationally troubled companies in the belief that
these companies (and their securities) will react positively to changing
economic conditions or that management will take actions designed to overcome
adversity, such as the restructuring of current business operations. The Fund
may invest in loans and participations (both secured and unsecured) made to
financially troubled companies by banks, insurance companies and Government
institutions such as the Federal Deposit Insurance Corporation or the Pension
Benefit Guaranty Corporation. The Fund may also invest in fixed-income
securities issued by states, municipalities, local governments and their
agencies and authorities, which pay interest which is exempt from federal
income taxation. In addition, the Fund may invest in mortgage-backed
securities. Equity-related securities in which the Fund may invest include
common stocks, preferred stocks, securities convertible or exchangeable for
common stocks or preferred stocks, equity investments in partnerships, joint
ventures and other forms of non-corporate investments, American Depositary
Receipts (ADRs), and

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warrants and rights exercisable for equity securities. The Fund may invest up
to 30% of its total assets in equity and fixed-income securities of foreign
issuers denominated in U.S. dollars or foreign currencies. ADRs and Global
Depositary Receipts (GDRs) are not included in this 30% limitation. See "Risks
of Financially and Operationally Troubled Issuers" below.

The Fund is permitted to invest in defaulted securities and in low quality
debt securities having a rating of D or better as determined by Standard &
Poor's Ratings Group (S&P), C or better by Moody's Investors Service, Inc.
(Moody's), or having a comparable rating determined by another nationally
recognized statistical rating organization (NRSRO), or in unrated securities
which, in the opinion of the investment adviser, are of equivalent quality.
Securities rated lower than BBB by S&P or Baa by Moody's are commonly known as
"junk bonds." See "Risk Factors Relating to Investing in Debt Securities Rated
Below Investment Grade (Junk Bonds)" below and the "Description of Security
Ratings" in the Appendix.

The Subadviser maintains a credit unit which the Fund's portfolio managers
may consult in managing the Fund's portfolio and in researching financially
troubled and operationally troubled issuers. The Fund's portfolio managers
review on an ongoing basis financially troubled and operationally troubled
issuers, including prospective purchases and portfolio holdings of the Fund.
They have broad access to research and financial reports, data retrieval
services and industry analysts.

The securities of financially and operationally troubled issuers may require
active monitoring and at times may require the Fund's investment adviser to
participate in bankruptcy or reorganization proceedings on behalf of the Fund.
To the extent the investment adviser becomes involved in such proceedings, the
Fund may have a more active participation in the affairs of the issuer than is
generally assumed by an investor and such participation may subject the Fund to
the litigation risks described below. However, the Fund does not invest in the
securities of financially or operationally troubled issuers for the purpose of
exercising day-to-day management of any issuer's affairs.

RISKS OF FINANCIALLY AND OPERATIONALLY TROUBLED ISSUERS

Investment in the securities of financially and operationally troubled
issuers involves a high degree of credit and market risk. See "Risk Factors
Relating to Investing in Debt Securities Rated Below Investment Grade (Junk
Bonds)" below. Although the Fund will invest in select companies which in the
view of its investment adviser have the potential over the long term for
capital growth, there can be no assurance that such financially or
operationally troubled companies can be successfully transformed into
profitable operating companies. There is a possibility that the Fund may incur
substantial or total losses on its investments. During an economic downturn or
recession, securities of financially troubled issuers are more likely to go
into default than securities of other issuers. In addition, it may be difficult
to obtain information about financially and operationally troubled issuers.

Investment in the securities of financially and operationally troubled
issuers is a long-term investment strategy and, accordingly, investors in the
Fund should have the financial ability and willingness to remain invested for
the long term. Securities of financially troubled issuers are less liquid and
more volatile than securities of companies not experiencing financial
difficulties. The market prices of such securities are subject to erratic and
abrupt market movements and the spread between bid and asked prices may be
greater than normally expected. In addition, it is anticipated that many of the
Fund's portfolio investments may not be widely traded and that the Fund's
position in such securities may be substantial relative to the market for such
securities. As a result, the Fund may experience delays and incur losses and
other costs in connection with the sale of its portfolio securities.

The Fund may invest in the securities of companies involved in bankruptcy
proceedings, reorganizations and financial restructurings and may have a more
active participation in the affairs of the issuer than is generally assumed by
an investor. This may subject the Fund to litigation risks or prevent the Fund
from disposing of securities. In a bankruptcy or other proceeding, the Fund as
a creditor may be unable to enforce its rights in any collateral or may have
its security interest in any collateral challenged, disallowed or subordinated
to the claims of other creditors. While the Fund will attempt to avoid taking
the types of actions that would lead to equitable subordination or creditor
liability, there can be no assurance that such claims will not be asserted or
that the Fund will be able to successfully defend against them. Because (unlike
the Fund) other investors may purchase the securities of these companies for
the purpose of exercising control or management, the Fund may be at a
disadvantage to the extent that the Fund's interests differ from the interests
of these other investors.

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<PAGE>

BANKRUPTCY AND OTHER PROCEEDINGS--LITIGATION RISKS

When a company seeks relief under the Federal Bankruptcy Code (or has a
petition filed against it), an automatic stay prevents all entities, including
creditors, from foreclosing or taking other actions to enforce claims, perfect
liens or reach collateral securing such claims. Creditors who have claims
against the company prior to the date of the bankruptcy filing must petition
the court to permit them to take any action to protect or enforce their claims
or their rights in any collateral. Such creditors may be prohibited from doing
so if the court concludes that the value of the property in which the creditor
has an interest will be "adequately protected" during the proceedings. If the
bankruptcy court's assessment of adequate protection is inaccurate, a
creditor's collateral may be wasted without the creditor being afforded the
opportunity to preserve it. Thus, even if the Fund holds a secured claim, it
may be prevented from collecting the liquidation value of the collateral
securing its debt, unless relief from the automatic stay is granted by the
court.

Security interests held by creditors are closely scrutinized and frequently
challenged in bankruptcy proceedings and may be invalidated for a variety of
reasons. For example, security interests may be set aside because, as a
technical matter, they have not been perfected properly under the Uniform
Commercial Code or other applicable law. If a security interest is invalidated,
the secured creditor loses the value of the collateral and because loss of the
secured status causes the claim to be treated as an unsecured claim, the holder
of such claim will almost certainly experience a significant loss of its
investment. While the Fund intends to scrutinize any security interests that
secure the debt it purchases, there can be no assurance that the security
interests will not be challenged vigorously and found defective in some
respect, or that the Fund will be able to prevail against the challenge.

Moreover, debt may be disallowed or subordinated to the claims of other
creditors if the creditor is found guilty of certain inequitable conduct
resulting in harm to other parties with respect to the affairs of a company
filing for protection from creditors under the Federal Bankruptcy Code.
Creditors' claims may be treated as equity if they are deemed to be
contributions to capital, or if a creditor attempts to control the outcome of
the business affairs of a company prior to its filing under the Bankruptcy
Code. If a creditor is found to have interfered with the company's affairs to
the detriment of other creditors or shareholders, the creditor may be held
liable for damages to injured parties. While the Fund will attempt to avoid
taking the types of action that would lead to equitable subordination or
creditor liability, there can be no assurance that such claims will not be
asserted or that the Fund will be able successfully to defend against them.

While the challenges to liens and debt described above normally occur in a
bankruptcy proceeding, the conditions or conduct that would lead to an attack
in a bankruptcy proceeding could in certain circumstances result in actions
brought by other creditors of the debtor, shareholders of the debtor or even
the debtor itself in other state or federal proceedings. As is the case in a
bankruptcy proceeding, there can be no assurance that such claims will not be
asserted or that the Fund will be able successfully to defend against them. To
the extent that the Fund assumes an active role in any legal proceeding
involving the debtor, the Fund may be prevented from disposing of securities
issued by the debtor due to the Fund's possession of material, non-public
information concerning the debtor.

CORPORATE AND OTHER DEBT OBLIGATIONS

The Fund may invest in corporate and other debt obligations including
convertible securities of domestic and foreign issuers. Issuers are not limited
to the corporate form of organization. Bonds and other debt securities are used
by issuers to borrow money from investors. The issuer pays the investor a fixed
or variable rate of interest and must repay the amount borrowed at maturity.
Some debt securities, such as zero coupon bonds, do not pay current interest
but are purchased at a discount from their face values. The discount
approximates the total amount of interest the security will accrue and compound
over the period until maturity of the particular interest payment date at a
rate of interest reflecting the market rate of the security at the time of
issuance. Zero coupon securities do not require the periodic payment of
interest. These investments benefit the issuer by mitigating its need for cash
to meet debt service but also require a higher rate of return to attract
investors who are willing to defer receipt of cash.

Pay-in-kind securities have their interest payable upon maturity by delivery
of additional securities. Deferred payment securities are securities that
remain a zero coupon security until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Certain debt securities are subject to call provisions. Zero coupon,
pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity

B-4
<PAGE>

in the event of adverse market conditions than comparably rated securities
paying cash interest at regular payment periods. See "Zero Coupon, Pay-in-Kind
or Deferred Payment Securities" below.

The Fund is permitted to invest in defaulted securities and in low quality
debt securities or in unrated securities which, in the opinion of the
investment adviser, are of equivalent quality. See "Securities of Financially
and Operationally Troubled Issuers" above, "Risk Factors Relating to Investing
in Debt Securities Rated Below Investment Grade (Junk Bonds)" below and the
"Description of Security Ratings" in the Appendix. Lower rated securities are
subject to a greater risk of loss of principal and interest than are higher
rated securities.

ZERO COUPON, PAY-IN-KIND OR DEFERRED PAYMENT SECURITIES

The Fund may invest in zero coupon, pay-in-kind or deferred payment
securities. Zero coupon securities are securities that are sold at a discount
to par value and on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received annually "phantom income." The Fund
accrues income with respect to these securities prior to the receipt of cash
payments. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain a zero coupon security until a predetermined date,
at which time the stated coupon rate becomes effective and interest becomes
payable at regular intervals. Zero coupon, pay-in-kind and deferred payment
securities may be subject to greater fluctuation in value and lesser liquidity
in the event of adverse market conditions than comparable rated securities
paying cash interest at regular intervals.

CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS

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

In general, the market value of a convertible security is at least the higher
of its "investment value" (that is, its value as a fixed-income security) or
its "conversion value" (that is, its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of
the underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.

TRADE CLAIMS

The Fund may invest in trade claims, which are non-securitized rights of
payment arising from obligations other than borrowed funds. Trade claims
typically arise when, in the ordinary course of business, vendors and suppliers
extend credit to a company by offering payment terms. Generally, when a company
files for bankruptcy protection, payments on trade claims cease and the claims
are subject to compromise along with the other debts of the company. Trade
claims typically are bought and sold at a discount reflecting the degree of
uncertainty with respect to the timing and extent of recovery. In addition to
the risks otherwise associated with low-quality obligations, trade claims have
other risks, including (1) the possibility that the amount of the claim may be
disputed by the obligor, (2) the debtor may have a variety of defenses to
assert against the claim under the bankruptcy code, and (3) volatile pricing
due to a less liquid market, including a small

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<PAGE>

number of brokers for trade claims and a small universe of potential buyers. It
is not unusual for trade claims to be priced at a discount to publicly traded
securities that have an equal or lower priority claim. Additionally, trade
claims may be treated as non-securities investments. As a result, any gains may
be considered "non-qualifying" under the Internal Revenue Code. See "Taxes,
Dividends and Distributions".

MORTGAGE-BACKED SECURITIES

Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage
loans secured by real property. There are currently three basic types of
mortgage-backed securities: (1) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC); (2) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities; and (3) those issued by private issuers
that represent an interest in or are collateralized by whole mortgage loans or
mortgage-backed securities without a Government guarantee but usually having
some form of private credit enhancement.

Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors, as a general rule prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Accordingly, amounts available for reinvestment by
the Fund are likely to be greater during a period of declining interest rates
and, as a result, likely to be reinvested at lower interest rates than during a
period of rising interest rates. Mortgage-backed securities may decrease in
value as a result of increases in interest rates and may benefit less than
other fixed-income securities from declining interest rates because of the risk
of prepayment.

MULTI-CLASS PASS-THROUGH SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS.
A collateralized mortgage obligation (CMO) is a security issued by a
corporation or U.S. Government agency or instrumentality which is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation
to make interest and principal payments is secured by the underlying portfolio
of mortgages or mortgage-backed securities. Multi-class pass-through securities
are equity interests in a trust composed of mortgages or mortgage-backed
securities. Payments of principal and interest on the underlying mortgage
assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multi-class pass-
through securities. CMOs may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing. The issuer of a series of CMOs may elect
to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All future
references to CMOs include REMICs.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
underlying mortgage assets may be allocated among the several classes of a CMO
series in a number of different ways. Generally, the purpose of the allocation
of the cash flow of a CMO to the various classes is to obtain a more
predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-backed securities.

ASSET-BACKED SECURITIES

The Fund may invest in asset-backed securities. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, have been securitized in pass-
through structures similar to the mortgage pass-through structures or in a pay-
through structure similar to the CMO structure. The Fund may invest in these
and other types of asset-backed securities that may be developed in the future.
Unlike mortgage-backed securities, asset-backed securities do not have the
benefit of a security interest in the related collateral. Credit card
receivables, for example, are generally unsecured and the debtors are entitled
to the protection of a number of state and

B-6
<PAGE>

federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, the security interests in
the underlying automobiles are often not transferred when the pool is created,
with the resulting possibility that the collateral could be resold. In general,
these types of loans are of shorter average life than mortgage loans and are
less likely to have substantial prepayments. In many instances, asset-backed
securities are over-collateralized to ensure the relative stability of their
credit quality.

LOAN PARTICIPATIONS AND ASSIGNMENTS

The Fund may invest in fixed and floating rate loans (Loans) arranged through
private negotiations between a corporate borrower and one or more financial
institutions (Lenders). The Fund may invest in such Loans generally in the form
of participations in Loans (Participations) and assignments of all or a portion
of Loans from third parties (Assignments). The Fund may acquire Participations
and Assignments which are high yield, non-convertible corporate debt securities
of varying maturities. Participations typically will result in the Fund having
a contractual relationship only with the Lender, not with the borrower. The
Fund will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In
connection with purchasing Participations, the Fund generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the Loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the Loan
in which it has purchased the Participation. As a result, the Fund will assume
the credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. When the
Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan, except that under certain circumstances such
rights may be more limited than those held by the assigning Lender.

The Fund may have difficulty disposing of Assignments and Participations.
Because the market for such instruments is not highly liquid, the Fund
anticipates that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on the Fund's ability to dispose of particular Assignments or
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.

MUNICIPAL SECURITIES

The Fund may invest in municipal securities, which include notes and bonds
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities and the
District of Columbia, the interest on which is generally eligible for exclusion
from federal income tax and, in certain instances, applicable state or local
income and personal property taxes. Such securities are traded primarily in the
over-the-counter market.

MUNICIPAL BONDS. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets, water and sewer works and gas and electric
utilities. Municipal bonds also may be issued in connection with the refunding
of outstanding obligations and obtaining funds to lend to other public
institutions or for general operating expenses.

The two principal classifications of municipal bonds are "general obligation"
and "revenue." General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source.

Industrial development bonds (IDBs) are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities
for business and manufacturing, housing, sports, pollution control, and for
airport, mass transit, port and parking facilities. Although IDBs are issued by
municipal authorities, they are generally secured by the revenues derived from
payments of the industrial user. The payment of the principal and interest on
IDBs is dependent solely on the ability of the user of the facilities financed
by the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for the payment.

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MUNICIPAL NOTES. Municipal notes generally are used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
notes include:

1. Tax Anticipation Notes. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use
and business taxes, and are payable from these specific future taxes.

2. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in the
expectation of reception of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.

3. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases,
the long-term bonds then provide the money for the repayment of the Notes.

4. Construction Loan Notes. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are
applied to the payment of Construction Loan Notes, is sometimes provided by
a commitment by the Government National Mortgage Association (GNMA) to
purchase the loan, accompanied by a commitment by the Federal Housing
Administration to insure mortgage advances thereunder. In other instances,
permanent financing is provided by commitments of banks to purchase the
loan.

TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper, the
interest on which is generally exempt from federal income taxes, typically are
represented by short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.

FLOATING RATE AND VARIABLE RATE SECURITIES. The Fund is permitted to invest
in floating rate and variable rate municipal securities, including
participation interests therein and inverse floaters. Floating or variable rate
securities often have a rate of interest that is set as a specific percentage
of a designated base rate, such as the rate on Treasury Bonds or Bills or the
prime rate at a major commercial bank. These securities also allow the holder
to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the holder paid for
them. Variable rate securities provide for a specified periodic adjustment in
the interest rate. The interest rate on floating rate securities changes
whenever there is a change in the designated base interest rate. Floating rate
and variable rate securities typically have long maturities but afford the
holder the right to demand payment at earlier dates. Such floating rate and
variable rate securities will be treated as having maturities equal to the
period of adjustment of the interest rate.

An inverse floater is a debt instrument with a floating or variable interest
rate that moves in the opposite direction of the interest rate on another
security or the value of an index. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.

MUNICIPAL LEASE OBLIGATIONS. The Fund may also invest in municipal lease
obligations. A municipal lease obligation is a municipal security the interest
on and principal of which is payable out of lease payments made by the party
leasing the facilities financed by the issue. Typically, municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (for example, schools, dormitories,
office buildings or prisons) or the acquisition of equipment. The facilities
are typically used by the state or municipality pursuant to a lease with a
financing authority. Certain municipal lease obligations may trade
infrequently. Accordingly, the investment adviser will monitor the liquidity of
municipal lease obligations under the supervision of the Board of Directors.
Municipal lease obligations will not be considered illiquid for purposes of the
Fund's 15% limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. See
"Illiquid Securities" below.

RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)

Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (i.e., high

B-8
<PAGE>

yield or high risk) securities (commonly referred to as junk bonds) are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Fund.

Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession, securities
of highly leveraged issuers are more likely to default than securities of
higher rated issuers. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell
the securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices in calculating the Fund's net
asset value. Lower rated or unrated debt obligations also present risks based
on payment expectations. The Fund may invest more than 35% of its assets in
lower rated fixed-income securities, including securities having the lowest
ratings assigned by nationally recognized statistical ratings organizations or
no rating but judged by the Subadviser to be of comparable quality. Such
investments involve a high degree of risk and are predominantly speculative.

Debt rated BB, B, CCC, CC and C by S&P, and debt rated Ba, B, Caa, Ca and C
by Moody's is regarded by the rating agency, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB/Ba indicates the
lowest degree of speculation and D/C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Similarly, debt rated Ba or BB and below is regarded by the
relevant rating agency as speculative. Debt rated C by S&P is the lowest rated
debt that is not in default as to principal or interest and such issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing. Such securities are also generally considered to be
subject to greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. Debt rated D by S&P is in payment
default. Moody's does not have a D rating. See the "Description of Security
Ratings" in the Appendix.

Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than a rating indicates.

FOREIGN SECURITIES

The Fund may invest up to 30% of its total assets in equity and fixed-income
securities of foreign issuers denominated in U.S. dollars or foreign
currencies. ADRs and GDRs are not included in this 30% limitation. ADRs,
European Depositary Receipts (EDRs), GDRs and other types of depositary
receipts evidence ownership of underlying securities issued by a foreign
corporation that have been deposited with a depositary or custodian bank,
typically a U.S. bank or trust company. Depositary receipts may be issued in
connection with an offering of securities by the issuer of the underlying
securities or issued by a depositary bank as a vehicle to promote investment
and trading in the underlying securities. While depositary receipts may not
necessarily be denominated in the same currency as the underlying securities,
the risks associated with foreign securities also generally apply to depositary
receipts. See "Risk Factors Relating to Investing in Foreign Securities" below.

FOREIGN GOVERNMENT SECURITIES

Foreign government securities include debt securities issued or guaranteed,
as to payment of principal and interest, by governments, quasi-governmental
entities, governmental agencies, supranational entities and other governmental
entities (collectively, Government Entities) denominated in U.S. dollars or
foreign currencies. A "supranational entity" is an entity constituted by the
national governments of several countries to promote economic development.
Examples of such supranational entities include, among others, the World Bank
(International Bank for Reconstruction and Development), the

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European Investment Bank and the Asian Development Bank. Debt securities of
"quasi-governmental entities" are issued by entities owned by a national,
state, or equivalent government or are obligations of a political unit that are
not backed by the national government's "full faith and credit" and general
taxing powers. Examples of quasi-governmental entities include, among others,
the Province of Ontario and the City of Stockholm. Foreign government
securities also include mortgage-backed securities issued by Government
Entities.

BRADY BONDS. The Fund is permitted to invest in debt obligations commonly
known as "Brady Bonds" which are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection
with debt restructurings under a plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady (the Brady Plan). Brady Bonds have been issued
in connection with the restructuring of the bank loans, for example, of the
governments of Mexico, Venezuela and Argentina.

Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and issued
in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.

Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady
Bonds are often viewed as having three or four valuation components: (1) the
collateralized repayment of principal at final maturity; (2) the collateralized
interest payments; (3) the uncollateralized interest payments; and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have
then been due on the Brady Bonds in the normal course. In addition, in light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
of countries issuing Brady Bonds, investments in Brady Bonds are to be viewed
as speculative.

RISK FACTORS RELATING TO INVESTING IN FOREIGN SECURITIES

Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange
controls and the risk of currency fluctuations. Such securities may be subject
to greater fluctuations in price than securities issued by U.S. corporations or
issued or guaranteed by the U.S. Government, its instrumentalities or agencies.
In addition, there may be less publicly available information about a foreign
company or government than about a domestic company or the U.S. Government.
Foreign companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could affect investment. In many instances, foreign debt
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. These investments, however, may be less
liquid than the securities of U.S. corporations. In the event of default of any
such foreign debt obligations, it may be more difficult for the Fund to obtain
or enforce a judgment against the issuers of such securities.

Investing in the equity and fixed-income markets of developing countries
involves exposure to economies that are generally less diverse and mature and
to political systems which can be expected to have less stability than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than

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<PAGE>

the markets of developed countries. The risks associated with investments in
foreign securities may be greater with respect to investments in developing
countries and are certainly greater with respect to investments in the
securities of financially and operationally troubled issuers.

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

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

The Fund may, but need not, enter into foreign currency forward contracts,
options on foreign currencies and futures contracts on foreign currencies and
related options, for hedging purposes, including: locking-in the U.S. dollar
price of the purchase or sale of securities denominated in a foreign currency;
locking-in the U.S. dollar equivalent of dividends to be paid on such
securities which are held by the Fund; and protecting the U.S. dollar value of
such securities which are held by the Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES

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

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

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

The Fund's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Fund's other service providers to address the
conversion. The Fund has not borne any expense relating to these actions.

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<PAGE>

MONEY MARKET INSTRUMENTS

The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. These obligations will be U.S. dollar-
denominated or denominated in a foreign currency. Consistent with its
investment objective and policies, the Fund will also invest in lower quality
money market instruments of financially or operationally troubled issuers, such
as commercial paper. Money market instruments typically have a maturity of
thirteen months or less as measured from the date of purchase.

RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES

The Fund may also engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to enhance
return. The Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. These strategies currently include the
use of options, foreign currency forward contracts and futures contracts and
options thereon. The Fund's ability to use these strategies may be limited by
various factors, such as market conditions, regulatory limits and tax
considerations, and there can be no assurance that any of these strategies will
succeed. See "Taxes, Dividends and Distributions." If new financial products
and risk management techniques are developed, the Fund may use them to the
extent consistent with its investment objective and policies.

OPTIONS TRANSACTIONS

The Fund may purchase and write (that is, sell) put and call options on
securities, financial indices and currencies that are traded on U.S. or foreign
securities exchanges or in the over-the-counter (OTC) market to seek to enhance
return or to protect against adverse price fluctuations in securities in the
Fund's portfolio. These options will be on equity and debt securities,
including U.S. Government securities, financial indices, including stock
indices (for example, S&P 500), and foreign currencies. The Fund may write
covered put and call options to attempt to generate additional income through
the receipt of premiums, purchase put options in an effort to protect the value
of securities (or currencies) that it owns against a decline in market value
and purchase call options in an effort to protect against an increase in the
price of securities (or currencies) it intends to purchase. The Fund may also
purchase put and call options to offset previously written put and call options
of the same series.

A call option gives the purchaser, in exchange for a premium paid, the right
for a specified period of time to purchase the securities or currency subject
to the option at a specified price (the exercise price or strike price). The
writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities
or currency in excess of the exercise price of the option during the period
that the option is open. There is no limitation on the amount of call options
the Fund may write.

A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities or currency subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Fund, as the writer of a put option, might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.

The Fund will write only "covered" options. A written option is covered if,
as long as the Fund is obligated under the option, it (1) owns an offsetting
position in the underlying security or currency or (2) segregates cash or other
liquid assets in an amount equal to or greater than its obligation under the
option. Under the first circumstance, the Fund's losses are limited because it
owns the underlying security; under the second circumstance, in the case of a
written call option, the Fund's losses are potentially unlimited.

OPTIONS ON SECURITIES. The Fund may wish to protect certain portfolio
securities against a decline in market value at a time when put options on
those particular securities are not available for purchase. The Fund may
therefore purchase a put

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<PAGE>

option on other carefully selected securities, the values of which the
investment adviser expects will have a high degree of positive correlation to
the values of such portfolio securities. If the investment adviser's judgment
is correct, changes in the value of the put options should generally offset
changes in the value of the portfolio securities being hedged. If the
investment adviser's judgment is not correct, the value of the securities
underlying the put option may decrease less than the value of the Fund's
investments and therefore the put option may not provide complete protection
against a decline in the value of the Fund's investments below the level sought
to be protected by the put option.

The Fund may similarly wish to hedge against appreciation in the value of
securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options on
other carefully selected securities the values of which the investment adviser
expects will have a high degree of positive correlation to the values of the
securities that the Fund intends to acquire. In such circumstances the Fund
will be subject to risks analogous to those summarized above in the event that
the correlation between the value of call options so purchased and the value of
the securities intended to be acquired by the Fund is not as close as
anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the Fund.

The Fund may write options on securities in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write
a call option against that security. If the call option is exercised, the
Fund's maximum gain will be the premium it received for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price of the option. If the option is
not exercised and the price of the underlying security declines, the amount of
the decline will be offset in part, or entirely, by the premium received.

The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline
moderately during the option period. Buy-and-write transactions using at-the-
money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. A buy-and-write transaction using an out-of-the-money call option may
be used when it is expected that the premium received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call option is exercised in such a
transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price of the option. If
the option is not exercised and the price of the underlying security declines,
the amount of the decline will be offset in part, or entirely, by the premium
received.

Prior to being notified of exercise of the option, the writer of an exchange-
traded option that wishes to terminate its obligation may effect a "closing
purchase transaction" by buying an option of the same series as the option
previously written. (Options of the same series are options with respect to the
same underlying security, having the same expiration date and the same strike
price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a
position by effecting a "closing sale transaction" by selling an option of the
same series as the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected.

Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its contra-party with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do
so would result in the loss of the premium paid by the Fund as well as the loss
of the expected benefit of the transaction.

When the Fund writes an OTC option, it generally will be able to close out
the OTC option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote the OTC option.
While the Fund will enter into OTC options only with dealers which agree to,
and which are expected to be capable of, entering into closing transactions
with the Fund, there can be no assurance that the Fund will be able to
liquidate an OTC option at a

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<PAGE>

favorable price at any time prior to expiration. Until the Fund is able to
effect a closing purchase transaction in a covered OTC call option the Fund has
written, it will not be able to liquidate securities used as cover until the
option expires or is exercised or different cover is substituted. In the event
of insolvency of the contra-party, the Fund may be unable to liquidate an OTC
option. See "Illiquid Securities" below.

OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund
may repurchase any OTC options it writes for a maximum price to be calculated
by a formula set forth in the option agreement. The "cover" for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. See "Illiquid Securities" below.

The Fund may write only "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price
of the "covered" option, or will segregate cash or other liquid assets having a
value equal to or greater than the exercise price of the option. In the case of
a straddle written by the Fund, the amount segregated will equal the amount, if
any, by which the put is "in-the-money."

OPTIONS ON SECURITIES INDICES. The Fund also may purchase and write call and
put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Fund owns or intends to
purchase. Through the writing or purchase of index options, the Fund can
achieve many of the same objectives as through the use of options on individual
securities. Options on securities indices are similar to options on a security
except that, rather than the right to take or make delivery of a security at a
specified price, an option on a securities index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the securities index upon which the option is based is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends upon price movements in the market generally (or in a particular
industry or segment of the market), rather than upon price movements in
individual securities. Price movements in securities that the Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index and, therefore, the Fund bears the risk that a loss on an
index option would not be completely offset by movements in the price of such
securities.

When the Fund writes an option on a securities index, it will be required to
deposit with its custodian, and mark-to-market, eligible securities equal in
value to 100% of the exercise price in the case of a put, or the contract value
in the case of a call. In addition, where the Fund writes a call option on a
securities index at a time when the contract value exceeds the exercise price,
the Fund will segregate and mark-to-market, until the option expires or is
closed out, cash or cash equivalents equal in value to such excess.

Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.

RISKS OF OPTIONS TRANSACTIONS

An exchange-traded option position may be closed out only on an exchange
which provides a secondary market for an option of the same series. Although
the Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option at any
particular time, and for some exchange-traded options, no secondary market on
an exchange may exist. In such event, it might not be possible to effect
closing transactions in particular options, with the result that the Fund would
have to exercise its exchange-traded options in order to realize any profit and
may incur transaction costs in connection therewith. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction in a

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<PAGE>

secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise.

Reasons for the absence of a liquid secondary market on an exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an exchange; (e) inadequacy of the facilities of an exchange or
clearinghouse, such as The Options Clearing Corporation (the OCC) to handle
current trading volume; or (f) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with their
terms.

In the event of the bankruptcy of a broker through which the Fund engages in
options transactions, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.

The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the option markets.

RISKS OF OPTIONS ON FOREIGN CURRENCIES

Options on foreign currencies involve the currencies of two nations and
therefore, developments in either or both countries affect the values of
options on foreign currencies. Risks include government actions affecting
currency valuation and the movements of currencies from one country to another.
The quantity of currency underlying option contracts represent odd lots in a
market dominated by transactions between banks; this can mean extra transaction
costs upon exercise. Option markets may be closed while round-the-clock
interbank currency markets are open, and this can create price and rate
discrepancies.

FUTURES CONTRACTS AND RELATED OPTIONS

The Fund may purchase and sell financial futures contracts and options
thereon which are traded on a commodities exchange or board of trade to reduce
certain risks of its investments and to attempt to enhance return in accordance
with regulations of the Commodity Futures Trading Commission (CFTC). These
futures contracts and related options will be on debt securities, including
U.S. Government securities, financial indices and foreign currencies. The Fund,
and thus its investors, may lose money through any unsuccessful use of these
strategies.

A futures contract is an agreement to purchase or sell an agreed amount of
securities or currencies at a set price for delivery in the future. A stock
index futures contract is an agreement to deliver an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index on an agreed future date and the contract price. The Fund may
purchase and sell futures contracts as a hedge against changes resulting from
market conditions in the value of securities which are held in the Fund's
portfolio or which the Fund intends to acquire.

The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the market value
of the Fund's total assets. The Fund may purchase and sell futures contracts
and related options, without limitation, for bona fide hedging purposes in
accordance with regulations of the CFTC (that is, to reduce certain risks of
its investments). The value of all futures contracts sold will not exceed the
total market value of the Fund's portfolio.

Futures contracts and related options are generally subject to segregation
requirements of the Securities and Exchange Commission (the Commission) and the
coverage requirements of the CFTC. If the Fund does not hold the security
underlying

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<PAGE>

the futures contract, the Fund will be required to segregate on an ongoing
basis with its Custodian cash or other liquid assets in an amount at least
equal to the Fund's obligations with respect to such futures contracts.

The Fund's successful use of futures contracts and related options depends
upon the investment adviser's ability to predict the direction of the market
and is subject to various additional risks. The correlation between movements
in the price of a futures contract and the movements in the index or price of
the currencies being hedged is imperfect and there is a risk that the value of
the indices or currencies being hedged may increase or decrease at a greater
rate than the related futures contracts, resulting in losses to the Fund.
Certain futures exchanges or boards of trade have established daily limits on
the amount that the price of futures contracts or related options may vary,
either up or down, from the previous day's settlement price. These daily limits
may restrict the Fund's ability to purchase or sell certain futures contracts
or related options on any particular day.

As a purchaser of a futures contract, the Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the futures
contract at a specified time in the future for a specified price. As a seller
of a futures contract, the Fund incurs an obligation to deliver the specified
amount of the underlying obligation at a specified time in return for an agreed
upon price.

The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates or market conditions. The investment adviser may
purchase futures when the price of securities, indices or currencies is
expected to rise and sell futures when the price of securities, indices or
currencies is expected to decline. If the investment adviser anticipates that
interest rates may rise and, concomitantly, the price of the Fund's portfolio
securities may fall, the Fund may sell a futures contract. If declining
interest rates are anticipated, the Fund may purchase a futures contract to
protect against a potential increase in the price of securities the Fund
intends to purchase. Subsequently, appropriate securities may be purchased by
the Fund in an orderly fashion; as securities are purchased, corresponding
futures positions would be terminated by offsetting sales of contracts. In
addition, futures contracts will be bought or sold in order to close out a
short or long position in a corresponding futures contract.

Although most futures contracts call for actual delivery or acceptance of
securities or cash, the contracts usually are closed out before the settlement
date without the making or taking of delivery. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security and the same delivery date. If the sale
price exceeds the offsetting purchase price, the seller would be paid the
difference and would realize a gain. If the offsetting purchase price exceeds
the sale price, the seller would pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same aggregate amount of the specific type of security
(or currency) and the same delivery date. If the offsetting sale price exceeds
the purchase price, the purchaser would realize a gain, whereas if the purchase
price exceeds the offsetting sale price, the purchaser would realize a loss.
There is no assurance that the Fund will be able to enter into a closing
transaction.

When the Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction, an "initial margin" of cash or other liquid assets
equal to approximately 2-3% of the contract amount. Initial margin requirements
are established by the exchanges on which futures contracts trade and may, from
time to time, change. In addition, brokers may establish margin deposit
requirements in excess of those required by the exchanges.

Initial margin in futures transactions is different from margin in securities
transactions in that initial margin does not involve the borrowing of funds by
a brokers' client but is, rather, a good faith deposit on a futures contract
which will be returned to the Fund upon the proper termination of the futures
contract. The margin deposits made are marked-to-market daily and the Fund may
be required to make subsequent deposits into the segregated account, maintained
at its Custodian for that purpose, of cash or other liquid assets, called
"variation margin," in the name of the broker, which are reflective of price
fluctuations in the futures contract.

OPTIONS ON FUTURES CONTRACTS

The Fund may purchase and sell call and put options on futures contracts
which are traded on an exchange and enter into closing transactions with
respect to such options to terminate an existing position. An option on a
futures contract gives

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the purchaser the right (in return for the premium paid), and the writer the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the assumption of an offsetting futures position by the writer and
holder of the option will be accompanied by delivery of the accumulated cash
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract at exercise exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.

The Fund may only write "covered" put and call options on futures contracts.
The Fund will be considered "covered" with respect to a call option it writes
on a futures contract if the Fund owns the assets which are deliverable under
the futures contract or an option to purchase that futures contract having a
strike price equal to or less than the strike price of the "covered" option and
having an expiration date not earlier than the expiration date of the "covered"
option, or if it segregates for the term of the option cash or other liquid
assets equal to the fluctuating value of the optioned future. The Fund will be
considered "covered" with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the "covered" option, or if
it segregates for the term of the option cash or other liquid assets at all
times equal in value to the exercise price of the put (less any initial margin
deposited by the Fund with its Custodian with respect to such option). There is
no limitation on the amount of the Fund's assets which can be segregated.

The Fund will purchase options on futures contracts for identical purposes to
those set forth above for the purchase of a futures contract (purchase of a
call option or sale of a put option) and the sale of a futures contract
(purchase of a put option or sale of a call option), or to close out a long or
short position in futures contracts.

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS

The Fund may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio may
decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.

If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.

Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator," subject to compliance with certain conditions. The
exemption is conditioned upon a requirement that all of the Fund's futures or
options transactions constitute bona fide hedging transactions within the
meaning of the regulations of the CFTC. The Fund will use futures and options
on futures in a manner consistent with this requirement. The Fund may also
enter into futures or related options contracts to attempt to enhance return if
the aggregate initial margin and option premiums do not exceed 5% of the market
value of the Fund's total assets, after taking into account unrealized profits
and unrealized losses on any such contracts, provided, however, that in the
case of an option that is in-the-money, the in-the-money amount may be excluded
in computing such 5%. The above restriction does not apply to the purchase and
sale of futures and related options contracts for bona fide hedging purchases.

In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either: (1)
a substantial majority (that is, approximately 75%) of all anticipatory hedge
transactions (transactions in which the Fund does not own at the time of the
transaction, but expects to acquire, the securities underlying the relevant
futures contract) involving the purchase of futures contracts will be completed
by the purchase of securities which are the subject of the hedge, or (2) the
underlying value of all long positions in futures contracts will not exceed the
total value of (a) all short-term debt obligations held by the Fund; (b) cash
held by the Fund; (c) cash proceeds due to the Fund on investments within
thirty days; (d) the margin deposited on the contracts; and (e) any unrealized
appreciation in the value of the contracts.

If the Fund maintains a short position in a futures contract, it will cover
this position by segregating cash or other liquid assets equal in value (when
added to any initial or variation margin on deposit) to the market value of the
securities

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<PAGE>

underlying the futures contract. Such a position may also be covered by owning
the securities underlying the futures contract, or by holding a call option
permitting the Fund to purchase the same contract at a price no higher than the
price at which the short position was established.

In addition, if the Fund holds a long position in a futures contract, it will
segregate cash or other liquid assets equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit).
Alternatively, the Fund could cover its long position by purchasing a put
option on the same futures contract with an exercise price as high or higher
than the price of the contract held by the Fund.

Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then
it may prove impossible to liquidate a futures position until the daily limit
moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if the Fund has insufficient cash, it
may be disadvantageous to do so. In addition, the Fund may be required to take
or make delivery of the instruments underlying futures contracts it holds at a
time when it is disadvantageous to do so. The ability to close out options and
futures positions could also have an adverse impact on the Fund's ability to
hedge effectively its portfolio.

In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the investment adviser.

There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Fund's portfolio securities. One
such risk which may arise in employing futures contracts to protect against the
price volatility of portfolio securities is that the prices of securities
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the cash prices of the Fund's
portfolio securities. Another such risk is that prices of futures contracts may
not move in tandem with the changes in prevailing interest rates against which
the Fund seeks a hedge. A correlation may also be distorted by the fact that
the futures market is dominated by short-term traders seeking to profit from
the difference between a contract or security price objective and their cost of
borrowed funds. Such distortions are generally minor and would diminish as the
contract approached maturity.

There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (or currencies) which are the subject of the hedge. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities (or currencies) and futures
market could result. Price distortions could also result if investors in
futures contracts elect to make or take delivery of underlying securities (or
currencies) rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures markets could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in
the prices of securities (or currencies) and movements in the prices of futures
contracts, a correct forecast of interest rate trends by the investment adviser
may still not result in a successful hedging transaction.

Compared to the purchase or sale of futures contracts, the purchase and sale
of call or put options on futures contracts involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to the
Fund notwithstanding that the purchase or sale of a futures contract would not
result in a loss, as in the instance where there is no movement in the prices
of the futures contracts or underlying securities (or currencies).

FOREIGN CURRENCY FORWARD CONTRACTS

The Fund may enter into foreign currency forward contracts to protect the
value of its assets against future changes in the level of currency exchange
rates. The Fund may enter into such contracts on a spot, that is, cash, basis
at the rate then

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<PAGE>

prevailing in the currency exchange market or on a forward basis, by entering
into a forward contract to purchase or sell currency. A forward contract on
foreign currency is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days agreed upon by the parties
from the date of the contract at a price set on the date of the contract. See
"Risks Related to Foreign Currency Forward Contracts" below.

The Fund's dealings in forward contracts will be limited to hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of a forward contract with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities and accruals of interest or dividends receivable
and Fund expenses. Position hedging is the sale of a foreign currency with
respect to portfolio security positions denominated or quoted in that currency
or in a different currency (cross hedge). Although there are no limits on the
number of forward contracts which the Fund may enter into, the Fund may not
position hedge (including cross hedges) with respect to a particular currency
for an amount greater than the aggregate market value (determined at the time
of making any sale of foreign currency) of the securities being hedged.

RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS

The Fund may enter into foreign currency forward contracts in several
circumstances. When the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when the Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for a fixed amount of
dollars, for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, the Fund may be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the foreign currency during the period between the date on
which the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such payments are made or received.

Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
forward contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. If the Fund
enters into a position hedging transaction, the transaction will be covered by
the position being hedged or the Fund's Custodian will segregate cash or other
liquid assets of the Fund (less the value of the "covering" positions, if any)
in an amount equal to the value of the Fund's total assets committed to the
consummation of the given forward contract.

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

It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of
the foreign currency and if the market value of the security is less than the
amount of foreign currency that the Fund is obligated to deliver, then it would
be necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).

If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices
decline during the period between the Fund's entering into a forward contract
for the sale of a foreign currency and the date it enters into an offsetting
contract for the purchase of the foreign currency, the Fund will realize a gain
to the extent that the price of the currency it

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<PAGE>

has agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward contract prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.

The Fund's dealing in foreign currency forward contracts will generally be
limited to the transactions described above. Of course, the Fund is not
required to enter into such transactions with regard to its foreign currency-
denominated securities. Also, this method of protecting the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities which are
unrelated to exchange rates. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they also tend to limit any potential gain which might result should the value
of such currency increase. The Fund's ability to enter into foreign currency
forward contracts may be limited by certain requirements for qualification as a
regulated investment company under the Internal Revenue Code. See "Taxes,
Dividends and Distributions."

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

RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES

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

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

OTHER INVESTMENTS

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

The Fund may purchase or sell securities on a when-issued or delayed delivery
basis, that is, delivery and payment can take place in the future after the
date of the transaction. The Fund will make commitments for such when-issued
transactions only with the intention of actually acquiring the securities. The
Fund's Custodian will segregate cash or other liquid assets

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<PAGE>

having a value equal to or greater than such commitments. If the Fund chooses
to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio security,
incur a gain or loss due to market fluctuations. At the time of delivery of the
securities, the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually agreed-
upon time and price. The repurchase date is usually within a day or two of the
original purchase, although it may extend over a number of months. The Fund's
repurchase agreements will at all times be fully collateralized in an amount at
least equal to the resale price. The Fund's repurchase agreements will be
collateralized by U.S. Government obligations. The Fund will enter into
repurchase transactions only with parties meeting creditworthiness standards
approved by the Fund's Board of Directors. The Fund's investment adviser will
monitor the creditworthiness of such parties, under the general supervision of
the Board of Directors. In the event of a default or bankruptcy by a seller,
the Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of such collateral upon a default in the obligation to
repurchase are less than the repurchase price, the Fund will suffer a loss.

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

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral that is
equal to at least the market value, determined daily, of the loaned securities.
During the time portfolio securities are on loan, the borrower will pay the
Fund an amount equivalent to any dividend or interest paid on such securities
and the Fund may invest the cash collateral and earn additional income, or it
may receive an agreed-upon amount of interest income from the borrower. As with
any extensions of credit, there are risks of delay in recovery and in some
cases loss of rights in the collateral should the borrower of the securities
fail financially. The advantage of such loans is that the Fund continues to
receive payments in lieu of the interest and dividends of the loaned
securities, while at the same time earning interest either directly from the
borrower or on the collateral which will be invested in short-term obligations.

A loan may be terminated by the Fund at any time without cause. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. These loans of portfolio securities will only be made to firms
determined to be creditworthy pursuant to procedures approved by the Board of
Directors of the Fund. On termination of the loan, the borrower is required to
return the securities to the Fund, and any gain or loss in the market price
during the loan would inure to the Fund.

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

BORROWING

The Fund may borrow up to 33 1/3% of the value of its total assets
(calculated at the time of the borrowing) from banks for temporary,
extraordinary or emergency purposes, for the clearance of transactions or for
investment purposes. The Fund

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may pledge up to 33 1/3% of its total assets to secure these borrowings. If the
Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings. If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, the Fund may be
required to sell portfolio securities to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. The Fund will not purchase
portfolio securities when borrowings exceed 5% of the value of its total
assets.

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

ILLIQUID SECURITIES

The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Repurchase agreements
subject to demand are deemed to have a maturity equal to the applicable notice
period.

Securities of financially and operationally troubled issuers are less liquid
and more volatile than securities of companies not experiencing financial
difficulties. Many of the Fund's portfolio investments may not be widely
traded. Accordingly, the Fund may have to sell portfolio securities at
disadvantageous times and at disadvantageous prices in order to maintain no
more than 15% of its net assets in illiquid securities. This could have an
adverse impact on the Fund's performance.

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

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

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

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act, privately placed commercial paper and municipal lease
obligations for which there is a readily available market are treated as liquid
only when deemed liquid

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under procedures established by the Board of Directors. The Fund's investment
in Rule 144A securities could have the effect of increasing illiquidity to the
extent that qualified institutional buyers become, for a limited time,
uninterested in purchasing Rule 144A securities. The investment adviser will
monitor the liquidity of such restricted securities subject to the supervision
of the Board of Directors. In reaching liquidity decisions, the investment
adviser will consider, among others, the following factors: (1) the frequency
of trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers and the mechanics
of the transfer). With respect to municipal lease obligations, the investment
adviser will also consider: (1) the willingness of the municipality to
continue, annually or biannually, to appropriate funds for payment of the
lease; (2) the general credit quality of the municipality and the essentiality
to the municipality of the property covered by the lease; (3) an analysis of
factors similar to that performed by nationally recognized statistical rating
organizations (NRSROs) in evaluating the credit quality of a municipal lease
obligation, including (1) whether the lease can be cancelled; (2) if
applicable, what assurance there is that the assets represented by the lease
can be sold; (3) the strength of the lessee's general credit (for example, its
debt, administrative, economic and financial characteristics); (4) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (for example, the potential for an event of
nonappropriation); and (5) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the investment adviser. In addition, in order for commercial
paper that is issued in reliance on Section 4(2) of the Securities Act to be
considered liquid, (a) it must be rated in one of the two highest rating
categories by at least two NRSROs, or if only one NRSRO rates the securities,
by that NRSRO, or, if unrated, be of comparable quality in the view of the
investment adviser; and (b) it must not be "traded flat" (that is, without
accrued interest) or in default as to principal or interest.

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

SHORT SALES

The Fund may sell a security it does not own in anticipation of a decline in
the market value of that security (short sales). To complete the transaction,
the Fund will borrow the security to make delivery to the buyer. The Fund is
then obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the security
is replaced, the Fund is required to pay to the lender any dividends or
interest which accrue during the period of the loan. To borrow the security,
the Fund may be required to pay a premium which would increase the cost of the
security sold. The proceeds of the short sale will be retained by the broker to
the extent necessary to meet margin requirements until the short position is
closed out. Until the Fund replaces the borrowed security, it will (a)
segregate cash or other liquid assets at such a level that the amount deposited
in the account plus the amount deposited with the broker as collateral will
equal the current value of the security sold short and will not be less than
the market value of the security at the time it was sold short or (b) otherwise
cover its short position through a short sale "against-the-box," which is a
short sale in which the Fund owns an equal amount of the securities sold short
or securities convertible into or exchangeable for, without payment of any
further consideration, securities of the same issue as, and equal in amount to,
the securities sold short. The value of securities of any one issuer in which
the Fund is short may not exceed the lesser of 2% of the value of the Fund's
net assets or 2% of the securities of any class of any issuer.

The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss will be increased, by the amount of any
premium, dividends or interest paid in connection with the short sale.

B-23
<PAGE>

SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund does invest in securities of other
investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees.

SEGREGATED ASSETS

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

(D) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS

For temporary defensive purposes, the Fund may hold up to 100% of its assets
in cash, high quality money market instruments and U.S. Treasury securities
(including repurchase agreements). U.S. Treasury securities include bills,
notes, bonds and other securities issued by the U.S. Treasury. These
instruments are direct obligations of the U.S. Government and, as such, are
backed by the "full faith and credit" of the United States. They differ
primarily in their interest rates, the length of their maturities and the
dates of their issuances.

High quality money market instruments include commercial paper of
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks. Temporary investments may also be
made in obligations issued or guaranteed by the U.S. Government, its agencies
or its instrumentalities and repurchase agreements. Investments in obligations
of foreign banks may be subject to certain risks, including future political
and economic developments, the possible imposition of withholding taxes on
interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions.

(E) PORTFOLIO TURNOVER

The Fund's portfolio turnover rate generally is not expected to exceed 150%.
The portfolio turnover rates for the fiscal years ended November 30, 1998 and
1997 were 188% and 175%, respectively. The higher portfolio turnover in 1998
was a result of the size and nature of the Fund, while the higher portfolio
turnover in 1997 was a result of the unusually active new issue calendar in
the high yield market. The portfolio turnover rate is generally the percentage
computed by dividing the lesser of portfolio purchases or sales (excluding all
securities, including options, whose maturities or expiration date at
acquisition were one year or less) by the monthly average value of the
portfolio. High portfolio turnover (100% or more) involves correspondingly
greater brokerage commissions and other transaction costs, which are borne
directly by the Fund. In addition, high portfolio turnover may also mean that
a proportionately greater amount of distributions to shareholders will be
taxed as ordinary income rather than long-term capital gains compared to
investment companies with lower portfolio turnover. See "Brokerage Allocation
and Other Practices" and "Taxes, Dividends and Distributions."

B-24
<PAGE>

INVESTMENT RESTRICTIONS

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

The Fund may not:

1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided
that the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.

2. Make short sales of securities or maintain a short position if, when
added together, more than 25% of the value of the Fund's net assets would be
(i) deposited as collateral for the obligation to replace securities
borrowed to effect short sales and (ii) allocated to segregated accounts in
connection with short sales. Short sales "against-the-box" are not subject
to this limitation.

3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 33 1/3% of the value of its total
assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes, for the clearance of transactions or for investment
purposes. The Fund may pledge up to 33 1/3% of the value of its total assets
to secure such borrowings. For purposes of this restriction, the purchase or
sale of securities on a when-issued or delayed delivery basis, forward
foreign currency exchange contracts and collateral arrangements relating
thereto, and collateral arrangements with respect to interest rate swap
transactions, reverse repurchase agreements, dollar roll transactions,
options, futures contracts and options thereon and obligations of the Fund
to Directors pursuant to deferred compensation arrangements are not deemed
to be a pledge of assets or the issuance of a senior security.

4. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined
at the time of investment) would then be invested in securities of a single
issuer, or (ii) 25% or more of the Fund's total assets (determined at the
time of the investment) would be invested in a single industry.

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

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

7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws. The Fund has not adopted a
fundamental investment policy with respect to investments in restricted
securities.

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

9. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which the Fund will not hold more than 3% of the outstanding
voting securities of any one investment company, will not have invested more
than 5% of its total assets in any one investment company and will not have
invested more than 10% of its total assets (determined at the time of
investment) in such securities of one or more investment companies, or
except as part of a merger, consolidation or other acquisition.

10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.

B-25
<PAGE>

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

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

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

MANAGEMENT OF THE FUND

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS** (AGE) FUND DURING PAST 5 YEARS
------------------------ ------------- --------------------
<C> <C> <S>
Edward D. Beach (74) Director President and Director of
BMC Fund, Inc., a closed-end
investment company; formerly
Vice Chairman of Broyhill
Furniture Industries, Inc.;
Certified Public Accountant;
Secretary and Treasurer of
Broyhill Family Foundation,
Inc.; Member of the Board of
Trustees of Mars Hill
College; Director or Trustee
of 44 funds within the
Prudential Mutual Funds.
Delayne Dedrick Gold (59) Director Marketing and Management
Consultant; Director or
Trustee of 44 funds within
the Prudential Mutual Funds.
*Robert F. Gunia (51) Vice President and Vice President (since
Director September 1997), The
Prudential Insurance Company
of America (Prudential);
Executive Vice President and
Treasurer (since December
1996), Prudential
Investments Fund Management
LLC (PIFM); Senior Vice
President (since March 1987)
of Prudential Securities
Incorporated (Prudential
Securities); formerly Chief
Administrative Officer (July
1990-September 1996),
Director (January 1989-
September 1996), and
Executive Vice President,
Treasurer and Chief
Financial Officer (June
1987-September 1996) of
Prudential Mutual Fund
Management, Inc.; Vice
President and Director
(since May 1989) of The Asia
Pacific Fund, Inc.; Director
or Trustee of 44 funds
within the Prudential Mutual
Funds.
Douglas H. McCorkindale (58) Director Vice Chairman (since March
1984) and President (since
September 1997) of Gannett
Co. Inc. (publishing and
media); Director of Gannett
Co. Inc., Frontier
Corporation and Continental
Airlines, Inc. and Director
or Trustee of 23 funds
within the Prudential Mutual
Funds.
*Mendel A. Melzer, CFA (38) Director Chief Investment Officer
751 Broad Street (since October 1996) of
Newark, NJ 07102 Prudential Mutual Funds;
formerly Chief Financial
Officer (November 1995-
September 1996) of
Prudential Investments,
Senior Vice President and
Chief Financial Officer
(April 1993-November 1995)
of Prudential Preferred
Financial Services, Managing
Director (April 1991-April
1993) of Prudential
Investment Advisors, and
Senior Vice President (July
1989-April 1991) of
Prudential Capital
Corporation; Chairman and
Director of Prudential
Series Fund, Inc.; Director
or Trustee of 44 other funds
within the Prudential Mutual
Funds.
</TABLE>

B-26
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS** (AGE) FUND DURING PAST 5 YEARS
------------------------ ------------- --------------------
<C> <C> <S>
Thomas T. Mooney (56) Director President of the Greater
Rochester Metro Chamber of
Commerce; former Rochester
City Manager; Trustee of
Center for Governmental
Research, Inc.; Director of
Blue Cross of Rochester, The
Business Council of New York
State, Executive Service
Corps of Rochester, Monroe
County Water Authority,
Rochester Jobs, Inc., Monroe
County Industrial
Development Corporation and
Northeast Midwest Institute;
President, Director and
Treasurer of First Financial
Fund, Inc. and The High
Yield Plus Fund, Inc. and
Director or Trustee of 33
other funds within the
Prudential Mutual Funds.
Stephen P. Munn (55) Director Chairman (since January
1994), Director and
President (since 1988) and
Chief Executive Officer
(1988-December 1993) of
Carlisle Companies
Incorporated (manufacturer
of industrial products) and
Director or Trustee of 18
funds within the Prudential
Mutual Funds.
Richard A. Redeker (55) Director Formerly President, Chief
Executive Officer and
Director (October 1993-
September 1996), Prudential
Mutual Fund Management,
Inc., Executive Vice
President, Director and
Member of Operating
Committee (October 1993-
September 1996) of
Prudential Securities,
Director (October 1993-
September 1996) of
Prudential Securities Group,
Inc., Executive Vice
President, The Prudential
Investment Corporation
(January 1994-September
1996), Director (January
1994-September 1996),
Prudential Mutual Fund
Distributors, Inc. and
Prudential Mutual Fund
Services, Inc., and Senior
Executive Vice President and
Director of Kemper Financial
Services, Inc. (September
1978-September 1993); and
Director or Trustee of 30
funds within the Prudential
Mutual Funds.
Robin B. Smith (58) Director Chairman and Chief Executive
Officer (since August 1996)
of Publishers Clearing
House; formerly President
and Chief Executive Officer
(January 1988-August 1996)
and President and Chief
Operating Officer (September
1981-December 1988) of
Publishers Clearing House;
Director of BellSouth
Corporation, Texaco Inc.,
Springs Industries Inc. and
Kmart Corporation and
Director or Trustee of 32
funds within the Prudential
Mutual Funds.
*Brian M. Storms (44) President and Director President (since October
1998) of Prudential
Investments; formerly
President (September 1996-
October 1998) of Prudential
Mutual Funds, Annuities and
Investment Management
Services, Managing Director
(July 1991-September 1996)
of Fidelity Investment
Institutional Services
Company, Inc., President
(October 1989-September
1991) of J.K. Schofield and
Senior Vice President
(September 1982-October
1989) of INVEST Financial
Corporation; President and
Director or Trustee of 47
funds within the Prudential
Mutual Funds.
</TABLE>

B-27
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS** (AGE) FUND DURING PAST 5 YEARS
------------------------ ------------- --------------------
<C> <C> <S>
Louis A. Weil, III (57) Director Chairman (since January
1999), President and Chief
Executive Officer (since
January 1996) and Director
(since September 1991) of
Central Newspapers, Inc.;
Chairman of the Board
(since January 1996),
Publisher and Chief
Executive Officer (August
1991-December 1995) of
Phoenix Newspapers, Inc.;
formerly Publisher (May
1989-March 1991) of Time
Magazine, President,
Publisher and Chief
Executive Officer (February
1986-August 1989) of The
Detroit News and member of
the Advisory Board, Chase
Manhattan Bank-Westchester;
Director or Trustee of 30
funds within the Prudential
Mutual Funds.
Clay T. Whitehead (59) Director President, National
Exchange Inc. (new business
development firm) (since
May 1983) and Director or
Trustee of 18 funds within
the Prudential Mutual
Funds.
Marguerite E.H. Morri- Secretary Vice President (since
son (42) December 1996) of PIFM;
Vice President and
Associate General Counsel
(since September 1987) of
Prudential Securities;
formerly Vice President and
Associate General Counsel
(June 1991-September 1996)
of Prudential Mutual Fund
Management Inc.
Grace C. Torres (39) Treasurer and Principal First Vice President (since
Financial and December 1996) of PIFM;
Accounting Officer First Vice President (since
March 1993) of Prudential
Securities; formerly First
Vice President (March 1994-
September 1996) of
Prudential Mutual Fund
Management, Inc.; and Vice
President of Bankers Trust
(July 1989-March 1994).
Stephen M. Ungerman (44) Assistant Treasurer Tax Director (since March
1996) of Prudential
Investments; formerly First
Vice President (February
1993-September 1996) of
Prudential Mutual Fund
Management, Inc.
</TABLE>
- --------

* "Interested" Director, as defined in the Investment Company Act, by reason
of affiliation with Prudential, Prudential Securities or PIFM.

** Unless otherwise stated, the address of the Directors and officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.

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

Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the
Manager. The Fund currently pays each of its Directors who is not an
affiliated person of PIFM or the Subadviser annual compensation of $1,250, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Director may change as a result of the introduction of additional
funds on the boards of which the Director will be asked to serve.

Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury
bills at the beginning of each calendar quarter or, pursuant to a Commission
exemptive order, at the daily rate of return of the Fund. Payment of the
interest so accrued is

B-28
<PAGE>

also deferred and accruals become payable at the option of the Director. The
Fund's obligation to make payments of deferred Directors' fees, together with
interest thereon, is a general obligation of the Fund.

The Directors have adopted a retirement policy which calls for the retirement
of Directors on December 31 of the year in which they reach the age of 72,
except that retirement is being phased in for Directors who were age 68 or
older as of December 31, 1993. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.

The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended November 30, 1998 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's board and that of all other funds managed
by PIFM (Fund Complex) for the calendar year ended December 31, 1998.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL 1998
COMPENSATION
FROM FUND
AGGREGATE AND FUND COMPLEX
COMPENSATION PAID
NAME AND POSITION FROM FUND TO DIRECTORS
- ----------------- ------------ ----------------
<S> <C> <C>
Edward D. Beach,.................................. $1,250 $135,000(44/71)*
Director
Delayne D. Gold,.................................. $1,250 $135,000(44/71)*
Director
Robert F. Gunia,**................................ -- None
Director
Donald D. Lennox,................................. $ 500 None
Former Director
Douglas H. McCorkindale,***....................... $1,250 $70,000(23/40)*
Director
Mendel A. Melzer,**............................... -- None
Director
Thomas T. Mooney,***.............................. $1,250 $115,000(35/70)*
Director
Stephen P. Munn,.................................. $1,250 $45,000(18/24)*
Director
Richard A. Redeker,**............................. -- None
Director
Robin B. Smith,***................................ $1,250 $90,000(32/41)*
Director
Brian M. Storms,** ............................... -- None
President and Director
Louis A. Weil, III,............................... $1,250 $90,000(30/54)*
Director
Clay T. Whitehead,................................ $1,250 $45,000(18/24)*
Director
</TABLE>
- --------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.

** "Interested" Directors do not receive compensation from the Fund or other
funds in the Fund Complex. Mr. Redeker is no longer an interested Director.

*** Total compensation from all funds in the Fund Complex for the calendar year
ended December 31, 1998 includes amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest, total compensation amounted to approximately $71,145, $119,740
and $116,225 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.

B-29
<PAGE>

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

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

As of January 8, 1999, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.

As of January 8, 1999, the only beneficial owners, directly or indirectly,
of more than 5% of any class of shares of the Fund were: Prudential Securities
C/F, John P. Dobson IRA DTD 06/14/95, 140 Christie Hill Road, Darien, CT,
which owned 20,726 Class A shares (approximately 9.4% of the outstanding Class
A shares); Publix Super Markets Charities, Inc. ATTN Marvin Weathers, P.O. Box
407, Lakeland, FL 33802 which held 99,243 Class A shares (approximately 45.2%
of the outstanding Class A shares); David A. Belford, 1 Nationwide Warehouse &
Storage, 2097 S. Hamilton Rd., Columbus, OH 43232-4143 who owned 18,499 Class
B shares (approximately 6.8% of the outstanding Class B shares); Susan T.
Auerbach, 990 5th Avenue, New York, NY 10021-0141 who owned 4,624 Class C
shares (approximately 6.3% of outstanding Class C shares); Ellias Manoles and
Marylu Manoles, Co-TTEES, Ellias Manoles Trust, UA DTD 10/20/73, FBO Ellias
Manoles, 20 Circle West, Edina, MN 55436-1358 who owned 4,967 Class C shares
(approximately 6.8% of the outstanding Class C shares); Nelag Partners, 37791
Halper Lake Drive, Rancho Mirage, CA 92270 which owned 4,042 Class C shares
(approximately 5.5% of the outstanding Class C shares) and Dr. Steven J. Bier
MD, TTEE Retirement Trust, 2488 Grand Concourse Rm 329, Bronx, NY 10458 who
owned 6,599 Class C shares (approximately 9.1% of the outstanding Class C
shares).

As of January 8, 1999, Prudential Securities was the record holder for other
beneficial owners of 201,849 Class A shares (approximately 91.5% of the
outstanding Class A shares); 236,216 Class B shares (approximately 86.8% of
the outstanding Class B shares); and 67,886 Class C shares (approximately
92.4% of the outstanding Class C shares). In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy material to the beneficial owners for which it is the record holder.

INVESTMENT ADVISORY AND OTHER SERVICES

(A) MANAGER AND INVESTMENT ADVISER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager),Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential Mutual Funds. See "How
the Fund is Managed--Manager" in the Prospectus. As of December 31, 1998, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $70.5 billion. According to the
Investment Company Institute, as of November 30, 1998, the Prudential Mutual
Funds were the 18th largest family of mutual funds in the United States.

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

Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities and
other assets. In connection therewith, PIFM is obligated to keep certain books
and records of the Fund. PIFM also administers the Fund's corporate affairs
and, in connection therewith, furnishes the Fund with office facilities,
together with those ordinary clerical and bookkeeping services which are not
being furnished by State Street Bank and Trust Company, the Fund's custodian
(the Custodian), and PMFS, the Fund's transfer and dividend disbursing agent.
The management services of PIFM for the Fund are not exclusive under the terms
of the Management Agreement and PIFM is free to, and does, render management
services to others.

B-30
<PAGE>

For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .75 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PIFM, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due to
PIFM will be reduced by the amount of such excess. No jurisdiction currently
limits the Fund's expenses.

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

(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PIFM or
the Fund's investment adviser;

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

(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI, the Subadviser or the
investment adviser), pursuant to the Subadvisory Agreement between PIFM and
the Subadviser (the Subadvisory Agreement).

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

The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. The
Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act.

For the fiscal years ended November 30, 1998 and 1997 and for the period
from March 26, 1996 through November 30, 1996, PIFM received management fees
of $64,913, $60,949 and $65,160, respectively.

PIFM has entered into the Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that the
Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, the Subadviser is obligated
to keep certain books and records of the Fund. PIFM continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the Subadviser's performance of such services. The
Subadviser is reimbursed by PIFM for the reasonable costs and expenses
incurred by the Subadviser in furnishing those services.

B-31
<PAGE>

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

(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS

Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998,
Prudential Securities Incorporated (Prudential Securities) was the Fund's
distributor. PIMS and Prudential Securities are subsidiaries of Prudential.

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

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

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

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

CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has voluntarily limited its distribution-related fees
payable under the Class A Plan to .25 of 1% of the average daily net assets of
the Class A shares. This voluntary waiver may be terminated at any time
without notice.

For the fiscal year ended November 30, 1998, the Distributor and Prudential
Securities collectively received payments of approximately $7,000 under the
Class A Plan. This amount was primarily expended for payments of account
servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended November 30, 1998, the Distributor and
Prudential Securities also collectively received approximately $22,000 in
initial sales charges.

CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan
provides that (1) up to .25 of 1% of the average daily net assets of the Class
B shares may be paid as a service fee and (2) up to .75 of 1% (not including
the service fee) of the average daily net assets of the Class B shares (asset-
based sales charge) may be paid for distribution-related expenses with respect
to Class B shares. The Class C Plan provides that (1) up to .25 of 1% of the
average daily net assets of the Class C shares may be paid as a service fee
and (2) up to .75 of 1% of the average daily net assets of the Class C share
may be paid for distribution-

B-32
<PAGE>

related expenses with respect to Class C shares. The service fee (.25 of 1% of
average daily net assets) is used to pay for personal service and/or the
maintenance of shareholder accounts. The Distributor also receives contingent
deferred sales charges from certain redeeming shareholders.

CLASS B PLAN. For the fiscal year ended November 30, 1998, the Distributor
and Prudential Securities collectively received approximately $48,600 from the
Fund under the Class B Plan and spent approximately $30,900 in distributing
the Fund's Class B shares. It is estimated that of the latter amount,
approximately 15.2% ($4,700) was spent on printing and mailing of prospectuses
to other than current shareholders; 2.3% ($700) on compensation to broker-
dealers for commissions to representatives and other expenses, including an
allocation overhead and other branch office distribution-related expenses,
incurred by it for distribution of Fund shares; and 82.5% ($25,500) on the
aggregate of (1) payments of commissions and account servicing fees to
financial advisers (44.0% or $13,600) and (2) an allocation of overhead and
other branch office distribution-related expenses (38.5% or $11,900). The term
"overhead and other branch office distribution-related expenses" represents
(a) the expenses of operating Prudential Securities' and Pruco Securities
Corporation's (Prusec's) branch offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs
and the costs of stationery and supplies, (b) the costs of client sales
seminars, (c) expenses of mutual fund sales coordinators to promote the sale
of Fund shares and (d) other incidental expenses relating to branch promotion
of Fund sales.

The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class B shares. For the fiscal year ended November 30,
1998, the Distributor and Prudential Securities collectively received
approximately $22,500 in contingent deferred sales charges attributable to
Class B shares.

CLASS C PLAN. For the fiscal year ended November 30, 1998, the Distributor
and Prudential Securities collectively received approximately $10,100 under
the Class C Plan and spent approximately $13,300 in distributing Class C
shares. It is estimated that of the latter amount, approximately 19.5%
($2,600) was spent on printing and mailing of prospectuses to other than
current shareholders; and 80.5% ($10,700) on the aggregate of (1) payments of
commissions and account servicing fees to financial advisers (65.5% or $8,700)
and (2) an allocation of overhead and other branch office distribution-related
expenses (15.0% or $2,000). The Distributor (and Prudential Securities as its
predecessor) also receives the proceeds of contingent deferred sales charges
paid by investors upon certain redemptions of Class C shares. For the fiscal
year ended November 30, 1998, the Distributor and Prudential Securities
collectively received approximately $100 in contingent deferred sales charges
attributable to Class C shares.

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

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

Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report will include an
itemization of the

B-33
<PAGE>

distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Directors shall be committed to the Rule 12b-1 Directors.

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

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

FEE WAIVERS/SUBSIDIES

PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. For the
fiscal year ending November 30, 1999, PIFM has agreed to subsidize the Fund's
operating expenses so that total Fund operating expenses do not exceed 1.25%,
2.00% and 2.00% of the average net assets for Class A, Class B and Class C
shares, respectively. In addition, the Distributor has waived a portion of its
distribution fees for the Class A shares as described above. These voluntary
waivers may be terminated at any time without notice. Fee waivers and subsidies
will increase the Fund's total return.

NASD MAXIMUM SALES CHARGE RULE

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

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

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

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

B-34
<PAGE>

BROKERAGE ALLOCATION AND OTHER PRACTICES

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

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

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

When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or services,
such as research reports, research compilations, statistical and economic data,
computer data bases, quotation equipment and services, research oriented
computer-software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultants. Such services are used in
connection with some or all of the Manager's investment activities; some of
such services, obtained in connection with the execution of transactions for
one investment account, may be used in managing other accounts, and not all of
these services may be used in connection with the Fund.

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

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

B-35
<PAGE>

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

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

The table below sets forth information concerning the payment of commissions
by the Fund, including the commissions paid to Prudential Securities, for the
periods indicated.

<TABLE>
<CAPTION>
FISCAL FISCAL MARCH
YEAR YEAR 26, 1996
ENDED ENDED THROUGH
NOVEMBER NOVEMBER NOVEMBER
30, 1998 30, 1997 30, 1996
-------- -------- --------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund........ $22,037 $23,699 $22,054
Total brokerage commissions paid to Prudential Secu-
rities............................................. $ 0 $ 0 $ 0
Percentage of total brokerage commissions paid to
Prudential Securities.............................. 0% 0% 0%
</TABLE>

The Fund did not pay commissions to Prudential Securities during the year
ended November 30, 1998. No payments were made to firms which provide
research, statistical or other services to the Subadviser.

The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at November 30, 1998. As of November 30, 1998, the Fund
held no such securities.

CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION

The Fund is authorized to issue 2 billion shares of common stock, $.001 par
value per share, divided into four classes, designated Class A, Class B, Class
C and Class Z common stock. Of the authorized shares of common stock of the
Fund, 500 million shares consist of Class A common stock, 500 million shares
consist of Class B common stock, 500 million shares consist of Class C common
stock and 500 million shares consist of Class Z common stock. Each class of
common stock of the Fund represents an interest in the same assets of the Fund
and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except Class Z
shares, which are not subject

B-36
<PAGE>

to any sales charges and distribution and/or service fees), which may affect
performance, (2) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its distribution arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature, and (5) Class Z shares will be offered exclusively for sale
to a limited group of investors. CLASS Z SHARES ARE NOT CURRENTLY OFFERED FOR
SALE TO INVESTORS. In accordance with the Fund's Articles of Incorporation, the
Board of Directors may authorize the creation of additional series of common
stock and classes within such series, with such preferences, privileges,
limitations and voting and dividend rights as the Board may determine.

The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances. Each share of each class of common stock is equal as to
earnings, assets and voting privileges, except as noted above, and each class
bears the expenses related to the distribution of its shares (with the
exception of Class Z shares, which are not subject to any distribution and/or
service fees). Except for the conversion feature applicable to the Class B
shares, there are no conversion, preemptive or other subscription rights. In
the event of liquidation, each share of common stock of the Fund is entitled to
its portion of all of the Fund's assets after all debts and expenses of the
Fund have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Directors.

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

PURCHASE, REDEMPTION AND PRICING OF FUND SHARES

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

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

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

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

B-37
<PAGE>

ISSUANCE OF FUND SHARES FOR SECURITIES

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

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold with a maximum sales charge of 5%, Class
C* shares are sold with a 1% sales charge, and Class B* and Class Z shares are
or will be sold at NAV. Using the NAV at November 30, 1998, the maximum
offering price of the Fund's shares is as follows:

<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share.................. $11.71
Maximum sales charge (5% of offering price)............................. .62
------
Offering price to public................................................ $12.33
======
CLASS B
Net asset value, redemption price and offering price to public per Class
B share*............................................................... $11.72
======
CLASS C
Net asset value and redemption price per Class C share*................. $11.72
Maximum sales charges (1% of offering price)............................ .12
------
Offering price to public................................................ $11.84
======
CLASS Z
Net asset value, redemption price and offering price to public per Class
Z share**.............................................................. $11.71
======
</TABLE>
- --------

* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions.

** Class Z shares were not offered on November 30, 1998 and are not offered as
of the date of this Statement of Additional Information.

SELECTING A PURCHASE ALTERNATIVE

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

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

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

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

B-38
<PAGE>

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

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

REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES

Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation or annuity plans under Sections 401(a), 403(b) and 457 of the
Internal Revenue Code, "rabbi" trusts and non-qualified deferred compensation
plans that are sponsored by any employer that has a tax qualified benefit plan
with Prudential (collectively, Benefit Plans), provided that the Benefit Plan
has existing assets of at least $1 million invested in shares of Prudential
Mutual Funds (excluding money market funds other than those acquired pursuant
to the exchange privilege) or 250 eligible employees or participants. In the
case of Benefit Plans whose accounts are held directly with the Transfer Agent
or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class A shares may be purchased at NAV by participants who are repaying loans
made from such plans to the participant.

Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, for which Prudential provides
administrative or recordkeeping services, provided that (1) the plan has at
least $1 million in existing assets or 250 eligible employees and (2) the Fund
is an available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code and plans that participate in the
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray Plan). All Benefit Plans of a company (or affiliated companies under
common control) for which Prudential serves as plan administrator or
recordkeeper are aggregated in meeting the $1 million threshold, provided that
Prudential has been notified in advance of the entitlement to the waiver of the
sales charge based on the aggregated assets. The term "existing assets"
includes stock issued by a plan sponsor, shares of Prudential Mutual Funds and
shares of certain unaffiliated mutual funds that participate in the PruArray
Plan (Participating Fund). "Existing assets" also include monies invested in
The Guaranteed Investment Account (GIA), a group annuity insurance product
issued by Prudential, the Guaranteed Insulated Separate Account, a separate
account offered by Prudential, and units of The Stable Value Fund (SVF), an
unaffiliated bank collective fund. Class A shares may also be purchased at NAV
by plans that have monies invested in GIA and SVF, provided (1) the purchase is
made with the proceeds of a redemption from either GIA or SVF and (2) Class A
shares are an investment option of the plan.

PruArray Association Benefit Plans. Class A shares are also offered at NAV to
Benefit Plans or non-qualified plans sponsored by employers which are members
of a common trade, professional or membership association (Association) that
participate in a PruArray Plan provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans
may purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified Plan(s) or non-qualified
plans so long as the employers in the Association (1) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (2) maintain their accounts with the Transfer Agent.

B-39
<PAGE>

PruArray Savings Program. Class A shares are also offered at NAV to employees
of companies that enter into a written agreement with Prudential Retirement
Services to participate in the PruArray Savings Program. Under this Program, a
limited number of Prudential Mutual Funds are available for purchase at NAV by
Individual Retirement Accounts and Savings Accumulation Plans of the company's
employees. The Program is available only to (1) employees who open an IRA or
Savings Accumulation Plan account with the Transfer Agent and (2) spouses of
employees who open an IRA account with the Transfer Agent. The program is
offered to companies that have at least 250 eligible employees.

Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.

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

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

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

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

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

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

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

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

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

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

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

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be

B-40
<PAGE>

combined to take advantage of the reduced sales charges applicable to larger
purchases. See "How to Buy, Sell and Exchange Shares of the Fund--Reducing or
Waiving Class A's Initial Sales Charge" in the Prospectus.

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

. an individual,

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

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

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

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

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

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

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

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

RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through your broker will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum offering
or price (NAV plus maximum sales charge) as of the previous business day. The
Distributor or the Transfer Agent must be notified at the time of purchase that
the investor is entitled to a reduced sales charge. The reduced sales charges
will be granted subject to confirmation of the investor's holdings. Rights of
Accumulation are not available to individual participants in any retirement or
group plans.

LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at NAV by entering into a Letter of Intent
whereby they agree to enroll, within a thirteen-month period, a specified
number of eligible employees or participants (Participant Letter of Intent).

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

A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount

B-41
<PAGE>

represented by the goal as if it were a single investment. In the case of a
Participant Letter of Intent, each investment made during the period will be
made at net asset value. Escrowed Class A shares totaling 5% of the dollar
amount of the Letter of Intent will be held by the Transfer Agent in the name
of the purchaser, except in the case of retirement and group plans where the
employer or plan sponsor will be responsible for paying any applicable sales
charge. The effective date of an Investment Letter of Intent (except in the
case of retirement and group plans) may be back-dated up to 90 days, in order
that any investment made during this 90-day period, valued at the purchaser's
cost, can be applied to the fulfillment of the Letter of Intent goal.

The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter
of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the Letter
of Intent goal is not achieved within the thirteen-month period, the purchaser
(or the employer or plan sponsor in the case of any retirement or group plan)
is required to pay the difference between the sales charge otherwise applicable
to the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such
difference. Investors electing to purchase Class A shares of the Fund pursuant
to a Letter of Intent should carefully read such Letter of Intent.

The Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will, in the case
of an Investment Letter of Intent, be granted subject to confirmation of the
investor's holdings or, in the case of a Participant Letter of Intent, subject
to confirmation of the number of eligible employees or participants in the
retirement or group plan. Letters of Intent are not available to any individual
participant in any retirement or group plan.

CLASS B SHARES

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

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

CLASS C SHARES

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

WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES

Benefit Plans. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and
Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class C shares may be purchased at NAV by participants who are repaying the
loans made from such plans to the participant.

Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified
retirement and deferred compensation plans participating in a PruArray Plan and
other plans for which Prudential provides administrative or recordkeeping
services.

B-42
<PAGE>

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

CLASS Z SHARES

Class Z shares of the Fund currently are available for purchase by the
following categories of investors:

. pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation plans and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue
Code and non-qualified plans for which the Fund is an available option
(collectively, Benefit Plans), provided such Benefit Plans (in
combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution
assets,

. participants in any fee-based program or trust program sponsored by an
affiliate of the Distributor which includes mutual funds as investment
options and for which the Fund is an available option,

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

. Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996,
(1) were Class Z shareholders of the Prudential Mutual Funds or (2)
executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds,

. current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund),

. employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan, and
. Prudential with an investment of $10 million or more.

After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.

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

SALE OF SHARES

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

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

If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning

B-43
<PAGE>

redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your
broker.

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

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

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

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

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

CONTINGENT DEFERRED SALES CHARGE

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (or one year in the case of
shares purchased

B-44
<PAGE>

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

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

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

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First........................................ 5.0%
Second....................................... 4.0%
Third........................................ 3.0%
Fourth....................................... 2.0%
Fifth........................................ 1.0%
Sixth........................................ 1.0%
Seventh...................................... None
</TABLE>

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

For example, assume you purchased 800 Class B shares at $12.50 per share for
a cost of $10,000. Subsequently, you acquired 5 additional Class B shares
through dividend reinvestment. During the second year after the purchase you
decided to redeem $5,000 of your investment. Assuming at the time of the
redemption the NAV had appreciated to $15 per share, the value of your Class B
shares would be $12,075 (805 shares at $15 per share). The CDSC would not be
applied to the value of the reinvested dividend shares and the amount which
represents appreciation ($2,075). Therefore, $2,295 of the $5,000 redemption
proceeds ($5,000 minus $2,075) would be charged at a rate of 4% (the
applicable rate in the second year after purchase) for a total CDSC of $117.

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

WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.

B-45
<PAGE>

The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:

(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;

(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 or a periodic distribution based on
life expectancy;

(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and

(4) a tax-free return of an excess contribution or plan distributions
following the death or disability of the shareholder, provided that the shares
were purchased prior to death or disability.

The waiver does not apply in the case of a tax-free rollover or transfer of
assets, other than one following a separation from service (that is, following
voluntary or involuntary termination of employment or following retirement).
Under no circumstances will the CDSC be waived on redemptions resulting from
the termination of a tax-deferred retirement plan, unless such redemptions
otherwise qualify for a waiver as described above. In the case of Direct
Account and Prudential Securities or Subsidiary Prototype Benefit Plans, the
CDSC will be waived on redemptions which represent borrowings from such plans.
Shares purchased with amounts used to repay a loan from such plans on which a
CDSC was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.

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

Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.

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

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

B-46
<PAGE>

In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.

<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death
certificate or, in the case of a trust, a
copy of the grantor's death certificate,
plus a copy of the trust agreement
identifying the grantor.
Disability--An individual will be consid- A copy of the Social Security
ered disabled if he or she is unable to Administration award letter or a letter
engage in any substantial gainful activity from a physician on the physician's
by reason of any medically determinable letterhead stating that the shareholder
physical or mental impairment which can be (or, in the case of a trust, the grantor)
expected to result in death or to be of is permanently disabled. The letter must
long-continued and indefinite duration. also indicate the date of disability.
Distribution from an IRA or 403(b) Custo- A copy of the distribution form from the
dial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is
taking a normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA)
or the plan administrator/trustee on
company letterhead indicating the amount of
the excess and whether or not taxes have
been paid.
</TABLE>

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

WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES

Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in a PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account and units of The
Stable Value Fund.

Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a broker not affiliated with Prudential and for
whom the broker provides administrative or recordkeeping services.

CONVERSION FEATURE--CLASS B SHARES

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

Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following formula:
(1) the ratio of (a) the amounts paid for Class B shares purchased at least
seven years prior to the conversion date to (b) the total amount paid for all
Class B shares purchased and then held in your account (2) multiplied by the
total number of Class B shares purchased and then held in your account. Each
time any Eligible Shares in your account convert to Class A shares, all shares
or amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.

B-47
<PAGE>

For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less than
the number of shares actually purchased approximately seven years before such
conversion date. For example, if 700 shares were initially purchased at $12.50
per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,500), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $10,000
divided by $11,500 (86.96%), multiplied by 900 shares equals 782.64 shares).
The Manager reserves the right to modify the formula for determining the number
of Eligible Shares in the future as it deems appropriate on notice to
shareholders.

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

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

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

SHAREHOLDER INVESTMENT ACCOUNT

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

AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than five full business days
prior to the record date to have subsequent dividends and/or distributions sent
in cash rather than reinvested. In the case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payment will be made directly to the broker. Any shareholder who receives a
cash payment representing a dividend or distribution may reinvest such dividend
or distribution at NAV by returning the check or the proceeds to the Transfer
Agent within 30 days after the payment date. Such investment will be made at
the NAV per share next determined after receipt of the check or proceeds by the
Transfer Agent. Such shareholder will receive credit for any CDSC paid in
connection with the amount of proceeds being reinvested.

EXCHANGE PRIVILEGE

The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of

B-48
<PAGE>

the Fund. All exchanges are made on the basis of the relative NAV next
determined after receipt of an order in proper form. An exchange will be
treated as a redemption and purchase for tax purposes. Shares may be exchanged
for shares of another fund only if shares of such fund may legally be sold
under applicable state laws. For retirement and group plans having a limited
menu of Prudential Mutual Funds, the exchange privilege is available for those
funds eligible for investment in the particular program.

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

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

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

If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.

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

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

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

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

Prudential California Municipal Fund
(California Money Market Series)

Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)

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

Prudential MoneyMart Assets, Inc. (Class A shares)

Prudential Tax-Free Money Fund, Inc.

CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the

B-49
<PAGE>

redemption of the Class B and Class C shares acquired as a result of the
exchange. The applicable sales charge will be that imposed by the fund in
which shares were initially purchased and the purchase date will be deemed to
be the date of the initial purchase, rather than the date of the exchange.

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

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

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

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

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

Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value.

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

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

B-50
<PAGE>

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

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

<TABLE>
<CAPTION>
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years................................. $ 110 $ 165 $ 220 $ 275
20 Years................................. 176 264 352 440
15 Years................................. 296 444 592 740
10 Years................................. 555 833 1,110 1,388
5 Years.................................. 1,371 2,057 2,742 3,428
</TABLE>

See "Automatic Investment Plan."
- --------
(/1/)Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room
and board for the 1993-1994 academic year.

(/2/)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.

AUTOMATIC INVESTMENT PLAN (AIP)

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

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

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

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

B-51
<PAGE>

Furthermore, each withdrawal constitutes a redemption of shares, and any gain
or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (1) the purchase of
Class A and Class C shares and (2) the redemption of Class B and Class C
shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the plan, particularly if used in connection with a
retirement plan.

TAX-DEFERRED RETIREMENT PLANS

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

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

TAX-DEFERRED RETIREMENT ACCOUNTS

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

TAX-DEFERRED COMPOUNDING(/1/)

<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
10 years................................................... $ 26,165 $ 31,291
15 years................................................... 44,676 58,649
20 years................................................... 68,109 98,846
25 years................................................... 97,780 157,909
30 years................................................... 135,346 244,692
</TABLE>
- --------
(/1/)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.

MUTUAL FUND PROGRAMS

From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as, to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.

The mutual funds in the program may be purchased individually or as a part of
a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their financial
adviser concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.

B-52
<PAGE>

NET ASSET VALUE

The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Fund will compute its NAV at 4:15 P.M., New York time on each day the New York
Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Fund shares have been received or days on which
changes in the value of the Fund's portfolio securities do not affect NAV. In
the event the New York Stock Exchange closes early on any business day, the NAV
of the Fund's shares shall be determined at a time between such closing and
4:15 P.M., New York time. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.

Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sales price of such exchange system on the day of valuation, or, if there
was no sale on such day, the mean between the last bid and asked prices on such
day, or at the bid price on such day in the absence of an asked price.
Corporate bonds (other than convertible debt securities) and U.S. Government
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager, in
consultation with the Subadviser to be over-the-counter, are valued on the
basis of valuations provided by an independent pricing agent or principal
market maker which uses information with respect to transactions in bonds,
quotations from bond dealers, agency ratings, market transactions in comparable
securities and various relationships between securities in determining value.
Convertible debt securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed by
the Manager in consultation with the Subadviser to be over-the-counter, are
valued at the mean between the last reported bid and asked prices provided by
principal market makers. Options on stock and stock indices traded on an
exchange are valued at the average between the most recently quoted bid and
asked prices on the respective exchange and futures contracts and options
thereon are valued at their last sales prices as of the close of trading on the
applicable commodities exchange or board of trade or, if there was no sale on
the applicable commodities exchange or board of trade on such day, at the mean
between the most recently quoted bid and asked prices on such exchange or board
of trade. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio
security is traded, such security will be valued at fair value considering
factors determined in good faith by the investment adviser under procedures
established by and under the general supervision of the Fund's Board of
Directors.

Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgement of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser,
including its portfolio managers, traders and its research and credit analysts,
on the basis of the following factors: cost of the security, transactions in
comparable securities, relationships among various securities and such other
factors as may be determined by the Manager, Subadviser, Board of Directors or
Valuation Committee to materially affect the value of the security. Short-term
debt securities are valued at cost, with interest accrued or discount amortized
to the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Board of Directors not to represent fair value.
Short-term securities with remaining maturities of 60 days or more, for which
market quotations are readily available, are valued at their current market
quotations as supplied by an independent pricing agent or principal market
maker.

Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class Z
shares will generally be higher than the NAV of Class A, Class B or Class C
shares as a result of the fact that the Class Z shares are not subject to any
distribution or service fee. It is expected, however, that the NAV of the four
classes will tend to converge immediately after the recording of dividends, if
any, which will differ by approximately the amount of the distribution and/or
service fee expense accrual differential among the classes.

B-53
<PAGE>

TAXES, DIVIDENDS AND DISTRIBUTIONS

The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income
tax on income and capital gains which are distributed to shareholders, and
permits net capital gains of the Fund (that is, the excess of net long-term
capital gains over net short-term capital losses) to be treated as long-term
capital gains of the shareholders, regardless of how long shareholders have
held their shares in the Fund. Net capital gains of a Fund which are available
for distribution to shareholders will be computed by taking into account any
capital loss carryforward of the Fund.

Qualification of a Fund as a regulated investment company requires, among
other things, that (a) the Fund derive at least 90% of the Fund's annual gross
income (without reduction for losses from the sale or other disposition of
securities) from interest, dividends, payments with respect to securities loans
and gains from the sale or other disposition of securities or options thereon
or foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) the Fund diversify its holdings
so that, at the end of each quarter of the taxable year (i) at least 50% of the
value of the Fund's assets is represented by cash, U.S. Government securities
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the value of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of
its assets is invested in the securities of any one issuer (other than U.S.
Government securities); and (c) the Fund distribute to its shareholders at
least 90% of its net investment income and net short-term gains (that is, the
excess of net short-term capital gains over net long-term capital losses) in
each year.

Gains or losses on sales of securities by the Fund will be treated as long-
term capital gains or losses if the securities have been held by it for more
than one year except in certain cases where the Fund acquires a put or writes a
call thereon or otherwise holds an offsetting position with respect to the
securities. Other gains or losses on the sale of securities will be short-term
capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Fund on securities lapses
or is terminated through a closing transaction, such as a repurchase by the
Fund of the option from its holder, the Fund will generally realize short-term
capital gain or loss. If securities are sold by the Fund pursuant to the
exercise of a call option written by it, the Fund will include the premium
received in the sale proceeds of the securities delivered in determining the
amount of gain or loss on the sale. Certain of the Fund's transactions may be
subject to wash sale, short sale, constructive sale, straddle and anti-
conversion provisions of the Internal Revenue Code which may, among other
things, require the Fund to defer recognition of losses. In addition, debt
securities acquired by the Fund may be subject to original issue discount and
market discount rules which, respectively, may cause the Fund to accrue income
in advance of the receipt of cash with respect to interest or cause gains to be
treated as ordinary income.

Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which the
Fund may invest. These investments will generally constitute Section 1256
contracts and will be required to be "marked to market" for federal income tax
purposes at the end of the Fund's taxable year; that is, treated as having been
sold at market value. Except with respect to certain forward foreign currency
exchange contracts, 60% of any gain or loss recognized on such "deemed sales"
and on actual dispositions will be treated as long-term capital gain or loss,
and the remainder will be treated as short-term capital gain or loss.

Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indices will be capital gain or loss and will be long-
term or short-term depending upon the holding period of the option. In
addition, positions which are part of a straddle will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a straddle, the Fund may be required to defer the
recognition of losses on positions it holds to the extent of any unrecognized
gain on offsetting positions held by the Fund.

The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or of any gain from disposition of the stock (collectively, PFIC income),
plus interest

B-54
<PAGE>

thereon, even if the Fund distributes the PFIC income as a taxable dividend to
its shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it
to the extent that income is distributed to its shareholders. The Fund may make
a "mark-to-market" election with respect to any stock it holds of a PFIC. If
the election is in effect, at the end of the Fund's taxable year, the Fund will
recognize the amount of gains, if any, with respect to PFIC stock. No loss will
be recognized on PFIC stock, except to the extent of gains recognized in prior
years. Alternatively, the Fund, if it meets certain requirements, may elect to
treat any PFIC in which it invests as a "qualified electing fund," in which
case, in lieu of the foregoing tax and interest obligation, the Fund will be
required to include in income each year its pro rata share of the qualified
electing fund's annual ordinary earnings and net capital gain, even if they are
not distributed to the Fund; those amounts would be subject to the distribution
requirements applicable to the Fund described above.

Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to its shareholders as ordinary income, rather than
increasing or decreasing the amount of the Fund's net capital gain. If Section
988 losses exceed other investment company taxable income during a taxable
year, the Fund would not be able to make any ordinary dividend distributions,
or distributions made before the losses were realized would be recharacterized
as a return of capital to shareholders, rather than as an ordinary dividend,
reducing each shareholder's basis in his or her Fund shares.

Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in
each share so received equal to the NAV of a share of the Fund on the
reinvestment date.

The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during
the 12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from
the prior year or the twelve-month period ending on October 31 of such prior
year, respectively. To the extent it does not meet these distribution
requirements, the Fund will be subject to a nondeductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the Fund
pays income tax is treated as distributed.

Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of the
Fund, the investor should carefully consider the impact of dividends, including
capital gains distributions, which are expected to be or have been announced.

Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.

A shareholder who acquires shares of the Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to include
certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the
Fund.

The per share dividends on Class B and Class C shares will generally be lower
than the per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share capital gains distributions, if any, will be paid in the same amounts for
Class A, Class B and Class C shares. See "Net Asset Value."

Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign

B-55
<PAGE>

partnership (foreign shareholder) are subject to a 30% (or lower treaty rate)
withholding tax upon the gross amount of the dividends unless the dividends
are effectively connected with a U.S. trade or business conducted by the
foreign shareholder. Capital gain dividends paid to a foreign shareholder are
generally not subject to withholding tax. A foreign shareholder will, however,
be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.

Dividends received by corporate shareholders are eligible for a dividends-
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign corporations, interest income, capital and currency
gain, gain or loss from Section 1256 contracts (described above) and income
from certain other sources will not constitute qualified dividends. Individual
shareholders are not eligible for the dividends-received deduction.

The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be the same amount for
Class A, Class B, Class C and Class Z shares. See "Net Asset Value."

Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary. The Fund does not
expect to meet the requirements of the Internal Revenue Code for "passing-
through" to its shareholders any foreign income taxes paid.

Dividends and distributions may also be subject to state and local taxes.

Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.

PERFORMANCE INFORMATION

YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B and Class
C shares. This yield is computed by dividing the Fund's net investment income
per share earned during this 30-day period by the maximum offering price per
share on the last day of this period. Yield is calculated according to the
following formula:

a-b
YIELD = 2 [( ___ +1) to the 6th power-1]
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.

Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period. Yields for the Fund will vary based on a number of factors
including changes in net asset value, market conditions, the level of interest
rates and the level of Fund income and expenses.

The Fund's 30-day yields for the 30 days ended November 30, 1998 were 6.69%,
6.27% and 6.15% for the Class A, Class B and Class C shares, respectively.
Class Z shares were not offered as of November 30, 1998.

AVERAGE ANNUAL TOTAL RETURN. The Fund may also advertise its average annual
total return. Average annual total return is determined separately for Class
A, Class B and Class C shares.

Average annual total return is computed according to the following formula:

B-56
<PAGE>

P ( 1 + T ) to the nth power = ERV

Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).

Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption. Without waiver of management
fees and/or expense subsidization, the Fund's average annual total returns
would have been lower as indicated in the parentheses ( ).

Below are the average annual total returns for the Fund's share classes for
the periods ended November 30, 1998.

<TABLE>
<CAPTION>
1 5 10 SINCE
YEAR YEARS YEARS INCEPTION
------ ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A...... -17.53% (-20.32%) N/A N/A 1.28% (-2.26%) (3/26/96)
Class B...... -18.90 (-21.81) N/A N/A 1.38 (-2.27) (3/26/96)
Class C...... -15.76 (-18.64) N/A N/A 2.08 (-1.49) (3/26/96)
Class Z...... N/A N/A N/A N/A

AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B
and Class C shares.

Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:

ERV-P
--------
P

Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).

Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges. Without waiver of management fees and/or
expense subsidization, the Fund's aggregate total returns would have been
lower as indicated in the parentheses ( ).

Below are the aggregate total returns for the Fund's share classes for the
periods ended November 30, 1998.

<CAPTION>
1 5 10 SINCE
YEAR YEARS YEARS INCEPTION
------ ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A...... -13.19% (-16.12%) N/A N/A 8.92% (-1.00%) (3/26/96)
Class B...... -13.90 (-16.81) N/A N/A 6.74 (-2.97) (3/26/96)
Class C...... -13.90 (-16.81) N/A N/A 6.74 (-2.97) (3/26/96)
Class Z...... N/A N/A N/A N/A
</TABLE>

B-57
<PAGE>

The Fund also may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may include data
from Lipper, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. Set forth below is a
chart which compares the performance of different types of investments over
the long term and the rate of inflation.(/1/)

PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(12/31/25-12/31/98)

[BAR CHART]

Common Stocks 11.2%
Long-Term
Gov't Bonds 5.3%
Inflation 3.1%

- --------

(/1/)Source: Ibbotson Associates. Used with permission. All rights
reserved. Common stock returns are based on the Standard and Poor's 500
Stock Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only and is not
intended to represent the performance of any particular investment or fund.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.

B-58
<PAGE>

Portfolio of Investments as of PRUDENTIAL DISTRESSED
November 30, 1998 SECURITIES FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------------
Long-Term Investments--99.9%
COMMON STOCKS(c)--42.8%
- ------------------------------------------------------------------
Aerospace--3.6%
25,000 Ladish Company, Inc. $ 250,000
- ------------------------------------------------------------------
Beverages--5.4%
12,500 Dr. Pepper Bottling Holdings, Inc. 375,000
- ------------------------------------------------------------------
Building & Related Industries--1.1%
4,750 EMCOR Group, Inc. 77,781
- ------------------------------------------------------------------
Casinos--2.2%
30,000 Alliance Gaming Corp. 76,875
20,357 Isle of Capri Casinos, Inc. 66,160
2,000 Nevada Gold & Casinos, Inc. 9,750
------------
152,785
- ------------------------------------------------------------------
Consumer Goods & Services--4.4%
1,400 Coinstar, Inc. 8,925
122,000 Firearms Training Systems, Inc. 297,375
------------
306,300
- ------------------------------------------------------------------
Electronics--2.2%
50,000 Electronic Retailing Systems
International, Inc. 150,000
- ------------------------------------------------------------------
Energy--3.2%
29,000 Baycorp Holdings, Ltd. 137,750
28,675 Grant Geophysical, Inc. 86,025
------------
223,775
Food Serving - Fast Foods
50 AmeriKing, Inc. $ 2,000
- ------------------------------------------------------------------
Health Services--1.6%
60,000 Unilab Corp. 108,750
- ------------------------------------------------------------------
Media--0.9%
8,400 Paxson Communications Corp. 60,900
- ------------------------------------------------------------------
Retail--10.4%
6,642 Edison Building LLC(b)
(cost $13,555; purchased 4/30/97) 1
32,751 Grand Union Co. 403,247
5,000 Homeland Holding Corp. 18,125
7,000 Musicland Stores Corp. 118,563
23,750 Samuels Jewelers, Inc. 115,781
50,839 Today's Man, Inc. 71,492
------------
727,209
- ------------------------------------------------------------------
Telecommunications--1.1%
250 Jordan Telecommunications Products 50,000
5,000 PageMart Wireless, Inc., Class A 30,000
115 Scott Cable Communications, Inc. 0
------------
80,000
- ------------------------------------------------------------------
Textiles & Apparel--0.2%
13,304 Forstmann & Co., Inc. 14,135
- ------------------------------------------------------------------
Waste Management--6.5%
78,260 Waste Systems International, Inc. 449,995
------------
Total common stocks
(cost $3,301,298) 2,978,630
------------
</TABLE>
- --------------------------------------------------------------------------------

See Notes to Financial Statements.

B-59
<PAGE>

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
CORPORATE BONDS--52.3%
- --------------------------------------------------------------------
Air Transportation--1.1%
Caa2 $ 100 Canadian Airlines Corp.,
Sr. Notes,
12.25%, 8/1/06 $ 75,000
- --------------------------------------------------------------------
Building & Related Industries--13.4%
B2 250 Clean Harbors, Inc.,(b)
Sr. Notes,
12.50%, 5/15/01
(cost $225,079; purchased
6/24/96) 212,500
Caa 300 DeGeorge Home Alliance,
Inc.,(b)
Sr. Notes,
12.00%, 4/1/01
(cost $264,009; purchased
2/3/97) 240,000
Caa1 225 Hechinger Co.,
Sr Notes,
6.95%, 10/15/03 146,250
B3 250 ICF Kaiser International,
Inc.,
Sr. Sub. Notes,
13.00%, 12/31/03 117,500
B3 250 The Presley Companies,
Sr. Notes,
12.50%, 7/1/01 218,750
----------
935,000
- --------------------------------------------------------------------
Casinos--3.4%
Caa 250 Santa Fe Hotel, Inc.,
First Mortgage Notes,
11.00%, 12/15/00 240,000
- --------------------------------------------------------------------
Communications--0.5%
B3 50 ICO Global Communications
Holdings,
Sr. Notes,
15.00%, 8/1/05 38,500
</TABLE>
- --------------------------------------------------------------------
See Notes to Financial Statements.

B-60
<PAGE>

Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
November 30, 1998 FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- --------------------------------------------------------------------
Consumer Goods--2.4%
B3 $ 200 Syratech Corp.,(b)
Sr. Notes,
11.00%, 4/15/07
(cost $175,083; purchased
3/20/98) $ 165,000
- --------------------------------------------------------------------
Consumer Goods & Services--5.0%
NR 50 Coinstar, Inc.,
Sr. Disc. Notes,
Zero Coupon (until 10/1/99),
13.00%, 10/1/06 41,500
Caa2 300 Color Spot Nurseries,
Sr. Sub. Notes,
10.50%, 12/15/07 180,000
B3 340(d) Grupo Azucarero Mexico S.A.,
Sr. Notes (Mexico),
11.50%, 1/15/05 125,800
----------
347,300
- --------------------------------------------------------------------
Food & Beverage--1.1%
Ca 250 Specialty Foods Acquisition
Corp.,
Sr. Sec'd. Disc. Deb., Ser.
B
Zero Coupon (until 8/15/99),
13.00%, 8/15/05 10,000
Caa 150 Sr. Sub. Notes, Ser. B
11.25%, 8/15/03 63,750
----------
73,750
- --------------------------------------------------------------------
Health Care--3.2%
B2 250 Sun Healthcare Group, Inc.,
Sr. Sub. Notes,
9.50%, 7/1/07 221,250
- --------------------------------------------------------------------
Mining--3.9%
B3 500 Anker Coal Group, Inc.,
Sr. Notes,
9.75%, 10/1/07 270,000
Packaging--3.2%
NR $ 284 Packaging Resources, Inc.,
Sr. Notes,
13.00%, 6/30/03 $ 221,174
- --------------------------------------------------------------------
Recreation--3.0%
NR 250 TVN Entertainment Corp.,
Sr. Notes,
14.00%, 8/1/08 212,500
- --------------------------------------------------------------------
Retail--4.1%
NR 77 Edison Brothers Stores
Inc.(a)
Sr. Notes,
11.00%, 9/26/07 30,800
B1 250 Speedy Muffler King, Inc.,(b)
Sr. Notes,
10.875%, 10/1/06
(cost $221,074; purchased
5/22/98) 255,000
----------
285,800
- --------------------------------------------------------------------
Telecommunications--3.5%
Ca 500 People's Choice TV Corp.,
Sr. Disc. Notes,
Zero Coupon (until 6/1/00),
13.125%, 6/1/04 105,000
Scott Cable Communications,
Inc.,
NR 18 Jr. Sub. PIK Notes,
16%, 7/18/02 3,624
NR 115 15%, 3/18/02 133,630
----------
242,254
- --------------------------------------------------------------------
Trucking & Shipping--1.7%
B3 250 TRISM, Inc.,
Sr. Sub. Notes,
10.75%, 12/15/00 117,500
</TABLE>
- --------------------------------------------------------------------
See Notes to Financial Statements.

B-61
<PAGE>

PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Portfolio of Investments as of November 30, 1998
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ---------------------------------------------------------------------
Utilities--2.8%
Caa $ 250 Empire Gas Corp.,
Sr. Sec'd. Notes,
7.00% (until 7/15/99),
12.875%, 7/15/04 $ 195,000
----------
Total corporate bonds
(cost $4,280,080) 3,640,028
----------
TRADE CLAIMS--0.8%
- --------------------------------------------------------------------
Retail
NR 284 Montgomery Ward Trade
Claim(c),
expires 1/1/49
(cost $99,312) 53,912
----------
- --------------------------------------------------------------------
Total Investments--99.9%
(cost $8,145,190; Note 4) 6,950,719
Other assets in excess of
liabilities--0.1% 8,093
----------
Net Assets--100% $6,958,812
==========

</TABLE>
- ---------------
(a) Represents issuer in default on interest payments; non-income producing
security.
(b) Indicates a restricted security; the aggregate cost of such securities is
$898,800. The aggregate value ($872,501) is approximately 12.4% of net
assets.
(c) Non-income producing securities.
(d) US$ Denominated Foreign Bond.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
The Fund's current prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-62
<PAGE>

PRUDENTIAL DISTRESSED SECURITIES
Statement of Assets and Liabilities FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets November 30, 1998
<S> <C>
Investments, at value (cost $8,145,190)................................................................. $ 6,950,719
Interest receivable..................................................................................... 149,186
Receivable for investments sold......................................................................... 99,437
Deferred expenses and other assets...................................................................... 36,286
Due from Manager........................................................................................ 24,885
-----------------
Total assets......................................................................................... 7,260,513
-----------------
Liabilities
Payable for investments purchased....................................................................... 116,988
Accrued expenses........................................................................................ 74,116
Bank overdraft.......................................................................................... 69,723
Payable for Fund shares reacquired...................................................................... 36,684
Distribution fee payable................................................................................ 4,190
-----------------
Total liabilities.................................................................................... 301,701
-----------------
Net Assets.............................................................................................. $ 6,958,812
=================

Net assets were comprised of:
Common stock, at par................................................................................. $ 601
Paid-in capital in excess of par..................................................................... 8,075,393
-----------------
8,075,994
Accumulated net realized gain on investments......................................................... 77,289
Net unrealized depreciation on investments........................................................... (1,194,471)
-----------------
Net assets, November 30, 1998........................................................................... $ 6,958,812
=================

Class A:
Net asset value and redemption price per share
($2,629,125 / 227,198 shares of common stock issued and outstanding).............................. $11.57
Maximum sales charge (5% of offering price).......................................................... .61
-----------------
Maximum offering price to public..................................................................... $12.18
=================

Class B:
Net asset value, offering price and redemption price per share
($3,476,978 / 300,272 shares of common stock issued and outstanding).............................. $11.58
=================

Class C:
Net asset value, and redemption price per share
($852,709 / 73,679 shares of common stock issued and outstanding)................................. $11.57
Sales charge (1% of offering price).................................................................. .12
-----------------
Offering price to public............................................................................. $11.69
=================

</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-63
<PAGE>

PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income November 30, 1998
-----------------
<S> <C>
Income
Interest.............................. $ 595,794
Dividends............................. 14,200
-----------------
609,994
-----------------
Expenses
Management fee........................ 64,913
Distribution fee--Class A............. 6,957
Distribution fee--Class B............. 48,617
Distribution fee--Class C............. 10,106
Custodian's fees and expenses......... 95,000
Registration fees..................... 33,000
Legal fees and expenses............... 32,000
Reports to shareholders............... 30,000
Amortization of deferred
organizational..................... 21,663
Audit fees and expenses............... 20,000
Directors' fees and expenses.......... 11,000
Transfer agent's fees and expenses.... 8,500
Miscellaneous......................... 3,661
-----------------
Total expenses..................... 385,417
Less: expense reimbursement (Note
2)................................. (233,158)
-----------------
Net expenses....................... 152,259
-----------------
Net investment income.................... 457,735
-----------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment
transactions.......................... 291,504
Net change in unrealized
appreciation/depreciation of
investments........................... (2,167,375)
-----------------
Net loss on investments.................. (1,875,871)
-----------------
Net Decrease in Net Assets
Resulting from Operations................ $(1,418,136)
=================

</TABLE>

PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended November 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income..... $ 457,735 $ 258,664
Net realized gain on
investments............ 291,504 465,952
Net change in unrealized
appreciation/depreciation
of investments......... (2,167,375) 1,413,109
----------------- -----------------
Net increase (decrease) in
net assets resulting
from operations........ (1,418,136) 2,137,725
----------------- -----------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................... (254,266) (90,663)
Class B................... (376,002) (108,026)
Class C................... (81,439) (29,623)
----------------- -----------------
(711,707) (228,312)
----------------- -----------------
Distributions in excess of
net investment income
Class A................... (43,045) --
Class B................... (63,654) --
Class C................... (13,787) --
----------------- -----------------
(120,486) --
----------------- -----------------
Distributions from net
realized gains
Class A................... (26,850) --
Class B................... (59,158) --
Class C................... (11,798) --
----------------- -----------------
(97,806) --
----------------- -----------------
Fund share transactions (net
of share conversions)
(Note 5)
Net proceeds from shares
sold................... 3,402,960 909,156
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions.......... 832,629 216,983
Cost of shares
reacquired............. (2,764,519) (5,475,625)
----------------- -----------------
Net increase (decrease) in
net assets from Fund
share transactions..... 1,471,070 (4,349,486)
----------------- -----------------
Total increase (decrease).... (877,065) (2,440,073)
Net Assets
Beginning of year............ 7,835,877 10,275,950
----------------- -----------------
End of year(a)............... $ 6,958,812 $ 7,835,877
================= =================

- ---------------
(a) Includes undistributed
net investment income
of........................ $ -- $ 253,972
================= =================

</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-64
<PAGE>

PRUDENTIAL DISTRESSED
NOTES TO FINANCIAL STATEMENTS SECURITIES FUND, INC.
- --------------------------------------------------------------------------------

Prudential Distressed Securities Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as a diversified, open-end management company.
The Fund was incorporated in Maryland on November 30, 1995. The Fund had no
significant operations other than the issuance of 2,667 shares of Class A, 2,667
shares of Class B and 2,666 shares of Class C common stock for $100,000 on
February 8, 1996 to Prudential Investments Fund Management LLC ("PIFM").
Investment operations commenced on March 26, 1996.

The investment objective of the Fund is capital appreciation. The Fund seeks to
achieve this objective by investing primarily in debt and equity securities
issued by financially troubled or bankrupt companies (financially troubled
issuers) and in equity securities of companies that in the view of its
investment adviser are currently undervalued, out-of-favor or price-depressed
relative to their long-term potential for growth and income (operationally
troubled issuers). Securities of financially and operationally troubled issuers
are less liquid and more volatile than securities of companies not experiencing
financial difficulties. Investment in such securities may be considered
speculative and may present potential for substantial loss.

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

NOTE 1. ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.

Securities Valuation: Investments listed on a securities exchange are valued at
the last sales price on the day of valuation, or, if there was no sale on such
day, the mean between the last bid and asked prices on such day or at the bid
price in the absence of an asked price. Corporate bonds and U.S. Government
securities that are actively traded in the over-the-counter market are valued by
an independent pricing service. Convertible debt securities that are traded in
the over-the-counter market are valued at the mean between the most recently
quoted bid and asked prices provided by principal market makers. Debt and equity
securities issued in private placements shall be valued at the bid prices
provided by primary market dealers. Securities for which market quotations are
not available, other than private placements, shall each be valued at a price
supplied by an independent pricing agent. Options on stock and stock indices
traded on an exchange are valued at the mean between the most recently quoted
bid and asked prices provided by the exchange. Futures contracts and options
thereon are valued at the last sales price as of the close of business of the
exchange. Securities for which reliable market quotations are not available or
for which the pricing agent or principal market maker does not provide a
valuation will be valued at fair value determined in good faith by or under the
direction of the Board of Directors of the Fund.

Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.

In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements take possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. If the seller defaults and the value of the collateral
declines or if bankruptcy proceedings are commenced with respect to the seller
of the security, realization of the collateral by the Fund may be delayed or
limited.

The Fund may hold up to 15% of its net assets in illiquid securities, including
those which are restricted as to disposition under securities law ("restricted
securities"). None of the issues of restricted securities held by the Fund at
November 30, 1998 include registration rights under which the Fund may demand
registration by the issuer.

Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. The Fund
amortizes premiums and discounts paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.

Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of the Fund based
upon the relative proportion of net assets of each class at the beginning of the
day.

Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.

Dividends and Distributions: The Fund expects to pay dividends out of net
investment income and make distributions of any net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.

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

B-65
<PAGE>

PRUDENTIAL DISTRESSED
NOTES TO FINANCIAL STATEMENTS SECURITIES FUND, INC.
- --------------------------------------------------------------------------------

Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.

Deferred Organization Costs: The Fund incurred approximately $82,000 in
connection with the organization of the Fund. These costs were deferred and are
being amortized over a period of 60 months ending March 2001.

Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income; Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease accumulated net realized gains on investments by
$213,880, increase undistributed net investment income by $120,486 and increase
paid-in capital in excess of par by $93,394. This is a result of a
reclassification of distributions. Net investment income, net realized gains and
net assets were not affected by these changes.

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

NOTE 2. AGREEMENTS

The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ("PIC"), doing business as
Prudential Investments ("PI"); PI furnishes investment advisory services in
connection with the management of the Fund and is reimbursed by PIFM for its
reasonable cost and expenses incurred providing such services. The Fund bears
all other costs and expenses.

The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .75 of 1% of the average daily net assets of the Fund.

PIFM voluntarily agreed to reimburse the Fund in order to reduce total expenses
so as not to exceed 1.25%, 2.00% and 2.00% of the average daily net assets of
the Class A, Class B and Class C shares, respectively, on an annualized basis.
For the year ended November 30, 1998, such reimbursements amounted to $233,158
(2.69% of average net assets; $.38 per share for Class A, B and C shares).

The Fund had a distribution agreement with Prudential Securities Incorporated
("PSI"), which acted as the distributor of the Class A, Class B and Class C
shares of the Fund through May 31, 1998. Prudential Investment Management
Services LLC ("PIMS") became the distributor of the Fund effective June 1, 1998
and is serving the Fund under the same terms and conditions as under the
agreement with PSI. The Fund compensated PSI and PIMS for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable
monthly.

Pursuant to the Class A, B and C Plans, the Fund compensates PSI and PIMS for
distribution related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net asset values of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, Class B and Class C shares for the year
ended November, 30, 1998.

PSI and PIMS have advised the Fund that they have received approximately $22,000
in front-end sales charges resulting from sales of Class A and after November 2,
1998 Class C shares for the year ended November 30, 1998. From these fees, PSI
and PIMS paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.

PSI and PIMS have advised the Fund that for the year ended November 30, 1998,
they received approximately $22,600 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders. PIFM, PIC, PIMS
and PSI are indirect, wholly owned subsidiaries of The Prudential Insurance
Company of America.

The Fund, along with other affiliated registered investment companies (the
"Funds"), has a credit agreement (the "Agreement") with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement for the year ended
November 30, 1998. The Funds pay a commitment fee at an annual rate of .055 of
1% on the unused portion of the credit facility. The commitment fee is accrued
and paid quarterly on a pro rata basis by the Funds. The Agreement expired on
December 30, 1997 and has been extended through December 29, 1998 under the same
terms.

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

NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES

Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended November 30, 1998 the
Fund incurred fees of approximately $4,600 for the services of PMFS. As of
November 30, 1998, approximately $400 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.

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

B-66
<PAGE>

PRUDENTIAL DISTRESSED
NOTES TO FINANCIAL STATEMENTS SECURITIES FUND, INC.
- --------------------------------------------------------------------------------

NOTE 4. PORTFOLIO SECURITIES

Purchases and sales of investment securities, other than short-term investments,
for the year ended November 30, 1998 were $16,362,654 and $15,042,920,
respectively.

The federal income tax basis of the Fund's investments at November 30, 1998 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized depreciation for federal income tax purposes was $1,194,471 (gross
unrealized appreciation--$821,195; gross unrealized
depreciation--$2,015,666).

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

NOTE 5. CAPITAL

The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Prior to November 2, 1998, Class C shares
were sold with a contingent deferred sales charge of 1% during the first year.
Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value.

On August 26, 1998, the Board of Directors of the Fund approved an amendment to
the Fund's Articles of Incorporation creating Class Z shares. There are 2
billion shares of $.001 par value common stock authorized divided into four
classes, designated Class A, Class B, Class C and Class Z, which each consist of
500 million authorized shares. At November 30, 1998, there were no Class Z
shares issued. Of the 601,149 shares of common stock issued and outstanding at
November 30, 1998, Prudential owned 20,726.

Transactions in shares of common stock were as follows:

Class A SHARES AMOUNT
- ------------------------------------- -------- -----------
<S> <C> <C>
Year ended November 30, 1998:
Shares sold.......................... 142,139 $ 2,290,931
Shares issued in reinvestment of
dividends
and distributions.................. 22,081 277,784
Shares reacquired.................... (68,517) (956,778)
-------- -----------
Net increase in shares outstanding
before conversion.................. 95,703 1,611,937
Shares issued upon conversion from
Class B............................ 1,381 21,582
-------- -----------
Net increase in shares outstanding... 97,084 $ 1,633,519
======== ===========

Class A SHARES AMOUNT
- ------------------------------------- -------- -----------
<S> <C> <C>
Year ended November 30, 1997:
Shares sold.......................... 28,654 $ 390,626
Shares issued in reinvestment of
dividends.......................... 7,185 84,009
Shares reacquired.................... (193,700) (2,363,624)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (157,861) (1,888,989)
Shares issued upon conversion from
Class B............................ 715 9,982
-------- -----------
Net decrease in shares outstanding... (157,146) $(1,879,007)
======== ===========

<CAPTION>
Class B
- -------------------------------------
<S> <C> <C>
Year ended November 30, 1998:
Shares sold.......................... 45,545 $ 706,611
Shares issued in reinvestment of
dividends
and distributions.................. 35,420 464,104
Shares reacquired.................... (110,916) (1,612,703)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (29,951) (441,988)
Shares reacquired upon conversion
into Class A....................... (1,383) (21,582)
-------- -----------
Net decrease in shares outstanding... (31,334) $ (463,570)
======== ===========

Year ended November 30, 1997:
Shares sold.......................... 16,501 $ 214,769
Shares issued in reinvestment of
dividends.......................... 8,896 104,821
Shares reacquired.................... (150,167) (1,863,184)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (124,770) (1,543,594)
Shares reacquired upon conversion
into Class A....................... (715) (9,982)
-------- -----------
Net decrease in shares outstanding... (125,485) $(1,553,576)
======== ===========

<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
Year ended November 30, 1998:
Shares sold.......................... 26,451 $ 405,418
Shares issued in reinvestment of
dividends
and distributions.................. 7,033 90,741
Shares reacquired.................... (14,583) (195,038)
-------- -----------
Net increase in shares outstanding... 18,901 $ 301,121
======== ===========

Year ended November 30, 1997:
Shares sold.......................... 23,901 $ 303,761
Shares issued in reinvestment of
dividends.......................... 2,403 28,153
Shares reacquired.................... (97,442) (1,248,817)
-------- -----------
Net decrease in shares outstanding... (71,138) $ (916,903)
======== ===========

</TABLE>

From time to time, the fund may have a concentration of several shareholders
holding a significant percentage of shares outstanding. Investment activities of
these shareholders may have an impact on the fund and the portfolio.

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

B-67
<PAGE>

PRUDENTIAL DISTRESSED
FINANCIAL HIGHLIGHTS SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------------
March 26,
1996(d)
Year Ended November 30, Through
------------------------- November 30,
1998(e) 1997(e) 1996
-------- ---------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................... $15.19 $ 11.85 $ 12.50
-------- ---------- ------
Income from investment operations
Net investment income(a)................................................ .87 .49 .25
Net realized and unrealized gain (loss) on investment transactions...... (2.69) 3.23 (.90)
-------- ---------- ------
Total from investment operations..................................... (1.82) 3.72 (.65)
-------- ---------- ------
Less distributions
Dividends from net investment income.................................... (1.39) (.38) --
Distributions in excess of net investment income........................ (.24) -- --
Distributions from net realized gains................................... (.17) -- --
-------- ---------- ------
Total distributions.................................................. (1.80) (.38) --
-------- ---------- ------
Net asset value, end of period.......................................... $11.57 $ 15.19 $ 11.85
======== ========== ======

TOTAL RETURN(b):........................................................ (13.19)% 32.35% (5.20)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......................................... $2,629 $ 1,976 $ 3,404
Average net assets (000)................................................ $2,783 $ 2,167 $ 4,391
Ratios to average net assets(a):
Expenses, including distribution fees................................ 1.25% 2.04% 2.76%(c)
Expenses, excluding distribution fees................................ 1.00% 1.79% 2.51%(c)
Net investment income................................................ 5.80% 3.73% 2.37%(c)
For Class A, B and C shares:
Portfolio turnover rate.............................................. 188% 175% 61%
</TABLE>
- ---------------

(a) Net of expense reimbursement.

(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.

(d) Commencement of investment operations.

(e) Calculated based upon weighted average shares outstanding during the
year.

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

B-68
<PAGE>

PRUDENTIAL DISTRESSED
FINANCIAL HIGHLIGHTS SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------
March 26,
1996(d)
Year Ended November 30, Through
------------------------- November 30,
1998(e) 1997(e) 1996
---------- -------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................... $15.16 $11.79 $ 12.50
----- -------- ------
Income from investment operations
Net investment income(a)................................................ .76 .39 .16
Net realized and unrealized gain (loss) on investment transactions...... (2.69) 3.24 (.87)
----- -------- ------
Total from investment operations..................................... (1.93) 3.63 (.71)
----- -------- ------
Less distributions
Dividends from net investment income.................................... (1.27) (.26) --
Distributions in excess of net investment income........................ (.21) -- --
Distributions from net realized gains................................... (.17) -- --
----- -------- ------
Total distributions.................................................. (1.65) (.26) --
----- -------- ------
Net asset value, end of period.......................................... $11.58 $15.16 $ 11.79
===== ======== ======

TOTAL RETURN(b):........................................................ (13.90)% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......................................... $3,477 $5,029 $ 5,387
Average net assets (000)................................................ $4,862 $4,860 $ 6,650
Ratios to average net assets(a):
Expenses, including distribution fees................................ 2.00% 2.79% 3.51%(c)
Expenses, excluding distribution fees................................ 1.00% 1.79% 2.51%(c)
Net investment income................................................ 5.05% 2.98% 1.59%(c)
</TABLE>
- ---------------

(a) Net of expense reimbursement.

(d) Commencement of investment operations.

(e) Calculated based upon weighted average shares outstanding during the
year.

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

B-69
<PAGE>

PRUDENTIAL DISTRESSED
FINANCIAL HIGHLIGHTS SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
---------------------------------------------
March 26,
1996(d)
Year Ended November 30, Through
-------------------------- November 30,
1998(e) 1997(e) 1996
----------- -------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................... $ 15.16 $11.79 $12.50
----- -------- -----
Income from investment operations
Net investment income(a)............................................... .75 .39 .16
Net realized and unrealized gain (loss) on investment transactions..... (2.69) 3.24 (.87)
----- -------- -----
Total from investment operations.................................... (1.94) 3.63 (.71)
----- -------- -----
Less distributions
Dividends from net investment income................................... (1.27) (.26) --
Distributions in excess of net investment income....................... (.21) -- --
Distributions from net realized gains.................................. (.17) -- --
----- -------- -----
Total distributions................................................. (1.65) (.26) --
----- -------- -----
Net asset value, end of period......................................... $ 11.57 $15.16 $11.79
===== ======== =====

TOTAL RETURN(b):....................................................... (13.90)% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................................ $ 853 $ 831 $1,485
Average net assets (000)............................................... $ 1,011 $1,100 $1,678
Ratios to average net assets(a):
Expenses, including distribution fees............................... 2.00% 2.79% 3.51%(c)
Expenses, excluding distribution fees............................... 1.00% 1.79% 2.51%(c)
Net investment income............................................... 5.05% 2.98% 1.71%(c)
</TABLE>
- ---------------

(a) Net of expense reimbursement.

(d) Commencement of investment operations.

(e) Calculated based upon weighted average shares outstanding during the
year.

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

B-70
<PAGE>

PRUDENTIAL DISTRESSED
REPORT OF INDEPENDENT ACCOUNTANTS SECURITIES FUND, INC.
- --------------------------------------------------------------------------------

To the Shareholders and Board of Directors of
Prudential Distressed Securities Fund, Inc.

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Distressed Securities
Fund, Inc. (the 'Fund') at November 30, 1998, the results of its operations for
the year then ended, and the changes in its net assets and the financial
highlights for each of the two years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at November 30, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for the
period March 26, 1996 through November 30, 1996 were audited by other
independent accountants, whose opinion dated January 10, 1997 was
unqualified.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
January 25, 1999

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

B-71
<PAGE>

DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.

A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.

Baa: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

SHORT-TERM DEBT RATINGS

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.

PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obliqations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:

. Leading market positions in well-established industries.

. High rates of return on funds employed.

. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.

A-1
<PAGE>

. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

. Well-established access to a range of financial markets and assured
sources of alternate liquidity.

PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

STANDARD & POOR'S RATINGS GROUP

DEBT RATINGS

AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

BB, B, CCC AND CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics. BB indicates the least degree
of speculation and CC the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

COMMERCIAL PAPER RATINGS

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

DUFF & PHELPS CREDIT RATING CO.

LONG-TERM DEBT AND PREFERRED STOCK RATINGS

AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA: High credit quality. Protection factors are strong. Risk is modest but
may vary sightly from time to time because of economic conditions.

A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.

A-2
<PAGE>

BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.

BB: Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.

B: Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.

Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".

CCC: WELL BELOW INVESTMENT GRADE SECURITIES. CONSIDERABLE UNCERTAINTY EXISTS
AS TO TIMELY PAYMENT OF PRINCIPAL, INTEREST OR PREFERRED DIVIDENDS. PROTECTION
FACTORS ARE NARROW AND RISK CAN BE SUBSTANTIAL WITH UNFAVORABLE
ECONOMIC/INDUSTRY CONDITIONS, AND/OR WITH UNFAVORABLE COMPANY DEVELOPMENTS.

SHORT-TERM DEBT RATINGS

DUFF 1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.

DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.

DUFF 1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.

DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

A-3
<PAGE>

APPENDIX I--GENERAL INVESTMENT INFORMATION

ASSET ALLOCATION

Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.

DIVERSIFICATION

Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of
security.

DURATION

Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.

Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).

MARKET TIMING

Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.

POWER OF COMPOUNDING

Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.

STANDARD DEVIATION

Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying a greater volatility potential.
Standard deviation is only one of several measures of a fund's volatility.

I-1
<PAGE>

APPENDIX II--HISTORICAL PERFORMANCE DATA

The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.

The following chart shows the long-term performance of various asset classes
and the rate of inflation.

[LINE GRAPH]

Value of $1.00 invested on 1/1/26 through 12/31/98

Small Stocks -- $5,116.95 Long-Term Bonds -- $44.18
Common Stocks -- $2,350.89 Treasury Bills -- $14.94
Inflation -- $ 9.16

Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential Mutual
Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the
New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently)
in a variety of industries. It is often used as a broad measure of stock
market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).

II-1
<PAGE>

Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees
of a mutual fund. See "Risk/Return Summary--Fees and Expenses" in the
prospectus. The net effect of the deduction of the operating expenses of a
mutual fund on these historical total returns, including the compounded effect
over time, could be substantial.

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

<TABLE>
<CAPTION>
YEAR 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS/1/ 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
---------------------------------------------------------------------------------------------
U.S.GOVERNMENT
MORTGAGE
SECURITIES/2/ 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
---------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE BONDS/3/ 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
---------------------------------------------------------------------------------------------
U.S. HIGH YIELD
BONDS/4/ 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
---------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS/5/ 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3%
---------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST AND LOWEST 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4
RETURNS PERCENT
</TABLE>

- -------
/1/ LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/ LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/ LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/ LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.

/5/ SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in
the U.S., but including those in Japan, Germany, France, the U.K., Canada,
Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.

II-2
<PAGE>

This chart shows the growth of a
This chart illustrates the hypothetical $10,000 investment made
performance of major world stock in the stocks representing the S&P
markets for the period from 500 stock index with and without
December 31, 1985 through December reinvested dividends.
31, 1998. It does not represent the
performance of any Prudential [LINE GRAPH APPEARS HERE]
Mutual Fund.
Capital Appreciation and
AVERAGE ANNUAL TOTAL RETURNS OF Reinvesting Dividends -- $391,707
MAJOR WORLD STOCK MARKETS
(12/31/85-12/31/98)(IN U.S. DOLLARS) Capital Appreciation only -- $133,525

Belgium 22.7%
Spain 22.5% Source: Lipper, Inc. Used with
Netherlands 20.8% permission. All rights reserved. This
Sweden 19.9% chart is used for illustrative
Switzerland 18.3% purposes only and is not intended to
USA 18.1% represent the past, present or future
Hong Kong 17.8% performance of any Prudential Mutual
France 17.4% Fund. Common stock total return is
UK 16.7% based on the Standard & Poor's 500
Germany 13.4% Stock Index, a market-value-weighted
Austria 8.9% index made up of 500 of the largest
Japan 6.5% stocks in the U.S. based upon their
stock market value. Investors cannot
invest directly in indices.

Source: Morgan Stanley Capital
International (MSCI) and Lipper,
Inc. as of 12/31/98. Used with
permission. Morgan Stanley Country
indices are unmanaged indices which
include those stocks making up the
largest two-thirds of each
country's total stock market
capitalization. Returns reflect the
reinvestment of all distributions.
This chart is for illustrative
purposes only and is not indicative
of the past, present or future
performance of any specific
investment. Investors cannot invest
directly in stock indices.

II-3
<PAGE>

------------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL -- $15.8 TRILLION

[PIE CHART]

U.S. 51.0%
EUROPE 34.7%
PACIFIC BASIN 12.5%
CANADA 1.8%

Source: Morgan Stanley Capital
International, December 31, 1998. Used
with permission. This chart represents
the capitalization of major world
stock markets as measured by the
Morgan Stanley Capital International
(MSCI) World Index. The total market
capitalization is based on the value
of approximately 1577 companies in 22
countries (representing approximately
60% of the aggregate market value of
the stock exchanges). This chart is
for illustrative purposes only and
does not represent the allocation of
any Prudential Mutual Fund.

This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.

[LINE CHART]

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

Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond
from 1926-1996. Yields represent that of an annually renewed one-bond
portfolio with a remaining maturity of approximately 20 years. This chart is
for illustrative purposes and should not be construed to represent the yields
of any Prudential Mutual Fund.

II-4
<PAGE>

APPENDIX III--INFORMATION RELATING TO PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Pruden-
tial Mutual Funds. Unless otherwise indicated, the information is as of Decem-
ber 31, 1997 and is subject to change thereafter. All information relies on
data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1997. Principal products and services include life and health insurance,
other healthcare products, property and casualty insurance, securities broker-
age, asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs more than 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and
6,500 domestic and international financial advisors. Prudential is a major is-
suer of annuities, including variable annuities. Prudential seeks to develop
innovative products and services to meet consumer needs in each of its busi-
ness areas. Prudential uses the rock of Gibraltar as its symbol. The Pruden-
tial rock is a recognized brand name throughout the world.

Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 40 million people world-
wide. Long one of the largest issuers of life insurance, the Prudential has 25
million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. The Prudential provides auto insurance
for more than 1.5 million cars and insures more than 1.2 million homes.

Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in as-
sets under management. Prudential Investments, a business group of Prudential
(of which Prudential Mutual Funds is a key part) manages over $211 billion in
assets of institutions and individuals. In Institutional Investor, July 1998,
Prudential was ranked 8th in terms of total assets under management as of De-
cember 31, 1997.

Real Estate. The Prudential Real Estate Affiliates, is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents and more than 1,400 of-
fices across the United States./2/

Healthcare. Over two decades ago, the Prudential introduced the first feder-
ally-funded, for-profit HMO in the country. Today, approximately 4.9 million
Americans receive healthcare from a Prudential managed care membership./3/

Financial Services. The Prudential Savings Bank FSB, a wholly-owned subsidi-
ary of the Prudential, has nearly $1 billion in assets and serves nearly 1.5
million customers across 50 states.
- --------
/1/PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to The Prudential Investment Portfolios, Inc. and Mercator Asset
Management LP as the subadviser to International Stock Series, a portfolio
of Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.

/2/As of December 31, 1997.

/3/On December 10, 1998 Prudential announced its intention to sell Prudential
Health Care to Aetna, Inc. for $1 billion.

III-1
<PAGE>

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

As of November 30, 1998 Prudential Investments Fund Management is the eigh-
teenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable an-
nuities with more than 3.7 million shareholder accounts.

The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment port-
folios.

From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media. Addi-
tionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such
as The Wall Street Journal, The New York Times, Barron's and USA Today.

Equity Funds. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Fund, a growth-style equity fund managed by Jennison Associates LLC, a premier
institutional equity manager and a subsidiary of Prudential.

High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor approx-
imately 200 issues held in the Prudential High Yield Fund (currently the larg-
est fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase./4/ Non-investment grade bonds,
also known as junk bonds or high yield bonds, are subject to a greater risk of
loss of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.

Prudential's portfolio managers are supported by a large and sophisticated
research organization. Investment grade bond analysts monitor the financial
viability of different bond issuers in the investment grade corporate and mu-
nicipal bond markets--from IBM to small municipalities, such as Rockaway Town-
ship, New Jersey. These analysts consider among other things sinking fund pro-
visions and interest coverage ratios.

Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.

Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mu-
tual Fund.

Prudential Mutual Funds trades billions in U.S. and foreign government secu-
rities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers have met with several senior U.S. and foreign
government officials, on issues ranging from economic conditions in foreign
countries to the viability of index-linked securities in the United States.

INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and Annui-
ties. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer ac-
counts were opened each month at Prudential Securities./5/
- --------

/4/As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.

/5/As of December 31, 1998.

III-2
<PAGE>

Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment and financial
planning areas.

In addition to training, Prudential Securities provides its financial advi-
sors with access to firm economists and market analysts. It has also developed
proprietary tools for use by financial advisors, including the Financial
Architects SM, a state-of-the-art asset allocation software program which
helps Financial Advisors to evaluate a client's objectives and overall finan-
cial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.

For more complete information about any of the Prudential Mutual Funds, in-
cluding charges and expenses, call your Prudential Securities financial ad-
viser or Pruco/Prudential representative for a free prospectus. Read it care-
fully before you invest or send money.

III-3
<PAGE>

OTHER INFORMATION

ITEM 23. EXHIBITS.

(a) (1) Articles of Incorporation, incorporated by reference to Exhibit
1 to the Registration Statement on Form N-1A (File No. 333-00203)
filed via EDGAR on January 16, 1996.

(2) Articles Supplementary, incorporated by reference to Exhibit
(a)(2) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
December 14, 1998.

(3) Articles Supplementary.*

(b) By-Laws, incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
January 16, 1996.

(c) Instruments defining rights of shareholders incorporated by
reference to Exhibit 4 to the Registration Statement on Form N-1A
(File No. 333-00203) filed via EDGAR on January 16, 1996.

(d) (1) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 333-00203) filed via EDGAR on September 6,
1996.
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-00203) filed via
EDGAR on September 6, 1996.

(e) (1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC, incorporated by reference to
Exhibit (e)(1) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
December 14, 1998.

(2) Form of Selected Dealer Agreement, incorporated by reference to
Exhibit (e)(2) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
December 14, 1998.

(g) Custodian Contract between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8 to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 333-00203) filed via EDGAR on September 6, 1996.

(h) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
September 6, 1996.

(i) Opinion of Gardner, Carton & Douglas, incorporated by reference to
Exhibit 10 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
February 16, 1996.

(j) Consent of Independent Accountants.*

(l) Purchase Agreement, incorporated by reference to Exhibit 13 to Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 333-00203) filed via EDGAR on February 16, 1996.

(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares, incorporated by reference to Exhibit (m)(1) to Post-
Effective Amendment No. 4 to the Registration Statement on Form N-1A
(File No.333-00203) filed via EDGAR on December 14, 1998.

(2) Amended and Restated Distribution and Service Plan for Class B
shares, incorporated by reference to Exhibit (m)(2) to Post-
Effective Amendment No. 4 to the Registration Statement on Form N-1A
(File No.333-00203) filed via EDGAR on December 14, 1998.

(3) Amended and Restated Distribution and Service Plan for Class C
shares, incorporated by reference to Exhibit (m)(3) to Post-
Effective Amendment No. 4 to the Registration Statement on Form N-1A
(File No.333-00203) filed via EDGAR on December 14, 1998.

(n)Financial Data Schedules.*

(o)Amended Rule 18f-3 Plan, incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A (File No. 333-00203) filed via EDGAR on December 14, 1998.
- --------
*Filed herewith.

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

C-1
<PAGE>

ITEM 25. INDEMNIFICATION

As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-
Laws (Exhibit (b) to the Registration Statement), officers, directors,
employees and agents of the Registrant will not be liable to the Registrant,
any shareholder, officer, director, employee, agent or other person for any
action or failure to act, except for bad faith, willful misfeasance, gross
negligence or reckless disregard of duties, and those individuals may be
indemnified against liabilities in connection with the Registrant, subject to
the same exceptions. Section 2-418 of Maryland General Corporation Law permits
indemnification of directors who acted in good faith and reasonably believed
that the conduct was in the best interests of the Registrant. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution
Agreement (Exhibit (e)(1)) to the Registration Statement), the Distributor of
the Registrant may be indemnified against liabilities which it may incur,
except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.

The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.

Section 9 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.

The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Sections 17(h) and 17(i)
of such Act remain in effect and are consistently applied.

Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either
the registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office.

Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange
Commission staff's position of Section 17(h) advances will be limited in the
following respect:

(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including cost
connected with preparation of a settlement);

C-2
<PAGE>

(2) Any advances must be accompanied by a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds
the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification;

(3) Such promise must be secured by a surety bond or other suitable
insurance; and

(4) Such surety bond or other insurance must be paid for by the recipient
of such advance.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

(a) Prudential Investments Fund Management LLC

See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this
Registration Statement.

The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).

The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark,
NJ 07102-4077.

<TABLE>
<CAPTION>
NAME POSITION WITH PIFM PRINCIPAL OCCUPATION
- ---- ------------------ --------------------

<S> <C> <C>
Robert F. Executive Vice President Vice President, Prudential; Executive Vice
Gunia and Treasurer President and Treasurer, PIFM; Senior Vice
President, Prudential Securities
Neil A. Executive Vice President Executive Vice President and Director of
McGuinness Marketing, Prudential Mutual Funds &
Annuities (PMF&A);
Executive Vice President, PIFM
Brian Officer in Charge, President, President, PMF&A; Officer-in Charge,
Storms Chief Executive Officer and President, Chief Executive Officer and Chief
Chief Operating Officer Operating Officer, PIFM

Robert J. Executive Vice President Executive Vice President, PMF&A, Executive
Sullivan Vice President, PIFM
</TABLE>

(b) The Prudential Investment Corporation

See "How the Fund is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory
and Other Services" in the Statement of Additional Information constituting
Part B of this Registration Statement.

The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza,
Newark, NJ 07102.

<TABLE>
<CAPTION>
NAME AND
ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- -------- ----------------- ---------------------
<S> <C> <C>
E. Michael Chairman of the Board, Chief Executive Officer of Prudential Invest-
Caulfield President and Chief ments (PIC) of The Prudential Insurance Com-
Executive Officer and pany of America (Prudential)
Director
John R. Vice President and Director President of Private Asset Management Group
Strangfeld of Prudential; Senior Vice President, Pru-
dential; Vice President and Director PIC
</TABLE>

C-3
<PAGE>

ITEM 29. PRINCIPAL UNDERWRITERS

(a) Prudential Investment Management Services LLC (PIMS)

PIMS is distributor for Cash Accumulation Trust, Command Government Fund,
Command Money Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc.,
Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Diversified Bond Fund, Inc., Prudential Distressed Securities
Fund, Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund,
Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund,
Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust, Prudential High Yield Fund, Inc., Prudential High Yield
Total Return Fund, Inc., Prudential Index Series Fund, Prudential
Institutional Liquidity Portfolio, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap Value
Fund, Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund,
Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc.,
Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Real Estate Securities Fund, Prudential Small-Cap Quantum Fund,
Inc., Prudential Small Company Value Fund, Inc., Prudential Special Money
Market Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-
Managed Equity Fund, Prudential 20/20 Focus Fund, Prudential Utility Fund,
Inc., Prudential World Fund, Inc., The Prudential Investment Portfolios, Inc.
and The Target Portfolio Trust.

(b) Information concerning the officers and directors of PIMS is set forth
below.

<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND OFFICES
NAME(/1/) UNDERWRITER WITH REGISTRANT
--------- ------------- ---------------------
<C> <S> <C>
E. Michael Caulfield. President None
Mark R. Fetting...... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
Jean D. Hamilton..... Executive Vice President None
Ronald P. Joelson.... Executive Vice President None
Brian M. Storms...... Executive Vice President President and Director
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
John R. Strangfeld, Executive Vice President None
Jr. ................
Mario A. Mosse ...... Senior Vice President and None
Chief Operating Officer
Scott S. Wallner..... Vice President, Secretary and None
Chief Legal Officer
Michael G. Vice President, Comptroller None
Williamson.......... and Chief Financial Officer
C. Edward Chaplin.... Treasurer None
</TABLE>

- --------

(/1/)The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102, unless otherwise indicated.

C-4
<PAGE>

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and Prudential
Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837.
Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-
1(f) and Rules 31a-(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and the remaining
accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept
by State Street Bank and Trust Company and Prudential Mutual Fund
Services LLC.

ITEM 29. MANAGEMENT SERVICES

Other than as set forth under the captions "How the Fund is Managed--
Manager" and "How the Fund is Managed--Distributor" in the Prospectus and the
caption "Investment Advisory and Other Services" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.

ITEM 30. UNDERTAKINGS

Not applicable.

C-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Registrant has duly caused this Post-Effective Amendment to the Regis-
tration Statement to be signed by the undersigned, duly authorized, in the City
of Newark, and State of New Jersey, on the 28th day of January, 1999.

PRUDENTIAL DISTRESSED SECURITIES FUND, INC.

/s/ Brian M. Storms
By_________________________________
BRIAN M. STORMS PRESIDENT

Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Grace C. Torres Treasurer and Principal January 28, 1999
- --------------------------- Financial and Accounting Officer
GRACE C. TORRES
/s/ Edward D. Beach Director January 28, 1999
- ---------------------------
EDWARD D. BEACH
/s/ Delayne D. Gold Director January 28, 1999
- ---------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Director January 28, 1999
- ---------------------------
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale Director January 28, 1999
- ---------------------------
DOUGLAS H. MCCORKINDALE
/s/ Mendel A. Melzer Director January 28, 1999
- ---------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Director January 28, 1999
- ---------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Director January 28, 1999
- ---------------------------
STEPHEN P. MUNN
/s/ Richard A. Redeker Director January 28, 1999
- ---------------------------
RICHARD A. REDEKER
/s/ Robin B. Smith Director January 28, 1999
- ---------------------------
ROBIN B. SMITH
/s/ Brian M. Storms President and Director January 28, 1999
- ---------------------------
BRIAN M. STORMS
/s/ Louis A. Weil, III Director January 28, 1999
- ---------------------------
LOUIS A. WEIL, III
/s/ Clay T. Whitehead Director January 28, 1999
- ---------------------------
CLAY T. WHITEHEAD
</TABLE>

C-6
<PAGE>

PRUDENTIAL DISTRESSED SECURITIES FUND, INC.

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
(a)(1) Articles of Incorporation, incorporated by reference to Exhibit
1 to the Registration Statement on Form N-1A (File No.
333-00203) filed via EDGAR on January 16, 1996.
(2) Articles Supplementary, incorporated by reference to Exhibit
(a)(2) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
December 14, 1998.

(3) Articles Supplementary.*
(b) By-Laws, incorporated by reference to Exhibit 2 to the Regis-
tration Statement on Form N-1A (File No. 333-00203) filed via
EDGAR on January 16, 1996.
(c) Instruments Defining Rights of Shareholders, incorporated by
reference to Exhibit 4 to the Registration Statement on Form N-
1A (File No. 333-00203) filed via EDGAR on January 16, 1996.
(d)(1) Management Agreement between the Registrant and Prudential Mu-
tual Fund Management, Inc., incorporated by reference to Ex-
hibit 5(a) to Post-Effective Amendment No. 1 to the Registra-
tion Statement on Form N-1A (File No. 333-00203) filed via ED-
GAR on September 6, 1996.
(2) Subadvisory Agreement between Prudential Mutual Fund Manage-
ment, Inc. and The Prudential Investment Corporation, incorpo-
rated by reference to Exhibit 5(b) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 333-
00203) filed via EDGAR on September 6, 1996.
(e)(1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC, incorporated by reference
to Exhibit (e)(1) to Post-Effective Amendment No. 4 to the Reg-
istration Statement on Form N-1A (File No. 333-00203) filed via
EDGAR on December 14, 1998.
(2) Form of Selected Dealer Agreement, incorporated by reference to
Exhibit (e)(2) to Post-Effective Amendment No. 4 to the Regis-
tration Statement on Form N-1A (File No. 333-00203) filed via
EDGAR on December 14, 1998.
(g) Custodian Contract between the Registrant and State Street Bank
and Trust Company, incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 333-00203) filed via EDGAR on September 6,
1996.
(h) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc., incorporated by ref-
erence to Exhibit 9 to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-00203) filed
via EDGAR on September 6, 1996.
(i) Opinion of Gardner, Carton & Douglas, incorporated by reference
to Exhibit 10 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-00203) filed
via EDGAR on February 16, 1996.
(j) Consent of independent accountants.*
(l) Purchase Agreement, incorporated by reference to Exhibit 13 to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 333-00203) filed via EDGAR on February 16,
1996.
(m)(1) Amended and Restated Distribution and Service Plan for Class A
Shares, incorporated by reference to Exhibit (m)(1) to Post-Ef-
fective Amendment No. 4 to the Registration Statement on Form
N-1A (File No. 333-00203) filed via EDGAR on December 14, 1998.
(2) Amended and Restated Distribution and Service Plan for Class B
Shares, incorporated by reference to Exhibit (m)(2) to Post-Ef-
fective Amendment No. 4 to the Registration Statement on Form
N-1A (File No. 333-00203) filed via EDGAR on December 14, 1998.
(3) Amended and Restated Distribution and Service Plan for Class C
Shares, incorporated by reference to Exhibit (m)(3) to Post-Ef-
fective Amendment No. 4 to the Registration Statement on Form
N-1A (File No. 333-00203) filed via EDGAR on December 14, 1998.
(n) Financial Data Schedules.*
(o) Amended Rule 18f-3 Plan, incorporated by reference to Exhibit
(o) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
December 14, 1998.
</TABLE>
- --------
* Filed herewith.

<PAGE>

EXHIBIT 99.(a)(3)

ARTICLES SUPPLEMENTARY
OF
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.

Prudential Distressed Securities Fund, Inc., a Maryland corporation having
its principal offices in Baltimore, Maryland and Newark, New Jersey (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:

FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940.

SECOND: The total number of shares of all classes of stock which the
Corporation has authority to issue is 2,000,000,000 shares of common stock, par
value of $.001 each, having an aggregate par value of $2,000,000.

THIRD: Heretofore, the number of authorized shares of which the
Corporation had authority to issue was divided into three classes of shares,
consisting of 1,000,000,000 Class A shares, 500,000,000 Class B shares and
500,000,000 Class C shares.

FOURTH: In accordance with Section 2-105 (c) of the Maryland General
Corporation Law and pursuant to a resolution duly adopted by the Board of
Directors of the Corporation at a meeting held on August 26, 1998, the number of
classes into which shares of the Corporation are divided was increased, so that
shares of the Corporation now are divided into four classes of shares,
consisting of 500 million Class A shares, 500 million Class B shares, 500
million Class C shares and 500 million Class Z shares.

FIFTH: The Class Z shares shall represent the same interest in the
Corporation and have identical voting, dividend, liquidation and other rights as
the Class A, Class B and Class C shares except that (i) expenses related to the
distribution of each class of shares shall be borne solely by such class; (ii)
the bearing of such expenses solely by shares of each class shall be
appropriately reflected (in the manner determined by the Board of Directors) in
the net asset value, dividends, distribution and liquidation rights of the
shares of such class; (iii) the Class A Common Stock shall be subject to a
front-end sales load and Rule 12b-1 distribution fee as determined by the Board
of Directors from time to time; (iv) the Class B Common Stock shall be subject
to a contingent deferred sales charge and Rule 12b-1 distribution fee as
determined by the Board of Directors from time to time; (v) the Class C Common
Stock shall be subject to a front-end sales load, contingent deferred sales
charge and Rule 12b-1 distribution fee as determined by the Board of Directors
from time to time and (vi) the Class Z Common Stock shall not be subject to a
front-end sales load, a contingent deferred sales charge nor a Rule 12b-1
distribution fee. All shares of each particular class shall represent an equal
proportionate interest in that class, and each share of any particular class
shall be equal to each other share of that class.
<PAGE>

IN WITNESS WHEREOF, PRUDENTIAL DISTRESSED SECURITIES FUND, INC., has caused
these presents to be signed in its name and on its behalf by its Vice President
and attested by its Secretary on January 22, 1999.

PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.

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

Attest: /s/ Marguerite E.H. Morrison
----------------------------
Marguerite E.H. Morrison
Secretary

THE UNDERSIGNED, Vice President of Prudential Distressed Securities Fund,
Inc., who executed on behalf of the Corporation the foregoing Articles
Supplementary of which this certificate is made a part, hereby acknowledges in
the name and on behalf of said Corporation the foregoing Articles Supplementary
to be the corporate act of said Corporation and hereby certifies that to the
best of his knowledge, information and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.

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

<PAGE>

EXHIBIT 99.J

Consent of Independent Accountants

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 5 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
January 25, 1999, relating to the financial statements and financial highlights
of Prudential Distressed Securities Fund, Inc., which appears in such Statement
of Additional Information, and to the incorporation by reference of our report
into the Prospectus which constitute part of this Registration Statement. We
also consent to the reference to us under the heading "Investment Advisory and
Other Services" in such Statement of Additional Information and to the reference
to us under the heading "Financial Highlights" in such Prospectus.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
January 29, 1999

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 8,145,190
<INVESTMENTS-AT-VALUE> 6,950,719
<RECEIVABLES> 248,623
<ASSETS-OTHER> 61,171
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,260,513
<PAYABLE-FOR-SECURITIES> 116,988
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 184,713
<TOTAL-LIABILITIES> 301,701
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,075,994
<SHARES-COMMON-STOCK> 601,149
<SHARES-COMMON-PRIOR> 516,528
<ACCUMULATED-NII-CURRENT> 44,559
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,730
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,194,471)
<NET-ASSETS> 6,958,812
<DIVIDEND-INCOME> 854,568
<INTEREST-INCOME> 14,200
<OTHER-INCOME> 0
<EXPENSES-NET> 152,259
<NET-INVESTMENT-INCOME> 716,509
<REALIZED-GAINS-CURRENT> 32,730
<APPREC-INCREASE-CURRENT> (2,167,375)
<NET-CHANGE-FROM-OPS> (1,418,136)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (832,193)
<DISTRIBUTIONS-OF-GAINS> (97,806)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,402,960
<NUMBER-OF-SHARES-REDEEMED> (2,764,519)
<SHARES-REINVESTED> 832,629
<NET-CHANGE-IN-ASSETS> (877,065)
<ACCUMULATED-NII-PRIOR> 253,972
<ACCUMULATED-GAINS-PRIOR> 97,471
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64,913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (80,899)
<AVERAGE-NET-ASSETS> 2,783,000
<PER-SHARE-NAV-BEGIN> 15.19
<PER-SHARE-NII> 1.33
<PER-SHARE-GAIN-APPREC> (3.15)
<PER-SHARE-DIVIDEND> (1.63)
<PER-SHARE-DISTRIBUTIONS> (0.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.57
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 8,145,190
<INVESTMENTS-AT-VALUE> 6,950,719
<RECEIVABLES> 248,623
<ASSETS-OTHER> 61,171
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,260,513
<PAYABLE-FOR-SECURITIES> 116,988
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 184,713
<TOTAL-LIABILITIES> 301,701
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,075,994
<SHARES-COMMON-STOCK> 601,149
<SHARES-COMMON-PRIOR> 516,528
<ACCUMULATED-NII-CURRENT> 44,559
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,730
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,194,471)
<NET-ASSETS> 6,958,812
<DIVIDEND-INCOME> 854,568
<INTEREST-INCOME> 14,200
<OTHER-INCOME> 0
<EXPENSES-NET> 152,259
<NET-INVESTMENT-INCOME> 716,509
<REALIZED-GAINS-CURRENT> 32,730
<APPREC-INCREASE-CURRENT> (2,167,375)
<NET-CHANGE-FROM-OPS> (1,418,136)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (832,193)
<DISTRIBUTIONS-OF-GAINS> (97,806)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,402,960
<NUMBER-OF-SHARES-REDEEMED> (2,764,519)
<SHARES-REINVESTED> 832,629
<NET-CHANGE-IN-ASSETS> (877,065)
<ACCUMULATED-NII-PRIOR> 253,972
<ACCUMULATED-GAINS-PRIOR> 97,471
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64,913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (80,899)
<AVERAGE-NET-ASSETS> 4,862,000
<PER-SHARE-NAV-BEGIN> 15.16
<PER-SHARE-NII> 1.22
<PER-SHARE-GAIN-APPREC> (3.15)
<PER-SHARE-DIVIDEND> (1.48)
<PER-SHARE-DISTRIBUTIONS> (0.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.58
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 8,145,190
<INVESTMENTS-AT-VALUE> 6,950,719
<RECEIVABLES> 248,623
<ASSETS-OTHER> 61,171
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,260,513
<PAYABLE-FOR-SECURITIES> 116,988
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 184,713
<TOTAL-LIABILITIES> 301,701
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,075,994
<SHARES-COMMON-STOCK> 601,149
<SHARES-COMMON-PRIOR> 516,528
<ACCUMULATED-NII-CURRENT> 44,559
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,730
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,194,471)
<NET-ASSETS> 6,958,812
<DIVIDEND-INCOME> 854,568
<INTEREST-INCOME> 14,200
<OTHER-INCOME> 0
<EXPENSES-NET> 152,259
<NET-INVESTMENT-INCOME> 716,509
<REALIZED-GAINS-CURRENT> 32,730
<APPREC-INCREASE-CURRENT> (2,167,375)
<NET-CHANGE-FROM-OPS> (1,418,136)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (832,193)
<DISTRIBUTIONS-OF-GAINS> (97,806)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,402,960
<NUMBER-OF-SHARES-REDEEMED> (2,764,519)
<SHARES-REINVESTED> 832,629
<NET-CHANGE-IN-ASSETS> (877,065)
<ACCUMULATED-NII-PRIOR> 253,972
<ACCUMULATED-GAINS-PRIOR> 97,471
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64,913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (80,899)
<AVERAGE-NET-ASSETS> 1,011,000
<PER-SHARE-NAV-BEGIN> 15.16
<PER-SHARE-NII> 1.22
<PER-SHARE-GAIN-APPREC> (3.16)
<PER-SHARE-DIVIDEND> (1.48)
<PER-SHARE-DISTRIBUTIONS> (0.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.57
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>