PRUDENTIAL HIGH YIELD FUND INC, 497, 1998-03-06

PRUDENTIAL HIGH YIELD FUND INC
497, 1998-03-06

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Prudential High Yield Fund, Inc.
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PROSPECTUS DATED MARCH 3, 1998

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Prudential High Yield Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose primary investment objective is to maximize
current income through investment in a diversified portfolio of high yield fixed
income securities. Capital appreciation is a secondary investment objective
which will only be sought when consistent with the primary objective. The high
yield securities sought by the Fund will generally be securities rated in the
medium to lower categories by recognized rating services (Baa or lower by
Moody's Investors Service, or BBB or lower by Standard & Poor's Ratings Group or
comparably rated by any other Nationally Recognized Statistical Rating
Organization) or non-rated securities which are, in the opinion of the Fund's
investment adviser, of comparable quality. There can be no assurance that the
Fund's investment objectives will be achieved. See "How the Fund
Invests--Investment Objectives and Policies."

THE FUND MAY INVEST UP TO 100% OF ITS ASSETS IN LOWER RATED BONDS, COMMONLY
KNOWN AS JUNK BONDS. INVESTMENTS OF THIS TYPE ARE SUBJECT TO GREATER RISK OF
LOSS OF PRINCIPAL AND INTEREST, INCLUDING DEFAULT RISK, THAN HIGHER RATED BONDS.
THE FUND MAY ALSO INVEST IN DISTRESSED SECURITIES. PURCHASERS SHOULD CAREFULLY
ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. SEE "HOW THE FUND
INVESTS--INVESTMENT OBJECTIVES AND POLICIES" AT PAGE 9. SEE ALSO "HOW THE FUND
INVESTS--RISK FACTORS--RISKS RELATING TO INVESTING IN HIGH YIELD SECURITIES" AT
PAGE 14 "-- RISKS RELATING TO INVESTING IN DISTRESSED SECURITIES" AT PAGE 15 AND
"DESCRIPTION OF CORPORATE BOND RATINGS" AT PAGE A-1.

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 Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of The Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated March 3, 1998, which information is incorporated herein by reference (is
legally considered a part of this Prospectus) and is available without charge
upon request to the Fund at the address or telephone number noted above. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference, and other
information regarding the Fund.

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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.

- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

<PAGE>

FUND HIGHLIGHTS

The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.

WHAT IS PRUDENTIAL HIGH YIELD FUND, INC.?

Prudential High Yield Fund, Inc. is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified
management investment company.

WHAT ARE THE FUND'S INVESTMENT OBJECTIVES?

The primary investment objective of the Fund is to maximize current income
through investment in a diversified portfolio of high yield fixed income
securities rated Baa or lower by Moody's Investors Service (Moody's), or BBB or
lower by Standard & Poor's Ratings Group (Standard & Poor's) or comparably rated
by any other Nationally Recognized Statistical Rating Organization (NRSRO), and
which, in the opinion of the Fund's investment adviser, do not subject a fund
investing in such securities to unreasonable risks. As a secondary investment
objective, the Fund will seek capital appreciation but only when consistent with
its primary objective. Capital appreciation may result, for example, from an
improvement in the credit standing of an issuer whose securities are held in the
Fund's portfolio or from a general lowering of interest rates, or a combination
of both. There can be no assurance that the Fund's objectives will be achieved.
See "How the Fund Invests--Investment Objectives and Policies" at page 9.

WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?

The Fund invests primarily in lower rated bonds, commonly known as junk
bonds. Investments of this type are subject to greater risk of loss of
principal and interest. The Fund may also invest in distressed securities.
Purchasers should carefully assess the risks associated with an investment in
the Fund. See "How the Fund Invest--Investment Objectives and Policies" at page
9. See also "How the Fund Invests--Risk Factors--Risks Relating to Investing in
High Yield Securities" at page 14, "--Risks Relating to Investing in Distressed
Securities" at page 16 and "Description of Corporate Bond Ratings" at page A-1.
As with an investment in any mutual fund, an investment in this Fund can
decrease in value and you can lose money.

The Fund may also engage in various hedging and return enhancement
strategies, including using derivatives, which may be considered speculative and
may result in higher risks and costs to the Fund. See "How the Fund Invests--
Hedging and Return Enhancement Strategies" at page 10.

WHO MANAGES THE FUND?

Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of .50
of 1% of the Fund's average daily net assets up to and including $250 million,
.475 of 1% of the next $500 million, .45 of 1% of the next $750 million, .425 of
1% of the next $500 million, .40 of 1% of the next $500 million, .375 of 1% of
the next $500 million and .35 of 1% of the Fund's average daily net assets in
excess of $3 billion. As of January 31, 1998, PIFM served as manager or
administrator to 64 investment companies, including 42 mutual funds, with
aggregate assets of approximately $63 billion. The Prudential Investment
Corporation, which does business under the name of Prudential Investments (PI,
the Subadviser or the investment adviser) furnishes investment advisory services
in connection with the management of the Fund under a Subadvisory Agreement with
PIFM. See "How the Fund is Managed--Manager" at page 18.

WHO DISTRIBUTES THE FUND'S SHARES?

Prudential Securities Incorporated (Prudential Securities or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares. The Distributor is paid an annual distribution and service fee
which is currently being charged at the rate of .15 of 1% of the average daily
net assets of the Class A shares, at the rate of up to .75 of 1% of the average
daily net assets of the Class B shares and which is currently being charged at
the rate of .75 of 1% of the average daily net assets of the Class C shares. The
Distributor incurs the expense of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which is reimbursed by the Fund.
See "How the Fund is Managed--Distributor" at page 18.

<PAGE>

WHAT IS THE MINIMUM INVESTMENT?

The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
investment requirement. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How to
Buy Shares of the Fund" at page 24 and "Shareholder Guide-- Shareholder
Services" at page 35.

HOW DO I PURCHASE SHARES?

You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at NAV without any sales charge. See "How the Fund
Values its Shares" at page 20 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 24.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers four classes of shares through this Prospectus:

<TABLE>

<S> <C>

o Class A Shares: Sold with an initial sales charge of up to 4% of the
o Class B Shares: offering price. Sold without an initial sales charge but
are subject to a contingent deferred sales charge or CDSC
(declining from 5% to zero of the lower of the amount
invested or the redemption proceeds) which will be
imposed on certain redemptions made within six years of
purchase. Although Class B shares are subject to higher
ongoing distribution- related expenses than Class A
shares, Class B shares will automatically convert to
Class A shares (which are subject to lower ongoing
distribution-related expenses) approximately seven years
after purchase.

o Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.

o Class Z Shares: Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not
subject to any ongoing service or distribution expenses.

</TABLE>

See "Shareholder Guide--Alternative Purchase Plan" at page 25.

HOW DO I SELL MY SHARES?

You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 29.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about selling their
Class Z shares.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

The Fund expects to declare daily and pay monthly dividends of net
investment income and make distributions of any net capital gains, if any, at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 21.

<PAGE>

FUND EXPENSES

CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed
on Purchases (as a percentage of
offering price) . .................. 4% None None None
Maximum Sales Load on
Reinvested Dividends ............... None None None None
Maximum Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower) ............... None 5% during the first year, 1% on redemptions None
decreasing by 1% made within one
annually to 1% in the year of purchase
fifth and sixth years and
0% the seventh year*
Redemption Fees .................... None None None None
Exchange Fees ...................... None None None None

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)

CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
Management Fees .. ................. .41% .41% .41% .41%
12b-1 Fees (After Reduction) ....... .15%++ .75% .75%++ None
Other Expenses .. .................. .13% .13% .13% .13%
--- --- --- ---
Total Fund Operating Expenses (After
Reduction) ........................ .69% 1.29% 1.29% .54%
=== ==== ==== ===
</TABLE>

EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period: .. .........................................................
Class A .......................................................... $47 $61 $77 $122
Class B .......................................................... $63 $71 $81 $131
Class C .......................................................... $23 $41 $71 $156
Class Z .......................................................... $ 6 $17 $30 $ 68
You would pay the following expenses on the same investment, assuming
no redemption: ..
Class A .......................................................... $47 $61 $77 $122
Class B .......................................................... $13 $41 $71 $131
Class C .......................................................... $13 $41 $71 $156
Class Z .......................................................... $ 6 $17 $30 $ 68
</TABLE>

The above example is based on data for the Fund's fiscal year ended December 31,
1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" include operating expenses of
the Fund, such as Directors' and professional fees, registration fees, reports
to shareholders, transfer agency and custodian fees.

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* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--Class
B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% per annum and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees with
respect to Class A and Class C shares of the Fund to no more than .15 of 1%
and .75 of 1% of the average daily net asset value of the Class A and Class C
shares, respectively, for the year ending December 31, 1998. Total operating
expenses without such limitations would be .84% and 1.54% for Class A and
Class C shares, respectively. See "How the Fund is Managed--Distributor."

<PAGE>

FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the periods indicated)
(Class A Shares)

The following financial highlights with respect to each of the five years
in the period ended December 31, 1997 have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The financial
highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."

YEAR ENDED DECEMBER 31

--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of

period ............................................. $ 8.39 $ 8.19 $ 7.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................ .73 .75 .81
Net realized and unrealized gain (loss) on
investments ..................................... .30 .22 .53
---------- ---------- ----------
Total from investment operations ................ 1.03 .97 1.34
---------- ---------- ----------
LESS DISTRIBUTIONS:

Dividends from net investment income ............. (.73) (.75) (.81)
Distributions in excess of net investment income (.04) (.02) (.02)
Distributions from paid-in capital in excess of par - - -
---------- ---------- ----------
Total distributions ............................ (.77) (.77) (.83)
---------- ---------- ----------
Net asset value, end of period ................... 8.65 $ 8.39 $ 8.19
========== ========== ==========
TOTAL RETURN:(B) .................................. 12.81% 12.60% 18.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................... $1,730,473 $1,564,429 $1,336,354
Average net assets (000) ......................... $1,635,480 $1,385,143 $1,056,555
Ratios to average net assets:

Expenses, including distribution fees ............ .69% .72% .75%
Expenses, excluding distribution fees ............ .54% .57% .60%
Net investment income .............................. 8.59% 9.20% 10.13%
Portfolio turnover rate ........................... 113% 89% 78%

JANUARY 22,
1990(A)
THROUGH
DECEMBER 31,
1994 1993 1992 1991 1990
---- ---- ---- --- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period ............................................. $ 8.70 $ 8.19 $ 7.88 $ 6.72 $ 8.45
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ............................. .80 .84 .90 .93 1.01
Net realized and unrealized gain (loss) on
investments ...................................... (1.00) .52 .32 1.26 (1.70)
-------- -------- -------- ------- ---------
Total from investment operations ................. (.20) 1.36 1.22 2.19 (.69)
-------- -------- -------- ------- ---------
LESS DISTRIBUTIONS:

Dividends from net investment income .............. (.80) (.84) (.90) (.93) (1.01)
Distributions in excess of net investment income (.02) (.01) - - -
Distributions from paid-in capital in excess of par - - (.01) (.10) (.03)
-------- -------- -------- ------- ---------
Total distributions ............................. (.82) (.85) (.91) (1.03) (1.04)
-------- -------- -------- ------- ---------
Net asset value, end of period .................... $ 7.68 $ 8.70 $ 8.19 $ 7.88 $ 6.72
======== ======== ======== ======= =========
TOTAL RETURN:(B) ................................... (2.35)% 17.32% 15.97% 34.29% (9.15)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .................... $161,435 $171,364 $106,188 $54,025 $ 21,448
Average net assets (000) .......................... $165,517 $149,190 $ 81,129 $37,194 $ 15,594
Ratios to average net assets:

Expenses, including distribution fees ........... .78% .76% .85% .88% .93%(c)
Expenses, excluding distribution fees ........... .63% .61% .70% .73% .78%(c)
Net investment income ............................. 9.86% 9.93% 10.96% 12.73% 13.58%(c)
Portfolio turnover rate .......................... 74% 85% 68% 51% 40%
</TABLE>

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(a) Commencement of offering of Class A shares.
(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.
(c) Annualized.

<PAGE>

FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the years indicated)
(Class B Shares)

The following financial highlights with respect to each of the five years
in the period ended December 31, 1997, have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."

YEAR ENDED DECEMBER 31,

----------------------------------------------------------
1997 1996 1995 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year ...... $ 8.38 $ 8.18 $ 7.67 $ 8.69
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS:

Net investment income .................. .68 .71 .76 .76
Net realized and unrealized gain
(loss) on investments ............... .29 .22 .53 (1.00)
---------- ---------- ---------- ----------
Total from investment operations ...... .97 .93 1.29 (.24)
---------- ---------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment
income .............................. (.68) (.71) (.76) (.76)
Distributions in excess of net
investment income ..................... (.04) (.02) (.02) (.02)
Distributions from paid-in capital
in excess of par ..................... - - - -
Distributions from net realized
gains ................................. - - - -
---------- ---------- ---------- ----------
Total distributions .................. (.72) (.73) (.78) (.78)
---------- ---------- ---------- ----------
Net asset value, end of year ......... $ 8.63 $ 8.38 $ 8.18 $ 7.67
========== ========== ========== ==========
TOTAL RETURN:(A) ..................... 12.07% 11.97% 17.49% (2.92)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) ......... $2,640,491 $2,596,207 $2,730,903 $3,311,323
Average net assets (000) ............... $2,589,122 $2,652,883 $2,725,385 $3,566,709
Ratio to average net assets:
Expenses, including distribution
fees ................................. 1.29% 1.32% 1.35% 1.38%
Expenses, excluding distribution
fees ................................. .54% .57% .60% .63%
Net investment income ............... 7.99% 8.62% 9.56% 9.28%
Portfolio turnover rate ............... 113% 89% 78% 74%

------------------------------------------------------------
1993 1992 1991 1990 1989 1988(B)
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:

Net asset value, beginning of year . $ 8.19 $ 7.88 $ 6.71 $ 8.52 $ 9.71 $ 9.69
---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT

OPERATIONS:

Net investment income .................. .79 .85 .88 1.00 1.10 1.10
Net realized and unrealized gain
(loss) on investments ............... .51 .32 1.26 (1.76) (1.19) -
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations ...... 1.30 1.17 2.14 ( .76) ( .09) 1.10
---------- ---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment
income .............................. (.79) (.85) (.88) (1.02) (1.10) (1.08)
Distributions in excess of net
investment income ..................... (.01) - - - - -
Distributions from paid-in capital
in excess of par ..................... - (.01) (.09) (.03) - -
Distributions from net realized
gains ................................. - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Total distributions .................. (.80) (.86) (.97) (1.05) (1.10) (1.08)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of year ......... $ 8.69 $ 8.19 $ 7.88 $ 6.71 $ 8.52 $ 9.71
========== ========== ========== ========== ========== ==========
TOTAL RETURN:(A) ..................... 16.54% 15.30% 33.62% (9.52)% (1.38)% 11.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) ......... $3,745,985 $2,887,698 $2,199,127 $1,626,067 $2,405,670 $2,561,016
Average net assets (000) ............... $3,389,439 $2,582,922 $1,970,257 $1,994,229 $2,689,992 $2,427,581
Ratio to average net assets:
Expenses, including distribution
fees ................................. 1.36% 1.45% 1.48% 1.55% 1.36% 1.30%
Expenses, excluding distribution
fees ................................. .61% .70% .73% .80% .71% .67%
Net investment income ............... 9.35% 10.29% 11.65% 13.34% 11.70% 10.93%
Portfolio turnover rate ............... 85% 68% 51% 40% 59% 57%
</TABLE>

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(a) 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 year reported and includes reinvestment of dividends and
distributions.

(b) On May 2, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since then
has acted as manager of the Fund.

<PAGE>

FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the periods indicated)
(Class C Shares)

The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class C share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. The information is based on data contained in the
financial statements. Further performance information is contained in the annual
report which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."

YEAR ENDED DECEMBER 31,
--------------------------------------- AUGUST 1, 1994(A)
THROUGH
1997 1996 1995 DECEMBER 31, 1994
----------- ----------- ----------- ------------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C>
Net asset value, beginning of period .. ..................... $ 8.38 $ 8.18 $ 7.67 $ 8.05
------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ....................................... .68 .71 .76 .32
Net realized and unrealized gain (loss) on investments ...... .29 .22 .53 (.37)
------- ------- ------- --------
Total from investment operations ........................... .97 .93 1.29 (.05)
------- ------- ------- --------

LESS DISTRIBUTIONS:
Dividends from net investment income ......................... (.68) (.71) (.76) (.32)
Distributions in excess of net investment income .. .......... (.04) (.02) (.02) (.01)
------- --------
Total distributions ......................................... (.72) (.73) (.78) (.33)
------- ------- ------- --------
Net asset value, end of period ............................... $ 8.63 $ 8.38 $ 8.18 $ 7.67
======= ======= ======= ========

TOTAL RETURN:(B) ............................................. 12.07% 11.97% 17.49% (0.79)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .............................. $55,879 $43,374 $24,021 $ 4,860
Average net assets (000) ..................................... $45,032 $28,647 $12,063 $ 2,840
Ratios to average net assets:
Expenses, including distribution fees ....................... 1.29% 1.32% 1.35% 1.48%(c)
Expenses, excluding distribution fees ....................... .54% .57% .60% .73%(c)
Net investment income ....................................... 7.99% 8.60% 9.49% 9.80%(c)
Portfolio turnover rate ...................................... 113% 89% 78% 74%
</TABLE>

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

(a) Commencement of offering of Class C shares.
(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.
(c) Annualized.

<PAGE>

FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the periods indicated)
(Class Z Shares)

The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a share of Class Z common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. The information is based on data contained in the
financial statements. Further performance information is contained in the annual
report which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."

MARCH 1,
YEAR 1996(A)
ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- ------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of period .. ........... $ 8.39 $ 8.34
INCOME FROM INVESTMENT OPERATIONS:

Net investment income ............................. .74 .63
Net realized and unrealized gains on investments .. .30 .07
------- --------
Total from investment operations ................. 1.04 .70
------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income .............. (.74) (.63)
Distributions in excess of net investment income .. (.04) (.02)
------- --------
Total distributions .............................. (.78) (.65)
------- --------
Net asset value, end of period .................... $ 8.65 $ 8.39
======= ========
TOTAL RETURN:(B) .................................. 12.96% 8.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................... $41,625 $ 31,748
Average net assets (000) .......................... $35,808 $ 28,978
Ratios to average net assets:
Expenses ........................................ .54% .57%(c)
Net investment income ........................... 8.74% 9.31%(c)
Portfolio turnover rate .......................... 113% 89%
</TABLE>

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

(a) Commencement of offering of Class Z shares.
(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.
(c) Annualized.

<PAGE>

- --------------------------------------------------------------------------------
HOW THE FUND INVESTS

INVESTMENT OBJECTIVES AND POLICIES

THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS TO MAXIMIZE CURRENT INCOME
THROUGH INVESTMENT IN A DIVERSIFIED PORTFOLIO OF HIGH YIELD FIXED INCOME
SECURITIES WHICH, IN THE OPINION OF THE FUND'S INVESTMENT ADVISER, DO NOT
SUBJECT A FUND INVESTING IN SUCH SECURITIES TO UNREASONABLE RISKS. AS A
SECONDARY INVESTMENT OBJECTIVE, THE FUND WILL SEEK CAPITAL APPRECIATION BUT ONLY
WHEN CONSISTENT WITH ITS PRIMARY OBJECTIVE. CAPITAL APPRECIATION MAY RESULT, FOR
EXAMPLE, FROM AN IMPROVEMENT IN THE CREDIT STANDING OF AN ISSUER WHOSE
SECURITIES ARE HELD IN THE FUND'S PORTFOLIO OR FROM A GENERAL LOWERING OF
INTEREST RATES, OR A COMBINATION OF BOTH. CONVERSELY, CAPITAL DEPRECIATION MAY
RESULT, FOR EXAMPLE, FROM A LOWERED CREDIT STANDING OR A GENERAL RISE IN
INTEREST RATES, OR A COMBINATION OF BOTH. THE ACHIEVEMENT OF THE FUND'S
OBJECTIVES WILL DEPEND UPON THE INVESTMENT ADVISER'S ANALYTICAL AND PORTFOLIO
MANAGEMENT SKILLS. THERE CAN BE NO ASSURANCE THAT THESE OBJECTIVES WILL BE
ACHIEVED.

AS WITH AN INVESTMENT IN ANY MUTUAL FUND, AN INVESTMENT IN THIS FUND CAN
DECREASE IN VALUE AND YOU CAN LOSE MONEY.

THE FUND'S INVESTMENT OBJECTIVES ARE FUNDAMENTAL POLICIES AND, THEREFORE,
MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
FUND'S OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.

THE HIGHER YIELDS SOUGHT BY THE FUND ARE GENERALLY OBTAINABLE FROM
SECURITIES RATED IN THE LOWER CATEGORIES BY RECOGNIZED RATING SERVICES. THE FUND
EXPECTS TO SEEK HIGH CURRENT INCOME BY INVESTING PRINCIPALLY IN FIXED INCOME
SECURITIES RATED BAA OR LOWER BY MOODY'S INVESTORS SERVICE (MOODY'S), OR BBB OR
LOWER BY STANDARD & POOR'S RATINGS GROUP (STANDARD & POOR'S) OR COMPARABLY RATED
BY ANY OTHER NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO).
Changes in economic or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments in bonds rated baa or lower or
bbb or lower than is the case with higher grade bonds. Corporate bonds which are
rated Baa by Moody's are described by Moody's as being investment grade, but are
also characterized as having speculative characteristics. Corporate bonds rated
below Baa by Moody's and BBB by Standard & Poor's are considered speculative.
Such high yield securities are commonly known as junk bonds. It is the present
policy of the Fund not to invest in securities rated below B by both Moody's and
Standard & Poor's unless, in the opinion of the investment advise, the financial
condition of the issuer or the protection afforded to the particular securities
is stronger than would otherwise be indicated by such lower ratings (except with
respect to distressed securities), however, this policy is evaluated from time
to time and is subject to change. A description of corporate bond ratings is
contained in Appendix A to this Prospectus. Since some issuers do not seek
ratings for their securities, non-rated securities will also be considered for
investment by the Fund but only when the investment adviser believes that the
financial condition of the issuers of such securities and/or the protection
afforded by the terms of the securities themselves limit the risk to the Fund to
a degree comparable to that of rated securities which are consistent with the
Fund's objectives and policies.

The investment adviser will perform its own investment analysis and will
not rely principally on the ratings assigned by the rating services, although
such ratings will be considered by the investment adviser. The investment
adviser will consider, among other things, the financial history and condition,
the prospects and the management of an issuer in selecting securities for the
Fund's portfolio.

<PAGE>

CONSISTENT WITH ITS PRIMARY INVESTMENT OBJECTIVE, UNDER NORMAL CONDITIONS
AT LEAST 80% OF THE VALUE OF THE FUND'S TOTAL ASSETS WILL BE INVESTED IN THE
HIGH YIELD, MEDIUM TO LOWER RATED FIXED INCOME SECURITIES PREVIOUSLY DESCRIBED.
However, when prevailing economic conditions cause a narrowing of the spreads
between the yields derived from medium to lower rated or comparable non-rated
securities and those derived from higher rated issues, the Fund may invest in
higher rated fixed income securities which provide similar yields but have less
risk. Fixed income securities appropriate for the Fund may include both
convertible and nonconvertible debt securities and preferred stock. Generally,
the Fund's average weighted maturity will range from 7 to 12 years. As of
December 31, 1997, the Fund's average weighted maturity was 8.4 years.

THE FUND MAY ALSO 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 for federal income tax and
accounting purposes 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 comparably rated securities paying cash interest at regular
interest payment periods. See "Portfolio Characteristics--Zero Coupon,
Pay-in-Kind and Deferred Payment Securities" in the Statement of Additional
Information.

The Fund may invest in non-fixed income equity securities, such as
securities of financially troubled or bankrupt companies (financially troubled
issuers) and in equity securities of companies, that in the view of the
Subadviser are currently undervalued, out-of-favor or price depressed relative
to their long-term potential for growth and income (operationally troubled
issuers) (collectively referred to with financially troubled issuers as
distressed securities). Equity securities include common stocks, preferred
stocks and warrants. The Board has adopted a non-fundamental policy that the
Fund initially will limit its investments in such securities to no more than 10%
of its total assets. To the extent the Fund invests in equity securities, there
will be a diminution in the Fund's overall yield. See "Risk Factors-Risks
Relating to Investing in Distressed Securities."

The Fund may on occassion invest up to 20% of its assets in United States
currency denominated fixed income issues of foreign governments and other
foreign issuers and up to 10% of its total assets in foreign currency
denominated debt issues of foreign or domestic issuers. Such investment
strategies involve certain risks. See "Portfolio Characteristics" in the
Statement of Additional Information.

WHEN MARKET CONDITIONS DICTATE A MORE DEFENSIVE INVESTMENT STRATEGY, THE
FUND MAY INVEST TEMPORARILY IN SHORT-TERM OBLIGATIONS OF, OR SECURITIES
GUARANTEED BY, THE UNITED STATES GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES
OR IN HIGH QUALITY OBLIGATIONS OF BANKS AND CORPORATIONS. THE YIELD ON THESE
SECURITIES WILL TEND TO BE LOWER THAN THE YIELD ON OTHER SECURITIES TO BE
PURCHASED BY THE FUND.

HEDGING AND RETURN ENHANCEMENT STRATEGIES

THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. The Fund, and thus the investor, may
lose money through any unsuccessful use of these strategies. These strategies
currently include the use of futures contracts and options thereon (including
interest rate futures contracts and options thereon). The Fund's ability to use
these strategies may be limited by market conditions, regulatory limits and
there can be no assurance that any of these

<PAGE>

strategies will succeed. New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objectives and policies.

FUTURES CONTRACTS

The Fund may enter into futures contracts for the purchase or sale of debt
securities and financial indices (collectively, interest rate futures contracts)
in accordance with the Fund's investment objectives. A purchase of a futures
contract (or a long futures position) means the assumption of a contractual
obligation to acquire a specified quantity of the securities underlying the
contract at a specified price at a specified future date. A sale of a futures
contract (or a short futures position) means the assumption of a contractual
obligation to deliver a specified quantity of the securities underlying the
contract at a specified price at a specified future date. At the time a futures
contract is purchased or sold, the Fund is required to deposit cash or other
liquid assets with a futures commission merchant or in a segregated account
representing between approximately 11 1/2% to 5% of the contract amount, called
initial margin. Thereafter, the futures contract will be valued daily and the
payment in cash of maintenance or variation margin may be required, resulting in
the Fund paying or receiving cash that reflects any decline or increase in the
contract's value, a process known as marking-to-market.

Some futures contracts by their terms may call for the actual delivery or
acquisition of the underlying assets and other futures contracts must be cash
settled. In most cases the contractual obligation is extinguished before the
expiration of the contract by buying (to offset an earlier sale) or selling (to
offset an earlier purchase) an identical futures contract calling for delivery
or acquisition in the same month. The purchase (or sale) of an offsetting
futures contract is referred to as a closing transaction.

LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS

CFTC LIMITS. In accordance with Commodity Futures Trading Commission (CFTC)
regulations, the Fund is not permitted to purchase or sell interest rate futures
contracts or options thereon for return enhancement or risk management purposes
if immediately thereafter the sum of the amounts of initial margin deposits on a
Fund's existing futures and premiums paid for options on futures exceed 5% of
the liquidation value of such Fund's total assets (the 5% CFTC limit). This
restriction does not apply to the purchase and sale of interest rate futures
contracts and options thereon for bona fide hedging purposes.

SEGREGATION REQUIREMENTS. To the extent the Fund enters into futures
contracts, it is required by the Commission to maintain a segregated asset
account sufficient to cover the Fund's obligations with respect to such futures
contracts, which will consist of cash or other liquid assets in an amount equal
to the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial margin deposited by the Fund with respect
to such futures contracts. Offsetting the contract by another identical contract
eliminates the segregation requirement.

With respect to options on futures, there are no segregation requirements
for options that are purchased and owned by the Fund. However, written options,
since they involve potential obligations of the Fund, may require segregation of
Fund assets if the options are not covered as described below under "Options on
Futures Contracts." If the Fund writes a call option that is not covered, it
must segregate for the term of the options cash or other liquid assets equal to
the fluctuating value of the optioned futures. If the Fund writes a put option
that is not covered, the segregated amount would have to be at all times equal
in value to the exercise price of the put (less any initial margin segregated by
the Fund with respect to such option).

USES OF INTEREST RATE FUTURES CONTRACTS

Interest rate futures contracts will be used for bona fide hedging, risk
management and return enhancement purposes.

POSITION HEDGING. The Fund might sell interest rate futures contracts to
protect the Fund against a rise in interest rates which would be expected to
decrease the value of debt securities which the Fund holds. This would be
considered a bona fide hedge and, therefore, is not subject to the 5% CFTC
limit. For example, if interest rates are expected to

<PAGE>

increase, the Fund might sell futures contracts on debt securities, the values
of which historically have closely correlated or are expected to closely
correlate to the values of the Fund's portfolio securities. Such a sale would
have an effect similar to selling an equivalent value of the Fund's portfolio
securities. If interest rates increase, the value of the Fund's portfolio
securities will decline, but the value of the futures contracts to the Fund will
increase at approximately an equivalent rate thereby keeping the NAV of the Fund
from declining as much as it otherwise would have. The Fund could accomplish
similar results by selling debt securities with longer maturities and investing
in debt securities with shorter maturities when interest rates are expected to
increase. However, since the futures market may be more liquid than the cash
market, the use of futures contracts as a hedging technique would allow the Fund
to maintain a defensive position without having to sell portfolio securities. If
in fact interest rates decline rather than rise, the value of the futures
contract will fall but the value of the bonds should rise and should offset all
or part of the loss. If futures contracts are used to hedge 100% of the bond
position and correlate precisely with the bond positions, there should be no
loss or gain with a rise (or fall) in interest rates. However, if only 50% of
the bond position is hedged with futures, then the value of the remaining 50% of
the bond position would be subject to change because of interest rate
fluctuations. Whether the bond positions and futures contracts correlate
precisely is a significant risk factor.

ANTICIPATORY POSITION HEDGING. Similarly, when it is expected that interest
rates may decline and the Fund intends to acquire debt securities, the Fund
might purchase interest rate futures contracts. The purchase of futures
contracts for this purpose would constitute an anticipatory hedge against
increases in the price of debt securities (caused by declining interest rates)
which the Fund subsequently acquires and would normally qualify as a bona fide
hedge not subject to the 5% CFTC limit. Since fluctuations in the value of
appropriately selected futures contracts should approximate that of the debt
securities that would be purchased, the Fund could take advantage of the
anticipated rise in the cost of the debt securities without actually buying
them. Subsequently, the Fund could make the intended purchases of the debt
securities in the cash market and concurrently liquidate the futures positions.

RISK MANAGEMENT AND RETURN ENHANCEMENT. The Fund might sell interest rate
futures contracts covering bonds. This has the same effect as selling bonds in
the portfolio and holding cash and reduces the duration of the portfolio.
(Duration measures the price sensitivity of the portfolio to interest rates. The
longer the duration, the greater the impact of interest rate changes on the
portfolio's price.) This should lessen the risks associated with a rise in
interest rates. In some circumstances, this may serve as a hedge against a loss
of principal, but is usually referred to as an aspect of risk management.

The Fund might buy interest rate futures contracts covering bonds with a
longer maturity than its portfolio average. This would tend to increase the
duration and should increase the gain in the overall portfolio if interest rates
fall. This is often referred to as risk management rather than hedging but, if
it works as intended, has the effect of increasing principal value. If it does
not work as intended because interest rates rise instead of fall, the loss will
be greater than would otherwise have been the case. Futures contracts used for
these purposes are not considered bona fide hedges and, therefore, are subject
to the 5% CFTC limit.

OPTIONS ON FUTURES CONTRACTS

The Fund may enter into options on futures contracts for certain bona fide
hedging, risk management and return enhancement purposes. This includes the
ability to purchase put and call options and write (I.E., sell) covered put and
call options on futures contracts that are traded on commodity and futures
exchanges.

If the Fund purchased an option on a futures contract, it has the right but
not the obligation, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call or a short position if
the option is a put) at a specified exercise price at any time during the option
exercise period.

Unlike purchasing an option, which is similar to purchasing insurance to
protect against a possible rise or fall of security prices or currency values,
the writer or seller of an option undertakes an obligation upon exercise of the
option to either buy or sell the underlying futures contract at the exercise
price. A writer of a call option has the obligation upon exercise to assume a
short futures position and a writer of a put option has the obligation to assume
a long futures

<PAGE>

position. Upon exercise of the option, the assumption of offsetting futures
positions 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. If there is no balance
in the writer's margin account, the option is out of the money and will not be
exercised. The Fund, as the writer, has income in the amount it was paid for the
option. If there is a margin balance, the Fund will have a loss in the amount of
the balance less the premium it was paid for writing the option.

When the Fund writes a put or call option on a futures contracts, the
option must either be covered or, to the extent not covered, will be subject to
segregation requirements. The Fund will be considered covered with respect to a
call option it writes on a futures contract if the Fund owns the securities or
currency which is 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. A 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.

To the extent the Fund is not covered as described above with respect to
written options, it will segregate for the term of the option, cash or other
liquid assets as described above under "Limitations on the Purchase and Sale of
Futures Contracts and Related Options--Segregation Requirements."

USES OF OPTIONS ON FUTURES CONTRACTS

Options on interest rate futures contracts would be used for bona fide
hedging, risk management and return enhancement purposes.

POSITION HEDGING. The Fund may purchase put options on interest rate or
currency futures contracts to hedge its portfolio against the risk of a decline
in the value of the debt securities it owns as a result of rising interest
rates.

ANTICIPATORY HEDGING. The Fund may also purchase call options on futures
contracts as a hedge against an increase in the value of securities the Fund
might intend to acquire as a result of declining interest rates.

Writing a put option on a futures contract may serve as a partial
anticipatory hedge against an increase in the value of debt securities the Fund
might intend to acquire. If the futures price at expiration of the option is
above the exercise price, the Fund retains the full amount of the option premium
which provides a partial hedge against any increase that may have occurred in
the price of the debt securities the Fund intended to acquire. If the market
price of the underlying futures contract is below the exercise price when the
option is exercised, the Fund would incur a loss, which may be wholly or
partially offset by the decrease in the value of the securities the Fund might
intend to acquire.

Whether options on interest rate futures contracts are subject to or exempt
from the 5% CFTC limit depends on whether the purposes of the options
constitutes a bona fide hedge.

RISK MANAGEMENT AND RETURN ENHANCEMENT. Writing a put option that does not
relate to securities the Fund intends to acquire would be a return enhancement
strategy which would result in a loss if interest rates rise.

Similarly, writing a covered call option on a futures contract is also a
return enhancement strategy. If the market price of the underlying futures
contract at expiration of a written call option is below the exercise price, the
Fund would retain the full amount of the option premium increasing the income of
the Fund. If the futures price when the option is exercised is above the
exercise price, however, the Fund would sell the underlying securities which
were the cover for the contract and incur a gain or loss depending on the cost
basis for the underlying asset.

Writing a covered call option as in any return enhancement strategy can
also be considered a partial hedge against a decrease in the value of a Fund's
portfolio securities. The amount of the premium received acts as a partial hedge
against any decline that may have occurred in the Fund's debt securities. See
"Portfolio Characteristics--Futures Contracts" in the Statement of Additional
Information.

<PAGE>

RISK FACTORS

RISKS RELATING TO INVESTING IN HIGH YIELD SECURITIES

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 yield)
securities 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. The
achievement of its investment objective may be more dependent on the investment
adviser's own credit analysis than is the case for higher quality bonds.
Investors should carefully consider the relative risks of investing in high
yield securities and understand that such securities are not generally meant for
short-term investing.

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 used in
calculating the Fund's NAV. Under circumstances where the Fund owns the majority
of an issue, market and credit risks may be greater.

Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.

Ratings of fixed income securities represent the rating agencies' opinions
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.

During the fiscal year ended December 31, 1997, the monthly dollar weighted
average ratings of the debt obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:

PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
------- --------------------
<S> <C> <C>
AAA/Aaa --
AA/Aa --
A/A --
BBB/Baa 0.68%
BB/Ba 30.19%
B/B 53.63%
CCC/Caa 4.29%
Unrated 11.21%
</TABLE>

See "Investment Objectives and Policies" in the Statement of Additional
Information.

<PAGE>

RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES

PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS
AND TRANSACTION COSTS TO WHICH THE FUND WOULD NOT BE SUBJECT ABSENT THE USE OF
THESE STRATEGIES. THE FUND, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. If the investment adviser's prediction of
movements in the direction of the securities 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
futures contracts and options on futures contracts include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction of
interest rates and securities prices and markets; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the prices of the securities 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; and (5) 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 security
at a disadvantageous time, due to the need for the Fund to maintain cover or to
segregate securities in connection with hedging techniques.

RISKS RELATING TO INVESTING IN DISTRESSED SECURITIES

DISTRESSED SECURITIES INVOLVE A HIGH DEGREE OF CREDIT AND MARKET RISK AND
ARE SUBJECT TO GREATER CREDIT AND MARKET RISK AND PRICE VOLATILITY THAN THE
SECURITIES IN WHICH THE FUND GENERALLY INVESTS. ALTHOUGH THE FUND WOULD 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 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.

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.

DISTRESSED SECURITIES WHICH THE FUND MAY PURCHASE MAY ALSO INCLUDE
SECURITIES OF COMPANIES INVOLVED IN BANKRUPTCY PROCEEDINGS, REORGANIZATIONS AND
FINANCIAL RESTRUCTURINGS. TO THE EXTENT THE FUND INVESTS IN SUCH SECURITIES, IT
MAY HAVE A MORE ACTIVE PARTICIPATION IN THE AFFAIRS OF ISSUERS THAN IS GENERALLY
ASSUMED BY AN INVESTOR. THIS MAY SUBJECT THE FUND TO LITIGATION RISKS OR PREVENT
THE FUND FROM DISPOSING OF SECURITIES.

OTHER INVESTMENTS AND POLICIES

REPURCHASE AGREEMENTS

The Fund may on occasion enter into repurchase agreements whereby the
seller of a security agrees to repurchase a security from the Fund at a mutually
agreed upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed upon rate of return effective for the period of time the Fund's money is
invested in the security. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of instruments
declines, the Fund will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the

<PAGE>

Fund may incur a loss. The Fund participates in a joint repurchase account with
other investment companies managed by PIFM pursuant to an order of the
Commission. See "Portfolio Characteristics--Repurchase Agreements" in the
Statement of Additional Information.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

The Fund may purchase securities on a when-issued or delayed basis.
When-issued or delayed delivery transactions arise when securities are purchased
by the Fund with payment and delivery taking place a month or more in the future
in order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. While the Fund will only
purchase securities on a when-issued or delayed delivery basis with the
intention of acquiring the securities, the Fund may sell the securities before
the settlement date, if it is deemed advisable. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis,
the Fund will record the transaction and thereafter reflect the value, each day,
of such security in determining the net asset value of the Fund. At the time of
delivery of the securities, the value may be more or less than the purchase
price. The Fund will segregate cash or other liquid assets having a value equal
to or greater than the Fund's purchase commitments. Subject to this requirement,
the Fund may purchase securities on such basis without limit.

BORROWING

The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
However, the Fund will not purchase securities when borrowings exceed 5% of the
value of the Fund's total assets.

SECURITIES LENDING

The Fund may lend its portfolio securities to brokers or dealers in
corporate or governmental securities, banks or other recognized institutional
borrowers of securities, provided that the borrower at all times maintains cash
or other liquid assets or secures an irrevocable letter of credit in favor of
the Fund in an amount equal to at least 100%, determined daily, of the market
value of the securities loaned which are maintained in a segregated account
pursuant to applicable regulations. 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 Fund may pay reasonable
administration and custodial fees in connection with a loan.

LOAN PARTICIPANTS AND ASSIGNMENTS

The Fund may invest in bank debt which includes interests in loans to
companies or their affiliates undertaken to finance a capital restructuring or
in connection with recapitalizations, acquisitions, leveraged buyouts,
refinancings or other financially leveraged transactions and may include loans
which are designed to provide temporary or bridge financing to a borrower
pending the sale of identified assets, the arrangement of longer-term loans or
the issuance and sale of debt obligations. These loans, which may bear fixed or
floating rates, have generally been arranged through private negotiations
between a corporate borrower and one or more financial institutions (Lenders),
including banks. The Fund's investment may be in the form of participations in
loans (Participations) or of assignments of all or a portion of loans from third
parties (Assignments).

<PAGE>

Participations differ both from the public and private debt securities
typically held by the Fund and from Assignments. In Participations, the Fund has
a contractual relationship only with the Lender, not with the borrower. As a
result, the Fund has 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. Thus, the Fund assumes the credit risk of
both the borrower and the Lender that is selling the Participation. In the event
of the insolvency of the Lender, the Fund may be treated as a general creditor
of the Lender and may not benefit pfrom any set-off between the Lender and the
borrower. In Assignments, by contrast, the Fund acquires direct rights against
the borrower, except that under certain circumstances such rights may be more
limited than those held by the assigning Lender. See "Portfolio
Characteristics--Bank Debt" in the Statement of Additional Information.

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. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (Securities Act), that have a readily available market would
not be considered illiquid for purposes of this limitation. 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
time, uninterested in purchasing Rule 144A securities. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Board of Directors. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.

Restricted securities are sometimes referred to as private placement
securities. Such securities may be purchased directly from the issuer or in the
secondary market (Direct Placement Securities). The Fund will purchase Direct
Placement Securities when, in the opinion of the investment adviser, such
securities provide greater value due either to higher yields, attractive
technical features (such as call or refunding protection) or both.

Direct Placement Securities are subject to statutory or contractual
restrictions and delays on resale. Limitations on the resale of such securities
may have an adverse effect on their marketability, which may prevent the Fund
from disposing of them promptly at reasonable prices. The Fund may have to bear
the expense of registering such securities for resale and the risk of
substantial delays in effecting such registration. At certain times, adverse
conditions in the public securities markets may preclude a public offering of an
issuer's securities.

INVESTMENTS IN SECURITIES OF OTHER INVESTMENT COMPANIES

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

INVESTMENT RESTRICTIONS

The Fund is subject to certain investment restrictions which, like its
investment objectives, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.

<PAGE>

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HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------

THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.

For the year ended December 31, 1997, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B, Class C and
Class Z shares were .69%, 1.29%, 1.29% and .54%, respectively. See "Financial
Highlights."

MANAGER

PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE FUND'S AVERAGE DAILY NET ASSETS UP TO AND INCLUDING $250 MILLION, .475 OF
1% OF THE NEXT $500 MILLION, .45 OF 1% OF THE NEXT $750 MILLION, .425 OF 1% OF
THE NEXT $500 MILLION, .40 OF 1% OF THE NEXT $500 MILLION, .375 OF 1% OF THE
NEXT $500 MILLION AND .35 OF 1% OF THE FUND'S AVERAGE DAILY NET ASSETS IN EXCESS
OF $3 BILLION. PIFM is organized in New York as a limited liability company. It
is the successor to Prudential Mutual Fund Management, Inc., which transferred
its assets to PIFM in September 1996. For the fiscal year ended December 31,
1997, the Fund paid management fees to PIFM of .41% of the Fund's average net
assets. See "Manager" in the Statement of Additional Information.

As of January 31, 1998, PIFM served as the manager to 42 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies with aggregate
assets of approximately $63 billion.

UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.

UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PIFM
continues to have responsibility pursuant to the Management Agreement for all
investment advisory services and supervises PI's performance of such services.

The current portfolio manager of the Fund is Lars M. Berkman, a Managing
Director of PI. Mr. Berkman has managed the Fund's portfolio since July 1991 and
has been employed by PI as a portfolio manager since 1990. Prior thereto, he was
with the Corporate Finance Group (from 1989 to 1990) and the Financial Services
Group (from 1987 to 1988) of The Prudential Insurance Company of America
(Prudential). In managing the Fund, he seeks to identify well priced, high yield
securities consistent with the Fund's investment objective. Mr. Berkman is
assisted by a team of credit analysts who analyze corporate cash flows, sales,
earnings and management trends.

PIFM and PIC are wholly-owned subsidiaries of Prudential, a major
diversified insurance and financial services company.

DISTRIBUTOR

PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL.

UNDER 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,

<PAGE>

CLASS B AND CLASS C SHARES. The Distributor also incurs the expenses of
distributing the Fund's Class Z shares under the Distribution Agreement, none of
which is reimbursed by or paid for by the Fund. These expenses include
commissions and account servicing fees paid to, or on account of, financial
advisers of the Distributor and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) 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 and Prusec
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.

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 (i) 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 (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. It is expected that in the case
of Class A Shares, proceeds from the distribution fee will be used primarily to
pay account servicing fees to financial advisers. The Distributor has agreed to
limit its distribution-related fees payable under the Class A Plan to .15 of 1%
of the average daily net assets of the Class A shares for the current fiscal
year ending December 31, 1998.

UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .75 OF 1% AND 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to the Distributor of (i) an asset-based sales charge
of up to .75 of 1% of the average daily net assets of the Class B shares and
(ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.75 of 1%. The Class C Plan provides for the payment to the Distributor of (i)
an asset-based sales charge of up to .75 of 1% of the average daily net assets
of the Class C shares, and (ii) a service fee of up to .25 of 1% of the average
daily net assets of the Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholder accounts. The Distributor
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending December 31, 1998. The Distributor also receives contingent
deferred sales charges from certain redeeming shareholders. See "Shareholder
Guide-How to Sell Your Shares--Contingent Deferred Sales Charge."

For the fiscal year ended December 31, 1997, the Fund paid distribution
expenses of .15%, .75% and .75% of the average net assets of the Class A, Class
B and Class C shares, respectively. The Fund records all payments made under the
Plans as expenses in the calculation of net investment income. See "Distributor"
in the Statement of Additional Information.

Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund will be 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.

Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not interested persons of the Fund (as defined
in the Investment Company Act) and who have no direct or indirect financial
interest in the operation of the Plan or any agreement related to the Plan (the
Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan may be
terminated at any time by vote of a majority of the Rule 12b-1 Directors or of a
majority of the outstanding shares of the applicable class of the Fund. The Fund
will not be obligated to pay expenses incurred under any Plan if it is
terminated or not continued.

<PAGE>

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 out of its own resources 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.

The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.

FEE WAIVERS

The Distributor has agreed to limit its distribution fee for the Class A
and Class C shares as described above under "Distributor." Fee waivers will
increase the Fund's total return. See "Performance Information" in the Statement
of Additional Information and "Fund Expenses" above.

PORTFOLIO TRANSACTIONS

Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.

From time to time Prudential Securities (and other affiliates of
Prudential) render investment banking services which may relate to or involve
issuers of securities held by the Fund or sought to be purchased or sold by the
Fund. Accordingly, Prudential Securities and its clients may have interests in
actual or potential conflict with the interests of the Fund. Under such
circumstances, the Manager will act in the best interests of the Fund without
regard to the interests of Prudential Securities or its clients.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

State Street Bank and Trust Company (State Street or the Custodian), 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. Its mailing address is P.O. Box 1713, Boston, Massachusetts 02105.

Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), Raritan
Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend
Disbursing Agent and, in those capacities, maintains certain books and records
for the Fund. PMFS is a wholly-owned subsidiary of PIFM. Its mailing address is
P.O. Box 15005, New Brunswick, New Jersey 08906-5005.

YEAR 2000

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 their 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, and those of their outside service
providers, to prepare for the year 2000 and expect that their systems will be
adapted in time for that event. Although, at this time, there can be no
assurance that there will be no adverse impact on the Fund.

- --------------------------------------------------------------------------------
HOW THE FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------

THE FUND'S 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 BOARD OF DIRECTORS HAS FIXED
THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.

<PAGE>

Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.

The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV.

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 the other three
classes because Class Z shares are not subject to any distribution and/or
service fees. It is expected, however, that the NAV of the four classes will
tend to converge immediately after the recording of dividends, which will differ
by approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.

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HOW THE FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------

FROM TIME TO TIME THE FUND MAY ADVERTISE ITS YIELD AND TOTAL RETURN (INCLUDING
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN) IN ADVERTISEMENTS AND
SALES LITERATURE. YIELD AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR
CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. THESE FIGURES ARE BASED ON
HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The
yield refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then annualized; that is, the amount
of income generated by the investment during that 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage of
the investment. The income earned on the investment is also assumed to be
reinvested at the end of the sixth 30-day period. The total return shows how
much an investment in the Fund would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Fund)
assuming that all distributions and dividends by the Fund were reinvested on the
reinvestment dates during the period and less all recurring fees. The aggregate
total return reflects actual performance over a stated period of time. Average
annual total return is a hypothetical rate of return that, if achieved annually,
would have produced the same aggregate total return if performance had been
constant over the entire period. Average annual total return smooths out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges. Neither average annual total return nor
aggregate total return takes into account any federal or state income taxes
which may be payable upon redemption. The Fund also may include comparative
performance information in advertising or marketing the Fund's shares. Such
performance information may include data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., other industry publications, business
periodicals and market indices. See "Performance Information" in the Statement
of Additional Information. Further performance information is contained in the
Fund's annual and semi-annual reports to shareholders, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."

- --------------------------------------------------------------------------------
TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------

TAXATION OF THE FUND

THE FUND HAS QUALIFIED AND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO FEDERAL

<PAGE>

INCOME TAXES ON ITS NET INVESTMENT INCOME AND NET CAPITAL AND CURRENCY GAINS, IF
ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.

TAXATION OF SHAREHOLDERS

All dividends out of net investment income, together with distributions of
net short-term capital gains in excess of net long-term capital losses, will be
taxable as ordinary income to the shareholder whether or not reinvested. Any net
long-term capital gains (I.E., the excess of capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as such to the shareholders, whether
or not reinvested and regardless of the length of time a shareholder has owned
his or her shares. The maximum capital gains rate for individual shareholders is
28% with respect to securities held by the Fund for more than 12 months, but not
more than 18 months, and 20% with respect to securities held by the Fund for
more than 18 months. The maximum tax for ordinary income is 39.6%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the 35% maximum corporate tax rate for ordinary income.

Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as a capital gain.
Any such capital gain derived by an individual will be subject to tax at the
reduced rates described above depending upon the shareholder's holding period of
the shares sold. Any such loss will be long-term capital loss if the shares have
been held for more than one year and otherwise as a short-term capital loss. Any
such loss, with respect to shares that are held for six months or less, however,
will be treated as a long-term capital loss to the extent of any capital gains
distributions received by the shareholder.

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 Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
any class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.

Shareholders not subject to tax on their income will generally not be
required to pay tax on amounts distributed to them.

WITHHOLDING TAXES

Under the Internal Revenue Code, the Fund is generally required to withhold
and remit to the U.S. Treasury 31% of dividends, capital gain distributions and
redemption proceeds payable to individuals and certain noncorporate shareholders
who fail to furnish correct tax identification numbers on IRS Form W-9 (or IRS
Form W-8 in the case of certain foreign shareholders) or generally who are
otherwise subject to backup withholding. Dividends of net investment income and
net short-term capital gains payable to a foreign shareholder will generally be
subject to U.S. withholding tax at the rate of 30% (or lower treaty rate).

Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.

DIVIDENDS AND DISTRIBUTIONS

THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS BASED ON ACTUAL
NET INVESTMENT INCOME DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES; HOWEVER, A PORTION OF SUCH DIVIDEND MAY ALSO INCLUDE
PROJECTED NET INVESTMENT INCOME. THE FUND EXPECTS TO MAKE DISTRIBUTIONS AT LEAST
ANNUALLY OF ANY NET CAPITAL GAINS, IF ANY. Dividends paid by the Fund with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class will bear its own distribution expenses,
generally resulting in lower dividends for Class B and Class C

<PAGE>

shares in relation to Class A and Class Z shares and lower dividends for Class A
shares in relation to Class Z shares. Distributions of net capital gains, if
any, will be paid in the same amount for each class of shares. See "How the Fund
Values its Shares."

DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS OF FUND SHARES ON THE PAYMENT DATE AND RECORD DATE,
RESPECTIVELY, OR SUCH OTHER DATE AS THE BOARD OF DIRECTORS MAY DETERMINE, UNLESS
THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. The Fund will
notify each shareholder after the close of the Fund's taxable year both of the
dollar amount and the taxable status of that year's dividends and distributions
on a per share basis. If you hold shares through Prudential Securities, you
should contact your financial adviser to elect to receive dividends and
distributions in cash.

As of December 31, 1997 the Fund had a capital loss carryforward for
federal income tax purposes of $553,025,700. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such carryforward amount.

To the extent that, in a given year, distributions to shareholders exceed
the Fund's current and accumulated earnings and profits, shareholders will
receive a return of capital in respect of such year and, in an annual statement,
will be notified of the amount of any return of capital for such year.

Any distributions of net capital gains paid shortly after a purchase by an
investor will have the effect of reducing the NAV of the investor's shares by
the per share amount of the distributions. Such distributions, although in
effect a return of invested principal, are subject to federal income taxes.
Accordingly, prior to purchasing shares of the Fund, an investor should
carefully consider the impact of capital gains distributions which are expected
to be or have been announced.

IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINED WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF THE FUND.

- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------

DESCRIPTION OF COMMON STOCK

THE FUND WAS INCORPORATED IN MARYLAND ON JANUARY 5, 1979. THE FUND IS
AUTHORIZED TO ISSUE 3 BILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE,
DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z
COMMON STOCK, WHICH CONSISTS OF 750 MILLION AUTHORIZED CLASS A SHARES, 750
MILLION AUTHORIZED CLASS B SHARES, 750 MILLION AUTHORIZED CLASS C SHARES AND 750
MILLION AUTHORIZED CLASS Z SHARES. Each class of common stock represents an
interest in the same assets of the Fund and is identical in all respects except
that (i) each class is subject to different sales charges and distribution
and/or service fees (except for Class Z shares, which are not subject to any
sales charges and distribution and/or service fees), which may affect
performance, (ii) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its 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, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to a limited group of
investors. See "How the Fund is Managed-Distributor." 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. Currently, the Fund is offering only four classes,
designated Class A, Class B, Class C and Class Z shares.

<PAGE>

The Board of Directors may increase or decrease the number of authorized
shares without approval by the 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 as described under "Shareholder Guide-How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except that, as noted above, each class of shares
(with the exception of Class Z shares, which are not subject to any distribution
and/or service fees) bears the expenses related to the distribution of its
shares. Except for the conversion feature applicable to 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 debt 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 Class Z shares are not subject to any distribution and/or
service fee. 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% 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.

ADDITIONAL INFORMATION

This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the Commission
under the Securities Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.

- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------

HOW TO BUY SHARES OF THE FUND

YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, PRUSEC OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O. BOX
15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the NAV per
share next determined following receipt of an order by the Transfer Agent or the
Distributor plus a sales charge which, at your option, may be imposed either (i)
at the time of purchase (Class A shares) or (ii) on a deferred basis (Class B or
Class C shares). Class Z shares are offered to a limited group of investors at
NAV without any sales charge. Participants in programs sponsored by Prudential
Retirement Series should contact their client representative for more
information about Class Z shares. Payments may be made by cash, wire, check or
through your brokerage account. See "Alternative Purchase Plan" and "How the
Fund Values its Shares."

The minimum initial investment for Class A and Class B shares is $1,000 and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. There is no minimum initial investment
for Class Z shares. The minimum subsequent investment is $100 for all classes,
except for Class Z shares for which there is no such minimum. All minimum
investment requirements are waived for certain retirement and employee savings
plans or custodial accounts for the benefit of minors. For purchases through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.

Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.

<PAGE>

The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.

Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.

Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.

PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). 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,
Boston, Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential High Yield 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 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 High Yield 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.

ALTERNATIVE PURCHASE PLAN

THE FUND OFFERS FOUR CLASSES OF SHARES THROUGH THIS PROSPECTUS (CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST
BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE
AMOUNT OF THE PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND
OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).

ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
----------------------------------- -------------------------- ---------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of .30 of 1% (Currently Initial sales charge waived or
4% of the public offering price being charged at a reduced for certain purchases
rate of .15 of 1%)

CLASS B Maximum CDSC of 5% of .75 of 1% Shares convert to Class A shares
the lesser of the amount invested approximately seven years after
or the redemption proceeds; purchase
declines to zero after six years

CLASS C Maximum CDSC of 1% of the 1% (Currently being Shares do not convert to another
lesser of the amount invested or charged at a rate of .75 class
the redemption proceeds on of 1%)
redemptions made within one year
of purchase
CLASS Z None None Sold to a limited group of
investors.

</TABLE>

The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distributor and
service plan. (ii) each class has exclusive voting rights

<PAGE>

on any matter submitted to shareholders that relates solely to its 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, (iii)
only Class B shares have a conversion feature, and (iv) Class Z shares are
exclusively offered for sale to a limited group of investors. The four classes
also have separate exchange privileges. See "How to Exchange Your Shares" below.
The income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee (if any) of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.

Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.

IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature-Class B Shares" below).

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 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% 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 more than 6 years, you should
consider purchasing Class A shares over either Class B or Class C shares
regardless of whether or not you qualify for a reduced sales charge on Class A
shares.

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 and Class C 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 Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus 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 during which the CDSC is applicable.

<PAGE>

ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. SEE "REDUCTION AND
WAIVER OF INITIAL SALES CHARGES" AND "CLASS Z SHARES" BELOW.

CLASS A SHARES

The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:

SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------- ---------------- ----------------- ------------------
<S> <C> <C> <C>
Less than $50,000 ....... 4.00% 4.17% 3.75%
$50,000 to $99,999 ...... 3.50% 3.63% 3.25%
$100,000 to $249,999 .... 2.75% 2.83% 2.50%
$250,000 to $499,999 .... 2.00% 2.04% 1.90%
$500,000 to $999,999 .... 1.50% 1.52% 1.40%
$1,000,000 and above .... None None None
</TABLE>

The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.

In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisors and other persons which distribute shares
of the Fund finders' fees from its own resources based on a percentage of the
NAV of shares sold by such person.

REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares-Reduction and Waiver of Initial Sales Charges-Class A Shares" in the
Statement of Additional Information.

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 and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (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 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 serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and (ii) 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 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or

<PAGE>

SmartPath Plan). All plans of a company for which Prudential serves as plan
administrator or recordkeeper are aggregated in meeting the $1 million
threshold. The term existing assets as used herein includes stock issued by a
plan sponsor, shares of Prudential Mutual Funds and shares of certain
unaffiliated mutual funds that participate in the PruArray or SmartPath Program
(Participating Funds). Existing assets also include monies invested in The
Guaranteed Interest Account (GIA), a group annuity insurance product issued 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 (i) the purchase is made with the
proceeds of a redemption from either GIA or SVF and (ii) 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 the PruArray Program 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 (i) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (ii) maintain their accounts with the Fund's Transfer Agent.

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 (i) employees who open an
IRA or Savings Accumulation Plan account with the Fund's transfer agent and (ii)
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,
PruArray Plan or SmartPath 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
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and 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, (c) employees of subadvisers of the Prudential
Mutual Funds, provided that purchases at NAV are permitted by such person's
employer, (d) 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, (e) registered representatives and
employees of dealers who have entered into a selected dealer agreement with
Prudential Securities provided that purchases at NAV are permitted by such
person's employer, (f) investors who have a business relationship with a
financial adviser who joined Prudential Securities from another investment firm,
provided that (i) 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, (ii) 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 (iii) the financial
adviser served as the client's broker on the previous purchases, and (g)
investors in Individual Retirement Accounts, provided the purchase is made with
the proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential Investments serves as the record keeper or administrator.

You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
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
purchased upon the reinvestment of dividends

28
<PAGE>

and distributions. See "Purchase and Redemption of Fund Shares-Reduction and
Waiver of Initial Sales Charges- Class A Shares" in the Statement of Additional
Information.

CLASS B AND CLASS C SHARES

The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges." The Distributor will pay, from its
own resources, sales commissions of up to 4% of the purchase price of Class B
shares to dealers, financial advisers and other persons who sell the 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. See
"How the Fund is Managed-Distributor." In connection with the sale of Class C
shares, the Distributor will pay, from its own resources, dealers, financial
advisers and other persons which distribute Class C shares a sales commission of
up to 1% of the purchase price at the time of the sale.

CLASS Z SHARES

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

(i) pension, profit-sharing or other employee benefit plans qualified 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
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; (ii) participants in any fee-based
program or trust program sponsored by Prudential Securities, The Prudential
Savings Bank, F.S.B. or any affiliate which includes mutual funds as investment
options and for which the Fund is an available option; (iii) certain
participants in the MEDLEY Program (group variable annuity contracts) sponsored
by Prudential for whom Class Z shares of the Prudential Mutual Funds are an
available option; (iv) Benefit Plans for which Prudential Retirement Services
serves as recordkeeper and as of September 20, 1996, (a) were Class Z
shareholders of the Prudential Mutual Funds or (b) executed a letter of intent
to purchase Class Z shares of the Prudential Mutual Funds; (v) current and
former Directors/Trustees of the Prudential Mutual Funds (including the Fund);
and (vi) employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan.

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

HOW TO SELL YOUR SHARES

YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
CDSC, as described below. See "Contingent Deferred Sales Charges" below.

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 IN ORDER TO BE
REDEEMED, WHICH MAY DELAY RECEIPT OF THE

<PAGE>

PROCEEDS 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 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.

If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, 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 or SmartPath 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 OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) 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 (d) 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 (b), (c) or
(d) exist.

PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.

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. See "How the Fund Values its Shares." 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
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,

<PAGE>

the credit will be on a PRO RATA basis. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities, 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
Charges" below. Exercise of the repurchase privilege may affect federal tax
treatment of any gain realized upon redemption.

CONTINGENT DEFERRED SALES CHARGES

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 one year of purchase 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 one year, in the case of Class C shares. 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.
See "How the Fund is Managed-Distributor" and "Waiver of the Contingent Deferred
Sales Charges- Class B Shares" below.

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. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:

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

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 net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding six
years (five years for Class B shares purchased prior to January 22, 1990); then
of amounts representing the cost of shares held beyond the applicable CDSC
period; then of amounts representing the cost of shares acquired prior to July
1, 1985; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.

<PAGE>

For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.

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 CHARGES-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, 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 the shares were purchased prior to death or disability.

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 include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 591|M/2; and (iii) 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 (I.E.,
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 PSI 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.

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% amount is reached.

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

You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, 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. See "Purchase and Redemption of
Fund Shares-Waiver of the Contingent Deferred Sales Charge-Class B Shares" in
the Statement of Additional Information.

A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares-Quantity
Discount-Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.

<PAGE>

WAIVER OF CONTINGENT DEFERRED SALES CHARGES-CLASS C SHARES

PRUARRAY OR SMARTPATH PLANS. The CDSC will be waived on redemptions from
certain qualified and non-qualified retirement and deferred compensation plans
that participate in the Transfer Agent's PruArray and SmartPath Programs.

CERTAIN OTHER EMPLOYEE BENEFIT AND RETIREMENT PLANS. The CDSC will be
waived on redemptions from certain employee benefit plans and retirement plans
that invest in the Fund through third party recordkeeping and administrative
service providers that have entered into a services agreement with the
Distributor and that invest in the Fund through the use of an omnibus investment
account. Such third party recordkeeping and administrative service providers may
be compensated by the Distributor from its own resources.

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: (i)
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 (ii) 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.

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 NAVs 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 100 shares were initially purchased at $10 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 $1,100), 95.24 shares would convert approximately
seven years from the initial purchase (I.E., $1,000 divided by $2,100 (47.62%)
multiplied by 200 shares equals 95.24 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. See "How the Fund Values its Shares."

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 will 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 (i) 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 (ii) that the conversion of shares does not

<PAGE>

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.

HOW TO EXCHANGE YOUR SHARES

AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENT OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS
C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE
NAV. No sales charge will be imposed at the time of the exchange. Any applicable
CDSC payable upon the redemption of shares exchanged 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. Class B and Class C shares may not be
exchanged into money market funds other than the Prudential Special Money Market
Fund, Inc. For purposes of calculating the 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. See "Conversion Feature-Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.

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. (THE FUND OR ITS AGENTS COULD BE SUBJECT TO LIABILITY
IF THEY FAIL TO EMPLOY REASONABLE 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. The Exchange Privilege is available only in states where
the exchange may legally be made.

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. SEE "HOW TO SELL YOUR SHARES" ABOVE.

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.

SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan-Class A Shares-Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan-Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a 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.
Similarly, 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

<PAGE>

in the NAV 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 or Prusec
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 to 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 NAV.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities' 401(k) Plan following
separation from service (I.E., voluntary or involuntary termination of
employment or retirement) will have their Class Z shares exchanged to Class A
shares at NAV.

The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.

FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).

To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.

SHAREHOLDER SERVICES

In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:

o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold your shares
through Prudential Securities, you should contact your financial adviser.

o AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.

o TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
tax-sheltered 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, the administration, custodial fees and other
details is available from Prudential Securities or the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal or
tax adviser with respect to the establishment and maintenance of such a plan.

<PAGE>

o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."

o REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses the Fund will provide one annual report and semi-annual shareholder
report and annual prospectus per household. You may request additional copies of
such reports by calling (800) 225-1852 or by writing to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition,
monthly unaudited financial data are available upon request from the Fund.

o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone at (800) 225-1852 (toll free) or, from outside the U.S.A., at
(908) 417-7555 (collect).

For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.

<PAGE>

- --------------------------------------------------------------------------------
APPENDIX A

DESCRIPTION OF CORPORATE BOND RATINGS
- --------------------------------------------------------------------------------

MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:

AAA-Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." 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.

Moody's applies numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, the modifier 2 indicates a mid-range rating and the
modifier 3 indicates that the issue ranks at the lower end of the rating
category.

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 sometime 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.

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.

C-Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

A-1

<PAGE>

STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS:

AAA-Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest.

AA-Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.

A-Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.

BBB-Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.

BB, B, CCC, CC, C-Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and 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.

BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.

B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.

CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. CC: The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.

C: The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
debt service payments are continued.

C1: The rating C1 is reserved for income bonds on which no interest is
being paid.

D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.

A-2

<PAGE>

- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY

Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec registered representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.

-------------------------------------------------------
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 Mortgage Income Fund, Inc.
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 Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund

Florida Series
Maryland Series

Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.

-------------------------------------------------------
Global Funds

Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio

Prudential Intermediate Global Income Fund, Inc.

Prudential International Bond Fund, Inc.

Prudential Natural Resources Fund, Inc.

Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.

The Global Total Return Fund, Inc.

-------------------------------------------------------
Equity Funds

Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
Prudential Jennison Series Fund, Inc.
Prudential Active Balanced Fund

Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund

Prudential Multi-Sector Fund, Inc.

Prudential Small-Cap Quantum Fund, Inc.

Prudential Small Company Value Fund, Inc.

Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund

-------------------------------------------------------
Money Market Funds

o 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.
o 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
o COMMAND FUNDS
Command Money Fund

Command Government Fund

Command Tax-Free Fund
o INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

B-1

<PAGE>

No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of an offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.

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

PAGE
-----
FUND HIGHLIGHTS .................................... 2
What are the Fund's Risk Factors and
Special Characteristics? ..................... 2
FUND EXPENSES .................................... 4
FINANCIAL HIGHLIGHTS .............................. 5
HOW THE FUND INVESTS .............................. 9
Investment Objectives and Policies .............. 9
Hedging and Return Enhancement Strategies ...... 11
Risk Factors .................................... 14
Other Investments and Policies .................. 15
Investment Restrictions ........................ 17
HOW THE FUND IS MANAGED ........................... 18
Manager ....................................... 18
Distributor .................................... 18
Fee Waivers .................................... 20
Portfolio Transactions ........................ 20
Custodian and Transfer and Dividend
Disbursing Agent .............................. 20
YEAR 2000 .......................................... 20
HOW THE FUND VALUES ITS SHARES ..................... 20
HOW THE FUND CALCULATES PERFORMANCE ................ 21
TAXES, DIVIDENDS AND DISTRIBUTIONS ............... 22
GENERAL INFORMATION .............................. 23
Description of Common Stock ..................... 23
Additional Information ........................ 24
SHAREHOLDER GUIDE ................................. 24
How to Buy Shares of the Fund .................. 24
Alternative Purchase Plan ..................... 25
How to Sell Your Shares ........................ 30
Conversion Feature -Class B Shares ............ 33
How to Exchange Your Shares ..................... 34
Shareholder Services ........................... 35
DESCRIPTION OF CORPORATE BOND RATINGS .............. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY .................. B-1

- --------------------------------------------------------------------------------
MF110A

Class A: 74435F-10-6
CUSIP Nos.: Class B: 74435F-20-5
Class C: 74435F-30-4
Class Z: 74435F-40-3
Prudential High
Yield
Fund, Inc.

[GRAPHIC OMITTED]

PROSPECTUS

MARCH 3, 1998

WWW.PRUDENTIAL.COM

[LOGO]

<PAGE>

PRUDENTIAL HIGH YIELD FUND, INC.
Statement of Additional Information

March 3, 1998

Prudential High Yield Fund, Inc. (the Fund), is an open-end diversified
management investment company whose primary investment objective is to maximize
current income through investment in a diversified portfolio of high yield
fixed-income securities. Capital appreciation is a secondary investment
objective which will only be sought when consistent with the primary objective.
The high yield securities sought by the Fund will generally be securities rated
in the medium to lower categories by recognized rating services (Baa or lower by
Moody's Investors Service or BBB or lower by Standard & Poor's Ratings Group or
comparably rated by any other Nationally Recognized Statistical Rating
Organization) or non-rated securities of comparable quality. There can be no
assurance that the Fund's investment objectives will be achieved. See
"Investment Objectives and Policies."

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 March 3, 1998, a copy
of which may be obtained from the Fund upon request.

TABLE OF CONTENTS

CROSS-REFERENCE
TO PAGE IN

PAGE PROSPECTUS

------- ----------------
<S> <C> <C>
General Information ......................................................... B-2 23
Investment Objectives and Policies .......................................... B-2 9
Portfolio Characteristics ................................................... B-2 9
Investment Restrictions ...................................................... B-7 17
Directors and Officers ...................................................... B-8 18
Manager ..................................................................... B-12 18
Distributor .................................................................. B-13 18
Portfolio Transactions and Brokerage ....................................... B-15 20
Purchase and Redemption of Fund Shares ....................................... B-16 24
Shareholder Investment Account ............................................. B-19 24
Net Asset Value ............................................................ B-22 20
Taxes, Dividends and Distributions .......................................... B-23 21
Performance Information ...................................................... B-25 21
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants B-26 20
Financial Statements ......................................................... B-27 -
Report of Independent Accountants .......................................... B-46 -
Appendix I-General Investment Information .................................... I-1 -
Appendix II-Historical Performance Data .................................... II-1 -
Appendix III-Information Relating to the Prudential ........................ III-1 -
</TABLE>

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

MF110B

<PAGE>

GENERAL INFORMATION

At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name from
Prudential-Bache High Yield Fund, Inc. to Prudential High Yield Fund, Inc.

INVESTMENT OBJECTIVES AND POLICIES

The primary investment objective of the Fund is to maximize current income
through investment in a diversified portfolio of high yield fixed income
securities which in the opinion of the Fund's investment adviser do not subject
a fund investing in such securities to unreasonable risks. As a secondary
investment objective, the Fund will seek capital appreciation but only when
consistent with its primary objective. Capital appreciation may result, for
example, from an improvement in the credit standing of an issuer whose
securities are held in the Fund's portfolio or from a general lowering of
interest rates, or a combination of both. Conversely, capital depreciation may
result, for example, from a lowered credit standing or a general rise in
interest rates, or a combination of both. The achievement of the Fund's
objectives will depend upon the investment adviser's analytical and portfolio
management skills. There can be no assurance that these objectives will be
achieved. All investment objectives and policies of the Fund other than those
described under "How the Fund Invests-Investment Restrictions" in the Prospectus
may be changed by the Board of Directors of the Fund without shareholder
approval.

Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which the Fund may
invest, the yields and prices of such securities may tend to fluctuate more than
those for higher rated securities. In the lower quality segments of the
fixed income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities market
resulting in greater yield and price volatility.

Another factor which causes fluctuations in the prices of fixed income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in the Fund's net asset value.

Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
rated securities, investors should consider carefully the relative risks
associated with investments in securities which carry medium to lower ratings
and in comparable non-rated securities. In addition to the risk of default,
there are the related costs of recovery on defaulted issues. The investment
adviser will attempt to reduce these risks through diversification of the
portfolio and by analysis of each issuer and its ability to make timely payments
of income and principal, as well as broad economic trends in corporate
developments.

Certain of the high fixed income securities in which the Fund may invest
may be purchased at a market discount. The Fund does not intend to hold such
securities until maturity unless current yields on these securities remain
attractive. Capital losses may be recognized when securities purchased at a
premium are held to maturity or are called or redeemed at a price lower than
their purchase price. Capital gains or losses also may be recognized for federal
income tax purposes on the retirement of such securities or may be recognized
upon the sale of securities.

PORTFOLIO CHARACTERISTICS

When market conditions dictate a more defensive investment strategy, the
Fund may invest temporarily without limit in high quality money market
instruments, including commercial paper of corporations organized under the laws
of any state or political subdivision of the United States, certificates of
deposit, bankers' acceptances and other obligations of domestic banks, including
foreign branches of such banks, having total assets of at least $1 billion,
obligations of foreign banks subject to the limitations set forth in Investment
Restriction No. 14 and obligations issued or guaranteed by the United States
Government, its instrumentalities or agencies. The yield on these securities
will tend to be lower than the yield on other securities to be purchased by the
Fund.

The Fund may also employ, in its discretion, the following strategies in
order to help achieve its primary investment objective of maximizing current
income.

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

The Fund may invest in zero coupon, pay-in-kind and 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

B-2

<PAGE>

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.

There are certain risks related to investing in zero coupon, pay-in-kind
and deferred payment securities. These securities generally are more sensitive
to movements in interest rates and are less liquid than comparably rated
securities paying cash interest at regular intervals. Consequently, such
securities may be subject to greater fluctuation in value. During a period of
severe market conditions, the market for such securities may become even less
liquid. In addition, as these securities do not pay cash interest, the Fund's
investment exposure to these securities and their risks, including credit risk,
will increase during the time these securities are held in the Fund's portfolio.
Further, to maintain its qualification for pass-through treatment under the
federal tax laws, the Fund is required to distribute income to its shareholders
and, consequently, may have to dispose of its portfolio securities under
disadvantageous circumstances to generate the cash, or may have to leverage
itself by borrowing the cash to satisfy these distributions, as they relate to
the distribution of phantom income and the value of the paid-in-kind interest.
The required distributions will result in an increase in the Fund's exposure to
such securities.

BANK DEBT

Participations differ both from the public and private debt securities
typically held by the Fund and from Assignments. In Participations, the Fund has
a contractual relationship only with the Lender, not with the borrower. As a
result, the Fund has 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. Thus, the Fund assumes the credit risk of
both the borrower and the Lender that is selling the Participation. In the event
of the insolvency of the Lender, 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. In Assignments, by contrast, the Fund acquires direct rights against
the borrower, except that under certain circumstances such rights may be more
limited than those held by the assigning Lender.

Investments in Participations and Assignments otherwise bear risks common
to investing in debt instruments which the Fund is currently authorized to
purchase, including the risk of nonpayment of principal and interest by the
borrower, the risk that any loan collateral may become impaired and that the
Fund may obtain less than the full value for loan interests sold because they
are illiquid. The lack of a highly liquid secondary market for loans 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 loans in response to a specific
economic event such as deterioration in the creditworthiness of the borrower. In
addition to the creditworthiness of the borrower, the Fund's ability to receive
payment of principal and interest is also dependent on the creditworthiness of
any institution (I.E., the Lender) interposed between the Fund and the borrower.

FUTURES CONTRACTS

The Fund may enter into futures contracts for the purchase or sale of debt
securities and financial indices (collectively, interest rate futures contracts)
in accordance with the Fund's investment objective. A purchase of a futures
contract (or a long futures position) means the assumption of a contractual
obligation to acquire a specified quantity of the securities underlying the
contract at a specified price at a specified future date. A sale of a futures
contract (or a short futures position) means the assumption of a contractual
obligation to deliver a specified quantity of the securities underlying the
contract at a specified price at a specified future date. At the time a futures
contract is purchased or sold, the Fund is required to deposit cash or
securities with a futures commission merchant or in a segregated account
representing between approximately 11|M/2% to 5% of the contract amount, called
initial margin. Thereafter, the futures contract will be valued daily and the
payment in cash of maintenance or variation margin may be required, resulting in
the Fund paying or receiving cash that reflects any decline or increase in the
contract's value, a process known as marking-to-market.

B-3

<PAGE>

The Fund's ability to establish and close out positions in futures
contracts and options on futures contracts would be impacted by the liquidity of
these markets. Although the Fund generally would purchase or sell only those
futures contracts and options thereon for which there appeared to be a liquid
market, there is no assurance that a liquid market on an exchange will exist for
any particular futures contract or option at any particular time. In the event
no liquid market exists for a particular futures contract or option thereon in
which the Fund maintains a position, it would not be possible to effect a
closing transaction in that contract or to do so at a satisfactory price and the
Fund would have to either make or take delivery under the futures contract or,
in the case of a written call option, wait to sell the underlying securities
until the option expired or was exercised, or, in the case of a purchased
option, exercise the option. In the case of a futures contract or an option on a
futures contract which the Fund had written and which the Fund was unable to
close, the Fund would be required to maintain margin deposits on the futures
contract or option and to make variation margin payments until the contract is
closed.

Risks inherent in the use of these strategies include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction of
interest rates, securities prices and markets; (2) imperfect correlation between
the price of futures contracts and options thereon and movement in the prices of
the securities being hedged; (3) the fact that the 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; and (5) the possible inability of the Fund to sell a portfolio
security at a time that otherwise would be favorable for it to do so. In the
event it did sell the security and eliminated its cover, it would have to
replace its cover with an appropriate futures contract or option or segregate
securities with the required value, as described under "How the Fund Invests--
Limitations on the Purchase and Sale of Futures Contracts and Related Options--
Segregation Requirements" in the Prospectus.

Although futures prices themselves have the potential to be extremely
volatile, in the case of any strategy involving interest rate futures contracts
and options thereon when the Subadviser's expectations are not met, assuming
proper adherence to the segregation requirement, the volatility of the Fund as a
whole should be no greater than if the same strategy had been pursued in the
cash market.

Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the securities markets,
significant price and rate movements can take place in the securities markets
that cannot be reflected in the futures markets.

Pursuant to the requirements of the Commodity Exchange Act, as amended (the
Commodity Exchange Act), all futures contracts and options thereon must be
traded on an exchange. Since a clearing corporation effectively acts as the
counterparty on every futures contract and option thereon, the counter party
risk depends on the strength of the clearing or settlement corporation
associated with the exchange. Additionally, although the exchanges provide a
means of closing out a position previously established, there can be no
assurance that a liquid market will exist for a particular contract at a
particular time. In the case of options on futures, if such a market does not
exist, the Fund, as the holder of an option on futures contracts, would have to
exercise the option and comply with the margin requirements for the underlying
futures contract to utilize any profit, and if the Fund were the writer of the
option, its obligation would not terminate until the option expired or the Fund
was assigned an exercise notice.

There can be no assurance that the Fund's use of futures contracts and
related options will be successful and the Fund may incur losses in connection
with its purchase and sale of future contracts and related options.

REPURCHASE AGREEMENTS

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 the loss.

The Fund participates in a joint repurchase agreement account with other
investment companies managed by Prudential Investments Fund Management LLC
(PIFM) pursuant to an order of the Securities and Exchange Commission
(Commission). On

B-4

<PAGE>

a daily basis, any uninvested cash balances of the Fund may be aggregated with
those of such other 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 in any amount to brokers, dealers and financial
institutions, 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. The
advantage of such loans is that the Fund continues to receive the interest and
dividends on the loaned securities, while at the same time earning interest on
the collateral which will be invested in short-term obligations.

A loan may be terminated by the borrower on one business day's notice or by
the Fund at any time. 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. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
investment adviser to be creditworthy. 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.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

From time to time, in the ordinary course of business, the Fund may
purchase securities on a when-issued or delayed delivery basis-I.E., delivery
and payment can take place a month or more after the date of the transaction.
The purchase price and the interest rate payable on the securities are fixed on
the transaction date. The securities so purchased are subject to market
fluctuation, and no interest accrues to the Fund until delivery and payment take
place. At the time the Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value of such securities in determining its net asset
value each day. The Fund will make commitments for such when-issued transactions
only with the intention of actually acquiring the securities, and to facilitate
such acquisitions, the Fund will maintain in a segregated account securities
having value equal to or greater than such commitments. On delivery dates for
such transactions, the Fund will meet its obligations from maturities or sales
of the securities held in the separate account and/or from then available cash
flow. 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 other
portfolio obligations, incur a gain or loss due to market fluctuation.

SECURITIES OF FOREIGN ISSUERS

The Fund may invest up to 20% of its total assets in United States currency
denominated fixed-income issues of foreign governments and other foreign
issuers, including preferred stock.

The Fund believes that in many instances such foreign fixed-income
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. Many of these investments currently enjoy
increased liquidity, although, under certain market conditions, such securities
may be less liquid than the securities of United States corporations, and are
certainly less liquid than securities issued or guaranteed by the United States
Government, its instrumentalities or agencies.

The above-described foreign investments 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 issue, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities issued by United States corporations or issued or
guaranteed by the United States Government, its instrumentalities or agencies.
In addition, there may be less publicly available information about a foreign
company than about a domestic company. 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, with respect to certain foreign
countries, there is a possibility of expropriation or confiscatory taxation or
diplomatic developments which could affect investment in those countries.
Finally, in the event of a default of any such foreign debt obligations, it may
be more difficult for the Fund to obtain or to enforce a judgment against the
issuers of such securities.

B-5

<PAGE>

The Fund may also invest up to 10% of its total assets in foreign currency
denominated debt securities of foreign or domestic issuers; however, the Fund
will not engage in such investment activity unless it has been first authorized
to do so by its Board of Directors. In addition to the risks listed in the
preceding paragraph with respect to fixed income securities of foreign issuers,
foreign currency denominated securities may be affected favorably or unfavorably
by changes in currency rates and in exchange control regulations, and costs may
be incurred in connection with conversions between various currencies. It may
not be possible to hedge against the risks of currency fluctuations.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.

In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible 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. (NASD)

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (E.G., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). In addition, in order for commercial paper that is issued in reliance
on Section 4(2) of the Securities Act to be considered liquid, (i) it must be
rated in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be traded flat (I.E.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.

The staff of the Commission has taken the position, which the Fund will
follow, that purchased 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 its election, to unwind the OTC option. The exercise
of such an option ordinarily would 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 assets used as cover as liquid. See "How
the Fund Invests-Illiquid Securities" in the Prospectus.

PORTFOLIO TURNOVER

Although the Fund does not intend to engage in substantial short-term
trading, it may sell portfolio securities without regard to the length of time
that they have been held in order to take advantage of new investment
opportunities or yield differentials, or because the Fund desires to preserve
gains or limit losses due to changing economic conditions or the financial
condition of the

B-6

<PAGE>

issuer. It is not anticipated that the Fund's portfolio turnover rate will
exceed 150%. Since the Fund's inception, the annual portfolio turnover rate has
not exceeded 100%. A portfolio turnover rate of 150% may exceed that of other
investment companies with similar objectives. The portfolio turnover rate is
computed by dividing the lesser of the amount of the securities purchased or
securities sold (excluding securities whose maturities at acquisition were one
year or less) by the average monthly value of securities owned during the year.
A 100% turnover rate would occur, for example, if all of the securities held in
the Fund's portfolio were sold and replaced within one year. However, when
portfolio changes are deemed appropriate due to market or other conditions, such
turnover rate may be greater than anticipated. A higher rate of turnover results
in increased transaction costs to the Fund. For the fiscal years ended December
31, 1996, and 1997, the Fund's portfolio turnover rate was 89% and 113%,
respectively.

SEGREGATED ACCOUNTS

When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account. "Liquid assets" means cash, U.S. Government securities, equity
securities (including foreign securities), debt obligations or other liquid,
unencumbered assets, marked-to-market daily, including foreign securities, high
yield fixed income securities and distressed securities. See "How the Fund
Invests--Risk Factors--Risks Relating to Investing in High Yield Securities" and
"--Risks Relating to Investing in Distressed Securities" in the Prospectus.

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 (i) 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 (ii) more than 50% of the outstanding voting
shares.

The Fund may not:

(1) Invest more than 5% of the market or other fair value of its total
assets in the securities of any one issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or instrumentalities).

(2) Purchase more than 10% of the voting securities of any issuer.

(3) Invest more than 25% of the market or other fair value of its total
assets in the securities of issuers, all of which conduct their principal
business activities in the same industry. For purposes of this restriction, gas,
electric, water and telephone utilities will each be treated as being a separate
industry. This restriction does not apply to obligations issued or guaranteed by
the United States Government or its agencies or instrumentalities.

(4) Make short sales of securities.

(5) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio securities
and the making of margin payments in connection with transactions in financial
futures contracts.

(6) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. Secured borrowings may take the form of
reverse repurchase agreements, pursuant to which the Fund would sell portfolio
securities for cash and simultaneously agree to repurchase them at a specified
date for the same amount of cash plus an interest component. For purposes of
this restriction, obligations of the Fund to Directors pursuant to deferred
compensation arrangements and the purchase and sale of securities on a
when-issued or delayed delivery basis and engaging in financial futures
contracts and related options are not deemed to be the issuance of a senior
security or a pledge of assets.

(7) Engage in the underwriting of securities except insofar as the Fund may
be deemed an underwriter under the Securities Act in disposing of a portfolio
security.

(8) Purchase or sell real estate or real estate mortgage loans, although it
may purchase marketable securities of issuers which engage in real estate
operations or securities which are secured by interests in real estate.

(9) Purchase or sell commodities or commodity futures contracts except
financial futures contracts and options thereon.

(10) Make loans of money or securities, except through the purchase of debt
obligations, bank debt (I.E. loan participations), repurchase agreements and
loans of securities.

(11) Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest in the
securities of companies which invest in or sponsor such programs.

B-7

<PAGE>

(12) Purchase securities of other investment companies, except in the open
market involving only customary brokerage commissions and as a result of which
no more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.

(13) Invest for the purpose of exercising control or management of another
company.

(14) Invest more than 20% of the market or other fair value of its total
assets in United States currency denominated issues of foreign governments and
other foreign issuers; or invest more than 10% of the market or other fair value
of its total assets in securities which are payable in currencies other than
United States dollars. The Fund will not engage in investment activity in
non-U.S. dollar denominated issues without first obtaining authorization to do
so from its Board of Directors. See "Portfolio Characteristics-Securities of
Foreign Issuers."

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.

DIRECTORS AND OFFICERS

NAME, ADDRESS** POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
- --------------------------- ------------------ ----------------------
<S> <C> <C>

Edward D. Beach (73) Director President and Director of BMC Fund, Inc., a closed-end
investment company; previously, 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; President, Director of The High Yield
Income Fund, Inc.

Eugene C. Dorsey (70) Director Retired President, Chief Executive Officer and Trustee of
the Gannett Foundation (now Freedom Forum); former
Publisher of four Gannett newspapers and Vice
President of Gannett Company; past Chairman of
Independent Sector (national coalition of philanthropic
organizations); former Chairman of the American
Council for the Arts; Director of the Advisory Board of
Chase Manhattan Bank of Rochester, The High Yield
Income Fund, Inc. and First Financial Fund, Inc.

Delayne Dedrick Gold (59) Director Marketing and Management Consultant. Director of The
High Yield Income Fund, Inc.

*Robert F. Gunia (51) Director and Vice President, Prudential Investments (since September
Vice President 1997); Executive Vice President and Treasurer,
Prudential Investments Fund Management LLC (PIFM); (since December 1996)
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), Executive Vice President, Treasurer and Chief
Financial Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice President
and Director of The Asia Pacific Fund, Inc. (since May
1989); Director of The High Yield Income Fund, Inc.

</TABLE>

B-8

<PAGE>

NAME, ADDRESS** POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
- ---------------------------- ------------------ ---------------------
<S> <C> <C>
*Harry A. Jacobs, Jr. (76) Director Senior Director (since January 1986) of Prudential
1 Seaport Plaza Securities; formerly Interim Chairman and Chief
New York, NY Executive Officer of Prudential Mutual Fund
Management, Inc. (June-September 1993); formerly
Chairman of the Board of Prudential Securities
(1982-1985) and Chairman of the Board and Chief
Executive Officer of Bache Group, Inc. (1977-1982).
Director of The First Australia Fund, Inc., The
First Australia Prime Income Fund, Inc. and Director
of The High Yield Income Fund, Inc.

*Mendel A. Melzer, CFA, (37) Director Chief Investment Officer (since October 1996) of Prudential
ChFC, CLU Mutual Funds; formerly Chief Financial Officer of Prudential
751 Broad Street Investments (November 1995-September 1996), Senior
Newark, NJ Vice President and Chief Financial Officer of Prudential
Preferred Financial Services (April 1993-November
1995), Managing Director of Prudential Investment
Advisors (April 1991-April 1993) and Senior Vice
President of Prudential Capital Corporation (July
1989-April 1991); Chairman and Director of Prudential
Series Fund, Inc.; Director of The High Yield Income
Fund, Inc.

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 Monroe County
Water Authority, Rochester Jobs, Inc., Blue Cross of Rochester,
The Business Council of New York State, Executive Service Corps
of Rochester, Monroe County Industrial Development
Corporation, Northeast Midwest Institute, and The High Yield Income
Fund, Inc.; President, Director and Treasurer of First Financial
Fund, Inc. and The High Yield Plus Fund, Inc.

Thomas H. O'Brien (73) Director President of O'Brien Associates (Financial and
Management Consultants) (since April 1984); formerly
President of Jamaica Water Securities Corp. (holding
company) (February 1989-August 1990); Chairman of
the Board and Chief Executive Officer (September
1987-February 1989) of Jamaica Water Supply Company
and Director (September 1987-April 1991); Director and
President of Winthrop Regional Health Systems, Inc,
and United Presbyterian Homes; Director of Ridgewood
Savings Bank and The High Yield Income Fund, Inc;
Trustee of Hofstra University.
</TABLE>

B-9

<PAGE>

NAME, ADDRESS** POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
- -------------------------- ------------------ -----------------------
<S> <C> <C>

*Richard A. Redeker (54) President and Employee of Prudential Investments; formerly President,
751 Broad Street Director Chief Executive Officer and Director (October
Newark, NJ 1993-September 1996), Prudential Mutual Fund
Management, Inc., Executive Vice President, Director and
Member of the Operating Committee (October 1993-September 1996)
of Prudential Securities, Director (October
1993-September 1996) of Prudential Securities Group, Inc.
(PSG), Executive Vice President, The Prudential
Investment Corporation (January 1994-September 1996),
Director (January 1994-September 1996) of 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); President and Director of The High Yield Income
Fund, Inc.

Nancy H. Teeters (67) Director Economist; formerly Vice President and Chief Economist of
International Business Machines Corporation (March
1986-June 1990); Member of the Board of Governors of the
Horace Rackham School of Graduate Studies of the University
of Michigan; Director of Inland Steel Industries (since
July 1991) and The High Yield Income Fund, Inc.

Louis A. Weil, III (56) Director Publishers 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 of Phoenix
Newspapers, Inc. (August 1991-December 1995); formerly,
Publisher of Time Magazine (May 1989-March 1991),
President, Publisher and Chief Executive Officer
of The Detroit News (February 1986-August 1989) and
member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The High Yield Income Fund,
Inc.

S. Jane Rose (52) Secretary Senior Vice President (since December 1996) of PIFM;
Senior Vice President and Senior Counsel of Prudential
Securities (since July 1992); formerly Senior Vice President
(January 1991-September 1996) Senior Counsel
(June 1987-September 1996) of Prudential Mutual Fund Management, Inc.

Grace C. Torres (38) Treasurer and First Vice President (since December 1996) of PIFM; First
Principal Vice President (since March 1994) of Prudential
Financial and Securities, formerly First Vice President (March
Accounting 1994-September 1996) of Prudential Mutual Fund
Officer Management, Inc. and Vice President (July 1989-March
1994) of Bankers Trust Corporation.

Stephen M. Ungerman (44) Assistant Tax Director of Prudential Investments and the Private
Treasurer Asset Group of Prudential (since March 1996); formerly, First Vice
President of Prudential Mutual Fund Management, Inc.
(February 1993-September 1996) and Senior Tax
Manager of Price Waterhouse (1981-January 1993).

Deborah A. Docs (40) Assistant Vice President (since December 1996) of PIFM; Vice
Secretary President and Associate General Counsel (June 1991
September 1996) of PIFM; Vice President and Associate
General Counsel of Prudential Securities.

</TABLE>

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

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

** Unless otherwise indicated, 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

B-10

<PAGE>

Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities Incorporated or Prudential Mutual Fund Distributors, Inc.

The officers conduct and supervise the daily business operations of the
Fund, while the directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.

The Fund pays each of its directors who is not an affiliated person of PIFM
or The Prudential Investment Corporation (PIC) annual compensation of $4,500, 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 whose Boards the Director may be asked to serve.

Directors may receive their Director's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee in installments which accrue interest at
a rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury
Bills at the beginning of each calendar quarter or, pursuant to a Commission
exemptive order, at the daily rate of return of the Fund. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Director. The Fund's obligation to make payments of deferred Director's
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, Messrs. Jacobs,
Beach and O'Brien are scheduled to retire on December 31, 1998, 1999 and 1999,
respectively.

Pursuant to the terms of the Management Agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees and expenses of all Directors of the Fund who are affiliated persons of
the Manager.

The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1997 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, 1997.

COMPENSATION TABLE

TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITSACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PARTOF TRUST BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS
- ------------------------------------------------ -------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Edward D. Beach-Director $4,500 None N/A $135,000(38/63)*
Eugene C. Dorsey-Director** $4,500 None N/A $ 70,000(16/43)*
Delayne Dedrick Gold-Director $4,500 None N/A $135,000(38/63)*
Robert F. Gunia-Director and Vice President(1) -- -- -- --
Harry A. Jacobs, Jr.-Director(1) -- -- -- --
Donald D. Lennox-Retired Director $4,500 None N/A $ 90,000(26/50)*
Mendel A. Melzer-Director(1) -- -- -- --
Thomas T. Mooney-Director** $4,500 None N/A $115,000(31/64)*
Thomas H. O'Brien-Director $4,500 None N/A $ 45,000(11/29)*
Richard A. Redeker-Director and President(1) -- None N/A --
Nancy H. Teeters-Director $4,500 None N/A $ 90,000(23/42)*
Louis A. Weil, III-Director $4,500 -- -- $ 90,000(26/50)*
</TABLE>

- -----------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.

(1) Directors who are "interested" do not receive compensation from the
Fund complex (including the Fund).

** Total compensation from all of the funds in the Fund complex for the calendar
year ended December 31, 1997, includes amounts deferred at the election of
Directors under the Fund's deferred compensation plans. Including accrued
interest, total compensation amounted to $87,401 and $143,909 for Messrs.
Dorsey and Mooney, respectively.

As of February 6, 1998, the directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.

As of February 6, 1998, there were no beneficial owners, directly or
indirectly, of more than 5% of the outstanding shares of any class of beneficial
interest.

B-11

<PAGE>

As of February 6, 1998, Prudential Securities was the record holder for
other beneficial owners of 73,102,930 Class A shares (or 37% of the outstanding
Class A shares), 157,572,710 Class B shares (or 51% of the outstanding Class B
shares) 5,927,557 Class C shares (or 86% of the outstanding Class C shares) and
1,434,469 Class Z shares (or 27% of the outstanding Class Z shares) of the Fund.
In the event of any meetings of shareholders, Prudential Securities will
forward, or cause the forwarding of, proxy materials to the beneficial owners
for which it is the record holder.

MANAGER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to substantially all of the other investment
companies that, together with the Fund, comprise the "Prudential Mutual Funds."
See "How the Fund is Managed" in the Prospectus. As of December 31, 1997, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $63 billion. According to the Investment
Company Institute, as of October 31, 1997, Prudential Mutual Funds were the 15th
largest family of mutual funds in the United States. According to data provided
by Lipper Analytical Services, Inc., the Fund is among the oldest and largest
U.S. mutual funds in the high current yield category of taxable fixed income
funds.

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 Prudential serves as the
transfer agent for the Prudential Mutual Funds and, in addition, provides
customer service, recordkeeping and management and administration services to
qualifed 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. 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, and Prudential Mutual
Fund Services LLC (PMFS or the Transfer Agent), 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.

For its services, PIFM receives, pursuant to the Management Agreement, a
fee at an annual rate of .50 of 1% of the Fund's average daily net assets up to
and including $250 million, .475 of 1% of the next $500 million, .45 of 1% of
the next $750 million, .425 of 1% of the next $500 million, .40 of 1% of the
next $500 million, .375 of 1% of the next $500 million and .35 of 1% over $3
billion 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.

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 PIC
(the Subadvisory Agreement).

Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated 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) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Commission, and
paying

B-12

<PAGE>

the fees and expenses of notice filings made in accordance with state securities
laws, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders 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. The Management
Agreement was last approved by the Board of Directors of the Fund, including a
majority of the Directors who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act on May 22,
1997 and by shareholders of the Fund on April 28, 1988.

For the fiscal years ended December 31, 1995, 1996 and 1997 the Fund paid
PIFM a management fee of $15,779,009, $16,817,042 and $17,569,047, respectively.

PIFM has entered into the Subadvisory Agreement with PI (the Subadviser), 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. Investment advisory services are
provided to the Fund by a business group of the Subadviser, known as Prudential
Investments.

The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 22, 1997, and by shareholders of the Fund on April 28, 1988.

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.

DISTRIBUTOR

Prudential Securities Incorporated (Prudential Securities or the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the shares of the Fund.

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, B and C shares Prudential Securities. Also
incures the expenses of distributing the Fund's Class Z shares under a
Distribution Agreement none of which are reimbursed or paid for by the Fund. See
"How the Fund is Managed-Distributor" in the Prospectus.

Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 6, 1989, the Board of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Class A Plan or Class B Plan or in any agreement related to either Plan (the
Rule 12b-1 Directors), at a meeting called for the purpose of voting on each
Plan, adopted a new plan of distribution for the Class A shares of the Fund (the
Class A Plan) and approved an amended and restated plan of distribution with
respect to the Class B shares of the Fund (the Class B Plan). On February 28,
1993, the Board of Directors, including a majority of the Rule 12b-1 Directors,
at a meeting called for the purpose of voting on each Plan, approved
modifications to the Fund's Class A and Class B Plans and Distribution
Agreements to conform them to recent amendments to the NASD maximum sales charge
rule described below. As so modified, the Class A Plan provides that (i) 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 the maintenance of shareholder accounts (service
fee) and (ii) total distribution fees (including the service fee of .25 of 1%)
may not exceed .30 of 1%. As so modified, the Class B Plan provides that (i) up
to .25 of 1% of the average daily net assets of the Class B shares may be paid
as a service fee and (ii) up to .75 of 1% (including the service fee) of the
average daily net assets

B-13

<PAGE>

of the Class B shares (asset-based sales charge) may be used as reimbursement
for distribution-related expenses with respect to the Class B shares. On May 3,
1993, the Board of Directors, including a majority of the Rule 12b-1 Directors,
at a meeting called for the purpose of voting on each Plan, adopted a plan of
distribution for the Class C shares of the Fund and approved further amendments
to the plans of distribution for the Fund's Class A and Class B shares changing
them from reimbursement type plans to compensation type plans. The Class C Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class C
shares may be paid for providing service and/or maintaining shareholder accounts
and (ii) up to .75 of 1% of the average daily net assets of the Class C shares
may be paid for distribution-related expenses with respect to the Class C
shares. The Plans were last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 22, 1997. The Class A Plan, as
amended, was approved by the Class A and Class B shareholders and the Class B
Plan, as amended, was approved by Class B shareholders on July 19, 1994. The
Class C Plan was approved by the sole shareholder of Class C shares on August 1,
1994.

CLASS A PLAN. For the fiscal year ended December 31, 1997, the Distributor
received payments of approximately $2,453,200 under the Class A Plan. This
amount was primarily expended on commission credits to Prudential Securities and
Prusec for payment of account servicing fees to financial advisers and other
persons who sell Class A shares. The Distributor received $1,239,500 in initial
sales charges with respect to sales of Class A shares.

CLASS B PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $19,418,400 from the Fund under the Class B Plan. It is estimated that
the Distributor incurred aggregate distribution expenses of approximately
$17,723,700 on behalf of the Fund during such period. It is estimated that of
this amount approximately 0.2% ($36,100) was spent on printing and mailing of
prospectuses to other than current shareholders; 26.19% ($4,769,900) on
compensation to Pruco Securities Corporation, an affiliated broker-dealer
(Prusec), for commissions to its representatives and other expenses, including
an allocation on account of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
and $12,917,700 (72.9%) on the aggregate of (i) payments of commissions to
account executives ($6,688,600 or 37.7%) and (ii) an allocation of overhead and
other branch office distribution-related expenses ($6,229,100 or 35.2 %). The
term "overhead and other branch office distribution-related expenses" represents
(a) the expenses of operating Prudential Securities' B-14 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 also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales
Charges" in the Prospectus. For the fiscal year ended December 31, 1997,
Prudential Securities received approximately $ contingent deferred sales
charges.

CLASS C PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $337,700 from the Fund under the Class C Plan. It is estimated that the
Distributor incurred aggregate distribution expenses of approximately $408,800
on behalf of the Fund during such period. It is estimated that of this amount
approximately 0.5% ($2,200) was spent on printing and mailing of prospectuses to
other than current shareholders; 4.7% ($18,900) on compensation to Pruco
Securities Corporation, an affiliated broker-dealer (Prusec), for commissions to
its representatives and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses, incurred by it
for distribution of Fund shares; and $383,700 (94.8%) on the aggregate of (i)
payments of commissions to account executives ($259,800 or 64.2%) and (ii) an
allocation of overhead and other branch office distribution-related expenses
($123,900 or 30.6 %). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' B-14 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 also receives the proceeds of contingent deferred sales charges paid
by investors upon certain redemptions of Class C shares. See "Shareholder
Guide-How to Sell Your Shares-Contingent Deferred Sales Charges" in the
Prospectus. For the year ended December 31, 1997, the Distributor received $ in
contingent deferred sales charges.

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 Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each 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 on not more than
30 days' written notice to any other party to the Plans. 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
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), 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 contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.

B-14

<PAGE>

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 distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of the 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 law. The Distribution Agreement was
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 22, 1997.

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 on unreimbursed distribution expenses 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 on
shares of the Fund may not exceed .75 of 1% per class.The 6.25% limitation
applies to the Fund rather than on a per shareholder basis. If aggregate sales
charges were to exceed 6.25% of total gross sales of shares of any class, all
sales charges on shares of that class would be suspended.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section, the
term "Manager" includes the "Subadviser." In placing orders for portfolio
securities of the Fund, the Manager is required to give primary consideration to
obtaining the most favorable price and efficient execution. This means that the
Manager will seek to execute each transaction at a price and commission, if any,
which will provide the most favorable total cost or proceeds reasonably
obtainable in the circumstances. While the Manager generally seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread or commission available. Within the framework of the policy of
obtaining most favorable price and efficient execution, the Manager will
consider research and investment services provided by brokers or dealers who
effect or are parties to portfolio transactions of the Fund, the Manager or the
Manager's other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Manager in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for the Fund may be used in managing other investment
accounts. Conversely, brokers furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than those of the Fund, and the services furnished by such brokers may be
used by the Manager in providing investment management for the Fund. Commission
rates are established pursuant to negotiations with the broker based on the
quality and quantity of execution services provided by the broker in the light
of generally prevailing rates. The Manager's policy is to pay higher commissions
to brokers, other than Prudential Securities, for particular transactions than
might be charged if a different broker had been selected on occasions when, in
the Manager's opinion, this policy furthers the objective of obtaining best
price and execution. In addition, the Manager is authorized to pay higher
commissions on brokerage transactions for the Fund to brokers, other than
Prudential Securities (or any affiliate), in order to secure research and
investment services described above, subject to the primary consideration of
obtaining the most favorable price and efficient execution in the circumstances
and subject to review by the Fund's Board of Directors from time to time as to
the extent and continuation of this practice. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the Fund's
Board of Directors.

The securities purchased by the Fund 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 the Distributor or any affiliate in any transaction
in which the Distributor or any affiliate acts as principal. Thus, it will not
deal with the Distributor acting as market maker, and it will not execute a
negotiated trade with the Distributor if execution involves Prudential
Securities' acting as principal with respect to any part of the Fund's order.

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, except in accordance
with rules of the Commission. The Fund may not participate in any transaction
where Prudential Securities (or any affiliate) is acting as principal, nor may
the Fund deal with Prudential Securities in any transaction in which Prudential
Securities (or any affiliate) acts as principal or market maker, except as may
be permitted by the Commission. These limitations, in the opinion of the
Manager, will not significantly affect the Fund's ability to pursue its
investment objective. However, the Fund may be at a disadvantage because of
these limitations in comparison to other funds not subject to such limitations.

B-15
<PAGE>

Subject to the above considerations, the Manager may use Prudential
Securities as a broker for the Fund. In order for Prudential Securities or any
affiliate to effect any portfolio transactions for the Fund, the commissions,
fees and 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 brokers in connection with comparable transactions
involving similar securities being purchased or sold on a securities exchange
during a comparable period of time. This standard would allow Prudential
Securities or any affiliate to receive no more than the remuneration which would
be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction. Furthermore, the Board of Directors of the Fund,
including a majority of the noninterested 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 transactions with Prudential Securities or any
afffiliate are also subject to such fiduciary standards as may be imposed upon
Prudential Securities or such affiliate by applicable law.

The Fund paid no brokerage commissions to Prudential Securities for the
fiscal years ended December 31, 1995, 1996, and 1997.

PURCHASE AND REDEMPTION 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 (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares of the
Fund are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors at NAV. See "Shareholder
Guide-How to Buy Shares of the Fund" in the Prospectus.

Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subect to any sales charges and distribution and/or service fees),
which may affect performance, (ii) each class has exclusive voting rights with
respect to any matter submitted to shareholders that relates solely to its
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, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Distributor" and
"Shareholder Investment Account-Exchange Privilege."

ISSUANCE OF FUND SHARES FOR SECURITIES. Transactions involving the issuance
of Fund shares for securities (rather than cash) will be limited to (i)
reorganizations, (ii) statutory mergers, or (iii) 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 at a maximum sales charge of 4% and Class
B*, Class C* and Class Z shares of the Fund are sold at NAV. Using the Fund's
NAV at December 31, 1997, 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 ............... $ 8.65
------
Maximum sales charge (4% of offering price) ........................... .36
------
Offering price to public ............................................. $ 9.01
======
CLASS B

Net asset value, offering price and redemption price per Class B share* $ 8.63
======
CLASS C

Net asset value, offering price and redemption price per Class C share* $ 8.63
======
CLASS Z

Net asset value, offering price and redemption price per Class Z share $ 8.65
======
</TABLE>

- -----------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide-How to Sell Your
Shares-Contingent Deferred Sales Charges" in the Prospectus.

B-16

<PAGE>

REDUCTION AND WAIVER OF INITIAL SALES CHARGES-CLASS A SHARES

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 combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide-Alternative Purchase Plan" in the Prospectus.

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

(a) an individual;

(b) the individual's spouse, their children and their parents;

(d) 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);

(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;

(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse;

(g) one or more employee benefit plans of a company controlled by an
individual;

(h) 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); and

(i) (1) a client of a Prudential Securities financial adviser who gives
such financial adviser discretion to purchase the Prudential Mutual Funds for
his or her account only in connection with participation in a market timing
program and for which program Prudential Securities receives a separate advisory
fee or (2) a client of an unaffiliated registered investment adviser which is a
client of Prudential Securities financial adviser, if such unaffiliated adviser
has discretion to purchase the Prudential Mutual Funds for the accounts of his
or her customers but only if the client of such unaffiliated adviser
participates in a market timing program conducted by such unaffiliated adviser;
provided such accounts in the aggregate have assets of at least $15 million
invested in the Prudential Mutual Funds.

The Distributor 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 Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (NAV plus maximum sales charge) as of the
previous business day. See "How the Fund Values its Shares" in the Prospectus.
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 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 also 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 qualify to purchase Class A shares at net asset value by entering into
a Letter of Intent whereby they agree to enroll, within a thirteen month period,
a special number of eligible employees or participants (Participant 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 and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held either
directly with the Transfer Agent or through Prudential Securities. 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 be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.

B-17

<PAGE>

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 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 NAV. 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 investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal, except in the case of retirement and group plans.

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 oblige 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 charge 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 individual
participants in any retirement or group plans.

WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE-CLASS B SHARES

The Contingent Deferred Sales Charge (CDSC) is waived under circumstances
described in the Prospectus. See "Shareholder Guide-How to Sell Your
Shares-Waiver of Contingent Deferred Sales Charges-Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.

<TABLE>

<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION

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
considered disabled if he or she is
unable to engage in any substantial
gainful activity by reason of any
medically determinable physical or
mental impairment which can be
expected to result in death or to
be of long-continued and indefinite
duration.

A copy of the Social Security
Administration award letter or a
letter from a physician on the
physician's letterhead stating that
the shareholder (or, in the case of a
trust, the grantor) is permanently
disabled. The letter must also
indicate the date of disability.

Distribution from an IRA or 403(b) A copy of the distribution form from
Custodial Account the 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.

QUANTITY DISCOUNT-CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994

The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000.

B-18

<PAGE>

The quantity discount will be imposed at the following rates depending on
whether the aggregate value exceeded $500,000 or $1 million:

CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVEST
OR REDEMPTION PROCEEDS
-------------------------------------------
YEAR SINCE PURCHASE
PAYMENT MADE $500,000 TO $1 MILLION OVER $1 MILLION
- --------------------------------------- ------------------------ ----------------
<S> <C> <C>
First ..................... 3.0% 2.0%
Second ..................... 2.0% 1.0%
Third ..................... 1.0% 0%
Fourth and thereafter ...... 0% 0%

</TABLE>

You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.

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 the
shareholders the following privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For the
convenience of investors, all dividends and capital gains distributions are
automatically reinvested in full and fractional shares of the Fund at NAV. An
investor may direct the Transfer Agent in writing not less than 5 full business
days prior to the record date to have subsequent dividends and/or distributions
sent to him or her 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 dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such 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.

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,
respectively, of 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.

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
Structured Maturity Fund and 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) (Class A Shares)
(U.S. Treasury Money Market Series) (Class A Shares)
Prudential Municipal Series Fund

(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)

(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A Shares)

Prudential Tax-Free Money Fund

B-19

<PAGE>

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

Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty (60) 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.

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

Additional details about the Exchange Privilege for each of the Prudential
Mutual Funds are available from the Transfer Agent, Prudential Securities or
Prusec. The Exchange Privilege may be modified, terminated or suspended on sixty
(60) 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.

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>

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>

- -----------
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.

B-20

<PAGE>

See "Automatic Savings Accumulation Plan."

AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)

Under ASAP, 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
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Stock certificates are not
issued to ASAP participants.

Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide-How to Sell Your
Shares-Contingent Deferred Sales Charges" in the Prospectus.

In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan. See "Shareholder Investment Account-Automatic
Reinvestment of Dividends and/or Distributions."

Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The 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 exceed reinvested dividends and distributions, the
shareholder's original investment may be correspondingly reduced and ultimately
exhausted.

Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B or Class C shares. Shareholders
should consult their tax advisers regarding the tax consequences of the
systematic withdrawal 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 sheltered 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, the administration, custodial fees and other details are available
from Prudential Securities 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.

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.

B-21

<PAGE>

TAX-DEFERRED COMPOUNDING(1)
---------------------------

<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER SAVINGS IRA
------------- ---------- ---------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 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, E.G., 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 requirements in connection with such a program.

The mutual funds in the program may be purchased individually or as part of
the program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, individuals should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
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.

NET ASSET VALUE

Under the Investment Company Act, the Board of Directors are 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 sale 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, as provided by a
pricing service or principal market marker. 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 to be over-the-counter, are valued on the basis of
valuations provided by a pricing service 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 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 mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of trading on the applicable commodities exchange.
Quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents at the current rate obtained from a recognized bank or
dealer, and forward currency exchange contracts are valued at the current cost
of covering or offsetting such contacts. 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 judgment 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.
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 Trustees not to represent fair value.
Short-term securities with remaining maturities of more than 60 days, for which
market quotations are readily available, are valued at their current market
quotations as supplied by an independent

B-22

<PAGE>

pricing agent or principal market maker. 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
the 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.

TAXES, DIVIDENDS AND DISTRIBUTIONS

The Fund declares dividends on a daily basis in an amount based on actual
net investment income determined in accordance with generally accepted
accounting principles. A portion of such dividend may also include projected net
investment income. Such dividends will be payable monthly in additional shares
of the Fund unless otherwise requested by the shareholder.

Net capital gains, if any, will be distributed at least annually. In
determining the amount of capital gains to be distributed, any capital loss
carry forwards from prior years will be offset against capital gains. The Fund
had a capital loss carry forward for federal income tax purposes at December 31,
1997 of approximately $553,025,700, of which $202,439,400 expires in 1998,
$77,895,200 expires in 1999, $110,441,500 expires in 2000 and $162,249,600
expires in 2003. Such carryforward is after utilization of approximately
$120,901,200 of the net taxable gain realized and recognized during the year
ended December 31, 1997. Accordingly, no capital gains distribution (short-term
or long-term) is expected to be paid to shareholders until net capital gains
have been realized in excess of the aggregate of such amounts. Distributions, if
any, will be paid in additional Fund shares based on the NAV unless the
shareholder elects in writing not less than 5 full business days prior to the
record date to receive such distributions in cash.

The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. Under
Subchapter M, the Fund is not subject to federal income taxes on the taxable
income it distributes to shareholders, provided that it distributes to
shareholders each year at least 90% of its net investment income and net
short-term capital gains in excess of net long-term capital losses, if any.

Qualification as a regulated investment company under the Internal Revenue
Code generally requires, among other things, that the Fund (a) derive at least
90% of its annual gross income (without offset for losses from the sale or other
disposition of securities or foreign currencies) from interest, payments with
respect to securities loans, dividends and gains from the sale or other
disposition of securities or foreign currencies and certain financial futures,
options and forward contracts; and (b) diversify its holdings so that, at the
end of each quarter of the taxable year, (i) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the market 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).

The Fund generally will be subject to a nondeductible excise tax of 4% to
the extent that it does not meet certain minimum distribution requirements as of
the end of each calendar year. The Fund intends to make timely distributions of
the Fund's income in compliance with these requirements. As a result, it is
anticipated that the Fund will not be subject to the excise tax.

The Fund may purchase debt securities that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as income
earned by the Fund and therefore is subject to the distribution requirements of
the Internal Revenue Code. Because the original issue discount income earned by
the Fund in a taxable year may not be represented by cash income, the Fund may
have to dispose of other securities and use the proceeds to make distributions
to satisfy the Internal Revenue Code's distribution requirements. Debt
securities acquired by the Fund also may be subject to the market discount
rules.

Distributions of net investment income and realized net short-term capital
gains of the Fund are taxable to shareholders of the Fund as ordinary income,
whether such distributions are taken in cash or reinvested in additional shares.
Distributions of net capital gains (I.E., the excess of capital gains from the
sale of assets held for more than 12 months over net short-term capital losses),
if any, are taxable as capital gains regardless of whether the shareholder
received such distribution in additional shares or in cash or of how long shares
of the Fund have been held. The maximum capital gains rate for individuals is
28% with respect to assets held by the Fund for more than 12 months, but not
more than 18 months, and 20% with respect to assets held by the Fund for more
than 18 months. The maximum capital gains rate for corporate shareholders
currently is the same as the maximum tax rate for ordinary income. Distributions
and dividends paid by the Fund generally will not be eligible for the
dividends-received deduction for corporate shareholders. Tax-exempt shareholders
will not be required to pay taxes on amounts distributed to them.

Certain financial futures contracts held by the Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
Any gain or loss recognized on actual or deemed sales of these financial futures
contracts will be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. The Fund may be required to defer the
recognition of losses on financial futures contracts to the extent of any
unrecognized gains on related positions held by the Fund.

B-23

<PAGE>

The Fund's gains and losses on the sale, lapse, or other termination of
call options it holds on financial futures contracts will generally be treated
as gains and losses from the sale of financial futures contracts. If call
options written by the Fund expire unexercised, the premiums received by the
Fund give rise to short-term capital gains at the time of expiration. The Fund
may also have short-term gains and losses associated with closing transactions
with respect to call options written by the Fund. If call options written by the
Fund are exercised, the selling price of the financial futures contract is
increased by the amount of the premium received by the Fund, and the character
of the capital gain or loss on the sale of the futures contract depends on the
contract's holding period.

Upon the exercise of a put held by the Fund, the premium initially paid for
the put is offset against the amount received for the futures contract, bond or
note sold pursuant to the put thereby decreasing any gain (or increasing any
loss) realized on the sale. Generally, such gain or loss is short-term or
long-term capital gain or loss, depending on the holding period of the futures
contract, bond or note. However, in certain cases in which the put is not
acquired on the same day as the underlying securities identified to be used in
the put's exercise, gain on the exercise, sale or disposition of the put is
short-term capital gain. If a put is sold prior to exercise, any gain or loss
would be capital gain or loss, the character of which would depend on the
holding period of the put. If a put expires unexercised, the Fund would realize
capital loss, the character of which would depend on the holding period of the
put, in an amount equal to the premium paid for the put. In certain cases in
which the put and securities identified to be used in its exercise are acquired
on the same day, however, the premium paid for the unexercised put is added to
the basis of the identified securities. In certain cases, a put may affect the
holding period of the underlying security.

If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend or distribution will be treated for tax
purposes as being paid by the Fund and received by its shareholders on December
31 of the year in which such dividend was declared.

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 with respect to the Class B and Class C
shares. The per share distributions of net capital gains, if any, will be paid
in the same amount for Class A, Class B, Class C and Class Z shares. See "Net
Asset Value."

Any gain or loss realized upon a sale or redemption of shares of the Fund
by a shareholder who is not a dealer in securities will be treated as capital
gain or loss. In the case of an individual, any such capital gain will be
treated as short-term capital loss if the shares were held for not more than 12
months, gain taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and gain taxable at the maximum rate
of 20%, if such shares were held for more than 18 months. In the case of a
corporation, any such capital gain will be treated as long-term capital gain,
taxable at the same rates as ordinary income, if such shares were held for more
than 12 months. Any such capital loss will be treated as long-term capital loss
if the shares have been held for more than one year and otherwise as short-term
capital loss. However, any loss realized by a shareholder upon the sale of
shares of the Fund held by the shareholder for six months or less will be
treated as long-term capital loss to the extent of any capital gains
distributions received by the shareholder.

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 or distribution will
constitute a replacement of shares.

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.

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 or capital
gains distributions which are expected to be or have been announced.

The Fund may be subject to state or local tax in certain states where it is
deemed to be doing business. Further, in those states which have income tax
laws, the tax treatment of the Fund and of shareholders of the Fund with respect
to distributions by the Fund and sales on Fund shares may differ from federal
tax treatment. Distributions to, and sales of Fund shares by, shareholders may
be subject to additional state and local taxes.

B-24

<PAGE>

Statements as to the tax status of distributions to shareholders of the
Fund will be mailed annually. Shareholders are urged to consult their own tax
advisers regarding specific questions as to federal, state or local taxes.

PERFORMANCE INFORMATION

YIELD. The Fund may from time to time advertise its yield as calculated
over a 30-day period. The yield is determined separately for Class A, Class B,
Class C and Class Z shares. The yield will be computed by dividing the Fund's
net investment income per share earned during this 30-day period by the NAV per
share on the last day of this period.

Yield is calculated according to the following formula:

a - b
YIELD = 2 [(----- + 1)6-1]
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.

The yield for the 30-day period ended December 31, 1997 for the Fund's
Class A, Class B, Class C and Class Z shares was 8.42%, 8.16%, 8.17% and 8.93%,
respectively.

Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period. Yield for the Fund will vary depending 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 Board of Directors of the Fund has adopted procedures to ensure that
the Fund's yield is calculated in accordance with SEC regulations. Under those
procedures, limitations may be placed on yield to maturity calculations of
particular securities.

AVERAGE ANNUAL TOTAL RETURN. The Fund may also from time to time advertise
its average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.

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

P(1 + T)n = ERV

Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1000 investment 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
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.

The average annual total return with respect to the Class A shares for the
one year, five year and since inception (January 22, 1990) periods ended
December 31, 1997 was 8.30%, 10.55% and 11.27%, respectively. The average annual
total return for the Class B shares of the Fund for the one, five and ten year
periods ended on December 31, 1997 was 7.07%, 10.64% and 9.88%, respectively.
The average annual total return for Class C shares for the one year and since
inception (August 1, 1994) periods ended December 31, 1997 was 11.07% and
11.77%, respectively.The average annual total return for Class Z shares for the
one year and since inception (March 1, 1996) periods ended December 31, 1997 was
12.96% and 11.88%, respectively.

AGGREGATE TOTAL RETURN. The Fund may from time to time advertise its
aggregate total return. Aggregate total return is determined separately for
Class A, Class B, Class C and Class Z shares. See "How the Fund Calculates
Performance" in the Prospectus.

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

ERV - P
-------
P

Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical
$1000 investment made at the beginning of the 1, 5 or 10 year
periods.

B-25

<PAGE>

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.

The aggregate total return with respect to the Class A shares for the one
year, five year and since inception periods ended December 31, 1997 was 12.81%,
71.96% and 143.28%, respectively. The aggregate total return with respect to the
Class B shares of the Fund for the one, five and ten-year periods ended on
December 31, 1997 was 12.07%, 66.80% and 156.38%, respectively. The aggregate
total return for Class C shares for the one year and since inception (August 1,
1994) periods ended December 31, 1997 was 12.07% and 46.27%, respectively. The
aggregate total return for the Class Z shares for the one year and since
inception (March 1, 1996) periods ended December 31, 1997 were 12.96% and
22.87%.

From time to time, the performance of the Fund may be measured against
various 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

[The following table represents a chart in the printed piece.]

A LOOK AT PERFORMANCE OVER THE LONG-TERM
AVERAGE ANNUAL RETURNS
1/1/26-12/31/97

Common Stocks 11.0%
Long-Term Gov't. Bonds 5.2%
Inflation 3.1%

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

1Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation-1997 Yearbook
(annually updates the work of Roger G. Ibbotson and Rex A. Sinquefield). 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.

CUSTODIAN, TRANSFER AND DIVIDEND
DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to agreements with the Fund.

Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
It 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, payment of dividends and distributions, and related functions. For
these services, PMFS receives an annual fee of $13.00 per shareholder account, a
new account set-up fee of $2.00 for each manually established 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 communications expenses and other
costs. For the fiscal year ended December 31, 1997, the Fund incurred fees of
$3,538,000 for the services of PMFS.

Price Waterhouse 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-26

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.0%
BONDS--92.9%
- ------------------------------------------------------------------------------------------------------------------------------
Aerospace--0.9%
K & F Industries, Inc. B3 9.25% 10/15/07 $ 6,300 $ 6,457,500
Sequa Corp., Sr. Sub. Notes B3 9.375 12/15/03 34,450 35,828,000
--------------
42,285,500
- ------------------------------------------------------------------------------------------------------------------------------
Automotive Parts--3.1%
Foamex JPS Automotive LLC, Sr. Notes B2 11.125 6/15/01 21,700 (d) 24,195,500
Hayes Wheels Int'l., Inc.,
Sr. Sub. Notes B3 11.00 7/15/06 32,000 35,680,000
Sr. Sub. Notes B3 9.125 7/15/07 17,500 18,090,625
Standyne Automotive Corp., Sr. Sub. Notes Caa1 10.25 12/15/07 14,400 14,400,000
Trident Automotive Plc., Sr. Sub. Notes B2 10.00 12/15/05 15,000 15,375,000
Venture Holdings, Sr. Notes B2 9.50 7/01/05 21,500 21,822,500
Walbro Corp., Sr. Notes B2 10.125 12/15/07 9,000 9,225,000
--------------
138,788,625
- ------------------------------------------------------------------------------------------------------------------------------
Broadcasting & Other Media--7.8%
American Lawyer Media, Inc.,
Sr. Disc. Notes, Zero Coupon (until 12/15/02) B3 12.25 12/15/08 7,850 4,435,250
Sr. Sub. Notes B1 9.75 12/15/07 10,400 10,556,000
Capstar Radio Broadcasting,
Sr. Disc. Notes, Zero Coupon (until 2/1/02) NR 12.75 2/01/09 15,200 10,792,000
Sr. Sub. Notes NR 9.25 7/01/07 16,500 16,582,500
Fox/Liberty Networks LLC.,
Sr. Disc. Notes, Zero Coupon (until 8/1/02) B1 9.75 8/15/07 24,250 15,520,000
Sr. Notes B1 8.875 8/15/07 15,000 14,962,500
Globo Comunicacoes, Sr. Notes (Brazil) B+(a) 10.50 12/20/06 23,900 23,003,750
Grupo Televisa S. A., Sr. Notes (Mexico) Ba3 11.375 5/15/03 15,500 16,817,500
Hollinger Int'l. Publish., Inc., Sr. Notes Ba3 8.625 3/15/05 10,000 10,350,000
Lamar Advertising Co.,
Sr. Sub. Notes B1 9.625 12/01/06 13,500 14,512,500
Sr. Sub. Notes B1 8.625 9/15/07 7,500 7,678,125
Outdoor Systems, Inc.,
Sr. Sub. Notes B1 9.375 10/15/06 29,000 30,812,500
Sr. Sub. Notes B1 8.875 6/15/07 49,000 51,205,000
Production Resource LLC., Sr. Sub. Notes Caa2 11.50 1/15/08 15,000 15,037,500
SFX Broadcasting, Inc., Sr. Sub. Notes B3 10.75 5/15/06 32,820 36,019,950
Sun Media Corp., Sr. Sub. Notes (Canada) B3 9.50 5/15/07 14,650 15,748,750
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-27

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Broadcasting & Other Media (cont'd.)
Telemundo Group, Inc., Sr. Disc. Notes B1 7.00% 2/15/06 $ 10,000 $ 10,500,000
TV Azteca S.A. De CV, Gtd. Sr. Notes (Mexico) Ba3 10.50 2/15/07 22,000 22,660,000
Young Broadcasting, Inc.,
Sr. Sub. Notes B2 10.125 2/15/05 13,300 13,965,000
Sr. Sub. Notes B2 8.75 6/15/07 6,000 5,910,000
--------------
347,068,825
- ------------------------------------------------------------------------------------------------------------------------------
Building & Related Industries--5.8%
American Builders, Sr. Sub. Notes B3 10.625 5/15/07 11,000 11,412,500
D.R. Horton, Inc., Sr. Notes Ba2 8.375 6/15/04 14,000 14,140,000
Falcon Building Prod., Inc.,
Sr. Sub. Disc. Notes, Zero Coupon (until 6/15/02) B3 10.50 6/15/07 24,100 15,906,000
Sr. Sub. Notes B3 9.50 6/15/07 20,150 20,603,375
Falcon Holdings Corp. L.P., Sr. Sub. Notes, PIK NR 11.00 9/15/03 31,872 34,341,655
Greystone Homes Corp., Sr. Notes Ba3 10.75 3/01/04 17,350 18,954,875
Kaufman & Broad Home Corp., Sr. Sub. Notes Ba3 9.625 11/15/06 30,000 31,800,000
Kevco, Inc., Sr. Sub. Notes B3 10.375 12/01/07 12,000 12,255,000
Koppers Industries, Inc., Sr. Sub. Notes B2 9.875 12/01/07 8,550 8,806,500
Nortek, Inc.,
Sr. Notes Ba3 9.25 3/15/07 26,000 26,520,000
Sr. Notes B1 9.125 9/01/07 32,500 32,987,500
NVR, Inc., Sr. Notes B2 11.00 4/15/03 15,600 16,926,000
U.S. Home Corp., Sr. Sub. Notes B1 8.88 8/15/07 15,000 15,187,500
--------------
259,840,905
- ------------------------------------------------------------------------------------------------------------------------------
Cable--8.5%
Adelphia Communications Corp., Sr. Notes B3 10.50 7/15/04 10,000 10,712,500
Cablevision Systems Corp., Sr. Sub. Notes B2 9.25 11/01/05 19,835 21,025,100
Comcast UK Cable Corp., Sr. Disc. Deb.,
Zero Coupon (until 11/15/00) B2 11.20 11/15/07 19,900 16,168,750
Diamond Cable Co., Sr. Disc. Notes, Zero Coupon
(until 3/31/04) (United Kingdom) B3 13.25 9/30/04 30,860 27,774,000
Echostar Communications Corp., Sr. Disc. Notes,
Zero Coupon (until 6/1/99) B2 12.875 6/01/04 32,210 29,472,150
Echostar Satellite, Sr. Disc. Notes, Zero Coupon
(until 3/15/00) B3 13.125 3/15/04 10,000 8,300,000
International Cabletel, Inc., Sr. Disc. Notes,
Zero Coupon (until 4/15/00) B3 12.75 4/15/05 25,950 21,798,000
Kablemedia Holdings, Sr. Disc. Notes, Zero Coupon
(until 8/1/01) (Germany) B3 13.625 8/01/06 12,000 8,760,000
Lenfest Communications, Inc., Sr. Notes Ba3 8.375 11/01/05 20,050 20,601,375
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-28

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Cable (cont'd.)
Rogers Cablesystems, Inc., (Canada)
Sr. Sec'd. Notes Ba3 10.00% 3/15/05 $ 61,075 $ 67,182,500
Sr. Sec'd. Deb. Ba3 10.00 12/01/07 12,000 13,140,000
Sr. Sec'd. Deb. Ba3 10.125 9/01/12 24,575 26,786,750
Rogers Cantel, Inc., (Canada)
Deb. Ba3 9.375 6/01/08 44,500 46,947,500
Sr. Sub. Notes NR 8.80 10/01/07 42,350 42,138,250
Star Choice Communications, Inc. (Canada) NR 13.00 12/15/05 5,250 (d) 5,407,500
Telewest Plc., Sr. Disc. Deb., Zero Coupon (until
10/1/00)
(United Kingdom) B1 11.00 10/01/07 20,500 15,938,750
--------------
382,153,125
- ------------------------------------------------------------------------------------------------------------------------------
Casinos--6.2%
Boyd Gaming Corp., Sr. Sub. Notes B1 9.50 7/15/07 32,375 33,993,750
Empress River Casino Finance Corp., Sr. Notes Ba3 10.75 4/01/02 16,000 17,280,000
Fitzgeralds Gaming Corp., Sr. Sec. Notes, B3 12.25 12/15/04 14,000 14,105,000
Grand Casino, Inc.,
First Mtge. Notes Ba3 10.125 12/01/03 41,100 44,388,000
Sr. Notes B2 9.00 10/15/04 16,250 16,331,250
Horseshoe Gaming LLC.,
Sr. Notes NR 12.75 9/30/00 17,270 19,169,700
Sr. Sub. Notes B3 9.375 6/15/07 27,100 28,522,750
Majestic Star Casino LLC., Sr. Notes B2 12.75 5/15/03 6,000 6,442,500
Trump Atlantic City Assocs., First Mtge. Notes B1 11.25 5/01/06 65,250 64,371,875
Venetian Casino Resort LLC., First Mtge. Notes B3 12.25 11/15/04 34,000 34,085,000
--------------
278,689,825
- ------------------------------------------------------------------------------------------------------------------------------
Chemicals--2.7%
Huntsman Corp., Sr. Sub. Notes B2 9.50 7/01/07 30,000 31,500,000
ISP Holdings, Inc., Sr. Notes Ba3 9.75 2/15/02 29,081 30,680,455
Pharmaceutical Fine Chemicals, Sr. Sub. Notes
(Luxembourg) B3 9.75 11/15/07 10,000 10,150,000
Sterling Chemical Holdings, Inc.,
Sr. Disc. Notes, Zero Coupon (until 8/15/01) Caa 13.50 8/15/08 21,000 12,600,000
Sr. Sub. Notes B3 11.75 8/15/06 10,000 10,200,000
Terra Industries, Inc., Sr. Notes Ba3 10.50 6/15/05 24,100 25,847,250
--------------
120,977,705
- ------------------------------------------------------------------------------------------------------------------------------
Computer Services--0.5%
Viasystems, Inc., Sr. Sub. Notes B3 9.75 6/01/07 20,000 20,650,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-29

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Products--2.4%
Consumers Int'l., Inc., Sr. Sec'd. Notes Ba3 10.25% 4/01/05 $ 16,600 $ 18,094,000
Desa Int'l., Inc., Sr. Sub. Notes B3 9.875 12/15/07 11,500 11,816,250
Doskocil, Sr. Sub. Notes B3 10.125 9/15/07 8,000 8,280,000
Holmes Products Corp., Gtd Notes B3 9.875 11/15/07 9,825 9,984,656
Imperial Holly Corp., Sr. Sub. Notes B2 9.75 12/15/07 18,500 18,615,625
Lifestyle Furnishings, Inc., Sr. Sub. Notes B1 10.875 8/01/06 27,500 30,525,000
Sealy Mattress Co.,
Sr. Sub. Disc. Notes, Zero Coupon (until 12/1/02) B3 10.875 12/15/07 10,000 6,050,000
Sr. Sub. Notes B3 9.875 12/15/07 4,750 4,862,813
--------------
108,228,344
- ------------------------------------------------------------------------------------------------------------------------------
Drugs & Health Care--7.5%
Alaris Med. Systems, Inc., Sr. Sub. Notes NR 9.75 12/01/06 24,475 25,759,937
Alliance Imaging, Inc., Sr. Sub. Notes B3 9.625 12/15/05 12,000 12,135,000
Dade International, Inc., Sr. Sub. Notes B3 11.125 5/01/06 26,850 29,870,625
Fresenius Med Care Capital Trust, Gtd. Notes NR 9.00 12/01/06 55,290 57,778,050
Integrated Health Services, Inc.,
Sr. Sub. Notes NR 10.25 4/30/06 37,500 39,375,000
Sr. Sub. Notes B2 9.50 9/15/07 19,000 19,570,000
Sr. Sub. Notes B2 9.25 1/15/08 10,000 10,200,000
Paragon Health Network, Inc.,
Sr. Sub. Disc. Notes, Zero Coupon (until 11/1/02) B3 10.50 11/01/07 25,900 16,058,000
Sr. Sub. Notes B3 9.50 11/01/07 10,000 10,025,000
Tenet Healthcare Corp.,
Sr. Sub. Notes Ba3 10.125 3/01/05 46,600 50,910,500
Sr. Sub. Notes Ba3 8.625 1/15/07 23,500 24,263,750
Vencor, Inc., Sr. Sub. Notes B1 8.625 7/15/07 40,700 40,598,250
--------------
336,544,112
- ------------------------------------------------------------------------------------------------------------------------------
Energy--6.4%
AES Corp.,
Sr. Sub. Exch. Ba1 8.375 8/15/07 28,675 28,603,312
Sr. Sub. Notes Ba1 10.25 7/15/06 35,000 37,800,000
Sr. Sub. Notes Ba1 8.50 11/01/07 25,000 25,031,250
Anker Coal Group, Inc., Sr. Notes B3 9.75 10/01/07 13,600 13,532,000
Benton Oil & Gas Co., Sr. Notes B2 11.625 5/01/03 11,300 12,458,250
Cliffs Drilling Co., Sr. Notes B1 10.25 5/15/03 12,800 13,824,000
DI Industies, Inc., Sr. Notes B1 8.875 7/01/07 9,750 10,091,250
Forcenergy, Inc., Sr. Sub. Notes B2 9.50 11/01/06 10,000 10,500,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-30

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Energy (cont'd.)
McDermott J. Ray, Sr. Sub. Notes B1 9.375% 7/15/06 $ 22,100 $ 23,757,500
Parker Drilling Co., Sr. Notes (cost $13,493,240;
purchased 11/5/96) B1 9.75 11/15/06 13,600 (b) 14,620,000
Plains Resources, Inc., Sr. Sub. Notes B2 10.25 3/15/06 11,000 11,852,500
Pogo Producing Co., Sr. Sub. Notes B1 8.75 5/15/07 15,600 15,990,000
Snyder Oil Corp., Sr. Sub. Notes B2 8.75 6/15/07 16,300 16,401,875
Transamerican Energy Corp., Sr. Sec'd. Disc. Notes,
Zero Coupon (until 6/1/99) B3 13.00 6/15/02 30,000 24,225,000
Vintage Petroleum, Inc.,
Sr. Sub. Notes B1 9.00 12/15/05 13,750 14,437,500
Sr. Sub. Notes B1 8.625 2/01/09 12,435 12,932,400
--------------
286,056,837
- ------------------------------------------------------------------------------------------------------------------------------
Financial Services--1.8%
Americredit Corp., Sr. Notes Ba2 9.25 2/01/04 19,100 19,100,000
Delta Financial Corp., Sr. Notes B1 9.50 8/01/04 11,150 11,066,375
First Nationwide Holdings, Inc.,
Sr. Notes B3 12.50 4/15/03 26,750 30,361,250
Sr. Sub. Notes Ba3 10.625 10/01/03 16,000 17,880,000
--------------
78,407,625
- ------------------------------------------------------------------------------------------------------------------------------
Food & Beverage--2.2%
Ameriserve Food Dist., Inc., Sr. Sub. Notes NR 10.125 7/15/07 37,945 39,462,800
Curtice Burns Foods, Inc., Sr. Sub. Notes B3 12.25 2/01/05 21,080 23,082,600
Fresh Del Monte Produce, N.V., Sr. Notes Ba3 10.00 5/01/03 17,450 18,148,000
PSF Holdings, LLC., Sr. Sec'd. Notes (cost
$11,408,403;
purchased 5/20/94 and 5/8/97) NR 11.00 9/17/03 11,050 (b) 11,879,277
Southern Foods Group L.P., Sr. Sub. Notes B2 9.875 9/01/07 6,850 7,158,250
--------------
99,730,927
- ------------------------------------------------------------------------------------------------------------------------------
Industrials--0.8%
Insilco Corp., Sr. Sub. Notes B3 10.25 8/15/07 12,800 13,440,000
Trench Electric S.A., Gtd. Sr. Sub. Notes
(Netherlands) B3 10.25 12/15/07 20,000 20,350,000
--------------
33,790,000
- ------------------------------------------------------------------------------------------------------------------------------
Leisure & Tourism--3.5%
Ballys Health & Tennis Corp., Sr. Sub. Notes B3 9.875 10/15/07 11,500 11,672,500
Hedstrom Corp., Sr. Sub. Notes B3 10.00 6/01/07 9,400 9,470,500
Hedstrom Holdings, Inc., Sr. Disc. Notes
Zero Coupon (until 6/1/02) Caa 12.00 6/01/09 3,400 2,040,000
HMC Acquisition Properties, Inc., Sr. Notes Ba3 9.00 12/15/07 61,760 64,539,200
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-31

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Leisure & Tourism (cont'd.)
HMH Properties, Inc., Sr. Notes Ba3 8.875% 7/15/07 $ 34,750 $ 36,574,375
Hollywood Theaters, Inc., Sr. Sub. Notes B3 10.625 8/01/07 8,000 8,520,000
Regal Cinemas, Inc., Sr. Sub. Notes B1 8.50 10/01/07 10,500 10,605,000
Town Sports Int'l., Inc., Sr. Notes B2 9.75 10/15/04 13,450 13,315,500
--------------
156,737,075
- ------------------------------------------------------------------------------------------------------------------------------
Miscellaneous Services--1.5%
Coinstar, Inc., Sr. Sub. Disc. Notes, Zero Coupon
(until 10/1/99) NR 13.00 10/01/06 9,300 7,347,000
Color Spot Nurseries, Sr. Sub. Notes NR 10.50 12/15/07 12,000 12,120,000
Continental Global Group, Inc., Sr. Notes B2 11.00 4/01/07 10,000 10,650,000
Kindercare Learning Center, Inc., Sr. Sub. Notes B3 9.50 2/15/09 22,375 22,263,125
United Stationer Supply Co., Sr. Sub. Notes B3 12.75 5/01/05 12,000 13,650,000
--------------
66,030,125
- ------------------------------------------------------------------------------------------------------------------------------
Paper & Forest Products--2.5%
AEP Industry, Inc., Sr. Sub. Notes B2 9.875 11/15/07 8,300 8,528,250
Doman Inds., Ltd., Sr. Notes B1 9.25 11/15/07 5,450 5,286,500
Gaylord Container Corp.,
Sr. Notes B3 9.75 6/15/07 7,000 6,755,000
Sr. Sub. Disc. Notes Caa 12.75 5/15/05 18,988 20,317,160
Indah Kiat Fin. Mauritius, Ltd., Gtd. Sr. Notes
(Indonesia) Ba3 10.00 7/01/07 35,500 29,465,000
Pacific Lumber Co., Sr. Notes B3 10.50 3/01/03 29,153 30,173,355
Pindo Deli Fin. Mauritius, Ltd., Gtd. Sr. Notes
(India) Ba3 10.75 10/01/07 11,000 9,405,000
--------------
109,930,265
- ------------------------------------------------------------------------------------------------------------------------------
Plastic Products--0.4%
Applied Extrusion Technology, Inc., Sr. Notes B2 11.50 4/01/02 18,300 19,489,500
- ------------------------------------------------------------------------------------------------------------------------------
Retail--2.9%
Big 5 Corp., Sr. Notes B2 10.875 11/15/07 20,900 20,638,750
Brylane L.P., Sr. Sub. Notes B1 10.00 9/01/03 5,000 5,306,250
Cole National Group, Inc.,
Sr. Sub. Notes B2 9.875 12/31/06 16,200 17,253,000
Sr. Sub. Notes B1 8.625 8/15/07 15,650 15,552,188
Duane Reade Holding Corp., Sr. Sub. Notes Caa 15.00 9/15/04 5,000 4,175,000
French Fragrances, Inc., Sr. Notes B2 10.375 5/15/07 15,030 15,781,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-32

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Retail (cont'd.)
Leslies Poolmart, Inc., Sr. Notes B2 10.375% 7/15/04 $ 6,400 $ 6,656,000
Specialty Retailers, Inc., Sr. Notes Ba3 8.50 7/15/05 25,250 25,755,000
Syratech Corp., Sr. Notes B1 11.00 4/15/07 18,065 16,800,450
--------------
127,918,138
- ------------------------------------------------------------------------------------------------------------------------------
Steel & Metals--4.1%
AK Steel Corp., Sr. Notes Ba2 9.125 12/15/06 21,200 21,677,000
Armco, Inc., Sr. Notes B2 9.00 9/15/07 11,600 11,368,000
International Wire Group, Inc., Sr. Sub. Notes B3 11.75 6/01/05 18,500 20,303,750
Kaiser Aluminum & Chemical Corp., Sr. Sub. Notes B2 12.75 2/01/03 32,180 34,231,475
Metallurg, Inc., Sr. Notes B3 11.00 12/01/07 6,550 6,713,750
Sheffield Steel Corp., First Mtge. Caa2 11.50 12/01/05 11,000 11,440,000
Silgan Holdings, Inc., Sr. Sub. Deb. B1 9.00 6/01/09 13,000 13,292,500
WCI Steel, Inc., Sr. Sec'd. Notes B2 10.00 12/01/04 34,000 34,765,000
Wheeling Pittsburgh Corp., Sr. Notes B2 9.25 11/15/07 28,150 27,305,500
--------------
181,096,975
- ------------------------------------------------------------------------------------------------------------------------------
Supermarkets--0.9%
Pantry, Inc., Sr. Sub. Notes B3 10.25 10/15/07 22,250 22,806,250
Pueblo Xtra Int'l., Inc., Sr. Notes B3 9.50 8/01/03 8,250 7,816,875
Southland Corp., Sr. Sub. Deb. B1 12.00 6/15/09 10,000 10,000,000
--------------
40,623,125
- ------------------------------------------------------------------------------------------------------------------------------
Technology--0.7%
Details Holdings Corp., Sr. Disc. Notes,
Zero Coupon (until 11/15/02) Caa1 12.50 11/15/07 11,200 6,552,000
Details, Inc., Sr. Sub. Notes B3 10.00 11/15/05 11,375 11,687,813
DII Group, Inc., Sr. Sub. Notes B1 8.50 9/15/07 11,500 11,298,750
--------------
29,538,563
- ------------------------------------------------------------------------------------------------------------------------------
Telecommunications--15.5%
Barak ITC Int'l., Sr. Sub. Disc. Notes,
Zero Coupon (until 11/1/02) (Israel) B3 12.50 11/15/07 36,500 20,622,500
CCPR Services, Inc., Sr. Sub. Notes B2 10.00 2/01/07 10,000 9,500,000
Cellnet Data Systems, Inc., Sr. Disc. Notes,
Zero Coupon (until 10/1/02) NR 14.00 10/01/07 44,455 (d) 19,782,475
Centennial Cellular Corp., Sr. Notes B1 10.125 5/15/05 11,945 12,960,325
Communication Cellular, S.A., Sr. Def'd. Bonds,
Zero Coupon (until 11/15/00) (Columbia) B3 13.125 11/15/03 34,750 26,323,125
Concentric Network Corp., Sr. Notes NR 12.75 12/15/07 7,500 (d) 7,687,500
Crown Castle Int'l. Corp., Sr. Disc. Notes,
Zero Coupon (until 11/1/02) B3 10.625 11/15/07 11,450 7,156,250
Dialog Corp., Sr. Sub. Notes (United Kingdom) B3 11.00 11/15/07 18,000 18,765,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-33

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Telecommunications (cont'd.)
Geotek Communications, Inc., Sr. Conv. Notes NR 12.00% 2/15/01 $ 12,000 $ 9,000,000
Grupo Iusacell S.A. de CV, Sr. Notes (Mexico) B2 10.00 7/15/04 15,650 15,728,250
GST Equipment, Inc., Sr. Sec'd. Notes NR 13.25 5/01/07 10,000 11,400,000
GST Telecommunications, Inc.,
Conv. Sr. Disc. Notes, Zero Coupon (until
12/15/00) NR 13.875 12/15/05 2,262 2,171,520
Sr. Sub. Notes NR 12.75 11/15/07 13,875 14,499,375
GST USA, Inc., Sr. Disc. Notes, Zero Coupon (until
12/15/00) NR 13.875 12/15/05 16,096 12,313,440
Highwaymaster Communications, Inc., Sr. Notes Caa1 13.75 9/15/05 8,300 8,424,500
ICG Holdings, Inc., Sr. Disc. Notes, Zero Coupon
(until 9/15/00) NR 13.50 9/15/05 15,000 12,187,500
Impsat Corp., Sr. Notes B2 12.125 7/15/03 16,600 16,849,000
Intermedia Cap. Partners L.P., Sr. Notes B2 11.25 8/01/06 30,250 33,426,250
Intermedia Communications of Florida,
Sr. Disc. Notes, Zero Coupon (until 7/1/02) B2 11.25 7/15/07 27,500 20,006,250
Sr. Disc. Notes, Zero Coupon (until 5/15/01) B2 12.50 5/15/06 22,500 17,887,500
Sr. Notes B2 8.50 1/15/08 12,500 12,500,000
International Wireless Communications, Inc., Sr.
Disc. Notes NR Zero 8/15/01 12,000 (d) 6,000,000
Jacor Communications, Inc., Sr. Sub. Notes B2 9.75 12/15/06 37,050 39,828,750
Jordan Telecommunication Products, Sr. Sub. Notes NR 9.875 8/01/07 10,000 10,225,000
McLeod, Inc.,
Sr. Disc. Notes, Zero Coupon (until 3/1/02) B3 10.50 3/01/07 20,000 14,550,000
Sr. Notes B3 9.25 7/15/07 15,000 15,750,000
MGC Communications, Inc., Sr. Sec'd. Notes NR 13.00 10/01/04 8,200 (d) 8,405,000
Millicom Int'l. Cellular, Sr. Disc. Notes,
Zero Coupon (until 12/1/01) (Luxembourg) B3 13.50 6/01/06 10,000 7,350,000
Netia Holdings B.V., (Poland)
Gtd. Sr. Disc. Notes, Zero Coupon (until 11/1/01) B3 11.25 11/01/07 15,250 8,692,500
Gtd. Sr. Notes B3 10.25 11/01/07 14,000 13,440,000
Nextel Communications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 9/1/02) B3 10.65 9/15/07 25,500 16,128,750
Sr. Disc. Notes, Zero Coupon (until 10/31/02) B3 9.75 10/31/07 75,000 46,031,250
Nextlink Communications, Inc., Sr. Notes B3 9.625 10/01/07 11,600 11,977,000
Pagemart Nationwide, Inc., Sr. Disc. Notes,
Zero Coupon (until 2/1/00) NR 15.00 2/01/05 23,000 19,665,000
Price Communications Cellular Corp., Sr. Disc. Notes NR 13.50 8/01/07 8,000 (d) 5,120,000
Price Communications Wireless, Sr. Sub. Notes
Zero Coupon (until 8/1/02) NR 11.75 7/15/07 10,000 10,850,000
PriCellular Wireless Corp.,
Sr. Disc. Notes, B3 14.00 11/15/01 13,270 14,762,875
Sr. Disc. Notes, Zero Coupon (until 10/1/98) B3 12.25 10/01/03 15,850 16,048,125
Primus Telecommunications Group, Sr. Notes B3 11.75 8/01/04 12,250 13,107,500
PTC Int'l. Fin. B.V., Sr. Sub. Disc. Notes,
Zero Coupon (until 7/1/02) B+(a) 10.75 7/01/07 23,900 15,296,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-34

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Telecommunications (cont'd.)
Qwest Communications Int'l., Inc., Sr. Disc. Notes,
Zero Coupon (until 10/15/02) B2 9.47% 10/15/07 $ 26,400 $ 18,018,000
RCN Corp., Sr. Disc. Notes, Zero Coupon (until
10/15/02) B3 11.125 10/15/07 35,350 22,182,125
Telesystem Int'l. Wireless, Inc., (Canada)
Sr. Disc. Notes, Zero Coupon (until 11/1/02) Caa1 10.50 11/01/07 7,920 4,395,600
Sr. Disc. Notes, Zero Coupon (until 6/30/02) Caa1 13.25 6/30/07 23,530 14,882,725
UNIFI Communications, Inc., Sr. Notes NR 14.00 3/01/04 20,200 (d) 18,180,000
USN Communications, Inc., Sr. Notes Caa1 14.825 8/15/04 9,250 (d) 7,030,000
Winstar Communications, Inc., Conv. Sr. Disc. Notes,
Zero Coupon (until 10/15/00) NR 14.00 10/15/05 5,000 5,150,000
--------------
692,256,960
- ------------------------------------------------------------------------------------------------------------------------------
Textiles--1.0%
Foamex L.P. Cap. Corp., Sr. Sub. Notes B3 9.875 6/15/07 16,300 16,707,500
Polysindo Int'l. Finance Co., (Indonesia)
Gtd. Sec'd. Notes Ba3 9.375 7/30/07 11,800 8,496,000
Notes Ba3 11.375 6/15/06 10,000 8,100,000
Worldtex, Inc., Sr. Notes B1 9.625 12/15/07 12,300 12,607,500
--------------
45,911,000
- ------------------------------------------------------------------------------------------------------------------------------
Transportation/Trucking/Shipping--1.9%
Autopistas Del Sol S.A., Sr. Notes (Argentina) NR 10.25 8/01/09 10,000 9,200,000
Espirito Santo Centrais Electric, Sr. Notes
(Luxembourg) B1 10.00 7/15/07 20,500 18,245,000
Kitty Hawk, Inc., Sr. Sec'd. Notes B1 9.95 11/15/04 20,275 20,781,875
MRS Logistica S.A., Sr. Notes (Brazil) B(a) 10.625 8/15/05 12,500 11,250,000
Stena AB, Sr. Notes (Sweden) Ba2 8.75 6/15/07 10,000 10,100,000
TFM S.A. De CV, Sr. Disc. Deb.,
Zero Coupon (until 6/1/02) (Mexico) B2 11.75 6/15/09 18,000 11,340,000
Western Star Trucks Holdings, Ltd., Sr. Notes
(Canada) Ba2 8.75 5/01/07 5,000 5,150,000
--------------
86,066,875
- ------------------------------------------------------------------------------------------------------------------------------
Waste Management--1.4%
Allied Waste Industries, Inc.,
Sr. Disc. Notes, Zero Coupon (until 6/1/02) Caa 11.30 6/01/07 34,750 24,411,875
Sr. Sub. Notes B3 10.25 12/01/06 28,000 30,730,000
Companhia De Saneamento Basico, Notes (Mexico) NR 10.00 7/28/05 10,000 8,900,000
--------------
64,041,875
--------------
Total corporate bonds (cost $4,022,598,831) 4,152,852,831
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-35

<PAGE>

Portfolio of Investments as of PRUDENTIAL HIGH YIELD FUND,
December 31, 1997 INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Description Shares (Note 1)
<S> <C> <C>
- ------------------------------------------------------------
PREFERRED STOCKS--2.8%
Cablevision Systems Corp.,
$11.125, PIK 3,632 $ 41,949,600
$11.125, PIK 54,527 6,297,813
$11.75, PIK 121,128 14,353,648
California Fed. Corp., $9.125 1,822,245 47,833,931
Hyperion Telecommunications,
$12.875 51,449 5,199,645
Viasystems, Inc., $8.00 153,000 3,131,260
Von Hoffman Corp., $13.50 160,000 5,000,000
--------------
Total preferred stocks
(cost $106,334,984) 123,765,897
--------------
- ------------------------------------------------------------
COMMON STOCKS(c)--0.3%
Cellnet Data Systems, Inc.
(cost $1,080; purchased
6/25/97) 216,000 (b) 1,674,000
Coinstar, Inc. 65,100 618,450
Dr Pepper Bottling Co., Cl. A 72,580 1,487,890
EnviroSource, Inc. 428,333 1,284,999
Gaylord Container Corp., Cl. A 324,735 1,867,226
Hedstrom Holdings, Inc. 206,223 257,779
Nextel Communications, Inc. 135,299 3,517,774
Pagemart Nationwide, Inc. 71,750 645,750
Peachtree Cable Assn., Ltd. 31,559 299,810
PM Holdings Corp. 3,679 1,931,475
--------------
Total common stocks
(cost $8,243,009) 13,585,153
--------------
- ------------------------------------------------------------
COMMON TRUST UNITS(c)--0.7% Units
PSF Holdings, LLC.,
(cost $32,569,430;
purchased 3/8/94) 951,717 (b)(e) 31,406,661
--------------
- ------------------------------------------------------------
WARRANTS(c)--0.3% Warrants
American Telecasting, Inc.,
expiring 8/10/00 41,000 410
Cellnet Data Systems, Inc.,
expiring 9/15/07 44,455 (d) 889,100
Cellular Communications Int'l.,
Inc., expiring 8/15/03 22,250 445,000
Clearnet Communications, Inc.,
expiring 9/15/05 (Canada) 66,495 598,455
Comcel, expiring 11/15/03
(Columbia) 29,000 2,030,000
Concentric Network Corp.,
expiring 1/1/49 7,500 (d) $ 0
Foamex JPS Automotive L.P.,
expiring 7/1/99 20,250 (d) 405,000
Gaylord Container Corp.,
expiring 11/1/02 417,518 2,400,728
Heartland Wireless
Communications, Inc., expiring
12/31/00 39,000 390
Highwaymaster Communications,
expiring 1/1/49 8,300 99,600
Intelcom Group, Inc., expiring
9/15/05 127,809 1,853,231
Intermedia Communications of
Florida, expiring 6/1/00 11,250 1,237,500
International Wireless
Communications, Inc.,
expiring 8/15/01 12,000 (d) 600,000
MGC Communications, Inc.,
expiring 10/1/04 8,200 (d) 0
Nextel Communications, Inc.,
expiring 12/15/98 14,273 3,854
expiring 4/25/99
(cost $0; acquired 4/13/95) 7,000 (b) 21,000
President Riverboat Casinos,
Inc., expiring 9/30/99 44,150 1,766
Price Communications Cellular
Corp., expiring 8/1/07 27,520 275
Primus Telecommunications Group,
expiring 8/1/04 12,250 (d) 122,500
Star Choice Communications, Inc.,
expiring 1/1/49 (Canada) 121,590 (d) 1,216
Sterling Chemical Holdings, Inc.,
expiring 8/15/08 5,450 163,500
UNIFI Communications, Inc.,
expiring 3/1/03 20,200 (d) 404,000
United Int'l. Holdings, Inc.,
expiring 11/15/99 44,500 534,000
USN Communications, Inc.,
expiring 1/1/49 92,500 (d) 0
--------------
Total warrants (cost $715,009) 11,811,525
--------------
Total long-term investments
(cost $4,170,461,263) 4,333,422,067
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36

<PAGE>

Statement of Assets and Liabilities PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1997
<S> <C>
Investments, at value (cost $4,224,260,811)............................................................. $ 4,387,221,615
Cash.................................................................................................... 442,109
Interest receivable..................................................................................... 77,259,492
Receivable for Fund shares sold......................................................................... 13,037,128
Deferred expenses and other assets...................................................................... 98,744
-----------------
Total assets......................................................................................... 4,478,059,088
-----------------
Liabilities
Payable for Fund shares reacquired...................................................................... 3,749,494
Due to Distributor...................................................................................... 1,928,612
Due to Manager.......................................................................................... 1,534,503
Accrued expenses........................................................................................ 1,335,940
Dividends payable....................................................................................... 1,041,743
-----------------
Total liabilities.................................................................................... 9,590,292
-----------------
Net Assets.............................................................................................. $ 4,468,468,796
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 5,172,932
Paid-in capital in excess of par..................................................................... 4,854,975,571
-----------------
4,860,148,503
Distribution in excess of net investment income...................................................... (1,041,743)
Accumulated net realized loss on investments......................................................... (553,598,768)
Net unrealized appreciation on investments........................................................... 162,960,804
-----------------
Net assets, December 31, 1997........................................................................... $ 4,468,468,796
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($1,730,473,248 / 200,080,467 shares of common stock issued and outstanding)...................... $8.65
Maximum sales charge (4.00% of offering price)....................................................... .36
Maximum offering price to public..................................................................... $9.01
Class B:
Net asset value, offering price and redemption price per share
($2,640,490,863 / 305,928,089 shares of common stock issued and outstanding)...................... $8.63
Class C:
Net asset value, offering price and redemption price per share
($55,879,347 / 6,473,965 shares of common stock issued and outstanding)........................... $8.63
Class Z:
Net asset value, offering price and redemption price per share
($41,625,338 / 4,810,657 shares of common stock issued and outstanding)........................... $8.65
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-38

<PAGE>

PRUDENTIAL HIGH YIELD FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1997
<S> <C>
Income
Interest.............................. $ 393,792,092
Dividends............................. 5,652,438
-----------------
Total Income....................... 399,444,530
-----------------
Expenses
Distribution fee--Class A............. 2,453,219
Distribution fee--Class B............. 19,418,413
Distribution fee--Class C............. 337,741
Management Fee........................ 17,569,047
Transfer agent's fees and expenses.... 4,538,000
Custodian's fees and expenses......... 354,000
Reports to shareholders............... 248,000
Registration fees..................... 167,000
Insurance expense..................... 72,000
Audit fee............................. 48,000
Legal fees and expenses............... 42,000
Directors' fees and expenses.......... 37,000
Miscellaneous......................... 54,257
-----------------
Total expenses..................... 45,338,677
-----------------
Net investment income.................... 354,105,853
-----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on investment
transactions.......................... 146,274,171
Net change in unrealized appreciation of
investments........................... 7,321,433
-----------------
Net gain on investments.................. 153,595,604
-----------------
Net Increase in Net Assets
Resulting from Operations................ $ 507,701,457
-----------------
-----------------
</TABLE>

PRUDENTIAL HIGH YIELD FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income....... $ 354,105,853 $ 360,853,565
Net realized gain on
investment
transactions............. 146,274,171 33,923,042
Net change in unrealized
appreciation of
investments.............. 7,321,433 75,350,872
---------------- ----------------
Net increase in net assets
resulting from
operations............... 507,701,457 470,127,479
---------------- ----------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (139,641,643) (127,419,210)
Class B.................. (207,750,363) (228,744,279)
Class C.................. (3,608,339) (2,463,825)
Class Z.................. (3,105,508) (2,226,251)
---------------- ----------------
(354,105,853) (360,853,565)
---------------- ----------------
Dividends in excess of net
investment income
Class A.................. (8,405,450) (3,542,829)
Class B.................. (12,505,119) (6,360,123)
Class C.................. (217,197) (68,506)
Class Z.................. (186,930) (61,900)
---------------- ----------------
(21,314,696) (10,033,358)
---------------- ----------------
Fund share transactions (Net of
share conversions) (Note 5)
Net proceeds from shares
sold..................... 2,751,808,904 2,157,396,910
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 185,528,878 181,172,994
Cost of shares reacquired... (2,836,907,445) (2,293,331,143)
---------------- ----------------
Net increase in net assets
from Fund share
transactions............. 100,430,337 45,238,761
---------------- ----------------
Total increase................. 232,711,245 144,479,317
Net Assets
Beginning of year.............. 4,235,757,551 4,091,278,234
---------------- ----------------
End of year.................... $ 4,468,468,796 $ 4,235,757,551
---------------- ----------------
---------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-39

<PAGE>

Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
Prudential High Yield Fund, Inc. (the 'Fund') is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The primary investment objective of the Fund is to maximize current income
through investment in a diversified portfolio of high yield fixed-income
securities which, in the opinion of the Fund's investment adviser, do not
subject the Fund to unreasonable risks. As a secondary investment objective, the
Fund will seek capital appreciation but only when consistent with its primary
objective. Lower rated or unrated (i.e., high yield) securities are more likely
to react to developments affecting market risk (general market liquidity) and
credit risk (an issuer's inability to meet principal and interest payments on
its obligations) than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic developments in a specific industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: Portfolio securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at prices provided by
principal market makers and pricing agents. Any security for which the primary
market is on an exchange is valued at the last sales price on such exchange on
the day of valuation or, if there was no sale on such day, the last bid price
quoted on such day. Securities issued in private placements are valued at the
bid price or the mean between the bid and asked prices, if available, provided
by principal market makers. Any security for which a reliable market quotation
is unavailable is valued at fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
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, which approximates market value.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, under triparty repurchase
agreements as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest and, to the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. 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'). Certain issues of restricted securities held by the Fund at
December 31, 1997 are currently under contract to be registered. Restricted
securities, sometimes referred to as private placements, are valued pursuant to
the valuation procedures noted above.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on an identified cost basis. Interest income is
recorded on an accrual basis and dividend income is recorded on the ex-dividend
date. The Fund accretes original issue discounts as adjustments to interest
income. Income from payment-in-kind bonds is recorded daily based on an
effective interest method. 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.
Federal Income Taxes: It is the intent of the Fund to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
Dividends and Distributions: The Fund declares daily and pays dividends of net
investment income monthly and makes distributions at least annually of any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
market discount and wash sales.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with 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 distributions in excess of net
investment income by $21,307,352, increase accumulated net realized loss on
investments by $10,419,056 and
- --------------------------------------------------------------------------------
B-40

<PAGE>

Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
decrease paid in capital in excess of par by $10,888,296. This was primarily
resulting from: (i) sales of securities purchased with market discounts and,
(ii) an overdistribution of taxable income for the year ended December 31, 1997.
Net investment income, net realized gains and net assets were not affected by
this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement PIMF 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'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the Fund's average daily net assets up to $250 million,
.475 of 1% of the next $500 million, .45 of 1% of the next $750 million, .425 of
1% of the next $500 million, .40 of 1% of the next $500 million, .375 of 1% of
the next $500 million and .35 of 1% of the Fund's average daily net assets in
excess of $3 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, B, C and Z shares of the
Fund. The Fund compensates PSI 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 for Class A, B and C shares are accrued daily and payable
monthly. No distribution or service fees are paid to PSI as distributor of the
Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI with respect to
Class A, B and C shares, for distribution-related activities at an annual rate
of up to .30 of 1%, .75 of 1% and 1%, of the average daily net assets of the
Class A, B and C shares, respectively. Such expenses under the Plans were .15 of
1%, .75 of 1% and .75 of 1% of the average daily net assets of the Class A, B
and C shares, respectively, for the year ended December 31, 1997.
PSI has advised the Fund that it has received approximately $1,239,500 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1997. From these fees, PSI paid such sales charges to Pruco
Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended December 31, 1997, it received
approximately $4,064,800 and $32,300 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM and PIC 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 an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement during the year
ended December 31, 1997. The Funds pay a commitment fee at an annual rate of
.0555 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 and during the year ended December 31,
1997, the Fund incurred fees of approximately $3,538,000 for the services of
PMFS. As of December 31, 1997, $294,500 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1997 were $4,675,272,951 and $4,532,020,344,
respectively.
The federal income tax basis of the Fund's investments, including short-term
investments, as of December 31, 1997 was $4,224,833,888; accordingly, net
unrealized appreciation for federal income tax purposes was $162,387,727 (gross
unrealized appreciation--$205,405,586; gross unrealized
depreciation--$43,017,859).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1997 of approximately $553,025,700 of which $202,439,400 expires in
1998, $77,895,200 expires in 1999, $110,441,500 expires in 2000
- --------------------------------------------------------------------------------
B-41

<PAGE>

Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
and $162,249,600 expires in 2003. Such carryforward is after utilization of
approximately $120,901,200 of net taxable gains realized and recognized during
the year ended December 31, 1997. Accordingly, no capital gains distribution is
expected to be paid to shareholders until net gains have been realized in excess
of the aggregate of such amounts.
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4.00%. 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. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. 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. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
The Fund has 3 billion shares of $.01 par value common stock authorized; equally
divided into four classes, designated Class A, Class B, Class C and Class Z
shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ------------ ---------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold................... 193,384,884 $ 1,647,640,589
Shares issued in reinvestment
of dividends and
distributions............... 9,414,309 80,204,534
Shares reacquired............. (210,193,785) (1,791,846,142)
------------ ---------------
Net decrease in shares
outstanding before
conversions................. (7,394,592) (64,001,019)
Shares issued upon conversion
from Class B................ 20,996,980 178,917,604
------------ ---------------
Net increase in shares
outstanding................. 13,602,388 $ 114,916,585
------------ ---------------
------------ ---------------
Year ended December 31, 1996:
Shares sold................... 131,810,870 $ 1,086,630,794
Shares issued in reinvestment
of dividends and
distributions............... 8,520,554 69,971,317
Shares reacquired............. (156,945,056) (1,293,344,935)
------------ ---------------
Net decrease in shares
outstanding before
conversions................. (16,613,632) (136,742,824)
Shares issued upon conversion
from Class B................ 39,887,682 327,279,932
------------ ---------------
Net increase in shares
outstanding................. 23,274,050 $ 190,537,108
------------ ---------------
------------ ---------------
<CAPTION>
Class B Shares Amount
- ------------------------------ ------------ ---------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold................... 118,393,095 $ 1,004,044,328
Shares issued in reinvestment
of dividends and
distributions............... 11,760,615 99,976,935
Shares reacquired............. (113,114,191) (959,505,335)
------------ ---------------
Net increase in shares
outstanding before
conversion.................. 17,039,519 144,515,928
Shares reacquired upon
conversion into Class A..... (21,040,398) (178,917,604)
------------ ---------------
Net decrease in shares
outstanding................. (4,000,879) $ (34,401,676)
------------ ---------------
------------ ---------------
Year ended December 31, 1996:
Shares sold................... 115,557,562 $ 947,645,600
Shares issued in reinvestment
of dividends and
distributions............... 13,114,875 107,516,476
Shares reacquired............. (112,666,220) (923,331,159)
------------ ---------------
Net increase in shares
outstanding before
conversion.................. 16,006,217 131,830,917
Shares reacquired upon
conversion into Class A..... (39,936,363) (327,279,932)
------------ ---------------
Net decrease in shares
outstanding................. (23,930,146) $ (195,449,015)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- ------------------------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold................... 5,931,868 $ 50,289,762
Shares issued in reinvestment
of dividends and
distributions............... 257,238 2,191,113
Shares reacquired............. (4,892,651) (41,327,251)
------------ ---------------
Net increase in shares
outstanding................. 1,296,455 $ 11,153,624
------------ ---------------
------------ ---------------
Year ended December 31, 1996:
Shares sold................... 8,109,246 $ 66,598,614
Shares issued in reinvestment
of dividends and
distributions............... 178,716 1,465,941
Shares reacquired............. (6,047,207) (49,472,410)
------------ ---------------
Net increase in shares
outstanding................. 2,240,755 $ 18,592,145
------------ ---------------
------------ ---------------
<CAPTION>
Class Z
- ------------------------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold................... 5,863,890 $ 49,834,225
Shares issued in reinvestment
of dividends and
distributions............... 370,225 3,156,296
Shares reacquired............. (5,206,103) (44,228,717)
------------ ---------------
Net increase in shares
outstanding................. 1,028,012 $ 8,761,804
------------ ---------------
------------ ---------------
March 1, 1996(a) through
December 31, 1996:
Shares sold................... 6,826,290 $ 56,521,902
Shares issued in reinvestment
of dividends and
distributions............... 270,685 2,219,260
Shares reacquired............. (3,314,330) (27,182,639)
------------ ---------------
Net increase in shares
outstanding................. 3,782,645 $ 31,558,523
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-42

<PAGE>

Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............... $ 8.39 $ 8.19 $ 7.68 $ 8.70 $ 8.19
---------- ---------- ---------- -------- --------
Income from investment operations
Net investment income............................ .73 .75 .81 .80 .84
Net realized and unrealized gain (loss) on
investments................................... .30 .22 .53 (1.00) .52
---------- ---------- ---------- -------- --------
Total from investment operations.............. 1.03 .97 1.34 (.20) 1.36
---------- ---------- ---------- -------- --------
Less distributions
Dividends from net investment income............. (.73) (.75) (.81) (.80) (.84)
Distributions in excess of net investment
income........................................ (.04) (.02) (.02) (.02) (.01)
---------- ---------- ---------- -------- --------
Total distributions........................... (.77) (.77) (.83) (.82) (.85)
---------- ---------- ---------- -------- --------
Net asset value, end of year..................... $ 8.65 $ 8.39 $ 8.19 $ 7.68 $ 8.70
---------- ---------- ---------- -------- --------
---------- ---------- ---------- -------- --------
TOTAL RETURN(a).................................. 12.81% 12.60% 18.17% (2.35)% 17.32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................... $1,730,473 $1,564,429 $1,336,354 $161,435 $171,364
Average net assets (000)......................... $1,635,480 $1,385,143 $1,056,555 $165,517 $149,190
Ratios to average net assets:
Expenses, including distribution fees......... .69% .72% .75% .78% .76%
Expenses, excluding distribution fees......... .54% .57% .60% .63% .61%
Net investment income......................... 8.59% 9.20% 10.13% 9.86% 9.93%
For Classes A, B, C and Z shares:
Portfolio turnover rate.......................... 113% 89% 78% 74% 85%
</TABLE>
- ---------------
(a) 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 year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-43

<PAGE>

Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............... $ 8.38 $ 8.18 $ 7.67 $ 8.69 $ 8.19
---------- ---------- ---------- ---------- ----------
Income from investment operations
Net investment income............................ .68 .71 .76 .76 .79
Net realized and unrealized gain (loss) on
investments................................... .29 .22 .53 (1.00) .51
---------- ---------- ---------- ---------- ----------
Total from investment operations.............. .97 .93 1.29 (.24) 1.30
---------- ---------- ---------- ---------- ----------
Less distributions
Dividends from net investment income............. (.68) (.71) (.76) (.76) (.79)
Distributions in excess of net investment
income........................................ (.04) (.02) (.02) (.02) (.01)
---------- ---------- ---------- ---------- ----------
Total distributions........................... (.72) (.73) (.78) (.78) (.80)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year..................... $ 8.63 $ 8.38 $ 8.18 $ 7.67 $ 8.69
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN(a).................................. 12.07% 11.97% 17.49% (2.92)% 16.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................... $2,640,491 $2,596,207 $2,730,903 $3,311,323 $3,745,985
Average net assets (000)......................... $2,589,122 $2,652,883 $2,725,385 $3,566,709 $3,389,439
Ratios to average net assets:
Expenses, including distribution fees......... 1.29% 1.32% 1.35% 1.38% 1.36%
Expenses, excluding distribution fees......... .54% .57% .60% .63% .61%
Net investment income......................... 7.99% 8.62% 9.56% 9.28% 9.35%
</TABLE>
- ---------------
(a) 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 year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-44

<PAGE>

Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
------------------------------------------------ ------------
August 1,
1994(c)
Year Ended December 31, Through Year Ended
------------------------------- December 31, December 31,
1997 1996 1995 1994 1997
------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 8.38 $ 8.18 $ 7.67 $ 8.05 $ 8.39
------- ------- ------- ----- ------
Income from investment operations
Net investment income............................ .68 .71 .76 .32 .74
Net realized and unrealized gain (loss) on
investments................................... .29 .22 .53 (.37) .30
------- ------- ------- ----- ------
Total from investment operations.............. .97 .93 1.29 (.05) 1.04
------- ------- ------- ----- ------
Less distributions
Dividends from net investment income............. (.68) (.71) (.76) (.32) (.74)
Distributions in excess of net investment
income........................................ (.04) (.02) (.02) (.01) (.04)
------- ------- ------- ----- ------
Total distributions........................... (.72) (.73) (.78) (.33) (.78)
------- ------- ------- ----- ------
Net asset value, end of period................... $ 8.63 $ 8.38 $ 8.18 $ 7.67 $ 8.65
------- ------- ------- ----- ------
------- ------- ------- ----- ------
TOTAL RETURN(a).................................. 12.07% 11.97% 17.49% (0.79)% 12.96%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $55,879 $43,374 $24,021 $4,860 $ 41,625
Average net assets (000)......................... $45,032 $28,647 $12,063 $2,840 $ 35,808
Ratios to average net assets:
Expenses, including distribution fees......... 1.29% 1.32% 1.35% 1.48%(b) .54%
Expenses, excluding distribution fees......... .54% .57% .60% .73%(b) .54%
Net investment income......................... 7.99% 8.60% 9.49% 9.80%(b) 8.74%
<CAPTION>
March 1, 1996(d)
Through
December 31,
1996
--------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 8.34
------
Income from investment operations
Net investment income............................ .63
Net realized and unrealized gain (loss) on
investments................................... .07
------
Total from investment operations.............. .70
------
Less distributions
Dividends from net investment income............. (.63)
Distributions in excess of net investment
income........................................ (.02)
------
Total distributions........................... (.65)
------
Net asset value, end of period................... $ 8.39
------
------
TOTAL RETURN(a).................................. 8.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $ 31,748
Average net assets (000)......................... $ 28,978
Ratios to average net assets:
Expenses, including distribution fees......... .57%(b)
Expenses, excluding distribution fees......... .57%(b)
Net investment income......................... 9.31%(b)
</TABLE>
- ---------------
(a) 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.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45

<PAGE>

Report of Independent Accountants PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Prudential High Yield 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 High Yield Fund, Inc.
(the 'Fund') at December 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1998

B-46

<PAGE>

APPENDIX I
GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

Asset allocation is a technique for reducing risk and 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 devation 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 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.

This chart shows the long-term performance of various asset classes and the
rate of inflation.

[CHART]

- -------

Source: STOCKS, BONDS, BILLS AND INFLATION 1997 YEARBOOK, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
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 attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.

Small stock returns for 1926-1989 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 represented by a portfolio that
contains only one bond with a maturity of roughly 20 years. At the beginning of
each year a new bond with a then-current coupon replaces the old bond. 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).

IMPACT OF INFLATION. The "real" rate of investment return is that which
exceeds the rate of inflation, the percentage change in the value of consumer
goods and the general cost of living. A common goal of long-term investors is to
outpace the erosive impact of inflation on investment returns.

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 1987
through 1997. 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 "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on the historical total
returns, including the compounded effect over time, could be substantial.

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

YTD
---------------------------------------------------------------------------------------------
'87 '88 '89 '90 '91 '92 '93 '94 9/95

--------- --------- ---------- ----------- ------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury Bonds1 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 13.2%
U.S. Government
Mortgage Securities2 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 13.1%
U.S. Investment Grade
Corporate Bonds3 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 16.5%
U.S. High Yield
Corporate Bonds4 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 15.6%
World
Government Bonds5 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 17.1%
Difference between highest
and lowest return percent 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 4.0%
</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 Brothers World Government Index (Non U.S.) includes 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>

The chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.

[CHART]

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

Source: STOCKS, BONDS, BILLS AND INFLATION 1997 YEARBOOK, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This 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 only and should
not be construed to represent the yields of any Prudential Mutual Fund.

The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1976 through December 31, 1996. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed of one-third U.S. stock (S&P
500), one-third foreign stock (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.

[CHART]

- -----------
* Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past perfomance is not indicative of future results. The
S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securites, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.

II-3

<PAGE>

APPENDIX III-INFORMATION RELATING TO THE 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 Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 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 PIC1 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,
1996. Prudential (together with its subsidiaries) employs more than 92,000
persons worldwide, and maintains a sales force of approximately 13,000 agents
and 6,400 financial advisors. Prudential is a major issuer of annuities,
including variable annuities. Prudential seeks to develop innovative products
and services to meet consumer needs in each of its business areas. Prudential
uses the rock of Gibraltar as its symbol. The Prudential 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 50 million people
worldwide-one of every five people in the United States. Long one of the largest
issuers of individual life insurance, the Prudential has 22 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for approximately 1.6
million cars and insures approximately 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, 1996, Prudential had more than $322 billion in assets
under management. Prudential Investments, a business group of Prudential (of
which Prudential Mutual Funds is a key part) manages over $190 billion in assets
of institutions and individuals. In PERSONS & INVESTMENTS, May 12, 1996,
Prudential was ranked third in terms of total assets under management.

REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate broker network in the United States, has more than 34,000 brokers and
agents across the United States.2

HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.

FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

As of October 31, 1997 Prudential Investments Fund Management was the 17th
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities 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
portfolios.

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.
Additionally, 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.

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

1 Prudential Investments 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 Capital Corp. as the subadviser to Prudential Jennisen Series
Fund, Inc. and Xereator 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, 1996.

III-1

<PAGE>

EQUITY FUNDS. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years, Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. 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 Capital Corp., 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 the
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.3 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. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets-from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions 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 FORECASTERS 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 mutual
fund.

Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers 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.

Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.

Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).

TRADING DATA.4 On an average day, Prudential Mutual Funds' U.S. and foreign
equity trading desks traded $77 million in securities representing over 3.8
million shares with nearly 200 different firms. Prudential Mutual Funds' bond
trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.5 Prudential Mutual Funds'money market desk traded
$3.3 billion in money market securities on an average day, or over $800 billion
a year. They made a trade every 3 minutes of every trading day. In 1994, the
Prudential Mutual Funds affected more than 40,000 trades in money market
securities and held an average $20 billion of money market securities.6

Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.

-----------

3 As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.

4 Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.

5 Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage Funds.

6 As of December 31, 1994.

III-2

<PAGE>

INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.7

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 areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Adviser training program received a grade of A\'96 (compared to an industry
average of B+).

In 1995, Prudential Securities' equity research team ranked 9th in
Institutional Investor Magazine's 1993 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.8

In addition to training, Prudential Securities provides its financial
advisers 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
financial 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,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.

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7 As of December 31, 1994.

8 On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores are
produced by taking the number of votes awarded to an individual analyst and
weighting them based on the size of the voting institution. In total, the
magazine sends its survey to approximately 2,000 institutions and a group of
European and Asian institutions.

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