PRUDENTIAL NATIONAL MUNICIPALS FUND INC, 497, 1998-11-27

PRUDENTIAL NATIONAL MUNICIPALS FUND INC
497, 1998-11-27

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<PAGE>

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
(CLASS Z SHARES)

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PROSPECTUS DATED NOVEMBER 23, 1998

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Prudential National Municipals Fund, Inc. (the Fund), is an open-end, diversi-
fied management investment company whose investment objective is to seek a
high level of current income exempt from federal income taxes. In attempting
to achieve this objective, the Fund intends to invest substantially all of its
total assets in carefully selected long-term Municipal Bonds of medium quali-
ty, i.e., obligations of issuers possessing adequate but not outstanding ca-
pacities to service their debt. Subject to the limits described herein, the
Fund may also buy and sell financial futures for the purpose of hedging its
securities portfolio. There can be no assurance that the Fund's investment ob-
jective will be achieved. See "How the Fund is Managed--Investment Objective
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.

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Class Z shares are offered exclusively for sale to a limited group of invest-
ors. Only Class Z shares are offered through this Prospectus. The Fund also
offers Class A, Class B and Class C shares at NAV without any sales charge
through the attached Prospectus (the Retail Class Prospectus) which is a part
hereof.

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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 November 23, 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.

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AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.

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 EXPENSES

<TABLE>
<CAPTION>
CLASS Z
SHARES
-------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)................................................................ None
Maximum Sales Load or Deferred Sales Load Imposed on Reinvested
Dividends............................................................. None
Maximum Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, whichever is lower)........................... None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES
<CAPTION>
(as a percentage of average net assets) CLASS Z
SHARES*
-------
<S> <C>
Management Fees...................................................... .48%
12b-1 Fees........................................................... None
Other Expenses....................................................... .15%
---
Total Fund Operating Expenses........................................ .63%
---
</TABLE>
<TABLE>
<CAPTION>
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 Z................................... $6 $20 $35 $79
</TABLE>

The example should not be considered a representation of past or future ex-
penses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the vari-
ous costs and expenses that an investor in Class Z shares will bear,
whether directly or indirectly. For more complete descriptions of the vari-
ous costs and expenses, see "How the Fund Is Managed." "Other Expenses" in-
clude operating expenses of the Fund, such as directors' and professional
fees, registration fees, reports to shareholders, transfer agency and cus-
todian fees.
--------
* Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended December
31, 1997.

2
<PAGE>

THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND IS MANAGED--DISTRIBUTOR"
IN THE RETAIL CLASS PROSPECTUS:

Prudential Investment Management Services LLC serves as the Distributor of
Class Z shares and incurs the expenses of distributing the Fund's Class Z
shares under a Distribution Agreement with the Fund, none of which is paid for
or reimbursed by the Fund.

THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND VALUES ITS SHARES" IN
THE RETAIL CLASS PROSPECTUS:

Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
dividends. As long as the Fund declares dividends daily, the NAV of the
Class A, Class B, Class C and Class Z shares will generally be the same. It is
expected, however, that the Fund's dividends will differ by approximately the
amount of any distribution and/or service fee expense accrual differential
among the classes.

THE FOLLOWING INFORMATION SUPPLEMENTS "TAXES, DIVIDENDS AND DISTRIBUTIONS--
DIVIDENDS AND DISTRIBUTIONS" IN THE RETAIL CLASS PROSPECTUS:

The per share dividends on Class Z shares will generally be higher than the
per share dividends on Class A, Class B or Class C shares as a result of the
fact that Class Z shares are not subject to any distribution or service fee.

THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER GUIDE--HOW TO BUY SHARES
OF THE FUND" AND "SHAREHOLDER GUIDE--HOW TO SELL YOUR SHARES" IN THE RETAIL
CLASS PROSPECTUS:

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

(i) participants in any fee-based program or trust program sponsored by any
affiliate of the Distributor which includes mutual funds as investment options
and for which the Fund is an available option; (ii) current and former
Directors/Trustees of the Prudential Mutual Funds (including the Fund); and
(iii) employees of Prudential or Prudential Securities who participate in an
employer-sponsored employee saving plan.

In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers or dealers that have entered into
agreements to act as participating or introducing brokers for the Distributor
(Dealers), financial advisers and other persons which distribute shares a
finders' fee, based on a percentage of the NAV of shares sold by such persons.

THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER GUIDE--HOW TO EXCHANGE
YOUR SHARES" IN THE RETAIL CLASS PROSPECTUS:

Class Z shareholders of the Fund may exchange their Class Z shares for Class
Z shares of other Prudential Mutual Funds on the basis of relative net asset
value. Shareholders who qualify to purchase Class Z shares (other than
participants in any fee-based program) will have their Class B and Class C
shares which are not subject to contingent deferred sales charges and their
Class A shares exchanged for Class Z shares on a quarterly basis. Participants
in any fee-based program for which the Fund is an available option will have
their Class A shares, if any, exchanged for Class Z shares when they elect to
have those assets become a part of the fee-based program. Upon leaving the
program (whether voluntary 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 the net asset value. See
"Shareholder Guide--How to Exchange Your Shares--Special Exchange Privileges."

THE INFORMATION ABOVE ALSO SUPPLEMENTS THE INFORMATION UNDER "FUND
HIGHLIGHTS" IN THE RETAIL CLASS PROSPECTUS AS APPROPRIATE.

3
<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 any 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.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are the Fund's Risk Factors and Special Characteristics?............. 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 8
Investment Objective and Policies......................................... 8
Hedging and Return Enhancement Strategies................................. 10
Other Investments and Policies............................................ 16
Portfolio Management Techniques........................................... 17
Investment Restrictions................................................... 18
HOW THE FUND IS MANAGED.................................................... 18
Manager................................................................... 18
Distributor............................................................... 19
Fee Waivers............................................................... 21
Portfolio Transactions.................................................... 21
Custodian and Transfer and
Dividend Disbursing Agent................................................ 21
Year 2000................................................................. 21
HOW THE FUND VALUES ITS SHARES............................................. 22
HOW THE FUND CALCULATES PERFORMANCE........................................ 22
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 23
GENERAL INFORMATION........................................................ 25
Description of Common Stock............................................... 25
Additional Information.................................................... 26
SHAREHOLDER GUIDE.......................................................... 26
How to Buy Shares of the Fund............................................. 26
Alternative Purchase Plan................................................. 27
How to Sell Your Shares................................................... 30
Conversion Feature--Class B Shares........................................ 33
How to Exchange Your Shares............................................... 34
Shareholder Services...................................................... 36
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... A-1
</TABLE>

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MF104Z

CUSIP No.:Class Z: 743918 40 1

Prudential
National
Municipals
Fund, Inc.
(Class Z Shares)

PROSPECTUS

November 23, 1998

www.prudential.com

[LOGO] Prudential
Investments
<PAGE>

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

SUPPLEMENT DATED NOVEMBER 23, 1998 TO
RETAIL CLASS PROSPECTUS DATED MARCH 4, 1998

THE FOLLOWING INFORMATION SHOULD BE ADDED TO THE COVER PAGE OF THE
PROSPECTUS:

The date of the Prospectus is hereby changed to November 23, 1998.

AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.

THE FOLLOWING INFORMATION SUPPLEMENTS "FINANCIAL HIGHLIGHTS" IN THE
PROSPECTUS:

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS A, CLASS B AND CLASS C SHARES)

The following financial highlights for Class A, Class B and Class C shares
are unaudited. 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, Class B and Class C share of common stock, respectively, outstanding,
total return, ratios to average net assets and other supplemental data for the
period indicated. The information has been determined based on data contained
in the financial statements.

<TABLE>
<CAPTION>
SIX-MONTHS ENDED
JUNE 30, 1998 (UNAUDITED) (C)
---------------------------------
CLASS A CLASS B CLASS C
---------- ---------- ---------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 16.12 $ 16.16 $ 16.16
---------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income...................... .40 .36 .34
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions.............................. (.05) (.05) (.05)
---------- ---------- ---------
Total from investment operations.......... .35 .31 .29
---------- ---------- ---------
LESS DISTRIBUTIONS
- ------------------
Dividends from net investment income....... (.40) (.36) (.34)
Distributions in excess of net investment
income.................................... -- -- --
Tax return of capital distributions........ -- -- --
---------- ---------- ---------
Total distributions....................... (.40) (.36) (.34)
---------- ---------- ---------
Net asset Value, end of period............. $ 16.07 $ 16.11 $ 16.11
========== ========== =========
TOTAL RETURN(A):........................... 2.21% 2.00% 1.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 480,443 $ 128,212 $ 1,659
Average net assets (000)................... $ 485,960 $ 138,886 $ 1,168
Ratios to average net assets (b):
Expenses, including distribution fees..... .73% 1.13% 1.38%
Expenses, excluding distribution fees..... .63% .63% .63%
Net investment income..................... 4.96% 4.56% 4.31%
Portfolio turnover rate.................... 14% 14% 14%
</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)Class Z shares did not exist at June 30, 1998.
<PAGE>

THE FOLLOWING INFORMATION SUPPLEMENTS "FUND EXPENSES" AND "SHAREHOLDER
GUIDE":

NEW PRICING STRUCTURE FOR CLASS C SHARES

Effective on November 2, 1998, Class C shares of the Prudential Mutual Funds
will be sold with a 1% initial sales charge and will be subject to a
contingent deferred sales charge of 1% of the lesser of the amount invested or
the redemption proceeds if redeemed within 18 months of purchase. In
connection with the sale of Class C shares, the Distributor will pay dealers,
financial advisers and other persons who sell Class C shares a sales
commission of up to 2% of the purchase price at the time of sale.

Class C shares issued before November 2, 1998 will not be affected by the
new pricing structure described above and will continue to be subject to a
contingent deferred sales charge of 1% on redemptions within one year of
purchase.

WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES

The paragraph under "Alternative Purchase Plan--Class A Shares--Reduction
and Waiver of Initial Sales Charges--Benefit Plans" is amended to read in its
entirety as follows:

Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Sections 457 and 403 (b)(7) of the
Internal Revenue Code and non-qualified deferred compensation plans that are
sponsored by any employer that has a tax qualified benefit plan with
Prudential (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class A shares may be purchased at NAV by participants who are repaying loans
made from such plans to the participant.

WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES

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

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

Investments of Redemption Proceeds from Other Investment
Companies. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate.

2
<PAGE>

Such purchases must be made within 60 days of the redemption. Investors
eligible for this waiver include: (i) investors purchasing shares through an
account at Prudential Securities Incorporated; (ii) investors purchasing
shares through an ADVANTAGE Account or an Investor Account with Pruco
Securities Corporation; and (iii) investors purchasing shares through other
Dealers. This waiver is not available to investors who purchase shares
directly from the Transfer Agent. You must notify the Transfer Agent directly
or through your Dealer if you are entitled to this waiver and provide the
Transfer Agent with such supporting documents as it may deem appropriate.

WAIVER OF CLASS C CONTINGENT DEFERRED SALES CHARGES

Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Program and other plans for which Prudential
provides administrative or recordkeeping services. The CDSC will also be
waived on redemptions from Benefit Plans sponsored by Prudential and its
affiliates to the extent that the redemption proceeds are invested in The
Guaranteed Investment Account, a group annuity insurance product issued by
Prudential, the Guaranteed Insulated Separate Account, a separate account
offered by Prudential, and units of The Stable Value Fund, an unaffiliated
bank collective fund.

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

MINIMUM INITIAL INVESTMENT FOR CLASS C SHARES

The minimum initial investment for Class C shares has been lowered to
$2,500. The minimum initial investment for purchases made through the
Automatic Investment Plan is $50.

EXPENSE TABLE -- EXAMPLE

The following replaces the information on Class C shares under "Fund
Expenses -- Example."

EXAMPLE

You would pay the following expenses on a $1,000 investment to Class C
shares, assuming (1) 5% annual return and (2) redemption at the end of each
time period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class C...................................... $34 $53 $85 $174
</TABLE>

You would pay the following expenses on the same investment assuming no
redemption:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class C...................................... $24 $53 $85 $174
</TABLE>

SHAREHOLDER GUIDE

The following replaces information under "Shareholder Guide -- Alternative
Purchase Plan".

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 Funds.

3
<PAGE>

If you intend to hold your investment in a Fund for less than 3 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 3% 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 3 years, but less than 4
years, or for more than 5 years, but less than 6 years, you should consider
purchasing Class A shares because the maximum 3% initial sales charge plus the
cumulative annual distribution-related fee on Class A shares would be lower
than: (i) the contingent deferred sales charge plus the cumulative annual
distribution-related fee on Class B shares; and (ii) the 1% initial sales
charge plus the cumulative annual distribution-related fee on Class C shares.

If you intend to hold your investment for more than 4 years, but less than 5
years, you may consider purchasing Class A or Class B shares because: (i) the
maximum 3% initial sales charge plus the cumulative annual distribution-
related fee on Class A shares and (ii) the contingent deferred sales charge
plus the cumulative annual distribution-related fee on Class B shares would be
lower than the 1% initial sales charge plus the cumulative annual
distribution-related fee on Class C shares.

If you intend to hold your investment for more than 6 years and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or Class C
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 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 C shares, you would have to hold your investment for more than
3 years for the 1% initial sales charge plus the higher cumulative annual
distribution-related fee on the Class C 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 C distribution-related fee on the investment
fluctuations in NAV, the effect of the return on the investment over this
period of time or redemptions when the CDSC is applicable.

THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND IS MANAGED--DISTRIBUTOR"
IN THE PROSPECTUS:

Effective July 1, 1998, Prudential Investment Management Services LLC
(PIMS), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-
4077, was appointed the exclusive Distributor of Fund shares. Shares continue
to be offered through Prudential Securities Incorporated, Pruco Securities
Corporation and other brokers and dealers. PIMS is a wholly owned subsidiary
of The Prudential Insurance Company of America and an affiliate of Prudential
Securities Incorporated and Pruco Securities Corporation. All other
arrangements with respect to the distribution of Fund shares described in the
Prospectus remain unchanged.

4
<PAGE>

THE FOLLOWING INFORMATION SUPPLEMENTS "GENERAL INFORMATION--DESCRIPTION OF
COMMON STOCK" IN THE PROSPECTUS:

The Fund is authorized to offer 1 billion shares of common stock, $.01 par
value per share, divided into four classes of shares, designated Class A,
Class B, Class C and Class Z shares, each of which consists of 250 million
authorized 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 or
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. Since
Class B and Class C shares generally bear higher distribution expenses than
Class A shares, the liquidation proceeds to shareholders of those classes are
likely to be lower than to Class A shareholders and to Class Z shareholders,
whose shares are not subject to any distribution and/or service fee. In
accordance with the Fund's Articles of Incorporation, the Board of Directors
may authorize the creation of additional series and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Directors may determine. Currently, the Fund is offering four
classes, designated Class A, Class B, Class C and Class Z shares.

THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER GUIDE--SHAREHOLDER
SERVICES" IN THE PROSPECTUS:

THE PRUTECTOR PROGRAM-OPTIONAL GROUP TERM LIFE INSURANCE. Prudential makes
available optional group term life insurance coverage to purchasers of shares
of certain Prudential Mutual Funds which are held in an eligible brokerage
account. This insurance protects the value of your mutual fund investment for
your beneficiaries against market downturns. The insurance benefit is based on
the difference at the time of the insured's death between the "protected
value" and the then current market value of the shares. This coverage is not
available in all states and is subject to various restrictions and
limitations. For more complete information about this program, including
charges and expenses, please contact your Prudential Representative.

THE INFORMATION ABOVE ALSO SUPPLEMENTS THE INFORMATION UNDER "FUND
HIGHLIGHTS" IN THE PROSPECTUS AS APPROPRIATE.

5
<PAGE>

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

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

PROSPECTUS DATED MARCH 4, 1998

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

- -------------------------------------------------------------------------------
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 State-
ment of Additional Information, dated March 4, 1998, which information is in-
corporated herein by reference (is legally considered a part of this Prospec-
tus) 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.

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

Investors are advised to read this Prospectus and retain it for future
reference.

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

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 NATIONAL MUNICIPALS FUND, INC.?

Prudential National Municipals 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 IS THE FUND'S INVESTMENT OBJECTIVE?

The investment objective of the Fund is to seek a high level of current
income exempt from federal income taxes. In attempting to achieve this
objective, under normal circumstances, the Fund intends to invest
substantially all, and in any event at least 80%, of its total assets in
Municipal Bonds and Municipal Notes. There can be no assurance that the
Fund's objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 8.

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

The Fund's portfolio will consist primarily of carefully selected long-
term Municipal Bonds of medium quality. While the Fund's investment adviser
will not be limited by the ratings assigned by the rating services, the
Municipal Bonds in which the Fund's portfolio will be principally invested
will be rated A and Baa by Moody's Investors Service (Moody's) and A and
BBB by Standard & Poor's Ratings Group (S&P) or comparably rated by any
other Nationally Recognized Statistical Rating Organization (NRSRO) or, if
not rated, will be, in the judgment of the investment adviser, of
substantially comparable quality. See "How the Fund Invests--Investment
Objective and Policies" at page 8. 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. As with an investment in any Mutual
Fund, an investment in this Fund can decrease in value and you can lose
money.

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 $250 million, .45 of 1% of the next
$500 million, .425 of 1% of the next $250 million, .40 of 1% of the next
$250 million and .375 of 1% of the Fund's average daily net assets in
excess of $1.5 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 (PIC), 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 shares. The Distributor is
paid an annual distribution and service fee which is currently being
charged at the rate of .10 of 1% of the average daily net assets of the
Class A shares, at the rate of .50 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. See "How the
Fund is Managed--Distributor" at page 19.

2
<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. There is
no minimum investment requirement for certain 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 26 and "Shareholder Guide--Shareholder Services" at page 36.

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). See "How the Fund Values its
Shares" at page 22 and "Shareholder Guide--How to Buy Shares of the Fund" at
page 26.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers three classes of shares:

. Class A Shares: Sold with an initial sales charge of up to 3% of the offering
price.

. Class B Shares: 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.

. 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, unlike
Class B Shares, Class C Shares do not convert to another
class.

See "Shareholder Guide--Alternative Purchase Plan" at page 27.

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 30.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

The Fund expects to declare daily and pay monthly dividends of net investment
income and make distributions of 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 23.

3
<PAGE>

FUND EXPENSES

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load Imposed on
Purchases
(as a percentage of offering
price)......................... 3% None None
Maximum Sales Load or Deferred
Sales Load Imposed on
Reinvested Dividends........... None None None
Maximum Deferred Sales Load (as
a percentage of original
purchase price or redemption None 5% during the first 1% on redemptions
proceeds, whichever is lower).. year, made within one
decreasing by 1% year of purchase
annually to 1% in
the fifth and sixth
years and 0% the
seventh year*
Redemption Fees................. None None None
Exchange Fees................... None None None
ANNUAL FUND OPERATING EXPENSES**
<CAPTION>
(as a percentage of average net assets) CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees............... .48% .48% .48%
12b-1 Fees (After Reduction).. .10%++ .50% .75++
Other Expenses................ .15% .15% .15%
--- ---- ----
Total Fund Operating Expenses
(After Reduction)............ .73% 1.13% 1.38%
=== ==== ====
</TABLE>
<TABLE>
<CAPTION>
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................................... $37 $53 $69 $118
Class B................................... $62 $66 $72 $121
Class C................................... $24 $44 $76 $166
You would pay the following expenses on the
same investment assuming no redemption:
Class A................................... $37 $53 $69 $118
Class B................................... $12 $36 $62 $121
Class C................................... $14 $44 $76 $166
</TABLE>

The above example is based on data for the Fund's fiscal year ended Decem-
ber 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 vari-
ous costs and expenses that an investor in the Fund will bear, whether di-
rectly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund Is Managed." "Other Expenses" include oper-
ating expenses of the Fund, such as directors' and professional fees, reg-
istration fees, reports to shareholders, transfer agency and custodian
fees.
--------
* Class B shares will automatically convert to Class A shares
approximately seven years after purchase. See "Shareholder Guide--
Conversion Feature--Class B Shares."
** The expense information in the table has been restated to reflect
current fees. Effective September 1, 1997, PIFM eliminated its
management fee waiver (.05 of 1%). See "How the Fund is Managed--
Manager--Fee Waivers."
+ 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
the 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 .10 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 (before management
fee waiver) and without such limitations would be .93% and 1.63% for
Class A and Class C shares, respectively. See "How the Fund is Managed--
Distributor."

4
<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 notes thereto,
which appear in the Statement of Additional Information. The following
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."
<TABLE>
<CAPTION>
JANUARY 22,
YEAR ENDED 1990(B)
DECEMBER 31, THROUGH
------------------------------------------------------------------------ DECEMBER
1997 1996 1995 1994 1993 1992 1991 31, 1990
-------- -------- -------- ------- ------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of period..... $ 15.56 $ 15.98 $ 14.42 $ 16.30 $ 15.94 $16.00 $15.09 $14.98
-------- -------- -------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.... .81(d) .82(d) .81(d) .81 .90 .94 .97 .90
Net realized and
unrealized gain (loss)
on investment
transactions............ .67 (.42) 1.57 (1.78) 1.05 .43 .91 .11
-------- -------- -------- ------- ------- ------ ------ ------
Total from investment
operations............. 1.48 .40 2.38 (.97) 1.95 1.37 1.88 1.01
-------- -------- -------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income....... (.81) (.82) (.81) (.81) (.90) (.94) (.97) (.90)
Distributions in excess
of net investment
income.................. (.01) --(e) (.01) -- -- -- -- --
Distributions from net
realized gains.......... (.10) -- -- (.10) (.69) (.49) -- --
-------- -------- -------- ------- ------- ------ ------ ------
Total distributions..... (.92) (.82) (.82) (.91) (1.59) (1.43) (.97) (.90)
-------- -------- -------- ------- ------- ------ ------ ------
Net asset value, end of
period.................. $ 16.12 $ 15.56 $ 15.98 $ 14.42 $ 16.30 $15.94 $16.00 $15.09
======== ======== ======== ======= ======= ====== ====== ======
TOTAL RETURN(A).......... 9.80% 2.66% 16.91% (6.04)% 12.60% 8.88% 12.94% 6.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $493,178 $502,739 $538,145 $12,721 $14,167 $7,700 $3,819 $1,846
Average net assets (000). $491,279 $508,159 $446,350 $14,116 $11,786 $5,401 $2,697 $1,161
Ratios to average net
assets:
Expenses, including dis-
tribution fees......... .70%(d) .68%(d) .75%(d) .77% .69% .72% .75% .75%(c)
Expenses, excluding dis-
tribution fees......... .60%(d) .58%(d) .65%(d) .67% .59% .62% .65% .65%(c)
Net investment income... 5.15%(d) 5.31%(d) 5.34%(d) 5.38% 5.49% 5.79% 6.27% 6.43%(c)
Portfolio turnover rate.. 38% 46% 98% 120% 82% 114% 59% 110%
</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) Commencement of offering of Class A shares.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.

5
<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
notes thereto, which appear in the Statement of Additional Information. The
following 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 years 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."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, begin-
ning of year........... $ 15.60 $ 16.02 $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15 $ 15.04
-------- -------- -------- -------- -------- -------- -------- -------- ----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .. .75(c) .76(c) .76(c) .75 .84 .88 .91 .90 .96
Net realized and
unrealized gain (loss)
on investment transac-
tions.................. .67 (.42) 1.58 (1.78) 1.05 .44 .91 (.04) .11
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Total from investment
operations............ 1.42 .34 2.34 (1.03) 1.89 1.32 1.82 .86 1.07
-------- -------- -------- -------- -------- -------- -------- -------- ----------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (.75) (.76) (.76) (.75) (.84) (.88) (.91) (.90) (.96)
Distributions in excess
of net investment
income................. (.01) --(d) (.01) -- -- -- -- -- --
Distributions from net
realized gains......... (.10) -- -- (.10) (.69) (.49) -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Total distributions.... (.86) (.76) (.77) (.85) (1.53) (1.37) (.91) (.90) (.96)
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Net asset value, end of
year................... $ 16.16 $ 15.60 $ 16.02 $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15
======== ======== ======== ======== ======== ======== ======== ======== ==========
TOTAL RETURN(A)......... 9.35% 2.26% 16.49% (6.39)% 12.15% 8.50% 12.42% 5.96% 7.43%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of year
(000) ................. $141,528 $168,185 $222,865 $672,272 $848,299 $828,702 $874,338 $882,212 $1,033,173
Average net assets
(000).................. $151,938 $193,312 $252,313 $751,623 $854,919 $829,830 $862,249 $940,215 $1,027,726
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.10%(c) 1.08%(c) 1.15%(c) 1.17% 1.09% 1.12% 1.15% 1.13% 1.01%
Expenses, excluding
distribution fees..... .60%(c) .58%(c) .65%(c) .67% .59% .62% .65% .64% .66%
Net investment income.. 4.75%(c) 4.91%(c) 4.96%(c) 4.96% 5.09% 5.39% 5.87% 6.03% 6.45%
Portfolio turnover rate. 38% 46% 98% 120% 82% 114% 59% 110% 198%
<CAPTION>
1988(B)
-----------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, begin-
ning of year........... $ 14.57
-----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .. 1.03
Net realized and
unrealized gain (loss)
on investment transac-
tions.................. .47
-----------
Total from investment
operations............ 1.50
-----------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (1.03)
Distributions in excess
of net investment
income................. --
Distributions from net
realized gains......... --
-----------
Total distributions.... (1.03)
-----------
Net asset value, end of
year................... $ 15.04
===========
TOTAL RETURN(A)......... 10.49%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of year
(000) ................. $1,066,159
Average net assets
(000).................. $1,081,122
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.02%
Expenses, excluding
distribution fees..... .66%
Net investment income.. 6.86%
Portfolio turnover rate. 152%
</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.
(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. See "Manager" in the Statement of
Additional Information.
(c) Net of management fee waiver.
(d) Less than $.005 per share.

6
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF 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 notes thereto,
which appear in the Statement of Additional Information. The following
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."
<TABLE>
<CAPTION>
AUGUST 1,
YEAR ENDED 1994(B)
DECEMBER 31, THROUGH
---------------------------- DECEMBER 31,
1997 1996 1995 1994
------ ------ ------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $15.60 $16.02 $14.44 $15.13
------ ------ ------ ------
INCOME FROM INVESTMENT OPERA-
TIONS:
Net investment income........... .71(d) .72(d) .72(d) .29
Net realized and unrealized gain
(loss) on
investment transactions........ .67 (.42) 1.59 (.69)
------ ------ ------ ------
Total from investment opera-
tions......................... 1.38 .30 2.31 (.40)
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income......................... (.71) (.72) (.72) (.29)
Distributions in excess of net
investment income.............. (.01) -- (e) (.01) --
Distributions from net realized
gains.......................... (.10) -- -- --
------ ------ ------ ------
Total distributions............ (.82) (.72) (.73) (.29)
------ ------ ------ ------
Net asset value, end of period.. $16.16 $15.60 $16.02 $14.44
====== ====== ====== ======
TOTAL RETURN(A)................. 9.08% 2.01% 16.22% (2.63)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000). $ 825 $ 772 $ 403 $ 141
Average net assets (000)........ $ 758 $ 674 $ 247 $ 103
Ratios to average net assets:
Expenses, including distribu-
tion fees..................... 1.35%(d) 1.33%(d) 1.40%(d) 1.51%(c)
Expenses, excluding distribu-
tion fees..................... .60%(d) .58%(d) .65%(d) .76%(c)
Net investment income.......... 4.50%(d) 4.67%(d) 4.66%(d) 4.84%(c)
Portfolio turnover rate......... 38% 46% 98% 120%
</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) Commencement of offering of Class C shares.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.

7
<PAGE>

HOW THE FUND INVESTS

INVESTMENT OBJECTIVE AND POLICIES

THE INVESTMENT OBJECTIVE OF THE FUND IS TO SEEK A HIGH LEVEL OF CURRENT
INCOME EXEMPT FROM FEDERAL INCOME TAXES. IN ATTEMPTING TO ACHIEVE THIS
OBJECTIVE, UNDER NORMAL CIRCUMSTANCES THE FUND INTENDS TO INVEST SUBSTANTIALLY
ALL, AND IN ANY EVENT AT LEAST 80%, OF ITS TOTAL ASSETS IN MUNICIPAL BONDS AND
MUNICIPAL NOTES. THERE CAN BE NO ASSURANCE THAT SUCH OBJECTIVE WILL BE
ACHIEVED. See "Investment Objective and Policies" in the Statement of
Additional Information.

THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY 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 MUNICIPAL BONDS IN WHICH THE FUND MAY INVEST INCLUDE GENERAL OBLIGATION
AND LIMITED OBLIGATION OR REVENUE BONDS. GENERAL OBLIGATION BONDS ARE SECURED
BY THE ISSUER'S PLEDGE OF ITS FAITH, CREDIT AND TAXING POWER FOR THE PAYMENT
OF PRINCIPAL AND INTEREST, WHEREAS REVENUE BONDS ARE PAYABLE ONLY FROM THE
REVENUES DERIVED FROM A PARTICULAR FACILITY OR CLASS OF FACILITIES OR IN SOME
CASES, FROM THE PROCEEDS OF A SPECIAL EXCISE OR OTHER SPECIFIC REVENUE SOURCE.
THE MUNICIPAL NOTES IN WHICH THE FUND MAY INVEST INCLUDE TAX, REVENUE AND BOND
ANTICIPATION NOTES WHICH ARE ISSUED TO OBTAIN FUNDS FOR VARIOUS PUBLIC
PURPOSES.

Interest on certain Municipal Bonds and Municipal Notes may be subject to
the federal alternative minimum tax. From time to time the Fund may purchase
Municipal Bonds and Municipal Notes that are private activity bonds (as
defined in the Internal Revenue Code of 1986, as amended (Internal Revenue
Code)), the interest on which is a tax preference subject to the alternative
minimum tax. See "Taxes, Dividends and Distributions".

THE FUND'S PORTFOLIO WILL CONSIST PRIMARILY OF CAREFULLY SELECTED LONG-TERM
MUNICIPAL BONDS OF MEDIUM QUALITY. WHILE THE FUND'S INVESTMENT ADVISER WILL
NOT BE LIMITED BY THE RATINGS ASSIGNED BY THE RATING SERVICES, THE MUNICIPAL
BONDS IN WHICH THE FUND'S PORTFOLIO WILL BE PRINCIPALLY INVESTED WILL BE RATED
A AND BAA BY MOODY'S INVESTORS SERVICE (MOODY'S) AND A AND BBB BY STANDARD &
POOR'S RATINGS GROUP (S&P) OR COMPARABLY RATED BY ANY OTHER NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF NOT RATED, WILL BE,
IN THE JUDGMENT OF THE INVESTMENT ADVISER, OF SUBSTANTIALLY COMPARABLE
QUALITY. Bonds rated BBB by S&P normally exhibit adequate payment protection
parameters, but in the event of adverse market conditions are more likely to
lead to a weakened capacity to pay principal and interest than bonds in the A
category. Bonds rated Baa by Moody's are considered medium grade obligations.
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. A more complete description of
these and other Municipal Bond and Note ratings is contained in Appendix A to
the Statement of Additional Information.

8
<PAGE>

BECAUSE ISSUERS OF MEDIUM QUALITY MUNICIPAL BONDS MAY CHOOSE NOT TO HAVE
THEIR OBLIGATIONS RATED, IT IS POSSIBLE THAT A SUBSTANTIAL PORTION OF THE
FUND'S PORTFOLIO MAY CONSIST OF OBLIGATIONS WHICH ARE NOT RATED. The market
for rated bonds is usually broader than that for non-rated bonds, which may
result in less flexibility in disposal of such non-rated bonds.

THE FUND MAY ALSO ACQUIRE MUNICIPAL BONDS WHICH HAVE BEEN RATED BELOW MEDIUM
QUALITY BY THE RATING SERVICES IF, IN THE JUDGMENT OF THE FUND'S INVESTMENT
ADVISER, THE BONDS HAVE THE CHARACTERISTICS OF MEDIUM QUALITY OBLIGATIONS. In
determining whether Municipal Bonds which are not rated or which have been
rated below medium quality by the rating services have the characteristics of
rated Municipal Bonds of medium quality, the investment adviser will rely upon
information from various sources, including, if available, reports by the
rating services, research, analysis and appraisals of brokers and dealers and
the views of the Fund's directors and others regarding economic developments
and the creditworthiness of particular issuers.

MUNICIPAL BONDS OF MEDIUM QUALITY ARE SUBJECT TO FLUCTUATION IN VALUE AS A
RESULT OF CHANGING ECONOMIC CIRCUMSTANCES AS WELL AS CHANGES IN INTEREST
RATES. THUS, WHILE MEDIUM QUALITY OBLIGATIONS WILL GENERALLY PROVIDE A HIGHER
YIELD THAN DO HIGH QUALITY MUNICIPAL BONDS OF SIMILAR MATURITIES, THEY ARE
SUBJECT TO A GREATER DEGREE OF MARKET FLUCTUATION WITH LESS CERTAINTY OF THE
ISSUER'S CONTINUING ABILITY TO MEET THE PAYMENTS OF PRINCIPAL AND INTEREST
WHEN DUE AND MAY HAVE SPECULATIVE CHARACTERISTICS NOT PRESENT IN BONDS OF
HIGHER QUALITY. IN ADDITION, OBLIGATIONS WITH LONGER MATURITIES (E.G., 20
YEARS OR MORE) GENERALLY OFFER BOTH HIGHER YIELDS AND GREATER EXPOSURE TO
MARKET FLUCTUATION FROM CHANGES IN INTEREST RATES THAN DO THOSE WITH SHORTER
MATURITIES. CONSEQUENTLY, SHARES OF THE FUND MAY NOT BE SUITABLE FOR PERSONS
WHO CANNOT ASSUME THE SOMEWHAT GREATER RISKS OF CAPITAL DEPRECIATION INVOLVED
IN SEEKING HIGHER TAX-EXEMPT YIELDS.

In recent years, there has been a narrowing of the yield spreads between
higher and lower quality Municipal Bonds and a reduction in the supply of
medium grade Municipal Bonds. As a result of these changing conditions in the
municipal securities markets, the investment adviser has invested a
substantial portion of the Fund's assets in higher quality Municipal Bonds.
The investment adviser intends to invest in medium grade Municipal Bonds to
the extent market conditions warrant.

THE INTEREST RATES PAYABLE ON CERTAIN MUNICIPAL BONDS AND NOTES ARE NOT
FIXED AND MAY FLUCTUATE BASED UPON CHANGES IN MARKET RATES. MUNICIPAL BONDS
AND NOTES OF THIS TYPE ARE CALLED VARIABLE RATE OBLIGATIONS. The interest rate
payable on a variable rate obligation is adjusted either at predesignated
intervals or whenever there is a change in the market rate of interest on
which the interest rate payable is based. Other features may include the right
whereby the Fund may demand prepayment of the principal amount of the
obligation prior to its stated maturity (a demand feature) and the right of
the issuer to prepay the principal amount prior to maturity. The principal
benefit of a variable rate obligation is that the interest rate adjustment
minimizes changes in the market value of the obligation. As a result, the
purchase of variable rate obligations should enhance the ability of the Fund
to maintain a stable NAV and to sell an obligation prior to maturity at a
price approximating the full principal amount of the obligation. The payment
of principal and interest by issuers of certain Municipal Bonds and Notes
purchased by the Fund may be guaranteed by letters of credit or other credit
facilities offered by banks or other financial institutions. Such guarantees
will be considered in determining whether a Municipal Bond or Note meets the
Fund's investment quality requirements.

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

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SOME MUNICIPAL SECURITIES, SUCH AS ZERO COUPON MUNICIPAL SECURITIES, DO NOT
PAY CURRENT INTEREST BUT ARE PURCHASED AT A DISCOUNT FROM THEIR FACE VALUES.
The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security
at the time of issuance. Zero coupon securities do not require the periodic
payment of interest. These investments benefit the issuer by mitigating its
need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of cash. These
investments may experience greater volatility in market value than securities
that make regular payments of interest.

THE FUND MAY BE ABLE TO REDUCE THE RISK OF FLUCTUATIONS IN ASSET VALUE
CAUSED BY CHANGES IN INTEREST RATES BY HEDGING ITS PORTFOLIO THROUGH THE USE
OF FINANCIAL FUTURES. During or in anticipation of a decline in interest
rates, the Fund may purchase futures contracts to hedge against subsequent
purchases of long-term bonds at higher prices. During or in anticipation of an
increase in interest rates, the Fund may hedge its portfolio securities by
selling futures contracts for the purpose of limiting the exposure of its
portfolio to the resulting decrease in value. There are risks associated with
hedging transactions and there can be no assurance that hedges will have the
intended result. See "Hedging and Return Enhancement Strategies" below.

ALSO, THE FUND MAY PURCHASE SECONDARY MARKET INSURANCE ON MUNICIPAL BONDS
AND NOTES WHICH IT HOLDS OR ACQUIRES. Although the fee for secondary market
insurance will reduce the yield of the insured Bonds and Notes, such insurance
would be reflected in the market value of the municipal obligation purchased
and may enable the Fund to dispose of a defaulted obligation at a price
similar to that of comparable municipal obligations which are not in default.

Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor.
While insurance coverage for the Municipal Bonds and Notes held by the Fund
reduces credit risk by providing that the insurance company will make timely
payment of principal and interest if the issuer defaults on its obligation to
make such payment, it does not afford protection against fluctuation in the
price, i.e., the market value, of the municipal obligations caused by changes
in interest rates and other factors, nor in turn against fluctuations in the
NAV of the shares of the Fund.

HEDGING AND RETURN ENHANCEMENT STRATEGIES

THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. THE FUND, AND THUS ITS INVESTORS, MAY
LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies
currently include the purchase of put or tender options on Municipal Bonds and
Notes and the purchase and sale of financial futures contracts and options
thereon and municipal bond index futures contracts. The Fund's ability to use
these strategies may be limited by market conditions, regulatory limits and
tax considerations and there can be no assurance that any of these strategies
will succeed. See "Investment Objective and Policies" in the Statement of
Additional Information. 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 objective and
policies. As with an investment in any mutual fund, an investment in the Fund
can decrease in value and you can lose money.

PUTS

THE FUND MAY PURCHASE AND EXERCISE PUTS OR TENDER OPTIONS ON MUNICIPAL BONDS
AND NOTES. PUTS OR TENDER OPTIONS GIVE THE FUND THE RIGHT TO SELL SECURITIES
HELD IN THE FUND'S PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A SPECIFIED
DATE. Puts or tender options may be acquired to reduce the volatility of the
market value of

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securities subject to puts or tender options compared to the volatility of
similar securities not subject to puts. The acquisition of a put or tender
option may involve an additional cost to the Fund compared to the cost of
securities with similar credit ratings, stated maturities and interest coupons
but without applicable puts. Such increased cost may be paid either by way of
an initial or periodic premium for the put or by way of a higher purchase
price for securities to which the put is attached. In addition, there is a
credit risk associated with the purchase of puts or tender options in that the
issuer of the put or tender option may be unable to meet its obligation to
purchase the underlying security. Accordingly, the Fund will acquire puts or
tender options under the following circumstances: (1) the put or tender option
is written by the issuer of the underlying security and such security is rated
within the 4 highest quality grades as determined by Moody's, S&P or other
NRSRO; (2) the put or tender option is written by a person other than the
issuer of the underlying security and such person has securities outstanding
which are rated within such 4 highest quality grades; or (3) the put or tender
option is backed by a letter of credit or similar financial guarantee issued
by a person having securities outstanding which are rated within the 2 highest
quality grades of such rating services.

THE FUND ANTICIPATES BEING AS FULLY INVESTED AS PRACTICABLE IN MUNICIPAL
BONDS AND NOTES; HOWEVER, BECAUSE THE FUND DOES NOT INTEND TO INVEST IN
TAXABLE OBLIGATIONS, THERE MAY BE OCCASIONS WHEN, AS A RESULT OF MATURITIES OF
PORTFOLIO SECURITIES OR SALES OF FUND SHARES OR IN ORDER TO MEET ANTICIPATED
REDEMPTION REQUESTS, THE FUND MAY HOLD CASH WHICH IS NOT EARNING INCOME. IN
ADDITION, THERE MAY BE OCCASIONS WHEN, IN ORDER TO RAISE CASH TO MEET
REDEMPTIONS, THE FUND MIGHT BE REQUIRED TO SELL SECURITIES AT A LOSS.

Unlike many issues of common and preferred stock and corporate bonds which
are traded between brokers acting as agent for their customers on securities
exchanges, Municipal Bonds and Notes are customarily purchased from or sold to
dealers who are selling or buying for their own account. There are no
requirements that most Municipal Bonds and Notes be registered with or
qualified for sale by federal or state securities regulators. Since there are
large numbers of Municipal Bond and Note issues of many different issuers,
most issues do not trade on any single day. On the other hand, most issues are
generally marketable, since a major dealer will normally, on request, bid for
any issue, other than obscure ones. Regional municipal securities dealers are
frequently more willing to bid on issues of municipalities in their geographic
area.

ALTHOUGH MOST MUNICIPAL BONDS AND NOTES ARE MARKETABLE, THE STRUCTURE OF THE
MARKET INTRODUCES ITS OWN ELEMENT OF RISK; A SELLER MAY FIND, ON OCCASION,
THAT DEALERS ARE UNWILLING TO MAKE BIDS FOR CERTAIN ISSUES THAT THE SELLER
CONSIDERS REASONABLE. IF THE SELLER IS FORCED TO SELL, HE OR SHE MAY REALIZE A
CAPITAL LOSS THAT WOULD NOT HAVE BEEN NECESSARY IN DIFFERENT CIRCUMSTANCES.
BECAUSE THE NAV OF THE FUND'S SHARES REFLECTS THE DEGREE OF WILLINGNESS OF
DEALERS TO BID FOR MUNICIPAL BONDS AND NOTES, THE PRICE OF THE FUND'S SHARES
MAY BE SUBJECT TO GREATER FLUCTUATION THAN SHARES OF OTHER INVESTMENT
COMPANIES WITH DIFFERENT INVESTMENT POLICIES. SEE "NET ASSET VALUE" IN THE
STATEMENT OF ADDITIONAL INFORMATION.

The ratings of Moody's, S&P and other NRSROs represent each service's
opinion as to the quality of the Municipal Bonds or Notes rated. It should be
emphasized that ratings are general and are not absolute standards of quality
or guarantees as to the creditworthiness of an issuer. Subsequent to its
purchase by the Fund, an issue of Municipal Bonds or Notes may cease to be
rated, or its ratings may be reduced. Neither event requires the elimination
of that obligation from the Fund's portfolio, but will be a factor in
determining whether the Fund should continue to hold that issue in its
portfolio.

FROM TIME TO TIME, PROPOSALS HAVE BEEN INTRODUCED BEFORE CONGRESS FOR THE
PURPOSE OF RESTRICTING OR ELIMINATING THE FEDERAL INCOME TAX EXEMPTION FOR
INTEREST ON MUNICIPAL BONDS AND NOTES AND FOR PROVIDING

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<PAGE>

STATE AND LOCAL GOVERNMENTS WITH FEDERAL CREDIT ASSISTANCE. REEVALUATION OF
THE FUND'S INVESTMENT OBJECTIVE AND STRUCTURE MIGHT BE NECESSARY IN THE FUTURE
DUE TO MARKET CONDITIONS WHICH MAY RESULT FROM FUTURE CHANGES IN THE TAX LAWS.

FUTURES CONTRACTS AND OPTIONS THEREON

THE FUND MAY ENGAGE IN TRANSACTIONS IN FUTURES CONTRACTS FOR RETURN
ENHANCEMENT AND RISK MANAGEMENT PURPOSES AS WELL AS TO REDUCE THE RISK OF
FLUCTUATIONS IN THE VALUE OF ITS ASSETS CAUSED BY INTEREST RATE CHANGES BY
HEDGING ITS PORTFOLIO THROUGH THE USE OF FINANCIAL FUTURES AND OPTIONS THEREON
TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE.

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 other liquid assets with a futures commission merchant or in
a segregated account representing between approximately 1 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 from
their portfolios 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. See "Investment Objective and Policies--Segregated
Accounts" in the Statement of Additional Information.

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<PAGE>

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 and maintain for the term of the option cash
or other liquid, unencumbered assets equal to the fluctuating value of the
optioned futures. If a 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 deposited by the Fund with respect
to such option).

USE 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 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 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.

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<PAGE>

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. It
if 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 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 amount of
the balance less the premium it was paid for writing the option.

When the Fund writes a put or call option on 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 and maintain for the term of the option
cash or liquid assets.

USE 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.

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<PAGE>

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 purpose 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 was the cover for the contract and incur a gain or loss depending on the
cost basis for the underlying assets.

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.

RISKS RELATING TO TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS THEREON

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

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<PAGE>

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 "Segregation Requirements."

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 counterparty
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 realize 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.

OTHER INVESTMENTS AND POLICIES

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

The Fund may purchase municipal obligations on a when-issued or delayed
delivery basis, in each case without limit. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for such securities take place at a later date. During the period
between purchase and settlement, no interest accrues to the purchaser. In the
case of purchases by the Fund, the price that the Fund is required to pay on
the settlement date may be in excess of the market value of the municipal
obligations on that date. While securities may be sold prior to the settlement
date, the Fund intends to purchase these securities with the purpose of
actually acquiring them unless a sale would be desirable for investment
reasons. At the time the Fund makes the commitment to purchase a municipal
obligation on a when-issued basis, it will record the transaction and reflect
the value of the obligation, each day, in determining its NAV. This value may
fluctuate from day to day in the same manner as values of municipal
obligations otherwise held by the Fund. If the seller defaults in the sale,
the Fund could fail to realize the appreciation, if any, that had occurred.
The Fund will establish a segregated account in which it will maintain cash or
other liquid assets equal in value to its commitments for when-issued or
delayed delivery securities.

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<PAGE>

MUNICIPAL LEASE OBLIGATIONS

THE FUND MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES
FINANCED BY THE ISSUE. Typically, municipal lease obligations are issued by a
state or municipal financing authority to provide funds for the construction
of facilities (e.g., schools, dormitories, office buildings or prisons). The
facilities are typically used by the state or municipality pursuant to a lease
with a financing authority. Certain municipal lease obligations may trade
infrequently. Accordingly, the investment adviser will monitor the liquidity
of municipal lease obligations under the supervision of the Board of
Directors. Municipal lease obligations will not be considered illiquid for
purposes of the Fund's 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for
such securities. See "Illiquid Securities" below and "Investment Objective and
Policies--Illiquid Securities" 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 or contractual restrictions on resale and securities that are not readily
marketable. Securities, including municipal lease obligations, that have a
readily available market are not considered illiquid for the purposes of this
limitation. The investment adviser will monitor the liquidity of such
securities under the supervision of the Directors. See "Investment Objectives
and Policies--Illiquid Securities" in the Statement of Additional Information.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.

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.

BORROWING

The Fund may borrow an amount equal to no more than 33 1/3% 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 33 1/3% of its total assets to secure these borrowings.
However, the Fund will not purchase portfolio securities when borrowings
exceed 5% of the value of the Fund's total assets.

PORTFOLIO MANAGEMENT TECHNIQUES

In seeking to achieve the Fund's investment objective, the Fund's investment
adviser will cause the Fund to purchase securities which it believes represent
the best values then currently available in the marketplace. Such values are a
function of yield, maturity, issue classification and quality characteristics,
coupled with expectations regarding the economy, movements in the general
level and term structure of interest rates, political developments and
variations in the supply of funds available for investment in the tax-exempt
market relative to the demand for funds placed upon it. The following are some
of the more important management techniques which will be utilized by the
Fund's investment adviser.

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ADJUSTMENT OF MATURITIES

The investment adviser will seek to anticipate movements in interest rates
and will adjust the maturity distribution of the portfolio accordingly. Longer
term securities have ordinarily yielded more than shorter term securities.
From time to time, however, the normal yield relationships between longer and
shorter term securities have been reversed. In addition, longer term
securities have historically been subject to greater and more rapid price
fluctuation. The investment adviser will be free to take advantage of price
volatility in order to attempt to increase the Fund's NAV by making
appropriate sales and purchases of portfolio securities.

ISSUE AND QUALITY CLASSIFICATION

Securities with the same general quality rating and maturity
characteristics, but which vary according to the purpose for which they were
issued, often tend to trade at different yields. Similarly, securities issued
for similar purposes and with the same general maturity characteristics, but
which vary according to the creditworthiness of their respective issuers, tend
to trade at different yields. These yield differentials tend to fluctuate in
response to political and economic developments as well as temporary
imbalances in normal supply and demand relationships. The investment adviser
monitors these fluctuations closely, and will adjust portfolio positions in
various issue and quality classifications according to the value disparities
brought about by these yield relationship fluctuations.

INVESTMENT RESTRICTIONS

The Fund is subject to certain investment restrictions which, like its
investment objective, 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
of 1940, as amended (the Investment Company Act). See "Investment
Restrictions" in the Statement of Additional Information.

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 and Class C
shares were .70%, 1.10%, and 1.35%, 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 $250 MILLION, .45 OF 1% OF THE NEXT $500
MILLION, .425 OF 1% OF THE NEXT $250 MILLION, .40 OF 1% OF THE NEXT $250
MILLION AND .375 OF 1% OF THE FUND'S AVERAGE DAILY NET ASSETS IN EXCESS OF
$1.5 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 .48% of the Fund's average
daily net assets. See "Fee Waivers" below and "Manager" in the Statement of
Additional Information.

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<PAGE>

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), THE SUBADVISER 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 the
Subadviser's performance of such services.

The current portfolio manager of the Fund is Peter J. Allegrini, a Managing
Director of Prudential Investments. Mr. Allegrini is responsible for the day-
to-day management of the Fund's portfolio. Mr. Allegrini has managed the
Fund's portfolio since April 1996. Mr. Allegrini has been employed by PI as a
portfolio manager since July 1994 and serves as the portfolio manager of a
number of other portfolios managed by PI. He was employed by Fidelity
Investments from 1982 to 1985 as a senior bond analyst and from 1985 to 1994
as a portfolio manager, most recently of Fidelity Adviser High Income
Municipal Fund.

PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (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, EACH A PLAN, AND COLLECTIVELY, THE PLANS) ADOPTED
BY THE FUND UNDER RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A
DISTRIBUTION AGREEMENT (THE DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS
THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES.
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.

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<PAGE>

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 NAV 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 .10 of 1% of the average daily net assets of the Class A shares for
the fiscal year ending December 31, 1998.

UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY THE DISTRIBUTOR FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 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 .50 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 .50 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 .10 of 1%, .50 of 1% and .75 of 1% 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 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 all shares of the Fund other than expenses allowable 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.

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 who distribute shares of the Fund. Such payments
may be calculated by reference to the NAV 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.

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<PAGE>

FEE WAIVERS

PIFM may from time to time waive its management fee or a portion thereof and
subsidize certain operating expenses of the Fund. The Fund is not required to
reimburse PIFM for such management fee waivers. Effective September 1, 1997,
PIFM discontinued its waiver of its management fee of .05% of 1% of the Funds
average daily net assets. See "Fund Expenses."

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 yield and total return. See "Performance Information" in
the Statement of Additional Information and "Fund Expenses" above.

PORTFOLIO TRANSACTIONS

The Distributor may also act as a broker or futures commission merchant 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.

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. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
08906-5005. PMFS is a wholly-owned subsidiary of PIFM.

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
income, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no
adverse impact on the Fund. The Manager, the Distributor, the Transfer Agent
and the Custodian have advised the Fund that they have been actively working
on necessary changes to their computer systems to prepare for the year 2000
and expect that their systems, and those of their outside services, will be
adapted in time for that event.

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<PAGE>

HOW THE FUND VALUES ITS SHARES

THE FUND'S NAV IS DETERMINED BY SUBTRACTING ITS LIABILITIES FROM 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.

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. 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. It is expected,
however, that the NAV per share of the three classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.

HOW THE FUND CALCULATES PERFORMANCE

FROM TIME TO TIME THE FUND MAY ADVERTISE ITS YIELD, TAX EQUIVALENT YIELD,
AND TOTAL RETURN (INCLUDING AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL
RETURN) IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD,
AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B AND CLASS C
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 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
tax equivalent yield is calculated similarly to the yield, except that the
yield is increased using a stated income tax rate to demonstrate the taxable
yield necessary to produce an after-tax yield equivalent to the Fund. The
total return shows what an investment in the Fund would have earned 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.,

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<PAGE>

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 ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL 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.

Gain or loss realized by the Fund from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary
income to the extent of any market discount. Market discount generally is the
difference, if any, between the price paid by the Fund for the security and
the principal amount of the security (or, in the case of a security issued at
an original issue discount, the revised issued price of the security). The
market discount rule does not apply to any security that was acquired by the
Fund at its original issue price.

TAXATION OF SHAREHOLDERS

Distributions out of net investment income, to the extent attributable to
interest received on tax-exempt securities, are exempt from federal income tax
when paid to shareholders. Distributions of other net investment income and
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 capital gains (i.e., the excess of net 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 capital gains 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
individuals is 28% with respect to assets held for more than 12 months, but
not more than 18 months, and 20% with respect to assets held 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.

It is not anticipated that corporate shareholders will be entitled to any
dividends received deduction with respect to distributions from the Fund.

Interest on certain private activity tax-exempt obligations issued on or
after August 8, 1986, is a preference item for purposes of the alternative
minimum tax for both individual and corporate shareholders. In the event that
the Fund invests in such obligations, the portion of an exempt-interest
dividend of the Fund that is allocable to such municipal obligations will be
treated as a preference item to shareholders for purposes of the alternative
minimum tax. In addition, a portion of the exempt-interest dividends received
by corporate shareholders with respect to interest on tax-exempt obligations,
whether or not private activity bonds, will be taken into account in computing
the alternative minimum tax. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.

Any gain or loss realized upon a sale 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-

23
<PAGE>

term capital loss if the shares were held for not more than 12 months, capital
gain taxable at the maximum rate of 28% if such shares were held for more than
12, but not more than 18 months, and capital 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 a short-term capital loss. Any such loss with respect to shares that are
held for six months or less however, will be disallowed to the extent of any
exempt interest dividends received with respect to such shares, or treated as
long-term capital loss to the extent of any capital gain distributions
received by the shareholder with respect to such shares.

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.

Net tax-exempt interest distributed by the Fund to shareholders may not be
exempt from state or local taxation. 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.

WITHHOLDING TAXES

Under the Internal Revenue Code, the Fund is generally required to withhold
and remit to the U.S. Treasury 31% of taxable 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 from taxable net investment income and net short-term capital gains
paid 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 OF NET
INVESTMENT INCOME AND MAKE DISTRIBUTIONS OF NET CAPITAL GAINS, IF ANY, AT
LEAST ANNUALLY. 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 shares in relation to
Class A 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 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 the Distributor, you should
contact your financial adviser to elect to receive dividends and distributions
in cash.

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<PAGE>

In determining the amount of capital gains to be distributed, any capital
loss carryovers from prior years will be offset against capital gains. The
Fund intends to invest its assets so that dividends paid from net tax-exempt
interest earned from Municipal Bonds and Notes will qualify as exempt-interest
dividends and be excluded from the shareholder's gross income under the
Internal Revenue Code.

Any dividends or 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. Although in
effect a return of invested principal, capital gain distribution and
dividends, to the extent such distributions are out of taxable net income, are
subject to federal income taxes. Accordingly, prior to purchasing shares of
the Fund, an investor should carefully consider the impact of dividends and
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 9, 1980. THE FUND IS
AUTHORIZED TO ISSUE 750 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C
COMMON STOCK, EACH OF WHICH CONSISTS OF 250 MILLION AUTHORIZED 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, (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 (except that the Fund has agreed with the
Commission in connection with the offering of a conversion feature on Class B
shares to submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv)
only Class B shares have a conversion feature. See "How the Fund is Managed--
Distributor." The Fund has received an order from the Commission permitting
the issuance and sale of multiple classes of common stock. Currently, the Fund
is offering only three classes designated Class A, Class B, and Class C
shares. In accordance with the Fund's Articles of Incorporation, the Board of
Directors may authorize the creation of additional series of common stock and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Board may determine.

The Board of Directors may increase or decrease the number of authorized
shares without 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 as noted above, and each class of shares
bears the expenses related to the distribution of its shares. Except for the
conversion feature applicable to the Class B

25
<PAGE>

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. The Fund's shares do not have cumulative voting rights for the
election of Directors, so that holders of more than 50 percent of the shares
voting can, if they choose, elect all Directors being selected, while the
holders of the remaining Shares would be unable to elect any 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 THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is
the NAV 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). See "Alternative Purchase Plan" below. See
also, "How the Fund Values its Shares." Payments may be made by cash, wire,
check or through your brokerage account.

AN INVESTMENT IN THE FUND MAY NOT BE APPROPRIATE FOR TAX-EXEMPT OR TAX-
DEFERRED INVESTORS. SUCH INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS.

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 all
classes. All minimum investment requirements are waived for certain employee
savings plans. 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, the Distributor 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 the Distributor will not receive stock certificates.

26
<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
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential National Municipals 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, or Class C
shares).

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

In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential National
Municipals Fund, Inc., Class A, Class B, or Class C 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 THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
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).

<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
------------------------ ------------------------------- ------------------------
<C> <S> <C> <C>
Class A Maximum initial sales .30 of 1% (Currently being Initial sales charge
charge of 3% of the charged at a rate of .10 of 1%) waived or reduced for
public offering price certain purchases
Class B Maximum CDSC of 5% of .50 of 1% Shares convert to Class
the lesser of the amount A shares approximately
invested or the seven years after
redemption proceeds; purchase
declines to zero after
six years
Class C Maximum CDSC of 1% of 1% (Currently being charged Shares do not convert to
the lesser of the amount at a rate of .75 of 1%) another class
invested or the
redemption proceeds on
redemptions made within
one year of purchase
</TABLE>

27
<PAGE>

The three 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
is subject to different 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 arrangements
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
(except as noted under the heading "General Information--Description of Common
Stock"), (iii) each class has a different exchange feature and (iv) only Class
B shares have a conversion feature. 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 Class A shares.

Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C 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 5 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 3% 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 5 years and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or Class C
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 C shares, you would have to hold your investment for more than
4 years for the higher cumulative annual distribution-related fee on Class C
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 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.

28
<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. SEE "REDUCTION AND WAIVER OF INITIAL SALES CHARGES" 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:

<TABLE>
<CAPTION>
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 $99,999.......... 3.00% 3.09% 3.00%
$100,000 to $249,999....... 2.50% 2.56% 2.50%
$250,000 to $499,999....... 1.50% 1.52% 1.50%
$500,000 to $999,999....... 1.00% 1.01% 1.00%
$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 of 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
a finders' fee 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.

PruArray Savings Plan. 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
Savings Accumulation Plans of the company's employees. The Program is
available only to employees who open a Savings Accumulation Plan 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 PruArray Plan
qualifies to purchase Class A shares at NAV, all subsequent purchases will be
made at NAV.

Other Waivers. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees 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

29
<PAGE>

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.

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 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 advisors 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 sale 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.

HOW TO SELL YOUR SHARES

YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT
OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain
cases, however, redemption proceeds from the Class B shares will be reduced by
the amount of any applicable contingent deferred sales charge, 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 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

30
<PAGE>

the 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.

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 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

31
<PAGE>

less than a full repurchase is made, the credit will be on a pro rata basis.)
You must notify the Fund's Transfer Agent, either directly or through the
Distributor, 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 not
affect federal tax treatment of any gain realized upon redemption.

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a 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:

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

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of Fund shares made during the preceding six years (five
years for 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.

32
<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
net asset value 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 that the shares were purchased prior to death or disability. 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 the
Distributor or Prusec, at the time of redemption, that you are entitled to
waiver of the contingent deferred sales charge 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.

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

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.

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 NAV 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.

33
<PAGE>

For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 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 and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.

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 REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B AND CLASS C SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, AND CLASS C
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 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.

34
<PAGE>

IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order. The exchange privilege is available
only in states where the exchange may legally be made.

IF YOU HOLD SHARES THROUGH THE DISTRIBUTOR, 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". 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. Eligibility for this exchange privilege will be
calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the 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 the Distributor or Prusec that they are eligible for this
special exchange privilege.

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 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).

35
<PAGE>

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:

. 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 shares through Prudential Securities, you should contact your financial
adviser.

. 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.

. 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."

. 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 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.

. 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.

36
<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 representative or telephone the Funds 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
The Global Total Return Fund, Inc.
Global Utility 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 Jennison 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
.Taxable Money Market Funds
Cash Accumulation Trust
National Money Market Fund
Liquid Assets Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.

.Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series

.Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund

.Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

A-1
<PAGE>

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

TABLE OF CONTENTS

- --------------------------------------------------------------------------------
MF104A

Class A: 743918 20 3
CUSIP Nos.: Class B: 743918 10 4
Class C: 743918 30 2

Prudential National
Municipals
Fund, Inc.

PROSPECTUS

MARCH 4, 1998

www.prudential.com

[LOGO] Prudential
Investments
<PAGE>

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

SUPPLEMENT DATED NOVEMBER 23, 1998 TO
STATEMENT OF ADDITIONAL INFORMATION DATED MARCH 4, 1998

THE FOLLOWING INFORMATION SHOULD BE ADDED TO THE COVER PAGE OF THE STATEMENT
OF ADDITIONAL INFORMATION:

The date of the Statement of Additional Information is hereby changed to
November 23, 1998.

THE FOLLOWING INFORMATION SUPPLEMENTS "DIRECTORS AND OFFICERS" IN THE
STATEMENT OF ADDITIONAL INFORMATION:

As of November 13, 1998, the Directors and officers of the Fund, as a group,
owned less than 1% of each class of the outstanding common stock of the Fund.

As of November 13, 1998, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest
were: Christine V. Doyle, 58 Remington Road, Ridgefield, CT 06877-4326 who
held 21,396 Class C Shares (15.1%); Huntington Newspapers Inc., Attn: Larry
Hensley, P.O. Box 860, Huntington, IN 46750-0860 which held 8,787 Class C
shares (6.2%); Craig Morrison & Betsy Morrison J TEN, 25716 Summerfield CT,
Wheaton, IL 60187-7924 who held 30,251 Class C shares (or 21.4% of the
outstanding Class C shares); and Worldwide Forwarders Inc., Richard H.
Panadero, 9706 SW 155 CT, Miami, FL 33196 who held 33,742 Class C shares (or
23.9% of the outstanding Class C shares).

As of November 13, 1998, Prudential Securities was the record holder for
other beneficial owners of 10,220,357 Class A shares (or 34% of the
outstanding Class A Shares), 2,940,083 Class B shares (or 38% of the
outstanding Class B shares) and 98,952 Class C shares (or 70% of the
outstanding Class C shares ) of the Fund. In the event of any meeting of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy materials to the beneficial owners for which it is the record holder.

THE FOLLOWING INFORMATION SUPPLEMENTS "DISTRIBUTOR" IN THE STATEMENT OF
ADDITIONAL INFORMATION:

PIMS serves as the Distributor of Class Z shares and incurs the expenses of
distributing the Fund's Class Z shares under a Distribution Agreement with the
Fund, none of which are reimbursed by or paid for by the Fund.

THE FOLLOWING INFORMATION SUPPLEMENTS "PURCHASE AND REDEMPTION OF FUND
SHARES" IN THE STATEMENT OF ADDITIONAL INFORMATION:

Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed at the time of purchase, on a deferred basis or both.
Class A shares are sold with a front-end sales charge. Class B shares are
subject to a contingent deferred sales charge. Class C shares are sold with a
low front-end sales charge, but are also subject to a contingent deferred
sales charge. Class Z shares are offered to a limited group of investors at
NAV without any sales charges. See "Shareholder Guide--How to Buy Shares of
the Fund" in the Prospectus.
<PAGE>

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 expenses (except for Class Z
shares, which are not subject to any sales charges or 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 interest 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."

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
3%, Class C* shares are sold with a front-end sales charge of 1%, and Class B*
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 would be as
follows:

<TABLE>
<CAPTION>
CLASS A
-------
<S> <C>
NAV and redemption price per Class A share........................ $16.12
Maximum sales charge (3% of offering price)....................... .50
------
Offering price to public.......................................... $16.62
======
CLASS B
-------
NAV, offering price and redemption price per Class B share*....... $16.16
======
CLASS C
-------
NAV, offering price and redemption price per Class C share*....... $16.16
Maximum sales charge (1% of offering price)***.................... .16
------
Offering price to public.......................................... $16.32
======
CLASS Z
-------
NAV, offering price and redemption price per Class Z share........ $16.12
======
</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.
**Class Z shares did not exist at December 31, 1997.
***Prior to November 2, 1998, Class C shares were sold without an initial
sales charge.

THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER INVESTMENT ACCOUNT--
EXCHANGE PRIVILEGE" IN THE STATEMENT OF ADDITIONAL INFORMATION:

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

THE FOLLOWING INFORMATION SUPPLEMENTS "FINANCIAL STATEMENTS" IN THE
STATEMENT OF ADDITIONAL INFORMATION:

The unaudited financial statements of the Fund for the six-month period
ended June 30, 1998 are incorporated by reference from the Fund's semi-annual
report to shareholders for the period then ended. The Fund will furnish a copy
of such report upon written request to the Fund at Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077, or by calling the Fund at
(800) 225-1852. The unaudited financial statements reflect any adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the period presented.
MF104C-2
2
<PAGE>

The Statement of Additional Information of Prudential National Municipals
Fund, Inc. is incorporated by reference in its entirety from the filing on
March 6, 1998 pursuant to Rule 497 under the Securities Act of 1933, as
amended (File No. 2-66407).

This registration statement is not intended to amend the Statement of
Additional Information dated March 4, 1998 referred to above, except to the
extent indicated.
<PAGE>

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

Statement of Additional Information
March 4, 1998

Prudential National Municipals Fund, Inc. (the Fund), is an open-end,
diversified management investment company whose investment objective is to
seek a high level of current income exempt from federal income taxes. In
attempting to achieve this objective, the Fund intends to invest substantially
all of its total assets in carefully selected long-term Municipal Bonds of
medium quality, i.e., obligations of issuers possessing adequate but not
outstanding capacities to service their debt. Subject to the limits described
herein, the Fund may also buy and sell financial futures for the purpose of
hedging its securities portfolio. There can be no assurance that the Fund's
investment objective will be achieved. See "Investment Objective 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 4, 1998, a copy of
which may be obtained from the Fund upon request at the address or telephone
noted above.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ---------------
<S> <C> <C>
General Information...................................... B-2 25
Investment Objective and Policies........................ B-2 8
Investment Restrictions.................................. B-5 18
Directors and Officers................................... B-7 18
Manager.................................................. B-10 18
Distributor.............................................. B-12 19
Portfolio Transactions and Brokerage..................... B-14 21
Purchase and Redemption of Fund Shares................... B-15 26
Shareholder Investment Account........................... B-17 26
Net Asset Value.......................................... B-20 22
Taxes, Dividends and Distributions....................... B-21 23
Performance Information.................................. B-23 22
Custodian and Transfer and Dividend Disbursing Agent and
Independent Accountants................................. B-25 21
Financial Statements..................................... B-26 --
Report of Independent Accountants........................ B-45 --
Appendix I--Description of Tax-Exempt Security Ratings... I-1 --
Appendix II--General Investment Information.............. II-1 --
Appendix III--Historical Performance Data................ III-1 --
Appendix IV--Information Relating to Prudential.......... IV-1 --
</TABLE>

- -------------------------------------------------------------------------------
MF104B
<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 National Municipals Fund, Inc. to Prudential National
Municipals Fund, Inc.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to seek a high level of current
income exempt from federal income taxes. In attempting to achieve this
objective, the Fund intends to invest substantially all, and in any event at
least 80%, of its total assets in Municipal Bonds and Municipal Notes, except
in certain circumstances. From time to time the Fund may invest in Municipal
Bonds and Municipal Notes that are "private activity bonds" (as defined in the
Internal Revenue Code), the interest on which is a tax preference subject to
the alternative minimum tax. See "Taxes, Dividends and Distributions" in the
Prospectus. There can be no assurance that the Fund's investment objective
will be achieved. For a further description of the Fund's investment objective
and policies see "How the Fund Invests--Investment Objective and Policies" in
the Prospectus.

MUNICIPAL NOTES

For liquidity purposes, pending investment in Municipal Bonds, or on a
temporary or defensive basis due to market conditions, the Fund may invest in
tax-exempt short-term debt obligations (maturing in one year or less). These
obligations, known as "Municipal Notes," include tax, revenue and bond
anticipation notes which are issued to obtain funds for various public
purposes. The interest from these Notes is exempt from federal income taxes.
The Fund will limit its investments in Municipal Notes to (1) those which are
rated, at the time of purchase, within the three highest grades assigned by
Moody's Investors Service (Moody's) or the two highest grades assigned by
Standard & Poor's Ratings Group (S&P) or comparably rated by any other
Nationally Recognized Statistical Rating Organization (NRSRO); (2) those of
issuers having, at the time of purchase, an issue of outstanding Municipal
Bonds rated within the four highest grades of Moody's or S&P or comparably
rated by any other NRSRO; or (3) those which are guaranteed by the U.S.
Government, its agents or instrumentalities.

MUNICIPAL BONDS

Municipal Bonds include debt obligations of a state, a territory, or a
possession of the United States, or any political subdivision thereof (e.g.,
counties, cities, towns, villages, districts, authorities) or the District of
Columbia issued to obtain funds for various purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Bonds may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses and the obtaining of funds to loan to public or private
institutions for the construction of facilities such as education, hospital
and housing facilities. In addition, certain types of private activity bonds
may be issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, port or parking facilities, air or
water pollution control facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal. Such obligations
are included within the term Municipal Bonds if the interest paid thereon is
at the time of issuance, in the opinion of the issuer's bond counsel, exempt
from federal income tax. The current federal tax laws, however, substantially
limit the amount of such obligations that can be issued in each state. See
"Taxes, Dividends and Distributions."

The two principal classifications of Municipal Bonds are "general
obligation" and limited obligation or "revenue" bonds. General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest, whereas revenue bonds are payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Private activity bonds that are Municipal Bonds are
in most cases revenue bonds and do not generally constitute the pledge of the
credit of the issuer of such bonds. The credit quality of private activity
revenue bonds is usually directly related to the credit standing of the
industrial user involved. There are, in addition, a variety of hybrid and
special types of municipal obligations as well as numerous differences in the
security of Municipal Bonds, both within and between the two principal
classifications described above.

The interest rates payable on certain Municipal Bonds and Municipal Notes
are not fixed and may fluctuate based upon changes in market rates. Municipal
Bonds and Notes of this type are called "variable rate" obligations. The
interest rate payable on a variable rate obligation is adjusted either at
predesignated intervals or whenever there is a change in the market rate of
interest on which the interest rate payable is based. Other features may
include the right whereby the Fund may demand prepayment of the principal
amount of the obligation prior to its stated maturity (a demand feature) and
the right of the issuer to prepay the principal

B-2
<PAGE>

amount prior to maturity. The principal benefit of a variable rate obligation
is that the interest rate adjustment minimizes changes in the market value of
the obligation. As a result, the purchase of variable rate obligations should
enhance the ability of the Fund to maintain a stable NAV per share and to sell
an obligation prior to maturity at a price approximating the full principal
amount of the obligation. The payment of principal and interest by issuers of
certain Municipal Bonds and Notes purchased by the Fund may be guaranteed by
letters of credit or other credit facilities offered by banks or other
financial institutions. Such guarantees will be considered in determining
whether a Municipal Bond or Note meets the Fund's investment quality
requirements.

The Fund will treat an investment in a municipal security refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded securities, except to the extent there
are amounts in excess of funds necessary for such debt service, (iii)
principal and interest on the escrowed securities will be sufficient to
satisfy all scheduled principal, interest and any premiums on the refunded
securities and a verification report prepared by a party acceptable to a
nationally recognized statistical rating agency, or counsel to the holders of
the refunded securities, so verifies, (iv) the escrow agreement provides that
the issuer of the refunded securities grants and assigns to the escrow agent,
for the equal and ratable benefit of the holders of the refunded securities,
an express first lien on, pledge of and perfected security interest in the
escrowed securities and the interest income thereon, (v) the escrow agent had
no lien of any type with respect to the escrowed securities for payment of its
fees or expenses except to the extent there are excess securities, as
described in (ii) above. The Fund will not, however, invest more than 25% of
its total assets in pre-refunded bonds of the same municipal issuer.

PURCHASE AND EXERCISE OF PUTS

Puts give the Fund the right to sell securities held in the Fund's portfolio
at a specified exercise price on a specified date. Puts or tender options may
be acquired to reduce the volatility of the market value of securities subject
to puts or tender options compared to the volatility of similar securities not
subject to puts or tender options. The acquisition of a put or tender option
may involve an additional cost to the Fund, compared to the cost of securities
with similar credit ratings, stated maturities and interest coupons but
without applicable puts or tender options. Such increased cost may be paid
either by way of an initial or periodic premium for the put or tender option
or by way of a higher purchase price for securities to which the put or tender
option is attached. In addition, there is a credit risk associated with the
purchase of puts or tender options in that the issuer of the put or tender
option may be unable to meet its obligation to purchase the underlying
security. Accordingly, the Fund will acquire puts or tender options under the
following circumstances: (1) the put or tender option is written by the issuer
of the underlying security and such security is rated within the four highest
quality grades as determined by Moody's or S&P or other NRSRO; (2) the put or
tender option is written by a person other than the issuer of the underlying
security and such person has securities outstanding which are rated within
such four highest quality grades; or (3) the put or tender option is backed by
a letter of credit or similar financial guarantee issued by a person having
securities outstanding which are rated within the two highest quality grades
of such rating services.

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 issuer. In order to seek a high level of current income, the
investment adviser intends to change the composition of the Fund's portfolio,
adjusting maturities and the quality and type of issue. Accordingly, it is
possible that the Fund's portfolio turnover rate may reach, or even exceed,
150%. 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 all securities whose maturities at acquisition were one year
or less) by the average monthly value of such 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 years
ended December 31, 1996 and 1997 the Fund's portfolio turnover rates were 46%
and 38%, respectively.

FINANCIAL FUTURES CONTRACTS

The Fund will engage in transactions in financial futures contracts for
return enhancement and risk management purposes as well as to hedge against
interest rate related fluctuations in the value of securities which are held
in the Fund's portfolio or which the Fund intends to purchase. The Fund will
engage in such transactions consistent with the Fund's investment objective. A
clearing

B-3
<PAGE>

corporation associated with the commodities exchange on which a futures
contract trades assumes responsibility for the completion of transactions and
guarantees that open futures contracts will be performed. Although interest
rate futures contracts call for actual delivery or acceptance of debt
securities, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery.

OPTIONS ON FINANCIAL FUTURES. The Fund may enter into options on future
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.

LIMITATIONS ON PURCHASE AND SALE. Under regulations of the Commodity
Exchange Act, investment companies registered under the Investment Company Act
of 1940, as amended (the Investment Company Act) are exempt from the
definition of "commodity pool operator," subject to compliance with certain
conditions. The Fund will only engage in futures transactions for bona fide
hedging, risk management and return enhancement purposes in accordance with
the rules of the Commodity Futures Trading Commission and not for speculation.
With respect to long positions assumed by the Fund, the Fund will segregate an
amount of cash or other liquid assets so that the amount so segregated plus
the amount of initial and variation margin held in the account of its broker
equals the market value of the futures contracts, and thereby insure that the
use of futures contracts is unleveraged. The Fund will continue to invest at
least 80% of its total assets in Municipal Bonds and Municipal Notes except in
certain circumstances, as described in the Prospectus under "How the Fund
Invests--Investment Objective and Policies." The Fund may not enter into
futures contracts if, immediately thereafter, the sum of the amount of initial
and net cumulative variation margin on outstanding futures contracts, together
with premiums paid on options thereon, would exceed 20% of the total assets of
the Fund.

RISKS OF FINANCIAL FUTURES TRANSACTIONS. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in
"How the Fund Invests--Investment Objective and Policies" in the Prospectus,
there are a number of other risks associated with the use of financial futures
for hedging purposes.

Hedging involves the risk of imperfect correlation because changes in the
price of futures contracts only generally parallel but do not necessarily
equal changes in the prices of the securities being hedged. The risk of
imperfect correlation increases as the composition of the Fund's securities
portfolio diverges from the securities that are the subject of the futures
contract, for example, those included in the municipal index. Because the
change in price of the futures contract may be more or less than the change in
prices of the underlying securities, even a correct forecast of interest rate
changes may not result in a successful hedging transaction.

The Fund intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in such futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that
a liquid market will always exist for any particular contract at any
particular time. Accordingly, there can be no assurance that it will always be
possible to close a futures position when such closing is desired; and in the
event of adverse price movements, the Fund would continue to be required to
make daily cash payments of variation margin. However, in the event futures
contracts have been sold to hedge portfolio securities, such securities will
not be sold until the offsetting futures contracts can be executed. Similarly,
in the event futures have been bought to hedge anticipated securities
purchases, such purchases will not be executed until the offsetting futures
contracts can be sold.

The hours of trading of interest rate futures contracts may not conform to
the hours during which the Fund may trade Municipal Bonds. To the extent that
the futures markets close before the municipal bond market, significant price
and rate movements can take place that cannot be reflected in the futures
markets on a day-to-day basis.

RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Compared to the sale of financial futures, the purchase of
put options on financial futures involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
put option on a financial future would result in a loss to the Fund when the
sale of a financial future would not, such as when there is no movement in the
price of debt securities.

An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in

B-4
<PAGE>

particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the sale of underlying securities pursuant to the exercise of put options.

Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange could continue to be
exercisable in accordance with their terms.

There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market or contractual restrictions on resale.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period. Mutual funds do not typically hold a significant amount of
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 illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days.

Municipal lease obligations will not be considered illiquid for purposes of
the Fund's 15% limitation on illiquid securities provided the investment
adviser determines that there is a readily available market for such
securities. 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). With respect to municipal lease obligations, the investment
adviser also considers: (1) the willingness of the municipality to continue,
annually or biannually, to appropriate funds for payment of the lease; (2) the
general credit quality of the municipality and the essentiality to the
municipality of the property covered by the lease; (3) in the case of unrated
municipal lease obligations, an analysis of factors similar to that performed
by nationally recognized statistical rating organizations in evaluating the
credit quality of a municipal lease obligation, including (i) whether the
lease can be cancelled; (ii) if applicable, what assurance there is that the
assets represented by the lease can be sold; (iii) the strength of the
lessee's general credit (e.g., its debt, administrative, economic and
financial characteristics); (iv) the likelihood that the municipality will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the operations of the municipality (e.g., the
potential for an event of nonappropriation); (v) the legal recourse in the
event of failure to appropriate; and (4) any other factors unique to municipal
lease obligations as determined by the investment adviser.

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.

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.

B-5
<PAGE>

The Fund may not:

(1) With respect to 75% of its total assets, 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 U.S. Government, its
agencies or instrumentalities). It is the current policy (but not a
fundamental policy) of the Fund not to invest more than 5% of the market or
other fair value of its total assets in the securities of any one issuer.

(2) Make short sales of securities.

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

(4) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 33 1/3% 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 33 1/3% 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. The Fund would maintain, in a segregated account with its
Custodian, liquid assets equal in value to the amount owed. For purposes of
this restriction, obligations of the Fund to Directors pursuant to deferred
compensation arrangements, the purchase and sale of securities on a when-
issued or delayed delivery basis, the purchase and sale of financial futures
contracts and options and collateral arrangements with respect to margins for
financial futures contracts and with respect to options are not deemed to be
the issuance of a senior security or a pledge of assets.

(5) Engage in the underwriting of securities or purchase any securities as
to which registration under the Securities Act of 1933 would be required for
resale of such securities to the public.

(6) Purchase or sell real estate or real estate mortgage loans, although it
may purchase Municipal Bonds or Notes secured by interests in real estate.

(7) Make loans of money or securities except through the purchase of debt
obligations or repurchase agreements.

(8) Purchase securities of other investment companies, except in the open
market involving any customary brokerage commissions and as a result of which
not 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.

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

(10) Purchase industrial revenue bonds if, as a result of such purchase,
more than 5% of total Fund assets would be invested in industrial revenue
bonds where payment of principal and interest are the responsibility of
companies with less than three years of operating history.

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

(12) Invest more than 25% of the value of its total assets in securities
whose issuers are located in any one state.

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.

B-6
<PAGE>

DIRECTORS AND OFFICERS

<TABLE>
<CAPTION>
NAME,
ADDRESS
AND POSITION WITH PRINCIPAL OCCUPATIONS
AGE(/1/) 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, formerly, Vice Chairman of
Broyhill Furniture Industries, Inc.;
Certified Public Accountant; Secretary and Treasurer of
Broyhill Family Foundation, Inc.; Member of the Board
of Trustees of Mars Hill College; Director of The High
Yield Income Fund, Inc.
Eugene C. Dorsey (71) 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 (since September 1997), Prudential In-
Vice President vestments; Executive Vice President and Treasurer
(since December 1996); Prudential Investments Fund Man-
agement LLC (PIFM); Senior Vice President (since March
1987) of Prudential Securities Incorporated (Prudential
Securities); formerly Chief Administrative Officer
(July 1990-September 1996), Director (January 1989-Sep-
tember 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.
*Harry A. Jacobs, Jr. Director Senior Director (since January 1986) of Prudential Secu-
(76) rities; formerly Interim Chairman and Chief Executive
1 Seaport Plaza Officer of Prudential Mutual Fund Management, Inc.
New York, NY (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
The High Yield Income Fund, Inc.
*Mendel A. Melzer CFA Director Chief Investment Officer (since October 1996) of Pruden-
(37) tial Mutual Funds; formerly Chief Financial Officer
751 Broad Street, (November 1995-September 1996) of Prudential Invest-
Newark, NJ ments, Senior Vice President and Chief Financial Offi-
cer (April 1993-November 1995) of Prudential Preferred
Financial Services, Managing Director (April 1991-April
1993) of Prudential Investment Advisors and Senior Vice
President (July 1989-April 1991) of Prudential Capital
Corporation; Chairman and Director of Prudential Series
Fund, Inc., Director of The High Yield Income Fund,
Inc.
</TABLE>

- ---------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with The Prudential Insurance Company of America
(Prudential) or Prudential Securities.

B-7
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(/1/) POSITION WITH FUND DURING PAST 5 YEARS
-------------------------- ------------------ ---------------------
<C> <C> <S>
Thomas T. Mooney (56) Director President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; Trustee of
Center for Governmental Research, Inc.; Director of
Blue Cross of Rochester, The Business Council of New
York State, Monroe County Water Authority, Rochester
Jobs, Inc., 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,
and United Presbyterian Homes; Director of Ridgewood
Savings Bank; Trustee of Hofstra University; Director
of The High Yield Income Fund, Inc.
*Richard A. Redeker (55) President and Director Employee of Prudential Investments; formerly President,
751 Broad Street Chief Executive Officer and Director (October 1993-
Newark, NJ September 1996) of Prudential Mutual Fund Management,
Inc.; Executive Vice President, Director and Member of
the Operating Committee (October 1993-September 1996)
of Prudential Securities; Director (since October
1993-September 1996) of Prudential Securities Group,
Inc.; Executive Vice President, The Prudential Investment
Corporation (January 1994-September 1996); Director
(January 1994-September 1996) of Prudential Mutual Fund
Distributors, Inc., and Prudential Mutual Fund Servic-
es, Inc. and Senior Executive Vice President and Direc-
tor 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
(March 1986-June 1990) of International Business Ma-
chines Corporation; Member of the Board of Governors of
the Horace Rockham School of Graduate Studies of the
University of Michigan; Director of Inland Steel Indus-
tries (since July 1991) and The High Yield Income Fund,
Inc.
Louis A. Weil, III (56) Director Publisher and Chief Executive Officer (since January
1996) and Director (since September 1991) of Central
Newspapers, Inc.; Chairman of the Board (since January
1996), Publisher and Chief Executive Officer (August
1991-December 1995) of Phoenix Newspapers, Inc.;
formerly, Publisher 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; Se-
nior Vice President and Senior Counsel (since July
1992) of Prudential Securities; formerly Senior Vice
President (January 1991-September 1996) and Senior
Counsel (June 1987-September 1996) of Prudential Mutual
Fund management, Inc.
Grace C. Torres (38) Treasurer and Principal First Vice President (since December 1996) of PIFM;
Financial and First Vice President (since March 1994) of Prudential
Accounting Officer Securities; formerly First Vice President (March 1994-
September 1996) of Prudential Mutual Fund Management,
Inc. and Vice President (July 1989-March 1994) of Bank-
ers Trust Corporation.
</TABLE>

B-8
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(/1/) POSITION WITH FUND DURING PAST 5 YEARS
- -------------------------- ------------------ ---------------------
<S> <C> <C>
Stephen Assistant Treasurer Tax Director (since March 1996) of Prudential Invest-
M. ments and the Private Asset Group of The Prudential In-
Ungerman surance Company of America (Prudential); formerly First
(44) Vice President of Prudential Mutual Fund Management,
Inc. (February 1993-September 1996) and Senior Tax Man-
ager of Price Waterhouse (1981-January 1993).
Deborah Assistant Secretary Vice President (since December 1996) of PIFM; formerly
A. Docs Vice President and Associate General Counsel (June
(40) 1991-September 1996) of PIFM; Vice President and Asso-
ciate General Counsel of Prudential Securities.
</TABLE>
- ---------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential or Prudential Securities or PIFM.

(/1/) Unless otherwise noted the address for each of the above persons is c/o:
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.

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.

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 Prudential Investments 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 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 an exemptive order of
the Commission, 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 Directors'
fees, together with interest thereon, is a general obligation of the Fund.

The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr. Jacobs is
scheduled to retire on December 31, 1998, and Messrs. Beach and O'Brien are
scheduled to retire on December 31, 1999.

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

The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1997 and the aggregate compensation paid to such Directors
for service on the Fund's board and that of all other investment companies
registered under the Investment Company Act of 1940 managed by PIFM (Fund
Complex) for the calendar year ended December 31, 1997.

B-9
<PAGE>

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL 1996
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM FUND
AGGREGATE BENEFITS ACCRUED ANNUAL AND FUND
COMPENSATION AS PART OF FUND 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, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest
were: Christine V. Doyle, 58 Remington Road, Ridgefield, CT 06877-4326 who
held 20,960 Class C Shares (42%); Huntington Newspapers Inc., Attn: Larry
Hensley, P.O. Box 860, Huntington, IN 46750-0860 which held 8,787 Class C
shares (76.9%); and Mrs. Eloyse Ewell TTEE, C.L. Ewell Family Trust, 180
Forest Ridge Way, Honolulu, HI 96822-5002, who had 3,329 Class C Shares of the
Fund (6.4%).

As of February 6, 1998, Prudential Securities was the record holder for
other beneficial owners of 10,359,069 Class A shares (or 34% of the
outstanding Class A shares), 3,274,184 Class B shares (or 37% of the
outstanding Class B shares), and 42,339 Class C shares (or 81% of the
outstanding Class C shares) of the Fund. In the event of any meeting 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 January
31, 1998, 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, the Prudential
Mutual Funds were the 17th largest family of mutual funds in the United
States.

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

B-10
<PAGE>

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 PMF 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 $250 million, .45 of 1% of
the next $500 million, .425 of 1% of the next $250 million, .40 of 1% of the
next $250 million and .375 of 1% of the Fund's average daily net assets in
excess of $1.5 billion. 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.
Reductions in excess of the total compensation payable to PIFM will be paid by
PIFM to the Fund. No such reductions were required during the fiscal year
ended December 31, 1997. No jurisdiction currently limits the Fund's expenses.

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

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

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

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

B-11
<PAGE>

For the fiscal years ended December 31, 1997, 1996 and 1995, the Fund paid
PIFM management fees of $2,869,410 (net of waiver of $215,979), $2,996,081
(net of waiver of $351,073) and $2,983,142 (net of waiver of $349,455),
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 unit of the Subadviser, known
as Prudential Mutual Fund Investment Management.

The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to such contracts or
interested persons of such parties 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, each a Plan and collectively the Plans)
adopted by the Fund under Rule 12b-1 under the Investment Company Act and a
distribution agreement (the Distribution Agreement), the Distributor incurs
the expenses of distributing the Fund's Class A, Class B and Class C shares.
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 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
8, 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 National
Association of Securities Dealers, Inc. (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 .50 of 1% (including the service fee) of the
average daily net assets 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
personal 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.

B-12
<PAGE>

CLASS A PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $491,279 under the Class A Plan. This amount was primarily expended
on commission credits to the Distributor and Prusec for payment of account
servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended December 31, 1997, the Distributor also
received approximately $52,100 in initial sales charges.

CLASS B PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $759,692 from the Fund under the Class B Plan. It is estimated that
the Distributor spent approximately $456,200 in distributing the Fund's Class
B shares, on behalf of the Fund during the year ended December 31, 1997. It is
estimated that of this amount approximately $6,600 (1.5%) was spent on
printing and mailing of prospectuses to other than current shareholders;
$112,200 (24.6%) on compensation to Prusec, an affiliated broker-dealer, for
commissions to its representatives and other expenses, including an allocation
of overhead and other branch office distribution-related expenses, incurred by
it for distribution of Fund shares; and $337,400 (73.9%) on the aggregate of
(i) payments of commissions to financial advisers ($246,400 or 54.0%) and (ii)
an allocation on account of overhead and other branch office distribution-
related expenses ($91,000 or 19.9%). The term "overhead and other branch
office distribution-related expenses" represents (a) the expenses of operating
the Distributor's branch offices in connection with the sale of Fund shares,
including lease costs, the salaries and employee benefits of operations and
sales support personnel, utility costs, communications costs and the costs of
stationery and supplies, (b) the costs of client sales seminars, (c) expenses
of mutual fund sales coordinators to promote the sale of Fund shares and (d)
other incidental expenses relating to branch promotion of Fund sales.

The Distributor 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 Charge " in the Prospectus. For the fiscal year ended December 31, 1997,
the Distributor received approximately $393,600 in contingent deferred sales
charges with respect to Class B shares.

CLASS C PLAN. For the fiscal year ended December 31, 1997 the Distributor
received $5,686 under the Class C Plan and spent approximately $5,000 in
distributing Class C shares. 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 fiscal year ended December
31, 1997, the Distributor received approximately $3,900 in contingent deferred
sales charges with respect to Class C shares.

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 60 days' written notice to any other party to the Plans. None of the
Plans may 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.

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. A restated Distribution Agreement
was last 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 any
class, all sales charges on shares of that class would be suspended.

B-13
<PAGE>

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager is responsible for decisions to buy and sell securities and
futures contracts for the Fund, the selection of brokers, dealers and futures
commission merchants to effect the transactions and the negotiation of
brokerage commissions, if any. The term "Manager" as used in this section
includes the "Subadviser." Fixed-income securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a
profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. The Fund
will not deal with Prudential Securities in any transaction in which
Prudential Securities acts as principal. Purchases and sales of securities on
a securities exchange, while infrequent, and purchases and sales of futures on
a commodities exchange or board of trade will be effected through brokers who
charge a commission for their services. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law,
Prudential Securities and its affiliates.

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 provide the most
favorable total cost or proceeds reasonably attainable 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 larger than 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 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 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 Board of Directors. Portfolio securities may not be purchased from any
underwriting or selling syndicate of which Prudential Securities (or any
affiliate), during the existence of the syndicate, is a principal underwriter
(as defined in the Investment Company Act), except in accordance with rules of
the Commission. This limitation, in the opinion of the Fund, will not
significantly affect the Fund's ability to pursue its present investment
objective. However, in the future in other circumstances, the Fund may be at a
disadvantage because of this limitation in comparison to other funds with
similar objectives but not subject to such limitations.

Subject to the above considerations, the Manager may use Prudential
Securities as a broker or futures commission merchant for the Fund. In order
for Prudential Securities (or any affiliate) to effect any portfolio
transactions for the Fund on an exchange or board of trade, the commissions,
fees or other remuneration received by Prudential Securities (or any
affiliate) must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers or futures commission merchants in
connection with comparable transactions involving similar securities or
futures contracts being purchased or sold on a securities exchange or board of
trade 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 or futures
commission merchant 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 affiliate) are also subject to such
fiduciary standards as may be imposed upon Prudential Securities (or such
affiliate) by applicable law.

B-14
<PAGE>

The Fund paid no brokerage commissions to Prudential Securities for the
fiscal years ended December 31, 1994, 1995 and 1996.

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). See
"Shareholder Guide" in the Prospectus.

Each class of shares 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, 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
(except that the Fund has agreed with the Commission in connection with the
offering of a conversion feature on Class B shares to submit any amendment of
the Class A distribution and service plan to both Class A and Class B
shareholders), and (iii) each class has a different exchange privilege and
(iv) only Class B shares have a conversion feature. 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, and (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
market, and (d) are approved by the Fund's investment advisor.

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
3% and Class B*, and Class C* 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>
<CAPTION>
CLASS A
<S> <C>
NAV and redemption price per Class A share........................ $16.12
Maximum sales charge (3% of offering price)....................... .50
------
Offering price to public.......................................... $16.62
======
<CAPTION>
CLASS B
<S> <C>
NAV, offering price and redemption price per Class B share*....... $16.16
======
<CAPTION>
CLASS C
<S> <C>
NAV, offering price and redemption price per Class C share*....... $16.16
======
</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.

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);

B-15
<PAGE>

(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; and

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

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

In addition, an eligible group of related Fund investors may include (i) 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
(ii) a client of an unaffiliated registered investment adviser which is a
client of a 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 charges 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 the
Class A shares of the Fund and Class A 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) 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. 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.

A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. 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. The effective date of a Letter of Intent 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.

The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser 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.

B-16
<PAGE>

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>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certifi-
cate 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 A copy of the Social Security Administra-
considered disabled if he or she tion award letter or a letter from a physi-
is unable to engage in any substan- cian on the physician's letterhead stating
tial gainful activity by reason of that the shareholder (or, in the case of a
any medically determinable physi- trust, the grantor) is permanently disa-
cal or mental impairment which can bled. The letter must also indicate the
be expected to result in death or date of disability.
to be of long-continued and indef-
inite duration.
</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. The quantity discount will be imposed at the following
rates depending on whether the aggregate value exceeded $500,000 or $1
million:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCESS
--------------------------------------
YEAR SINCE PURCHASE
PAYMENT MADE $500,001 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 a record of the shares held is
maintained by the Transfer Agent. If a share 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 distributions are
automatically reinvested in full and fractional shares of the Fund at net
asset value per share. An investor may direct the Transfer Agent in writing
not less than five full business days prior to the record date to have
subsequent dividends and/or distributions sent 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. Such shareholder will receive credit for any CDSC paid in
connection with the amount of proceeds being reinvested.

B-17
<PAGE>

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.

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 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, Inc.

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. No
CDSC will be payable upon such exchange of Class B and Class C shares, but a
CDSC will be payable upon the redemption of Class B 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 may 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 account 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 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.

B-18
<PAGE>

Additional details about the Exchange Privilege and prospectuses 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 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>
<CAPTION>
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................. $ 110 $ 165 $ 220 $ 275
20 Years............................. 176 264 352 440
15 Years............................. 296 444 592 740
10 Years............................. 555 833 1,110 1,388
5 Years............................. 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan (ASAP)."
- ---------
/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.
/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.

AUTOMATIC 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. Share 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 having shares of
the Fund held 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 net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."

B-19
<PAGE>

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 continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.

Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized generally 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 and
Class C shares. Each shareholder should consult his or her own tax adviser
with regard to the tax consequences of the systematic withdrawal plan.

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 investment 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

The net asset value (NAV) per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. NAV is calculated separately for each class. The Fund will
compute its NAV once daily 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 the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's
Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. In the event the New York Stock
Exchange closes early on any business day, the NAV of the Fund's shares shall
be determined at a time between such closing and 4:15 P.M., New York time. The
New York Stock Exchange is closed on the following holidays: New Years Day,
Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Portfolio securities for which reliable market quotations are 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 Subadvisor, are valued by the
Valuation Committee or Board of Directors in coordination with the Manager or
Subadvisor. When market quotations are not readily available, such securities
and other assets are valued at fair value in accordance with procedures
adopted by the Board of Directors. Under these procedures, the Fund values
municipal securities on the basis of valuations provided by a pricing service
which uses information with respect to transactions in bonds, quotations from
bond dealers, market transactions in comparable securities and various
relationships between securities in determining value. This service is
expected to be furnished by J. J. Kenny Information Systems Inc. Short-term
securities maturing within 60 days of the valuation date are valued at
amortized cost, if their original maturity was 60 days or less, or by
amortizing their value on the 61st day prior to maturity, if their original
term to maturity exceeded 60 days, unless such valuation is determined not to
represent fair value by the Board of Directors.

NAV is calculated separately for each class. 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. It is expected, that the NAV of the three classes will tend to
converge immediately after the recording of dividends, if any, which will
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.

B-20
<PAGE>

TAXES, DIVIDENDS AND DISTRIBUTIONS

The Fund will declare a dividend immediately prior to 4:15 P.M. on each day
that net asset value per share of the Fund is determined of all of the daily
net income of the Fund to shareholders of record of the Fund as of 4:15 P.M.,
New York time, of the preceding business day. The amount of the dividend may
fluctuate from day to day. Unless otherwise requested by the shareholder,
dividends are automatically reinvested monthly in additional full or
fractional shares of the Fund at net asset value per share. The dividend
payment date is on or about the 25th day of each month, although the Fund
reserves the right to change this date without further notice to shareholders.
Shareholders may receive cash payments from the Fund equal to the dividends
earned during the month by completing the appropriate section on the
Application Form or by notifying Prudential Mutual Fund Services LLC (PMFS),
the Fund's Transfer and Dividend Disbursing Agent, at least five business days
prior to the payable date. Cash distributions are paid by check within five
business days after the dividend payment date.

The Fund intends to distribute to shareholders of record monthly dividends
consisting of all of the net investment income of the Fund. Net capital gains
of the Fund will be distributed at least annually.

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

The Fund is qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (Internal Revenue Code). Under the Internal Revenue Code, the Fund is
not subject to federal income taxes on the taxable income that it distributes
to shareholders, provided that at least 90% of its net taxable investment
income and net short-term capital gains in excess of net long-term capital
losses and 90% of its net tax-exempt interest income in each taxable year is
so distributed. Qualification as a regulated investment company under the
Internal Revenue Code 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 dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies and certain financial
futures, options and forward contracts; (b) derive less than 30% of its gross
income from gains from the sale or other disposition of securities or options
thereon held for less than three months; and (c) 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 intends to comply with the
provisions of the Internal Revenue Code that require at least 50% of the value
of its total assets at the close of each quarter of its taxable year to
consist of obligations the interest on which is exempt from federal income tax
in order to pass through tax-exempt income to its shareholders.

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.

Gains or losses on sales of securities by the Fund will be treated as
capital gains or losses the character of which will depend upon the Fund's
holding period in the securities. The acquisition of a put by the Fund may
affect the holding period of securities held by the Fund. 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.

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 depending on
the contract's holding period.

B-21
<PAGE>

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 capital gain
or loss, the character of which depends 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
recognized by the Fund would be capital gain or loss, depending on the holding
period of the put. If a put expires unexercised, the Fund would realize short-
term or long-term capital loss, the character of which depends 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.

Interest on indebtedness incurred or continued by a shareholder, whether a
corporation or an individual, to purchase or carry shares of the Fund is not
deductible to the extent that distributions from the Fund are exempt from
Federal income tax. The Treasury has the authority to issue regulations which
would disallow the interest deduction if incurred to purchase or carry shares
of the Fund owned by the taxpayer's spouse, minor child or an entity
controlled by the taxpayer. Shareholders who have held their shares for six
months or less may be subject to a disallowance of losses from the sale or
exchange of those shares to the extent of any dividends received by the
shareholders on such shares and, if such losses are not disallowed, they will
be treated as long-term capital losses to the extent of any distribution of
long-term capital gains received by the shareholders with respect to such
shares. Entities or persons who are "substantial users" (or related persons)
of facilities financed by private activity bonds should consult their tax
advisers before purchasing shares of the Fund.

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

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.

Exempt-interest dividends attributable to interest on certain "private
activity" tax-exempt obligations is a preference item for purposes of
computing the alternative minimum tax for both individuals and corporations.
Moreover, exempt-interest dividends, whether or not on private activity bonds,
that are held by corporations will be taken into account (i) in determining
the alternative minimum tax imposed on 75% of the excess of adjusted current
earnings over alternative minimum taxable income, (ii) in calculating the
environmental tax equal to 0.12 percent of a corporation's modified
alternative minimum taxable income in excess of $2 million, and (iii) in
determining the foreign branch profits tax imposed on the effectively
connected earnings and profits (with adjustments) of United States branches of
foreign corporations. The Fund plans to avoid to the extent possible investing
in private activity tax-exempt obligations.

The Fund may be subject to state or local tax in certain other 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 may differ from federal tax treatment.
The exemption of interest income for federal income tax purposes may not
result in similar exemption under the laws of a particular state or local
taxing authority. The Fund will report annually to its shareholders the
percentage and source, on a state-by-state basis, of interest income on
Municipal Bonds received by the Fund during the preceding year and on other
aspects of the federal income tax status of distributions made by the Fund.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes.

B-22
<PAGE>

PERFORMANCE INFORMATION

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

Yield is calculated according to the following formula:

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

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

The yield for the 30-day period ended December 31, 1997 for the Fund's Class
A, Class B and Class C shares was 4.22%, 3.95% and 3.70%, 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 based on a number of factors
including change in NAV, market conditions, the level of interest rates and
the level of Fund income and expenses.

TAX EQUIVALENT YIELD. The Fund may also calculate the tax equivalent yield
over a 30-day period. The tax equivalent yield is determined separately for
Class A, Class B and Class C shares. The tax equivalent yield will be
determined by first computing the yield as discussed above. The Fund will then
determine what portion of the yield is attributable to securities, the income
of which is exempt for federal income tax purposes. This portion of the yield
will then be divided by one minus 39.6% (the assumed maximum tax rate for
individual taxpayers not subject to Alternative Minimum Tax) and then added to
the portion of the yield that is attributable to other securities.

Tax equivalent yield is calculated according to the following formula:

TAX EQUIVALENT YIELD = Yield
------
1-.396

The tax equivalent yield for the 30-day period ended December 31, 1997 for
the Fund's Class A, Class B and Class C shares was 6.99%, 6.54% and 6.13%,
respectively.

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 and Class C shares. See "How the Fund
Calculates Performance" in the Prospectus.

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

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

Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 payment made
at the beginning of the 1, 5 or 10 year periods.

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 (adjusted for management fee waiver) 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 6.50%, 6.23% and 7.51%,
respectively. The average annual total return (adjusted for management fee
waiver) with respect to the Class B shares of the Fund for the one, five, and
ten year periods ended on December 31, 1997 was 4.35%, 6.31% and 7.69%,
respectively. The average annual total return (adjusted for management fee
waiver) for Class C shares for the one year and since inception (August 1,
1994) periods ended December 31, 1997 was 8.08% and 6.98%, respectively.

B-23
<PAGE>

The average annual total return (before management fee waiver) 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 6.44%, 6.20% and 7.50%,
respectively. The average annual total return (before management fee waiver)
with respect to the Class B shares of the Fund for the one, five and ten-year
periods ended on December 31, 1997 was 4.28%, 6.28% and 7.68%, respectively.
The average annual total return (before management fee waiver) for Class C
shares for the one year and since inception (August 1, 1994) periods ended
December 31, 1997 was 8.01% and 6.94%, respectively.

(PIFM eliminated its management fee waiver of .05 of 1%, effective September
1, 1997. See "Fee Waivers" in the Prospectus.)

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 and Class C 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.

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 (after management fee waiver) 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 9.80%, 39.44% and 83.23%,
respectively. The aggregate total return (after management fee waiver) with
respect to the Class B shares of the Fund for the one, five and ten-year
periods ended on December 31, 1997 was 9.35%, 36.76% and 109.77%,
respectively. The aggregate total return (after management fee waiver) for
Class C shares for the one year and since inception (August 1, 1994) periods
ended December 31, 1997 was 9.08% and 25.92%, respectively.

The aggregate total return (before management fee waiver) 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 9.73%, 39.26% and 83.01%,
respectively. The aggregate total return (before management fee waiver) with
respect to the Class B shares of the Fund for the one, five and ten-year
periods ended on December 31, 1997 was 9.28%, 36.59% and 109.51%,
respectively. The aggregate total return (before management fee waiver) for
Class C shares for the one year and since inception (August 1, 1994) periods
ended December 31, 1997 was 9.01% and 25.77%, respectively.

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/

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

[GRAPH APPEARS HERE]

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

- ---------
/1/Source: 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 & Poor's 500 Stock Index,
a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of
broad stock price movements. This chart is for illustrative
purposes only and is not intended to represent the performance of
any particular investment or fund. Investors cannot invest
directly in an index. Past performance is not a guarantee of
future results.

B-24
<PAGE>

CUSTODIAN AND 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 an agreement 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 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 $413,100 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-25
<PAGE>

B-26
<PAGE>

B-27
<PAGE>

B-28
<PAGE>

B-29
<PAGE>

B-30
<PAGE>

B-31
<PAGE>

B-32
<PAGE>

B-33
<PAGE>

B-34
<PAGE>

B-35
<PAGE>

B-36
<PAGE>

B-37
<PAGE>

B-38
<PAGE>

B-39
<PAGE>

B-40
<PAGE>

B-41
<PAGE>

B-42
<PAGE>

B-43
<PAGE>

B-44
<PAGE>

B-45
<PAGE>

APPENDIX I
DESCRIPTION OF TAX-EXEMPT SECURITY RATINGS

CORPORATE AND TAX-EXEMPT BOND RATINGS

The four highest ratings of Moody's Investors Service ("Moody's") for tax-
exempt and corporate bonds are Aaa, Aa, A and Baa. Bonds rated Aaa are judged
to be of the "best quality." The rating of Aa is assigned to bonds which are
of "high quality by all standards," but as to which margins of protection or
other elements make long-term risks appear somewhat larger than Aaa rated
bonds. The Aaa and Aa rated bonds comprise what are generally known as "high
grade bonds." Bonds which are rated A by Moody's possess many favorable
investment attributes and are considered "upper medium grade obligations."
Factors giving security to principal and interest of A rated bonds are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future. Bonds rated Baa are
considered as "medium grade" obligations. 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. Moody's applies numerical modifiers "1", "2", and "3"
in each generic rating classification from Aa through B in its corporate bond
rating system. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a mid-
range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category. The forgoing ratings for tax-exempt
bonds are sometimes presented in parentheses preceded with a "con" indicating
the bonds are rated conditionally. Bonds for which the security depends upon
the completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed or (d) payments to which
some other limiting condition attaches. Such parenthetical rating denotes the
probable credit stature upon completion of construction or elimination of the
basis of the condition.

The four highest ratings of Standard & Poor's Ratings Group ("Standard &
Poor's") for tax-exempt and corporate bonds are AAA, AA, A and BBB. Bonds
rated AAA bear the highest rating assigned by Standard & Poor's to a debt
obligation and indicate an extremely strong capacity to pay principal and
interest. Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree. Bonds rated A have
a strong capacity to pay principal and interest, although they are somewhat
more susceptible to the adverse effects of changes in circumstances and
economic conditions. The BBB rating, which is the lowest "investment grade"
security rating by Standard & Poor's, indicates an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category. The foregoing ratings are
sometimes followed by a "p" indicating that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely and entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion.

TAX-EXEMPT NOTE RATINGS

The ratings of Moody's for tax-exempt notes are MIG 1, MIG 2, MIG 3 and MIG
4. Notes bearing the designation MIG 1 are judged to be of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both. Notes bearing the designation MIG 2 are judged to be of
high quality, with margins of protection ample although not so large as in the
preceding group. Notes bearing the designation MIG 3 are judged to be of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Market access for refinancing, in
particular, is likely to be less well established. Notes bearing the
designation MIG 4 are judged to be of adequate quality, carrying specific risk
but having protection commonly regarded as required of an investment security
and not distinctly or predominantly speculative.

The ratings of Standard & Poor's for municipal notes issued on or after July
29, 1984 are "SP-1" "SP-2" and "SP-3". Prior to July 29, 1984, municipal notes
carried the same symbols as municipal bonds. The designation "SP-1" indicates
a very strong capacity to pay principal and interest. A "+" is added for those
issues determined to possess overwhelming safety characteristics. An "SP-2"
designation indicates a satisfactory capacity to pay principal and interest
while an "SP-3" designation indicates speculative capacity to pay principal
and interest.

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<PAGE>

CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS

Moody's and Standard & Poor's rating grades for commercial paper, set forth
below, are applied to Municipal Commercial Paper as well as taxable commercial
paper.

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rate issuers: Prime-1, superior capacity; Prime-2, strong capacity; and Prime-
3, acceptable capacity.

Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. Issues assigned A
ratings are regarded as having the greatest capacity for timely payment.
Issues in this category are further refined with the designation 1, 2 and 3 to
indicate the relative degree of safety. The "A-1" designation indicates the
degree of safety regarding timely payment is very strong. A "+" designation is
applied to those issues rated "A-1" which possess an overwhelming degree of
safety. The "A-2" designation indicates that capacity for timely payment is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated "A-1." The "A-3" designation indicates that the capacity for
timely payment is satisfactory. Such issues, however, are somewhat more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Issues rated "B" are regarded as having only
an adequate capacity for timely payment and such capacity may be impaired by
changing conditions or short-term adversities.

I-2
<PAGE>

APPENDIX II
GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.

DIVERSIFICATION

Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks and (general returns) of any one type of
security.

DURATION

Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.

Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).

MARKET TIMING

Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.

POWER OF COMPOUNDING

Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.

STANDARD DEVIATION

Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential.
Standard deviation is only one of several measures of a fund's volatility.

II-1
<PAGE>

APPENDIX III
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.

HISTORICAL PERFORMANCE DATA

[GRAPH APPEARS HERE]

Value of $1.00 invested on 1/1/26 through 12/31/97

Small Stocks $5,519.97
Common Stocks $1,828.33
Long-Term Bonds $ 39.07
Treasury Bills $ 14.25
Inflation $ 9.02

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.

III-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
to September 1996. 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 these historical total
returns, including the compounded effect over time, could be substantial.

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7% 9.6%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government
Mortgage
Securities/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4% 9.5%
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3% 10.2%
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. High Yield
Corporate Bonds/4/ 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4% 12.8%
- -----------------------------------------------------------------------------------------------------------------------------------
World Government
Bonds/5/ 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%)
- -----------------------------------------------------------------------------------------------------------------------------------
Difference between
highest and lowest 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1
</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
Governmental 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 over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

III-2
<PAGE>

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

LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)

(GRAPH APPEARS HERE)

- -------
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. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1994.
Yields represent that of an annual renewed one-bond portfolio with a remaining
maturity of approximately 20 years. This chart is for illustrative purposes
and should not be construed to represent the yields of any Prudential Mutual
Fund.

III-3
<PAGE>

APPENDIX IV
INFORMATION RELATING TO PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the
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 PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1996. Principal products and services include life and health insurance,
other health care products, property and casualty insurance securities,
brokerage, asset management, investment advisory services and real estate
brokerage. Prudential (together with its subsidiaries) employs more than
81,000 persons worldwide, and maintains a sales force of approximately 11,500
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 ($12.1 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 $314 billion in
assets under management. Prudential's 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 Pensions and
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 brokerage network in the United States, has more than 37,500 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 LLC 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.
- ---------
/1/ Prudential Investments Fund Investment Management 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 subadviser to Nicholas-Applegate Fund,
Inc., Jennison Associates Capital Corp. as the subadviser to Prudential
Jennison Series Fund, Inc. and Mercater Asset Management, L.P., as
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.

IV-1
<PAGE>

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.

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
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 Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.

Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
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 $3.2 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 effected more than 40,000
trades in money market securities and held on average $20 billion of money
market securities./6/
- ---------
/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.

IV-2
<PAGE>

Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., 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.

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 Prudential Securities./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
Advisor training programs received a grade of A- (compared to an industry
average of B+) .

In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "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
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectSM, 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.

- ---------
/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.

IV-3