PRUDENTIAL NATIONAL MUNICIPALS FUND INC, 485APOS, 1999-01-11

PRUDENTIAL NATIONAL MUNICIPALS FUND INC
485APOS, 1999-01-11

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As filed with the Securities and Exchange Commission on January 11, 1999
Securities Act Registration No. 2-66407
Investment Company Act Registration No. 811-2992
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]

POST-EFFECTIVE AMENDMENT NO. 28 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]

AMENDMENT NO. 27 [X]
(Check appropriate box or boxes)

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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
(Exact name of registrant as specified in charter)
(formerly Prudential-Bache National Municipals Fund, Inc.)

GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7521

DEBORAH A. DOCS, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):

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

[_] on pursuant to paragraph (b)

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

[_] on (date) pursuant to paragraph (a), of Rule 485.
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2), of Rule
485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.

Title of Securities Being Registered .. Shares of Common Stock, par value $.01
per share.
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TYPE OF FUND:
_________________________________
Tax-exempt bond

INVESTMENT OBJECTIVE:
_________________________________
High level of current income
exempt from federal income taxes

PRUDENTIAL NATIONAL
MUNICIPALS FUND, INC.

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PROSPECTUS: MARCH 1, 1999

As with all mutual funds,
filing this prospectus with
the Securities and Exchange
Commission does not mean that
the SEC has approved the Fund
shares, nor has the SEC deter-
mined that this prospectus is
complete or accurate. It is a
criminal offense to state oth-
erwise.
[LOGO OF PRUDENTIAL INVESTMENTS APPEARS HERE]
<PAGE>

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TABLE OF CONTENTS
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<TABLE>
<C> <S>
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 How the Fund Invests
5 Investment Objective and Policies
7 Other Investments
8 Derivative Strategies
9 Additional Strategies
10 Investment Risks
13 How the Fund is Managed
13 Manager
13 Investment Adviser
13 Portfolio Manager
14 Distributor
14 Year 2000 Readiness Disclosure
15 Distributions and Tax Issues
15 Distributions
16 Tax Issues
17 If You Sell or Exchange Your Shares
18 How to Buy, Sell and Exchange Shares of the Fund
18 How to Buy Shares
24 How to Sell Your Shares
27 How to Exchange Your Shares
30 Financial Highlights
30 Class A Shares
31 Class B Shares
32 Class C Shares
33 Class Z Shares
34 The Prudential Mutual Fund Family
For More Information (Back Cover)
</TABLE>
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[GRAPHIC]
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. (800) 225-1852
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Risk/Return Summary
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This section highlights key information about the Prudential National
Municipals Fund, Inc., which we refer to as "the Fund." Additional information
follows this summary.

INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to seek a high level of current income exempt from
federal income taxes. This means we normally invest at least 80% of the Fund's
total assets in municipal bonds. The Fund's portfolio consists primarily of
long-term municipal bonds of medium quality. While we make every effort to
achieve our objective, we can't guarantee success.

PRINCIPAL RISKS
Although we look to invest wisely, all investments involve risk. Since the Fund
invests primarily in long-term municipal bonds of medium quality, there is the
risk that the bonds may lose value because interest rates change or there is a
lack of confidence in the borrower. Bonds with longer maturity dates typically
produce higher yields and are subject to greater price shifts as a result of
changes in interest rates than bonds with shorter maturity dates.
Bond prices and the Fund's net asset value generally move in opposite
directions--if interest rates go up, the prices of the bonds in the Fund's
portfolio may fall because the bonds the Fund holds won't, as a rule, pay as
well as the newer bonds issued. Bonds that are issued when interest rates are
high generally increase in value when interest rates fall.
In addition to interest rate changes, municipal bonds of medium quality are
subject to a greater degree of market fluctuation and greater risk that the
issuer may be unable to make principal and interest payments when they are due
than higher quality securities.
The Fund may also use hedging techniques to protect its assets and earn
income. These strategies may present above average risks. Derivatives may not
fully offset the underlying positions and this could result in losses to the
Fund that would not otherwise have been incurred. Some of our investment
strategies involve additional risk. Like any mutual fund, an investment in the
Fund could lose value, and you could lose money. For more detailed information
about the risks associated with the Fund, see "How the Fund Invests--Investment
Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or by any other
government agency.
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1
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Risk/Return Summary
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EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The
following bar chart and table show the Fund's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Fund and how returns can change. Past performance does not
assure that the Fund will achieve similar results in the future.

[ANNUAL RETURN CHART APPEARS HERE]

1 These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown.

Average Annual Returns (as of 12-31-98/1/)
<TABLE>
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<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares 99.99% 99.99% N/A 99.99% (since 1-22-90)
Class B shares 99.99% 99.99% 99.99% 99.99% (since 4-25-80)
Class C shares 99.99% N/A N/A 99.99% (since 8-1-94)
Class Z shares N/A N/A N/A 99.99% (since [11-23-98])
Lehman Muni Bond Index/2/ 99.99% 99.99% 99.99% *
Lipper Average/3/ 99.99% 99.99% 99.99% **
</TABLE>
1 The Fund's returns are after deduction of sales charges and expenses.
2 The Lehman Brothers Municipal Bond Index is an unmanaged index of over 21,000
municipal bonds which are generally representative of the long-term
investment grade municipal bond market. These returns do not include the
effect of any sales charges. Again, that means the actual returns would be
lower if they included the effect of sales charges.
3 The Lipper Municipal Debt Funds Category is based on the average return of
all mutual funds in this category without deducting any sales charges. Again,
these returns would be lower if they deducted sales charges.
* The Lehman Muni Bond Index since inception returns are % for Class A, % for
Class B, % for Class C and % for Class Z shares.
** The Lipper returns since inception of each class are % for Class A, % for
Class B, % for Class C and % for Class Z shares. Source: Lipper, Inc.

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Prudential National Municipals Fund, Inc. (800) 225-1852

2
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Risk/Return Summary
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FEES AND EXPENSES
This table shows the sales charges, fees, and expenses for each share class of
the Fund--Class A, B, C, and Z. Each share class has different sales charges--
known as loads--and expenses, but represents an investment in the same fund.
Class Z shares are available only to a limited group of investors. For more
information about which share class is right for you, see "How to Buy, Sell and
Exchange Shares of the Fund."

Shareholder Fees/1/ (paid directly from your investment)
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on 3% None 1% None
purchases (as a percentage of offering
price)

Maximum deferred sales charge (load) None 5%/2/ 1%/3/ None
(as a percentage of the lower of original
purchase price or sale proceeds)

Maximum sales charge (load) imposed on None None None None
reinvested dividends and other
distributions

Redemption fees None None None None

Exchange fee None None None None

Annual Fund Operating Expenses (deducted from Fund assets)
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<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .50% .50% .50% .50%
+ Distribution and service (12b-1) fees/4/ .30% .50% 1.00% None
+ Other expenses .xx% .xx% .xx% .xx%
= Total annual Fund operating expenses .xx% .xx% .xx% .xx%
</TABLE>

1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares will automatically convert to Class A shares approximately
seven years after purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase. The CDSC is applied to the lesser of either the original purchase
price or the redemption proceeds.
4 The Distributor of the Fund has voluntarily reduced its distribution and
service fees for Class A and Class C shares to .10 of 1% and .75 of 1% of the
average daily net assets of the Class A and Class C shares, respectively.
This voluntary reduction may be terminated at any time without notice. With
this reduction, Total annual Fund operating expenses for Class A and Class C
shares are .xx% and .xx%, respectively.

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3
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Risk/Return Summary
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Example
This example will help you compare the fees and expenses of the Fund's dif-
ferent share classes and compare the cost of investing in the Fund with the
cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:

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<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A shares $-- $-- $-- $--
Class B shares $-- $-- $-- $--
Class C shares $-- $-- $-- $--
Class Z shares $-- $-- $-- $--
</TABLE>

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

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Prudential National Municipals Fund, Inc. (800) 225-1852

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How the Fund Invests
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high level of current income
exempt from federal income taxes. This means we invest substantially all, and,
in any event, at least 80% of the value of the Fund's total assets in municipal
bonds, which include municipal notes. Municipal notes, like municipal bonds,
are fixed-income securities issued by states and municipalities, except that
municipal notes mature in one year or less. While we make every effort to
achieve our objective, we can't guarantee success.
Municipal bonds include general obligation bonds and revenue bonds. General
obligation bonds are obligations supported by the credit of an issuer that has
the power to tax and are payable from such issuer's general revenues and not
from any particular source. Revenue bonds, on the other hand, are payable from
revenues derived from a particular source.
The Fund's portfolio will consist primarily of long-term municipal bonds of
medium quality. Although we will not be limited by ratings assigned by rating
services, this means that the Fund's portfolio will be principally invested in
investment grade municipal bonds, that is, bonds 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 another Nationally Recognized Statistical Rating
Organization (NRSRO). A rating is an assessment of the likelihood of timely
payment of debt. An investor can evaluate the expected likelihood of debt
repayment by an issuer by looking at its ratings as compared to another similar
issuer. Bonds rated Baa by Moody's and BBB by S&P are considered medium rated
and are described by Moody's as being investment grade bonds, but with
speculative characteristics.
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States and municipalities issue bonds in order to borrow money to finance a
project. You can think of bonds as loans that investors make to the state,
local government or other issuer. The government gets the cash needed to
complete the project and investors earn income on their investment. Bonds are
also known as fixed-income securities because they generally provide a steady
income by paying interest until the bond matures, at which point the original
loan is repaid. Rating services such as Moody's Investors Service (Moody's) or
Standard and Poor's Ratings Group (S&P) review the financial condition of a
bond issuer to provide grades based on the quality of the bond issue and to
alert investors to the risk of a particular bond issue.

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5
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How the Fund Invests
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Although the investment adviser will consider ratings assigned to a security,
it will perform its own investment analysis. The Fund, for example, may acquire
municipal bonds rated below investment grade, that is, high yield or junk
bonds, if, in the opinion of the investment adviser, the bonds have the charac-
teristics of medium rated securities. High yield securities offer higher
yields, but also greater price volatility and risk of loss of principal and
income. In addition to investing in rated securities, the Fund may invest in
unrated securities that we determine are of comparable quality to medium rated
securities.
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 quality 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 Fund may also invest in floating rate bonds, variable rate bonds, inverse
floaters and zero coupon municipal bonds. Floating rate bonds are municipal
bonds that have an interest rate that is set as a specific percentage of a des-
ignated rate, such as the rate on Treasury bonds or the prime rate at major
commercial banks. The interest rate on floating rate bonds changes when there
is a change in the designated rate. Variable rate bonds are municipal bonds
that have an interest rate that is adjusted based on the market rate at a spec-
ified period. They generally allow the Fund to demand payment of the bond on
short notice, for an amount that may be more or less than the amount paid.
Inverse floaters are municipal bonds 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. Zero coupon municipal bonds do not pay interest
during the life of the bond. An investor makes money by purchasing the bond at
a price that is less that the money the investor will receive when the munici-
pality repays the amount borrowed (face value).
The Fund may purchase secondary market insurance on municipal bonds it
acquires. Although the insurance premium will reduce the yield on the insured
bonds, the insurance will reduce the Fund's credit risk and may increase the
insured bond's market value.
The interest on municipal bonds generally is exempt from federal income
taxes. The Fund, however, may hold certain private activity bonds,

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How the Fund Invests
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which are municipal bonds the interest on which is subject to the federal
alternative minimum tax (AMT). See "Distribution and Tax Issues--Distributions.
In seeking to achieve the Fund's investment objective, the investment adviser
will purchase securities that it believes represent the best values based on
yield, maturity, issue and quality characteristics, and expectations regarding
economic and political developments, including movements in interest rates and
demand for municipal bonds. The investment adviser will seek to anticipate
interest rate movements and adjust the Fund's portfolio holdings accordingly.
The investment adviser will also seek to take advantage of differentials in
yields with respect to securities with similar credit ratings and maturities,
but which vary according to the purpose for which they were issued, as well as
securities issued for similar purposes with similar maturities, but which vary
according to ratings. For more information, see "Investment Risks" and the
Statement of Additional Information, "Description of the Fund, its Investments
and Risks." The Statement of Additional Information-- which we refer to as the
SAI--contains additional information about the Fund. To obtain a copy see the
back cover page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of Prudential National
Municipals Fund, Inc. can change investment policies are not fundamental.

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

Municipal Lease Obligations
Municipal lease obligations are obligations where the interest and principal
are paid out of lease payments make by the party leasing the facilities that
were built with the bonds. Typically, municipal lease obligations are issued by
states or financing authorities to provide money for construction projects such
as schools, offices or stadiums. The entity that leases the building or
facility would be responsible for paying the interest and principal on the
obligation.

When-Issued and Delayed Delivery Securities
The Fund may purchase municipal obligations on a "when-issued" or "delayed
delivery" basis, without limit. When the Fund makes this type of pur-

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7
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How the Fund Invests
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chase, the price and rate are fixed at the time of purchase, but delivery and
payment for the bonds take place at a later time. The purchase price for these
bonds includes interest accrued during the period between the date of purchase
and the date the bonds are delivered, so there is no interest income during
that period. There is a risk that the price the Fund pays at delivery may be
more than the market value of the bonds on that date.

Temporary Defensive Strategy and Short-Term Investments
In response to adverse market, economic or political conditions, or for
liquidity purposes, pending investment in municipal bonds, we may temporarily
invest up to 100% of the Fund's assets in municipal notes. Investing heavily in
these securities can limit our ability to achieve our investment objective of a
high level of current income exempt from federal income taxes, but can help to
preserve the Fund's assets.

DERIVATIVE STRATEGIES
We may use a number of alternative investment strategies--including
derivatives--to try to improve the Fund's returns or protect its assets,
although we cannot guarantee they will work, that the instruments necessary to
implement these strategies will be available, or that the Fund will not lose
money. Derivatives--such as financial futures, including interest rate futures
contracts, options and options on futures--involve costs and can be volatile. A
futures contract is an agreement to buy or sell a set quantity of an underlying
product at a future date, or to make or receive a cash payment based on the
value of an index. An option is the right to buy or sell a security, or in the
case of an option on a future, the right to buy or sell a futures contract, in
exchange for a premium. With derivatives, the investment adviser tries to
predict if the underlying investment (a security, market index, currency,
interest rate, or some other investment), will go up or down at some future
date. We may use derivatives to try to reduce risk or to increase return
consistent with the Fund's overall investment objective. The investment adviser
will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we may
use may not match the Fund's underlying holdings. For more information about
these strategies, see the SAI, "Description of the Fund, its investments and
Risks--Hedging and Return Enhancement Strategies."

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Prudential National Municipals Fund, Inc. (800) 225-1852

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How the Fund Invests
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ADDITIONAL STRATEGIES
The Fund also follows certain policies when it purchases shares of other
investment companies (the Fund may hold up to 10% of its total assets in such
securities, which entail duplicate management and advisory fees to sharehold-
ers); borrows money (the Fund can borrow up to 33 1/3% of the value of its
total assets); and holds illiquid securities (the Fund may hold up to 15% of
its net assets in illiquid securities, including securities, with legal or
contractural restrictions, those without a readily available market, and repur-
chase agreements with maturities longer than 7 days). The Fund is subject to
certain investment restrictions that are fundamental policies and cannot be
changed without shareholder approval. For more information about these restric-
tions, see the SAI.

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9
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How the Fund Invests
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INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no excep-
tion. This chart outlines the key risks and potential rewards of the Fund's
principal investments. See, too, "Description of the Fund, Its Investments and
Risks" in the SAI.

Investment Type
% of Fund's Total Risks Potential Rewards
Assets
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Municipal bonds . Credit risk--risk . Tax-exempt
that the borrower interest income
can't pay back (except with
the money bor- respect to cer-
rowed or make tain bonds, such
interest payments as private
activity bonds,
which are subject
to the federal
alternative min-
imum tax (AMT))

At least 80%
under normal con-
ditions
. Market risk--risk
that bonds will
lose value in the . If interest rates
market because decline, long-
interest rates term yields
change or there should be higher
is a lack of con- than money market
fidence in the yields
borrower
. Concentration
risk--risk that
bonds may lose
value because of
political or eco-
nomic events in
the geographic
region where the
Fund's invest-
ments are focused
. Risk that federal
income tax rates
may decrease,
which could
decrease demand
for municipal
bonds
. May be difficult
to value
precisely and
sell at time or
price desired
(illiquidity
risk)

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Zero coupon . Credit risk . Tax-exempt
municipal bonds . Market risk interest income
. Concentration (except with
Percentage varies risk respect to cer-
. Risk that federal tain bonds such
income taxes may as private
decrease, which activity bonds,
could decrease which are subject
demand for munic- to the AMT)
ipal bonds
. Value rises
faster when
interest rates
fall
. Typically subject
to greater vola-
tility and less
liquidity in
adverse markets
than other munic-
ipal bonds

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HOW THE FUND INVESTS
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
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DERIVATIVES . Derivatives such . The Fund could
Percentage varies as futures and make money and
options may not protect against
fully offset the losses if the
underlying investment
positions and analysis proves
this could result correct
in losses to the . Derivatives that
Fund that would involve leverage
not have could generate
otherwise substantial gains
occurred at low cost
. Derivatives used
for risk . One way to manage
management may the Fund's
not have the risk/return
intended effects balance by
and may result in locking in the
losses or missed value of an
opportunities investment ahead
of time
. The counterparty
to a derivatives
contract could
default
. Derivatives that
involve leverage
(borrowing for
investment) could
magnify losses
. Certain types of
derivatives
involve costs to
the Fund which
can reduce
returns

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11
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How the Fund Invests
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Investment Type (cont'd)
% of Fund's Total Risks Potential Rewards
Assets
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Municipal lease . Credit risk . Tax-exempt
obligations . Market risk interest income
. Concentration (except with
Percentage varies risk respect to
. Potential risk certain bonds,
that federal such as private
income tax rates activity bonds,
may decrease, which are subject
which could to the AMT)
decrease demand
for municipal . If interest rates
bonds decline, long-
term yields
should be higher
than money market
yields
. May be difficult
to value
precisely and
sell at time or
price desired
(illiquidity
risk)

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Illiquid . May be difficult
securities to value
precisely

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

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How the Fund is Managed
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MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077

Under a management agreement with the Fund, PIFM manages the Fund's investment
operations and administers its business affairs. For the fiscal year ended
December 31, 1998, the Fund paid PIFM management fees of of 1% of the Fund's
average net assets.
As of November 30, 1998, PIFM served as the Manager to all 46 of the Pruden-
tial Mutual Funds, and as Manager or administrator to 22 closed-end investment
companies, with aggregate assets of approximately $69 billion.

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

PORTFOLIO MANAGER
The Fund is managed by Peter J. Allegrini, Managing Director of Prudential
Investments. Mr. Allegrini is responsible for the day-to-day management of the
Fund.
Mr. Allegrini has managed the Fund's portfolio since April 1996. He has been
employed by Prudential Investments as a portfolio manager since July 1994 and
serves as the portfolio manager of a number of other portfolios managed by Pru-
dential Investments. Prior to July 1994, he was employed by Fidelity Invest-
ments 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.

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13
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How the Fund is Managed
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DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS)--a direct, wholly-owned
subsidiary of The Prudential Insurance Company or America--distributes the
Fund's shares under a Distribution Agreement with the Fund. The Fund has
Distribution and Service Plans under Rule 12b-1 of the Investment Company Act.
Under the Plans and the Distribution Agreement, PIMS pays the expenses of
distributing the Fund's Class A, B, C and Z shares, and provides certain
shareholder support services. The Fund pays distribution and other fees to PIMS
as compensation for its services. These fees--known as 12b-1 fees--are shown in
the "Fees and Expenses" table.

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

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

Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund pays to shareholders dividends of net investment
income monthly and distributes capital gains, if any, at least annually.
Dividends generally will be exempt from federal income taxes. If, however, the
Fund invests in taxable obligations, it will pay dividends that are not exempt
from federal income taxes. Dividends and distributions from, and gain from the
sale of stock of, the Fund may also be subject to state income tax in the state
in which you reside.
The following briefly discusses some of the important tax issues you should
be aware of, but is not meant to be tax advice. For tax advice, please speak
with your tax adviser.

DISTRIBUTIONS
The Fund pays dividends of any net investment income to shareholders, typically
every month. For example, if the Fund owns a City XYZ bond and the bond pays
interest, the Fund will pay out a portion of this interest as a dividend to its
shareholders, assuming the Fund's income is more than its costs and expenses.
These dividends generally will be exempt from federal income taxes, as long as
50% or more of the value of the Fund's assets at the end of each quarter is
invested in state, municipal, and other obligations, the interest on which is
excluded from gross income for federal income tax purposes. As mentioned, at
least 80% of the Fund's assets will be invested in such obligations during
normal market conditions. Dividends attributable to the taxable bonds held by
the Fund, market discount and to short-term capital gains, however, will be
subject to federal, state and local income tax at ordinary income tax rates.
Some shareholders may be subject to federal alternative minimum tax liability.
Tax-exempt interest from certain bonds is treated as an item of tax preference,
and may be attributed to shareholders. A portion of all tax-exempt interest is
includable as an upward adjustment in determining a corporation's alternative
minimum taxable income. These rules could make you liable for the alternative
minimum tax (AMT).
The Fund also distributes long-term capital gains to shareholders (typically
once a year) Long-term capital gains are generated when the Fund sells assets
that it held for more than 12 months, for a profit. For an individual, the
maximum long-term capital gains rate is 20%.

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

15
<PAGE>

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

For your convenience, dividends and distributions of long-term capital gains
are automatically reinvested in the Fund, without any sales charge. If you ask
us to pay the distributions in cash, we will send you a check if your account
is with the transfer agent. Otherwise, if your account is with a dealer you
will receive a credit to your account. Either way, the distributions may be
subject to taxes. For more information about Automatic Reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services," under "How
to Buy, Sell and Exchange Shares of the Fund--How to Buy Shares."

TAX ISSUES
Form 1099
Every year you will receive a Form 1099, which reports the amount of taxable
dividends and long-term capital gains we distributed to you during the prior
year.
Generally, distributions are treated as if they were paid in the year they
are received, except when we declare certain dividends in the fourth quarter
and actually pay them in January of the following year. In such cases, the div-
idends are treated as if they were paid on December 31 of the prior year. Cor-
porate shareholders are not eligible for the 70% dividends-received deduction
on dividends paid by the Fund.

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

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16
<PAGE>

- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAX ISSUES
- --------------------------------------------------------------------------------

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

[GRAPHIC] CAPITAL GAIN
+ $ (taxes owed)

RECEIPTS FROM SALE $ OR

[GRAPHIC] CAPITAL LOSS
- $ (offset against gain)

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

IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN which is subject to tax, unless you hold shares in a qualified tax-
deferred plan or account. For individuals, the maximum capital gains tax rate
is 20% for shares
held more than twelve months. If you sell shares of the Fund for a loss, you
may have a capital loss, which you may use to offset any capital gains you
have.
Exchanging your shares of the Fund for the shares of another Prudential
Mutual Fund is considered a sale for tax purposes. In other words, it's a "tax-
able event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the
taxes described above.
Any gains you may have from selling or exchanging Fund shares will not be
reported on the Form 1099. Therefore, you or your financial adviser should keep
track of the dates on which you buy and sell--or exchange-- Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.

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

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17
<PAGE>

HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------

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

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

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

STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C, and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within six years (that is why they call it a Contingent Deferred
Sales Charge, or CDSC), but the operating expenses each year generally are
higher than the Class A share expenses. With Class C shares, you pay a 1% front
end sales charge and a 1% CDSC if you sell within 18 months of purchase, but
the operating expenses are also higher than Class A share expenses.
When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees

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18
<PAGE>

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

. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
. Whether you qualify to purchase Class Z shares
See "How to Sell Your Shares" for a description of the impact of CDSCs.

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z

<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $5,000 None
amount/1/

Minimum amount for $100 $100 $100 None
subsequent purchases/1/

Maximum initial sales 3% of the public None 1% None
charge offering price

Contingent Deferred None If sold during: 1% on sales None
Sales Charge (CDSC)/2/ year 1 5% made within
year 2 4% 18 months of
year 3 3% purchase/2/
year 4 2%
years 5/6 1%
year 7 0%
Annual distribution and .30 of 1% .50 of !% 1% (.75 of None
service (12b-1) fees (.10 of 1% 1% currently)
(shown as a percentage currently)
of average net
assets)/3/
</TABLE>
1 The minimum initial and subsequent investment for purchases made through the
Automatic Investment Plan is $50. For more information, see "Step 4:
Additional Shareholder Services-Automatic Investment Plan."
2 For more information about the CDSC and how it is calculated, see "Contingent
Deferred Sales Charges (CDSC)." Class C shares bought before November 2, 1998
have a 1% CDSC if sold within one year.
3 These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and may
cost you more than paying other types of sales charges. The service fee for
Class A, Class B and Class C shares is .25 of 1%. The distribution fee is
limited to .30 of 1% (including the .25 of 1% service fee) for Class A shares
and .75 of 1% for Class C shares.

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

19
<PAGE>

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

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

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $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 million and above/1/ None None None
</TABLE>

1 If you invest $1 million or more, you can buy only Class A shares, unless you
qualify to buy Class Z shares.

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

Waivers are also available to investors in certain programs sponsored by bro-
kers, investment advisers and financial planners who have agreements with Pru-
dential Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades and charges its clients a management, consulting or other
fee for its services; and

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20
<PAGE>

. Mutual fund "supermarket" programs where the sponsor links its custom-
ers' accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.

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

WAIVING CLASS C'S INITIAL SALES CHARGE
Investments of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential Secu-
rities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must:
. purchase your shares through an account at Prudential Securities;
. purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation; or
. purchase your shares through other brokers.

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

QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
. Participants in any fee-based program or trust program sponsored by Pru-
dential or an affiliate which includes the Fund as an available option
. Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund)

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

21
<PAGE>

. Prudential with an investment of $10 million or more

In connection with the sale of shares, the Manager, the Distributor or one of
their affiliates may pay brokers, financial advisers and other persons a com-
mission of up to 4% of the purchase price for Class B shares, up to 1% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.

CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested divi-
dends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the conver-
sions quarterly, not on the anniversary date of your purchase. For more infor-
mation, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Class B
Shares."

STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV per share--is
determined by a simple calculation--it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its expenses)
is $1,000 and there are 100 shares of Fund XYZ owned by shareholders, the price
of one share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily avail-
able, at fair value as determined in good faith under procedures established by
the Fund's Board. Most national newspapers report the NAVs of most mutual
funds, which allows investors to check the price of mutual funds daily.

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<PAGE>

- --------------------------------------------------------------------------------
Mutual Fund Shares

The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds City ABC bonds in
its portfolio and the price of City ABC bonds goes up, while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.

- --------------------------------------------------------------------------------
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. We do
not determine NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of the Fund's port-
folio do not materially affect the NAV.

What Price Will You Pay for Shares of the Fund?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an ini-
tial sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share clas-
ses). Your broker may charge you a separate or additional fee for purchases of
shares.

Step 4: Additional Shareholder Services
As a Fund shareholder, you can take advantage of the following services and
privileges:

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

Prudential Mutual Fund Services LLC
Attn: Account Maintenance
P.O. Box 15015
New Brunswick, NJ 08906-5015

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

23
<PAGE>

Automatic Investment Plan. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.

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

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

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

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

Prudential Mutual Fund Services LLC
Attn: Redemption Services
P.O. Box 15010
New Brunswick, NJ 08906-5010

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24
<PAGE>

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

Restrictions on Sales
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the
value of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Shares--Sale of Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust and if you hold your shares directly with the Transfer Agent, you may
have to have the signature on your sell order guaranteed by a financial insti-
tution. For more information, see the SAI, "Purchase, Redemption and Pricing of
Fund Shares--Sale of Shares--Signature Guarantee."

Contingent Deferred Sales Charges (CDSC)
If you sell Class B shares within six years of purchase, or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as pos-
sible, we will sell amounts representing shares in the following order:
. Amounts representing shares you purchased with reinvested dividends and
distributions
. Amounts representing the increase in NAV above the total amount of pay-
ments for shares made during the past six years for Class B shares (five
years for Class B shares purchased before January 22, 1990) and 18
months for Class C shares
. Amounts representing the cost of shares held beyond the CDSC period (six
years for Class B shares and 18 months for Class C shares)

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

25
<PAGE>

Since shares that fall into any of the categories listed above are not sub-
ject to the CDSC, selling them first helps you to avoid--or at least minimize--
the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to a CDSC, we will apply the CDSC to amounts representing the cast
of shares held for the longest period of time within the applicable CDSC
period.
As we noted in the "Share Class Comparison" chart, the CDSC for Class B
shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the anni-
versary date itself. The CDSC is 1% for Class C shares-- which is applied to
shares sold within 18 months of purchase (or one year if purchased before
November 2, 1998). For both Class B and Class C shares, the CDSC is the lesser
of the original purchase price or the redemption proceeds. For purposes of
determining how long you've held your shares, all purchases during the month
are grouped together and considered to have been made on the last day of the
month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding
any time shares were held in a money market fund.

WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy (with
rights of survivorship), provided the shares were purchased before the
death or disability
. On certain sales from a Systematic Withdrawal Plan

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

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<PAGE>

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

Small Accounts
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your
account. We would do this to minimize the Fund's expenses paid by other share-
holders. We will give you 60 days' notice, during which time you can purchase
additional shares to avoid this action.

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

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

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

27
<PAGE>

If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:

Prudential Mutual Fund Services LLC
Attn: Exchange Processing
P.O. Box 15010
New Brunswick, NJ 08906-5010

There is no sales charge for such exchanges, however, if you exchange--and
then sell--Class B shares within approximately six years of your original pur-
chase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for
CDSC liability.
Remember, as we explained in the section entitled "Fund Distributions and Tax
Issues--Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge NAV or Class Z shares, we will automati-
cally exchange your Class B and Class C shares that are not subject to a CDSC
for shares of the class for which you qualify (Class A or Class Z). We make
such exchanges on a quarterly basis if you qualify for this special exchange
privilege. We have obtained a legal opinion that this exchange is not a "tax-
able event" for federal income tax purposes, but this opinion is not binding on
the IRS.

Frequent Trading
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. Also when market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advanta-

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28
<PAGE>

geous to sell any securities, so the Fund's performance may be hurt. When large
dollar amounts are involved, market timing can also make it difficult to use
long-term investment strategies because we cannot predict how much cash the
Fund will have to invest. When in our opinion such activity would have a dis-
ruptive effect on portfolio management, the Fund reserves the right to refuse
purchase orders and exchanges into the Fund by any person, group or commonly
controlled accounts. The Fund may notify a market timer of rejection of an
exchange or purchase order subsequent to the day the order is placed. If the
Fund allows a market timer to trade Fund shares, it may require the market
timer to enter into a written agreement to follow certain procedures and limi-
tations.

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29
<PAGE>

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

The financial highlights will help you evaluate the Fund's financial
performance for the past 5 years. The total return in each chart represents the
rate that a shareholder earned on an investment in that share class of the
Fund, assuming reinvestment of all dividends and other distributions. The
information is for each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.

CLASS A SHARES
The financial highlights for the five years ended December 31, 1998 were
audited by [ ], independent accountants, whose reports were unquali-
fied.

<TABLE>
<CAPTION>
Class A Shares (fiscal years ended 12-
31)
- -------------------------------------------------------------------------------
Per Share Operating
Performance 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $-- $ 15.56 $ 15.98 $ 14.42 $ 16.30
Income from investment
operations:
Net investment income -- .81/3/ .82/3/ .81/3/ .81
Net realized and
unrealized gain (loss)
on investment
transactions -- .67 (.42) 1.57 (1.78)
Total from investment
operations -- 1.48 .40 2.38 (.97)
- -------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment income -- .81 (.82) (.81) (.81)
Distributions in excess
of investment income -- (.01) --/1/ (.01) --
Distributions from net
realized gains -- (.10) -- -- (.10)
Total distributions -- (92) (.82) (.82) (.91)
Net asset value, end of
year $-- $16.12 15.56% $15.98 $14.42
Total return/1/ --% 9.80% 2.66% 16.91% (6.04)%
- -------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of year
(000) $-- $493,178 $502,739 $538,145 $12,721
Average net assets (000) $-- $491,279 $508,159 $446,350 $14,116
Ratios to average net
assets:
Expenses, including
distribution fees --% .70%/3/ .68%/3/ .75%/3/ .77%
Expenses, excluding
distribution fees --% .60%/3/ .58%/3/ .65%/3/ .67%
Net investment income --% .5.15%/3/ 5.31%/3/ 5.34%/3/ 5.38%/3/
Portfolio turnover --% .38 46% 98% 120%
</TABLE>
- --------------------------------------------------------------------------------
1 Less than $.005 per share.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.
3 Net of management fee waiver.

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

[GRAPHIC]
Prudential National Municipal Funds, Inc. (800) 225-1852

30
<PAGE>

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

CLASS B SHARES
The financial highlights for the five years ended December 31, 1998 were
audited by [ ], independent accountants, whose reports were unquali-
fied.

<TABLE>
<CAPTION>
Class B Shares (fiscal years ended 12-
31)
- -------------------------------------------------------------------------------
Per Share Operating
Performance 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $-- $15.60 $16.02 $14.15 $16.33
Income from investment
operations:
Net investment income -- .75/3/ .76/3/ .76/3/ .75
Net realized and
unrealized gain (loss) on
investment transactions -- .67 (.42) 1.58 (1.78)
Total from investment
operations -- 1.42 .34 2.34 (1.03)
- -------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment income -- (.75) (.76) (.76) (.75)
Distributions in excess of
investment income -- (.01) --/1/ (.01) --
Distributions from net
realized gains -- (.10) -- -- (.10)
Total distributions -- (.86) (.76) (.77) (.85)
Net asset value, end of
year $-- $16.16 $15.60 $16.02 $14.45
Total return/2/ -- 9.35% 2.26% 16.49% (6.39%)
- -------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of year
(000) $-- $141,528 $168,185 $222,865 $672,272
Average net assets (000) $-- $151,938 $193,312 $252,313 $751,623
Ratios to average net
assets:
Expenses, including
distribution fees -- 1.10%/3/ 1.08%/3/ 1.15%/3/ 1.17%
Expenses, excluding
distribution fees -- .60%/3/ .58%/3/ .65%/3/ .67%
Net investment income -- 4.75%/3/ 4.91%/3/ 4.96%/3/ 4.96%
Portfolio turnover -- 38% 46% 98% 120%
</TABLE>
- --------------------------------------------------------------------------------
1 Less than $.005 per share.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.
3 Net of management fee waiver.

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

31
<PAGE>

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

CLASS C SHARES
The financial highlights for the four years ended December 31, 1998 and the
period from August 1, 1994 through December 31, 1994 were audited by
[ ], independent accountants,whose reports were unqualified.

<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Per Share Operating Performance (fiscal years ended 12-31)
1998 1997 1996 1995 1994/1/
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $-- $15.60 $16.02 $14.44 $15.13
Income from investment
operations:
Net investment income -- .71/4/ .72/4/ .72/4/ .29
Net realized and unrealized
gain (loss) on investment
transactions -- .67 (.42) 1.59 (.69)
Total from investment
operations -- 1.38 .30 2.31 (.40)
- -------------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income -- (.71) (.72) (.72) (.29)
Distributions in excess of
investment income -- (.01) --/2/ (.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/3/ --% 9.08% 2.01% 16.22% (2.63)%
- -------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
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
distribution fees --% 1.35%/4/ 1.33%/4/ 1.40%/4/ 1.51%/5/
Expenses, excluding
distribution fees --% .60%/4/ .58%/4/ .65%/4/ .76%/5/
Net investment income --% 4.50%/4/ 4.67%/4/ 4.66%/4/ 4.84%/5/
Portfolio turnover --% 38% 46% 98% 120%
</TABLE>
- --------------------------------------------------------------------------------
1 For the period from August 1, 1994 (when Class C shares were first offered)
through December 31, 1994.
2 Less than $.005 per share.
3 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and are sold on the last day of each
period reported.
4 Net of management fee waiver.

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

[GRAPHIC]
Prudential National Municipal Funds, Inc. (800) 225-1852

32
<PAGE>

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

CLASS Z SHARES
The financial highlights for the period from November 23, 1998 through December
31, 1998 were audited by [ ], independent accountants, whose report
was unqualified.

<TABLE>
<CAPTION>
Class Z Shares (fiscal year ended 12-31)
- -----------------------------------------------------------
Per Share Operating Performance 1998/1/
<S> <C>
Net asset value, beginning of period $--
Income from investment operations:
Net investment income --
Net realized and unrealized gain (loss) on
investment transactions --
Total from investment operations --
- -----------------------------------------------------------
Less distributions:
Dividends from net investment income
Distributions in excess of investment income --
Distributions from net investment income --
Total distributions --
Net asset value, end of period $--
Total return/2/ --%
- -----------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1998
<S> <C>
Net assets, end of period (000)
Average net assets (000) $--
Ratios to average net assets:
Expenses, including distribution fees --%/3/
Expenses, excluding distribution fees --%/3/
Net investment income --%/3/
Portfolio turnover --%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period from November 23, 1998 (when Class Z
shares were first offered) through December 31, 1998.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day, and are sold on the last day, of each
period reported. Total return for periods of less than a full year is not
annualized.
3 Annualized.

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

33
<PAGE>

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

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your
individual needs. For information about these funds, contact your financial
adviser or call us at (800) 225-1852. Read the prospectus carefully before you
invest or send money.

STOCK FUNDS
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Asset Allocation/Balanced Funds
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
GLOBAL FUNDS
Global Stock Funds
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Index Series Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.

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

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

[GRAPHIC]
Prudential National Municipals Fund, Inc. (800) 225-1852

34
<PAGE>

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

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

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

Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.

MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.

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

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

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

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

35
<PAGE>

FOR MORE INFORMATION
________________________________________________________________

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

Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers Should Contact:
Prudential Investment Management Services LLC
P.O. Box 15035
New Brunswick, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:

Statement of Additional Information (SAI)
(incorporated by reference into this prospectus)

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

Semi-Annual Report

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

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

In Person:
Public Reference Room in Washington, DC
(For hours of operation, call (800) SEC-0330)

Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP NUMBERS:
Class A: 743918-20-3
Class B: 743918-10-4
Class C: 743918-30-2
Class Z: 743918-40-1

Investment Company Act File No:
811-2992

Printed on Recycled Paper
[RECYCLE LOGO APPEARS HERE]

<PAGE>

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

Statement of Additional Information

March , 1999

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 long-term Municipal Bonds of medium quality, that
is, 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 "Description of the Fund, Its Investments and Risks."

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

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated March , 1999, a copy of
which may be obtained from the Fund upon request at the address or telephone
noted above.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund History.............................................................. B-2
Description of the Fund, Its Investments and Risks........................ B-2
Investment Restrictions................................................... B-10
Management of the Fund.................................................... B-12
Control Persons and Principal Holders of Securities....................... B-15
Investment Advisory and Other Services.................................... B-15
Brokerage Allocation and Other Practices.................................. B-19
Capital Shares, Other Securities and Organization......................... B-21
Purchase, Redemption and Pricing of the Fund Shares....................... B-21
Shareholder Investment Account............................................ B-30
Net Asset Value........................................................... B-33
Taxes, Dividends and Distributions........................................ B-34
Performance Information................................................... B-37
Financial Statements...................................................... B-
Independent Accountants Report............................................ B-
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>

FUND HISTORY

The Fund was incorporated in Maryland on January 9, 1980.

DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS

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

(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS.

The 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 and you could lose money.

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
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 generally 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 that are guaranteed by the U.S. Government, its
agents or instrumentalities (the interest on which may not be exempt from
federal income taxes).

MUNICIPAL BONDS

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 and A and BBB by S&P or comparably rated by any other
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.

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 (for example,
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,

B-2
<PAGE>

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.

Municipal Bonds include debt obligations of a state, a territory, or a
possession of the United States, or any political subdivision thereof (for
example, 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.

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 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: (1) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (2) 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, (3) 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, (4) 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, (5) 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 (2) 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

B-3
<PAGE>

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.

RISK MANAGEMENT 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 and regulatory limits and
there can be no assurance that any of these strategies will succeed. New
financial products and risk management techniques continue to be developed and
the Fund may use these new investments and techniques to the extent consistent
with its investment 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.

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 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.

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.

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

B-4
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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.

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

OPTIONS ON FUTURES CONTRACTS

The Fund may enter into options on 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 future 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 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.

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<PAGE>

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.

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.

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

CFTC LIMITS. Under regulations of the Commodity Exchange Act, as amended
(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. 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.

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 insures 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. 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.

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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 above
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).

RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES

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

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

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

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

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

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.

Pursuant to the requirements of the Commodity Exchange Act, all futures
contract and options thereon must be traded on an exchange. 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. 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 exchanges. Although the Fund

B-7
<PAGE>

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 underlying securities until the option
expired or was exercised or, in the case or a purchased option, exercise the
option and comply with the margin requirements for the underlying futures
contract to realize any profit. 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. 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.

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.

As described above, under regulations of the Commodity Exchange Act,
investment companies registered under the Investment Company Act are exempt
from the definition of commodity pool operator, subject to compliance with
certain conditions. The Fund may enter into futures or related options
contracts for return enhancement purposes if the aggregate initial margin and
option premiums do not exceed 5% of the liquidation value of the Fund's total
assets, after taking into account unrealized profits and unrealized losses on
any such contracts, provided, however, that in the case of an option that is
in-the-money, the in-the-money amount may be excluded in computing such 5%.
The above restriction does not apply to the purchase and sale of futures and
related options contracts for bona fide hedging purchases within the meaning
of the regulations of the CFTC.

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

If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account, cash or liquid assets equal
in value (when added to any initial or variation margin on deposit) to the
market value of the securities underlying the futures contract. Such a
position may also be covered by owning the securities underlying the futures
contract, or by holding a call option permitting the Fund to purchase the same
contract at a price no higher than the price at which the short position was
established.

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

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

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

B-8
<PAGE>

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

An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. As described above,
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 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: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (3) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (4) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; ((5) the
facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (6) 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, such as certain securities subject to
contractual restrictions on resale (restricted securities). 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 and certain other securities for which there is
a readily available market will not be considered illiquid for purposes of the
Fund's 15% limitation on illiquid securities only when deemed liquid under
procedures established by the Directors. In reaching liquidity decisions, the
investment adviser will consider, inter alia, the following factors: (1) the
frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (for
example, the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer). With respect to municipal lease
obligations, the investment adviser 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 (a) whether the lease can be cancelled; (b) if
applicable, what assurance there is that the assets represented by the lease
can be sold; (c) the strength of the lessee's general credit (e.g., its debt,
administrative, economic and financial characteristics); (d) 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);
(e) 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.

(D) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS

As described above, for liquidity purposes, pending investment in Municipal
Bonds, or on a temporary or defensive basis due to market conditions, the Fund
may invest without limit in Municipal Notes. Investing heavily in these
securities can limit our ability

B-9
<PAGE>

to achieve our investment objective of a high level of current income exempt
from federal income taxes, but can help to preserve the Fund's assets.

(E) 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, 1997 and 1998 the Fund's portfolio turnover rates were 38%
and %, respectively. See "Brokerage Allocations and Other Practices" and
"Taxes, Dividends and Distributions."

SEGREGATED ASSETS

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. Such hedging transactions may
involve when-issued and delayed securities, futures contracts, written options
and options on futures contracts (unless otherwise covered). If collateralized
or otherwise covered, in accordance with Commission guidelines, these will not
be deemed to be senior securities.

INVESTMENT RESTRICTIONS

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

The Fund may not:

(1) 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.

B-10
<PAGE>

(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-11
<PAGE>

MANAGEMENT OF THE FUND

<TABLE>
<CAPTION>
NAME, ADDRESS(/1/) AND POSITION WITH PRINCIPAL OCCUPATIONS
(AGE) FUND DURING PAST 5 YEARS
- ---------------------- ------------- ---------------------
<S> <C> <C>
Edward D. Beach (74) Director President and Director of BMC Fund, Inc., a closed-end
investment
company; previously Vice Chairman of Broyhill Furniture
Industries, Inc.;
Certified Public Accountant; Secretary and Treasurer of
Broyhill Family Foundation, Inc.; Member of the Board
of Trustees of Mars Hill College; 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 (60) Director Marketing and Management Consultant; Director of The
High Yield Income Fund, Inc.
*Robert F. Gunia (52) Director and Vice President (since September 1997) of The Prudential
Vice President Insurance Company of America (Prudential); Executive
Vice President and Treasurer (since December 1996) of
Prudential Investments Fund Management LLC (PIFM) Se-
nior Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential Securities); for-
merly Chief Administrative Officer (July 1990-September
1996), Director (January 1989-September 1996), Execu-
tive Vice President, Treasurer and Chief Financial Of-
ficer (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.
*Mendel A. Melzer CFA (37) Director Chief Investment Officer (since October 1996) of Pruden-
751 Broad Street tial Mutual Funds; formerly Chief Financial Officer
Newark, NJ 07102-4077 (November 1995-September 1996) of Prudential Invest-
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.
Thomas T. Mooney (57) 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.
</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-12
<PAGE>

<TABLE>
<CAPTION>
NAME, ADDRESS(/1/) AND PRINCIPAL OCCUPATIONS
(AGE) POSITION WITH FUND DURING PAST 5 YEARS
---------------------- ------------------ ---------------------
<C> <C> <S>
Thomas H. O'Brien (74) 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-
August 1990); 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) Director Employee of Prudential Invest-
751 Broad Street ments; formerly President,
Newark, NJ 07102-4077 Chief Executive Officer and
Director (October 1993-Sep-
tember 1996) of Prudential
Mutual Fund Management, Inc.;
Executive Vice President, Di-
rector and Member of the Op-
erating Committee (October
1993-September 1996) of Pru-
dential Securities; Director
(October 1993-September 1996)
of Prudential Securities
Group, Inc.; Executive Vice
President, The Prudential In-
vestment Corporation (January
1994-September 1996); Direc-
tor (January 1994-September
1996) of Prudential Mutual
Fund Distributors, Inc., and
Prudential Mutual Fund Serv-
ices, Inc. and Senior Execu-
tive Vice President and Di-
rector of Kemper Financial
Services, Inc. (September
1978-September 1993); Direc-
tor of The High Yield Income
Fund, Inc.
*Brian M. Storms (44) President and President (since October 1998)
Director of Prudential Investments;
formerly President (September
1996-October 1998) of
Prudential Mutual Funds,
Annuities and Investment
Management Services, Managing
Director (July 1991-September
1996) of Fidelity Investment
Institutional Services
Company, Inc., President
(October 1989-September 1991)
of J.K. Schofield and Senior
Vice President (September
1982-October 1989) of INVEST
Financial Corporation.
Nancy H. Teeters (68) Director Economist, formerly Vice Pres-
ident and Chief Economist
(March 1986-June 1990) of In-
ternational Business Machines
Corporation; Member of the
Board of Governors of the
Horace Rockham School of
Graduate Studies of the Uni-
versity of Michigan; Director
of Inland Steel Industries
(since July 1991) and The
High Yield Income Fund, Inc.
Louis A. Weil, III (57) 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), formerly 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.
Grace C. Torres (39) Treasurer and Principal First Vice President (since
Financial and December 1996) of PIFM; First
Accounting Officer Vice President (since March
1994) of Prudential Securi-
ties; formerly First Vice
President (March 1994-Septem-
ber 1996) of Prudential Mu-
tual Fund Management, Inc.
and Vice President (July
1989-March 1994) of Bankers
Trust Corporation.
</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-13
<PAGE>

<TABLE>
<CAPTION>
Principal Occupations
Name, Address(/1/) and (Age) 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
(46) Vice President (February 1993-September 1996) of Pru-
dential Mutual Fund Management, Inc. and Senior Tax
Manager (1981-January 1993) of Price Waterhouse LLP.
Deborah Secretary Vice President (since December 1996) of PIFM; formerly
A. Docs Vice President and Associate General Counsel (June
(41) 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 of the Directors and officers is c/o:
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.

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

Directors and officers of the Fund are also trustees, Directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.

The officers conduct and supervise the daily business operations of the
Company, while the Directors, in addition to their functions set forth under
"Management of the Company" and "Investment Advisory and Other Services,"
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 a Commission exemptive
order of the Commission, at the daily rate of return of the Fund (the Fund
rate). 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, 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, 1998 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), including the Fund, for the calendar year ended December 31, 1998.

B-14
<PAGE>

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL 1998
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............... $ None N/A $
Eugene C. Dorsey--
Director**............. $ None N/A $
Delayne Dedrick Gold--
Director............... $ None N/A $
Robert F. Gunia--
Director and Vice
President(/1/)......... -- -- -- --
Mendel A. Melzer--
Director(/1/).......... -- -- -- --
Thomas T. Mooney--
Director**............. $ None N/A $
Thomas H. O'Brien--
Director............... $ None N/A $
Richard A. Redeker--
Director............... $ None N/A $
Brian Storms--Director
and President(/1/)..... $ $
Nancy H. Teeters--
Director............... $ None N/A $
Louis A. Weil, III--
Director............... $ -- -- $
</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, 1998, includes amounts deferred at the
election of Directors under the Fund's deferred compensation plans.
Including accrued interest, total compensation amounted to $ and $
for Messrs. Dorsey and Mooney, respectively.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

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

As of , 1999, the Directors and officers of the Fund, as a group, owned
less than 1% of each class of the outstanding shares of the Fund. As of ,
1999, each of the following entities owned more than 5% of the outstanding
shares of each of the classes indicated:

As of February , 1999, Prudential Securities was the record holder for
other beneficial owners of Class A shares (approximately % of such
shares outstanding), Class B shares (approximately % of such shares
outstanding), Class C shares (approximately % of such shares
outstanding) and Class Z shares (approximately % of such shares
outstanding). In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy materials to
beneficial owners for which it is the record holder.

INVESTMENT ADVISORY AND OTHER SERVICES

(A) MANAGER AND INVESTMENT ADVISER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to substantially all of the other
investment companies that, together with the Fund, comprise the "Prudential
Mutual Funds." See "How the Fund is Managed--Manager" in the Prospectus. As of
January 31, 1999, PIFM managed and/or administered open-end and closed-end
management investment companies with assets of approximately $[ ] billion.
According to the Investment Company Institute, as of [ ], 1998, the
Prudential Mutual Funds were the th 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.

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

B-15
<PAGE>

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.

PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and subsidies will increase the Fund's total return. These voluntary waivers
may be terminated at any time without notice.

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

B-16
<PAGE>

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

For the fiscal years ended December 31, 1998, 1997 and 1996, the Fund paid
PIFM management fees of $ , $2,869,410 (net of waiver of $215,979) and
$2,996,081 (net of waiver of $351,073), 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 provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or the Subadviser upon not more than 60 days',
nor less than 30 days', written notice. The Subadvisory Agreement provides
that it will continue in effect for a period of more than two years from its
execution only so long as such continuance is specifically approved at least
annually in accordance with the requirements of the Investment Company Act.

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

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

Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, 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.

The expenses incurred under the Plans include commissions and accounting
servicing fees paid to or on account of brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of
Fund shares. Including lease, utility communications and sales promotion
expenses. The distribution and/or service fees may also be used by the
Distributor to compensate on a continuing basis brokers in consideration for
the distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.

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

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

CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has voluntarily limited its distribution-related fees
payable under the Class A Plan to .10 of 1% of the average daily net assets of
the Class A shares. This voluntary waiver may be terminated at any time
without notice. Fee waivers will increase the Fund's total return.

B-17
<PAGE>

For the fiscal year ended December 31, 1998, the Distributor and Prudential
Securities received payments of $ under the Class A Plan. The amount was
primarily expanded for payment of account servicing fees to financial advisers
and other persons who sell Class A shares. The Distributor and Prudential
Securities also received approximately $ , in initial sales charges.

CLASS B AND CLASS C PLANS. 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 asset of the Class B and Class C shares,
respectively. The Class B Plan provides for the payment to the Distributor of
(1) an asset-based sales charge of up to .50 of 1% of the average daily net
assets of the Class B shares, and (2) 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 (1) an asset-based sales charge of up to
.75 of 1% of the average daily net assets of the Class C shares, and (2) 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. The Distributor also receives
continuing deferred sales charges from certain redeeming shareholders. This
voluntary waiver may be terminated at any time without notice. Fee waivers
will increase the Fund's total return.

CLASS B PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities received $ from the Fund under the Class B
Plan. It is estimated that the Distributor spent approximately $ 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
% ($ ) was spent on printing and mailing of prospectuses to other
than current shareholders; % ($ ) 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 % ($ ) on the aggregate of (1) payments of commissions to
financial advisers % ($ ) and (2) an allocation on account of
overhead and other branch office distribution-related expenses %
($ ). 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 (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by holders of Class B
shares upon certain redemptions of Class B shares. See "How to Buy, Sell and
Exchange Shares of the Fund--How to Sell Your Shares--Contingent Deferred
Sales Charge (CDSC)" in the Prospectus. For the fiscal year ended December 31,
1998, the Distributor and Prudential Securities received approximately
$ , in contingent deferred sales charges with respect to Class B shares.

CLASS C PLAN. For the fiscal year ended December 31, 1998 the Distributor
and Prudential Securities received $ , from the Fund under the Class C
Plan and spent approximately $ in distributing the Fund's Class C
shares. It is estimated that of the latter amount approximately % ($ )
was spent on printing and mailing of prospectus to other than current
shareholders; % ($ ) on compensation to Pruco Securities Corporation,
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;
% ($ ) on the aggregate of (i) payments of commission and account
servicing fees to financial advisers ( % or $ ) and (ii) an allocation
of overhead and other branch office distribution-related expenses ( % or
$ ). 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, communication costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.

The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of CDSCs paid by holders of Class C shares upon certain
redemptions of Class C shares. For the year ended December 31, 1998, the
Distributor and Prudential Securities received approximately $ in CDSCs
with respect to Class C shares.

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

B-18
<PAGE>

The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the directors who are not
interested persons of the Fund and have no direct or indirect financial
interest in the Class A, Class B or Class C Plans or in any agreement related
to the Plans (Rule 12b-1 Directors), cast in person at a meeting called for
the purpose of voting on such continuance. 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.

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

The Distributor has waived a portion of its distribution fees for the Class
A and Class C shares as described above. Fee waivers and subsidies will
increase the Fund's total return. These voluntary waivers may be terminated at
any time without notice. See "Performance Information."

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

Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 06837, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $13.00
per shareholder account and a new account set-up fee of $2.00 for each
manually established shareholder account. PMFS is also reimbursed for its out-
of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communication expenses and other costs.

[ ], New York, New York , serves as the Fund's independent
accountants and in that capacity audits the Fund's annual financial
statements.

BROKERAGE ALLOCATION AND OTHER PRACTICES

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.

B-19
<PAGE>

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.

The Fund paid no brokerage commissions to Prudential Securities for the
fiscal years ended December 31, 1996, 1997 and 1998.

The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at [ ], 1998. As of [ ], 1998, the Fund did not
hold any securities of its regular brokers and dealers.

B-20
<PAGE>

CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION

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 (1) 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, (2) 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, (3) each class has a different exchange
privilege, (4) only Class B shares have a conversion feature and (5) 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 Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances. Each share of each class of common stock is equal as to
earnings, assets and voting privileges, except as noted above, and each class
bears the expenses related to the distribution of its shares (with the
exception of Class Z shares, which are not subject to any distribution and/or
service fees). Except for the conversion feature applicable to the Class B
shares, there are no conversion, preemptive or other subscription rights. In
the event of liquidation, each share of common stock of the Fund is entitled
to its portion of all of the Fund's assets after all debts and expenses of the
Fund have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower to Class A shareholders
and to Class Z shareholders, whose shares are not subject to any distribution
and/or service fees. The Fund's shares do not have cumulative voting rights
for the election of Directors.

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

PURCHASE, REDEMPTION AND PRICING OF FUND SHARES

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

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

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

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

B-21
<PAGE>

ISSUANCE OF FUND SHARES FOR SECURITIES

Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, 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%, Class C* shares are sold with a 1% sales charge and Class B* and Class Z
shares of the Fund are sold at NAV. Using the Fund's NAV at December 31, 1998,
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.......................... $
Maximum sales charge (3% of offering price).........................
----
Offering price to public............................................ $
====
<CAPTION>
CLASS B
<S> <C>
NAV, offering price and redemption price per Class B share*......... $
====
<CAPTION>
CLASS C
<S> <C>
NAV, offering price and redemption price per Class C share*......... $
Maximum sales charge (1% of offering price).........................
----
Offering price to public............................................ $
====
<CAPTION>
CLASS Z
<S> <C>
NAV, offering price and redemption price per Class Z share.......... $
====
</TABLE>
---------

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

SELECTING A PURCHASE ALTERNATIVE

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

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 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 more than 4
years, or for more than 5 years, but less than 6 years, you should consider
purchasing Class A shares because that 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.

B-22
<PAGE>

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 fee 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 on the return on the investment over this
period of time or redemptions when the CDSC is applicable.

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

Class A shares may be purchased at NAV, through the Distributor or the
Transfer Agent, by:

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

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

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

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

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

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

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

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

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

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

. an individual;

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

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

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

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

B-23
<PAGE>

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

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

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 Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales 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 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 your
broker. 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 or the Transfer Agent must be
notified at the time of purchase that the investor is entitled to a reduced
sales charge. The reduced sales charges will be granted subject to confirmation
of the investor's holdings. Rights of Accumulation are not available to
individual participants in any retirement or group plans.

LETTERS OF INTENT. Reduced sales charges are 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 (Investment Letter of
Intent).

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

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-24
<PAGE>

CLASS B SHARES

The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Redemptions of Class B shares may be subject to a CDSC. See
"Contingent Deferred Sales Charges" below.

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

CLASS C SHARES

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

WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES

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

CLASS Z SHARES

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

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

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

. employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan and

. Prudential with an investment of $10 million or more.

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

SALE OF SHARES

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

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

If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your broker.

B-25
<PAGE>

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

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

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

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

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

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase (or one year in the case of shares
purchased prior to November 2, 1998) will be subject to a 1% CDSC. The CDSC
will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduced the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and 18 months, in the case of Class C
shares (one year for Class C shares purchased before November 2, 1998). A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any CDSC will be paid to and retained by the
Distributor.

B-26
<PAGE>

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 as money
market fund. See "Shareholder Investment Account--Exchange Privilege."

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

<TABLE>
<CAPTION>
Contingent Deferred Sales
Charge as a Percentage
Year Shares 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 distribution; 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 Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.

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

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

Waiver of Contingent Deferred Sales Charge--Class B Shares. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.

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

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

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
considered disabled if he or she
is
unable to engage in any substan- A copy of the Social Security Administra-
tial gainful activity by reason of tion award letter or a letter from a physi-
any medically determinable physi- cian on the physician's letterhead stating
cal or mental impairment which can that the shareholder (or, in the case of a
be expected to result in death or trust, the grantor) is permanently disa-
to be of long-continued and indef- bled. The letter must also indicate the
inite duration. date of disability.
</TABLE>

B-27
<PAGE>

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

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.

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.

CONVERSION FEATURE--CLASS B SHARES

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

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

For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different 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 (that is, $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.

B-28
<PAGE>

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

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

B-29
<PAGE>

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 broker. 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.

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. An exchange is treated as a redemption and purchase for federal income
tax purposes. 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.

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

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

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

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

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

CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
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.

B-30
<PAGE>

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

Prudential California Municipal Fund
(California Money Market Series)

Prudential Government Securities Trust

(Money Market Series)

(U.S. Treasury Money Market Series)

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

Prudential MoneyMart Assets, Inc.

Prudential Tax-Free Money Fund, Inc.

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

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

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

B-31
<PAGE>

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

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

DOLLAR COST AVERAGING

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

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

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

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

See "Automatic Investment Plan" below.
- ---------
/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 INVESTMENT PLAN (AIP)

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

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

B-32
<PAGE>

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 "Automatic Reinvestment of Dividends
and/or Distributions" above.

The Transfer Agent, the Distributor or your broker acts 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 and Class C shares and (ii) the redemption of
Class B and Class C shares. Each shareholder should consult his or her own tax
adviser with regard to the tax consequences of the 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, such as to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund
may waive or reduce the minimum initial investment requirements in connection
with such a program.

The mutual funds in the program may be purchased individually or as 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

B-33
<PAGE>

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.

As long as the Fund declares dividends daily, the net asset value of the
Class A, Class B, Class C and Class Z shares of the Fund will generally be the
same. It is expected, however, that the dividends, if any, will differ by
approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.

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. Capital gains, if
any, of the Fund will be distributed at least annually.

The Fund has elected to qualify 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 generally requires, among other things, that the
Fund (a) derive at least 90% of its annual gross income (without offset for
losses from the sale or other disposition of securities or foreign currencies)
from 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) 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) and (c) the Fund
distribute to its shareholders at least 90% of its net investment income and
net short-term gains (i.e., the excess of net short-term capital gains over
net long-term capital losses) and 90% of its net tax-exempt interest income in
each year. 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 is subject to a nondeductible 4% excise tax if it does not
distribute 98% of its ordinary taxable income on a calendar year basis and 98%
of its capital gains on an October 31 year-end basis. The Fund intends to
distribute its income and capital gains in the manner necessary to avoid
imposition of the 4% excise tax. Dividends and distributions generally are
taxable to shareholders in the year in which they are received or accrued;
however, dividends declared in October, November and December payable to
shareholders of record on a specified date in October, November and December
and paid in the following January will be treated as having been paid by the
Fund and received by shareholders in such prior year. Under this rule, a
shareholder may be taxed in one year on dividends or distributions actually
received in January of the following year.

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

B-34
<PAGE>

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.

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.

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

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 taxable
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 issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Fund at its original issue.

If any net capital gains from the sale of assets held for more than 12
months in excess of net short-term capital losses are retained by the Fund for
investment, requiring federal income taxes to be paid thereon by the Fund, the
Fund will elect to treat such capital gains as having been distributed to
shareholders. As a result, shareholders will be taxed on such amounts as
capital gains, will be able to claim their proportionate share of the federal
income taxes paid by the Fund on such gains as a credit against their own
federal income tax liabilities, and will be entitled to increase the adjusted
tax basis of their shares by the differences between their pro rata share of
such gains and their tax credit.

Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to flow through as tax-exempt interest to its
shareholders provided that 50% or more of the value of its assets at the end
of each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to share holders of tax-exempt interest earned by the Fund for
the taxable year are not subject to federal income tax (except for possible
application of the alternative minimum tax). Interest from certain private
activity and other bonds is treated as an item of tax preference for purposes
of the alternative minimum tax on individuals and the alternative minimum tax
on corporations. To the extent interest on such bonds is distributed to
shareholders of the Fund, shareholders will be subject to the alternative
minimum tax on such distributions. 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. 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.

Distributions of taxable net investment income and of the excess of net
short-term capital gains over net long-term capital losses are taxable to
shareholders as ordinary income. None of the income distributions of the Fund
will be eligible for the deduction for dividends received by corporations.

B-35
<PAGE>

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 with respect to asset gains recognized by the Fund is 20%. The
maximum capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.

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.

Any gain or loss realized upon a sale or redemption of shares of the Fund by
a shareholder who is not a dealer in securities will be treated as capital
gain or loss. Any such capital gain or loss be treated as a long-term capital
gain or loss if the shares were held for more than 12 months. 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
exempt-interest 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.

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.

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 certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. Such proposals, if enacted,
may further limit the availability of state or municipal obligations for
investment by the Fund and the value of portfolio securities held by the Fund
may be adversely affected.

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-36
<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)6-1]
cd

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

The yield for the 30-day period ended December 31, 1998 for the Fund's Class
A, Class B, Class C and Class Z shares was %, %, %, and %, 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, 1998 for
the Fund's Class A, Class B, Class C and Class Z shares was %, %, % and %,
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)n=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.

B-37
<PAGE>

Below are the average annual total returns for the Fund's share classes
(except for Class Z shares, the inception date of which was November 23, 1998)
for the periods ended December 31, 1998.

<TABLE>
<CAPTION>
5 Years 10 Years Since Inception
1 (% without waivers (% without waivers (% without waivers
Year or subsidies) or subsidies) or subsidies) Inception Date
---- ------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C> <C>
Class A................. [ %] [ %] ( %) N/A [ %] ( %) 1-22-90
Class B................. [ %] [ %] ( %) [ %] ( %) [ %] ( %) 8-1-94
Class C................. [ %] [ %] ( %) [ %] ( %) [ %] ( %) 4-25-80
</TABLE>

(PIFM eliminated its management fee waiver of .05 of 1%, effective September
1, 1997).

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.

Below are the aggregate total returns for the Fund's share classes for the
periods ended December 31, 1998.

<TABLE>
<CAPTION>
5 Years 10 Years Since Inception
1 (% without waivers (% without waivers (% without waivers
Year or subsidies) or subsidies) or subsidies) Inception Date
---- ------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C> <C>
Class A................. [ %] [ %] ( %) N/A [ %] ( %) 1-22-90
Class B................. [ %] [ %] ( %) [ %] ( %) [ %] ( %) 4-25-80
Class C................. [ %] [ %] ( %) [ %] ( %) [ %] ( %) 8-1-94
Class Z................. N/A N/A N/A [ %] ( %) 11-23-98
</TABLE>

B-38
<PAGE>

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

[GRAPH APPEARS HERE]
Performance Comparison of Different Types of Investments
Over the Long Term (1/1926 - 12/1997)
Common Stocks Long-Term Gov't Bonds Inflation
------------- --------------------- ---------
11.0% 5.2% 3.1%

/1/ Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1998
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-39
<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.

I-1
<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.

[GRAPH APPEARS HERE]
Value of $1.00 invested on 1/1/26 through 12/31/97
Small Stocks -- $5,519,97 Long-Term Bonds -- $39.07
Common Stocks -- $1,828.33 Treasury Bills -- $14.25
Inflation -- $ 9.02

Source: Stocks, Bonds, Bills, and Inflation 1998 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 1997. The total returns of the indices include accrued interest,
plus the price changes (gains or losses) of the underlying securities during
the period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees
of a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.

[CHART APPEARS HERE]

<TABLE>
<CAPTION>
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 RETURNS
PERCENT 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)
[LINE GRAPH APPEARS HERE]

Source: Stocks, Bonds, Bills, and Inflation 1998 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, 1997 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1997. Principal products and services include life and health insurance,
other 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
79,000 persons worldwide, and maintains a sales force of approximately 10,100
agents and 6,500 domestic and international financial advisors. Prudential is
a major 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 40 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 25 million
life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. The Prudential provides auto insurance
for more than 1.5 million cars and insures more than 1.2 million homes.

Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 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 37,000 brokers
and agents and more than 1,100 offices throughout the United States./2/

Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.

Financial Services. The Prudential Savings Bank (FSB), 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 December 30, 1997 Prudential Investments Fund Management LLC was the
eighteenth 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/PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as one of
the subadvisers to The Prudential Investment Portfolios, 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 LLC, a premier institutional
equity manager and a subsidiary of Prudential.

High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
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 Investments, a business group 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, 1997, assets held by Prudential Securities for
its clients approximated $235 billion. During 1997, over 29,000 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.

In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Three 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, 1997.
/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
<PAGE>

PART C

OTHER INFORMATION

ITEM 23. EXHIBITS.

(a)(1) Restated Articles of Incorporation. Incorporated by reference to
Exhibit 1 to Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A filed via EDGAR on February 28, 1995 (File No.
2-66407).

(2) Articles Supplementary. Incorporated by reference to Exhibit 1(b)
to Post-Effective Amendment No. 27 to the Registration Statement
filed on Form N-1A via EDGAR on November 19, 1998 (File No. 2-66407).

(b)Amended and restated By-Laws. Incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 20 to the Registration Statement
filed on Form N-1A via EDGAR filed on March 1, 1994 (File No. 2-
66407).

(c)Instruments defining rights of holders of the securities being
offered. Incorporated by reference to Exhibits Nos. 1 and 2 above.

(d)(1) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc. Incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 25 to the Registration Statement filed
on Form N-1A via EDGAR on March 5, 1997 (File No. 2-66407).

(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and the Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 25 to the
Registration Statement filed on Form N-1A via EDGAR on March 5, 1997
(File No. 2-66407).

(e)(1) Selected Dealer Agreement. Incorporated by reference to Exhibit
6(a) to Post-Effective Amendment No. 27 to the Registration Statement
filed on Form N-1A via EDGAR on November 19, 1998 (File No. 2-66407).

(2) Distribution Agreement. Incorporated by reference to Exhibit 6(b)
to Post-Effective Amendment No. 27 to the Registration Statement
filed on Form N-1A via EDGAR on November 19, 1998 (File No. 2-66407).

(g)Custodian Agreement between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit 8 to Post-
Effective Amendment No. 25 to the Registration Statement filed on
Form N-1A via EDGAR on March 5, 1997 (File No. 2-66407).

(h)Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit 9(a) to Post-Effective Amendment No. 25 to Registration
Statement filed on Form N-1A via EDGAR on March 5, 1997 (File No. 2-
66407).

(i)Opinion of Swidler, Berlin, Shereff, Friedman, LLP (f.k.a., Shereff,
Friedman, Hoffman & Goodman, LLP). Incorporated by reference to
Exhibit 10 to Post-Effective Amendment No. 26 to Registration
Statement filed on Form N-1A via EDGAR on March 4, 1998 (File No. 2-
66407).

(j)Consent of Independent Accountants.*

(m)(1) Distribution and Service Plan for Class A shares. Incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A filed via EDGAR on November 19,
1998 (File No. 2-66407).

(2) Distribution and Service Plan for Class B shares. Incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A filed via EDGAR on November 19,
1998 (File No. 2-66407).

(3) Distribution and Service Plan for Class C shares. Incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A filed via EDGAR on November 19,
1998 (File No. 2-66407).

(n) Financial Data Schedules.*

(o)Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to Post-
Effective Amendment No. 27 to Registration Statement on Form N-1A
filed via EDGAR on November 19, 1998 (File No. 2-66407).
- ---------

*To be filed by amendment.

C-1
<PAGE>

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 25. INDEMNIFICATION.

As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-
Laws (Exhibit 2 to the Registration Statement), officers, directors, employees
and agents of the Registrant will not be liable to the Registrant, any
stockholder, officer, director, employee, agent or other person for any action
or failure to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be indemnified
against liabilities in connection with the Registrant, subject to the same
exceptions. Section 2-418 of Maryland General Corporation Law permits
indemnification of directors who acted in good faith and reasonably believed
that the conduct was in the best interests of the Registrant. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of each Distribution
Agreement (Exhibits 6(b), 6(c) and 6(d) to the Registration Statement), each
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence,
willful misfeasance or reckless disregard of duties.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission (Commission) such indemnification is
against public policy as expressed in the 1940 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in
connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such director, officer or controlling
person in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of
such issue.

The Registrant intends to purchase an insurance policy insuring its officers
and directors against liabilities, and certain costs of defending claims
against such officers and directors, to the extent such officers and directors
are not found to have committed conduct constituting willful misfeasance, bad
faith, gross negligence or reckless disregard in the performance of their
duties. The insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.

Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.

The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner
consistent with Release No. 11330 of the Commission under the 1940 Act so long
as the interpretation of Sections 17(h) and 17(i) of such Act remain in effect
and are consistently applied.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

(a) Prudential Investments Fund Management LLC (PIFM).

See "How the Fund is Managed-Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this
Registration Statement.

The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by
reference.

The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077.

C-2
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<C> <S> <C>
Robert F. Gunia Executive Vice Vice President, Prudential Investments; Executive Vice
President and President and Treasurer, PIFM; Senior Vice President,
Treasurer Prudential Securities
Neil A. McGuinness Executive Vice Executive Vice President and Director of Marketing,
President Prudential Mutual Funds & Annuities (PMF&A);
Executive Vice President, PIFM
Brian M. Storms Officer-in-Charge, President, PMF&A; Officer-in-Charge, President, Chief
President, Chief Executive Officer and Chief Operating Officer, PIFM
Executive Officer
and Chief Operating
Officer
Robert J. Sullivan Executive Vice Executive Vice President, PMF&A; Executive Vice
President President, PIFM
</TABLE>

(b) The Prudential Investment Corporation (PIC)

See "How the Fund is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory
and Other Services--Manager and Investment Adviser" in the Statement of
Additional Information constituting Part B of this Registration Statement.

The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
---------------- ----------------- ---------------------
<C> <S> <C>
E. Michael Caulfield Chairman Chief Executive Officer of Prudential Investments
of the (PIC) of The Prudential Insurance Company of America
Board, (Prudential)
President
and Chief
Executive
Officer
and
Director
John R. Strangfeld Vice President of Private Asset Management Group of
President Prudential; Senior Vice President, Prudential; Vice
and President and Director, PIC
Director
</TABLE>

C-3
<PAGE>

ITEM 27. PRINCIPAL UNDERWRITERS

(a) Prudential Investment Management Services LLC (PIMS)

PIMS is distributor for Cash Accumulation Trust, Command Government Fund,
Command Money Fund, Command Tax-Free Fund, The Global Total Return Fund Inc.,
Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond
Fund, Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund,
Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund,
Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust, Prudential High Yield Fund, Inc., Prudential High Yield
Total Return Fund, Inc., Prudential Index Series Fund, Prudential
Institutional Liquidity Portfolio, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap Value
Fund, Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund,
Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Pacific Index Fund,
Prudential Real Estate Securities Fund, Prudential Small Company Value Fund,
Inc., Prudential Small-Cap Quantum Fund, Inc., Prudential Special Money Market
Fund, Inc., Prudential Stock Index Fund, Prudential Structured Maturity Fund,
Inc., Prudential Tax-Free Money Fund, Inc., Prudential 20/20 Focus Fund,
Prudential Utility Fund, Inc., Prudential World Fund, Inc., The Prudential
Investment Portfolios, and The Target Portfolio Trust.

(b) Information concerning the officers and directors of PIMS is set forth
below.

<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(/1/) UNDERWRITER REGISTRANT
- --------- ------------- -------------
<S> <C> <C>
E. Michael Caulfield..... President None

Mark R. Fetting.......... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102

Jean D. Hamilton......... Executive Vice President None

Ronald P. Joelson........ Executive Vice President None

Brian M. Storms.......... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102

John R. Strangfeld....... Executive Vice President None

Mario A. Mosse........... Senior Vice President and Chief None
Operating Officer

Scott S. Wallner......... Vice President, Secretary and Chief None
Legal Officer

Michael G. Williamson.... Vice President, Comptroller and Chief None
Financial Officer

C. Edward Chaplin........ Treasurer None
</TABLE>
- ---------

(1) The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise indicated.

C-4
<PAGE>

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, Newark, New Jersey 07102-4077, and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey, 08837. Documents required by Rules 31a-
1 (b) (5), (6), (7), (9), (10) and (11) and 31a-1 (f) will be kept at Three
Gateway Center, documents required by Rules 31a-1 (b) (4) and (11) and 31a-1
(d) at Three Gateway Center and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust
Company and Prudential Mutual Fund Services. Inc.

ITEM 29. MANAGEMENT SERVICES

Other than as set forth under the captions "How the Fund is Managed--
Manager" and "How the Fund is Managed--Distributor" in the Prospectus and the
caption "Investment Advisory and Other Services--Manager and Investment
Adviser" and "--Principal Underwriter, Distributor and Rule 12b-1 Plans" in
the Statement of Additional Information, constituting Parts A and B,
respectively, of this Registration Statement, Registrant is not a party to any
management-related service contract.

ITEM 30. UNDERTAKINGS

The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of Registrant's latest annual report to shareholders
upon request and without charge.

C-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark, and State of New Jersey, on the 11th day of
January, 1999.

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

/s/ Brian M. Storms
---------------------------------
(BRIAN M. STORMS, PRESIDENT)

Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Edward D. Beach Director January 11, 1999
-------------------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Director January 11, 1999
-------------------------------------------
EUGENE C. DORSEY
/s/ Delayne Dedrick Gold Director January 11, 1999
-------------------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Vice President and
------------------------------------------- Director January 11, 1999
ROBERT F. GUNIA
/s/ Mendel A. Melzer Director January 11, 1999
-------------------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Director January 11, 1999
-------------------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Director January 11, 1999
-------------------------------------------
THOMAS H. O'BRIEN
/s/ Richard A. Redeker Director January 11, 1999
-------------------------------------------
RICHARD A. REDEKER
/s/ Brian M. Storms President and Director January 11, 1999
-------------------------------------------
BRIAN M. STORMS
/s/ Nancy Hays Teeters Director January 11, 1999
-------------------------------------------
NANCY HAYS TEETERS
/s/ Louis A. Weil, III Director January 11, 1999
-------------------------------------------
LOUIS A. WEIL, III
/s/ Grace C. Torres Principal Financial and
------------------------------------------- Accounting Officer January 11, 1999
GRACE C. TORRES
</TABLE>

C-6
<PAGE>

EXHIBIT INDEX

(2) Articles Supplementary. Incorporated by reference to Exhibit
1(b) to Post-Effective Amendment No. 27 to the Registration Statement
filed on Form N-1A via EDGAR on November 19, 1998 (File No. 2-66407).

(c)Instruments defining rights of holders of the securities being
offered. Incorporated by reference to Exhibits Nos. 1 and 2 above.

(i) Opinion of Swidler, Berlin, Shereff, Friedman, LLP (f.k.a., Shereff,
Friedman, Hoffman & Goodman, LLP). Incorporated by reference to
Exhibit 10 to Post-Effective Amendment No. 26 to Registration
Statement filed on Form N-1A via EDGAR on March 4, 1998 (File No. 2-
66407).

(j) Consent of Independent Accountants.*

(m)(1) Distribution and Service Plan for Class A shares. Incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A Filed via EDGAR on November 19,
1998 (File No. 2-66407).

(2) Distribution and Service Plan for Class B shares. Incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A Filed via EDGAR on November 19,
1998 (File No. 2-66407).

(3) Distribution and Service Plan for Class C shares. Incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A Filed via EDGAR on November 19,
1998 (File No. 2-66407).

(n) Financial Data Schedules.*

*To be filed by amendment.