PRUDENTIAL NATIONAL MUNICIPALS FUND INC, 485BPOS, 2000-03-02

PRUDENTIAL NATIONAL MUNICIPALS FUND INC
485BPOS, 2000-03-02

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<PAGE>

As filed with the Securities and Exchange Commission on March 2, 2000
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. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 30
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
[X]
AMENDMENT NO. 29
(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):

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

[_] on (date) pursuant to paragraph (b)
[_] 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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<PAGE>

[LOGO] PRUDENTIAL PROSPECTUS MARCH 1, 2000

Prudential
National Municipals Fund, Inc.

FUND TYPE Tax-exempt bond

OBJECTIVE High level of current income exempt from federal income taxes

Build [GRAPHIC]

As with all mutual funds, the Securities and
Exchange Commission has not approved or
disapproved the Fund's shares nor has the on the Rock
SEC determined that this prospectus is
complete or accurate. It is a criminal offense
to state otherwise.
<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
3 Evaluating Performance
4 Fees and Expenses
6 How the Fund Invests
6 Investment Objective and Policies
8 Other Investments and Strategies
11 Investment Risks
14 How the Fund is Managed
14 Board of Directors
14 Manager
14 Investment Adviser
16 Distributor
17 Fund Distributions and Tax Issues
17 Distributions
18 Tax Issues
19 If You Sell or Exchange Your Shares
21 How to Buy, Sell and Exchange Shares of the Fund
21 How to Buy Shares
28 How to Sell Your Shares
31 How to Exchange Your Shares
33 Telephone Redemptions and Exchanges
34 Financial Highlights
34 Class A Shares
35 Class B Shares
36 Class C Shares
37 Class Z Shares
38 The Prudential Mutual Fund Family
For More Information (Back Cover)
</TABLE>

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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

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Risk/Return Summary
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This section highlights key information about the PRUDENTIAL 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 try 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 because
there is a lack of confidence in the borrower. Bonds with longer maturity dates
typically produce higher yields and are subject to greater price fluctuations
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 from interest rates--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 have
speculative characteristics and 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.

Municipal bonds and, in particular, municipal leases may be subject to the
risk that the municipality may not set aside funds in future budgets to make
the bond or lease payments.

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1
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Risk/Return Summary
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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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2 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

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Risk/Return Summary
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EVALUATING PERFORMANCE

A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The bar chart and table below demonstrate the
risk of investing in the Fund by showing how returns can change from year to
year and by showing how the Fund's average annual total returns compare with
those of a broad measure of market performance and a group of similar mutual
funds. Past performance does not mean that the Fund will achieve similar
results in the future.

[GRAPH]

Annual Returns* (Class B shares)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
5.95% 12.41% 8.49% 12.15% -6.39% 16.49% 2.26% 9.35% 4.99% -3.98%

BEST QUARTER: 6.26% (3rd quarter of 1995)
WORST QUARTER: -5.99% (1st quarter of 1994)

* 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/1/ (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares (3.69)% 5.99% N/A 6.44 %(since 1-22-90)
Class B shares (3.98)% 5.60% 5.94% 7.89 %(since 4-25-80)
Class C shares (4.22)% 5.34% N/A 4.41 %(since 8-1-94)
Class Z shares N/A N/A N/A N/A (since 1-22-99)
Lehman Muni Bond Index/2/ (2.06)% 6.91% 6.89% N/A
Lipper Average/3/ (4.63)% 5.76% 6.18% N/A
</TABLE>

1 The Fund's returns are after deduction of sales charges and expenses. Without
the distribution and service (12b-1) fee waiver for Class A and Class C
shares, the returns would have been lower.

2 The Lehman Brothers Municipal Bond Index--an unmanaged index of over 21,000
long-term investment grade municipal bonds--gives a broad look at how long-
term investment-grade municipal bonds have performed. These returns do not
include the effect of any sales charges or operating expenses of a mutual
fund. These returns would be lower if they included the effect of sales
charges and operating expenses. The Lehman Muni Bond Index returns since the
inception of each class are 7.00% for Class A, 8.36% for Class B, 5.86% for
Class C and (3.48)% for Class Z shares. Source: Lehman Brothers.

3 The Lipper Municipal Debt Funds Category is based on the average return of
all mutual funds in this category. These returns do not include the effect of
any sales charges. These returns would be lower if they included the effect
of sales charges. The Lipper returns since the inception of each class are
6.36% for Class A, 8.26% for Class B, 4.74% for Class C and (5.68)% for Class
Z shares. Source: Lipper Inc.

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3
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Risk/Return Summary
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FEES AND EXPENSES

These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each 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)
<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
</TABLE>

ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .48% .48% .48% .48%
+ Distribution and service (12b-1) fees/4/ .30% .50% 1.00% --
+ Other expenses .13% .13% .13% .13%
= TOTAL ANNUAL FUND OPERATING EXPENSES .91% 1.11% 1.61% .61
- Fee waiver or expense reimbursement/4/ .05% None .25% --
= NET ANNUAL FUND OPERATING EXPENSES .86% 1.11% 1.36% .61
</TABLE>

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

/2/ The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.
/3/ The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.

/4/ For the fiscal year ending December 31, 2000, the Distributor of the Fund
has contractually agreed to reduce its distribution and service (12b-1) fees
for Class A and Class C shares to .25 of 1% and .75 of 1% of the average
daily net assets of Class A and Class C shares, respectively.

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4 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

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Risk/Return Summary
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EXAMPLE

This example will help you compare the fees and expenses of the Fund's
different share classes and 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, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A and Class C
shares during the first year. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $385 $577 $784 $1,382
Class B shares $613 $653 $712 $1,221
Class C shares $337 $579 $944 $1,971
Class Z shares $ 62 $195 $340 $ 762
</TABLE>

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $385 $577 $784 $1,382
Class B shares $113 $353 $612 $1,221
Class C shares $237 $579 $944 $1,971
Class Z shares $ 62 $195 $340 $ 762
</TABLE>

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5
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How the Fund Invests
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is 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 medium-quality 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 major
rating service. A rating is an assessment of the likelihood of timely repayment
of interest and principal and can be useful when comparing different debt
obligations. These ratings are not a guarantee of quality. The opinions of the
rating agencies do not reflect market risk and they may at times lag behind the
current financial conditions of the company. 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 or BBB by S&P
have speculative characteristics.
Although the investment adviser will consider ratings assigned to a
security, it will perform its own investment analysis. The Fund, for example,
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MUNICIPAL BONDS

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.

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6 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

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How the Fund Invests
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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 characteristics of medium-rated securities. High-yield securities offer
higher yields, but also offer 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 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, which are
municipal bonds the interest on which is subject to the federal alternative
minimum tax (AMT). See "Fund Distributions 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" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover
page of this prospectus.

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7
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How the Fund Invests
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The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies of the Fund that are not fundamental.

OTHER INVESTMENTS AND STRATEGIES

In addition to the principal strategies, we also may use the following
investment strategies to increase the Fund's returns or protect its assets if
market conditions warrant.

FLOATING RATE BONDS, VARIABLE RATE BONDS, INVERSE FLOATERS AND ZERO COUPON
MUNICIPAL BONDS

The Fund may 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
designated 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
specified 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 than the money the investor will receive when the
municipality repays the amount borrowed (face value).

MUNICIPAL LEASE OBLIGATIONS

The Fund may invest in municipal lease obligations. MUNICIPAL LEASE OBLIGATIONS
are obligations where the interest and principal are paid out of lease payments
made 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.

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8 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

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How the Fund Invests
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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 purchase, the
price and interest rate are fixed at the time of purchase, but delivery and
payment for the obligations take place at a later time. The Fund does not earn
interest income until the date the obligations are delivered.

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 take a
temporary defensive position and 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 various DERIVATIVE strategies to try to improve the Fund's returns
or protect its assets. We cannot guarantee that these strategies will work,
that the instruments necessary to implement these strategies will be available,
or that the Fund will not lose money. Derivatives--such as financial futures,
including interest rate futures contracts, and options on futures--involve
costs and can be volatile. With derivatives, the investment adviser tries to
predict if the underlying investment, whether a security, market index,
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.

Financial Futures Contracts and Related Options

The Fund may purchase and sell financial futures contracts and related options
on financial futures. A FUTURES CONTRACT is an agreement to buy or sell a set
quantity of an underlying product at a future date, or to make or receive a
cash payment based on the value of a securities index. An OPTION

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9
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How the Fund Invests
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is the right to buy or sell a security, or in the case of an option on a
futures contract, the right to buy or sell a futures contract, in exchange for
a premium.

For more information about these strategies, see the SAI, "Description of the
Fund, Its Investments and Risks."

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
shareholders); 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
contractual restrictions on resale, those without a readily available market,
and repurchase agreements with maturities longer than seven days). The Fund is
subject to certain investment restrictions that are fundamental policies which
means they cannot be changed without shareholder approval. For more information
about these restrictions, see the SAI.

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10 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

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How the Fund Invests
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INVESTMENT RISKS

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

INVESTMENT TYPE
RISKS POTENTIAL REWARDS
% OF FUND'S TOTAL
ASSETS

MUNICIPAL BONDS
. Credit risk--the
risk that the
borrower can't
pay back the
money borrowed or
make interest
payments (lower
for insured and
higher rated
bonds)

. Tax-exempt inter-
At least 80% un- est income, ex-
der normal condi- cept with respect
tions to certain bonds,
such as private
activity bonds,
which are subject
to the federal
alternative mini-
mum tax (AMT)
. Market risk--the
risk that bonds . If interest rates
will lose value decline, long-
in the market be- term yields
cause interest should be higher
rates rise or than money market
there is a lack yields
of confidence in
the borrower

. Concentration
risk--the risk
that bonds may
lose value be-
cause of politi-
cal, economic or
other events in
the geographic
region where the
Fund's invest-
ments are focused

. Tax risk--the
risk that federal
income tax rates
may decrease,
which could de-
crease demand for
municipal bonds

. Illiquidity
risk--the risk
that bonds may be
difficult to
value precisely
and sell at time
or price desired

. Nonappropriation
risk--the risk
that the
municipality may
not include the
bond obligations
in future budgets

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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
ASSETS RISKS POTENTIAL REWARDS
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HIGH-YIELD DEBT . Higher market . May offer higher
SECURITIES (JUNK risk than higher- interest income
BONDS) grade debt secu- and higher poten-
rities tial gains than
Percentage varies higher- grade
. Higher credit debt securities
risk than higher-
grade debt secu-
rities . Most bonds rise
in value when in-
terest rates fall

. Higher illiquid-
ity risk than
higher-grade debt
securities, in
which case valua-
tion would depend
more on invest-
ment adviser's
judgment than is
generally the
case with higher-
rated securities

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ZERO COUPON
MUNICIPAL BONDS . See credit risk, . Tax-exempt inter-
market risk con- est income, ex-
Percentage varies centration risk cept with respect
and tax risk to certain bonds,
. Typically subject such as private
to greater vola- activity bonds,
tility and less which are subject
liquidity in ad- to the AMT
verse markets
than other munic- . Value rises
ipal bonds faster when in-
terest rates fall

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VARIABLE/FLOATING . Value lags value . May offer protec-
RATE BONDS of fixed-rate se- tion against in-
curities when in- terest rate
Percentage varies terest rates changes
change

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INVERSE FLOATERS . High market . Income generally
risk--risk that will increase
inverse floaters when interest
Percentage varies will fluctuate in rates decrease
value more dra-
matically than
other debt secu-
rities when in-
terest rates
change

. See credit risk
and illiquidity
risk

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WHEN-ISSUED AND . May magnify un- . May magnify un-
DELAYED-DELIVERY derlying invest- derlying invest-
SECURITIES ment losses ment gains

. Investment costs
may exceed poten-
tial underlying
Percentage varies investment gains

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12 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

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How the Fund Invests
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INVESTMENT TYPE
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS

DERIVATIVES . The Fund could
Percentage varies . Derivatives such make money and
as futures and protect against
options on losses if the
futures that are investment
used for hedging analysis proves
purposes may not correct
fully offset the
underlying . One way to manage
positions and the Fund's
this could result risk/return
in losses to the balance is to
Fund that would lock in the value
not have of an investment
otherwise ahead of time
occurred
. Derivatives used
for risk
management may
not have the
intended effects
and may result in
losses or missed
opportunities
. The other party
to a derivatives
contract could
default

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

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MUNICIPAL LEASE
OBLIGATIONS . See credit risk, . Tax-exempt
market risk, interest income,
Percentage varies concentration except with
risk, respect to
nonappropriation certain bonds,
risk, illiquidity such as private
risk and tax risk activity bonds,
which are subject
to the AMT
. If interest rates
decline, long-
term yields
should be higher
than money market
yields

- --------------------------------------------------------------------------------
ILLIQUID
SECURITIES . See illiquidity
risk

Up to 15% of net . May offer a more
assets attractive yield
or potential for
growth than more
widely traded
securities

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

13
<PAGE>

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

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

BOARD OF DIRECTORS

The Fund's Board of Directors oversees the actions of the Manager, investment
adviser and Distributor and decides on general policies. The Board also
oversees the Fund's officers, who conduct and supervise the daily business
operations of the Fund.

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. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended December 31, 1999, the Fund paid PIFM management fees of .48% of the
Fund's average daily net assets.

PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of December 31, 1999, PIFM served as the
manager to all 42 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $75.6 billion.

INVESTMENT ADVISER

The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.

Prudential Investments' Fixed Income Group manages more than $135 billion
for Prudential's retail investors, institutional investors, and policyholders.
Senior Managing Directors James J. Sullivan and Jack W. Gaston head the Group,
which is organized into teams specializing in different market sectors. Top-
down, broad investment decisions are made by the Fixed Income Policy Committee,
whereas bottom-up security selection is made by the sector teams.

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

14 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC](800) 225-1852
<PAGE>

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

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

Mr. Sullivan has overall responsibility for overseeing portfolio management
and credit research. Prior to joining Prudential Investments in 1998, he was a
managing director in Prudential's Capital Management Group, where he oversaw
portfolio management and credit research for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 16 years of experience in
risk management, arbitrage trading, and corporate bond investing.

Mr. Gaston has overall responsibility for overseeing quantitative research
and risk management. Prior to this appointment in 1999, he was senior managing
director of the Capital Management Group where he was responsible for the
investment performance and risk management for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 20 years of experience in
investment management, including extensive experience applying quantitative
techniques to portfolio management.

The Fixed Income Investment Policy Committee is comprised of key senior
investment managers. Members include seven sector team leaders, the chief
investment strategist, and the head of risk management. The Committee uses a
top-down approach to investment strategy, asset allocation, and general risk
management, identifying sectors in which to invest.

The Municipal Bond Team, headed by Evan Lamp, is primarily responsible for
overseeing the day-to-day management of the Fund.

This Team uses a bottom-up approach, which focuses on individual securities,
while staying within the guidelines of the Investment Policy Committee and the
Fund's investment restrictions and policies. In addition, the Credit Research
team of analysts supports the sector teams using bottom-up fundamentals, as
well as economic and industry trends. Other sector teams may contribute to
securities selection when appropriate.

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

15
<PAGE>

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

MUNICIPAL BONDS

ASSETS UNDER MANAGEMENT: $5.4 billion (as of December 31, 1999).

TEAM LEADER: Evan Lamp. GENERAL INVESTMENT EXPERIENCE: 7 years.

PORTFOLIO MANAGERS: 5. AVERAGE GENERAL INVESTMENT EXPERIENCE: 8 years, which
includes team members with significant mutual fund experience.

SECTOR: City, state and local government securities.

INVESTMENT APPROACH: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the municipal
market. Ultimately, they seek the highest expected return with the least risk.

DISTRIBUTOR

Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing
the Fund's Class A, B, C and Z shares, and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.

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

16 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

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

Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of 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 the Fund also may be
subject to state and local income tax in the state where you live.

Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit.
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 distributes DIVIDENDS out 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
interest on taxable bonds held by the Fund, market discount on taxable and tax-
exempt obligations and short-term capital gains, however, will be subject to
federal, state and local income tax at ordinary income tax rates. Corporate
shareholders are not eligible for the 70% dividends-received deduction on
dividends paid by the Fund.
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).

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

17
<PAGE>

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

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%.

For your convenience, Fund distributions of dividends and 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 broker 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," in the
next section.

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.

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

WITHHOLDING TAXES

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

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

18 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852
<PAGE>

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

IF YOU PURCHASE JUST BEFORE RECORD DATE

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

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. 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.

If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before
the sale of the shares.) If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the
taxes described above.

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

CAPITAL GAIN
(taxes owed)
RECEIPTS FROM SALE OR
CAPITAL LOSS
(offset against gain)

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

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

19
<PAGE>

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

Any gains you may have from selling or exchanging Fund shares will not be
reported on Form 1099; however, proceeds from the sale or exchange will be
reported on Form 1099-B. 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" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. 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.

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

20 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<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 Class A share expenses. With Class C shares, you pay a 1%
front-end sales charge and a 1% CDSC if you sell within 18 months of purchase,
but the operating expenses are also higher than the expenses for Class A
shares.
When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees

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

21
<PAGE>

. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
. 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% of the public None
charge offering price 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% 1% None
service (12b-1) fees (.25 of 1% (.75 of 1%
(shown as a percentage currently) currently)
of average net
assets)/3/
</TABLE>

1 The minimum investment requirements do not apply to certain custodial
accounts for minors. 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 "How to
Sell Your Shares- Contingent Deferred Sales Charge (CDSC)." Class C shares
bought before November 2, 1998 have a 1% CDSC if sold within one year.

3 These distribution and service (12b-1) 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.
Class A shares may pay a service fee of up to .25 of 1%. Class B and Class C
shares will pay a service fee of .25 of 1%. The distribution fee for Class A
shares is limited to .30 of 1% (including up to .25 of 1% as a service fee),
is .25 of 1% for Class B shares and is .75 of 1% for Class C shares. For the
fiscal year ending December 31, 2000, the Distributor of the Fund has
contractually agreed to reduce its distribution and service (12b-1) fees for
Class A and Class C shares to .25 of 1% and .75 of 1% of the average daily
net assets of Class A and Class C shares, respectively.

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

22 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852
<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 initial sales
charge by increasing the amount of your investment. This table shows 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 an eligible group of related investors

. Buy 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 current
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)

. Sign a LETTER OF INTENT, stating in writing that you or an eligible group
of related investors will purchase a certain amount of shares in the Fund
and other Prudential mutual funds within 13 months.

The Distributor may reallow Class A's sales charge to dealers.

Mutual Fund Programs. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential 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

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

23
<PAGE>

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

Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.

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

WAIVING CLASS C'S INITIAL SALES CHARGE

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

. Purchase your shares through an account at Prudential Securities

. Purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation
. Purchase your shares through another broker.

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

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

24 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

QUALIFYING FOR CLASS Z SHARES

Mutual Fund Programs. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:

. Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades, links its clients' accounts to a master account in
the sponsor's name and charges its clients a management, consulting or
other fee for its services

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

Other Types of Investors. Class Z shares also can be purchased by any of the
following:

. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option

. Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)

. 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
commission of up to 4% of the purchase price for Class B shares, up to 2% of
the purchase price for Class C shares and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise.

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

25
<PAGE>

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

STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY

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

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

26 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<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 (NYSE) is open for trading.
The NYSE is closed on national holidays and Good Friday. We do not determine
the NAV on days when we have not received any orders to purchase, sell or
exchange Fund shares, or when changes in the value of the Fund's portfolio do
not materially affect the NAV.

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
initial 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 classes). Your broker may charge you a separate or additional fee for
purchases of shares.

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

Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--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
application, notify your broker or notify the Transfer Agent in writing (at the
address below) at least five business days before the date we determine who
receives dividends.

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015

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

27
<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. Eligible investors who apply for PruTector coverage after the
initial 6-month enrollment period will need to provide satisfactory evidence of
insurability. This insurance is subject to other restrictions and is not
available in all states.

Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption 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, your broker 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

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

28 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

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

If you are selling more than $100,000 of shares, if you want the check
payable or 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 will need to have the signature on your sell order signature
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker-dealer or credit union. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Sale of Shares--Signature Guarantee."

CONTINGENT DEFERRED SALES CHARGE (CDSC)

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

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

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

29
<PAGE>

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

Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.

Having sold the exempt shares first, if there are any remaining shares that
are subject to a CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC
period.

As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2%
in the fourth and 1% in the fifth and sixth years. The rate decreases on the
first day of the month following the anniversary date of your purchase, not on
the anniversary date itself. The CDSC is 1% for Class C shares--which is
applied to shares sold within 18 months of purchase (one year for Class C
shares purchased before November 2, 1998). For both Class B and Class C shares,
the CDSC is calculated based on 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 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,
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 Charge--Waiver
of Contingent Deferred Sales Charge--Class B Shares."

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

30 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

REDEMPTION IN KIND

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

SMALL ACCOUNTS

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

90-DAY REPURCHASE PRIVILEGE

After you redeem your shares, you have a 90-day period during which you may
reinvest back into your account 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 account with the appropriate
number of shares to reflect the amount of the CDSC you paid on that reinvested
portion of your redemption proceeds. 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
certain other Prudential mutual funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential mutual
fund, but you can't exchange Class A shares for Class B, 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

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

31
<PAGE>

any time shares were held in a money market fund. We may change the terms of
the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:

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

There is no sales charge for exchanges. If, however, you exchange--and then
sell--Class B shares within approximately six years of your original purchase
or Class C shares within 18 months of your original purchase, you must still
pay the applicable CDSC. If you have exchanged Class B 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 period for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."

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

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

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

32 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

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

TELEPHONE REDEMPTIONS AND EXCHANGES

You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852. In order to redeem or exchange your shares by telephone, you
must complete an authorization form for telephone transactions. If you have
elected telephone redemption and exchange privileges and you call the Fund
before 4:15 p.m., New York time, you will receive a redemption amount based on
that day's NAV.

The Fund's Transfer Agent will record your telephone instructions and request
specific account information before redeeming or exchanging shares. The Fund
will not be liable if it follows instructions that it reasonably believes are
made by the shareholder. If the Fund does not follow reasonable procedures, it
may be liable for losses due to unauthorized or fraudulent telephone
instructions.

In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail.

The telephone redemption and exchange privileges may be modified or
terminated at any time. If this occurs, you will receive a written notice from
the Fund.

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

33
<PAGE>

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

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

Review each chart with the financial statements and the 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 were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.

<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING
PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $16.06 $16.12 $15.56 $15.98 $14.42
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income/3/ .76 .79 .81 .82 .81
Net realized and
unrealized gain (loss)
on investment
transactions (1.34) .06 .67 (.42) 1.57
TOTAL FROM INVESTMENT
OPERATIONS (.58) .85 1.48 .40 2.38
- ---------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.76) (.79) (.81) (.82) (.81)
Distributions in excess
of net investment
income --/1/ --/1/ (.01) --/1/ (.01)
Distributions from net
realized gains -- (.12) (.10) --
TOTAL DISTRIBUTIONS (.76) (.91) (92) (.82) (.82)
NET ASSET VALUE, END OF
YEAR $14.72 $16.06 $16.12 $15.56 $15.98
TOTAL RETURN/2/ (3.69)% 5.41% 9.80% 2.66% 16.91%
- ---------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR
(000) $498,428 $481,926 $493,178 $502,739 $538,145
Average net assets (000) $531,603 $483,759 $491,279 $508,159 $446,350
RATIOS TO AVERAGE NET
ASSETS/3/:
Expenses, including
distribution and
service (12b-1) fees .86% .73% .70% .68% .75%
Expenses, excluding
distribution and
service (12b-1) fees .61% .63% .60% .58% .65%
Net investment income 4.88% 4.89% 5.15% 5.31% 5.34%
Portfolio turnover 30% 23% 38% 46% 98%
</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 year
reported.

3 Net of expense subsidy and/or fee waiver.

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

34 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

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

CLASS B SHARES

The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.

<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 12-31)
- --------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR: $16.10 $16.16 $15.60 $16.02 $14.45
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income/3/ .73 .73 .75 .76 .76
Net realized and
unrealized gain (loss)
on investment
transactions (1.35) .06 .67 (.42) 1.58
TOTAL FROM INVESTMENT
OPERATIONS (.62) .79 1.42 .34 2.34
- ---------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.73) (.73) (.75) (.76) (.76)
Distributions in excess
of net investment income --/1/ --/1/ (.01) --/1/ (.01)
Distributions from net
realized gains -- (.12) (.10) -- --
TOTAL DISTRIBUTIONS (.73) (.85) (.86) (.76) (.77)
NET ASSET VALUE, END OF
YEAR $14.75 $16.10 $16.16 $15.60 $16.02
TOTAL RETURN/2/ (3.97)% 4.99% 9.35% 2.26% 16.49%
- ---------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR
(000) $92,265 $119,698 $141,528 $168,185 $222,865
Average net assets (000) $118,044 $131,195 $151,938 $193,312 $252,313
RATIOS TO AVERAGE NET
ASSETS:/3/
Expenses, including
distribution and service
(12b-1) fees 1.11% 1.13% 1.10% 1.08% 1.15%
Expenses, excluding
distribution and service
(12b-1) fees .61% .63% .60% .58% .65%
Net investment income 4.62% 4.49% 4.75% 4.91% 4.96%
Portfolio turnover 30% 23% 38% 46% 98%
</TABLE>

1 Less than $.005 per share.

3 Net of expense subsidy and/or fee waiver.

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

35
<PAGE>

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

CLASS C SHARES

The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.

<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 12-31)
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $16.10 $16.16 $15.60 $16.02 $14.44
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income/3/ .69 .69 .71 .72 .72
Net realized and unrealized
gain (loss) on investment
transactions (1.35) .06 .67 (.42) 1.59
TOTAL FROM INVESTMENT
OPERATIONS (.66) .75 1.38 .30 2.31
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.69) (.69) (.71) (.72) (.72)
Distributions in excess of net
investment income --/1/ --/1/ (.01) --/1/ (.01)
Distributions from net realized
gains -- (.12) (.10) -- --
TOTAL DISTRIBUTIONS (.69) (.81) (.82) (.72) (.73)
NET ASSET VALUE, END OF YEAR $14.75 $16.10 $16.16 $15.60 $16.02
TOTAL RETURN/2/ (4.22%) 4.73% 9.08% 2.01% 16.22%
- --------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $3,060 $2,296 $825 $772 $403
Average net assets (000) $2,643 $1,555 $758 $674 $247
RATIOS TO AVERAGE NET
ASSETS:/3/
Expenses, including
distribution and service (12b-
1) fees 1.36% 1.38% 1.35% 1.33% 1.40%
Expenses, excluding
distribution and service (12b-
1) fees .61% .63% .60% .58% .65%
Net investment income 4.39% 4.23% 4.50% 4.67% 4.66%
Portfolio turnover 30% 23% 38% 46% 98%
</TABLE>

1 Less than $.005 per share.

3 Net of expense subsidy and/or fee waiver.

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

36 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

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

CLASS Z SHARES

The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.

<TABLE>
<CAPTION>
CLASS Z SHARES (FISCAL PERIOD
ENDED 12-31)
- --------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999/1/
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.11
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .73
Net realized and
unrealized gain (loss)
on investment
transactions (1.40)
TOTAL FROM INVESTMENT
OPERATIONS (.67)
- --------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.73)
Distributions in excess
of net investment income --/2/
Distributions from net
realized gains --
TOTAL DISTRIBUTIONS (.73)
NET ASSET VALUE, END OF
PERIOD $ 14.71
TOTAL RETURN/3/ (4.22%)
- --------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999
<S> <C>
NET ASSETS, END OF
PERIOD (000) $ 797
Average net assets (000) $1,391
RATIOS TO AVERAGE NET
ASSETS:
Expenses, including
distribution and service
(12b-1) fees .64%/4/
Expenses, excluding
distribution and service
(12b-1) fees .64%/4/
Net investment income 5.45%/4/
Portfolio turnover 30%
</TABLE>

1 Information shown is for the period 1-22-99 (when Class Z shares were first
offered) through 12-31-99.

2 Less than $.005 per share.

3 Total return assumes reinvestment of dividends and any other distributions.
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 period of less than
a full year is not annualized.

4 Annualized.

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

37
<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 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 Sector Funds, Inc.

Prudential Financial Services Fund

Prudential Health Sciences Fund

Prudential Technology Fund

Prudential Utility Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.

Prudential Tax-Managed Funds

Prudential Tax-Managed Equity Fund

Prudential 20/20 Focus Fund

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

Target Funds

Large Capitalization Growth Fund

Large Capitalization Value Fund

Small Capitalization Growth Fund

Small Capitalization Value Fund
ASSET ALLOCATION/BALANCED FUNDS
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund

GLOBAL FUNDS
GLOBAL STOCK FUNDS
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Index Series Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.

Prudential Global Growth Fund

Prudential International Value Fund

Prudential Jennison International Growth Fund
Global Utility Fund, Inc.

Target Funds

International Equity Fund

GLOBAL BOND FUNDS

Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.

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

38 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. [GRAPHIC] (800) 225-1852

<PAGE>

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

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

Target Funds

Total Return Bond Fund

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

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

39
<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) 482-7555 (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 website 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 20549-0102

BY ELECTRONIC REQUEST
[email protected]
(The SEC charges a fee to copy
documents.)

IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call
1-202-942-8090)

VIA THE INTERNET
on the EDGAR Database at http://www.sec.gov

CUSIP Numbers NASDAQ Symbols

Class A Shares-- 743918-20-3 PRNMX

Class B Shares-- 743918-10-4 PBHMX

Class C Shares-- 743918-30-2 --

Class Z Shares-- 743918-40-1 --

Investment Company Act File No. 811-2992

MF104A Printed on Recycled Paper
<PAGE>

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

Statement of Additional Information

March 1, 2000

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. The Fund
seeks to achieve this objective by investing 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 and to increase the return on 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 1, 2000, 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-12
Management of the Fund.................................................... B-13
Control Persons and Principal Holders of Securities....................... B-15
Investment Advisory and Other Services.................................... B-16
Year 2000 Readiness Disclosure............................................ B-20
Brokerage Allocation and Other Practices.................................. B-20
Capital Shares, Other Securities and Organization......................... B-22
Purchase, Redemption and Pricing of Fund Shares........................... B-22
Shareholder Investment Account............................................ B-31
Net Asset Value........................................................... B-34
Taxes, Dividends and Distributions........................................ B-35
Performance Information................................................... B-38
Financial Statements...................................................... B-41
Report of Independent Accountants......................................... B-62
Appendix I--Description of Tax-Exempt Security Ratings.................... I-1
Appendix II--General Investment Information............................... II-1
Appendix III--Historical Performance Data................................. III-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 "Fund Distributions and Tax Issues" in the
Prospectus. The Fund expects that normally it will not invest 25% or more of
its total assets in a single industry. While the principal investment policies
and strategies for seeking to achieve this objective are described in the
Fund's Prospectus, the Fund may from time to time also use the securities,
instruments, policies and principal and non-principal strategies described
below in seeking to achieve its objective. 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 adverse market, economic or political
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, that is, high yield or "junk" bonds, 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

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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, 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.

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

Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated securities
(that is, high yield or high risk securities commonly referred to as junk
bonds) are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates. Fluctuations in the prices

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of portfolio securities subsequent to their acquisition will not affect cash
income from such securities but will be reflected in the Fund's net asset
value. The investment adviser considers both credit risk and market risk in
making investment decisions for the Fund. Investors should carefully consider
the relative risks of investing in high-yield securities and understand that
such securities are not generally meant for short term investing.

Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession,
securities of highly leveraged issuers are more likely to default than
securities of higher rated issuers. In addition to the risk of default, there
are the related costs of recovery on defaulted issues. In addition, the
secondary market for high-yield securities, which is concentrated in
relatively few market makers, may not be as liquid as the secondary market for
more highly rated securities and, from time to time, it may be more difficult
to value high-yield securities than more highly rated securities. Under
adverse market or economic conditions, the secondary market for high-yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell
the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Fund's NAV.

Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the debt portion of the Fund's
portfolio and increasing the exposure of the Fund to the risks of high-yield
securities. Since investors generally perceive that there are greater risks
associated with the medium to lower rated securities of the type in which the
Fund may invest, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower quality
segments of the fixed-income securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more
pronounced manner than do changes in higher quality segments of the fixed-
income securities which fluctuate in response to the general level of interest
rates.

PURCHASE AND EXERCISE OF PUTS

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

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

B-4
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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 futures contract obligates the seller of a contract to deliver to the
purchaser of a contract cash equal to a specific dollar amount times the
difference between the value of a specific fixed-income security or index at
the close of the last trading day of the contract and the price at which the
agreement is made. 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 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.) Duration is described in Appendix II under "Duration."
This should lessen the risks associated with a rise in interest rates. In some
circumstances, this may serve as a hedge against a loss of principal, but is
usually referred to as an aspect of risk management.

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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 (that is, 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.

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.

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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.

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.

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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 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
was 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.

B-8
<PAGE>

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.

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.

B-9
<PAGE>

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

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

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES

From time to time, in the ordinary course of business, the Fund may purchase
or sell securities on a when-issued or delayed delivery basis, that is,
delivery and payment can take place a month or more after the date of the
transaction. The purchase price and the interest rate payable on the
securities are fixed on the transaction date. The securities so purchased are
subject to market fluctuation, and no interest accrues to the Fund until
delivery and payment take place. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it will record
the transaction and thereafter reflect the value of such securities in
determining its NAV each day. The Fund will segregate cash or other liquid
assets, marked-to-market daily, having a value equal to or greater than such
commitments. If the Fund chooses to dispose of the right to acquire a when-
issued security prior to its acquisition, it could, as with the disposition of
any other portfolio security, incur a gain or loss due to market fluctuations.
At the time of delivery of the securities, the value may be more or less than
the purchase price, and an increase in the percentage of the Fund's assets
committed to the purchase of securities on a when-issued or delayed-delivery
basis may increase the volatility of the Fund's net asset value.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in illiquid
securities. If the Fund were to exceed this limit, the investment adviser
would take prompt action to reduce the Fund's holdings in illiquid securities
to no more than 15% of its net assets, as required by applicable law. Illiquid
securities include repurchase agreements which have a maturity of longer than
seven days or 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

The Fund may invest in municipal lease obligations. A municipal lease
obligation is a municipal security the interest on and principal of which is
payable out of lease payments made by the party leasing the facilities
financed by the issue. Typically, municipal lease obligations are issued by a
state or municipal financing authority to provide funds for the construction
of facilities (for example, schools, dormitories, office buildings or prisons)
or the acquisition of equipment. The facilities are typically used by the
state or municipality pursuant to a lease with a financing authority. Certain
municipal lease obligations may trade infrequently. Accordingly, the
investment adviser will monitor the liquidity of municipal lease obligations
under the supervision of the Directors.

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

B-10
<PAGE>

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 (for example, 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 (for example,
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.

ZERO COUPON MUNICIPAL BONDS. The Fund may invest in zero coupon municipal
bonds. Zero coupon municipal bonds do not pay current interest but are
purchased at a discount from their face values. The discount approximates the
total amount of interest the security will accrue and compound over the period
until maturity or the particular interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. Zero
coupon municipal bonds do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of cash. These investments may experience greater
volatility in market value than securities that make regular payments of
interest. Because the Fund accrues income which may not be represented by
cash, the Fund may be required to sell other securities in order to satisfy
the distribution requirements applicable to the Fund. Zero coupon municipal
bonds may be subject to greater fluctuation in value and lesser liquidity in
the event of adverse market conditions than comparably rated securities paying
cash interest at regular interest payment periods.

INVESTMENTS IN SECURITIES OF OTHER INVESTMENT COMPANIES

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

BORROWING

The Fund may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 33 1/3% of its total assets to secure these borrowings.
However, the Fund will not purchase portfolio securities when borrowings
exceed 5% of the value of the Fund's total assets.

(D) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS

As described above, in response to adverse market, economic or political
conditions, or for liquidity purposes, pending investment in municipal bonds,
the Fund may take a temporary defensive position and 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.

B-11
<PAGE>

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.

(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-12
<PAGE>

MANAGEMENT OF THE FUND

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(/1/) AND (AGE) POSITION WITH FUND DURING PAST 5 YEARS
---------------------------- ------------------ ---------------------
<C> <C> <S>
Eugene C. Dorsey (72) 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; former
Director of the Advisory
Board of Chase Manhattan
Bank of Rochester.
Delayne Dedrick Gold (61) Director Marketing and Management
Consultant.
*Robert F. Gunia (53) Vice President Executive Vice President and
and Director Chief Administrative Officer
(since June 1999) of
Prudential Investments;
Corporate Vice President
(September 1997-March 1999)
of The Prudential Insurance
Company of America
(Prudential); Executive Vice
President and Treasurer
(since December 1996) of
Prudential Investments Fund
Management LLC (PIFM);
President (since April 1999)
of Prudential Investment
Management Services LLC
(PIMS); former Senior Vice
President (March 1987-May
1999) and former Chief
Administrative Officer (July
1990-September 1996) of
Prudential Securities
Incorporated (Prudential
Securities); Director
(January 1989-September
1996), Executive Vice
President, Treasurer and
Chief Financial Officer
(June 1987-December 1996) of
Prudential Mutual Fund
Management, Inc. (PMF); and
Vice President and Director
(since May 1989) of The Asia
Pacific Fund, Inc.
Thomas T. Mooney (58) Director President of the Greater
Rochester Metro Chamber of
Commerce; former Rochester
City Manager; former Deputy
Monroe County Executive;
Trustee of Center for
Governmental Research, Inc.;
Director of Blue Cross of
Rochester, Monroe County
Water Authority, and
Executive Service Corps of
Rochester.
Stephen P. Munn (57) Director Chairman (since January
1994), Director and
President (since 1988) and
Chief Executive Officer
(since 1988) of Carlisle
Companies Incorporated
(manufacturer of industrial
products).
*David R. Odenath, Jr. (42) Director Officer in Charge, President,
Chief Executive Officer and
Chief Operating Officer
(since June 1999) of PIFM;
Senior Vice President (since
June 1999) of Prudential;
and Senior Vice President
(August 1993-May 1999),
PaineWebber Group, Inc.
Richard A. Redeker (56) Director Former employee of Prudential
Investments (October 1996-
December 1998); prior
thereto, President, Chief
Executive Officer and
Director (October 1993-
September 1996) of
Prudential Mutual Fund
Management, Inc.; Executive
Vice President, Director and
Member of Operating
Committee (October 1993-
September 1996) of
Prudential Securities;
Director (October 1993-
September 1996) of
Prudential Securities Group,
Inc.; Executive Vice
President, The Prudential
Investment Corporation (July
1994-September 1996);
Director (January 1994-
September 1996) of
Prudential Mutual Fund
Distributors, Inc. and
Prudential Mutual Fund
Services, Inc.; and former
Senior Executive Vice
President and Director of
Kemper Financial Services,
Inc. (September 1978-
September 1993).
*John R. Strangfeld, Jr. (45) President Chief Executive Officer,
and Director Chairman, President and
Director (since January
1990) of The Prudential
Investment Corporation;
Executive Vice President
(since February 1998),
Prudential Global Asset
Management Group of
Prudential, and Chairman
(since August 1989) of
Pricoa Capital Group;
formerly various positions
to Chief Executive Officer
(November 1994-December
1998) of Private Asset
Management Group of
Prudential; and Senior Vice
President (January 1986-
August 1989) of Prudential
Capital Group, a unit of
Prudential.
</TABLE>

B-13
<PAGE>

<TABLE>
<CAPTION>
NAME, ADDRESS(/1/) AND PRINCIPAL OCCUPATIONS
(AGE) POSITION WITH FUND DURING PAST 5 YEARS
---------------------- ------------------ ---------------------
<C> <C> <S>
Nancy H. Teeters (69) Director Economist; former Vice President
and Chief Economist (March 1986-
June 1990) of International
Business Machines Corporation;
former Governor of Federal
Reserve System (1978-1984); and
former Director of Inland Steel
Industries (July 1991-1999).
Louis A. Weil, III (58) Director Chairman (since January 1999),
President and Chief Executive
Officer (since January 1996) and
Director (since September 1991)
of Central Newspapers, Inc.;
Chairman of the Board (since
January 1996), Publisher and
Chief Executive Officer (August
1991-December 1995) of Phoenix
Newspapers, Inc.; former
Publisher of Time Magazine (May
1989-March 1991); former
President, Publisher and Chief
Executive Officer of The Detroit
News (February 1986-August
1989); and member of the
Advisory Board, Chase Manhattan
Bank--Westchester.
Grace C. Torres (40) Treasurer and First Vice President (since
Principal Financial December 1996) of PIFM; former
and Accounting First Vice President (March
Officer 1993-May 1999) of Prudential
Securities; and First Vice
President (March 1994-September
1996) of Prudential Mutual Fund
Management, Inc.
Stephen M. Ungerman (46) Assistant Tax Director of Prudential
Treasurer Investments (since March 1966);
former First Vice President of
Prudential Mutual Fund
Management, Inc. (February 1993-
September 1996).
Deborah A. Docs (42) Secretary Vice President (since December
1996) of PIFM; former Vice
President and Associate General
Counsel (June 1991-May 1999) of
Prudential Securities; and Vice
President and Associate General
Counsel (June 1991-September
1996) of Prudential Mutual Fund
Management, Inc.
</TABLE>
- ---------

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

(/1/) 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 Directors also review 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 Fund" 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 $3,000, 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 75.

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.

B-14
<PAGE>

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, 1999 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, 1999.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL 1999
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM FUND
AGGREGATE BENEFITS ACCRUED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS
- ----------------------- ------------ ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach--
Director@ $4,500 None N/A $142,500 (43/70)*
Eugene C. Dorsey--
Director** $4,500 None N/A $ 81,000 (17/48)*
Delayne Dedrick Gold--
Director $4,600 None N/A $144,500 (43/70)*
Robert F. Gunia--Vice
President and
Director(/1/) -- -- -- --
Thomas T. Mooney--
Director** $4,500 None N/A $ 29,500 (35/75)*
Stephen P. Munn--
Director $ 750 None N/A $ 62,250 (29/53)*
David R. Odenath, Jr.--
Director(/1/) -- -- -- --
Thomas H. O'Brien--
Director@ $4,500 None N/A $ 47,500 (11/26)*
Richard A. Redeker--
Director $4,500 None N/A $ 95,000 (29/53)*
John R. Strangfeld,
Jr.--President and
Director(/1/) -- -- -- --
Nancy H. Teeters--
Director $4,500 None N/A $ 97,000 (25/43)*
Louis A. Weil, III--
Director $4,550 None N/A $ 96,000 (29/53)*
</TABLE>
- ---------

@ Former Director, retired on December 31, 1999.
*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
or any fund in the Fund complex.

** Total compensation from all of the funds in the Fund complex for the
calendar year ended December 31, 1999, includes amounts deferred at the
election of Directors under the Fund's deferred compensation plans.
Including accrued interest, total compensation amounted to $103,574 and
$135,102 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 February 4, 2000, 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
February 4, 2000, each of the following entities owned more than 5% of the
outstanding shares of each of the classes indicated: Mrs. Christine Doyle, 58
Remington Rd., Ridgefield, CT 06877-4326, who held 20,106 Class C shares of
the Fund (approximately 11.3% of the outstanding Class C shares); Katz-
Ridgefield Investment Partnership LP, 473 Ridgeburry Rd., Ridgefield, CT
06877-1214, who held 21,242 Class C shares of the Fund (approximately 11.9% of
the outstanding Class C shares); Worldwide Forwarders Inc., Richard H.
Panadero, 9706 SW 155 CT, Miami, FL 33196, who held 35,857 Class C shares of
the Fund (approximately 20.1% of the outstanding Class C shares); Theresa C.
Peterson, 20 Maolis Rd., Nahant, MA 01908-1213, who held 5,232 Class Z shares
of the Fund (approximately 9.3% of the outstanding Class Z shares); Lisa G.
Brooks, 2390 Sandy Creek Farm Rd., Alpharetta, GA 30004-3621, who held 4,936
Class Z shares of the Fund (approximately 8.7% of the outstanding Class Z
shares); Mr. Paul L. Pahmier & Mrs. Helen A. Pahmier, 3120 S. Broadway,
Yorktown, IN 47396-9647, who held 3,355 Class Z shares of the Fund
(approximately 5.9% of the outstanding Class Z shares); Thomas A. Barnum,
Liesa M. Barnum, Community Property, 3840 Valley Quail Dr., Loomis, CA 95650-
9747, who held 4,758 Class Z shares of the Fund (approximately 8.4% of the
outstanding Class Z shares); Martha L. Hugon, Revocable Trust, 2304 W. Christy
Ln., Muncie, IN 47304-1770, who held 3,481 Class Z shares of the Fund
(approximately 6.2% of the outstanding Class Z shares).

As of February 4, 2000, Prudential Securities was the record holder for
other beneficial owners of 11,738,282 Class A shares (approximately 35.3% of
such shares outstanding), 2,429,652 Class B shares (approximately 39.8% of
such shares outstanding), 105,157 Class C shares (approximately 59.1% of such
shares outstanding) and 56,497 Class Z shares (approximately 99.9% 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.

B-15
<PAGE>

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
December 31, 1999, PIFM managed and/or administered open-end and closed-end
management investment companies with assets of approximately $75.6 billion.
According to the Investment Company Institute, as of September 30, 1999, the
Prudential mutual funds were the 20th 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 and dividend
distribution 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 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 has hired The Prudential Investment Corporation, doing business
as Prudential Investments (PI, the investment adviser or the Subadviser), to
provide subadvisory services to the Fund. PIFM also administers the Fund's
corporate affairs and, in connection therewith, furnishes the Fund with office
facilities, together with those ordinary clerical and bookkeeping services
which are not being furnished by State Street Bank and Trust Company, the
Fund's Custodian, and Prudential Mutual Fund Services LLC (PMFS or the
Transfer Agent), the Fund's transfer and dividend disbursing agent. The
management services of PIFM for the Fund are not exclusive under the terms of
the Management Agreement and PIFM is free to, and does, render management
services to others.

For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets up to
and including $250 million, .475 of 1% of the next $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, 1999. 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 Subadviser, 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 Subadviser, (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

B-16
<PAGE>

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.

For the fiscal years ended December 31, 1999, 1998, and 1997, the Fund paid
PIFM management fees of $3,129,064, $2,961,791, and $2,869,410 (net of waiver
of $215,979), respectively.

PIFM has entered into the Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that the
Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, the Subadviser is obligated
to keep certain books and records of the Fund. PIFM continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the Subadviser's performance of such services. The
Subadviser is reimbursed by PIFM for the reasonable costs and expenses
incurred by the Subadviser in furnishing those services. Effective January 1,
2000, PI is paid by PIFM at an annual rate of .250 of 1% of the Fund's average
daily net assets up to and including $250 million, .226 of 1% of the next $250
million, .203 of 1% of the next $500 million, .181 of 1% of the next $250
million, .160 of 1% of the next $250 million and .141 of 1% of over $1.5
billion of the Fund's average daily net assets. The fee is computed daily and
payable monthly.

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.

Prudential Investment's Fixed Income Group includes the following sector
teams which may contribute towards security selection in addition to the
sector team described in the prospectus (assets under management are as of
December 31, 1999):

MONEY MARKETS

ASSETS UNDER MANAGEMENT: $36.0 billion.

TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years.

PORTFOLIO MANAGERS: 8. AVERAGE GENERAL INVESTMENT EXPERIENCE: 12 years, which
includes team members with significant mutual fund experience.

SECTOR: High-quality short-term securities, including both taxable and tax-
exempt instruments.

INVESTMENT APPROACH: Focus is on safety of principal, liquidity and controlled
risk.

CODE OF ETHICS

The Board of Directors/Trustees of the Fund, or the Duly Appointed Officer-
in-Charge of each of the Fund, Manager, Subadviser and Distributor, has
adopted a Code of Ethics under Rule 17j-1 of the Investment Company Act of
1940, (the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Manager, Subadviser and Distributor and as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.

The Codes require that all access persons of the Manager, Subadviser and
Distributor preclear any personal securities investments (with limited
exceptions, such as unit investment trusts). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to all investment personnel of the Manager, Subadviser and
Distributor include a ban on acquiring any securities in an initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no access person may purchase

B-17
<PAGE>

or sell any security which at the time is being purchased or sold (as the case
may be), or to the knowledge of the access person is being considered for
purchase or sale, by any fund advised by the Subadviser. Furthermore, the Code
provides for trading "blackout periods" which prohibit trading by investment
personnel of a Fund within 7 days of trading by the Fund in the same (or
equivalent) security. The Codes are on public file with, and are available
from, the Commission.

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

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

CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has contractually agreed to limit its distribution-
related fees payable under the Class A Plan to .25 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending December 31, 2000.
Fee waivers will increase the Fund's total return.

For the fiscal year ended December 31, 1999, the Distributor received
payments of $1,329,006 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 also received approximately
$64,200, in initial sales charges attributable to Class A shares.

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 contractually 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 contingent deferred sales charges from certain redeeming
shareholders and, with respect to Class C shares, initial sales charges. Fee
waivers will increase the Fund's total return.

CLASS B PLAN. For the fiscal year ended December 31, 1999, the Distributor
received $590,221 from the Fund under the Class B Plan. It is estimated that
the Distributor spent approximately $607,200 in distributing the Fund's Class
B shares, on behalf of the Fund during the year ended December 31, 1999. It is
estimated that of this amount approximately 2.5% ($15,200) was spent on
printing and mailing of prospectuses to other than current shareholders; 27.0%
($164,000) on compensation to Prusec, an affiliated broker-dealer, for
commissions to its representatives and other expenses, including an allocation
of overhead and other branch

B-18
<PAGE>

office distribution-related expenses, incurred by it for distribution of Fund
shares; and 70.5% ($428,000) on the aggregate of (1) payments of commissions
to financial advisers 51.2% ($310,800) and (2) an allocation on account of
overhead and other branch office distribution-related expenses 19.3%
($117,200). The term "overhead and other branch office distribution-related
expenses" represents (a) the expenses of operating the Distributor's branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.

The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "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, 1999, the Distributor received
approximately $142,600, in contingent deferred sales charges with respect to
Class B shares.

CLASS C PLAN. For the fiscal year ended December 31, 1999 the Distributor
received $19,821, from the Fund under the Class C Plan and spent approximately
$23,100 in distributing the Fund's Class C shares. It is estimated that of the
latter amount approximately 1.7% ($400) was spent on printing and mailing of
prospectus to other than current shareholders; .4% ($100) 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; 97.9% ($22,600) on the aggregate of (i) payments
of commission and account servicing fees to financial advisers (70.2% or
$16,200) and (ii) an allocation of overhead and other branch office
distribution-related expenses (27.7% or $6,400). 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 also receives an initial sales charge and the proceeds of
CDSCs paid by holders of Class C shares upon certain redemptions of Class C
shares. For the year ended December 31, 1999, the Distributor received
approximately $1,400 in CDSCs with respect to Class C shares. For the fiscal
year ended December 31, 1999, the Distributor also received approximately
$9,400 in initial sales charges attributable to Class C shares.

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

The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the directors who are not
interested persons of the Fund and 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.

B-19
<PAGE>

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" below.

FEE WAIVERS/SUBSIDIES

PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its
distribution and service (12b-1) fees for the Class A and Class C shares as
described above. Fee waivers and subsidies will increase the Fund's total
return.

NASD MAXIMUM SALES CHARGE RULE

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

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

Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin,
New Jersey 08830, 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.

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

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.
Although the Fund has not experienced any material problems with the services
provided by the Manager, Distributor, Transfer Agent or the Custodian as a
result of the change from 1999 to 2000, there remains a possibility that
computer software systems in use might be impaired or unavailable because of
the way dates are encoded and calculated. Such an event could have a negative
impact on handling securities trades, payments of interest and dividends,
pricing and account services. Although, at this time, there can be no
assurance that there will be no future adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised
the Fund that they have completed necessary changes to their computer systems
in connection with the year 2000. The Fund's service providers (or other
securities market participants) may experience future material problems in
connection with the year 2000. The Fund and its Board have instructed the
Fund's principal service providers to monitor and report year 2000 problems.

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

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

B-20
<PAGE>

includes a profit to the dealer. In underwritten offerings, securities are
purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or
discount. The Fund will not deal with Prudential Securities in any transaction
in which Prudential Securities acts as principal. Purchases and sales of
securities on a securities exchange, while infrequent, and purchases and sales
of futures on a commodities exchange or board of trade will be effected
through brokers who charge a commission for their services. Orders may be
directed to any broker including, to the extent and in the manner permitted by
applicable law, Prudential Securities and its affiliates.

In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most
favorable total cost or proceeds reasonably attainable in the circumstances.
While the Manager generally seeks reasonably competitive spreads or
commissions, the Fund will not necessarily be paying the lowest spread or
commission available. Within the framework of the policy of obtaining most
favorable price and efficient execution, the Manager will consider research
and investment services provided by brokers or dealers who effect or are
parties to portfolio transactions of the Fund, the Manager or the Manager's
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the
execution of transactions for the Fund may be used in managing other
investment accounts. Conversely, brokers furnishing such services may be
selected for the execution of transactions of such other accounts, whose
aggregate assets are larger than the Fund, and the services furnished by such
brokers may be used by the Manager in providing investment management for the
Fund. Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in light of generally prevailing rates. The Manager's policy is to pay
higher commissions to brokers, other than Prudential Securities, for
particular transactions than might be charged if a different broker had been
selected, on occasions when, in the Manager's opinion, this policy furthers
the objective of obtaining best price and execution. In addition, the Manager
is authorized to pay higher commissions on brokerage transactions for the Fund
to brokers other than Prudential Securities in order to secure research and
investment services described above, subject to the primary consideration of
obtaining the most favorable price and efficient execution in the
circumstances and subject to review by the Fund's Board of Directors from time
to time as to the extent and continuation of this practice. The allocation of
orders among brokers and the commission rates paid are reviewed periodically
by the Board of Directors. Portfolio securities may not be purchased from any
underwriting or selling syndicate of which Prudential Securities (or any
affiliate), during the existence of the syndicate, is a principal underwriter
(as defined in the Investment Company Act), except in accordance with rules of
the Commission. This limitation, in the opinion of the Fund, will not
significantly affect the Fund's ability to pursue its present investment
objective. However, in the future in other circumstances, the Fund may be at a
disadvantage because of this limitation in comparison to other funds with
similar objectives but not subject to such limitations.

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

The Fund paid no brokerage commissions to Prudential Securities for the
fiscal years ended December 31, 1997, 1998 and 1999.

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 December 31, 1999. As of December 31, 1999, the Fund
did not hold any securities of its regular brokers and dealers.

B-21
<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) or (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, fund and class election,
dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by
wire to State Street Bank and Trust Company (State Street), Boston,
Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential National Municipals Fund, specifying on the wire the account number
assigned by PMFS and your name and identifying the class in which you are
investing (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 National
Municipals 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-22
<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, 1999,
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........................ $14.72
Maximum sales charge (3% of offering price)....................... .46
------
Offering price to public.......................................... $15.18
======
<CAPTION>
CLASS B
<S> <C>
NAV, offering price and redemption price per Class B share*....... $14.75
======
<CAPTION>
CLASS C
<S> <C>
NAV, offering price and redemption price per Class C share*....... $14.75
Sales charge (1% of offering price)............................... .15
------
Offering price to public.......................................... $14.90
======
<CAPTION>
CLASS Z
<S> <C>
NAV, offering price and redemption price per Class Z share........ $14.71
======
</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,

B-23
<PAGE>

you would not have all of your money invested initially because the sales
charge on Class A shares is deducted at the time of purchase.

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than
3 years for the 1% initial sales charge plus the higher cumulative annual
distribution-related fee on the Class C shares to exceed the initial sales
charge plus cumulative annual distribution-related 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 CHARGE--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

. members of the Board of Directors of Prudential

. real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the
Transfer Agent

. 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)

. 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").

Broker-dealers, investment advisers or financial planners sponsoring fee-
based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one
class of shares in the Fund in connection with different pricing options for
their programs. Investors should consider carefully any separate transaction
and other fees charged by these programs in connection with investing in each
available share class before selecting a share class.

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

B-24
<PAGE>

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

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

. an individual

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

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

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

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

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

. 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.

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
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.

An Investment Letter of Intent permits an investor 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
investor. The effective date of an Investment 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 investor's cost, can be applied to the fulfillment of
the Letter of Intent goal.

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

B-25
<PAGE>

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.

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 Charge" below.

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

CLASS C SHARES

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

WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES

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 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

Mutual Fund Programs. Class Z shares can be purchased by participants in any
fee-based program or trust program sponsored by Prudential or an affiliate
that includes mutual funds as investment options and the Fund as an available
option. Class Z shares can also be purchased by investors in certain programs
sponsored by broker-dealers, investment advisers and financial planners who
have agreements with Prudential Investments Advisory Group relating to:

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

Other Types of Investors. Class Z shares are also available for purchase by
the following categories of investors:

. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option

. Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)

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

B-26
<PAGE>

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.

RIGHTS OF ACCUMULATION

Reduced sales charges are also available through rights of accumulation,
under which an investor or an eligible group of related investors, as
described above under "Combined Purchase and Cumulative Purchase Privilege,"
may aggregate the value of their existing holdings of shares of the Fund and
shares of other Prudential mutual funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. Rights of accumulation may be applied across the classes
of the Prudential mutual funds. However, the value of shares held directly
with the Transfer Agent and through your broker will not be aggregated to
determine the reduced sales charge. The value of existing holdings for
purposes of determining the reduced sales charge is calculated using the
maximum offering price (net asset value plus maximum sales charge) as of the
previous business day.

The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The
reduced sales charge 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.

SALE OF SHARES

You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for 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.

In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates,
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.

SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(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, or stock power must be signature
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. In the case of
redemptions from a PruArray Plan, if the proceeds of the redemption are
invested in another investment option of the plan in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.

Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the written request, and certificates, if issued, 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.

B-27
<PAGE>

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

INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 day--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 back into your
account any portion or all of the proceeds of such redemption in shares of the
same Fund at the NAV next determined after the order is received, which must
be within 90 days after the date of the redemption. Any CDSC paid in
connection with such redemption will be credited (in shares) to your account.
(If less than a full repurchase is made, the credit will be on a pro rata
basis). You must notify the Transfer Agent, either directly or through the
Distributor or your broker, at the time the repurchase privilege is exercised,
to adjust your account for the CDSC you previously paid. Thereafter, any
redemptions will be subject to the CDSC applicable at the time of the
redemption. See "Contingent Deferred Sales Charge" below. Exercise of the
repurchase privilege may affect the federal tax treatment of the redemption.

CONTINGENT DEFERRED SALES CHARGE

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

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" below.

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>

B-28
<PAGE>

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of Fund shares made during the preceding six years (five
years for 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 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 A copy of the Social Security Administra-
is tion award letter or a letter from a physi-
unable to engage in any substan- cian on the physician's letterhead stating
tial gainful activity by reason of that the shareholder (or, in the case of a
any medically determinable physi- trust, the grantor) (a copy of the trust
cal or mental impairment which can agreement identifying the grantor will be
be expected to result in death or required as well) is permanently disabled.
to be of long-continued and indef- The letter must also indicate the date of
inite duration. disability.
</TABLE>

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 effected through the 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

B-29
<PAGE>

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.

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-30
<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 by the record date, cash
payment will be made directly to the broker. Any shareholder who receives
dividends or distributions in cash may subsequently reinvest any such dividend
distribution at NAV by returning the check to the Transfer Agent within 30
days after the payment date. Such reinvestment will be made at the NAV per
share next determined after receipt of the check by the Transfer Agent. Shares
purchased with reinvested dividends and/or distributions will not be subject
to CDSC upon redemption.

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 8:00 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 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-31
<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 mutual 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
an eligible 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 fund will be
excluded.

At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege the shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund 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-32
<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............................. $ 105 $ 158 $ 210 $ 263
20 Years............................. 170 255 340 424
15 Years............................. 289 433 578 722
10 Years............................. 547 820 1,093 1,366
5 Years............................. 1,361 2,041 2,721 3,402
</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 for subsequent investment into the
Fund. The investor's bank must be a member of the Automatic Clearing House
System. Share certificates are not issued to AIP participants.

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

SYSTEMATIC WITHDRAWAL PLAN

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

B-33
<PAGE>

In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) systematic withdrawals may not be for less than
$100 and (3) all dividends and/or distributions must be automatically
reinvested in additional full and fractional shares of the Fund in order for
the shareholder to participate in the 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 systematic 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 systematic 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 pursuit of 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.
In the event the New York Stock Exchange closes early on any business day, the
NAV of the Fund's shares shall be determined at a time between such closing
and 4:15 P.M., New York time. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.

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

B-34
<PAGE>

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., New York
time, 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 elect to receive dividends in cash each 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 is qualified as, intends to remain qualified as, and has elected to
be treated 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 of the Fund 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 stock, securities or foreign currencies or other income
(including gains from options, futures and forward contracts) derived with
respect to its business of investing in stocks, securities and currencies; (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 capital gains (that is, 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-35
<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-36
<PAGE>

Any net capital gains (that is, 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-37
<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, Class C
and Class Z shares. The yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the net asset
value per share on the last day of this period.

Yield is calculated according to the following formula:

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

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

The yield for the 30-day period ended December 31, 1999 for the Fund's Class
A, Class B, Class C and Class Z shares was 4.76%, 4.66%, 4.36% and 5.16%,
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, Class C and Class Z 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, 1999 for
the Fund's Class A, Class B, Class C and Class Z shares was 7.88%, 7.72%,
7.22% and 8.54%, 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, Class C and Class Z shares. See "Risk/Return
Summary--Evaluating Performance" in the Prospectus.

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

P(1+T) to the power of 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-38
<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 January 22, 1999)
for the periods ended December 31, 1999.

<TABLE>
<CAPTION>
5 YEARS 10 YEARS SINCE INCEPTION
(% WITHOUT WAIVERS (% WITHOUT WAIVERS (% WITHOUT WAIVERS
1 YEAR OR SUBSIDIES) OR SUBSIDIES) OR SUBSIDIES) INCEPTION DATE
------ ------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C> <C>
Class A................. -6.58% 5.35% (5.32%) N/A 6.12% (6.10%) 1-22-90
Class B................. -8.98% 5.44% (5.41%) 5.94% (5.93%) 7.89% (7.89%) 4-25-80
Class C................. -6.18% 5.13% (5.10%) N/A 4.21% (4.19%) 8-1-94
Class Z................. N/A N/A N/A N/A 1-22-99
</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 "Risk/Return Summary--Evaluating
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, 1999.

<TABLE>
<CAPTION>
5 YEARS 10 YEARS SINCE INCEPTION
(% WITHOUT WAIVERS (% WITHOUT WAIVERS (% WITHOUT WAIVERS
1 YEAR OR SUBSIDIES) OR SUBSIDIES) OR SUBSIDIES) INCEPTION DATE
------ ------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C> <C>
Class A................. -3.69% 33.79% (33.61%) N/A 86.02% (85.77%) 1-22-90
Class B................. -3.98% 31.33% (31.15%) 78.15% (77.91%) 346.03% (345.42%) 4-25-80
Class C................. -4.22% 29.72% (29.55%) N/A 26.31% (26.14%) 8-1-94
Class Z................. N/A N/A N/A -4.22% 1-22-99
</TABLE>

ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.

From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to
the approximate number of Fund interest holders and may refer to Lipper
rankings or Morningstar ratings, other related analyses supporting those
ratings, other industry publications, business periodicals and market indices.
In addition, advertising materials may reference studies or analyses performed
by the Manager or its affiliates. Advertising materials for sector funds,
funds that focus on market capitalizations, index funds and
international/global funds may discuss the potential benefits and risks of
that investment style. Advertising materials for fixed income funds may
discuss the benefits and risks of investing in the bond market including
discussions of credit quality, duration and maturity.

B-39
<PAGE>

Set forth below is a chart which compares the performance of different types
of investments over the long-term and the rate of inflation./1/

Performance Comparison of Different Types of Investments
Over The Long Term (12/31/25 - 12/31/99)

[BAR CHART]

Common Stocks 11.4%
Long-Term Gov't Bonds 5.1%
Inflation 3.1%

/1/ Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Composite Stock
Price 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-40
<PAGE>

Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--95.0%
- ------------------------------------------------------------------------------------------------------------------------------
Alaska--1.9%
Alaska Ind. Dev. & Expt. Auth. Rev., Revolving Fd. A2 5.40% 4/01/01 $ 870 $ 875,873
Anchorage Elec. Util. Rev.,
M.B.I.A. Aaa 6.50 12/01/12 3,400 3,747,718
M.B.I.A. Aaa 6.50 12/01/13 2,500 2,745,900
M.B.I.A. Aaa 6.50 12/01/14 3,455 3,770,096
------------
11,139,587
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--3.7%
Arizona St. Mun. Fin. Proj., Cert. of Part., Ser. 25,
B.I.G. Aaa 7.875 8/01/14 2,250 2,740,185
Maricopa Cnty. Sch. Dist., A.M.B.A.C.,
No. 3 Tempe Elem. Aaa Zero 7/01/09 1,500 900,000
No. 3 Tempe Elem. Aaa Zero 7/01/14 1,500 646,455
Maricopa Cnty. Uni. Sch. Dist.,
No. 80 Chandler, F.G.I.C. Aaa Zero 7/01/09 1,330 798,000
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/10 1,050 591,559
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/11 1,200 635,112
No. 80 Chandler, F.G.I.C., E.T.M. Aaa 6.25 7/01/11 375 407,745
No. 80 Chandler, F.G.I.C. Aaa 6.25 7/01/11 625 672,850
Phoenix Str. & Hwy. User Rev., Ser. A, F.G.I.C. Aaa Zero 7/01/12 2,500 1,239,825
Pima Cnty. Ind. Dev. Auth. Rev., F.S.A. Aaa 7.25 7/15/10 1,790 1,912,293
Pima Cnty. Uni. Sch. Dist., Gen. Oblig., F.G.I.C., Aaa 7.50 7/01/10 3,000 (f) 3,536,910
Tucson Cnty. Gen. Oblig.,
Ser. A Aa3 7.375 7/01/11 1,000 1,176,980
Ser. A Aa3 7.375 7/01/12 1,100 1,298,946
Ser. A Aa3 7.375 7/01/13 4,500 5,310,855
------------
21,867,715
- ------------------------------------------------------------------------------------------------------------------------------
California--9.1%
Abag Fin. Auth. for Nonprofit Corps., Cert. of Part.,
Amer. Baptist Homes., Ser. A BBB(d) 6.20 10/01/27 1,200 1,102,848
Anaheim Pub. Fin. Auth. Lease Rev., F.S.A.,
Sr. Pub. Impvts. Proj., Ser. A Aaa 6.00 9/01/24 5,500 5,570,455
Sub. Pub. Impvts. Proj., Ser. C Aaa 6.00 9/01/16 6,690 6,954,790
California Hlth. Facs. Fin. Auth. Rev., Ser. A A2 6.125 12/01/30 6,000 5,786,340
Encinitas Union Sch. Dist., Gen. Oblig., M.B.I.A Aaa Zero 8/01/21 3,810 1,019,975
Kern High Sch. Dist., Ser. A, M.B.I.A. Aaa 6.30 2/01/10 2,490 2,731,381
Long Beach Aquarium of the Pacific Rev., Ser. A, A.M.T. BBB(d) 6.125 7/01/23 6,000 5,601,240
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-41

<PAGE>

<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Long Beach Harbor Rev., Ser. A, F.G.I.C., A.M.T. Aaa 6.00% 5/15/18 $ 4,000 $ 4,084,800
Los Angeles Uni. Sch. Distr., Ser. A, F.G.I.C. Aaa 6.00 7/01/15 1,000 1,040,030
Pittsburg Redev. Agy., Tax Alloc.,
Los Medanos Comm. Dev. Proj. Aaa Zero 8/01/25 2,000 410,140
Los Medanos Comm. Dev. Proj. Aaa Zero 8/01/30 5,000 745,650
San Joaquin Hills Trans. Corr. Agy., Toll Rd. Rev. Aaa Zero 1/15/32 15,000 2,058,450
San Jose Redev. Agcy. Tax Alloc., M.B.I.A. Aaa 6.00 8/01/11 3,000 3,214,830
Santa Cruz Cnty. Pub. Fin. Auth. Rev., Ser. B A-(d) 6.20 9/01/23 2,000 1,990,460
Santa Margarita Dana Point Auth., M.B.I.A.,
Impvt. Dists. 3-3A-4 & 4A, Ser. B Aaa 7.25 8/01/09 2,000 2,319,200
Impvt. Dists. 3-3A-4 & 4A, Ser. B Aaa 7.25 8/01/10 2,450 2,878,750
Impvt. Dists. 3-3A-4 & 4A, Ser. B Aaa 7.25 8/01/14 2,000 2,347,780
So. Orange Cnty. Pub. Fin. Auth. Rev., Ser. C, F.G.I.C. Aaa 6.50 8/15/10 2,000 2,227,300
So. Whittier Elem. Sch. Dist., Gen. Oblig., Ser. A,
F.G.I.C. Aaa Zero 8/01/12 810 404,255
West Contra Costa Sch. Dist., Cert. of Part. Baa3 7.125 1/01/24 1,600 1,684,560
------------
54,173,234
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--4.8%
Arapahoe Cnty. Cap. Impvt. Trust Fund, Hwy. Rev., Ser.
E-470 Aaa 7.00 8/31/26 3,000 (b) 3,376,590
Colorado Hsg. Fin. Auth., A.M.T.
Singl. Fam. Proj. Aa2 8.00 6/01/25 2,145 2,230,800
Singl. Fam. Proj., Ser. A-2 Aa2 7.25 5/01/27 2,000 2,126,600
Singl. Fam. Proj., Ser. B-1 Aa2 7.90 12/01/25 1,320 1,389,933
Singl. Fam. Proj., Ser. C-1, M.B.I.A. Aaa 7.65 12/01/25 3,195 3,435,360
Singl. Fam. Proj., Ser. C-2 Aa2 6.875 11/01/28 3,500 3,664,115
Singl. Fam. Proj., Ser. C-2 Aa2 7.05 4/01/31 4,000 4,296,240
Colorado Springs Arpt. Rev., Ser. A., A.M.T. BBB(d) 7.00 1/01/22 7,960 (f) 8,250,938
------------
28,770,576
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--2.2%
Connecticut St. Hlth. & Edu. Facs. Auth. Rev.,
St. Mary's Hosp. Issue, Ser. E A3 5.50 7/01/20 5,650 4,761,763
St. Mary's Hosp. Issue, Ser. E A3 5.875 7/01/22 1,750 1,529,990
Univ. of Hartford, Ser. D Ba1 6.75 7/01/12 5,725 5,800,055
Connecticut St. Spec. Tax Oblig. Rev., Trans.
Infrastructure, Ser. A A1 7.125 6/01/10 1,000 1,132,830
------------
13,224,638
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-42

<PAGE>

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--1.0%
Dist. of Columbia, M.B.I.A,
Gen. Oblig., Ser. B Aaa 6.00% 6/01/13 $ 1,000 $ 1,040,200
Gen. Oblig., Ser. B Aaa 6.00 6/01/21 5,000 4,993,700
------------
6,033,900
- ------------------------------------------------------------------------------------------------------------------------------
Florida--2.5%
Broward Cnty. Res. Rec. Rev., Broward Co. L.P. South
Proj. A3 7.95 12/01/08 7,445 7,685,027
Florida St. Brd. of Ed., Gen. Oblig. Aa2 9.125 6/01/14 1,260 1,662,053
Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev.,
Tampa Elec. Proj. Aa3 8.00 5/01/22 5,000 5,476,000
------------
14,823,080
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--2.4%
Burke Cnty. Dev. Auth., Poll. Cntrl. Rev., M.B.I.A.,
Georgia Pwr. Co. Aaa 6.625 10/01/24 500 510,650
Oglethorpe Pwr. Co. Aaa 8.00 1/01/22 5,000 (b) 5,588,700
Oglethorpe Pwr. Co., E.T.M. Aaa 7.50 1/01/03 557 578,896
Forsyth Cnty. Sch. Dist. Dev. Rev. Aa3 6.75 7/01/16 500 552,615
Fulton Cnty. Sch. Dist. Rev. Aa2 6.375 5/01/17 750 801,788
Georgia Mun. Elec. Auth. Pwr. Rev.,
Ser. B A3 6.25 1/01/17 475 486,528
Ser. B, M.B.I.A. Aaa 6.375 1/01/16 5,000 5,329,450
Green Cnty. Dev. Auth. Indl. Park Rev. NR 6.875 2/01/04 395 406,751
------------
14,255,378
- ------------------------------------------------------------------------------------------------------------------------------
Guam--0.2%
Guam Pwr. Auth. Rev., Ser. A BBB(d) 6.625 10/01/14 1,000 (b) 1,097,940
- ------------------------------------------------------------------------------------------------------------------------------
Hawaii--0.4%
Hawaii St. Dept. Budget & Fin. Spl. Purp. Mtg. Rev.,
Hawaiian Elec. Co., Ser. C, M.B.I.A., A.M.T. Aaa 7.375 12/01/20 500 520,880
Kapiolani Hlth. Care Sys. A2 6.00 7/01/11 250 250,825
Hawaii St. Harbor Cap. Impvt. Rev., A.M.T.
F.G.I.C. Aaa 6.25 7/01/10 250 261,102
F.G.I.C. Aaa 6.25 7/01/15 500 506,645
Hawaii St., Gen. Oblig., Ser. CJ Aaa 6.25 1/01/15 650 (b) 689,683
------------
2,229,135
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-43

<PAGE>

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--5.1%
Chicago Board of Ed.,
Gen. Oblig., F.G.I.C. Aaa Zero 12/01/18 $ 3,400 $ 1,045,942
Gen. Oblig., F.G.I.C. Aaa Zero 12/01/19 2,000 573,640
Chicago Brd. of Ed., Gen. Oblig., F.G.I.C.,
Sch. Reform, Ser. B-1 Aaa Zero 12/01/12 1,500 702,495
Sch. Reform, Ser. B-1 Aaa Zero 12/01/17 10,000 3,302,600
Chicago City Colleges,
Gen. Oblig., F.G.I.C. Aaa Zero 1/01/24 5,000 1,105,000
Gen. Oblig., F.G.I.C. Aaa Zero 1/01/25 10,000 2,070,200
Cook and Du Page Cntys., High Sch. Dist No. 210, Gen.
Oblig., F.S.A. Aaa Zero 12/01/11 3,035 1,555,225
Illinois Dev. Fin. Auth. Rev., Cmnty. Rehab. Providers,
Ser. A BBB(d) 6.00% 7/01/15 2,000 1,795,040
Illinois Hlth. Fac. Auth. Rev.,
M.B.I.A Aaa 6.00 7/01/14 800 (b) 833,912
M.B.I.A Aaa 6.00 7/01/14 2,700 2,779,191
Metropolitan Pier & Expo. Auth., Hosptlty. Fac. Rev.,
McCormick Pl. Conv. BBB(d) 7.00 7/01/26 12,910 14,506,838
------------
30,270,083
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--0.3%
Gary Ind. Mtge. Rev., Lakeshore Dunes Apts., Ser. A,
G.N.M.A. AAA(d) 6.00 8/20/34 2,000 1,875,760
- ------------------------------------------------------------------------------------------------------------------------------
Kentucky--1.0%
Henderson Cnty. Solid Waste Disp. Rev., Macmillan
Bloedel Proj., A.M.T. Baa2 7.00 3/01/25 6,000 6,105,480
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--3.4%
New Orleans, Gen. Oblig., A.M.B.A.C. Aaa Zero 9/01/09 13,500 8,005,095
Orleans Parish Sch. Brd., E.T.M., M.B.I.A. Aaa 8.90 2/01/07 5,780 7,076,338
St. Charles Parish, Env. Impt. Rev., Louisiana Pwr. &
Lt. Co. Proj., Ser. A, A.M.T. Baa2 6.875 7/01/24 5,000 5,046,800
------------
20,128,233
- ------------------------------------------------------------------------------------------------------------------------------
Maryland--2.9%
Baltimore, Constr. Pub. Imprvt., Gen. Oblig., Ser. C,
F.G.I.C. Aaa 5.50 10/15/16 1,000 982,710
Baltimore, Econ. Dev. Lease Rev., Armistead Partnership,
Ser. A BBB(d) 7.00 8/01/11 1,000 1,033,780
Harford Cnty.,
Gen. Oblig. Aa2 5.50 3/01/06 180 (b) 185,173
Gen. Oblig. Aa2 5.50 3/01/06 570 589,107
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-44

<PAGE>

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Maryland (cont'd.)
Maryland St. Hlth. & Higher Edu. Facs. Auth. Rev.,
Doctor's Cmnty. Hosp. Baa1 5.50% 7/01/24 $ 3,000 $ 2,446,290
Howard Cnty. Gen. Hosp., E.T.M. Aaa 5.50 7/01/21 500 483,185
Mercy Medical Center, F.S.A. Aaa 5.75 7/01/26 1,000 961,910
Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr.
Physics Headqrtrs. BBB(d) 6.625 1/01/17 1,000 1,007,590
Maryland St. Trans. Auth. Rev., Balt. Int'l. Arpt.
Proj., Ser. A, A.M.T., F.G.I.C. Aaa 6.25 7/01/14 1,750 1,794,047
Montgomery Cnty., Gen. Oblig. Aaa 9.75 6/01/01 450 482,594
Northeast Waste Disp. Auth. Rev.,
Baltimore City Sludge Corp. Proj. NR 7.25 7/01/07 3,813 3,958,618
Montgomery Cnty. Res. Rec. Proj., Ser. A A2 6.00 7/01/07 1,000 1,028,540
Prince Georges Cnty., Poll. Cntrl. Rev., Potomac Elec.
Proj., M.B.I.A. Aaa 5.75 3/15/10 1,100 1,145,397
Takoma Park Hosp. Facs. Rev., Washington Adventist
Hosp., F.S.A. Aaa 6.50 9/01/12 1,000 1,099,880
------------
17,198,821
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--2.5%
Mass. Edu. Fin. Auth., Ed. Ln. Rev., Issue G., Ser. A.,
M.B.I.A., A.M.T. Aaa 5.10 12/01/13 1,000 934,450
Mass. St. Hlth. & Edl. Facs. Auth. Rev., Mass. Inst. of
Tech. Ser. I-1 Aaa 5.20 1/01/28 1,500 1,326,585
Mass. St. Wtr. Res. Auth. Rev., M.B.I.A.,
Ser. B Aaa 6.25 12/01/11 6,720 7,296,912
Ser. B Aaa 6.25 12/01/12 5,000 5,420,400
------------
14,978,347
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--6.8%
Brandon Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 5.875 5/01/26 1,310 (b) 1,384,853
Breitung Twnshp. Sch. Dist. Ref., Gen. Oblig., M.B.I.A. Aaa 6.30 5/01/15 250 257,935
Detroit Econ. Dev. Corp., Res. Rec. Rev., Ser. A,
F.S.A., A.M.T. Aaa 6.875 5/01/09 920 959,247
Detroit Sewage. Disp. Rev.,
Prerefunded Inflos AAA(d) 7.263 7/01/23 800 (b) 856,000
Unrefunded Balance Inflos AAA(d) 7.263 7/01/23 200 178,500
Detroit Wtr. Supply Sys. Rev., Ser. B, M.B.I.A. Aaa 5.55 7/01/12 1,000 1,015,330
Dexter Cmnty. Schs., Gen. Oblig., F.G.I.C. Aaa 5.10 5/01/28 10,000 8,681,400
Dickinson Cnty. Mem. Hosp. Sys. Rev. Ba1 8.00 11/01/14 1,000 1,137,500
Holland Sch. Dist., Gen. Oblig., A.M.B.A.C. Aaa Zero 5/01/15 2,400 965,160
Huron Valley Sch. Dist., Gen. Oblig., F.G.I.C. Aaa Zero 5/01/10 3,500 1,983,905
Kalamazoo Econ. Dev. Corp. Rev., Friendship Vlg., Ser. A BBB(d) 6.125 5/15/17 1,000 917,420
Lincoln Park Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 7.00 5/01/20 1,500 (b) 1,674,315
Michigan Higher Ed. Rev., Ser. XIII-A, M.B.I.A., A.M.T. Aaa 7.55 10/01/08 155 160,689
Michigan Mun. Bd. Auth. Rev., Wayne Cnty. Proj.,
M.B.I.A., E.T.M. Aaa 7.40 12/01/02 500 524,555
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45

<PAGE>

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Michigan (cont'd.)
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr., Ser. A A3 8.25% 7/01/12 $ 1,920 $ 1,994,707
Genesys Hlth. Sys., Ser. A Baa2 8.125 10/01/21 1,000 (b) 1,171,960
Genesys Hlth. Sys., Ser. A Baa2 7.50 10/01/27 500 (b) 563,340
Presbyterian Vlg. Oblig. NR 6.375 1/01/25 800 739,592
Michigan St. Hsg. Dev. Auth. Rev.,
Rental Hsg., Ser. B AA-(d) 7.55 4/01/23 1,000 1,039,790
Rental Hsg., Ser. A, A.M.T. AA-(d) 7.15 4/01/10 140 146,532
Rental Hsg., Ser. A, A.M.T. AA-(d) 7.70 4/01/23 500 520,660
Sngl. Fam. Mtge., Ser. A AA(d) 7.50 6/01/15 2,905 2,959,062
Michigan St. Strategic Fd., Ltd. Oblig. Rev.,
Waste Mgmt. Inc. Proj., A.M.T. Ba1 6.625 12/01/12 1,500 1,455,045
Worthington Armstrong Venture, A.M.T. A-(d) 5.75 10/01/22 1,000 943,080
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co. Proj.,
F.G.I.A., A.M.T. Aaa 7.65 9/01/20 2,000 2,076,600
Oak Park, A.M.B.A.C.,
Gen. Oblig. Aaa 7.00 5/01/12 400 (b) 426,308
Gen. Oblig., Aaa 7.00 5/01/11 375 (b) 399,664
Okemos Pub. Sch. Dist.,
M.B.I.A. Aaa Zero 5/01/12 1,100 548,009
M.B.I.A. Aaa Zero 5/01/13 1,000 464,770
Posen Cons. Sch. Dist. No. 9, M.B.I.A. Aaa 6.75 5/01/22 1,000 (b)(f) 1,075,880
Wayne Cnty. Bldg. Auth., Ser. A A3 8.00 3/01/17 1,250 (b) 1,356,163
Wyandotte Elec. Rev., Gen. Oblig., M.B.I.A. Aaa 6.25 10/01/08 2,000 2,132,980
------------
40,710,951
- ------------------------------------------------------------------------------------------------------------------------------
Minnesota--0.2%
Minneapolis St. Paul Hsg. Fin. Brd. Rev., Sngl. Fam.
Mtge., G.N.M.A., A.M.T. AAA(d) 7.30 8/01/31 635 650,348
St. Paul Science Museum, Cert. of Part., E.T.M. AAA(d) 7.50 12/15/01 413 426,869
------------
1,077,217
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--0.7%
Missouri St. Hsg. Dev. Comn. Mtge Rev., Sngl Fam.
Homeowner Ln., Ser. A, G.N.M.A., A.M.T. AAA(d) 7.20 9/01/26 3,740 3,918,248
- ------------------------------------------------------------------------------------------------------------------------------
Nevada--2.2%
Clark Cnty. Indl. Dev. Rev., Southwest Gas Corp., Ser.
A, A.M.T. Baa2 6.50 12/01/33 10,000 9,384,800
Nevada Hsg. Div. Multi Unit Hsg. Rev., F.N.M.A., A.M.T. AAA(d) 6.60 10/01/23 3,475 3,567,783
------------
12,952,583
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46

<PAGE>

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Hampshire--1.0%
New Hampshire Higher Ed. & Hlth. Facs. Auth. Rev.,
New Hampshire College BBB-(d) 6.30% 1/01/16 $ 500 $ 483,115
New Hampshire College BBB-(d) 6.375 1/01/27 2,000 1,889,200
New Hampshire St. Ind. Dev. Auth., Poll. Ctrl. Rev.,
Proj. A Ba3 7.65 5/01/21 3,420 3,513,708
------------
5,886,023
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--2.3%
New Jersey Econ. Dev. Auth. Rev., Performing Arts Ctr.
Proj.,
Ser. A, A.M.B.A.C. Aaa 6.00 6/15/08 1,410 1,498,336
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000 11,962,830
------------
13,461,166
- ------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.8%
New Mexico Mtge. Fin. Auth., Singl. Fam. Mtge., A.M.T. AAA(d) 6.30 7/01/28 4,965 4,972,001
- ------------------------------------------------------------------------------------------------------------------------------
New York--8.9%
Greece Central Sch. Dist.
F.G.I.C. Aaa 6.00 6/15/16 950 984,257
F.G.I.C. Aaa 6.00 6/15/17 950 979,099
F.G.I.C. Aaa 6.00 6/15/18 950 974,586
Metropolitan Trans. Auth., Trans. Facs. Rev.,
Ser. A, F.S.A. Aaa 5.75 7/01/11 675 690,937
Ser. A, F.S.A. Aaa 6.00 7/01/16 2,500 2,533,175
New York City Ind. Dev. Agcy., Spec. Fac. Rev., Terminal
One Group Assoc. Proj., A.M.T. A3 6.00 1/01/19 2,500 2,436,475
New York City Mun. Wtr. Fin. Auth. Rev., F.G.I.C. Aaa 6.75 6/15/16 10,565 (f) 10,938,578
New York City, Gen. Oblig.,
Ser. A A3 7.75 8/15/04 15 15,818
Ser. B A3 8.25 6/01/06 1,500 1,738,560
Ser. B A3 7.25 8/15/07 3,500 3,916,150
Ser. D A3 8.00 8/01/03 70 74,324
Ser. D A3 8.00 8/01/04 30 31,853
Ser. D Aaa 7.65 2/01/07 4,955 (b) 5,319,589
Ser. D A3 7.65 2/01/07 45 47,996
Ser. F A3 8.25 11/15/02 815 874,569
New York St. Dorm. Auth. Rev., Mem. Sloan Kettering
Cancer Ctr., M.B.I.A. Aaa 5.75 7/01/20 4,000 3,915,240
New York St. Env. Facs. Corp., Poll. Ctrl. Rev. Aaa 5.80 1/15/14 1,280 1,297,510
New York St. Local Gov't. Assist. Corp. Ref., Ser. E A3 6.00 4/01/14 2,000 2,083,620
New York St. Urban Dev. Corp. Rev. Ref., F.S.A.,
Correctional Facs. Aaa 6.50 1/01/09 3,000 3,268,500
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47

<PAGE>

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York (cont'd.)
Suffolk Cnty., Gen. Oblig., Ser. A, F.G.I.C. Aaa 5.25% 8/01/13 $ 1,325 $ 1,293,531
Triborough Bridge & Tunl. Auth. Rev., Ser. X, M.B.I.A. Aaa 6.625 1/01/12 8,500 9,446,645
------------
52,861,012
- ------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.7%
Mercer Cnty. Poll. Ctrl. Rev., Antelope Valley Station,
A.M.B.A.C. Aaa 7.20 6/30/13 9,000 10,324,440
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--2.9%
Franklin Cnty. Hosp. Rev., Doctors Ohio Hlth. Corp.,
Ser. A Baa3 5.60 12/01/28 5,000 4,065,650
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs. Rev., Buckeye
Pwr. Inc. Proj., A.M.B.A.C. Aaa 7.80 11/01/14 11,825 13,323,700
------------
17,389,350
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--2.9%
McGee Creek Auth. Wtr. Rev., M.B.I.A. Aaa 6.00 1/01/23 7,000 7,063,210
Tulsa Mun. Arpt. Trust Rev., A.M.T. Baa2 7.375 12/01/20 10,000 10,305,500
------------
17,368,710
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--3.3%
Beaver Cnty. Ind. Dev. Auth., Poll. Cntrl. Rev., Ohio
Edison Co. Proj., Ser. A Baa3 4.65 6/01/33 5,000 4,775,700
Clarion Cnty. Hosp. Auth. Rev., Clarion Hosp. Proj. BBB-(d) 5.60 7/01/10 685 642,667
Delaware Cnty. Ind. Dev. Auth. Rev., Res. Rec. Fac.,
Ser. A B2 6.20 7/01/19 3,000 2,700,660
Montgomery Cnty. Ind. Dev. Auth., Retirement Cmnty. Rev. A-(d) 5.25 11/15/28 2,000 1,589,240
Pennsylvania St., Cert. of Part., F.S.A. Aaa 6.25 11/01/06 600 626,046
Pennylvania Econ. Dev. Fin. Auth., Solid Waste Disp.
Rev., A.M.T. Baa2 6.00 6/01/31 4,500 4,037,715
Philadelphia Hosp. & Higher Edl. Facs. Auth. Rev.,
Children's Seashore House, Ser. A A-(d) 7.00 8/15/03 1,000 1,042,250
Philadelphia Wtr. & Waste Auth. Rev., M.B.I.A. Aaa 6.25 8/01/11 2,500 2,692,250
Westmoreland Cnty., Pennsylvania Ind. Dev. Auth. Rev.,
Valley Landfill Proj. BBB(d) 5.10 5/01/18 2,000 1,724,040
------------
19,830,568
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--3.7%
Puerto Rico Comnwlth., Gen. Oblig. Baa1 6.50 7/01/13 3,000 3,277,260
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev.,
Ser. A, A.M.B.A.C. Aaa Zero 7/01/18 2,500 846,525
Ser. V Baa1 6.375 7/01/08 500 522,000
Ser. V Baa1 6.625 7/01/12 4,000 4,156,160
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48

<PAGE>

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico (cont'd.)
Puerto Rico Ind., Tourist Ed. Med. & Env. Ctrl. Facs.
Rev.,
Dr. Pila Hosp. Proj., F.H.A. AAA(d) 6.125% 8/01/25 $ 500 $ 499,645
Hosp. Auxilio Mutuo Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/16 500 517,440
Puerto Rico Mun. Fin. Agcy. Rev., Ser. A, F.S.A. Aaa 6.00 7/01/14 250 267,243
Puerto Rico Tel. Auth. Rev.,
M.B.I.A. Aaa 6.363 1/25/07 4,100(b)(c) 4,294,750
M.B.I.A. Aaa 6.307 1/16/15 7,150(b)(c) 7,623,687
------------
22,004,710
- ------------------------------------------------------------------------------------------------------------------------------
South Carolina--1.6%
Charleston Wtrwks. & Swr. Rev., E.T.M. Aaa 10.375 1/01/10 7,415 9,537,470
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.8%
Bristol Hlth. & Edl. Fac. Rev., Bristol Memorial Hosp.,
F.G.I.C. Aaa 6.75 9/01/10 5,000 (f) 5,597,450
McMinn Cnty. Ind. Dev. Brd. Solid Waste Rev., Recycling
Fac., A.M.T. Baa1 7.40 12/01/22 5,000 5,285,750
------------
10,883,200
- ------------------------------------------------------------------------------------------------------------------------------
Texas--5.9%
Bexar Cnty. Hlth. Facs. Dev. Corp. Rev., Baptist Hlth.
Sys., Ser. A, M.B.I.A. Aaa 6.00 11/15/14 5,695 5,870,121
Dallas Ft. Worth, Regl. Arpt. Rev., F.G.I.C.,
Ser. A Aaa 7.375 11/01/08 3,500 3,885,140
Ser. A Aaa 7.375 11/01/09 3,500 3,885,140
Houston Indpt. Sch. Dist., Gen. Oblig., Ser. A Aaa 5.00 2/15/24 3,000 2,552,280
Houston Wtr. & Sew. Sys. Rev., Junior Lien, Ser. D,
M.B.I.A. Aaa 6.125 12/01/25 4,500 4,433,625
Keller Indpt. Sch. Dist. Rev. Aaa 6.00 8/15/23 3,970 3,994,694
Lakeway Mun. Util. Dist., Gen. Oblig., Ser. A, F.G.I.C. Aaa Zero 9/01/11 1,425 740,530
New Braunfels Indpt.,
Sch. Dist. Rev. Aaa Zero 2/01/10 2,335 1,336,601
Sch. Dist. Rev. Aaa Zero 2/01/11 2,365 1,269,910
Port Corpus Christi Auth. Rev. A2 7.50 8/01/12 2,000 2,077,180
San Antonio Elec. & Gas Rev., Ser. B, F.G.I.C. Aaa Zero 2/01/09 5,000 3,057,150
Univ. of Texas, Rev., Ser. B Aa1 6.75 8/15/13 2,035 2,137,645
------------
35,240,016
- ------------------------------------------------------------------------------------------------------------------------------
Utah--0.2%
Utah St. Brd. of Regents, Student Ln. Rev., Ser. F,
A.M.B.A.C., A.M.T. Aaa 7.00 11/01/01 1,000 (f) 1,041,340
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49

<PAGE>

Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Washington--3.5%
Washington St., Gen. Oblig., Ser. R-97A Aa1 Zero 7/01/16 $ 8,000 $ 2,954,080
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. A, F.S.A. Aaa 7.00% 7/01/08 4,000 4,477,960
Nuclear Proj. No. 1, Ser. B, F.S.A. Aaa 7.25 7/01/09 5,000 5,712,400
Nuclear Proj. No. 2, F.S.A. Aaa 5.40 7/01/12 5,400 5,221,422
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/06 3,000 2,131,230
------------
20,497,092
- ------------------------------------------------------------------------------------------------------------------------------
Wisconsin--1.2%
Wisconsin Hsg. & Econ. Dev. Auth., Home Ownership Rev.,
A.M.T. Aa2 6.20 3/01/27 2,100 2,059,239
Wisconsin St. Hlth. & Edu. Fac. Auth. Rev.,
Aurora Hlth. Care. Inc. Proj., Ser. A A-(d) 5.60 2/15/29 5,000 4,062,450
Aurora Hlth. Care. Inc. Proj., Ser. B A-(d) 5.625 2/15/29 1,000 816,160
------------
6,937,849
------------
Total long-term investments (cost $561,590,053) 565,065,853
------------
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--3.5%
- ------------------------------------------------------------------------------------------------------------------------------
Alabama--0.6%
Decatur Ind. Dev. Bd., Solid Waste Disp. Rev.,Amoco
Chemical Co. Proj., F.R.D.D. VMIG1 5.40 1/03/00 3,600 (e) 3,600,000
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--0.3%
Madison Cnty Env. Impt. Rev., Ser. A, F.R.D.D. VMIG1 5.35 1/03/00 100 (e) 100,000
Southwestern Dev. Auth., Solid Waste Disp. Rev., Shell
Oil Co. Proj., F.R.D.D. VMIG1 5.35 1/03/00 1,400 (e) 1,400,000
------------
1,500,000
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.1%
Calcasieu Parish Inc., Ind. Dev. Bd. Env. Rev., Citgo
Petroleum Corp., F.R.D.D. VMIG1 5.40 1/03/00 900 (e) 900,000
- ------------------------------------------------------------------------------------------------------------------------------
Mississipi--0.7%
Jackson Cnty, Ind. Ser. Facs. Rev., Chevron Inc. Proj.,
Ser. 94, F.R.D.D. VMIG1 5.40 1/03/00 4,300 (e) 4,300,000
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50

<PAGE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51

<PAGE>

<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
A.M.T.--Alternative Minimum Tax
B.I.G.--Bond Investors Guaranty Insurance Company
E.T.M.--Escrowed to Maturity
F.G.I.C.--Financial Guaranty Insurance Company
F.H.A.--Federal Housing Administration
F.N.M.A.--Federal National Mortgage Association
F.R.D.D.--Floating Rate Daily Demand Note(e)
F.S.A.--Financial Security Assurance
G.N.M.A.--Government National Mortgage Association
M.B.I.A.--Municipal Bond Insurance Association
(b) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(c) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year-end.
(d) Standard and Poor's Rating.
(e) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
(f) Pledged as initial margin on financial futures contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-52

<PAGE>

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Statement of Assets and Liabilities PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================

<S> <C>
Assets December 31, 1999
Investments, at value (cost $582,815,428)............................................................... $585,890,853
Cash.................................................................................................... 94,113
Interest receivable..................................................................................... 10,282,287
Receivable for Fund shares sold......................................................................... 563,907
Receivable for investments sold......................................................................... 477,563
Deferred expenses and other assets...................................................................... 18,100
-----------------
Total assets......................................................................................... 597,326,823
-----------------
Liabilities
Payable for Fund shares reacquired...................................................................... 1,703,058
Dividends payable....................................................................................... 402,145
Accrued expenses........................................................................................ 274,044
Management fee payable.................................................................................. 245,302
Distribution fee payable................................................................................ 149,092
Due from broker-variation margin........................................................................ 3,125
-----------------
Total liabilities.................................................................................... 2,776,766
-----------------
Net Assets.............................................................................................. $ 594,550,057
=================
Net assets were comprised of:
Common stock, at par................................................................................. $ 403,809
Paid-in capital in excess of par..................................................................... 592,263,617
-----------------
592,667,426
Accumulated net realized loss on investments......................................................... (1,252,169)
Net unrealized appreciation on investments........................................................... 3,134,800
-----------------
Net assets, December 31, 1999........................................................................... $ 594,550,057
=================
Class A:
Net asset value and redemption price per share
($498,428,421 3 33,865,243 shares of common stock issued and outstanding)......................... $14.72
Maximum sales charge (3% of offering price).......................................................... .46
-----------------
Maximum offering price to public..................................................................... $15.18
=================
Class B:
Net asset value, offering price and redemption price per share
($92,264,695 3 6,254,058 shares of common stock issued and outstanding)........................... $14.75
=================
Class C:
Net asset value and redemption price per share
($3,059,480 3 207,371 shares of common stock issued and outstanding).............................. $14.75
Sales charge (1% of offering price).................................................................. .15
-----------------
Offering price to public............................................................................. $14.90
=================
Class Z:
Net asset value, offering price and redemption price per share
($797,461 3 54,209 shares of common stock issued and outstanding)................................. $14.71
=================
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-53

<PAGE>

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Operations
================================================================================

Year Ended
Net Investment Income December 31, 1999
-----------------
Income
Interest.............................. $ 37,520,953
-----------------
Expenses
Management fee........................ 3,129,064
Distribution fee--Class A............. 1,329,006
Distribution fee--Class B............. 590,221
Distribution fee--Class C............. 19,821
Transfer agent's fees and expenses.... 412,000
Custodian's fees and expenses......... 150,000
Reports to shareholders............... 118,000
Registration fees..................... 47,000
Legal fees and expenses............... 45,000
Directors' fees and expenses.......... 40,000
Audit fees and expenses............... 39,000
Insurance expense..................... 8,000
Miscellaneous......................... 424
-----------------
Total expenses..................... 5,927,536
Custodian fee credit.................. (7,711)
-----------------
Net expenses....................... 5,919,825
-----------------
Net investment income.................... 31,601,128
-----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............... (671,635)
Financial futures contracts........... 298,219
-----------------
(373,416)
-----------------
Net change in unrealized appreciation
(depreciation) on:
Investments........................... (47,510,251)
Financial futures..................... 170,312
-----------------
(47,339,939)
-----------------
Net loss on investment transactions...... (47,713,355)
-----------------
Net Decrease in Net Assets
Resulting from Operations................ $ (16,112,227)
=============

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Changes in Net Assets
================================================================================

Year Ended December 31,
Increase (Decrease) -----------------------
in Net Assets 1999 1998
---- ----

Operations
Net investment income....... $ 31,601,128 $ 29,590,250
Net realized gain (loss) on
investment
transactions............. (373,416) 2,809,051
Net change in unrealized
depreciation on
investments.............. (47,339,939) (619,579)
----------------- -------------
Net increase (decrease) in
net assets resulting from
operations............... (16,112,227) 31,779,722
----------------- -------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (25,956,731) (23,636,186)
Class B.................. (5,456,913) (5,888,290)
Class C.................. (116,079) (65,774)
Class Z.................. (71,405) --
----------------- -------------
(31,601,128) (29,590,250)
----------------- -------------
Distributions in excess of
net investment income
Class A.................. (100,946) (17,881)
Class B.................. (18,963) (4,429)
Class C.................. (619) (86)
Class Z.................. (176) --
----------------- -------------
(120,704) (22,396)
----------------- -------------
Distributions from net
realized capital gains
Class A.................. -- (3,635,575)
Class B.................. -- (906,642)
Class C.................. -- (16,469)
----------------- -------------
-- (4,558,686)
----------------- -------------
Fund share transactions (net of share
conversions) (Note 5 & 6):
Net proceeds from shares
sold..................... 280,554,937 76,423,080
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 19,573,958 21,262,728
Cost of shares reacquired... (261,665,210) (126,905,006)
----------------- -------------
Increase (decrease) in net
assets from Fund share
transactions............. 38,463,685 (29,219,198)
----------------- -------------
Total decrease................. (9,370,374) (31,610,808)
Net Assets
Beginning of year.............. 603,920,431 635,531,239
----------------- -------------
End of year.................... $ 594,550,057 $ 603,920,431
================= =============

- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54

<PAGE>

Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================

Prudential National Municipals Fund, Inc. (the 'Fund') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The investment objective of the Fund is to seek a high level of current
income exempt from federal income taxes by investing substantially all of its
total assets in carefully selected long-term municipal bonds of medium quality.
The ability of the issuers of debt securities held by the Fund to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a 'when-issued' basis) on the basis
of prices 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 values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Board of Directors. All Securities are valued as
of 4:15 p.m., New York time.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. The Fund's principal reason for writing options is
to realize, through receipt of premiums, a greater current return than would be
realized on the underlying security alone. When the Fund purchases an option, it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
underlying the written option. The Fund, as purchaser of an option, bears the
risk of the potential inability of the counterparties to meet the terms of their
contracts.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the 'initial margin.' Subsequent payments, known as 'variation margin,'
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain(loss) on financial futures
contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on the identified cost basis. Interest income is
recorded on an accrual basis. The Fund amortizes premiums and accretes original
issue discount on portfolio securities as adjustments to interest income.
Expenses are recorded on the accrual basis which may require the use of certain
estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: It is the intent of the Fund to continue to meet the
requirements of the Internal Revenue Code applicable to regulated
- --------------------------------------------------------------------------------
B-55

<PAGE>

Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================

investment companies and to distribute all of its net income to its
shareholders. For this reason, no federal income tax provision is required.
Dividends and Distributions: Dividends from net investment income are declared
daily and paid monthly. The Fund will distribute at least annually any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants', Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income; Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income by $120,704,
increase accumulated net realized loss on investments by $149,567 and increase
paid in capital by $28,863, due to the sale of securities purchased with market
discount during the year ended December 31, 1999. Net investment income, net
realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .50% of the Fund's average daily net assets up to and including $250
million, .475% of the next $250 million, .45% of the next $500 million, .425% of
the next $250 million, .40% of the next $250 million and .375% of the Fund's
average daily net assets in excess of $1.5 billion.
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Class A, B, C and Z
shares of the Fund. The Fund compensates PIMS for distributing and servicing the
Fund's Class A, Class B and Class C shares, pursuant to plans of distribution
(the 'Class A, B and C Plans'), regardless of expenses actually incurred by
them. The distribution fees were accrued daily and payable monthly. No
distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS with respect
to Class A, B and C shares, for distribution-related activities at an annual
rate of up to .30 of 1%, .50 of 1% and 1%, of the average daily net assets of
the Class A, B and C shares, respectively. Such expenses under the Plans were
.25 of 1%, .50 of 1% and .75 of 1% of the average daily net assets of the Class
A, B and C shares, respectively, for the year ended December 31, 1999.
PIMS has advised the Fund that it received approximately $64,200 and $9,400 in
front-end sales charges resulting from sales of Class A and Class C shares,
respectively, during the year ended December 31, 1999. From these fees, PIMS
paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended December 31, 1999, it received
approximately $142,600 and $1,400 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America.
As of March 11, 1999, the Company along with other unaffiliated registered
investment companies (the 'Funds'), entered into a syndicated agreement ('SCA')
with an unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings outstanding will be at market rates. The Funds
pay a commitment fee at an annual rate of .065 of 1% on the unused portion of
the credit facility, which is accrued and paid quarterly on a pro rata basis by
the Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds
had a credit agreement with a maximum commitment of $200,000,000. The commitment
fee was .055 of 1% on the unused portion of the credit facility. The Fund did
not borrow any amounts pursuant to either agreement during the year ended
December 31, 1999. The purpose of the agreements is to serve as an alternative
source of funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the year ended December 31, 1999,
the Fund incurred fees of approximately $411,000 for
- --------------------------------------------------------------------------------

B-56

<PAGE>

Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================

the services of PMFS. As of December 31, 1999, approximately $32,800 of such
fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1999, were $216,669,330 and $195,715,557,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1999 was
$583,086,606 and, accordingly, net unrealized appreciation for federal income
tax purposes was $2,804,247 (gross unrealized appreciation--$17,324,536; gross
unrealized depreciation--$14,520,289).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1999 of approximately $922,000 which expires in 2007. Accordingly,
no capital gains distribution is expected to be paid until net gains have been
realized in excess of the carryforward.
During the year ended December 31, 1999, the Fund entered into financial futures
contracts. Details of open contracts at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Value at Value at
Number of Expiration Trade December 31, Unrealized
Contracts Type Date Date 1999 Appreciation
- --------- ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Long
Position:
U.S.
Treasury
100 Index Mar. 2000 $9,187,500 $9,246,875 $ 59,375
========
</TABLE>

- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 3%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
There are 1 billion shares of common stock, $.01 par value per share, authorized
divided into four classes, designated Class A, Class B, Class C and Class Z
common stock, each of which consists of 250 million authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 10,154,359 $ 150,151,142
Shares issued in connection with
reorganization (Note 6)........ 5,719,568 92,139,437
Shares issued in reinvestment of
dividends and distributions.... 1,049,415 16,182,668
Shares reacquired................ (13,662,479) (212,057,236)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 3,260,863 46,416,011
Shares issued upon conversion
from Class B................... 595,834 9,168,416
----------- -------------
Net increase in shares
outstanding.................... 3,856,697 $ 55,584,427
=========== =============
Year ended December 31, 1998:
Shares sold...................... 3,824,658 $ 61,874,353
Shares issued in reinvestment of
dividends and distributions.... 1,059,215 17,057,270
Shares reacquired................ (6,037,193) (97,515,280)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (1,153,320) (18,583,657)
Shares issued upon conversion
from Class B................... 573,854 9,271,697
----------- -------------
Net decrease in shares
outstanding.................... (579,466) $ (9,311,960)
=========== =============

<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 826,622 $ 10,991,293
Shares issued in connection with
reorganization (Note 6)........ 1,236,086 19,953,535
Shares issued in reinvestment of
dividends and distributions.... 209,350 3,243,633
Shares reacquired................ (2,859,392) (44,047,247)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (587,334) (9,858,786)
Shares reacquired upon conversion
into Class A................... (594,471) (9,168,416)
----------- -------------
Net decrease in shares
outstanding.................... (1,181,805) $ (19,027,202)
=========== =============
</TABLE>

- --------------------------------------------------------------------------------
B-57

<PAGE>

Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold...................... 797,807 $ 12,909,659
Shares issued in reinvestment of
dividends and distributions.... 256,538 4,140,932
Shares reacquired................ (1,803,505) (29,167,324)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (749,160) (12,116,733)
Shares reacquired upon conversion
into Class A................... (572,437) (9,271,697)
----------- -------------
Net decrease in shares
outstanding.................... (1,321,597) $ (21,388,430)
=========== =============

<CAPTION>
Class C
- ---------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 91,530 $ 1,390,702
Shares issued in connection with
reorganization (Note 6)........ 29,355 473,862
Shares issued in reinvestment of
dividends and distributions.... 5,874 90,815
Shares reacquired................ (62,002) (958,956)
----------- -------------
Net increase in shares
outstanding.................... 64,757 $ 996,423
=========== =============

Year ended December 31, 1998:
Shares sold...................... 101,316 $ 1,639,068
Shares issued in reinvestment of
dividends and distributions.... 3,998 64,526
Shares reacquired................ (13,773) (222,402)
----------- -------------
Net increase in shares
outstanding.................... 91,541 $ 1,481,192
=========== =============
<CAPTION>

Class Z
- ---------------------------------
<S> <C> <C>
January 22, 1999(a) through
December 31, 1999:
Shares sold...................... 210,908 $ 3,262,799
Shares issued in connection with
reorganization (Note 6)........ 136,091 2,192,167
Shares issued in reinvestment of
dividends and distributions.... 3,661 56,842
Shares reacquired................ (296,451) (4,601,771)
----------- -------------
Net increase in shares
outstanding.................... 54,209 $ 910,037
=========== =============
</TABLE>

- ---------------
(a) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 6. Reorganization
On August 26, 1998, the Board of Directors of the Fund approved an Agreement and
Plan of Reorganization (the 'Plan') which provided for the transfer of all of
the assets of the Prudential Municipal Series Fund Maryland Series ('Maryland
Series') and the Prudential Municipal Series Fund Michigan Series ('Michigan
Series') in exchange for Class A shares of the Fund and the Fund's assumption of
the liabilities of the Maryland and Michigan Series. The Plan also provided for
the transfer of all of the assets of the Class A, B, C and Z shares of the
Prudential Municipal Bond Fund--Intermediate Series ('Intermediate Series') in
exchange for like shares of the Fund and the Fund's assumption of the
liabilities of the Intermediate Series.
The Plan was approved by the shareholders of the Maryland, Michigan and
Intermediate Series at a shareholder meeting held on January 14, 1999. The
reorganization took place on January 22, 1999. The Maryland, Michigan and
Intermediate Series and the Fund incurred their pro rata share of the costs of
the reorganization, including the cost of proxy solicitation.
The acquisition was accomplished by a tax-free exchange of the following shares:
<TABLE>
<CAPTION>
National Municipals
Maryland Series: Fund Value
<S> <C> <C> <C> <C>
Class A 1,545,436 Class A 1,074,419 $17,304,069
B 930,543 A 647,510 10,432,984
C 11,019 A 7,667 123,541
<CAPTION>
Michigan Series:
<S> <C> <C> <C> <C>
Class A 2,459,122 A 1,845,487 29,729,243
B 1,640,985 A 1,230,484 19,826,554
C 43,799 A 32,842 529,193
<CAPTION>
Intermediate Series:
<S> <C> <C> <C> <C>
Class A 1,302,336 A 881,159 14,193,853
B 1,830,315 B 1,236,086 19,953,535
C 43,467 C 29,355 473,862
Z 201,141 Z 136,091 2,192,167
</TABLE>

The aggregate net assets and unrealized appreciation of the funds immediately
before the acquisition were:
<TABLE>
<CAPTION>
Unrealized
Net Assets Appreciation
----------- -------------
<S> <C> <C>
Maryland Series $27,860,594 $ 2,342,040
Michigan Series 50,084,990 4,856,230
Intermediate Series 36,813,417 1,858,582
</TABLE>

The aggregate net assets of the National Municipals Fund immediately before the
acquisition was $607,552,044.
- --------------------------------------------------------------------------------
B-58

<PAGE>

Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================

<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 16.06 $ 16.12 $ 15.56 $ 15.98 $ 14.42
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .76 .79 .81(b) .82(b) .81(b)
Net realized and unrealized gain (loss) on
investment transactions.................... (1.34) .06 .67 (.42) 1.57
-------- -------- -------- -------- --------
Total from investment operations........... (.58) .85 1.48 .40 2.38
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.76) (.79) (.81) (.82) (.81)
Distributions in excess of net investment
income..................................... --(c) --(c) (.01) --(c) (.01)
Distributions from net realized gains......... -- (.12) (.10) -- --
-------- -------- -------- -------- --------
Total distributions........................ (.76) (.91) (.92) (.82) (.82)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 14.72 $ 16.06 $ 16.12 $ 15.56 $ 15.98
======== ======== ======== ======== ========

TOTAL RETURN(a):.............................. (3.69)% 5.41% 9.80% 2.66% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $498,428 $481,926 $493,178 $502,739 $538,145
Average net assets (000)...................... $531,603 $483,759 $491,279 $508,159 $446,350
Ratios to average net assets:
Expenses, including distribution fees...... .86% .73% .70%(b) .68%(b) .75%(b)
Expenses, excluding distribution fees...... .61% .63% .60%(b) .58%(b) .65%(b)
Net investment income...................... 4.88% 4.89% 5.15%(b) 5.31%(b) 5.34%(b)
For Class A, B, C and Z shares:
Portfolio turnover rate.................... 30% 23% 38% 46% 98%
</TABLE>

- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59

<PAGE>

Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............ $ 16.10 $ 16.16 $ 15.60 $ 16.02 $ 14.45
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .73 .73 .75(b) .76(b) .76(b)
Net realized and unrealized gain (loss) on
investment transactions.................... (1.35) .06 .67 (.42) 1.58
-------- -------- -------- -------- --------
Total from investment operations........... (.62) .79 1.42 .34 2.34
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.73) (.73) (.75) (.76) (.76)
Distributions in excess of net investment
income..................................... --(c) --(c) (.01) --(c) (.01)
Distributions from net realized gains......... -- (.12) (.10) -- --
-------- -------- -------- -------- --------
Total distributions........................ (.73) (.85) (.86) (.76) (.77)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 14.75 $ 16.10 $ 16.16 $ 15.60 $ 16.02
======== ======== ======== ======== ========
TOTAL RETURN(a):.............................. (3.98)% 4.99% 9.35% 2.26% 16.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $92,265 $119,698 $141,528 $168,185 $222,865
Average net assets (000)...................... $118,044 $131,195 $151,938 $193,312 $252,313
Ratios to average net assets:
Expenses, including distribution fees...... 1.11% 1.13% 1.10%(b) 1.08%(b) 1.15%(b)
Expenses, excluding distribution fees...... .61% .63% .60%(b) .58%(b) .65%(b)
Net investment income...................... 4.62% 4.49% 4.75%(b) 4.91%(b) 4.96%(b)
</TABLE>

<PAGE>

Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
-------------------------------------------------- ------------
January 22,
1999(d)
Year Ended December 31, through
-------------------------------------------------- December 31,
1999 1998 1997 1996 1995 1999
------ ------ ------ ------ ------ ------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......... $16.10 $16.16 $15.60 $16.02 $14.44 $16.11
------ ------ ------ ------ ------ -----
Income from investment operations
Net investment income......................... .69 .69 .71(b) .72(b) .72(b) .73
Net realized and unrealized gain (loss) on
investment transactions.................... (1.35) .06 .67 (.42) 1.59 (1.40)
------ ------ ------ ------ ------ -----
Total from investment operations........... (.66) .75 1.38 .30 2.31 (.67)
------ ------ ------ ------ ------ -----
Less distributions
Dividends from net investment income.......... (.69) (.69) (.71) (.72) (.72) (.73)
Distributions in excess of net investment
income..................................... --(c) --(c) (.01) --(c) (.01) --(c)
Distributions from net realized gains......... -- (.12) (.10) -- -- --
------ ------ ------ ------ ------ -----
Total distributions........................ (.69) (.81) (.82) (.72) (.73) (.73)
------ ------ ------ ------ ------ -----
Net asset value, end of period................ $14.75 $16.10 $16.16 $15.60 $16.02 $14.71
====== ====== ====== ====== ====== ======
TOTAL RETURN(a):.............................. (4.22)% 4.73% 9.08% 2.01% 16.22% (4.22)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $3,060 $2,296 $825 $772 $403 $797
Average net assets (000)...................... $2,643 $1,555 $758 $674 $247 $1,391
Ratios to average net assets:
Expenses, including distribution fees...... 1.36% 1.38% 1.35%(b) 1.33%(b) 1.40%(b) .64%(e)
Expenses, excluding distribution fees...... .61% .63% .60%(b) .58%(b) .65%(b) .64%(e)
Net investment income...................... 4.39% 4.23% 4.50%(b) 4.67%(b) 4.66%(b) 5.45%(e)
</TABLE>

- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
(d) Commencement of offering of Class Z shares.
(e) Annualized
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61

<PAGE>

Report of Independent Accountants PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================

To the Shareholders and Board of Directors of
Prudential National Municipals Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential National Municipals
Fund, Inc. (the 'Fund') at December 31, 1999, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States. These financial statements and financial highlights (hereafter
referred to as 'financial statements') are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 18, 2000

Tax Information (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================

We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (December 31, 1999) as to the federal tax status of
dividends paid by the Fund during such fiscal year. Accordingly, we are advising
you that in the fiscal year ended December 31, 1999, dividends paid from net
investment income totalling $.76 per Class A share, $.73 per Class B share, $.69
per Class C shares and $.73 per Class Z were all federally tax-exempt interest
dividends. In addition, the Fund paid distributions of $.003 per share
(ordinary) which is taxable as ordinary.

The portion of your dividends which may be subject to the Alternative Minimum
Tax (AMT) as well as information with respect to the state taxability of your
investment in the Fund was sent to you under separate cover.

For the purpose of preparing your annual federal income tax return, however, you
should report the amounts as reflected on the appropriate Form 1099-DIV or
substitute 1099-DIV.

- --------------------------------------------------------------------------------
B-62

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

DIVERSIFICATION

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

DURATION

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

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

MARKET TIMING

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

POWER OF COMPOUNDING

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

STANDARD DEVIATION

Standard 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.

Value of $1.00 invested on 1/1/1926 through 12/31/1999

[LINE GRAPH]

Small Stocks $6,640.79
Common Stocks $2,845.63
Long-Term Bonds $ 40.22
Treasury Bills $ 15.64
Inflation $ 9.40

Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential Mutual
Fund.

Generally, stock returns are 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 1989 to September 1999. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying
securities during the period mentioned. The data is provided to illustrate the
varying historical total returns and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.

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

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

Year 1989 1990 1991 1992 1993 1994
------------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)%
------------------------------------------------------------
U.S.Government
Mortgage
Securities/2/ 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)%
------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)%
------------------------------------------------------------
U.S. High Yield
Bonds/4/ 0.8% (9.6)% 46.2%15.8% 17.1% (1.0)%
------------------------------------------------------------
World Government
Bonds/5/ (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0%
------------------------------------------------------------
Difference between
highest and lowest 18.8% 24.9% 30.9% 11.0% 10.3% 9.9%
returns percent

Year 1995 1996 1997 1998 1999
-------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 18.4% 2.7% 9.6% 10.0% -2.56%
-------------------------------------------------------
U.S.Government
Mortgage
Securities/2/ 16.8% 5.4% 9.5% 7.0% 1.86%
-------------------------------------------------------
U.S. Investment Grad
Corporate Bonds/3/ 22.3% 3.3% 10.2% 8.6% -1.96%
-------------------------------------------------------
U.S. High Yield
Bonds/4/ 19.2% 11.4% 12.8% 1.6% 2.39%
-------------------------------------------------------
World Government
Bonds/5/ 19.6% 4.1% (4.3)% 5.3% -5.07%
--------------------------------------------------------
Difference between
highest and lowest 5.5% 8.7% 17.1% 8.4% 7.46%
returns percent
--------------------------------------------------------

/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. Source: Lipper Inc.
/4/LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) Includes over 800
bonds issued by various foreign governments or agencies, excluding those in
the U.S., but including those in Japan, Germany, France, the U.K., Canada,
Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.

III-2
<PAGE>

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

Long Term U.S. Treasury Bond Yield in Percent (1926-1999)

[LINE GRAPH]

YEAR-END

Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond
from 1926-1999. 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>

This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 1999. It does not represent
the performance of any Prudential mutual fund.

Average Annual Total Returns of Major
World Stock Markets
(12/31/1985-12/31/1999)
(in U.S. dollars)

Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
U.K. 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%

Source: Morgan Stanley Capital International (MSCI), and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment
of all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.

This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.

[LINE GRAPH]

Capital Appreciation and Reinvesting
Dividends - $474,094
Capital Appreciation only - $159,597
(1969-1999)

Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential mutual fund. Common stock
total return is based on the Standard & Poor's 500 Composite Stock Price
Index, a market-value-weighted index made up of 500 of the largest stocks in
the U.S. based upon their stock market value. Investors cannot invest directly
in indexes.

III-4
<PAGE>

World Stock Market Capitalization by Region
World Total: 20.7 Trillion

[PIE CHART]

Canada 2.1%
Pacific Basin 16.4%
Europe 32.5%
U.S. 49.0%

Source: Morgan Stanley Capital International, December 31, 1999. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the
aggregate market value of the stock exchanges). This chart is for illustrative
purposes only and does not represent the allocation of any Prudential mutual
fund.

III-5
<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)(1) 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).

(2) Amendment to By-Laws of the Registrant.*

(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).

(3) Amendment to Subadvisory Agreement dated as of November 18, 1999,
between Prudential Investments Fund Management LLC and The Prudential
Investment Corporation.*

(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)(1) 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).

(2) Amendment to Custodian Contract/Agreement dated as of February
22, 1999 by and between the Registrant and State Street Bank and
Trust Company.*

(h)(1) 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).

(2) Amendment to Transfer Agency and Service Agreement dated as of
August 24, 1999 by and between the Registrant and Prudential Mutual
Fund Services LLC (successor to Prudential Mutual Fund Services,
Inc.)*

(i)(1) Opinion of Swidler, Berlin, Shereff, Friedman, 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).

(2) Consent of Counsel.*

(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)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).

(p)(1) Code of Ethics of Registrant.*

(p)(2) Code of Ethics of Prudential Investment Management LLC,
Prudential Investments Fund Management LLC and Prudential Investment
Corporation.*
- ---------
*Filed herewith.

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>
David R. Odenath, Jr. Officer in Charge, Officer in Charge, President, Chief Executive Officer
President, Chief and Chief Operating Officer, PIFM; Senior Vice
Executive Officer President, The Prudential Insurance Company of
and Chief Operating America (Prudential)
Officer
Robert F. Gunia Executive Vice Executive Vice President and Chief Administrative
President and Chief Officer, PIFM; Vice President, Prudential; President,
Administrative Prudential Investment Management Services LLC (PIMS)
Officer
William V. Healey Executive Vice Executive Vice President, Chief Legal Officer and
President, Chief Secretary, PIFM; Vice President and Associate General
Legal Officer and Counsel, Prudential; Senior Vice President, Chief
Secretary Legal Officer and Secretary, PIMS
Brian W. Henderson Executive Vice Executive Vice President, PIFM; Senior Vice President
President and Chief Operating Officer, PIMS
Stephen Pelletier Executive Vice Executive Vice President, PIFM
President
Judy A. Rice Executive Vice Executive Vice President, PIFM
President
Lynn M. Waldvogel Executive Vice Executive Vice President, PIFM
President
</TABLE>

(b) The Prudential Investment Corporation (PIC)

See "How the Fund is Managed" 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>
Jeffrey Hiller Chief Compliance Chief Compliance Officer, Prudential Global Asset
Officer Management

John R. Strangfeld, Jr. Chairman of the Board, President of Prudential Global Asset Management Group
President, Chief of Prudential; Senior Vice President, Prudential;
Executive Officer and Chairman of the Board, President, Chief Executive
Director Officer and Director, PIC

Bernard Winograd Senior Vice President Chief Executive Officer, Prudential Real Estate
and Director Investors; Senior Vice President and Director, PIC
</TABLE>

ITEM 27. PRINCIPAL UNDERWRITERS

(a) Prudential Investment Management Services LLC (PIMS)

PIMS is distributor for the following open-end management companies: Cash
Accumulation Trust, COMMAND Money Fund, COMMAND Government Fund, COMMAND Tax-
Free Fund, Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-
Applegate Growth Equity Fund), Prudential Balanced Fund, Prudential California
Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential Diversified
Funds, 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 Total Return 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 International Bond Fund, Inc., Prudential Mid-Cap
Value Fund, Prudential MoneyMart Assets, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc.,
Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Real Estate Securities Fund, Prudential Sector Funds, Inc.,
Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential 20/20 Focus Fund, Prudential Tax-Free Money
Fund, Inc., Prudential Tax-Managed Funds, Prudential World Fund, Inc., The
Prudential Investment Portfolios, Inc., Strategic Partners Series Target Funds
and The Target Portfolio Trust.

PIMS is also distributor of the following unit investment trusts: Separate
Accounts: Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential
Variable Contract Account-11, The Prudential Variable Contract Account-24, The
Prudential Variable Contract GI-2, The Prudential Discovery Select Group
Variable Contract Account, The Pruco Life Flexible Premium Variable Annuity
Account, The Pruco Life of New Jersey Flexible Premium Variable Annuity
Account, The Prudential Individual Variable Contract Account and The
Prudential Qualified Individual Variable Contract Account.

C-3
<PAGE>

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

<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND
NAME(/1/) UNDERWRITER OFFICES WITH REGISTRANT
- --------- ------------- -----------------------
<S> <C> <C>
Margaret Deverell....... Vice President and Chief Financial None
Officer

Robert F. Gunia......... President Vice President and Director

Kevin Frawley........... Senior Vice President and Compliance None
Officer
213 Washington Street
Newark, NJ 07102

William V. Healey....... Senior Vice President, Secretary and None
Chief Legal Officer

Brian W. Henderson...... Senior Vice President and Officer None

John R. Strangfeld, Advisory Board Member President and Director
Jr. ...................
</TABLE>
- ---------
(1) The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise indicated.

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,
194 Wood Avenue South, Iselin, New Jersey 08830. 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-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended, the
Registrant certifies that it meets all the requirements for effectiveness of
this Post Effective Amendment to the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and 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 25th day of
February, 2000.

PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

/s/ John R. Strangfeld, Jr.
---------------------------------

JOHN R. STRANGFELD, JR., PRESIDENT

Pursuant to the requirements of the 1933 Act, 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/ Eugene C. Dorsey Director February 25, 2000
-------------------------------------------
EUGENE C. DORSEY

/s/ Delayne Dedrick Gold Director February 25, 2000
-------------------------------------------
DELAYNE DEDRICK GOLD

/s/ Robert F. Gunia Vice President and
------------------------------------------- Director February 25, 2000
ROBERT F. GUNIA

/s/ Thomas T. Mooney Director February 25, 2000
-------------------------------------------
THOMAS T. MOONEY

/s/ Stephen R. Munn Director February 25, 2000
-------------------------------------------
STEPHEN R. MUNN

/s/ David R. Odenath, Jr. Director February 25, 2000
-------------------------------------------
DAVID R. ODENATH, JR.

/s/ Richard A. Redeker Director February 25, 2000
-------------------------------------------
RICHARD A. REDEKER

/s/ John R. Strangfeld, Jr. President and Director February 25, 2000
-------------------------------------------
JOHN R. STRANGFELD, JR.

/s/ Nancy Hays Teeters Director February 25, 2000
-------------------------------------------
NANCY HAYS TEETERS

/s/ Louis A. Weil, III Director February 25, 2000
-------------------------------------------
LOUIS A. WEIL, III

/s/ Grace C. Torres Principal Financial and
------------------------------------------- Accounting Officer February 25, 2000
GRACE C. TORRES
</TABLE>

C-5
<PAGE>

EXHIBIT INDEX

(b) (2) Amendment to By-Laws of Registrant.

(d) (3) Amendment to Subadvisory Agreement dated as of November 18, 1999
between Prudential Investments Fund Management LLC and The
Prudential Investments Corporation.

(g) (2) Amendment to Custodian Contract/Agreement dated as of February
22, 1999 by and between the Registrant and State Street Bank and
Trust Company.

(h) (2) Amendment to Transfer Agency and Service Agreement dated as of
August 24, 1999 by and between the Registrant and Prudential Mutual
Fund Services LLC (successor to Prudential Mutual Fund Services,
Inc).

(i) (2) Consent of Counsel.

(j) Consent of Independent Accountants.

(p) (1) Code of Ethics of Registrant.

(p) (2) Code of Ethics of Prudential Investment Management LLC,
Prudential Investments Fund Management LLC and Prudential
Corporation.

<PAGE>
EXHIBIT (b)(2)

The first paragraph of Article 1. Section 7 of the By-laws-Laws of the
Corporation is hereby replaced as follows:

Section 7. VOTING AND INSPECTORS. At all meetings, stockholders of
record entitled to vote thereat shall have one vote for each share of common
stock standing in his/her name on the books of the Corporation (and such
stockholders of record holding fractional shares,if any,shall have proportionate
voting rights) on the date for the determination of stockholders entitled to
vote at such meeting, either in person or by proxy. A stockholder may sign a
writing authorizing another person to act as proxy. Signing may be accomplished
by the stockholder or the stockholder's authorized agent signing the writing or
causing the stockholder's signature to be affixed to the writing by any
reasonable means, including facsimilie signature. A stockholder may authorize
another person to act as proxy by transmitting, or authorizing the transmission
of, a telegram, cablegram, datagram, or other means of electronic transmission
to the person authorized to act as proxy or to a proxy solicitation firm, proxy
support service organization, or other person authorized by the person who will
act as proxy to receive the transmission.

<PAGE>

Exhibit (d)(3)

AMENDMENT TO SUBADVISORY AGREEMENT

Prudential National Municipals Fund, Inc.

AMENDMENT made as of this 18 th day of November, 1999, between Prudential
Investments Fund Management LLC ("PIFM"), and The Prudential Investment
Corporation ("PIC").

WHEREAS, PIFM, either itself or as successor to Prudential Investments Fund
Management, Inc., and PIC have entered into a Subadvisory Agreement (the
"Agreement") dated May 2nd , 1988, with respect to the management of Prudential
National Municipals Fund, Inc. (the "Fund"); and

WHEREAS, the Agreement provides that PIC shall provide investment advisory
services to the Fund, subject to oversight by PIFM; and

WHEREAS, PIFM and PIC desire to amend the Agreement with respect to the
compensation to be paid by PIFM to PIC for services provided by PIC pursuant to
the Agreement.

NOW, THEREFORE, for and in consideration of the continuation of the
Agreement for its current term, and other good and valuable consideration, PIFM
and PIC hereby amend the Agreement to provide for the compensation to be paid by
PIFM to PIC as described on the attached schedule, effective as of January 1,
2000, for the same term, including renewals, as the Agreement and upon the same
terms and conditions as described in the Agreement.

IN WITNESS WHEREOF, PIMS and PIC have signed this Amendment as of the day
and year first above written.

PRUDENTIAL INVESTMENTS THE PRUDENTIAL INVESTMENT
FUND MANAGEMENT LLC CORPORATION

By: /s/Robert F. Gunia By: /s/John R. Strangfeld, Jr.
------------------ -------------------------

Name: Robert F. Gunia Name: John R. Strangfeld, Jr.
--------------- -----------------------

Title: Executive Vice President Title: Chairman of the Board,
------------------------ ----------------------
and Chief Administrative President, Chief Executive
Officer Officer and Director
<PAGE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Fund Name Contactrual Compensation
Mgmt Fee to PGAM
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity Funds
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential 20/20 Focus Fund* 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Balanced Fund 0.65% 0.325%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Developing Markets Fund -Developing Markets Equity Fund 1.25% 0.625%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Developing Markets Fund -Latin America Equity Fund 1.25% 0.625%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified Conservative Growth Fund* 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified Moderate Growth Fund* 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified High Growth Fund* 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Distressed Securities Fund, Inc. 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Emerging Growth Fund, Inc. 0.60% 0.300%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Equity Fund, Inc. .50% to $500 mil 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
.475% next $500 mil 0.226%
- ----------------------------------------------------------------------------------------------------------------------------------
.45% over 1 bil 0.203%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Equity Income Fund .60% to $500 mil 0.300%
- ----------------------------------------------------------------------------------------------------------------------------------
.50% next $500 mil 0.238%
- ----------------------------------------------------------------------------------------------------------------------------------
.475% next $500 mil 0.214%
- ----------------------------------------------------------------------------------------------------------------------------------
.45% over 1.5 bil 0.191%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Bond Market Index Fund 0.25% 0.125%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Europe Index Fund 0.40% 0.200%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Pacific Index Fund 0.40% 0.200%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Small Cap Index Fund 0.30% 0.195%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Stock Index Fund 0.30% 0.150%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Active Balanced Fund 0.65% 0.325%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Mid-Cap Value Fund 0.70% 0.350%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Natural Resources Fund 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Real Estate Securities Fund 0.75% .45% to $250 mil
- ----------------------------------------------------------------------------------------------------------------------------------
.40% next $250 mil
- ----------------------------------------------------------------------------------------------------------------------------------
.35% next $250 mil
- ----------------------------------------------------------------------------------------------------------------------------------
.30% over $750 mil
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Financial Services Fund 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Health Sciences Fund* 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Technology Fund 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Utility Fund .60% to $250 mil 0.300%
- ----------------------------------------------------------------------------------------------------------------------------------
.50% next $500 mil 0.238%
- ----------------------------------------------------------------------------------------------------------------------------------
.45% next $750 mil 0.203%
- ----------------------------------------------------------------------------------------------------------------------------------
.40% next $500 mil 0.170%
- ----------------------------------------------------------------------------------------------------------------------------------
.35% next $2 bil 0.140%
- ----------------------------------------------------------------------------------------------------------------------------------
.325% next $2 bil 0.122%
- ----------------------------------------------------------------------------------------------------------------------------------
.30% over $6 bil 0.105%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Small-Cap Quantum Fund, Inc. 0.60% 0.390%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Small Company Value Fund, Inc. 0.70% 0.455%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Tax-Managed Equity Fund 0.65% 0.325%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential World Fund, Inc., Global Series 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Europe Growth Fund 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Global Genesis Fund 1.00% 0.500%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Pacific Growth Fund 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Taxable Fixed Income Funds
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified Bond Fund, Inc. 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Global Limited Maturity Fund, Inc. 0.55% 0.275%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Government Income Fund, Inc. .50% to $3 bil 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
.35% over $3 bil 0.166%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Government Securities Trust Short Intermediate Term Series 0.40% 0.200%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Fund Name Contactrual Compensation
Mgmt Fee to PGAM
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
The High Yield Income Fund, Inc. 0.70% 0.350%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential High Yield Fund, Inc. .50% to $250 mil 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
.475% next $500 mil 0.226%
- ----------------------------------------------------------------------------------------------------------------------------------
.45% next $750 mil 0.203%
- ----------------------------------------------------------------------------------------------------------------------------------
.425% next $500 mil 0.181%
- ----------------------------------------------------------------------------------------------------------------------------------
.40% next $500 mil 0.160%
- ----------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.141%
- ----------------------------------------------------------------------------------------------------------------------------------
.35% over $3 bil 0.123%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential High Yield Total Return Fund, Inc. 0.65% 0.325%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Intermediate Global Income Fund, Inc. 0.75% 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential International Bond Fund, Inc, .75% to 1 bil 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
.70% over 1 bil 0.333%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Structured Maturity Fund, Inc. 0.40% 0.200%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Global Total Return Fund, Inc. .75% to $500 mil 0.375%
- ----------------------------------------------------------------------------------------------------------------------------------
.70% next $500 mil 0.333%
- ----------------------------------------------------------------------------------------------------------------------------------
.65% over $1 bil 0.293%
- ----------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fixed Income Funds
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential California Municipal Fund - California Series 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential California Municipal Fund - California Income 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential National Municipals Fund, Inc. .50% to $250 mil 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
.475% next $250 mil 0.226%
- ----------------------------------------------------------------------------------------------------------------------------------
.45% next $500 mil 0.203%
- ----------------------------------------------------------------------------------------------------------------------------------
.425% next $250 mil 0.181%
- ----------------------------------------------------------------------------------------------------------------------------------
.40% next $250 mil 0.160%
- ----------------------------------------------------------------------------------------------------------------------------------
.375% over $1.5 bil 0.141%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Bond Fund - High Income Series .50% to 1 bil 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
.45% over 1 bil 0.214%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Bond Fund - Insured Series .50% to 1 bil 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
.45% over 1 bil 0.214%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Florida Series 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Massachusetts Series 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New Jersey Series 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New York Series 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - North Carolina Series 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Ohio Series 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Pennsylvania Series 0.50% 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
Money Market Funds
- ----------------------------------------------------------------------------------------------------------------------------------
Command Money Fund .50% to $500 mil 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
.425% next $500 mil 0.191%
- ----------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.150%
- ----------------------------------------------------------------------------------------------------------------------------------
.35% over $1.5 bil 0.123%
- ----------------------------------------------------------------------------------------------------------------------------------
Command Government Money Market Fund .40% to $1 bil 0.200%
- ----------------------------------------------------------------------------------------------------------------------------------
.375% over $1 bil 0.169%
- ----------------------------------------------------------------------------------------------------------------------------------
Command Tax-Free Fund .50% to $500 mil 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
.425% next $500 mil 0.191%
- ----------------------------------------------------------------------------------------------------------------------------------
.375% over $1bil 0.150%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Government Securities Trust - Money Market Series .40% to $1 bil 0.200%
- ----------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.169%
- ----------------------------------------------------------------------------------------------------------------------------------
.35% over $1.5 bil 0.140%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Government Securities Trust - U.S. Treasury Money Market Series 0.40% 0.200%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Institutional Liquidity Portfolio, Inc. 0.20% 0.100%
- ----------------------------------------------------------------------------------------------------------------------------------
Prudential Tax-Free Money Market Fund, Inc. .50% to $750 mil 0.250%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

<PAGE>

Exhibit (g)(2)

AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT

This Amendment to the respective Custodian Contract/Agreement is made as of
February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.

WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and

WHEREAS, each Fund and the Custodian desire to amend certain provisions of
the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated under
the Investment Company Act of 1940, as amended (the "1940 Act"); and

WHEREAS, each Fund and the Custodian desire to amend and restate certain
other provisions of the Contract relating to the custody of assets of each of
the Funds held outside of the United States.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereby agree to amend the
Contract, to add the following new provisions which supersede the provisions in
the existing contracts relating to the custody of assets of the Funds outside
the United States.

3. The Custodian as Foreign Custody Manager.
----------------------------------------

3.1. Definitions.
-----------

Capitalized terms in this Article 3 shall have the following meanings:

"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.

"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.

1
<PAGE>

"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.

"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.

"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.

3.2. Delegation to the Custodian as Foreign Custody Manager.
------------------------------------------------------

Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule 17f-
5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.

3.3. Countries Covered.
-----------------

The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall
list on Schedule A the Eligible Foreign Custodians selected by the Foreign
Custody Manager to maintain the assets of the Funds which list of Eligible
Foreign Custodians may be amended from time to time in the sole discretion of
the Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.

Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Execution of this Amendment by the Fund shall be deemed to be a Proper
Instruction to open an account, or to place or maintain Foreign Assets, in each
country listed on Schedule A in which the Custodian has previously placed or
currently maintains Foreign Assets pursuant to the terms of the

2
<PAGE>

Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of a Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by that Fund's Board to the Custodian as Foreign Custody Manager for
that country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.

The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.

3.4. Scope of Delegated Responsibilities.
-----------------------------------

3.4.1. Selection of Eligible Foreign Custodians.
----------------------------------------

Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.

In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).

3.4.2. Contracts With Eligible Foreign Custodians.
------------------------------------------

The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).

3.4.3. Monitoring.
----------

In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign

3
<PAGE>

Custody Manager with the Eligible Foreign Custodian (or the rules or established
practices and procedures in the case of an Eligible Foreign Custodian selected
by the Foreign Custody Manager which is a foreign securities depository or
clearing agency that is not a Mandatory Securities Depository). The Foreign
Custody Manager shall provide the Board at least annually with information as to
the factors used in such monitoring system. If the Foreign Custody Manager
determines that the custody arrangements with an Eligible Foreign Custodian it
has selected are no longer appropriate, the Foreign Custody Manager shall notify
the Board in accordance with Section 3.7 hereunder and withdraw the Foreign
Assets from such Eligible Foreign Custodian as soon as reasonably practicable.

3.5. Guidelines for the Exercise of Delegated Authority.
--------------------------------------------------

For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.

3.6. Standard of Care as Foreign Custody Manager of a Portfolio.
----------------------------------------------------------

In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.

3.7. Reporting Requirements.
----------------------

The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.

3.8. Representations with Respect to Rule 17f-5.
------------------------------------------

The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.

3.9. Effective Date and Termination of the Custodian as Foreign Custody Manager.
--------------------------------------------------------------------------

The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty
(60) days after receipt by the non-terminating party of such notice.

4
<PAGE>

The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Funds with
respect to designated countries.

3.10. Most Favored Client.
-------------------

If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.

4. Duties of the Custodian with Respect to Property of the Funds held Outside
--------------------------------------------------------------------------
the United States.
-----------------

4.1 Definitions.
-----------

Capitalized terms in this Article 4 shall have the following meanings:

"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.

"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.

4.2. Holding Securities.
------------------

The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign Sub-Custodian in an account that is identified as
belonging to the Custodian for the benefit of its customers, provided however,
----------------
that (i) the records of the Custodian with respect to foreign securities of the
Funds which are maintained in such account shall identify those securities as
belonging to the Funds and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-
Custodian.

4.3. Foreign Securities Systems.
--------------------------

Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign Sub-
Custodian in such country pursuant to the terms of this Contract.

4.4. Transactions in Foreign Custody Account.
---------------------------------------

5
<PAGE>

4.4.1. Delivery of Foreign Assets.
--------------------------

The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:

(i) upon the sale of such foreign securities for the Fund in accordance
with customary market practice in the country where such foreign
securities are held or traded, including, without limitation: (A)
delivery against expectation of receiving later payment; or (B) in the
case of a sale effected through a Foreign Securities System, in
accordance with the rules governing the operation of the Foreign
Securities System;

(ii) in connection with any repurchase agreement related to foreign
securities;

(iii) to the depository agent in connection with tender or other similar
offers for foreign securities of the Portfolios;

(iv) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise become payable;

(v) to the issuer thereof, or its agent, for transfer into the name of the
Custodian (or the name of the respective Foreign Sub-Custodian or of
any nominee of the Custodian or such Foreign Sub-Custodian) or for
exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units;

(vi) to brokers, clearing banks or other clearing agents for examination or
trade execution in accordance with reasonable market custom; provided
--------
that in any such case the Foreign Sub-Custodian shall have no
responsibility or liability for any loss arising from the delivery of
such securities prior to receiving payment for such securities except
as may arise from the Foreign Sub-Custodian's own negligence or
willful misconduct;

(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement;

(viii) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities;

6
<PAGE>

(ix) for delivery as security in connection with any borrowing by the Funds
requiring a pledge of assets by the Funds;

(x) in connection with trading in options and futures contracts, including
delivery as original margin and variation margin;

(xi) in connection with the lending of foreign securities; and

(xii) for any other proper purpose, but only upon receipt of Proper
--- ----
Instructions specifying the foreign securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper trust\corporate purpose, and
naming the person or persons to whom delivery of such securities shall
be made.

4.4.2. Payment of Fund Monies.
----------------------

Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:

(i) upon the purchase of foreign securities for the Fund, unless otherwise
directed by Proper Instructions, in accordance with reasonable market
settlement practice in the country where such foreign securities are
held or traded, including, without limitation, (A) delivering money to
the seller thereof or to a dealer therefor (or an agent for such
seller or dealer) against expectation of receiving later delivery of
such foreign securities; or (B) in the case of a purchase effected
through a Foreign Securities System, in accordance with the rules
governing the operation of such Foreign Securities System;

(ii) in connection with the conversion, exchange or surrender of foreign
securities of the Fund;

(iii) for the payment of any expense or liability of the Fund, including
but not limited to the following payments: interest, taxes,
investment advisory fees, transfer agency fees, fees under this
Contract, legal fees, accounting fees, and other operating expenses;

(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Fund, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;

(v) in connection with trading in options and futures contracts, including
delivery as

7
<PAGE>

original margin and variation margin;

(vi) for payment of part or all of the dividends received in respect of
securities sold short;

(vii) in connection with the borrowing or lending of foreign securities;
and

(viii) for any other proper purpose, but only upon receipt of Proper
--- ----
Instructions specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose
to be a proper trust\corporate purpose, and naming the person or
persons to whom such payment is to be made.

4.4.3. Market Conditions; Market Information.
-------------------------------------

Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.

For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension funds or substantially similar institutions which, as a part
of their ordinary business operations, purchase or sell securities and make use
of global custody services.

The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:

(i) legal opinions relating to whether local law restricts with respect to
U.S. registered mutual funds (a) access of a fund's independent public
accountants to books and records of a Foreign Sub-Custodian or Foreign
Securities System, (b) a fund's ability to recover in the event of
bankruptcy or insolvency of a Foreign Sub-Custodian or Foreign
Securities System, (c) a fund's ability to recover in the event of a
loss by a Foreign Sub-Custodian or Foreign Securities System, and (d)

8
<PAGE>

the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars;

(ii) summary of information regarding Foreign Securities Systems; and

(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership limits, and
(f) unique market arrangements.

4.5. Registration of Foreign Securities.
----------------------------------

The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign Sub-
Custodian or in the name of any nominee of the foregoing, and the Fund agrees to
hold any such nominee harmless from any liability as a holder of record of such
foreign securities, except to the extent that the Fund incurs loss or damage due
to failure of such nominee to meet its standard of care set forth in the
Contract. The Custodian or a Foreign Sub-Custodian shall not be obligated to
accept securities on behalf of a Fund under the terms of this Contract unless
the form of such securities and the manner in which they are delivered are in
accordance with reasonable market practice.

4.6. Bank Accounts.
-------------

The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.

4.7. Collection of Income.
--------------------

The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.

4.8. Shareholder Rights.
------------------

With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use

9
<PAGE>

reasonable commercial efforts to facilitate the exercise of voting and other
shareholder rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued. The
Fund acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.

4.9. Communications Relating to Foreign Securities.
---------------------------------------------

The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.

4.10. Liability of Foreign Sub-Custodians and Foreign Securities Systems.
------------------------------------------------------------------

Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.

4.11. Tax Law.
-------

Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section 4.11
or from the failure of any Foreign Sub-Custodian to perform in accordance with
the terms of the applicable subcustody agreement, the Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on a
Fund, a series thereof or the Custodian as custodian of

10
<PAGE>

the Fund by the tax law of the United States or of any state or political
subdivision thereof. It shall be the responsibility of each Fund to notify the
Custodian of the obligations imposed on the Fund or the Custodian as custodian
of the Fund by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.

4.12. Liability of Custodian.
----------------------

Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.

The Custodian shall be liable for the acts or omissions of a Foreign Sub-
Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.

III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in the
event of any conflict between the provisions of Articles 3 and 4 hereof,
the provisions of Article 3 shall prevail.

11
<PAGE>

IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.

WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY

/s/Marc L. Parsons By: /s/Ronald E. Logue
- ------------------ ------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President

Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund
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 Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios Fund, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.
<PAGE>

Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Prudential Tax-Free Money Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.

Witnessed By:

By: /s/S. Jane Rose By: /s/Grace Torres
--------------- ---------------
Grace Torres
Treasurer

Prudential Government Income Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Municipal Bond Fund
Prudential California Municipal Fund
The High Yield Income Fund, Inc.
Prudential Municipal Series Fund
Prudential Government Securities Trust
Prudential Diversified Bond Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential National Municipals Fund, Inc.
Prudential Structured Maturity Fund, Inc.
<PAGE>

Witnessed By:

By: /s/Robert Rosselot By: /s/Deborah A. Docs
------------------ ------------------
Deborah A. Docs
Secretary

<PAGE>

Exhibit (h)(2)

AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT

THIS AMENDMENT to the Transfer Agency and Service Agreement by and between
Prudential National Municipals Fund, Inc. (the "Fund") and Prudential Mutual
Fund Services LLC (successor to Prudential Mutual Fund Services,
Inc.)("PMFS") is entered into as of August 24, 1999.

WHEREAS, the Fund and PMFS have entered into a Transfer Agency and Service
Agreement (the "Agreement") pursuant to which PMFS serves as transfer agent,
dividend disbursing agent and shareholder servicing agent for the Fund; and

WHEREAS, the Fund and PMFS desire to amend the Agreement to confirm the
Fund's agreement to pay transfer agency account fees and expenses for
beneficial owners holding shares through omnibus accounts maintained by The
Prudential Insurance Company of America, its subsidiaries or affiliates.

NOW, THEREFORE, for and in consideration of the continuation of the
Agreement, and other good and valuable consideration, Article 8 of the
Agreement is amended by adding the following section to the Agreement:

8.04 PMFS may enter into agreements with Prudential
or any subsidiary or affiliate of Prudential whereby PMFS will maintain
an omnibus account and the Fund will reimburse PMFS for amounts paid by
PMFS to Prudential, or such subsidiary or affiliate, in an amount not in
excess of the annual maintenance fee for each beneficial shareholder
account and transactional fees and expenses with respect to such
beneficial shareholder account as if each beneficial shareholder account
were maintained by PMFS on the Fund's records, subject to the fee
schedule attached hereto as Schedule A. Prudential, its subsidiary or
affiliate, as the case may be, shall maintain records relating to each
beneficial shareholder account that underlies the omnibus account
maintained by PMFS.
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.

PRUDENTIAL NATIONAL MUNICIPALS ATTEST:
FUND, INC.

By: /s/Robert R. Gunia By: /s/Deborah A. Docs
------------------ ------------------
Robert F. Gunia Deborah A. Docs
Vice President Secretary

PRUDENTIAL MUTUAL FUND SERVICES LLC

ATTEST:

By: /s/Brian W. Henderson By: /s/William V. Healey
----------------------- --------------------
Brian W. Henderson William V. Healey
President Secretary

<PAGE>

Exhibit (i)(2)

CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN, LLP

We hereby consent to the reference to our firm included in the
prospectus and statement of additional information of Prudential National
Municipals Fund, Inc. filed as part of Registration Statement No. 2-66407 and to
the use of our opinion of counsel, incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 26 to the Registration Statement on Form N-1A (File
No. 2-66407).

Swidler Berlin Shereff Friedman, LLP
/s/ Swidler Berlin Shereff Friedman, LLP

New York, New York
February 29, 2000

<PAGE>

Exhibit J

CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------

We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated February 18, 2000, relating to the financial statements and
financial highlights of Prudential National Municipals Fund, Inc., which appears
in such Registration Statement. We also consent to the references to us under
the headings "Investment Advisory and Other Services" and "Financial Highlights"
in such Registration Statement.

PricewaterhouseCoopers LLP

New York, New York
February 28, 2000

<PAGE>

EXHIBIT (p)(1)

Prudential National Municipals Fund, Inc.
(the Fund)

Code of Ethics Adopted Pursuant to Rule 17j-1
Under the Investment Company Act of 1940
(the Code)

1. Purposes
--------

The Code has been adopted by the Board of Directors/Trustees or the Duly
Appointed Officer-In-Charge of the Fund, the Manager, the Adviser/Subadviser,
and the Principal Underwriter in accordance with Rule 17j-1(c) under the
Investment Company Act of 1940 (the Act) and in accordance with the following
general principles:

(1) The duty at all times to place the interests of shareholders
first.

Investment company personnel should scrupulously avoid serving
their own personal interests ahead of shareholders' interests in any
decision relating to their personal investments.

(2) The requirement that all personal securities transactions be
conducted consistent with the Code and in such a manner as to avoid
any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility.

Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by its
spirit and the principles articulated herein.

(3) The fundamental standard that investment company personnel should
not take inappropriate advantage of their positions.

Investment company personnel must avoid any situation that might
compromise, or call into question, their exercise of fully independent
judgment in the interest of shareholders, including, but not limited
to the receipt of unusual investment opportunities, perquisites, or
gifts of more than a de minimis value from persons doing or seeking
business with the
<PAGE>

Fund.

Rule 17j-1 under the Act generally proscribes fraudulent or manipulative
practices with respect to a purchase or sale of a security held or to be
acquired (as such term is defined in Section 2.) by an investment company, if
effected by an associated person of such company.

The purpose of the Code is to establish procedures consistent with the Act
and Rule 17j-1 to give effect to the following general prohibitions as set forth
in Rule 17j-1(b) as follows:

(a) It shall be unlawful for any affiliated person of or Principal
Underwriter for a registered investment company, or any affiliated person
of an investment adviser of or principal underwriter for a registered
investment company in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired, by such
registered investment company:

(1) To employ any device, scheme or artifice to defraud such
registered investment company;

(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;

(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or

(4) To engage in any manipulative practice with respect to such
registered investment company.
<PAGE>

2. Definitions
-----------

(a) "Access Person" means any director/trustee, officer, general
partner or Advisory Person (including any Investment Personnel, as that
term is defined herein) of the Fund, the Manager, the Adviser/Subadviser,
or the Principal Underwriter.

(b) "Adviser/Subadviser" means the Adviser or Subadviser of the Fund
or both as the context may require.

(c) "Advisory Person" means (i) any employee of the Fund, Manager or
Adviser/Subadviser (or of any company in a control relationship to the
Fund, Manager or Adviser/Subadviser) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a security by the Fund, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales; and (ii) any natural person in a control relationship
to the Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.

(d) "Beneficial Ownership" will be interpreted in the same manner as
it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining
which security holdings of a person are subject to the reporting and short-
swing profit provisions of Section 16 of the Securities Exchange Act of
1934 and the rules and regulations thereunder, except that the
determination of direct or indirect beneficial ownership will apply to all
securities which an Access Person has or acquires (Exhibit A).
---------

(e) "Complex" means the group of registered investment companies for
which Prudential Investments Fund Management LLC serves as Manager;
provided, however, that with respect to Access Persons of the Subadviser
(including any unit or subdivision thereof), "Complex" means the group of
registered investment companies in the Complex advised by the Subadviser or
unit or subdivision thereof.

(f) "Compliance Officer" means the person designated by the Manager,
the Adviser/Subadviser, or Principal Underwriter (including his or her
designee) as having responsibility for compliance with the requirements of
the Code.

(g) "Control" will have the same meaning as that set forth in Section
2(a)(9) of the Act.

3
<PAGE>

(h) "Disinterested Director/Trustee" means a Director/ Trustee of the
Fund who is not an "interested person" of the Fund within the meaning of
Section 2(a)(19) of the Act.

An interested Director/Trustee who would not otherwise be deemed to be
an Access Person, shall be treated as a Disinterested Director/Trustee for
purposes of compliance with the provisions of the Code.

(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.

(j) "Investment Personnel" means: (a) Portfolio Managers and other
Advisory Persons who provide investment information and/or advice to the
Portfolio Manager(s) and/or help execute the Portfolio Manager's(s')
investment decisions, including securities analysts and traders ; and (b)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to the
purchase or sale of a security.

(k) "Manager" means Prudential Investments Fund Management, LLC.

(l) "Portfolio Manager" means any Advisory Person who has the direct
responsibility and authority to make investment decisions for the Fund.

(m) "Private placement" means a limited offering that is exempt from
registration under the Securities Act of 1933 pursuant to section 4(2) or
section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such
Securities Act.

(n) "Security" will have the meaning set forth in Section 2(a)(36) of
the Act, except that it will not include shares of registered open-end
investment companies, direct obligations of the Government of the United
States, short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For purposes of
the Code, an "equivalent Security" is one that has a substantial economic
relationship to another Security. This would include,

4
<PAGE>

among other things, (1) a Security that is exchangeable for or convertible
into another Security, (2) with respect to an equity Security, a Security
having the same issuer (including a private issue by the same issuer) and
any derivative, option or warrant relating to that Security and (3) with
respect to a fixed-income Security, a Security having the same issuer,
maturity, coupon and rating.

(o) Security held or to be acquired means any Security or any
equivalent Security which, within the most recent 15 days: (1) is or has
been held by the Fund; or (2) is being considered by the Fund or its
investment adviser for purchase by the Fund.

3. Applicability
-------------

The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.

4. Prohibited Purchases and Sales
------------------------------
A. Initial Public Offerings

No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall
not include offerings of government and municipal securities.

B. Private Placements

No Investment Personnel may acquire any Securities in a private placement
without prior approval.

5
<PAGE>

(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment opportunity
should be reserved for the Fund and its shareholders and whether the
opportunity is being offered to the Investment Personnel by virtue of his
or her position with the Fund. The Adviser/Subadviser shall maintain a
record of such prior approval and reason for same, for at least 5 years
after the end of the fiscal year in which the approval is granted.

(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent consideration of
an investment by the Fund in the issuer. In such circumstances, the Fund's
decision to purchase Securities of the issuer will be subject to an
independent review by appropriate personnel with no personal interest in
the issuer.

C. Blackout Periods

(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during which
any investment company in the Complex has a pending "buy" or "sell" order
in the same or an

6
<PAGE>

equivalent Security and until such time as that order is executed or
withdrawn; provided, however, that this prohibition shall not apply to
Disinterested Directors/Trustees except if they have actual knowledge of
trading by any fund in the Complex and, in any event, only with respect to
those funds on whose boards they sit.

This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and sale
of Securities for the Fund and are not engaged in the day-to-day operations
of the Fund; provided that Securities investments effected by such Access
Persons during the proscribed period are not effected with knowledge of the
purchase or sale of the same or equivalent Securities by any fund in the
Complex.

A "pending 'buy' or 'sell' order" exists when a decision to purchase
or sell a Security has been made and communicated.

(ii) Portfolio Managers are prohibited from buying or selling a
Security within seven calendar days before or after the Fund trades in the
same or an equivalent Security. Nevertheless, a personal trade by any
Investment Personnel shall not prevent a Fund in the same Complex from
trading in the same or an equivalent security. However, such a transaction
shall be subject to independent review by the Compliance Officer.

(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above, any
profits

7
<PAGE>

realized on such trades will be promptly required to be disgorged to the
Fund.

(iv) A transaction by Access Persons (other than Investment
Personnel) inadvertently effected during the period proscribed in (i) above
will not be considered a violation of the Code and disgorgement will not be
required so long as the transaction was effected in accordance with the
preclearance procedures described in Section 6 below and without prior
knowledge of trading by any fund in the Complex in the same or an
equivalent Security.

D. Short-Term Trading Profits

Except as provided in Section 5 below, Investment Personnel are prohibited
from profiting from a purchase and sale, or sale and purchase, of the same or an
equivalent Security within any 60 calendar day period. If trades are effected
during the proscribed period, any profits realized on such trades will be
immediately required to be disgorged to the Fund.

E. Short Sales

No Access Person may sell any security short which is owned by any Fund in
the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.

F. Options

No Access Person may write a naked call option or buy a naked put option on
a security owned by any Fund in the Complex. Access Persons may purchase options
on securities not held by any Fund in the Complex, or purchase call options or
write put options on securities owned by any Fund in the Complex, subject to
preclearance and

8
<PAGE>

the same restrictions applicable to other securities. Access Persons may write
covered call options or buy covered put options on a security owned by any Fund
in the Complex at the discretion of the Compliance Officer.

G. Investment Clubs

No Access Person may participate in an investment club.

5. Exempted Transactions
---------------------

Subject to preclearance in accordance with Section 6 below with respect to
subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:

(a) Purchases or sales of Securities effected in any account over
which the Access Person has no direct or indirect influence or control or
in any account of the Access Person which is managed on a discretionary
basis by a person other than such Access Person and with respect to which
such Access Person does not in fact influence or control such transactions.

(b) Purchases or sales of Securities (or their equivalents) which are
not eligible for purchase or sale by any fund in the Complex.

(c) Purchases or sales of Securities which are non-volitional on the
part of either the Access Person or any fund in the Complex.

(d) Purchases of Securities which are part of an automatic dividend
reinvestment plan.

(e) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its Securities, to the extent such
--- ----
rights were acquired from such issuer, and sales of such rights so
acquired.

(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500 shares
or less in the aggregate, if (i) the Access Person has no prior knowledge
of activity in such security by any fund in the Complex and (ii) the issuer
is listed on The New York Stock Exchange or has a market capitalization

9
<PAGE>

(outstanding shares multiplied by the current price per share) greater than
$1 billion (or a corresponding market capitalization in foreign markets).

(g) Any fixed-income Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 100 units
($100,000 principal amount) or less in the aggregate, if the Access Person
has no prior knowledge of transactions in such Securities by any fund in
the Complex.

(h) Any transaction in index options effected on a broad-based index
(See Exhibit B.)/1/

(i) Purchases or sales of Securities which receive the prior approval
of the Compliance Officer (such person having no personal interest in such
purchases or sales), based on a determination that no abuse is involved and
that such purchases and sales are not likely to have any economic impact on
any fund in the Complex or on its ability to purchase or sell Securities of
the same class or other Securities of the same issuer.

(j) Purchases or sales of Unit Investment Trusts.

6. Preclearance
------------

Access Persons (other than Disinterested Directors/Trustees) must preclear
all personal Securities investments with the exception of those identified in
subparts (a), (c), (d), (h) and (j) of Section 5 above.

All requests for preclearance must be submitted to the Compliance Officer
for approval. All approved orders must be executed no later than 5:00 p.m.
local time on the business day following the date preclearance is granted. If
any order is not timely executed, a request for preclearance must be
resubmitted.

7. Reporting
---------

(a) Disinterested Directors/Trustees shall report to the Secretary of the
Fund

- --------------------------------------------------------------------------------
/1/ Exhibit B will be amended by the Compliance Officer as necessary.

10
<PAGE>

or the Compliance Officer the information described in Section 7(b) hereof
with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security only if such Disinterested
----
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is
not required to make a report with respect to transactions effected in any
account over which such Director/Trustee does not have any direct or indirect
influence or control or in any account of the Disinterested Director/Trustee
which is managed on a discretionary basis by a person other than such
Director/Trustee and with respect to which such Director/Trustee does not in
fact influence or control such transactions. The Secretary of the Fund or the
Compliance Officer shall maintain such reports and such other records to the
extent required by Rule 17j-1 under the Act.

(b) Every report required by Section 7(a) hereof shall be made not later
than ten days after the end of the calendar quarter in which the transaction to
which the report relates was effected, and shall contain the following
information:

(i) The date of the transaction, the title and the number of shares, and
the principal amount of each Security involved;

11
<PAGE>

(ii) The nature of the transaction (i.e., purchase, sale or any other type
----
of acquisition or disposition);

(iii) The price at which the transaction was effected;

(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected; and

(v) The date that the report is submitted.

(c) Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.

8. Records of Securities Transactions and Post-Trade Review
--------------------------------------------------------

Access Persons (other than Disinterested Directors/Trustees) are required
to direct their brokers to supply, on a timely basis, duplicate copies of
confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.

Compliance with this Code requirement will be deemed to satisfy the
reporting

12
<PAGE>

requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.

The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).

9. Disclosure of Personal Holdings
-------------------------------

Within ten days after an individual first becomes an Access Person an
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.

10. Gifts
-----

Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.

11. Service As a Director
---------------------

13
<PAGE>

Investment Personnel are prohibited from serving on the boards of directors
of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such Investment Personnel serves as a director
through the use of "Chinese Wall" or other procedures designed to address the
potential conflicts of interest.

12. Certification of Compliance with the Code
-----------------------------------------

Access Persons are required to certify annually as follows:

(i) that they have read and understood the Code;

(ii) that they recognize that they are subject to the Code;

(iii) that they have complied with the requirements of the Code; and

(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to the
requirements of the Code.

13. Code Violations
---------------

All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.

14. Review by the Board of Directors/Trustees
-----------------------------------------
The Board of Directors/Trustees will be provided with an annual report
which at a

14
<PAGE>

minimum:

(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.

(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;

(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and

(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.

The Board will review such report and determine if any further action is
required.

15
<PAGE>

Explanatory Notes to Code
-------------------------

1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or Prudential Investment
Management Services, LLC, which acts as the Fund's distributor, or those of
their directors or officers who are not Directors/Trustees or Officers of the
Fund since they are deemed not to constitute Access Persons or Advisory Persons
as defined in paragraphs (e)(1) and (2) of Rule 17j-1.

16
<PAGE>

Exhibit A
---------
Definition of Beneficial Ownership
----------------------------------

The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own benefit,
whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held
by an access person for the benefit of someone else.

Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.

Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the
final determination of beneficial ownership is a question to be determined in
the light of the facts of the particular case, generally a person is regarded as
the beneficial owner of securities held in the name of his or her spouse and
their minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.

An access person also may be regarded as the beneficial owner of securities
held in the name of another person, if by reason of any contact, understanding,
relationship, agreement or other arrangement, he obtains therefrom benefits
substantially equivalent to those of ownership. Moreover, the fact that the
holder is a relative or relative of a spouse and sharing the same home as an
access person may in itself indicate that the access person would obtain
benefits substantially equivalent to those of ownership from securities held in
the name of such relative. Thus, absent countervailing facts, it is expected
that securities held by relatives who share the same home as an access person
will be treated as being beneficially owned by the access person.

An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.

17
<PAGE>

Exhibit B
---------

INDEX OPTIONS ON A BROAD-BASED INDEX

TICKER SYMBOL DESCRIPTION
- --------------------------------------------------------------------------------
NIK Nikkei 300 Index CI/Euro
- --------------------------------------------------------------------------------
OEX S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEW S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEY S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
SPB S&P 500 Index
- --------------------------------------------------------------------------------
SPZ S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SPX S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SXZ S&P 500 (Wrap)
- --------------------------------------------------------------------------------
SXB S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
RUZ Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
RUT Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
MID S&P Midcap 400 Open/Euro Index
- --------------------------------------------------------------------------------
NDX NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDU NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDV NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NCZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
SML S&P Small Cap 600
- --------------------------------------------------------------------------------
TPX U.S. Top 100 Sector
- --------------------------------------------------------------------------------
SPL S&P 500 Long-Term Close
- --------------------------------------------------------------------------------
ZRU Russell 2000 L-T Open./Euro
- --------------------------------------------------------------------------------
VRU Russell 2000 Long-Term Index
- --------------------------------------------------------------------------------

<PAGE>

EXHIBIT (p)(2)

Prudential Investment Management LLC (Principal Underwriter)
Prudential Investments Fund Management LLC (Manager)
Prudential Investment Corporation (Adviser or Subadviser)

Code of Ethics Adopted Pursuant to Rule 17j-1
Under the Investment Company Act of 1940
(the Code)

1. Purposes
--------

(1) The duty at all times to place the interests of shareholders
first.

Investment company personnel should scrupulously avoid serving
their own personal interests ahead of shareholders' interests in any
decision relating to their personal investments.

Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by its
spirit and the principles articulated herein.

(3) The fundamental standard that investment company personnel should
not take inappropriate advantage of their positions.

Fund.

The purpose of the Code is to establish procedures consistent with the Act
and Rule 17j-1 to give effect to the following general prohibitions as set forth
in Rule 17j-1(b) as follows:

(1) To employ any device, scheme or artifice to defraud such
registered investment company;

(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or

(4) To engage in any manipulative practice with respect to such
registered investment company.
<PAGE>

2. Definitions
-----------

(b) "Adviser/Subadviser" means the Adviser or Subadviser of the Fund
or both as the context may require.

(g) "Control" will have the same meaning as that set forth in Section
2(a)(9) of the Act.

3
<PAGE>

(h) "Disinterested Director/Trustee" means a Director/ Trustee of the
Fund who is not an "interested person" of the Fund within the meaning of
Section 2(a)(19) of the Act.

(k) "Manager" means Prudential Investments Fund Management, LLC.

(l) "Portfolio Manager" means any Advisory Person who has the direct
responsibility and authority to make investment decisions for the Fund.

4
<PAGE>

3. Applicability
-------------

4. Prohibited Purchases and Sales
------------------------------
A. Initial Public Offerings

B. Private Placements

No Investment Personnel may acquire any Securities in a private placement
without prior approval.

5
<PAGE>

C. Blackout Periods

6
<PAGE>

A "pending 'buy' or 'sell' order" exists when a decision to purchase
or sell a Security has been made and communicated.

(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above, any
profits

7
<PAGE>

realized on such trades will be promptly required to be disgorged to the
Fund.

D. Short-Term Trading Profits

E. Short Sales

No Access Person may sell any security short which is owned by any Fund in
the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.

F. Options

8
<PAGE>

G. Investment Clubs

No Access Person may participate in an investment club.

5. Exempted Transactions
---------------------

Subject to preclearance in accordance with Section 6 below with respect to
subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:

(b) Purchases or sales of Securities (or their equivalents) which are
not eligible for purchase or sale by any fund in the Complex.

(c) Purchases or sales of Securities which are non-volitional on the
part of either the Access Person or any fund in the Complex.

(d) Purchases of Securities which are part of an automatic dividend
reinvestment plan.

9
<PAGE>

(outstanding shares multiplied by the current price per share) greater than
$1 billion (or a corresponding market capitalization in foreign markets).

(h) Any transaction in index options effected on a broad-based index
(See Exhibit B.)/1/

(j) Purchases or sales of Unit Investment Trusts.

6. Preclearance
------------

7. Reporting
---------

(a) Disinterested Directors/Trustees shall report to the Secretary of the
Fund

- --------------------------------------------------------------------------------
/1/ Exhibit B will be amended by the Compliance Officer as necessary.

10
<PAGE>

(i) The date of the transaction, the title and the number of shares, and
the principal amount of each Security involved;

11
<PAGE>

(ii) The nature of the transaction (i.e., purchase, sale or any other type
----
of acquisition or disposition);

(iii) The price at which the transaction was effected;

(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected; and

(v) The date that the report is submitted.

8. Records of Securities Transactions and Post-Trade Review
--------------------------------------------------------

Compliance with this Code requirement will be deemed to satisfy the
reporting

12
<PAGE>

9. Disclosure of Personal Holdings
-------------------------------

10. Gifts
-----

11. Service As a Director
---------------------

13
<PAGE>

12. Certification of Compliance with the Code
-----------------------------------------

Access Persons are required to certify annually as follows:

(i) that they have read and understood the Code;

(ii) that they recognize that they are subject to the Code;

(iii) that they have complied with the requirements of the Code; and

(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to the
requirements of the Code.

13. Code Violations
---------------

All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.

14. Review by the Board of Directors/Trustees
-----------------------------------------
The Board of Directors/Trustees will be provided with an annual report
which at a

14
<PAGE>

minimum:

(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;

(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and

The Board will review such report and determine if any further action is
required.

15
<PAGE>

Explanatory Notes to Code
-------------------------

16
<PAGE>

Exhibit A
---------
Definition of Beneficial Ownership
----------------------------------

17
<PAGE>

Exhibit B
---------

INDEX OPTIONS ON A BROAD-BASED INDEX