PRUDENTIAL MORTGAGE INCOME FUND INC, 485A24E, 1996-03-05

PRUDENTIAL MORTGAGE INCOME FUND INC
485A24E, 1996-03-05

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<PAGE>

As filed with the Securities and Exchange Commission
on March 5, 1996

Securities Act Registration No. 2-76061
Investment Company Act Registration No. 811-3397
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/

PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. 22 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 23 /X/

(Check appropriate box or boxes)
----------------

PRUDENTIAL MORTGAGE INCOME FUND, INC.
(FORMERLY PRUDENTIAL GNMA FUND, INC.)

(Exact name of registrant as specified in charter)

ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292

(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250

S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)

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

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

/ / immediately upon filing pursuant to paragraph (b)

/ / on (date) pursuant to paragraph (b)

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

/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)

/ / on (date) pursuant to paragraph (a)(2) of rule 485

If appropriate, check the following box:

/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment

Registrant has registered an indefinite number of shares under the Securities
Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
Rule 24f-2 Notice for the Registrant's most recent fiscal year ended December
31, 1995 was filed on February 28, 1996.

CALCULATION OF REGISTRATION FEE CHART

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
TITLES OF SECURITIES BEING REGISTERED REGISTERED PER SHARE* OFFERING PRICE* FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share Indefinite * N/A N/A N/A
Common Stock, par value $.01 per share 4,777,679 $15.06 $289,995.36 $100.00
</TABLE>

* The calculation of the maximum aggregate offering price was made pursuant to
Rule 24e-2 and was based upon an offering price of $15.06 per share, equal to
the net asset value per share as of the close of business on February 23, 1996
pursuant to rule 457(d). The total number of shares redeemed during the fiscal
year ended December 31, 1995 amounted to 6,267,131 shares. Of this number, no
shares have been used for reduction pursuant to paragraph (a) of Rule 24e-2 in
all previous filings of post-effective amendments during the current year and
1,508,708 shares have been used for reduction pursuant to paragraph (c) or
rule 24f-2 in all previous filings during the current year. 4,758,423
($48,370,724) of the redeemed shares for the fiscal year ended December 31,
1995 are being used for the reductions in the post-effective amendment being
filed herein.

- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)

<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- - ---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information......... Fund Expenses; Financial Highlights; How
the Fund Calculates Performance
Item 4. General Description of Registrant....... Cover Page; Fund Highlights; How the
Fund Invests; General Information
Item 5. Management of Fund...................... Financial Highlights; How the Fund is
Managed; General Information
Item 6. Capital Stock and Other Securities...... Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered.... Shareholder Guide; How the Fund Values
its Shares
Item 8. Redemption or Repurchase................ Shareholder Guide; How the Fund Values
its Shares; General Information
Item 9. Pending Legal Proceedings............... Not Applicable

PART B
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Table of Contents
Item 12. General Information and History......... Not Applicable
Item 13. Investment Objectives and Policies...... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund.................. Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of
Securities.............................. Not Applicable
Item 16. Investment Advisory and Other
Services................................ Manager; Distributor; Custodian,
Transfer and Dividend Disbursing Agent
and Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities...... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................ Purchase and Redemption of Fund Shares;
Shareholder Investment Account; Net
Asset Value
Item 20. Tax Status.............................. Dividends, Distributions and Taxes
Item 21. Underwriters............................ Distributor
Item 22. Calculation of Performance Data......... Performance Information
Item 23. Financial Statements.................... Financial Statements

PART C
Information required to be included in Part C is set forth under the appropriate Item,
so numbered, in Part C to this Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL MORTGAGE INCOME FUND, INC.

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

PROSPECTUS DATED APRIL 29, 1996

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

Prudential Mortgage Income Fund, Inc. (the Fund), formerly the Prudential GNMA
Fund, Inc., is an open-end, diversified, management investment company whose
investment objective is to achieve a high level of income over the long term
consistent with providing reasonable safety in the value of each shareholder's
investment. In pursuing this objective, the Fund will invest primarily in
mortgage-related instruments, including mortgage-backed securities guaranteed as
to timely payment of principal and interest by the Government National Mortgage
Association (GNMA), other mortgage-backed securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government, and non-agency mortgage
instruments, along with obligations using mortgages as collateral. The Fund may
utilize other derivatives, including writing covered call and put options on
U.S. Government securities and entering into closing purchase and sale
transactions with respect to certain of such options. To hedge against changes
in interest rates, the Fund may also purchase put options and engage in
transactions involving interest rate futures contracts, options on such
contracts and interest rate swap transactions. There can be no assurance that
the Fund's investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.

This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated April 29, 1996, which information is
incorporated herein by reference (is legally considered to be a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.

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

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.

WHAT IS PRUDENTIAL MORTGAGE INCOME FUND, INC.?

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

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to achieve a high level of income over the
long term consistent with providing reasonable safety in the value of each
shareholder's investment. It seeks to achieve this objective by investing
primarily in mortgage-related instruments, including securities guaranteed as to
timely payment of principal and interest by the Government National Mortgage
Association (GNMA), other mortgage-backed securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government, and non-agency mortgage
instruments, along with obligations using mortgages as collateral. There can be
no assurance that the Fund's objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 8.

RISK FACTORS AND SPECIAL CHARACTERISTICS

The Fund will invest at least 65% of its total assets in mortgage-backed
securities which may decrease in value as a result of increases in interest
rates and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment of the principal on the
underlying mortgage loans.

In seeking to achieve its investment objective, the Fund may also write
covered call and put options on U.S. Government securities and enter into
closing purchase and sale transactions with respect to certain of such options.
To hedge against changes in interest rates, the Fund may also purchase put
options and engage in transactions involving interest rate futures contracts and
options on such contracts and engage in interest rate swap transactions. See
"How the Fund Invests--Investment Objective and Policies" at page 8. These
various hedging and return enhancement strategies, including the use of
derivatives, may be considered speculative and may result in higher risks and
costs to the Fund. See "How the Fund Invests--Hedging and Return Enhancement
Strategies--Risks of Hedging and Return Enhancement Strategies" at page 12.

WHO MANAGES THE FUND?

Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Fund's average daily net assets. As of January 31, 1996, PMF served as
manager or administrator to 60 investment companies, including 38 mutual funds,
with aggregate assets of approximately $52 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 15.

WHO DISTRIBUTES THE FUND'S SHARES?

Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B and Class C shares and is paid an
annual distribution and service fee which is currently being charged at the rate
of .15 of 1% of the average daily net assets of the Class A shares, an annual
distribution and service fee at the rate of .75 of 1% of the average daily net
assets of the Class B shares and an annual distribution and service fee which is
currently being charged at the rate of .75 of 1% of the average daily net assets
of the Class C shares.

See "How the Fund is Managed--Distributor" at page 15.

2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?

The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How to
Buy Shares of the Fund" at page 22 and "Shareholder Guide--Shareholder Services"
at page 30.

HOW DO I PURCHASE SHARES?

You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How the Fund Values its Shares"
at page 18 and "Shareholder Guide--How to Buy Shares of the Fund" at page 22.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers three classes of shares:

<TABLE>
<S> <C>
- - - Class A Shares: Sold with an initial sales charge of up to 4% of the
offering price.
- - - Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B
shares will automatically convert to Class A shares (which
are subject to lower ongoing distribution-related expenses)
approximately seven years after purchase.
- - - Class C Shares: Sold without an initial sales charge and, for one year after
purchase, are subject to a 1% CDSC on redemptions. Like
Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
</TABLE>

See "Shareholder Guide--Alternative Purchase Plan" at page 23.

HOW DO I SELL MY SHARES?

You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 25.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

The Fund expects to declare daily and pay monthly dividends of net investment
income, if any, and make distributions of any net capital gains at least
annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 19.

3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)............... 4% None None
Maximum Sales Load or Deferred
Sales Load Imposed on
Reinvested Dividends.......... None None None
Deferred Sales Load (as a
percentage of original
purchase price or redemption
proceeds, whichever is
lower)........................ None 5% during the first year, 1% on redemptions made within
decreasing by 1% annually to one year of purchase
1% in the fifth and sixth
years and 0% the seventh
year*
Redemption Fees................ None None None
Exchange Fee................... None None None

<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
.50% .50% .50%
Management Fees................
.15++ .75 .75++
12b-1 Fees (After Reduction)...
.62 .62 .62
Other Expenses.................
--- --- ---
Total Fund Operating Expenses
(After Reduction)............. 1.27% 1.87% 1.87%
--- --- ---
--- --- ---
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE 1 3 5 10
YEAR YEARS YEARS YEARS
---- ---- ---- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
Class A................................................... $52 $79 $107 $187
Class B................................................... $69 $89 $111 $181
Class C................................................... $29 $59 $101 $219
You would pay the following expenses on the same investment,
assuming no redemption:
Class A................................................... $52 $79 $107 $187
Class B................................................... $19 $59 $101 $196
Class C................................................... $19 $59 $101 $219
The above example is based on data for the Fund's fiscal year ended December 31, 1995. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and
expenses that an investor in the Fund will bear, whether directly or indirectly. For more
complete descriptions of the various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Fund, such as Directors' and professional fees,
registration fees, reports to shareholders, transfer agency and custodian fees and franchise
taxes.
<FN>
- - ------------------------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--Class
B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of shares of the Fund rather than on a per shareholder basis.
Therefore, long-term shareholders of the Fund may pay more in total sales
charges than the economic equivalent of 6.25% of such shareholders'
investment in such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares, respectively,
the Distributor has agreed to limit its distribution fees with respect to
Class A and Class C shares of the Fund to no more than .15 of 1% and .75 of
1% of the average daily net assets of the Class A and Class C shares,
respectively, for the fiscal year ending December 31, 1996. Total Fund
Operating Expenses without such limitation would be 1.42% and 2.12% for the
Class A and Class C shares, respectively. See "How the Fund is Managed--
Distributor."
</TABLE>

4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights, with respect to the five-year period
ended December 31, 1995, have been been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of Class A
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
JANUARY 22,
1990*
THROUGH
YEAR ENDED DECEMBER 31, DECEMBER
-------------------------------------------------------- 31,
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 13.50 $ 14.75 $ 15.07 $ 15.30 $ 14.84 $ 14.73
-------- -------- -------- -------- -------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income..... .89 .90 .95 1.10 1.14 1.17
Net realized and
unrealized gain (loss) on
investment
transactions............. 1.18 (1.19) (.21) (.15) .61 .15
-------- -------- -------- -------- -------- -----------
Total from investment
operations............. 2.07 (.29) .74 .95 1.75 1.32
-------- -------- -------- -------- -------- -----------
LESS DISTRIBUTIONS
Dividends to shareholders
from net investment
income................... (.89) (.90) (.95) (1.10) (1.14) (1.17)
Dividends to shareholders
in excess of net
investment income........ (.07) -- (.11) (.08) (.15) (.04)
Tax return of capital
distributions............ -- (.06) -- -- -- --
-------- -------- -------- -------- -------- -----------
Total distributions..... (.96) (.96) (1.06) (1.18) (1.29) (1.21)
-------- -------- -------- -------- -------- -----------
Net asset value, end of
period................... $ 14.61 $ 13.50 $ 14.75 $ 15.07 $ 15.30 $ 14.84
-------- -------- -------- -------- -------- -----------
TOTAL RETURN@:............ 15.53% (2.01)% 4.97% 6.42% 12.48% 9.41%
-------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).................... $99,183 $ 8,762 $10,863 $ 9,045 $ 6,268 $ 1,604
Average net assets
(000).................... $90,854 $ 9,874 $10,199 $ 6.651 $ 3,035 $ 756
Ratios to average net
assets:
Expenses, including
distribution fees...... 1.27% 1.13% 1.00% 1.00% 1.11% 1.15%+
Expenses, excluding
distribution fees...... 1.12% .98% .85% .85% .96% .99%+
Net investment income... 6.27% 6.42% 6.42% 7.26% 7.81% 9.16%+
Portfolio turnover........ 193% 560% 134% 33% 118% 481%
<FN>
- - ------------------------------
* Commencement of offering of Class A shares.
+ Annualized.
@ 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.
</TABLE>

5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights, with respect to the five-year period
ended December 31, 1995, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of Class B
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 # 1987 1986
-------- -------- -------- -------- -------- -------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning
of year........... $13.47 $14.71 $15.04 $15.27 $14.81 $14.86 $14.29 $ 14.76 $15.94 $15.94
-------- -------- -------- -------- -------- -------- -------- ------------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .82 .82 .87 1.02 1.06 1.15 1.19 1.17 1.14 1.13
Net realized and
unrealized
gain (loss) on
investment
transactions...... 1.15 (1.19) (.23) (.16) .60 (.01) .59 (.48) (.98) .48
-------- -------- -------- -------- -------- -------- -------- ------------- -------- --------
Total from
investment
operations...... 1.97 (.37) .64 .86 1.66 1.14 1.78 .69 .16 1.61
-------- -------- -------- -------- -------- -------- -------- ------------- -------- --------
LESS DISTRIBUTIONS
Dividends to
shareholders from
net investment
income............ (.82) (.82) (.87) (1.02) (1.06) (1.15) (1.19) (1.16) (1.14) (1.18)
Distributions to
shareholders from
net realized gain
on investment
transactions...... -- -- -- -- -- -- -- -- (.20) (.43)
Dividends to
shareholders in
excess of net
investment
income............ (.05) -- (.10) (.07) (.14) (.04) (.02) -- -- --
Tax return of
capital
distributions..... -- (.05) -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ------------- -------- --------
Total
distributions... (.87) (.87) (.97) (1.09) (1.20) (1.19) (1.21) (1.16) (1.34) (1.61)
-------- -------- -------- -------- -------- -------- -------- ------------- -------- --------
Net asset value,
end of year....... $14.57 $13.47 $14.71 $15.04 $15.27 $14.81 $14.86 $ 14.29 $14.76 $15.94
-------- -------- -------- -------- -------- -------- -------- ------------- -------- --------
-------- -------- -------- -------- -------- -------- -------- ------------- -------- --------
TOTAL RETURN@:..... 14.78% (2.57)% 4.29% 5.80% 11.82% 8.10% 12.93% 4.80% 1.10% 10.64%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000)........ $125,463 $245,437 $319,401 $325,969 $272,661 $226,605 $221,938 $236,626 $263,914 $284,421
Average net assets
(000)............. $146,240 $279,946 $332,731 $295,255 $243,749 $218,749 $223,251 $252,814 $278,475 $254,992
Ratios to average
net assets:
Expenses,
including
distribution
fees ........... 1.87% 1.73% 1.60% 1.60% 1.71% 1.74% 1.56% 1.52% 1.65% 1.39%
Expenses,
excluding
distribution
fees ........... 1.12% .98% .85% .85% .96% .99% .98% .91% 1.01% .80%
Net investment
income.......... 5.82% 5.82% 5.82% 6.66% 7.21% 7.96% 8.16% 7.83% 7.17% 7.21%
Portfolio
turnover.......... 193% 560% 134% 33% 118% 481% 200% 216% 331% 254%
<FN>
- - ----------------------------------
# On May 2, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since then
has acted as manager of the Fund.
@ 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.
</TABLE>

6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class C share of
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
CLASS C
---------------------
AUGUST
1,
1994+
YEAR THROUGH
ENDED DECEMBER
DECEMBER 31,
31, 1995 1994
-------- --------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period........................ $13.47 $14.01
-------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................................... .81 .30
Net realized and unrealized gain (loss) on investment
transactions............................................... 1.16 (.49)
-------- --------
Total from investment operations.......................... 1.97 (.19)
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.81) (.30)
Distributions to shareholders in excess of net investment
income..................................................... (.06) --
Tax return of capital distributions......................... -- (.05)
-------- --------
Total distributions....................................... (.87) (.35)
-------- --------
Net asset value, end of period.............................. $14.57 $13.47
-------- --------
-------- --------
TOTAL RETURN#:.............................................. 14.78% (1.32)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $ 655 $ 515
Average net assets (000).................................... $ 599 $ 460
Ratios to average net assets:
Expenses, including distribution fees..................... 1.87% 1.82%*
Expenses, excluding distribution fees..................... 1.12% 1.08%*
Net investment income..................................... 5.72% 5.32%*
Portfolio turnover.......................................... 193% 560%
<FN>
- - -------------
*Annualized.
+Commencement of offering of Class C shares.
#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.
</TABLE>

7
<PAGE>
HOW THE FUND INVESTS

INVESTMENT OBJECTIVE AND POLICIES

THE FUND'S INVESTMENT OBJECTIVE IS TO ACHIEVE A HIGH LEVEL OF INCOME OVER THE
LONG TERM CONSISTENT WITH PROVIDING REASONABLE SAFETY IN THE VALUE OF EACH
SHAREHOLDER'S INVESTMENT. IN PURSUING THIS OBJECTIVE, THE FUND WILL INVEST
PRIMARILY IN READILY MARKETABLE FIXED-INCOME SECURITIES THAT PROVIDE ATTRACTIVE
YIELDS BUT DO NOT INVOLVE SUBSTANTIAL RISK OF LOSS OF CAPITAL THROUGH DEFAULT,
PRINCIPALLY MORTGAGE-RELATED INSTRUMENTS, INCLUDING SECURITIES GUARANTEED AS TO
TIMELY PAYMENT OF PRINCIPAL AND INTEREST BY THE GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA), OTHER MORTGAGE-BACKED SECURITIES ISSUED OR GUARANTEED BY
AGENCIES OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT, AND NON-AGENCY MORTGAGE
INSTRUMENTS, ALONG WITH OBLIGATIONS USING MORTGAGES AS COLLATERAL. THERE CAN BE
NO ASSURANCE THAT SUCH OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and
Policies" in the Statement of Additional Information.

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

Under normal market conditions, the Fund will invest at least 65% of its total
assets in mortgage-backed securities. The Fund will invest the remainder of its
assets in U.S. Government securities, corporate bonds, notes and debentures and
high quality money market instruments and engage in the hedging and return
enhancement strategies described below. See "Hedging and Return Enhancement
Strategies" below. The Fund may invest up to 35% of its net assets in securities
rated at least A by Moody's Investors Service (Moody's) or Standard & Poor's
Ratings Group (S & P) or similarly rated by another nationally recognized
statistical rating organization or in non-rated securities which, in the view of
the investment adviser, are of comparable quality. The remainder of the
portfolio will be rated at least Aa by Moody's or AA by S & P or similarly rated
by another nationally recognized statistical rating organization or, if not so
rated, of comparable quality in the view of the investment adviser. A
description of security ratings is contained in an Appendix to the Statement of
Additional Information.

THE FUND MAY VARY THE PROPORTION OF ITS HOLDINGS OF LONG- AND SHORT-TERM DEBT
SECURITIES IN ORDER TO REFLECT ITS ASSESSMENT OF PROSPECTIVE CHANGES IN INTEREST
RATES EVEN IF SUCH ACTION MAY ADVERSELY AFFECT CURRENT INCOME. For example, if,
in the opinion of the investment adviser, interest rates generally are expected
to decline, the Fund may sell its shorter term securities and purchase longer
term securities in order to benefit from greater expected relative price
appreciation; the securities sold may have a higher current yield than those
being purchased. The success of this strategy will depend on the investment
adviser's ability to forecast changes in interest rates. Moreover, the Fund
intends to manage its portfolio actively by taking advantage of trading
opportunities such as sales of portfolio securities and purchases of higher
yielding securities of similar quality due to distortions in normal yield
differentials.

MORTGAGE-BACKED SECURITIES

Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. There are currently three basic types of
mortgage-backed securities: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, Federal
National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation
(FHLMC); (ii) those issued by private issuers that represent an interest in or
are collateralized by mortgage-backed securities issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized by
whole

8
<PAGE>

mortgage loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement. See "Private Mortgage
Pass-Through Securities" below. The Fund may invest in adjustable rate and fixed
rate mortgage securities.

The Fund may invest in mortgage-backed securities and other derivative
mortgage products, including those representing an undivided ownership interest
in a pool of mortgages, E.G., GNMA, FNMA and FHLMC certificates where the U.S.
Government or its agencies or instrumentalities guarantees the payment of
interest and principal of these securities. These guarantees do not extend to
the yield or value of the securities or the Fund's shares. See "Investment
Objective and Policies--Mortgage-Backed Securities--Other Agency and Non-Agency
Mortgage-Backed Securities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. The value of these
securities is likely to vary inversely with fluctuations in interest rates.

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

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES

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

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

In reliance on rules and interpretations of the Securities and Exchange
Commission (SEC), the Fund's investments in certain qualifying CMOs and REMICs
are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Investment Objective and
Policies--Mortgage-Backed Securities--Collateralized Mortgage Obligations" in
the Statement of Additional Information.

9
<PAGE>

STRIPPED MORTGAGE-BACKED SECURITIES

The Fund may also invest in mortgage-backed security strips (MBS strips) (i)
issued by the U.S. Government or its agencies or instrumentalities or (ii)
issued by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing (derivative multiclass mortgage securities). MBS
strips are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "I0" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the expected or anticipated rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and principal payments may have a material effect on yield to maturity.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may not fully recoup its initial investment
in IOs. Conversely, if the underlying mortgage assets experience less than
anticipated prepayments of principal, the yield on POs could be materially
adversely affected. See "Investment Objective and Policies--Mortgage-Backed
Securities" in the Statement of Additional Information. Derivative
mortgage-backed securities such as MBS strips are highly sensitive to changes in
prepayment and interest rates.

PRIVATE MORTGAGE PASS-THROUGH SECURITIES

Private mortgage pass-through securities are structured similarly to the GNMA,
FNMA and FHLMC mortgage pass-through securities and are issued by originators of
and investors in mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
rate mortgage loans. Since private mortgage pass-through securities typically
are not guaranteed by an entity having the credit status of GNMA, FNMA and
FHLMC, such securities generally are structured with one or more types of credit
enhancement.

OTHER FIXED-INCOME OBLIGATIONS

IN ADDITION TO MORTGAGE-BACKED SECURITIES, THE FUND MAY INVEST IN U.S.
GOVERNMENT AND CORPORATE BONDS, NOTES AND DEBENTURES AND MONEY MARKET
INSTRUMENTS. The value of fixed-income securities generally fluctuates with
changes in the creditworthiness of issuers and inversely with changes in
interest rates. There are risks in any investment, including fixed-income
securities, and there can be no assurance that the Fund will be able to achieve
its investment objective.

Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by the Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are commonly
referred to as Treasury strips.

Other fixed-income obligations that the Fund may invest in include certain
U.S. dollar denominated debt securities of foreign issuers, provided that such
investments do not, in the judgment of the Fund's investment adviser, entail
substantial additional risk to the Fund. See "Investment Restrictions" in the
Statement of Additional Information. Securities of foreign issuers may involve
considerations and risks not present in domestic securities, such as the risk to
the issuer of nationalization, confiscation or other national restrictions.
There may be less information about foreign issuers publicly available than is
generally the case with respect to domestic issuers. Furthermore, foreign
issuers are not generally subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic issuers.

ASSET-BACKED SECURITIES

The Fund may invest in asset-backed securities. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, have been securitized in
pass-through structures

10
<PAGE>

similar to the mortgage pass-through structures or in a pay-through structure
similar to the CMO structure. The Fund may invest in these and other types of
asset-backed securities that may be developed in the future. Unlike
mortgage-backed securities, asset-backed securities do not have the benefit of a
security interest in the related collateral. Credit card receivables, for
example, are generally unsecured and the debtors are entitled to the protection
of a number of state and federal consumer credit laws, some of which may reduce
the ability to obtain full payment. In the case of automobile receivables, the
security interests in the underlying automobiles are often not transferred when
the pool is created, with the resulting possibility that the collateral could be
resold. In general, these types of loans are of shorter average life than
mortgage loans and are less likely to have substantial prepayments. In many
instances, asset-backed securities are over-collateralized to ensure the
relative stability of their credit quality.

ADJUSTABLE RATE SECURITIES

The Fund is permitted to invest in adjustable rate or floating rate debt
securities, including corporate securities, securities issued by U.S. Government
agencies and mortgage-backed securities, whose interest rate is calculated by
reference to a specified index such as the constant maturity Treasury rate, the
T-bill rate or LIBOR (London Interbank Offered Rate) and is reset periodically.
Adjustable rate securities allow the Fund to participate in increases in
interest rates through these periodic adjustments. The value of adjustable or
floating rate securities will, like other debt securities, generally vary
inversely with changes in prevailing interest rates. The value of adjustable or
floating rate securities is unlikely to rise in periods of declining interest
rates to the same extent as fixed rate instruments of similar maturities. In
periods of rising interest rates, changes in the coupon will lag behind changes
in the market rate resulting in a lower net asset value until the coupon resets
to market rates.

HEDGING AND RETURN ENHANCEMENT STRATEGIES

THE FUND ALSO MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING THE USE OF
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. These strategies currently include the
use of options on U.S. Government securities and futures contracts and options
thereon. The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations, and there can be no
assurance that any of these strategies will succeed. See "Investment Objective
and Policies--Interest Rate Futures and Options Thereon" in the Statement of
Additional Information. New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objective and policies.

OPTIONS TRANSACTIONS

THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON U.S.
GOVERNMENT SECURITIES THAT ARE TRADED ON NATIONAL SECURITIES EXCHANGES OR IN THE
OVER-THE-COUNTER MARKET WITH PRIMARY GOVERNMENT SECURITIES DEALERS RECOGNIZED BY
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TO ENHANCE INCOME OR TO
HEDGE THE FUND'S PORTFOLIO. The Fund may write covered put and call options to
attempt to generate additional income through the receipt of premiums, purchase
put options in an effort to protect the value of a security that it owns against
a decline in market value and purchase call options in an effort to protect
against an increase in the price of securities it intends to purchase. The Fund
may also purchase put and call options to offset previously written put and call
options of the same series. See "Investment Objective and Policies--Option
Writing and Related Risks" in the Statement of Additional Information.

A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT,
FOR A SPECIFIED PERIOD OF TIME, TO PURCHASE THE SECURITIES SUBJECT TO THE OPTION
AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The writer of a call
option, in return for the premium, has the obligation, upon exercise of the
option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open.

A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put option,
in

11
<PAGE>
return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.

THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so long
as the Fund is obligated under the option, it owns an offsetting position in the
underlying security or maintains cash, U.S. Government securities or other
liquid high-grade debt obligations with a value sufficient at all times to cover
its obligations in a segregated account. See "Investment Objective and
Policies--Option Writing and Related Risks" in the Statement of Additional
Information.

THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE FUND MAY WRITE. THE
FUND WILL NOT PURCHASE AN OPTION IF, AS A RESULT OF SUCH PURCHASE, MORE THAN 10%
OF ITS TOTAL ASSETS WOULD BE INVESTED IN PREMIUMS FOR OPTIONS.

FUTURES CONTRACTS AND OPTIONS THEREON

THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, RETURN ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. These futures contracts
and options thereon will be on financial indices (including futures linked to
the London Interbank offered rate) and U.S. Government securities.

A FINANCIAL FUTURES CONTRACT IS AN AGREEMENT TO PURCHASE OR SELL AN AGREED
AMOUNT OF SECURITIES AT A SET PRICE FOR DELIVERY IN THE FUTURE.

UNDER REGULATIONS OF THE COMMODITY EXCHANGE ACT, INVESTMENT COMPANIES
REGISTERED UNDER THE INVESTMENT COMPANY ACT ARE EXEMPT FROM THE DEFINITION OF
"COMMODITY POOL OPERATOR," SUBJECT TO COMPLIANCE WITH CERTAIN CONDITIONS. THE
EXEMPTION IS CONDITIONED UPON THE FUND'S PURCHASING AND SELLING FUTURES
CONTRACTS AND OPTIONS THEREON FOR BONA FIDE HEDGING PURPOSES, EXCEPT THAT THE
FUND MAY PURCHASE AND SELL FUTURES CONTRACTS AND OPTIONS THEREON FOR ANY OTHER
PURPOSE TO THE EXTENT THAT THE AGGREGATE INITIAL MARGIN AND OPTION PREMIUMS DO
NOT EXCEED 5% OF THE LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS. ALTHOUGH
THERE ARE NO OTHER LIMITS APPLICABLE TO FUTURES CONTRACTS, THE VALUE OF ALL
FUTURES CONTRACTS SOLD WILL NOT EXCEED THE TOTAL MARKET VALUE OF THE FUND'S
PORTFOLIO.

THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than the related futures contract,
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of a futures contract
or option thereon may vary, either up or down, from the previous day's
settlement price. These daily limits may restrict the Fund's ability to purchase
or sell certain futures contracts or options thereon on any particular day.

THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON IS
LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT
COMPANY. SEE "INVESTMENT OBJECTIVE AND POLICIES--INTEREST RATE FUTURES AND
OPTIONS THEREON" AND "TAXES" IN THE STATEMENT OF ADDITIONAL INFORMATION.

RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES

PARTICIPATION IN THE OPTIONS AND FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH THE FUND WOULD NOT BE SUBJECT ABSENT THE 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

12
<PAGE>
thereon and movements in the prices of the securities being hedged; (3) the fact
that skills needed to use these strategies are different from those needed to
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; and (5) the possible need to
defer closing out certain hedged positions to avoid adverse tax consequences.
See "Taxes" in the Statement of Additional Information.

OTHER INVESTMENTS AND POLICIES

ILLIQUID SECURITIES

The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), and privately placed commercial paper
that have a readily available market are not considered illiquid for purposes of
this limitation. Investing in Rule 144A securities could, however, have the
effect of increasing the level of Fund illiquidity to the extent that qualified
institutional buyers become, for a limited time, uninterested in purchasing
these securities. The Fund intends to comply with any applicable state blue sky
laws restricting the Fund's investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Board of Directors. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.

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

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. When-issued or delayed delivery transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time of entering into the transaction. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash, U.S.
Government securities or other liquid high-grade debt obligations having a value
equal to or greater than the Fund's purchase commitments. The value of
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during the period between purchase and settlement. At
the time of delivery of the securities the value may be more or less than the
purchase price and an increase in the percentage of the Fund's assets committed
to the purchase of securities on a when-issued or delayed delivery basis may
increase the volatility of the Fund's net asset value.

REPURCHASE AGREEMENTS

The Fund may on occasion enter into repurchase agreements, whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may not be for a number of months.
The resale price is in excess of the purchase price, reflecting an agreed-upon
rate of return effective for the period of time the Fund's money is invested in
the repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss. The Fund

13
<PAGE>
participates in a joint repurchase account with other investment companies
managed by Prudential Mutual Fund Management, Inc. pursuant to an order of the
SEC. See "Investment Objective and Policies--Repurchase Agreements" in the
Statement of Additional Information.

DOLLAR ROLLS

The Fund may enter into dollar rolls in which the Fund sells securities to be
issued and delivered in the current month and simultaneously contracts to
repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the Fund
forgoes principal and interest paid on the securities. The Fund is compensated
by the difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale.

A "covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the dollar roll transaction. Dollar
rolls (other than covered rolls) are considered borrowings by the Fund for
purposes of the percentage limitations applicable to borrowings. Covered rolls,
however, are not treated as borrowings or other senior securities and will be
excluded from the calculation of the Fund's borrowings and other senior
securities.

The Fund will establish a segregated account with its Custodian in which it
will maintain cash, U.S. Government securities or other liquid, high-grade debt
obligations equal in value to its obligations in respect of dollar rolls.

SECURITIES LENDING

The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of the
market value of the securities loaned. During the time portfolio securities are
on loan, the borrower will pay the Fund an amount equivalent to any dividend or
interest paid on such securities and the Fund may invest the cash collateral and
earn additional income, or it may receive an agreed upon amount of interest
income from the borrower. See "Investment Objective and Policies--Lending of
Portfolio Securities" in the Statement of Additional Information.

BORROWING

The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.

INTEREST RATE SWAPS

The Fund may enter into interest rate swaps. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (E.G., an exchange of floating rate payments for fixed rate
payments). The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment. The risk of loss
with respect to interest rate swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make and will not exceed 5%
of the Fund's net assets.

When the Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that the Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid.

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<PAGE>
See "Investment Objective and Policies--Interest Rate Transactions" in the
Statement of Additional Information.

PORTFOLIO TURNOVER

INVESTMENT RESTRICTIONS

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

HOW THE FUND IS MANAGED

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

For the fiscal year ended December 31, 1995, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were 1.27%, 1.87% and 1.87%, respectively. See "Financial Highlights."

MANAGER

PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. PMF was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended December 31, 1995, the Fund paid management
fees to PMF of .50% of the Fund's average net assets. See "Manager" in the
Statement of Additional Information.

As of January 31, 1996, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $52 billion.

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

UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS

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<PAGE>
REIMBURSED BY PMF FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING
SUCH SERVICES. Under the Management Agreement, PMF continues to have
responsibility for all investment advisory services and supervises PIC's
performance of such services.

Barbara L. Kenworthy, a managing director and senior portfolio manager of
Prudential Mutual Fund Investment Management, a unit of PIC, has been the
portfolio manager of the Fund since May 1995. She is responsible for the
day-to-day management of the portfolio. Ms. Kenworthy joined PIC in July 1994,
having previously been employed by The Dreyfus Corporation (from June 1985 to
June 1994) where she served as president and portfolio manager for several
Dreyfus fixed-income funds. Ms. Kenworthy also serves as the portfolio manager
of other investment companies advised by PIC.

PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.

DISTRIBUTOR

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

UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PRUDENTIAL SECURITIES (ALSO, THE DISTRIBUTOR)
INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C
SHARES. These expenses include commissions and account servicing fees paid to,
or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Fund may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.

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

UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. It is expected that in the case
of Class A shares, proceeds from the distribution fee will be used primarily to
pay account servicing fees to financial advisers. Prudential Securities has
agreed to limit its distribution-related fees payable under the Class A Plan to
.15 of 1% of the average daily net assets of the Class A shares for the fiscal
year ending December 31, 1996.

UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .75 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .75 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-

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<PAGE>

related fee does not exceed .75 of 1%. The Class C Plan provides for the payment
to Prudential Securities of (i) an asset-based sales charge of up to .75 of 1%
of the average daily net assets of the Class C shares, and (ii) a service fee of
up to .25 of 1% of the average daily net assets of the Class C shares. The
service fee is used to pay for personal service and/or the maintenance of
shareholder accounts. Prudential Securities has agreed to limit its
distribution-related fees payable under the Class C Plan to .75 of 1% of the
average daily net assets of the Class C shares for the fiscal year ending
December 31, 1996. Prudential Securities also receives contingent deferred sales
charges from certain redeeming shareholders. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges."

For the fiscal year ended December 31, 1995, the Fund paid distribution
expenses of .15%, .75% and .75% of the average daily net assets of the Class A,
Class B and Class C shares, respectively. The Fund records all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.

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

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

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

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

On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner, who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.

Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of $500,000
per jurisdiction. PSI has agreed to provide additional funds, if necessary, for
the purpose of the settlement fund. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.

In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If, on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.

17
<PAGE>
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.

For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.

The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein, and
the Fund's assets, which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.

PORTFOLIO TRANSACTIONS

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

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.

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

HOW THE FUND VALUES ITS SHARES

THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE
FUND'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.

Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.

The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

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

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<PAGE>
HOW THE FUND CALCULATES PERFORMANCE

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

TAXES, DIVIDENDS AND DISTRIBUTIONS

TAXATION OF THE FUND

THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE FUND WILL
NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes" in the
Statement of Additional Information.

TAXATION OF SHAREHOLDERS

Any dividends out of net investment income, together with distributions of net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (I.E., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term 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 long-term
capital gains rate for individuals is 28%. The maximum long-term capital gains
rate for corporate shareholders is currently the same as the maximum tax rate
for ordinary income.

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<PAGE>

Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities generally will be treated as
long-term capital gain or loss if the shares have been held more than one year,
and otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, although otherwise treated
as a short-term capital loss, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder on such
shares.

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

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

WITHHOLDING TAXES

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

DIVIDEND AND DISTRIBUTIONS

THE FUND INTENDS TO DECLARE DAILY AND PAY MONTHLY INCOME DIVIDENDS BASED ON
ACTUAL NET INVESTMENT INCOME, IF ANY, DETERMINED IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES; HOWEVER, A PORTION OF SUCH DIVIDENDS MAY ALSO
INCLUDE PROJECTED NET INVESTMENT INCOME. The Fund expects to make distributions
of net capital gains, if any, at least annually. Dividends paid by the Fund with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class will bear its own distribution charges,
generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."

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

As of December 31, 1995, the Fund had a capital loss carryforward for federal
income tax purposes of $25,068,500. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such carryforward amount.

To the extent that, in a given year, distributions to shareholders exceed
recognized net investment income and recognized short-term and long-term capital
gains for the year, shareholders will receive a return of capital in respect of
such year and, in an annual statement, will be notified of the amount of any
return of capital for such year.

WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS FOUR BUSINESS
DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR
DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO YOU AS A
TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CAREFULLY CONSIDER THE
TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.

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<PAGE>
GENERAL INFORMATION

DESCRIPTION OF COMMON STOCK

THE FUND WAS INCORPORATED IN MARYLAND ON JANUARY 4, 1982. THE FUND IS
AUTHORIZED TO ISSUE 500 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C
COMMON STOCK, WHICH CONSISTS OF 166,666,666 AUTHORIZED CLASS A SHARES,
166,666,666 AUTHORIZED CLASS B SHARES AND 166,666,668 AUTHORIZED CLASS C SHARES.
Each class of common stock represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of common stock. Currently, the Fund
is offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Articles of Incorporation, the Board of Directors may
authorize the creation of additional series of common stock and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board may determine.

The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. 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 debt and expenses of the Fund have been paid. 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

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<PAGE>
ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE CERTAIN
RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE FUND'S
OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE
DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.

ADDITIONAL INFORMATION

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

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<PAGE>
SHAREHOLDER GUIDE

HOW TO BUY SHARES OF THE FUND

YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the
NAV next determined following receipt of an order by the Transfer Agent or
Prudential Securities plus a sales charge which, at your option, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). See "Alternative Purchase Plan" below. See also
"How the Fund Values its Shares."

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

The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. All minimum investment requirements are waived for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Services"
below.

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

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

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

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

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

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

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ALTERNATIVE PURCHASE PLAN

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

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

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

CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>

The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Common Stock"), and
(iii) only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.

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

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

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

If you intend to hold your investment in the Fund for less than 7 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 4% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.

If you intend to hold your investment for more than 6 years, you should
consider purchasing Class A shares over either Class B or Class C shares
regardless of whether or not you qualify for a reduced sales charge on Class A
shares.

24
<PAGE>
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have your entire purchase price
invested initially because the sales charge on Class A shares is deducted at the
time of purchase.

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related 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 B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions when the CDSC is applicable.

ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.

CLASS A SHARES

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

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

Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.

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

BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those
acquired pursuant to the exchange privilege) or 1,000 eligible employees or
participants. In the case of Benefit Plans whose accounts are held directly with
the Transfer Agent or Prudential Securities and for which the Transfer Agent or
Prudential Securities does individual account recordkeeping (Direct Account
Benefit Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or
Subsidiary Prototype Benefit Plans), Class A shares may be purchased at NAV by
participants who are repaying loans made from such plans to the participant.

PRUARRAY PLANS. Class A shares may be purchased at NAV by certain retirement
and deferred compensation plans, qualified or non-qualified under the Internal
Revenue Code, including pension, profit-sharing, stock-bonus or other employee
benefit plans

25
<PAGE>
under Section 401 of the Internal Revenue Code and deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Code that participate in
the Transfer Agent's PruArray Program (a benefit plan recordkeeping service)
(hereafter referred to as a PruArray Plan); provided (i) that the plan has at
least $1 million in existing assets or 1,000 eligible employees or participants
and (ii) that Prudential Mutual Funds constitute at least one-half of the plan's
investment options. The term "existing assets" for this purpose includes stock
issued by a PruArray Plan sponsor and shares of non-money market Prudential
Mutual Funds and shares of certain unaffiliated non-money market mutual funds
that participate in the PruArray Program (Participating Funds). "Existing
assets" also include shares of money market funds acquired by exchange from a
Participating Fund. After a PruArray Plan qualifies to purchase Class A shares
at NAV, all subsequent purchases will be made at NAV.

OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees 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, (d) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (e) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of Benefit Plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end fund
sponsored by the financial adviser's previous employer (other than a money
market or other no-load fund which imposes a distribution or service fee of .25
of 1% or less) and (iii) the financial adviser served as the client's broker on
the previous purchase.

You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges-- Class
A Shares" in the Statement of Additional Information.

CLASS B AND CLASS C SHARES

The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.

HOW TO SELL YOUR SHARES

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

IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU HOLD
SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY YOU
EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES, THE
CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST
BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN

26
<PAGE>
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, Inc., Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010.

If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.

PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.

PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK 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 SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will 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 net asset value
of the Fund during any 90-day period for any one shareholder.

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

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

27
<PAGE>
affect federal income tax treatment of any gain realized upon redemption.
However, if the redemption was made within a 30 day period of the repurchase and
if the redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, will generally not be allowed for federal income tax
purposes.

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.

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

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

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

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
then of amounts representing the cost of shares acquired prior to July 1, 1985;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.

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

28
<PAGE>
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 THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.

The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.

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

You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge -- Class B Shares" in the Statement of
Additional Information.

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

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.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.

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.

29
<PAGE>
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.

Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."

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

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

HOW TO EXCHANGE YOUR SHARES

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

IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you

30
<PAGE>
will be asked to provide your personal identification number. A written
confirmation of the exchange transaction will be sent to you. NEITHER THE FUND
NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH RESULTS FROM
ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER THE FOREGOING
PROCEDURES. (The Fund or its agents could be subject to liability if they fail
to employ reasonable procedures.) All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.

IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.

IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.

You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., 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, INC., AT THE ADDRESS NOTED ABOVE.

SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan -- Class A Shares -- Reduction and Waiver of Initial Sales
Charges" above. 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 on a
quarterly basis, unless the shareholder elects otherwise. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.

The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.

SHAREHOLDER SERVICES

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

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

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

- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the

31
<PAGE>
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details is available from Prudential Securities or the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal or
tax adviser with respect to the establishment and maintenance of such a plan.

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

- REPORTS TO SHAREHOLDERS. The Fund will send to you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
are available upon request from the Fund.

- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).

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

32
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY

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

TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.

EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- - -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS......................................................... 2
Risk Factors and Special Characteristics.............................. 2
FUND EXPENSES........................................................... 4
FINANCIAL HIGHLIGHTS.................................................... 5
HOW THE FUND INVESTS.................................................... 8
Investment Objective and Policies..................................... 8
Hedging and Return Enhancement Strategies............................. 11
Other Investments and Policies........................................ 13
Investment Restrictions............................................... 15
HOW THE FUND IS MANAGED................................................. 15
Manager............................................................... 15
Distributor........................................................... 16
Portfolio Transactions................................................ 18
Custodian and Transfer and Dividend Disbursing Agent.................. 18
HOW THE FUND VALUES ITS SHARES.......................................... 18
HOW THE FUND CALCULATES PERFORMANCE..................................... 18
TAXES, DIVIDENDS AND DISTRIBUTIONS...................................... 19
GENERAL INFORMATION..................................................... 21
Description of Common Stock........................................... 21
Additional Information................................................ 21
SHAREHOLDER GUIDE....................................................... 22
How to Buy Shares of the Fund......................................... 22
Alternative Purchase Plan............................................. 23
How to Sell Your Shares............................................... 25
Conversion Feature--Class B Shares.................................... 28
How to Exchange Your Shares........................................... 29
Shareholder Services.................................................. 30
THE PRUDENTIAL MUTUAL FUND FAMILY....................................... A-1
</TABLE>

-------------------------------------------
MF102A 440002K

Class A: 743915-20-9
CUSIP No.: Class B: 743915-10-0
Class C: 743915-30-8

PRUDENTIAL
MORTGAGE INCOME FUND, INC.
- - --------------------------------------

APRIL 29,
1996

[LOGO]
<PAGE>

PRUDENTIAL MORTGAGE INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 29, 1996

Prudential Mortgage Income Fund, Inc., formerly Prudential GNMA Fund, Inc.
(the Fund), is an open-end, diversified, management investment company whose
investment objective is to achieve a high level of income over the long term
consistent with providing reasonable safety in the value of each shareholder's
investment. In pursuing this objective, the Fund will invest primarily in
mortgage-related instruments, including mortgage-backed securities guaranteed as
to timely payment of principal and interest by the Government National Mortgage
Association (GNMA), other mortgage-backed securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government, and non-agency mortgage
instruments, along with obligations using mortgages as collateral. The Fund may
utilize other derivatives, including writing covered call and put options on
U.S. Government securities and entering into closing purchase and sale
transactions with respect to certain of such options. To hedge against changes
in interest rates, the Fund may also purchase put options and engage in
transactions involving interest rate futures contracts, options on such
contracts and interest rate swap contracts. There can be no assurance that the
Fund's investment objective will be achieved. See "Investment Objective and
Policies."

The Fund's address is One Seaport Plaza, New York, New York 10292, 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 April 29, 1996, a copy of
which may be obtained from the Fund upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS-
REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ----------
<S> <C> <C>
General Information and History.................................. B-2 21
Investment Objective and Policies................................ B-2 8
Investment Restrictions.......................................... B-11 14
Directors and Officers........................................... B-12 14
Manager.......................................................... B-15 14
Distributor...................................................... B-18 15
Portfolio Transactions and Brokerage............................. B-20 18
Purchase and Redemption of Fund Shares........................... B-21 21
Shareholder Investment Account................................... B-25 30
Net Asset Value.................................................. B-28 18
Dividends and Distributions...................................... B-29 19
Taxes............................................................ B-29 19
Performance Information.......................................... B-30 18
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants..................................................... B-33 18
Financial Statements............................................. B-34 --
Report of Independent Accountants................................ B-42 --
Appendix A--Description of Corporate Bond Ratings................ A-1 --
Appendix I--General Investment Information....................... I-1 --
Appendix II--Historical Performance Data......................... II-1 --
</TABLE>

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

MF102B
<PAGE>
GENERAL INFORMATION AND HISTORY

At a meeting held on May 5, 1995, the Board of Directors approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name from
Prudential GNMA Fund, Inc. to Prudential Mortgage Income Fund, Inc., to become
effective upon approval by the Fund's shareholders of certain changes in
investment policy, which approval was obtained at a shareholder meeting held on
August 16, 1995.

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to achieve a high level of income over
the long term consistent with providing reasonable safety in the value of each
shareholder's investment. In pursuing this objective it is expected that, under
normal market conditions, the Fund will invest at least 65% of its total assets
in mortgage-backed securities. The Fund also intends to invest in other readily
marketable fixed-income securities which provide attractive yields but which do
not involve substantial risk of loss of capital through default, and may engage
in the writing of covered put and call options, closing purchase and sale
transactions with respect to such options and interest rate futures and options
thereon. There can be no assurance that the Fund's investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" in the
Prospectus.

The Fund's investments are expected to consist principally of
mortgage-backed securities. A description of their characteristics follows.

MORTGAGE-BACKED SECURITIES

MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities, including
those which represent undivided ownership interests in pools of mortgages. The
U.S. Government or the issuing agency or instrumentality guarantees the payment
of interest on and principal of these securities. However, the guarantees do not
extend to the yield or value of the securities nor do the guarantees extend to
the yield or value of the Fund's shares. Mortgages backing the securities which
may be purchased by the Fund include conventional thirty-year fixed-rate
mortgages, graduated payment mortgages, fifteen-year mortgages, adjustable rate
mortgages and balloon payment mortgages. A balloon payment mortgage-backed
security is an amortized mortgage security with installments of principal and
interest, the last installment of which is predominantly principal. All of these
mortgages can be used to create pass-through securities. A pass-through security
is formed when mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an undivided mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. The remaining expected average life of a pool of
mortgage loans underlying a mortgage-backed security is a prediction of when the
mortgage loans will be repaid and is based upon a variety of factors, such as
the demographic and geographic characteristics of the borrowers and the
mortgaged properties, the length of time that each of the mortgage loans has
been outstanding, the interest rates payable on the mortgage loans and the
current interest rate environment.

During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that time.
Therefore, the Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages are reinvested in securities which have lower yields
than the prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium generally will result in capital losses.

GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities which evidence an
undivided interest in a pool or pools of mortgages. GNMA Certificates that the
Fund may purchase are the "modified pass-through" type, which entitle the holder
to receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment. The GNMA Certificates will
represent a PRO RATA interest in one or more pools of the following types of
mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on

B-2
<PAGE>

multifamily residential properties under construction; (vi) mortgage loans on
completed multifamily projects; (vii) fixed rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ("buydown" mortgage loans); (viii) mortgage
loans that provide for adjustments in payments based on periodic changes in
interest rates or in other payment terms of the mortgage loans; and (ix)
mortgage-backed serial notes. All of these mortgage loans will be FHA Loans or
VA Loans and, except as otherwise specified above, will be fully-amortizing
loans secured by first liens on one- to four-family housing units. Legislative
changes may be proposed from time to time in relation to the Department of
Housing and Urban Development which, if adopted, could alter the viability of
investing in GNMAs. As of the date of this Statement of Additional Information
no such legislation has been enacted.

FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby replenishing their
funds for additional lending. FNMA acquires funds to purchase home mortgage
loans from many capital market investors that may not ordinarily invest in
mortgage loans directly.

Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's PRO RATA interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.

Each FNMA Certificate will represent a PRO RATA interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (I.E., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.

FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) was
created in 1970 through enactment of Title III of the Emergency Home Finance Act
of 1970 (FHLMC Act). Its purpose is to promote development of a nationwide
secondary market in conventional residential mortgages.

The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a PRO RATA share of
all interest and principal payments made and owned on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.

GMCs also represent a PRO RATA interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.

FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the FHLMC Act. The principal activity of FHLMC
consists of the purchase of first lien, conventional, residential mortgage loans
and participation interests in such mortgage loans and the resale of the
mortgage loans so purchased in the form of mortgage securities, primarily FHLMC
Certificates.

FHLMC guarantees to each registered holder of the FHLMC Certificate the
timely payment of interest at the rate provided for by such FHLMC Certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal on the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of a claim by any mortgage insurer or (iii) the expiration of
any right of redemption, whichever occurs later, but in any event no later than
one year after demand has been made upon the mortgagor for accelerated payment
of principal. The obligations of FHLMC under its guarantee are obligations
solely of FHLMC and are not backed by the full faith and credit of the U.S.
Government.

FHLMC Certificates represent a PRO RATA interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with

B-3
<PAGE>

original terms to maturity of between ten and thirty years, substantially all of
which are secured by first liens on one- to four-family residential properties
or multifamily projects. Each mortgage loan must meet the applicable standards
set forth in the FHLMC Act. An FHLMC Certificate group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and participations comprising another FHLMC Certificate group.

The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if such
mortgage securities are purchased at a discount, an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.

NON-AGENCY MORTGAGE-BACKED SECURITIES. Certain non-agency private entities
also issue mortgage-backed securities. Other than lacking the guarantee by the
full faith and credit of the United States, the mortgage-backed securities
issued by private issuers generally have characteristics and risks comparable to
those issued by GNMA, as discussed above. Some mortgage-backed securities issued
by non-agency private issuers may be supported by a pool of mortgages not
acceptable to the agency issuers and thus may carry greater risks. The Fund may
invest in these mortgage-backed securities issued by non-agency private issuers
if they are rated at least A by Moody's Investors Service, Inc. (Moody's) or
Standard & Poor's Ratings Group (S&P).

ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
(ARMs) are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. Generally, ARMs have a specified maturity
date and amortize principal over their life. In periods of declining interest
rates, there is a reasonable likelihood that ARMs will experience increased
rates of prepayment of principal. However, the major difference between ARMs and
fixed rate mortgage securities is that the interest rate and the rate of
amortization of principal of ARMs can and do change in accordance with movements
in a particular, pre-specified, published interest rate index.

The amount of interest on an ARM is calculated by adding a specified amount,
the "margin," to the index, subject to limitations on the maximum and minimum
interest that can be charged to the mortgagor during the life of the mortgage or
to maximum and minimum changes to that interest rate during a given period.
Because the interest rate on ARMs generally moves in the same direction as
market interest rates, the market value of ARMs tends to be more stable than
that of long-term fixed rate securities.

There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs: those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury Note
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds index (often related to ARMs issued
by FNMA), tend to lag changes in market rate levels and tend to be somewhat less
volatile.

COLLATERALIZED MORTGAGE OBLIGATIONS. Certain issuers of collateralized
mortgage obligations (CMOs), including certain CMOs that have elected to be
treated as Real Estate Mortgage Investment Conduits (REMICS), are not considered
investment companies pursuant to a rule recently adopted by the Securities and
Exchange Commission (SEC), and the Fund may invest in the securities of such
issuers without the limitations imposed by the Investment Company Act of 1940,
as amended (the Investment Company Act) on investments by the Fund in other
investment companies. In addition, in reliance on an earlier SEC interpretation,
the Fund's investments in certain other qualifying CMOs, which cannot or do not
rely on the rule, are also not subject to the limitation of the Investment
Company Act on acquiring interests in other investment companies. In order to be
able to rely on the SEC's interpretation, these CMOs must be unmanaged, fixed
asset issuers, that (a) invest primarily in mortgage-backed securities, (b) do
not issue redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (d) are not
registered or regulated under the Investment Company Act as

B-4
<PAGE>
investment companies. To the extent that the Fund selects CMOs or REMICs that
cannot rely on the rule or do not meet the above requirements, the Fund may not
invest more than 10% of its assets in all such entities and may not acquire more
than 3% of the voting securities of any single such entity.

LENDING OF PORTFOLIO SECURITIES

The Fund may lend its portfolio securities without limit to broker-dealers,
banks or other recognized institutional borrowers of securities, provided that
the borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund equal in value to at least 100% of the
value of the securities loaned. During the time portfolio securities are on
loan, the borrower pays the Fund an amount equivalent to any interest paid on
such securities, and the Fund may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or secured a letter of credit.
Loans are subject to termination at the option of the Fund or the borrower. The
Fund may pay reasonable administrative and custodial fees in connection with a
loan and may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not have
the right to vote securities on loan, but would terminate the loan and regain
the right to vote if that were considered important with respect to the
investment.

REPURCHASE AGREEMENTS

The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Board of Directors.
The Fund's investment adviser will monitor the creditworthiness of such parties,
under the general supervision of the Board of Directors. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss.

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

PORTFOLIO TURNOVER

Although the Fund has no fixed policy with respect to portfolio turnover, it
may sell portfolio securities without regard to the length of time that they
have been held in order to take advantage of new investment opportunities or
yield differentials, or because the Fund desires to preserve gains or limit
losses due to changing economic conditions. Accordingly, it is possible that the
portfolio turnover rate of the Fund may reach, or even exceed, 350%. The
portfolio turnover rate is computed by dividing the lesser of the amount of the
securities purchased or securities sold (excluding all securities whose
maturities at acquisition were one year or less) by the average monthly value of
such securities owned during the year. A 100% turnover rate would occur, for
example, if all of the securities held in the portfolio of the Fund were sold
and replaced within one year. However, when portfolio changes are deemed
appropriate due to market or other conditions, such turnover rate may be greater
than anticipated. A higher rate of turnover results in increased transaction
costs to the Fund. The portfolio turnover rate for the Fund for the fiscal years
ended December 31, 1994 and 1995 was 560% and 193%, respectively. The Fund's
portfolio turnover rate in 1994 resulted in part from the repositioning of its
portfolio by its former portfolio manager. It also resulted from efforts to take
advantage of yield differentials which existed between mortgage "pass-through"
securities and U.S. Treasuries during a year when short-term interest rates were
particularly volatile. These efforts, which involved sales of pass-through
securities in order to buy Treasuries and vice versa, added significantly to the
Fund's higher turnover rate.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations

B-5
<PAGE>
on resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. A mutual fund
might also have to register such restricted securities in order to dispose of
them resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.

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

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

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

OPTION WRITING AND RELATED RISKS

CHARACTERISTICS. The Fund may write (I.E., sell) covered put and call
options on U.S. Government securities which are traded on registered securities
exchanges or which result from separate, privately negotiated transactions with
primary U.S. Government securities dealers recognized by the Board of Governors
of the Federal Reserve System (OTC options). A call option gives the purchaser
of the option the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during the option period. Conversely,
a put option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying security at the exercise price during the
option period.

So long as the obligation of the writer of the option continues, the writer
is subject to the exercise of the option, either by the assignment of an
exercise notice by the broker-dealer through whom the option was sold in the
case of an exchange-traded option or directly by notice from the holder in the
case of an OTC option. Upon exercise the Fund is required to deliver, in the
case of a call, or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This obligation terminates upon
expiration of the option, or at such earlier time that the Fund effects a
closing purchase transaction, either by purchasing an option covering the same
underlying security and having the same exercise price and expiration date (of
the same series) as that on which it desires to terminate its obligation or by
terminating the option contract through separate negotiation. The effect of such
closing purchase is that the writer's position will be cancelled. Once an
exchange-traded option has been exercised, the writer may not execute a closing
purchase transaction with respect thereto. Effecting closing purchase
transactions in OTC options is subject to negotiation between the Fund and the
holder of the option.

The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater current return
than would be realized on the underlying securities alone. The premium paid by
the purchaser of an option will reflect, among other things, the relationship of
the exercise price to the market price and volatility of the underlying
security,

B-6
<PAGE>
the remaining term of the option, supply and demand and interest rates. In
return for the premium, the covered call option writer has given up the
opportunity for profit from a price increase in the underlying security above
the exercise price so long as the option remains open, but retains the risk of
loss should the price of the security decline. Conversely, the put option writer
gains a profit, in the form of the premium, so long as the price of the
underlying security remains above the exercise price, but assumes an obligation
to purchase the underlying security from the buyer of the put option at the
exercise price even though the price of the security may fall below the exercise
price, at any time during the option period. If an option expires, the writer
realizes a gain in the amount of the premium. Such a gain may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill its obligation to purchase the
underlying security at the exercise price, which will usually exceed the then
current market value of the underlying security. The Fund would then incur a
loss equal to the difference between the price at which it is required to
purchase the underlying security and its market value at the time the option is
exercised, less the premium received for writing the option. If the Fund is able
to enter into a closing purchase transaction, it will realize a profit or loss
from such transaction if the cost of such transaction is less or more than the
premium received from writing the option.

Because the Fund may write only covered options, it may at times be unable
to write additional options unless it sells a portion of its portfolio holdings
to obtain new debt securities against which it can write options. This may
result in higher portfolio turnover and correspondingly greater brokerage
commissions and other transaction costs.

PURCHASING OPTIONS. The Fund may purchase put options in an effort to
protect the value of a security that it owns against a decline in market value,
and may also purchase put or call options for the purpose of offsetting
previously written put or call options of the same series. For a further
description of such transactions see "How the Fund Invests--Hedging and Return
Enhancement Strategies--Options Transactions" in the Prospectus.

RISKS AND LIMITATIONS PERTAINING TO OPTIONS TRANSACTIONS. When the Fund
enters into options transactions as a hedge against its portfolio of
mortgage-backed securities, it intends to use OTC options because there is
currently no GNMA option listed on a national securities exchange. There is
currently no secondary market for OTC options.

Exchange-traded options are currently available for other U.S. Government
securities. An exchange-traded option position may be closed out only on an
exchange that provides a secondary market for an option of the same series. OTC
options are not generally terminable at the option of the writer and may be
closed out only by negotiation with the holder. There is no assurance that a
liquid secondary market on an exchange will exist. In addition, because OTC
options are issued in privately negotiated transactions exempt from registration
under the Securities Act, there is no assurance that the Fund will succeed in
negotiating a closing out of an OTC option for any particular option at any
particular time. In such event, it might not be possible to effect closing
transactions in particular options. If the Fund, as a covered call option
writer, is unable to effect a closing purchase transaction in the secondary
market or otherwise, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.

Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an exchange; (v) inadequacy of the facilities of an exchange or a
clearing corporation to handle current trading volume; or (vi) a decision by one
or more exchanges to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by a clearing corporation as a
result of trades on that exchange would generally continue to be exercisable in
accordance with their terms.

The Fund's ability to write exchange-traded options on U.S. Government
securities is subject to limitations established by each of the applicable
exchanges governing the maximum number of options in each class which may be
written by a single investor or group of investors acting in concert, regardless
of whether the options are written on the same or different exchanges or are
held or written in one or more accounts or through one or more brokers. Thus,
the number of exchange-traded options which the Fund may write may be limited by
options written by other investment advisory clients of its investment adviser.
An exchange may order the liquidation of positions found to be in excess of
these limits, and it may impose certain other sanctions.

B-7
<PAGE>
The hours of trading for options on U.S. Government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.

SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS

ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds and
Notes tends to center on the most recently auctioned issues, the exchanges will
not indefinitely continue to introduce new series of options with expirations to
replace expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular issue will be
allowed to run their course, with the possible addition of a limited number of
new expirations as the original ones expire. Options trading on each series of
Bonds or Notes will thus be phased out as new options are listed on the more
recent issues, and a full range of expiration dates will not ordinarily be
available for every series on which options are traded.

ON TREASURY BILLS. Because the deliverable Treasury Bill changes from week
to week, writers of Treasury Bill call options cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
Bills with a principal amount corresponding to the option contract size, the
Fund may be hedged from a risk standpoint, although the long position may be in
Treasury Bills with maturities varying from those on which the options were
written. The Fund will maintain in a segregated account with its custodian
Treasury Bills maturing no later than those which would be deliverable in the
event of an assignment of an exercise notice to ensure that it can meet its open
option obligations.

ON MORTGAGE CERTIFICATES. Options on Mortgage Certificates are not
currently traded on any exchange. However, the Fund intends to engage in
transactions in OTC options on Mortgage Certificates.

Since the remaining principal balance of Mortgage Certificates declines each
month as a result of mortgage principal payments and prepayments, the Fund, as a
writer of a covered call option holding Mortgage Certificates as "cover" to
satisfy its delivery obligation in the event that the option is exercised, may
find that its Mortgage Certificates no longer have a sufficient remaining
principal balance for this purpose. Should this occur, the Fund will attempt to
effect a closing purchase transaction or will purchase additional Mortgage
Certificates from the same pool (if obtainable) or replacement Mortgage
Certificates in the cash market in order to remain covered.

INTEREST RATE FUTURES AND OPTIONS THEREON

INTEREST RATE FUTURES CONTRACTS. The Fund may purchase and sell interest
rate futures contracts (futures contracts) that are traded on U.S. commodities
exchanges as a 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. Currently futures contracts are available on several types
of fixed-income securities, including U.S. Treasury Bonds, U.S. Treasury Notes
and on U.S. Treasury Bills and Certificates of Deposit on the International
Monetary Market Division of the Chicago Mercantile Exchange. The Fund may also
purchase and sell Eurodollar futures and options thereon which are U.S. dollar
denominated instruments linked to the London Interbank rate and currently traded
on the Chicago Mercantile Exchange.

There are a number of reasons why entering into interest rate futures
contracts for hedging purposes can be beneficial to the Fund. First, futures
markets may be more liquid than the corresponding cash markets on the underlying
securities. Such enhanced liquidity results from the standardization of the
futures contracts and the large transaction volumes. Greater liquidity permits a
portfolio manager to effect a desired hedge both more quickly and in greater
volume than would be possible in the cash market. Second, a desired sale and
subsequent purchase can generally be accomplished in the futures market for a
fraction of the transaction costs that might be incurred in the cash market.

When a purchase or sale of an interest rate futures contract occurs, a
deposit of high quality, liquid securities called "initial margin" is made by
both buyer and seller with a custodian or otherwise for the benefit of the
broker. Unlike other types of margin, a futures margin account does not involve
any loan or borrowing but is merely a good faith deposit that must be maintained
in a minimum amount of cash or U.S. Treasury Bills, currently equal to 2% of the
contract amount for futures on Treasury Bonds, 1 1/2% of the contract amount for
futures on Treasury Notes, 1/10 of 1% of the contract amount for futures on
Treasury Bills and 2% for GNMA securities. All futures positions, both long and
short, are marked-to-market daily, with cash payments called "variation margin"
being made by buyers and sellers to the custodian, and passed through to the
sellers and buyers, to reflect daily changes in contract values.

B-8
<PAGE>
Although most interest rate futures contracts call for making or taking
delivery of the underlying securities, these obligations are typically cancelled
or closed out before the scheduled settlement date. The closing is accomplished
by purchasing (or selling) an identical futures contract to offset a short (or
long) position. Such an offsetting transaction cancels the contractual
obligations established by the original futures transaction. Other financial
futures contracts call for cash settlements rather than delivery of securities.

If the price of an offsetting futures transaction varies from the price of
the original futures transaction, the hedger will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
unrealized loss or gain on the hedged securities position, but may not always or
completely do so.

In accordance with current rules of the Commodity Futures Trading Commission
(the CFTC), the Fund may not purchase or sell any interest rate futures
contracts or options thereon for return enhancement or risk management purposes
if, immediately thereafter, the sum of initial margin deposits on the Fund's
futures positions and premiums paid for options thereon would exceed 5% of the
liquidation value of the Fund's total assets. The Fund may purchase and sell
futures contracts and options thereon for BONA FIDE hedging purposes without
limitation.

RISKS AND LIMITATIONS INVOLVED IN FUTURES HEDGING. There are a number of
risks associated with futures hedging. Changes in the price of a futures
contract generally parallel but do not necessarily equal changes in the prices
of the securities being hedged. The risk of imperfect correlation increases if
the composition of the Fund's securities portfolio diverges from the securities
that are the subject of the futures contract. Because the change in price of the
futures contract may be more or less than the change in prices of the underlying
securities, even a correct forecast of interest rate changes may not result in a
successful hedging transaction.

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

Successful use of futures contracts by the Fund is also subject to the
ability of the investment adviser to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
For example, if the Fund has hedged against the possibility of an increase in
interest rates that would adversely affect the price of securities in its
portfolio and prices of such securities increase instead, the Fund will lose
part or all of the benefit of the increased value of its securities because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
that reflect the rising market. The Fund may have to sell securities at a time
when it is disadvantageous to do so. Where futures are purchased to hedge
against a possible increase in the price of securities before the Fund is able
to invest its cash in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest in securities at that
time because of concern as to possible further market decline or for other
reasons, the Fund will realize a loss on the futures contract that is not offset
by a reduction in the price of the securities purchased.

The selling of futures contracts by the Fund and use of related transactions
in options on futures contracts (discussed below) are subject to position
limits, which are affected by the activities of the Fund's investment adviser,
similar to the option trading limits discussed under "Option Writing and Related
Risks."

The hours of trading of interest rate futures contracts may not conform to
the hours during which the Fund may trade U.S. Government securities. To the
extent that the futures markets close before the U.S. Government securities
markets, significant price and rate movements can take place in the U.S.
Government securities markets that cannot be reflected in the futures markets.

Pursuant to Rule 4.5 under the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator" in the Commodity Exchange Act, subject to compliance
with certain conditions. The exemption is conditioned upon a requirement that
all of the investment company's commodity futures transactions and options
thereon constitute BONA FIDE hedging transactions, except that the Fund may
purchase and sell futures

B-9
<PAGE>
and options thereon for any other purpose to the extent that the aggregate
initial margin and option premiums do not exceed 5% of the liquidation value of
the Fund's total assets. With respect to long positions assumed by the Fund, the
Fund will segregate with its custodian, or in a margin account with a broker, an
amount of cash and other assets permitted by CFTC regulations equal to the
market value of the futures contracts and thereby insure that the use of futures
contracts is unleveraged. The Fund will use interest rate futures in a manner
consistent with these requirements.

OPTIONS ON FUTURES CONTRACTS. The Fund will purchase put options on futures
contracts to hedge its portfolio of debt securities against the risk of rising
interest rates, and the consequent decline in the prices of U.S. Government
securities it owns. The Fund will also write call options on futures contracts
as a hedge against a modest decline in prices of debt securities held in the
Fund's portfolio. If the futures price at expiration of a written call option is
below the exercise price, the Fund will retain the full amount of the option
premium, thereby partially hedging against any decline that may have occurred in
the Fund's holdings of debt securities. If the futures price when the option is
exercised is above the exercise price, however, the Fund will incur a loss,
which may be wholly or partially offset by the increase of the value of the
security in the Fund's portfolio which was being hedged.

INTEREST RATE TRANSACTIONS

The Fund may enter into interest rate swaps, and will usually enter into
interest rate swaps on a net basis, I.E., the two payment streams are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that satisfies
the requirements of the Investment Company Act. To the extent that the Fund
enters into interest rate swaps on other than a net basis, the amount maintained
in a segregated account will be the full amount of the Fund's obligations, if
any, with respect to such interest rate swaps, accrued on a daily basis.
Inasmuch as segregated accounts are established for these hedging transactions,
the investment adviser and the Fund believe such obligations do not constitute
senior securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any interest rate swaps
unless the short-term debt of the other party thereto is rated in the highest
rating category of at least one nationally recognized rating organization at the
time of entering into such transaction. If there is a default by the other party
to such a transaction, the Fund will have contractual remedies pursuant to the
agreement related to the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid.

The use of interest rate swaps is a highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If incorrect in its forecast of
market values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared to what it would have been if
this investment technique was never used.

The Fund may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rates swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. Since interest rate
swaps are individually negotiated, the Fund expects to achieve an acceptable
degree of correlation between its rights to receive interest on its portfolio
securities and its rights and obligations to receive and pay interest pursuant
to interest rate swaps.

B-10
<PAGE>
INVESTMENT RESTRICTIONS

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

The Fund may not:

(1) Purchase any security (other than obligations of the U.S. Government,
its agencies, or instrumentalities) if as a result with respect to 75% of the
Fund's total assets, more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer.

(2) Make short sales of securities or purchase securities on margin (but the
Fund may obtain such short-term credits as may be necessary for the clearance of
transactions). For purposes of this investment restriction, the deposit or
payment by the Fund of initial or variation margin in connection with
transactions in interest rate futures contracts or related options transactions
and collateralization arrangements with respect to exchange-traded and OTC
options on debt securities are not considered the purchase of a security on
margin.

(3) Concentrate its investments in any one industry (no more than 25% of the
Fund's total assets will be invested in any one industry or in the securities of
issuers located in any one foreign country); however, there is no limitation as
to investments in obligations of the U.S. Government, its agencies or
instrumentalities.

(4) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction,
obligations of the Fund to Directors pursuant to deferred compensation
arrangements, the purchase or sale of securities on a when-issued or delayed
delivery basis, the purchase and sale of options and futures contracts and
collateral arrangements with respect to the purchase and sale of options and
futures contracts are not deemed to be the issuance of a senior security or a
pledge of assets.

(5) Purchase any security if as a result the Fund would then have more than
5% of its total assets (taken at current value) invested in securities of
companies (including predecessors) less than three years old.

(6) Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, except it may purchase and sell securities which are
secured by real estate and securities of companies which invest or deal in real
estate, interest rate futures contracts and other financial futures contracts
and options thereon.

(7) Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.

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

(9) Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which not more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a merger,
consolidation or other acquisition.

(10) Invest in interests in oil, gas or other mineral exploration or
development programs.

(11) Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities. (The purchase of a portion of an issue of securities
distributed publicly, whether or not the purchase is made on the original
issuance, is not considered the making of a loan.)

(12) Purchase securities of foreign issuers other than U.S. dollar
denominated debt securities rated at least Aa by Moody's or AA by S&P or U.S.
dollar denominated obligations of foreign branches of domestic banks or of any
bank organized under the laws of Canada, France, Germany, Japan, the
Netherlands, Switzerland or the United Kingdom, provided that such bank has, at
the time of the Fund's investment, total assets of at least $10 billion or the
equivalent.

B-11
<PAGE>
(13) Purchase or sell puts or calls or combinations thereof, except that the
Fund may write covered put and call options on U.S. Government securities,
purchase put and call options on U.S. Government securities and purchase and
sell interest rate futures contracts and other financial futures contracts and
options thereon, and, in connection with the purchase of other securities, it
may acquire warrants or other rights to subscribe for securities of companies or
parents or subsidiaries of such companies.

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.

In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy (i) purchase any security if as a result the
Fund would hold more than 10% of any class of securities of an issuer (taking
all debt issues of an issuer as a single class) in companies in which officers
and directors of the Fund or the manager own more than 1/2 of 1% of the
outstanding securities of such company, (ii) purchase securities of any issuer
if, to the knowledge of the Fund, any officer or director of the Fund or of the
Manager owns more than 1/2 of 1% of the outstanding securities of such issuer,
and such officers and directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer or (iii) purchase
warrants if as a result the Fund would then have more than 5% of its net assets
(determined at the time of investment) invested in warrants. Warrants will be
valued at the lower of cost or market and investment in warrants which are not
listed on the New York Stock Exchange or American Stock Exchange will be limited
to 2% of the Fund's net assets (determined at the time of investment). For the
purpose of this limitation, warrants acquired in units or attached to securities
are deemed to be without value.

DIRECTORS AND OFFICERS

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- - -------------------------------- -------------- -----------------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (71) Director President and Director of BMC Fund, Inc., a closed-end investment
c/o Prudential Mutual Fund company; previously, Vice Chairman of Broyhill Furniture Industries,
Management, Inc. Inc.; Certified Public Accountant; Secretary and Treasurer of
One Seaport Plaza Broyhill Family Foundation, Inc.; Member of the Board of Trustees of
New York, New York Mars Hill College; President and Director of The High Yield Income
Fund, Inc. and First Financial Fund, Inc.

Eugene C. Dorsey (68) Director Retired President, Chief Executive Officer and Trustee of the Gannett
c/o Prudential Mutual Fund Foundation (now Freedom Forum); former Publisher of four Gannett
Management, Inc. newspapers and Vice President of Gannett Company; past Chairman of
One Seaport Plaza Independent Sector (national coalition of philanthropic
New York, New York organizations) (since October 1989); former Chairman of the American
Council for the Arts; Director of the Advisory Board of Chase
Manhattan Bank of Rochester and The High Yield Income Fund, Inc.

Delayne Dedrick Gold (57) Director Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, New York
</TABLE>

B-12
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- - -------------------------------- -------------- -----------------------------------------------------------------------
<S> <C> <C>
*Harry A. Jacobs, Jr. (74) Director Senior Director (since January 1986) of Prudential Securities
One Seaport Plaza Incorporated (Prudential Securities); formerly Interim Chairman and
New York, New York Chief Executive Officer of PMF (June-September 1993); formerly
Chairman of the Board of Prudential Securities (1982-1985) and
Chairman of the Board and Chief Executive Officer of Bache Group Inc.
(1977-1982); Director of The First Australia Fund, Inc. and The First
Australia Prime Income Fund, Inc.; Trustee of The Trudeau Institute.

Thomas T. Mooney (54) Director President of the Greater Rochester Metro Chamber of Commerce; formerly
c/o Prudential Mutual Fund Rochester City Manager; Trustee of Center for Governmental Research,
Management, Inc. Inc.; Director of Blue Cross of Rochester, Monroe County Water
One Seaport Plaza Authority, Rochester Jobs, Inc., Northeast Midwest Institute,
New York, New York Executive Service Corps of Rochester and Monroe County Industrial
Development Corporation, First Financial Fund, Inc. and The High
Yield Plus Fund, Inc.

Thomas H. O'Brien (71) Director President, O'Brien Associates (Financial and Management Consultants)
c/o Prudential Mutual Fund (since April 1984); formerly President of Jamaica Water Securities
Management, Inc. Corp. (holding company) (February 1989-August 1990); Director
One Seaport Plaza (September 1987-April 1991) and Chairman of the Board and Chief
New York, New York Executive Officer (September 1987-February 1989) of Jamaica Water
Supply Company; Director of Ridgewood Savings Bank and Yankee Energy
System, Inc.; Trustee of Hofstra University.

*Richard A. Redeker (52) President and President, Chief Executive Officer and Director (since October 1993),
One Seaport Plaza Director PMF; Executive Vice President, Director and Member of the Operating
New York, New York Committee (since October 1993), Prudential Securities; Director
(since October 1993) of Prudential Securities Group, Inc.; Executive
Vice President, The Prudential Investment Corporation (since July
1994); Director (since January 1994) of Prudential Mutual Fund
Distributors, Inc. (PMFD) and Prudential Mutual Fund Services, Inc.
(PMFS); formerly Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September 1978-September 1993);
President and Director of The High Yield Income Fund, Inc.

Nancy H. Teeters (65) Director Economist; formerly Vice President and Chief Economist (March 1986-June
c/o Prudential Mutual 1990) of International Business Machines Corporation; Director of
Fund Management, Inc. Inland Steel Corporation (since 1991) and the First Financial Fund,
One Seaport Plaza Inc.
New York, New York

David W. Drasnin (58) Vice President Vice President and Branch Manager of Prudential Securities.
39 Public Square, Suite 500
Wilkes-Barre, Pennsylvania

Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990), Director (since January
One Seaport Plaza 1989) and Executive Vice President, Treasurer and Chief Financial
New York, New York Officer (since June 1987) of PMF; Senior Vice President (since March
1987) of Prudential Securities; Executive Vice President, Treasurer,
Comptroller and Director (since March 1991) of PMFD; Director (since
June 1987) of PMFS; Vice President and Director of The Asia Pacific
Fund, Inc. (since May 1989).
</TABLE>

B-13
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- - -------------------------------- -------------- -----------------------------------------------------------------------
<S> <C> <C>
S. Jane Rose (50) Secretary Senior Vice President (since January 1991) and Senior Counsel (since
One Seaport Plaza June 1987) of PMF; Senior Vice President and Senior Counsel (since
New York, New York July 1992) of Prudential Securities; formerly Vice President and
Associate General Counsel of Prudential Securities.

Grace Torres (36) Treasurer and First Vice President (since March 1994) Prudential Mutual Fund
One Seaport Plaza Principal Management, Inc.; First Vice President of Prudential Securities
New York, New York Financial and (since March 1994); prior thereto, Vice President of Bankers Trust
Accounting Corporation.
Officer

Deborah A. Docs (38) Assistant Vice President, Associate General Counsel (since January 1993),
One Seaport Plaza Secretary Associate Vice President (January 1990-December 1992), Assistant
New York, New York General Counsel (November 1991-December 1992) and Assistant Vice
President (January 1989-December 1989) of PMF; Vice President and
Associate General Counsel (since January 1993), Associate Vice
President (January 1992-December 1992) and Assistant General Counsel
(January 1992-January 1993) of Prudential Securities.

Stephen M. Ungerman (42) Assistant First Vice President of Prudential Mutual Fund Management, Inc. (since
One Seaport Plaza Treasurer February 1993); prior thereto, Senior Tax Manager of Price Waterhouse
New York, New York (1981-January 1993).
</TABLE>

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

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

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

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

The Fund pays each of its Directors who is not an affiliated person of the
Manager annual compensation of $7,500, in addition to certain out-of-pocket
expenses.

Directors may receive their Director's fees pursuant to a deferred fee
arrangement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Director. The
Fund's obligation to make payments of deferred Director's fees, together with
interest thereon, is a general obligation of the Fund. Mr. Dorsey elected to
receive his Director's fee pursuant to a deferred fee agreement with the Fund
for the fiscal year ended December 31, 1995.

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

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

The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1995 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's Board and the Boards of any other investment
companies managed by PMF (Fund Complex) for the calendar year ended December 31,
1995.

B-14
<PAGE>
COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM FUND
PENSION OR AND FUND
RETIREMENT COMPLEX
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL PAID
COMPENSATION AS PART OF FUND BENEFITS UPON TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT DIRECTORS
- - -------------------------------- ------------ ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
Edward D. Beach, Director $7,500 None N/A $183,500(22/43)**
Eugene C. Dorsey, Director $7,500 None N/A $77,375(10/34)**/*
Delayne Dedrick Gold, Director $7,500 None N/A $183,250(22/45)**
Thomas T. Mooney, Director $7,500 None N/A $129,625(14/19)**
Thomas H. O'Brien, Director $7,500 None N/A $44,000(6/24)**
Nancy H. Teeters, Director $7,500 None N/A $107,500(13/31)**
</TABLE>

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

* All compensation for the calendar year ended December 31, 1995 represents
deferred compensation. Aggregate compensation from the Fund for the fiscal
year ended December 31, 1995, including accrued interest, amounted to $8,516.
Aggregate compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1995, including accrued interest, amounted
to approximately $85,783.

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

As of February 9, 1996, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of common stock of the Fund.

The Board of Directors has nominated a new slate of Directors for the Fund
which will be submitted to shareholders at a special meeting scheduled to be
held in or about October 1996.

As of February 9, 1996, the only beneficial owners, directly or indirectly,
of more than 5% of the outstanding shares of any class of common stock of the
Fund were Patricia A. Vogel, 1660 Oliver Springs Highway, Clinton, TN 37716-5246
who held 5,052 Class C shares of the Fund (11.1%); The Cornelia Boss Trust, 370
Woodland Drive, Grayslake, IL 60030-1450 which held 6,253 Class C shares of the
Fund (13.8%); and the Delaware Charter T/F Kenneth R. Kahn, P.O. Box 8963,
Wilmington, DE 19899-8999 which held 7,408 Class C shares of the Fund (16.3%).

As of February 9, 1996, Prudential Securities was the record holder for
other beneficial owners of 1,347,002 Class A shares (or 20% of the outstanding
Class A shares), 3,524,031 Class B shares (or 41% of the outstanding Class B
shares) and 39,043 Class C shares (or 79% of the outstanding Class C shares) of
the Fund. In the event of any meetings of shareholders, Prudential Securities
will forward, or cause the forwarding of, proxy materials to the beneficial
owners for which it is the record holder.

MANAGER

The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other investment companies that, together with the Fund, comprise
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. As of January 31, 1996, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $52
billion. According to the Investment Company Institute, as of December 31, 1995,
the Prudential Mutual Funds were the 13th largest family of mutual funds in the
United States.

PMF is a subsidiary of Prudential Securities Incorporated and The Prudential
Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.

Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, 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

B-15
<PAGE>

the Fund and the composition of the Fund's portfolio, including the purchase,
retention, disposition and loan of securities. In connection therewith, PMF is
obligated to keep certain books and records of the Fund. PMF 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 PMFS, the Fund's transfer and dividend disbursing
agent. The management services of PMF for the Fund are not exclusive under the
terms of the Management Agreement and PMF is free to, and does, render
management services to others.

For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PMF, 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 PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended December 31, 1995. Currently, the
Fund believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of the Fund's average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1 1/2% of such assets in excess of
$100 million.

In connection with its management of the corporate affairs of the Fund, PMF
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 PMF or the
Fund's investment adviser;

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

(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).

Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the SEC, registering
the Fund and qualifying its shares under 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 PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act, on May 5, 1995 and by
shareholders of the Fund on April 29, 1988.

For the fiscal years ended December 31, 1993, 1994 and 1995, the Fund paid
management fees to PMF of $1,714,652, $1,450,053 and $1,188,713, respectively.

B-16
<PAGE>

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

The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 5, 1995, and by shareholders of the Fund on April 29, 1988.

The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC 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.

The Manager and the Subadviser are subsidiaries of Prudential which is one
of the largest diversified financial services institutions in the world and,
based on total assets, the largest insurance company in North America as of
December 31, 1994. Its primary business is to offer a full range of products and
services in three areas: insurance, investments and home ownership for
individuals and families; health-care management and other benefit programs for
employees of companies and members of groups; and asset management for
institutional clients and their associates. Prudential (together with its
subsidiaries) employs nearly 100,000 persons worldwide, and maintains a sales
force of approximately 19,000 agents, 3,400 insurance brokers and 6,000
financial advisors. It insures or provides other financial services to more than
50 million people worldwide. Prudential is a major issuer of annuities,
including variable annuities. Prudential seeks to develop innovative products
and services to meet consumer needs in each of its business areas. For the year
ended December 31, 1994, Prudential through its subsidiaries provided financial
services to more than 50 million people worldwide--more than one of every five
people in the United States. As of December 31, 1994, Prudential through its
subsidiaries provided automobile insurance for more than 1.8 million cars and
insured more than 1.5 million homes. For the year ended December 31, 1994, The
Prudential Bank, a subsidiary of Prudential, served 940,000 customers in 50
states providing credit card services and loans totaling more than $1.2 billion.
Assets held by Prudential Securities Incorporated (PSI) for its clients totaled
approximately $150 billion at December 31, 1994. During 1994, over 28,000 new
customer accounts were opened each month at PSI. The Prudential Real Estate
Affiliates, the fourth largest real estate brokerage network in the United
States, has more than 34,000 brokers and agents and more than 1,100 offices in
the United States.

Based on data for the period from January 1, 1995 to September 30, 1995 for
the Prudential Mutual Funds, on an average day, there are approximately $80
million in common stock transactions, over $150 million in bond transactions and
over $3.1 billion in money market transactions. In 1994, the Prudential Mutual
Funds effected more than 40,000 trades in money market securities and held on
average $20 billion of money market securities. Based on complex-wide data for
the period from January 1, 1995 to September 30, 1995, on an average day, over
7,000 shareholders telephoned Prudential Mutual Fund Services, Inc., the
Transfer Agent of the Prudential Mutual Funds, on the Prudential Mutual Funds'
toll-free number. On an annual basis, that represents approximately 1.8 million
telephone calls answered.

The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and taxable fixed-income securities. The portfolio
manager routinely consults with the credit unit in managing the Fund's
portfolio. The credit unit reviews on an ongoing basis issuers of tax-exempt and
taxable fixed-income obligations, including prospective purchases and portfolio
holdings of the Fund. Credit analysts have broad access to research and
financial reports, data retrieval services and industry analysts.

With respect to taxable fixed-income obligations, credit analysts review
financial statements published by corporate (and governmental) issuers to
examine income statements, balance sheets and cash flow numbers. They evaluate
this data against their expectations of sales, earnings growth and trends in
credit ratios. They study the impact of economic, regulatory and political
developments on companies and industries and look at the relative value of
companies. They are in regular communication both in person and by telephone
with company management, Wall Street analysts and rating agencies.

B-17
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, or television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.

DISTRIBUTOR

Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc.
(PMFD), One Seaport Plaza, New York, New York 10292, acted as distributor of the
Class A shares of the Fund.

Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), Prudential Securities (also, the
Distributor) incurs the expenses of distributing the Fund's Class A, Class B and
Class C shares. See "How the Fund is Managed--Distributor" in the Prospectus.

Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 19, 1989, the Board of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Class A or Class B Plan or in any agreement related to either Plan (the Rule
12b-1 Directors), at a meeting called for the purpose of voting on each Plan,
adopted a new plan of distribution for the Class A shares of the Fund (the Class
A Plan) and approved an amended and restated plan of distribution with respect
to the Class B shares of the Fund (the Class B Plan). On May 6, 1993, the Board
of Directors, including a majority of the Rule12b-1 Directors, at a meeting
called for the purpose of voting on each Plan, approved modifications of the
Fund's Class A and Class B Plans and Distribution Agreements to conform them
with recent amendments to the National Association of Securities Dealers, Inc.
(NASD) maximum sales charge rule described below. As so modified, the Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. As so modified, the
Class B Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class B shares may be paid as a service fee and (ii) up to .75 of 1% of
the average daily net assets of the Class B shares (asset-based sales charge)
may be used as reimbursement for distribution-related expenses with respect to
the Class B shares. The aggregate distribution fee for Class B shares
(asset-based sales charge plus service fee) may not exceed .75 of 1% of the
average daily net assets of Class B shares. On May 6, 1993, the Board of
Directors, including a majority of the Rule 12b-1 Directors, at a meeting called
for the purpose of voting on each Plan, adopted a plan of distribution for the
Class C shares of the Fund and approved further amendments to the plans of
distribution for the Fund's Class A and Class B shares changing them from
reimbursement type plans to compensation type plans. The Plans were last
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 5, 1995. The Class A Plan, as amended, was approved by the
Class A and Class B shareholders and the Class B Plan, as amended, was approved
by Class B shareholders on July 19, 1994. The Class C Plan was approved by the
sole shareholder of the Class C shares on August 1, 1994.

CLASS A PLAN. For the fiscal year ended December 31, 1995, PMFD received
payments of $136,281 under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. For the fiscal year ended December 31, 1995, PMFD also
received approximately $37,000 in initial sales charges.

CLASS B PLAN. For the fiscal year ended December 31, 1995, the PSI received
$1,097,175 from the Fund under the Class B Plan and spent approximately $396,000
in distributing the Fund's shares. It is estimated that of the latter amount
approximately $18,000 or 4.6% was spent on printing and mailing of prospectuses
to other than current shareholders; $145,000 or 36.6% on compensation to Pruco
Securities Corporation (Prusec), an affiliated broker-dealer, for commissions to
its representatives and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses, incurred by it
for distribution of Fund shares and $233,000 or 58.8% on the aggregate of (i)
payments of commissions to financial advisers ($168,000 or 42.4%) and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses ($65,000 or 16.4%). 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,

B-18
<PAGE>
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.

Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by holders of Class B shares upon certain redemptions of
Class B shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended December
31, 1995, Prudential Securities received approximately $502,000 in contingent
deferred sales charges with respect to Class B shares.

CLASS C PLAN. For the fiscal year ended December 31, 1995, Prudential
Securities received $4,491 from the Fund under the Class C Plan and spent
approximately $3,100 in distributing the Fund's Class C shares. It is estimated
that of the latter amount approximately $100 or 3.2% was spent on printing and
mailing of prospectuses to other than current shareholders; $500 or 16.1% on
compensation to Prusec for commissions to its representatives and other
expenses, including an allocation on account of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares
and $2,500 or 80.7% on the aggregate of (i) payments of commissions to financial
advisers ($1,800 or 58.1%) and (ii) an allocation on account of overhead and
other branch office distribution-related expenses ($700 or 22.6%). 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. Prudential Securities also receives the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended December
31, 1995, Prudential Securities received no contingent deferred sales charges
with respect to Class C shares.

The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
30 days' written notice to any other party to the Plans. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.

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 includes 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 Rule 12b-1
Directors shall be committed to the Rule 12b-1 Directors.

Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 5, 1995. On November 3, 1995, the
Board of Directors approved the transfer of the Distribution Agreement for Class
A shares with PMFD to Prudential Securities.

On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the

B-19
<PAGE>
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.

On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.

On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.

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.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager is responsible for decisions to buy and sell securities and
futures contracts for the Fund, the selection of brokers, dealers and futures
commission merchants to effect the transactions and the negotiation of brokerage
commissions, if any. For purposes of this section, the term "Manager" includes
the Subadviser. Fixed-income securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities acts as principal.
Purchases and sales of securities or futures contracts on a securities exchange
or board of trade will be effected through brokers or futures commission
merchants who charge a commission for their services. Orders may be directed to
any broker or futures commission merchant including, to the extent and in the
manner permitted by applicable law, Prudential Securities and its affiliates.

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

B-20
<PAGE>
spread or commission available. Within the framework of the policy of obtaining
the most favorable price and efficient execution, the Manager will consider
research and investment services provided by brokers, dealers or futures
commission merchants 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, dealers or
futures commission merchants furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than the Fund, and the services furnished by such brokers, dealers or
futures commission merchant may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker, dealer or
futures commission merchant in the light of generally prevailing rates. The
Manager's policy is to pay higher commissions to brokers, dealers and futures
commission merchants, other than Prudential Securities, for particular
transactions than might be charged if a different broker, dealer or futures
commission merchant 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, dealers and futures commission
merchants 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, dealers and futures commission merchants and the commission rates paid
are reviewed periodically by the Fund's Board of Directors. Portfolio securities
may not be purchased from any underwriting or selling syndicate of which
Prudential Securities (or any affiliate), during the existence of the syndicate,
is a principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the SEC. This limitation, in the opinion of the Fund,
will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.

Subject to the above considerations, Prudential Securities may act 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,
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
being purchased or sold on an 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 non-interested Directors, has adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Prudential Securities (or any affiliate) are
consistent with the foregoing standard. In accordance with Section 11(a) of the
Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential Securities
(or any affiliate) are also subject to such fiduciary standards as may be
imposed upon Prudential Securities (or such affiliate) by applicable law. During
the years ended December 31, 1995, 1994 and 1993, no brokerage commissions were
paid by the Fund to Prudential Securities.

PURCHASE AND REDEMPTION OF FUND SHARES

Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). See "Shareholder
Guide--How to Buy Shares of the Fund" in the Prospectus.

Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion

B-21
<PAGE>
feature on Class B shares to submit any amendment of the Class A distribution
and service plan to both Class A and Class B shareholders) and (iii) only Class
B shares have a conversion feature. See "Distributor." Each class also has
separate exchange privileges. See "Shareholder Investment Account--Exchange
Privilege."

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of 4%
and Class B* and Class C* shares of the Fund are sold at net asset value. Using
the Fund's net asset value at December 31, 1995, the maximum offering price of
the Fund's shares is as follows:

<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share........... $14.61
------
Maximum sales charge (4% of offering price)...................... .61
------
Maximum offering price to public................................. $15.22
------
------
CLASS B
Net asset value, offering price and redemption price per Class B
share*.......................................................... $14.57
------
------
CLASS C
Net asset value, offering price and redemption price per Class C
share*.......................................................... $14.57
------
------
<FN>
- - ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
</TABLE>

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

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.

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

(a) an individual;

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

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

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

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

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

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

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

RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent or through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential

B-22
<PAGE>
Securities. 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. See "How the
Fund Values its Shares" in the Prospectus. The Distributor must be notified at
the time of purchase that the investor is entitled to a reduced sales charge.
The reduced sales charges will be granted subject to confirmation of the
investor's holdings. Rights of Accumulation are not available to individual
participants in any retirement or group plans.

LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds. All shares of the Fund and shares of other Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the exchange
privilege) which were previously purchased and are still owned are also included
in determining the applicable reduction. However, the value of shares held
directly with the Transfer Agent and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held either
directly with the Transfer Agent or through Prudential Securities. The
Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.

A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge. The
effective date of a Letter of Intent may be back-dated up to 90 days, in order
that any investments made during this 90-day period, valued at the purchaser's
cost, can be applied to the fulfillment of the Letter of Intent goal, except in
the case of retirement and group plans.

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

WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.

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

B-23
<PAGE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.

QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE
AS A PERCENTAGE OF
DOLLARS INVESTED
OR REDEMPTION PROCEEDS
-------------------------
$500,001
YEAR SINCE PURCHASE TO $1 OVER $1
PAYMENT MADE MILLION 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.

B-24
<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 delivery of a stock certificate is desired,
it must be requested in writing for each transaction. Certificates are issued
only for full shares and may be redeposited in the Shareholder Investment
Account at any time. There is no charge to the investor for issuance of a
certificate. The Fund makes available to its shareholders the following
privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than 5 full business days
prior to the record date to have subsequent dividends and/or distributions sent
in cash rather than reinvested. In the case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payment will be made directly to the dealer. Any shareholder who receives a cash
payment representing a dividend or distribution may reinvest such distribution
at net asset value by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the net
asset value per share next determined after receipt of the check or proceeds by
the Transfer Agent. A shareholder will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.

EXCHANGE PRIVILEGE

The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws. For
retirement and group plans having a limited menu of Prudential Mutual Funds, the
Exchange Privilege is available for those funds eligible for investment in the
particular program.

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

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

The following money market funds participate in the Class A Exchange
Privilege:

Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New 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 for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, a money market fund. No CDSC will be payable upon such exchange but a CDSC
may be payable upon the redemption of the Class B and

B-25
<PAGE>
Class C shares acquired as a result of an exchange. The applicable sales charge
will be that imposed by the fund in which shares were initially purchased and
the purchase date will be deemed to be the first day of the month after the
initial purchase, rather than the date of the exchange.

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

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

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

DOLLAR COST AVERAGING

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

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

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

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- - ------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................ $ 110 $ 165 $ 220 $ 275
20 Years............................ 176 264 352 440
15 Years............................ 296 444 592 740
10 Years............................ 555 833 1,110 1,388
5 Years............................ 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
<FN>
- - ------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition,
fees, room and board for the 1993-1994 academic year.
</TABLE>

B-26
<PAGE>
<TABLE>
<S> <C>
(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.
</TABLE>

AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

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

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

Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals 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 must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charge applicable to (i)
the purchase of Class A shares and (ii) the withdrawal of Class B and Class C
shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the plan, particularly if used in connection with a
retirement plan.

TAX-DEFERRED RETIREMENT PLANS

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

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

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

B-27
<PAGE>
TAX-DEFERRED COMPOUNDING(1)

<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
--------------- -------- --------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
<FN>
- - ------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.
</TABLE>

MUTUAL FUND PROGRAMS

From time to time, the Fund (or a portfolio of the Fund, if applicable) 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 promoted
collectively. Typically, these programs are created with an investment theme,
e.g., to seek greater diversification, protection from interest rate movements
or access to different management styles. In the event such a program is
instituted, there may be a minimum investment requirement for the program as a
whole. The Fund may waive or reduce the minimum initial investment requirements
in connection with such a program.

The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors 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 per share is the net worth of the Fund (assets including
securities at value minus liabilities) divided by the number of shares
outstanding. Net asset value is calculated separately for each class. The
securities owned by the Fund are traded on national securities exchanges as well
as in the over-the-counter market. Currently, the value of portfolio securities,
including GNMA securities, is determined by reference to quotations received
from a pricing service as of 2:30 and 3:00 P.M., New York time. In addition to
market prices, the pricing service considers such factors as maturities, yields,
call features, and developments relating to specific securities in arriving at
valuations for normal institutional size trading units of securities.

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, if their term to maturity from date of purchase
was 60 days or less, or by amortizing their value on the 61st day prior to
maturity, if their term to maturity from date of purchase exceeded 60 days,
unless such valuation is determined not to represent fair value by the Board of
Directors.

Exchange-traded options on U.S. Government securities are valued at their
last sale price as of the close of options trading on the applicable exchanges,
which is currently 4:10 P.M., New York time. If there is no sale on the
applicable options exchange on a given day, options are valued at the average of
the quoted bid and asked prices as of the close of the applicable exchange.
Futures contracts are marked to market daily, and options thereon are valued at
their last sale price, as of the close of the applicable commodities exchanges,
which is currently 4:15 P.M., New York time. Securities or other assets for
which market quotations are not readily available (including OTC options) will
be valued at their fair value as determined in good faith by the Manager under
procedures established by the Fund's Board of Directors.

The Fund will compute its net asset value 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 net asset value. In the event the New York Stock Exchange closes
early on any business day, the net asset value 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,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.

B-28
<PAGE>
In the event that the New York Stock Exchange or the national securities
exchanges on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the Board of Directors of the Fund will
reconsider the time at which net asset value is computed. In addition, the Fund
may compute its net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.

DIVIDENDS AND DISTRIBUTIONS

The Fund declares dividends daily based on actual net investment income
determined in accordance with generally accepted accounting principles. A
portion of such dividends may also include projected net investment income. Such
dividends will be payable monthly. The Fund expects to make distributions of net
capital gains, if any, at least annually. In determining the amount of capital
gains to be distributed, any capital loss carryforwards from prior years will be
offset against capital gains. For federal income tax purposes, the Fund has a
capital loss carryforward as of December 31, 1995 of approximately $25,068,500
of which $3,126,000 expires in 1996, $3,073,700 expires in 1997, $2,647,800
expires in 1998, and $16,221,000 expires in 2002. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net capital gains have
been realized in excess of such carryforwards. Distributions will be paid in
additional Fund shares based on net asset value, unless the shareholder elects
in writing not less than five full business days prior to the record date to
receive such distributions in cash.

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

TAXES

The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the Internal Revenue Code). Under Subchapter M, the Fund is
not subject to federal income taxes on the taxable income it distributes to
shareholders, provided it distributes to shareholders each year at least 90% of
its net investment income and net short-term capital gains in excess of net
long-term capital losses, if any. In addition, Subchapter M permits net capital
gains of the Fund (i.e., the excess of net long-term capital gains over net
short-term capital losses) to be treated as long-term capital gains of the
shareholders, regardless of how long shares in the Fund are held.

Qualification as a regulated investment company under the Internal Revenue
Code requires, among other things, that (a) at least 90% of the Fund's annual
gross income be derived from interest, proceeds from loans of securities,
dividends and gains from the sale or other disposition of securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such securities or currencies; (b) the Fund derives less than 30% of its
annual gross income from gains from the sale or other disposition of securities
or options thereon held for less than three months; and (c) the Fund diversify
its holdings so that, at the end of each fiscal quarter, (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 the Fund's assets is invested in the securities of any one issuer
(other than U.S. Government securities). The Fund generally will be subject to a
nondeductible excise tax of 4% to the extent that it does not meet certain
minimum distribution requirements as of the end of each calendar year. The Fund
intends to make timely distributions of the Fund's income in compliance with
these requirements. As a result, it is anticipated that the Fund will not be
subject to the excise tax.

The "straddle" provisions of the Internal Revenue Code may also affect the
taxation of the Fund's transactions in options on securities, and limit the
deductibility of any loss from the disposition of a position to the extent of
the unrealized gain on any offsetting position. Further, any position in the
straddle (E.G., a put option acquired by the Fund) may affect the holding period
of the offsetting position for purposes of the 30% of gross income test
described above, and accordingly the Fund's ability to enter into straddles and
dispose of the offsetting positions may be limited.

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.

B-29
<PAGE>
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.

The Fund has obtained a written letter of determination from the
Pennsylvania Department of Revenue that, as a registered foreign corporation
"doing business" in Pennsylvania, the Fund is subject to the Pennsylvania
foreign franchise tax. Accordingly, it is believed that Fund shares are exempt
from Pennsylvania personal property taxes. The Fund anticipates that it will
continue such business activities but reserves the right to suspend them at any
time, resulting in the termination of the exemption.

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.
Distributions to shareholders may be subject to additional state and local
taxes. Shareholders are urged to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.

PERFORMANCE INFORMATION

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

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

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

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.

The Fund's 30-day yields for the 30 days ended December 31, 1995 were 4.5%,
4.1% and 4.1% for the Fund's Class A, Class B and Class C shares, respectively.

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

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

P(1+T)to the 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
investment made at the beginning of the 1, 5 or 10 year
periods.

B-30
<PAGE>
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.

The average annual total return for Class A shares for the one year, five
year and since inception (January 22, 1990) periods ended December 31, 1995 was
10.9%, 6.5% and 7.0%, respectively. The average annual total return for the
Class B shares of the Fund for the one, five and ten year periods ended on
December 31, 1995 was 9.8%, 6.5% and 7.1%, respectively. The average annual
total return for Class C shares for the one year and since inception (August 1,
1994) periods ended December 31, 1995 was 13.8% and 9.2%, respectively.

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

B-31
<PAGE>
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:

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
payment made at the beginning of the 1, 5 or 10 year periods.

Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.

The Fund's aggregate total return for Class A shares for the one year, five
year and since inception periods ended on December 31, 1995 was 15.5%, 42.3% and
55.6%, respectively. The aggregate total return for Class B shares for the one,
five and ten year periods ended on December 31, 1995 was 14.8%, 38.1% and 97.5%,
respectively. The aggregate total return for Class C shares for one year and
since inception periods ended December 31, 1995 was 14.8% and 13.3%,
respectively.

From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
A LOOK AT PERFORMANCE OVER THE LONG TERM
(1926-1994)
<S> <C>
Average Annual
Return
Common Stocks 10.2
Long 4.8
Infaltion 3.1
</TABLE>

(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1995
Yearbook," (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.

B-32
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.

Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
PMFS is a wholly-owned subsidiary of PMF. 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 per
shareholder account, a new account set-up fee for each manually established
account and a monthly inactive zero balance account fee per shareholder account.
PMFS is also reimbursed for its out-of-pocket expenses, including, but not
limited to, postage, stationery, printing, allocable communications expenses and
other costs. For the fiscal year ended December 31, 1995, the Fund incurred fees
of $523,000 for the services of PMFS.

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

B-33

<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF DECEMBER 31, 1995 PRUDENTIAL MORTGAGE INCOME FUND, INC.*
- - ------------------------------------------------------------
- - ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--99.0%
------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE
PASS-THROUGH OBLIGATIONS--18.5%
Federal National Mortgage
Association,
$ 10 7.00%, 4/01/08 $ 10,325
31,479 7.50%, 5/01/24 - 9/01/25 32,270,806
9,173 8.00%, 10/01/24 - 9/01/25 9,503,883
-------------
Total U.S. government agency
mortgage
pass-through obligations
(cost $40,930,159) 41,785,014
-------------
- - ------------------------------------------------------------
MORTGAGE-RELATED SECURITIES--72.2%
Government National Mortgage
Association,
67,270 7.00%, 7/15/22 - 8/15/24 68,342,047
27,553 7.50%, 7/15/07 - 6/15/25 28,465,992
41,553 8.00%, 2/15/04 - 11/15/25 43,380,066
21,046 9.00%, 4/15/01 - 4/15/25 22,406,625
-------------
Total mortgage-related securities
(cost $153,050,278) 162,594,730
-------------
- - ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATION--2.7%
Greenwich Capital Acceptance, Inc.,
62,623 2.24%, 1/25/24, (Interest only) 2,074,384
Structured Asset Securities Corp.,
4,000 7.375%, 9/25/24 3,945,000
-------------
Total collateralized mortgage
obligations
(cost $8,730,593) 6,019,384
-------------
U.S. GOVERNMENT OBLIGATIONS--5.6%
United States Treasury Bonds,
$2,500 6.875%, 8/15/25 $ 2,819,525
4,000 10.75%, 2/15/03 5,219,360
United States Treasury Notes,
4,000 7.50%, 2/15/05 4,533,760
-------------
Total U.S. government obligations
(cost $12,263,281) 12,572,645
-------------
Total long-term investments
(cost $214,974,311) 222,971,773
-------------
SHORT-TERM INVESTMENTS--0.8%
- - ------------------------------------------------------------
REPURCHASE AGREEMENT--0.8%
Joint Repurchase Agreement Account,
1,814 5.85%, 1/02/96 (Note 5)
(cost $1,814,000) 1,814,000
-------------
- - ------------------------------------------------------------
TOTAL INVESTMENTS--99.8%
(cost $216,788,311; Note 4) 224,785,773
Other assets in excess of
liabilities--0.2% 514,708
-------------
Net Assets--100% $ 225,300,481
-------------
-------------
</TABLE>
- - --------------------------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.
B-34 -----
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL MORTGAGE INCOME FUND, INC.*
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
DECEMBER 31, 1995
-----------------
Investments, at value (cost $216,788,311)............................................................... $ 224,785,773
Cash.................................................................................................... 28,158
Interest receivable..................................................................................... 1,713,861
Receivable for Fund shares sold......................................................................... 84,128
Deferred expenses and other assets...................................................................... 6,130
-----------------
Total assets......................................................................................... 226,618,050
-----------------
LIABILITIES
Payable for Fund shares reacquired...................................................................... 507,751
Dividends payable....................................................................................... 352,828
Accrued expenses........................................................................................ 246,608
Due to Manager.......................................................................................... 95,637
Due to Distributor...................................................................................... 93,385
Deferred directors fees................................................................................. 21,360
-----------------
Total liabilities.................................................................................... 1,317,569
-----------------
NET ASSETS.............................................................................................. $ 225,300,481
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 154,474
Paid-in capital in excess of par..................................................................... 241,474,544
---------------
241,629,018
Undistributed net investment income.................................................................. 742,368
Accumulated net realized loss on investments......................................................... (25,068,367)
Net unrealized appreciation on investments........................................................... 7,997,462
----------------
Net assets, December 31, 1995........................................................................... $ 225,300,481
----------------
----------------
Class A:
Net asset value and redemption price per share
($99,182,844 / 6,790,320 shares of common stock issued and outstanding)........................... $14.61
Maximum sales charge (4% of offering price).......................................................... .61
Maximum offering price to public..................................................................... $15.22
------
------
Class B:
Net asset value, offering price and redemption price per share
($125,462,863 / 8,612,143 shares of common stock issued and outstanding).......................... $14.57
------
------
Class C:
Net asset value, offering price and redemption price per share
($654,774 / 44,945 shares of common stock issued and outstanding)................................. $14.57
------
------
</TABLE>

- - --------------------------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.
- - ----- B-35
<PAGE>

PRUDENTIAL MORTGAGE INCOME FUND, INC.*
STATEMENT OF OPERATIONS
- - ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
INVESTMENT INCOME DECEMBER 31, 1995
-----------------
<S> <C>
Income
Interest................................. $ 18,147,455
-----------------
Expenses
Distribution fee--Class A................ 136,281
Distribution fee--Class B................ 1,097,175
Distribution fee--Class C................ 4,491
Management fee........................... 1,188,713
Transfer agent's fees and expenses....... 523,000
Custodian's fees and expenses............ 456,000
Reports to shareholders.................. 219,000
Registration fees........................ 77,000
Franchise taxes.......................... 56,000
Audit fee and expenses................... 54,000
Directors' fees and expenses............. 47,000
Legal fees and expenses.................. 35,000
Miscellaneous............................ 16,300
-----------------
Total expenses........................ 3,909,960
-----------------
Net investment income....................... 14,237,495
-----------------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investment
transactions............................. 4,861,866
Net change in unrealized appreciation of
investments.............................. 14,956,033
-----------------
Net gain on investments..................... 19,817,899
-----------------
Net Increase in Net Assets
Resulting from Operations................... $ 34,055,394
-----------------
-----------------
</TABLE>

PRUDENTIAL MORTGAGE INCOME FUND, INC.*
Statement of Changes in Net Assets

<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED DECEMBER 31,
<S> <C> <C>
IN NET ASSETS 1995 1994
------------ ------------
Operations
Net investment income.......... $ 14,237,495 $ 16,926,800
Net realized gain (loss) on
investments................. 4,861,866 (18,606,161)
Net change in unrealized
appreciation-depreciation of
investments................. 14,956,033 (6,286,536)
------------ ------------
Net Increase (decrease) in net
assets resulting from
operations.................. 34,055,394 (7,965,897)
------------ ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A..................... (5,693,222) (634,109)
Class B..................... (8,509,991) (16,282,437)
Class C..................... (34,282) (10,254)
------------ ------------
(14,237,495) (16,926,800)
------------ ------------
Dividends to shareholders in
excess of net investment
income
Class A..................... (460,031) --
Class B..................... (480,301) --
Class C..................... (2,442) --
------------ ------------
(942,774) --
------------ ------------
Tax return of capital
distributions
Class A..................... -- (37,535)
Class B..................... -- (1,004,614)
Class C..................... -- (1,833)
------------ ------------
-- (1,043,982)
------------ ------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold...... 12,534,281 27,166,084
Net asset value of shares
issued in reinvestment of
dividends................... 8,784,795 10,985,801
Cost of shares reacquired...... (69,607,739) (87,764,556)
------------ ------------
Net decrease in net assets from
Fund share transactions..... (48,288,663) (49,612,671)
------------ ------------
Total decrease.................... (29,413,538) (75,549,350)
NET ASSETS
Beginning of period............... 254,714,019 330,263,369
------------ ------------
End of period..................... $225,300,481 $254,714,019
------------ ------------
------------ ------------
</TABLE>

- - --------------------------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.
B-36 -----

<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL MORTGAGE INCOME FUND, INC.
- - --------------------------------------------------------------------------------
The Prudential Mortgage Income 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 achieve a high
level of income over the long-term consistent with providing reasonable safety
by investing primarily in mortgage-related instruments, including securities
guaranteed as to timely payment of principal and interest by the Government
National Mortgage Association (GNMA), other mortgage-backed securities issued or
guaranteed by agencies or instrumentalities of the U.S. Government, and
non-agency mortgage instruments, along with obligations using mortgages as
collateral. The ability of issuers of debt securities, held by the Fund, other
than those issued or guaranteed by the U.S. Government, to meet their
obligations may be affected by economic developments in a specific industry or
region. The Fund changed its name from the Prudential GNMA Fund, Inc. to the
Prudential Mortgage Income Fund, Inc., effective August 16, 1995.
- - ------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.

SECURITY VALUATION: The Fund values portfolio securities on the basis of prices
provided by dealers or by a pricing service which uses information such as
market values, maturities, yields, call features and developments relating to
specific securities in determining values.

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

SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Since certain mortgage-backed securities, such as
GNMAs, only settle on one day each month, there can be occasions when, pending
settlement, there may be substantial short-term securities in the portfolio
available to fund the purchases of these mortgage-backed securities. Realized
gains and losses on sales of investments are calculated on the identified cost
basis. Interest income is recorded on the accrual basis. The Fund amortizes
original issue discount paid on purchases of portfolio securities as adjustments
to interest income. Expenses are recorded on the accrual basis which may require
the use of certain estimates by management.

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

DOLLAR ROLLS: The Fund enters into mortgage dollar rolls in which the Fund sells
mortgage securities for delivery in the current month, realizing a gain or loss,
and simultaneously contracts to repurchase somewhat similar (same type, coupon
and maturity) securities on a specified future date. During the roll period the
Fund forgoes principal and interest paid on the securities. The Fund is
compensated by the interest earned on the cash proceeds of the initial sale and
by the lower repurchase price at the future date. The difference between the
sale proceeds and the lower repurchase price is taken into income. The Fund
maintains a segregated account, the dollar value of which is equal to its
obligations, in respect of dollar rolls.

FEDERAL INCOME TAXES: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income and net capital gains,
if any, to its shareholders. Therefore, 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 in excess of loss carryforwards. 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.

RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountant's Statement of position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease paid-in capital and
- - --------------------------------------------------------------------------------
- - ----- B-37

<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL MORTGAGE INCOME FUND, INC.
- - --------------------------------------------------------------------------------
increase undistributed net investment income by $621,652 for the year ended
December 31, 1995. Net realized gains and net assets were not affected by this
change.
- - ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF 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. PMF 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 PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the Fund's average daily net assets.

The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Prudential Securities Incorporated (``PSI'') is
distributor of the Class B and Class C shares of the Fund. The Fund compensated
PMFD and PSI for distributing and servicing the Fund's Class A, Class B and
Class C shares, pursuant to plans of distribution (the ``Class A, B and C
Plans''), regardless of expenses actually incurred by them. The distribution
fees are accrued daily and payable monthly. Effective January 2, 1996, PSI
became the distributor of the Class A shares of the Fund and is serving the Fund
under the same terms and conditions as under the arrangement with PMFD.

Pursuant to the Class A, B and C Plans, the Fund compensates PSI, and PMFD for
the year ended December 31, 1995 with respect to Class A shares, for
distribution-related activities at an annual rate of up to .30 of 1%, .75 of 1%
and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Class A Plan were .15 of 1% of the average
daily net assets of Class A shares and under the Class B and C Plans, .75 of 1%
of the average daily net assets of both the Class B and Class C shares,
respectively, for the year ended December 31, 1995.

PMFD has advised the Fund that it has received approximately $37,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1995. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.

PSI advised the Fund that for the year ended December 31, 1995, it received
approximately $502,000 in contingent deferred sales charges imposed upon certain
redemptions by Class B and C shareholders.

PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- - ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year ended December 31,
1995, the Fund incurred fees of approximately $347,000 for the services of PMFS.
As of December 31, 1995, approximately $27,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- - ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments
and dollar rolls, for the year ended December 31, 1995 aggregated $455,588,225
and $504,223,671, respectively.

The cost basis of investments for federal income tax purposes is substantially
the same as the basis for financial reporting purposes and, accordingly, as of
December 31, 1995 net unrealized appreciation of investments for federal income
tax purposes was $7,997,462 (gross unrealized appreciation--$10,999,191; gross
unrealized depreciation--$3,001,729).

The Fund had a capital loss carryforward as of December 31, 1995 of
approximately $25,068,500 of which $3,126,000 expires in 1996, $3,073,700
expires in 1997, $2,647,800 expires in 1998 and $16,221,000 expires in 2002.
Such carryforward is after utilization of approximately $2,476,540 of net
taxable gains realized and recognized during the year ended December 31, 1995.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
- - ------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily
- - --------------------------------------------------------------------------------
B-38 -----

<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL MORTGAGE INCOME FUND, INC.
- - --------------------------------------------------------------------------------
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or Federal agency obligations. As of December
31, 1995, the Fund has a 0.2% undivided interest in the joint account. The
undivided interest for the Fund represents $1,814,000 in the principal amount.
As of such date, each repurchase agreement in the joint account and the
collateral therefore were as follows:

Bear, Stearns & Co. Inc., 5.80%, in the principal amount of $262,000,000,
repurchase price $262,168,844, due 1/2/96. The value of the collateral including
accrued interest is $267,947,172.

BT Securities Corp., 5.75%, in the principal amount of $61,765,000, repurchase
price $61,804,461, due 1/2/96. The value of the collateral including accrued
interest is $63,059,883.

Goldman, Sachs & Co., 5.90%, in the principal amount of $365,000,000, repurchase
price $365,239,278 due 1/2/96. The value of the collateral including accrued
interest is $372,300,053.

Morgan Stanley & Co. Inc., 5.89%, in the principal amount of $103,000,000,
repurchase price $103,067,408, due 1/2/96. The value of the collateral including
accrued interest is $105,192,608.

Smith Barney, Inc., 5.83%, in the principal amount of $365,000,000, repurchase
price $365,236,439, due 1/2/96. The value of the collateral including accrued
interest is $372,300,416.
- - ------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 4%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. Each
class of shares has equal rights as to earnings, assets and voting privileges
except that each class bears different distribution expenses and has exclusive
voting rights with respect to its distribution plan. The Fund has authorized 500
million shares of common stock, $.01 par value per share, equally divided into
three classes, designated Class A, Class B and Class C.

Transactions in shares of common stock were as follows:

<TABLE>
<CAPTION>
Class A Shares Amount
- - ------------------------------------ ---------- -------------
<S> <C> <C>
Year ended December 31, 1995:
Shares sold......................... 232,288 $ 3,271,412
Shares issued in reinvestment of
dividends and distributions....... 278,118 3,964,381
Shares reacquired................... (2,365,659) $ (33,244,174)
---------- -------------
Net decrease in shares outstanding
before conversion................. (1,855,253) (26,008,381)
Shares issued upon conversion from
Class B........................... 7,996,682 110,374,476
---------- -------------
Net increase in shares
outstanding....................... 6,141,429 $ 84,366,095
---------- -------------
---------- -------------
Year ended December 31, 1994:
Shares sold......................... 160,285 $ 2,252,534
Shares issued in reinvestment of
dividends and distributions....... 23,025 322,132
Shares reacquired................... (271,037) (3,788,946)
---------- -------------
Net decrease in shares
outstanding....................... (87,727) $ (1,214,280)
---------- -------------
---------- -------------
<CAPTION>
Class B
- - ------------------------------------
<S> <C> <C>
Year ended December 31, 1995:
Shares sold......................... 649,378 $ 9,115,051
Shares issued in reinvestment of
dividends and distributions....... 341,323 4,813,667
Shares reacquired................... (2,581,546) (36,305,288)
---------- -------------
Net decrease in shares outstanding
before conversion................. (1,590,845) (22,376,570)
Shares reacquired upon conversion
into Class A...................... (8,019,907) (110,374,476)
---------- -------------
Net decrease in shares
outstanding....................... (9,610,752) $(132,751,046)
---------- -------------
---------- -------------
Year ended December 31, 1994:
Shares sold......................... 1,730,458 $ 24,377,281
Shares issued in reinvestment of
dividends and distributions....... 764,245 10,662,126
Shares reacquired................... (5,988,535) (83,970,630)
---------- -------------
Net decrease in shares
outstanding....................... (3,493,832) $ (48,931,223)
---------- -------------
---------- -------------
<CAPTION>
Class C
- - ------------------------------------
<S> <C> <C>
Year ended December 31, 1995:
Shares sold......................... 10,317 $ 147,818
Shares issued in reinvestment of
dividends and distributions....... 475 6,747
Shares reacquired................... (4,061) (58,277)
---------- -------------
Net increase in shares
outstanding....................... 6,731 $ 96,288
---------- -------------
---------- -------------
August 1, 1994* through
December 31, 1994:
Shares sold......................... 38,470 $ 536,269
Shares issued in reinvestment of
dividends and distributions....... 114 1,543
Shares reacquired................... (370) (4,980)
---------- -------------
Net increase in shares
outstanding....................... 38,214 $ 532,832
---------- -------------
---------- -------------
</TABLE>

- - ---------------
* Commencement of offering of Class C shares.
- - --------------------------------------------------------------------------------
- - ----- B-39

<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL MORTGAGE INCOME FUND, INC.*
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
----------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 13.50 $14.75 $ 15.07 $15.30 $14.84
----------- ------ ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... .89 .90 .95 1.10 1.14
Net realized and unrealized gain (loss) on
investment transactions.................... 1.18 (1.19) (.21) (.15) .61
----------- ------ ------- ------ ------
Total from investment operations........... 2.07 (.29) .74 .95 1.75
----------- ------ ------- ------ ------
LESS DISTRIBUTIONS
Dividends to shareholders from net investment
income..................................... (.89) (.90) (.95) (1.10) (1.14)
Dividends to shareholders in excess of net
investment income.......................... (.07) -- (.11) (.08) (.15)
Tax return of capital distributions........ -- (.06) -- -- --
----------- ------ ------- ------ ------
Total distributions........................ (.96) (.96) (1.06) (1.18) (1.29)
----------- ------ ------- ------ ------
Net asset value, end of period................ $ 14.61 $13.50 $ 14.75 $15.07 $15.30
----------- ------ ------- ------ ------
----------- ------ ------- ------ ------
TOTAL RETURN(a):.............................. 15.53% (2.01)% 4.97% 6.42% 12.48%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000)............... $99,183 $8,762 $10,863 $9,045 $6,268
Average net assets (000)...................... $90,854 $9,874 $10,199 $6,651 $3,035
Ratios to average net assets:
Expenses, including distribution fees...... 1.27% 1.13% 1.00% 1.00% 1.11%
Expenses, excluding distribution fees...... 1.12% .98% .85% .85% .96%
Net investment income...................... 6.27% 6.42% 6.42% 7.26% 7.81%
Portfolio turnover............................ 193% 560% 134% 33% 118%
</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.

- - --------------------------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.
B-40 ----

<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL MORTGAGE INCOME FUND, INC.*
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ------------
----------------------------------------------------------------
Year Ended December 31, Year Ended
---------------------------------------------------------------- December 31,
1995 1994 1993 1992 1991 1995
<S> <C> <C> <C> <C> <C> <C>
------------ -------- -------- -------- -------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 13.47 $ 14.71 $ 15.04 $ 15.27 $ 14.81 $ 13.47
------------ -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... .82 .82 .87 1.02 1.06 .81
Net realized and unrealized gain (loss) on
investment transactions.................... 1.15 (1.19) (.23) (.16) .60 1.16
------------ -------- -------- -------- -------- --------
Total from investment operations........... 1.97 (.37) .64 .86 1.66 1.97
------------ -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends to shareholders from net investment
income..................................... (.82) (.82) (.87) (1.02) (1.06) (.81)
Dividends to shareholders in excess of net
investment income.......................... (.05) -- (.10) (.07) (.14) (.06)
Tax return of capital distributions........... -- (.05) -- -- -- --
------------ -------- -------- -------- -------- --------
Total distributions........................ (.87) (.87) (.97) (1.09) (1.20) (.87)
------------ -------- -------- -------- -------- --------
Net asset value, end of period................ $ 14.57 $ 13.47 $ 14.71 $ 15.04 $ 15.27 $ 14.57
------------ -------- -------- -------- -------- --------
------------ -------- -------- -------- -------- --------
TOTAL RETURN(b): 14.78% (2.57)% 4.29% 5.80% 11.82% 14.78%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000)............... $125,463 $245,437 $319,401 $325,969 $272,661 $655
Average net assets (000)...................... $146,290 $279,946 $332,731 $295,255 $243,749 $599
Ratios to average net assets:
Expenses, including distribution fees...... 1.87% 1.73% 1.60% 1.60% 1.71% 1.87%
Expenses, excluding distribution fees...... 1.12% .98% .85% .85% .96% 1.12%
Net investment income...................... 5.82% 5.82% 5.82% 6.66% 7.21% 5.72%
Portfolio turnover............................ 193% 560% 134% 33% 118% 193%
<CAPTION>

August 1,
1994(c)
through
December 31,
1994
<S> <C>
------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 14.01
------

Income from investment operations
Net investment income......................... .30
Net realized and unrealized gain (loss) on
investment transactions.................... (.49)
------

Total from investment operations........... (.19)
------

Less distributions
Dividends to shareholders from net investment
income..................................... (.30)
Dividends to shareholders in excess of net
investment income.......................... --
Tax return of capital distributions........... (.05)
------

Total distributions........................ (.35)
------

Net asset value, end of period................ $ 13.47
------
------

TOTAL RETURN(b): (1.32)%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000)............... $515
Average net assets (000)...................... $460
Ratios to average net assets:
Expenses, including distribution fees...... 1.82%(a)
Expenses, excluding distribution fees...... 1.08%(a)
Net investment income...................... 5.32%
Portfolio turnover............................ 560%
</TABLE>

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

- - --------------------------------------------------------------------------------
*See Page 6.
See Notes to Financial Statements.

---- B-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL MORTGAGE INCOME FUND, INC.*
- - --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Mortgage Income 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 Mortgage Income Fund,
Inc. (the ``Fund'') at December 31, 1995, 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
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
``financial statements'') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1995 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 26, 1996
TAX INFORMATION PRUDENTIAL MORTGAGE INCOME FUND, INC.*
- - --------------------------------------------------------------------------------
We wish to advise you that the corporate dividends received deduction for the
Fund is zero. Only funds that invest in U.S. equity securities are entitled to
pass-through a corporate dividends received deduction.
- - --------------------------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.

B-42

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 22 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 26, 1996, relating to the financial statements and financial
highlights of Prudential Mortgage Income Fund, Inc., which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading "Custodian,
Transfer and Dividend Disbursing Agent and Independent Accountants" in such
Statement of Additional Information and to the reference to us under the heading
"Financial Highlights" in such Prospectus.

/s/ PRICE WATERHOUSE LLP

PRICE WATERHOUSE LLP
New York, New York
February 26, 1996

<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS

MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:

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

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

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

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

STANDARD & POOR'S RATINGS GROUP DEBT RATINGS:

AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

A-1
<PAGE>

APPENDIX I--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

Asset allocation is a technique for reducing risk, 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 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 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.

I-1
<PAGE>

APPENDIX II--HISTORICAL PERFORMANCE DATA

The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.

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

[GRAPH]

Source: Stocks, Bonds, Bills and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not of the past, present, or future performance of any
asset class or any Prudential Mutual Fund.

Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.

Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.

Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).

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

II-1
<PAGE>

Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
May 1995. The total returns of the indices include accrued interest, plus the
price changes (gains or losses) of the underlying securities during the period
mentioned. The data is provided to illustrate the varying historical total
returns and investors should not consider this performance data as an indication
of the future performance of the Fund or of any sector in which the Fund
invests.

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

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

<TABLE>
<CAPTION>
YTD
'87 '88 '89 '90 '91 '92 '93 '94 5/95
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 10.3%
- - ----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 10.1%
- - ----------------------------------------------------------------------------------------------------
U.S. INVESTMENT
GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 12.8%
- - ----------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 11.7%
- - ----------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.4%
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN
PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 9.3
</TABLE>

(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.

(5)SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

II-2
<PAGE>
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.

[GRAPH]
- - ------------------------

Source: Stocks, Bonds, Bills and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.

II-3
<PAGE>
PART C
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A) FINANCIAL STATEMENTS:

(1) Financial Statements included in the Prospectus constituting Part A
of this Registration Statement:

Financial Highlights.

(2) Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:

Portfolio of Investments at December 31, 1995.

Statement of Assets and Liabilities at December 31, 1995.

Statement of Operations for the year ended December 31, 1995.

Statement of Changes in Net Assets for the years ended December 31,
1995 and 1994.

Notes to Financial Statements.

Financial Highlights.

Report of Independent Accountants.

(B) EXHIBITS:

1. (a) Articles of Restatement, incorporated by reference to Exhibit 1
to Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on March 2, 1995 (File No. 2-76061).

(b) Articles of Amendment.*

2. By-Laws, incorporated by reference to Exhibit 2(c) to Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A filed
via EDGAR on May 9, 1994 (File No. 2-76061).

4. (a) Specimen stock certificate for Class B shares issued by the
Registrant, incorporated by reference to Exhibit 4 to Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A (File No.
2-76061).

(b) Specimen stock certificate for Class A shares issued by the
Registrant, incorporated by reference to Exhibit 4(b) to
Post-Effective Amendment No. 13 to the Registration Statement on
Form N-1A (File No. 2-76061).

(c) Instruments Defining Rights of Shareholders, incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A filed via EDGAR on March 1, 1994
(File No. 2-76061).

5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A (File No. 2-76061).

(b) 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. 10 to the
Registration Statement on Form N-1A (File No. 2-76061).

C-1
<PAGE>
6. (a) Selected Dealers Agreement, incorporated by reference to Exhibit
6(a) to the Registration Statement on Form N-1A (File No. 2-76061).

(b) Distribution Agreement for Class A shares, incorporated by
reference to Exhibit 6(b) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A filed via EDGAR on March 2, 1995
(File No. 276061).

(c) Distribution Agreement for Class B shares, incorporated by
reference to Exhibit 6(c) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A filed via EDGAR on March 2, 1995
(File No. 2-76061).

(d) Distribution Agreement for Class C shares, incorporated by
reference to Exhibit 6(d) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A filed via EDGAR on March 2, 1995
(File No. 2-76061).

(e) Amendment to Distribution Agreements.*

8. Custodian Agreement between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8 to the
Registration Statement on Form N-1A (File No. 2-76061).

9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 8(b) to Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A (File No. 2-76061).

10. (a) Opinion of Sullivan & Cromwell, incorporated by reference to
Exhibit 10 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 2-76061).

(c) Opinion of Sullivan & Cromwell, incorporated by reference to
Exhibit 10(c) to Post-Effective Amendment No. 20 to the Registration
Statement on Form N-1A filed via EDGAR on March 2, 1995 (File No.
2-76061).

(d) Opinion of Sullivan & Cromwell.*

11. Consent of Independent Accountants.*

13. Purchase Agreement, incorporated by reference to Exhibit 13 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A (File No. 2-76061).

15. (a) Distribution and Service Plan for Class A shares, incorporated
by reference to Exhibit 15(a) to Post-Effective Amendment No. 20 to
the Registration Statement on Form N-1A filed via EDGAR on March 2,
1995 (File No. 2-76061).

(b) Distribution and Service Plan for Class B shares, incorporated
by reference to Exhibit 15(b) to Post-Effective Amendment No. 20 to
the Registration Statement on Form N-1A filed via EDGAR on March 2,
1995 (File No. 2-76061).

(c) Distribution and Service Plan for Class C shares, incorporated
by reference to Exhibit 15(c) to Post-Effective Amendment No. 20 to
the Registration Statement on Form N-1A filed via EDGAR on March 2,
1995 (File No. 2-76061).

16. (a) Schedule of Computation of Performance Quotations for Class B
shares, incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A (File
No. 2-76061).

(b) Schedule of Computation of Performance Quotations for Class A
shares, incorporated by reference to Exhibit 16(b) to Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A (File
No. 2-76061).

C-2
<PAGE>
(c) Schedule of Calculation of Aggregate Total Return for Class A
and Class B shares, incorporated by reference to Exhibit 16(c) to
Post-Effective Amendment No. 15 to the Registration Statement on
Form N-1A (File No. 2-76061).

27. Financial Data Schedules.*

- - --------------
*Filed herewith.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of February 9, 1995, there were 11,636, 10,768 and 40 record holders of
Class A, Class B and Class C shares of common stock, $.01 par value per share,
issued by the Registrant, respectively.

ITEM 27. INDEMNIFICATION.

As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(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 the Distribution Agreement (Exhibit 6 to the
Registration Statement), the Distributor of the Registrant may be indemnified
against liabilities which it may incur, except liabilities arising from bad
faith, gross negligence, willful misfeasance or reckless disregard of duties.

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

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

Section 9 of the Management Agreement (Exhibit 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 Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance 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 Securities and Exchange Commission under the 1940
Act so long as the interpretations of Sections 17(h) and 17(i) of such Act
remain in effect and are consistently applied.

C-3
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

(a) Prudential Mutual Fund Management, Inc.

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

The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed on March 30, 1995).

The business and other connections of PMF's directors and principal executive
officers are set forth below. Except as otherwise indicated, the address of each
person is One Seaport Plaza, New York, NY 10292.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- - ----------------------------- ----------------------- ---------------------------------------------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice Executive Vice President, Director of Marketing and
President, Director of Director, PMF; Senior Vice President, Prudential
Marketing and Director Securities Incorporated (Prudential Securities);
Chairman and Director of Prudential Mutual Fund
Distributors, Inc. (PMFD)

Stephen P. Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President,
Prudential Securities; Vice President, PMFD

Frank W. Giordano Executive Vice Executive Vice President, General Counsel, Secretary and
President, General Director, PMF and PMFD; Senior Vice President,
Counsel, Secretary and Prudential Securities; Director, Prudential Mutual Fund
Director Services, Inc. (PMFS)

Robert F. Gunia Executive Vice Executive Vice President, Chief Financial and
President, Chief Administrative Officer, Treasurer and Director, PMF;
Financial and Senior Vice President, Prudential Securities; Executive
Administrative Vice President, Chief Financial Officer, Treasurer and
Officer, Treasurer and Director, PMFD; Director, PMFS
Director

Theresa A. Hamacher Director Director, PMF; Vice President, The Prudential Insurance
Prudential Plaza Company of America (Prudential); Vice President, The
Newark, NJ 07102 Prudential Investment Corporation (PIC)

Timothy J. O'Brien Director President, Chief Executive Officer, Chief Operating
Raritan Plaza One Officer and Director, PMFD; Chief Executive Officer and
Edison, NJ 08837 Director, PMFS; Director, PMF

Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF;
Executive Officer and Executive Vice President, Director and member of
Director Operating Committee, Prudential Securities; Director,
Prudential Securities Group, Inc. (PSG); Executive Vice
President, PIC; Director, PMFD; Director, PMFS

S. Jane Rose Senior Vice President, Senior Vice President, Senior Counsel and Assistant
Senior Counsel and Secretary, PMF; Senior Vice President and Senior
Assistant Secretary Counsel, Prudential Securities
</TABLE>

(b) The Prudential Investment Corporation (PIC)

C-4
<PAGE>
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" 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
- - ----------------------------- ----------------------- ---------------------------------------------------------
<S> <C> <C>
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice President,
Two Gateway Center PIC
Newark, NJ 07102
Barry M. Gillman Director Director, PIC
Theresa A. Hamacher Vice President Vice President, Prudential; Vice President, PIC;
Director, PMF
Harry E. Knapp, Jr. President, Chairman of President, Director and Chief Executive Officer, PIC;
the Board, Director Vice President, Prudential
and
Chief Executive
Officer
Richard A. Redeker Executive Vice President, Chief Executive Officer and Director, PMF;
One Seaport Plaza President Executive Vice President, Director and member of
New York, NY 10292 Operating Committee, Prudential Securities; Director,
PSG; Executive Vice President, PIC; Director, PMFD;
Director, PMFS
John L. Reeve Senior Vice President Managing Director, Prudential Asset Management Group;
Senior Vice President, PIC
Eric A. Simonson Vice President and Vice President and Director, PIC; Executive Vice
Director President, Prudential
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) Prudential Securities Incorporated

Prudential Securities Incorporated is distributor for Command Government Fund,
Command Money Fund, Command Tax-Free Fund, Prudential Institutional Liquidity
Portfolio, Inc., Prudential MoneyMart Assets, Inc., Prudential Special Money
Market Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Government
Securities Trust, Prudential Jennison Fund, Inc., The Target Portfolio Trust,
Prudential Allocation Fund, Prudential California Municipal Fund, Prudential
Diversified Bond Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity
Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund,
Inc., Prudential Global Natural Resources Fund, Inc., Prudential Government
Income Fund, Inc., Prudential Growth Opportunity Fund, Inc., Prudential High
Yield Fund, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential
Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National
Municipals Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Structured Maturity Fund, Inc., Prudential U.S. Government Fund, Prudential
Utility Fund, Inc.,

C-5
<PAGE>

Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund, and The BlackRock Government Income Trust, The Global
Government Plus Fund, Inc. and The Global Total Return Fund, Inc. Prudential
Securities is also a depositor for the following unit investment trusts:

Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust

(b) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.

<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- - ------------------------------------------------------------------------------------------ ----------------------
<S> <C> <C>
Robert C. Golden ................. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Alan D. Hogan..................... Executive Vice President, Chief Administrative Officer None
and Director
George A. Murray.................. Executive Vice President and Director None
Leland B. Paton .................. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff................. Executive Vice President, Chief Financial Officer and None
Director
Vincent T. Pica, II .............. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Richard A. Redeker................ Executive Vice President and Director Director and President
Hardwick Simmons.................. Chief Executive Officer, President and Director None
Lee B. Spencer, Jr................ General Counsel, Executive Vice President and Director None
</TABLE>

<TABLE>
<S> <C>
<FN>
- - ------------------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>

C-6
<PAGE>

ITEM 30. 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, One Seaport Plaza,
New York, New York 10292, and Prudential Mutual Fund Services, Inc., Raritan
Plaza One, Edison, New Jersey 08837. Documents required by Rules 31a-1(b)(5),
(6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Two Gateway Center,
Newark, New Jersey 07102, documents required by Rules 31a-1(b)(4) and (11) and
31a-1(d) at One Seaport Plaza 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 31. 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 under the
captions "Manager" and "Distributor" in the Statement of Additional Information,
constituting Part A and Part B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.

ITEM 32. UNDERTAKINGS.

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

C-7
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of New York, and State of New
York, on the 29th day of February, 1996.

PRUDENTIAL MORTGAGE INCOME FUND, INC.
/s/ Richard A. Redeker
-----------------------------------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ----------------------------------- ------------------------ -----------------
<S> <C> <C>
/s/ Richard A. Redeker President and Director February 29, 1996
- - ---------------------------------
RICHARD A. REDEKER

/s/ Edward D. Beach Director February 29, 1996
- - ---------------------------------
EDWARD D. BEACH

/s/ Eugene C. Dorsey Director February 29, 1996
- - ---------------------------------
EUGENE C. DORSEY

/s/ Delayne D. Gold Director February 29, 1996
- - ---------------------------------
DELAYNE D. GOLD

/s/ Harry A. Jacobs, Jr. Director February 29, 1996
- - ---------------------------------
HARRY A. JACOBS, JR.

/s/ Thomas T. Mooney Director February 29, 1996
- - ---------------------------------
THOMAS T. MOONEY

/s/ Thomas H. O'Brien Director February 29, 1996
- - ---------------------------------
THOMAS H. O'BRIEN

/s/ Nancy Hays Teeters Director February 29, 1996
- - ---------------------------------
NANCY HAYS TEETERS

/s/ Grace Torres Principal Financial and February 29, 1996
- - --------------------------------- Accounting Officer
GRACE TORRES
</TABLE>
<PAGE>
EXHIBIT INDEX

(b) Articles of Amendment.*

2. By-Laws, incorporated by reference to Exhibit 2(c) to Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A filed
via EDGAR on May 9, 1994 (File No. 2-76061).

6. (a) Selected Dealers Agreement, incorporated by reference to Exhibit
6(a) to the Registration Statement on Form N-1A (File No. 2-76061).

(e) Amendment to Distribution Agreements.*

8. Custodian Agreement between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8 to the
Registration Statement on Form N-1A (File No. 2-76061).

10. (a) Opinion of Sullivan & Cromwell, incorporated by reference to
Exhibit 10 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 2-76061).

(b) Opinion of Sullivan & Cromwell, incorporated by reference to
Exhibit 10(b) to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on March 1, 1994 (File No.
2-76061).
<PAGE>
(c) Opinion of Sullivan & Cromwell, incorporated by reference to
Exhibit 10(c) to Post-Effective Amendment No. 20 to the Registration
Statement on Form N-1A filed via EDGAR on March 2, 1995 (File No.
2-76061).

(d) Opinion of Sullivan & Cromwell.*

11. Consent of Independent Accountants.*

13. Purchase Agreement, incorporated by reference to Exhibit 13 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A (File No. 2-76061).

(c) Schedule of Calculation of Aggregate Total Return for Class A
and Class B shares, incorporated by reference to Exhibit 16(c) to
Post-Effective Amendment No. 15 to the Registration Statement on
Form N-1A (File No. 2-76061).

27. Financial Data Schedules.*

- - --------------
*Filed herewith.

<PAGE>

EXHIBIT 99.1(b)

ARTICLES OF AMENDMENT
OF
PRUDENTIAL GNMA FUND, INC.

PRUDENTIAL GNMA FUND, INC., a Maryland corporation having its principal
offices in Baltimore, Maryland and New York, New York (the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of
Maryland that:

FIRST: Article II of the Corporation's Charter is hereby amended
in its entirety to read as follows:

The name of the corporation (hereinafter called the "Corporation")
is Prudential Mortgage Income Fund, Inc.

SECOND: The foregoing amendment to the Charter of the Corporation
has been advised and approved by the Board of Directors of the Corporation.

THIRD: The foregoing amendment to the Charter of the Corporation
shall become effective at 9:00 a.m. on August 25, 1995.

IN WITNESS WHEREOF, PRUDENTIAL GNMA FUND, INC. has caused these
presents to be signed in its name and on its behalf by its President and
attested by its Secretary on August 16, 1995.

PRUDENTIAL GNMA FUND, INC.

By /s/ Richard A. Redeker
-----------------------------
Richard A. Redeker
President

Attest: /s/ S. Jane Rose
---------------------------
S. Jane Rose
Secretary

<PAGE>

The undersigned, President of PRUDENTIAL GNMA FUND, INC., who executed
on behalf of said corporation the foregoing amendments to the Charter of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said corporation, the foregoing amendments to the Charter to be the
corporate act of said corporation and further certifies that, to the best of
his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material
respects, under the penalties of perjury.

/s/ Richard A. Redeker
-----------------------------
Richard A. Redeker

GMF Cert of Amend 8/95

<PAGE>

EXHIBIT 99.6(e)

Amendment to Distribution Agreements
------------------------------------

The Distribution Agreements between Prudential Mutual Fund Distributors,
Inc. and each of the Funds listed below are hereby transferred to Prudential
Securities Incorporated effective January 1, 1996.

Name of Fund Date of Agreement
- - ------------ -----------------

The BlackRock Government Income Trust August 30, 1991 and amended
(Class A) and restated on April 12, 1995

Command Government Fund September 15, 1988 and amended
and restated on April 12, 1995

Command Money Fund September 15, 1988 and amended
and restated on April 12, 1995

Command Tax-Free Money Fund September 15, 1988 and amended
and restated on April 12, 1995

Global Utility Fund, Inc. February 4, 1991 and amended
(Class A) amended and restated on
July 1, 1993, August 1, 1994
and May 4, 1995

Nicholas-Applegate Fund, Inc. August 1, 1994 and amended
(Class A) and restated on May 12, 1995

Nicholas-Applegate Growth Equity Fund

Prudential Allocation Fund January 22, 1990 and amended
(Class A) and restated on August 1, 1994
and May 3, 1995
Strategy Portfolio
Balanced Portfolio

<PAGE>

Prudential California Municipal Fund August 1, 1994 and amended
(Class A) and restated on May 5, 1995

California Income Series
California Series

Prudential California Municipal Fund February 10, 1989 and amended
and restated on July 1, 1993
California Money Market Series and May 5, 1995

Prudential Diversified Bond Fund, Inc. January 3, 1995 and amended
(Class A) and restated on June 13, 1995

Prudential Equity Fund, Inc. August 1, 1994 and amended
(Class A) and restated on May 5, 1995

Prudential Equity Income Fund August 1, 1994 and amended
(Class A) and restated on May 3, 1995

Prudential Europe Growth Fund, Inc. July 11, 1994 and amended
(Class A) and restated on June 13, 1995

Prudential Global Fund, Inc. August 1, 1994 and amended
(Class A) and restated on June 5, 1995

Prudential Global Genesis Fund, Inc. August 1, 1994 and amended
(Class A) and restated on May 3, 1995

Prudential Global Natural Resources Fund, Inc. August 1, 1994 and amended
(Class A) and restated on May 3, 1995

Prudential Government Income Fund, Inc. January 22, 1990 and amended
(Class A) and restated on April 13, 1995

Prudential Government Securities Trust November 20, 1990 and amended
Money Market Series and restated on July 1, 1993,
U.S. Treasury Money Market Series May 2, 1995 and August 1, 1995

Prudential Growth Opportunity Fund, Inc. January 22, 1990 and amended
(Class A) and restated on July 1, 1993,
August 1, 1994 and May 2, 1995

<PAGE>

Prudential High Yield Fund, Inc. January 22, 1990 and amended
(Class A) and restated on July 1, 1993,
August 1, 1994 and May 2, 1995

Prudential Institutional Liquidity November 20, 1987 and amended
Portfolio, Inc. and restated on July 1, 1993
and April 11, 1995
Prudential Institutional Money Market Series

Prudential Intermediate Global Income August 1, 1994 and amended
Fund, Inc. (Class A) and restated on May 10, 1995

Prudential MoneyMart Assets May 1, 1988 and amended
and restated on July 1, 1993
and May 10, 1995

Prudential Mortgage Income Fund, Inc. August 1, 1994 and amended
(Class A) and restated on May 5, 1995

Prudential Multi-Sector Fund, Inc. August 1, 1994 and amended
(Class A) and restated on May 3, 1995

Prudential Municipal Bond Fund August 1, 1994 and amended
(Class A) and restated on May 3, 1995

Insured Series
High Yield Series
Intermediate Series

Prudential Municipal Series Fund August 1, 1994 and amended
(Class A) and restated on May 5, 1995

Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series

<PAGE>

Prudential Municipal Series Fund

Connecticut Money Market Series February 10, 1989 and amended
Massachusetts Money Market Series and restated on July 1, 1993
New Jersey Money Market Series and May 5, 1995
New York Money Market Series

Prudential National Municipals Fund, Inc. January 22, 1990 and amended
(Class A) and restated on July 1, 1993,
August 1, 1994 and May 2, 1995

Prudential Pacific Growth Fund, Inc. August 1, 1994 and amended
(Class A) and restated on June 5, 1995

Prudential Global Limited Maturity Fund, Inc. August 1, 1994 and amended
(formerly Prudential Short-Term Global Income and restated on June 5, 1995
Fund Inc.) (Class A)

Global Assets Portfolio
Limited Maturity Portfolio

Prudential Special Money Market Fund January 12, 1990 and amended
Money Market Series and restated on April 12, 1995

Prudential Structured Maturity Fund, Inc. August 1, 1994 and amended
(Class A) and restated on June 14, 1995

Income Portfolio

Prudential Tax-Free Money Fund, Inc. May 2, 1988 and amended and
restated on July 1, 1993,
May 2, 1995 and August 1, 1995

Prudential U. S. Government Fund August 1, 1994 and amended
(Class A) and restated on June 5, 1995

Prudential Utility Fund, Inc. August 1, 1994 and amended
(Class A) and restated on June 14, 1995

<PAGE>

EACH OF THE FUNDS LISTED ABOVE

By
/s/ Robert F. Gunia
----------------------------
Robert F. Gunia
Vice President

PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC.

By
/s/ Stephen P. Fisher
----------------------------
Stephen P. Fisher
Vice President

AGREED TO AND ACCEPTED BY:

PRUDENTIAL SECURITIES INCORPORATED

By
/s/ Brendan Boyle
----------------------------
Brendan Boyle
Senior Vice President

<PAGE>
Exhibit 10(d)
[SULLIVAN & CROMWELL LETTERHEAD]

February 26, 1996

Prudential Mortgage Income Fund, Inc.,
One Seaport Plaza,
New York, New York 10292.

Dear Sirs:

You have requested our opinion in connection with your filing of Post-
Effective Amendment No. 22 to the Registration Statement on Form N-1A (the
"Post-Effective Amendment") under the Securities Act of 1933 (the "Act") and
your registration in connection therewith of 4,777,679 shares of your Common
Stock, $.01 par value (the "Shares") pursuant to Rule 24e-2 under the Investment
Company Act of 1940.

As your counsel, we are familiar with your organization and corporate
status and the validity of your Common Stock.

We advise you that, in our opinion, when the Post-Effective Amendment
relating to the Shares has become effective under the Act, the Shares, when duly
issued and sold, for not less than the par value thereof and in conformity with
your charter, will be duly authorized and validly issued, fully paid and
nonassessable.

<PAGE>

Prudential Mortgage Income Fund, Inc., -2-

The foregoing opinion is limited to the Federal laws of the United
States and the General Corporation Laws of the State of Maryland, and we are
expressing no opinion as to the effect by the laws of any other jurisdiction.

We have relied as to certain matters on information obtained from
public officials, your officers and other sources believed by us to be
responsible.

We consent to the filing of this opinion with the Securities and
Exchange Commission in connection with the notice referred to above. In giving
such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.

Very truly yours,

/s/ Sullivan & Cromwell
--------------------------
Sullivan & Cromwell

<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 22 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 26, 1996, relating to the financial statements and financial highlights
of Prudential Mortgage Income Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.

PRICE WATERHOUSE LLP

1177 Avenue of the Americas
New York, New York
February 28, 1996

<PAGE>
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<NAME> PRUDENTIAL MORTGAGE INCOME FUND, INC.
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<NAME> PRUDENTIAL MORTGAGE INCOME FUND (CLASS A)

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<PAGE>
<ARTICLE> 6
<CIK> 0000700662
<NAME> PRUDENTIAL MORTGAGE INCOME FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL MORTGAGE INCOME FUND (CLASS B)

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<TOTAL-LIABILITIES> 1,317,569
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 242,250,670
<SHARES-COMMON-STOCK> 15,447,408
<SHARES-COMMON-PRIOR> 18,910,000
<ACCUMULATED-NII-CURRENT> 120,716
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (25,068,367)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,997,462
<NET-ASSETS> 225,300,481
<DIVIDEND-INCOME> 0
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<EXPENSES-NET> 3,909,960
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<REALIZED-GAINS-CURRENT> 4,861,866
<APPREC-INCREASE-CURRENT> 14,956,033
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<DISTRIBUTIONS-OF-GAINS> (942,774)
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<NUMBER-OF-SHARES-SOLD> 12,534,281
<NUMBER-OF-SHARES-REDEEMED> (69,607,739)
<SHARES-REINVESTED> 8,784,795
<NET-CHANGE-IN-ASSETS> (29,413,538)
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<PAGE>
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<NAME> PRUDENTIAL MORTGAGE INCOME FUND, INC.
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<NAME> PRUDENTIAL MORTGAGE INCOME FUND (CLASS C)

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<INVESTMENTS-AT-VALUE> 224,785,773
<RECEIVABLES> 1,797,989
<ASSETS-OTHER> 34,288
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 226,618,050
<PAYABLE-FOR-SECURITIES> 507,751
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 809,818
<TOTAL-LIABILITIES> 1,317,569
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 242,250,670
<SHARES-COMMON-STOCK> 15,447,408
<SHARES-COMMON-PRIOR> 18,910,000
<ACCUMULATED-NII-CURRENT> 120,716
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (25,068,367)
<OVERDISTRIBUTION-GAINS> 0
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