(ICON)
Prudential
Mortgage
Income
Fund, Inc.
ANNUAL
REPORT
Dec. 31, 1997
(LOGO)
<PAGE>
Prudential Mortgage Income Fund, Inc.
Performance At A Glance.
U.S. interest rates declined as inflation
inched up by the smallest amount in
more than a decade. This favorable economic
climate helped bolster prices of
mortgage backed securities. The Prudential
Mortgage Income Fund provided
returns that were in line with those of the
average U.S. mortgage fund tracked
by Lipper Analytical Services.
Cumulative Total Returns1
As of 12/31/97
<TABLE>
<CAPTION>
One
Five Ten Since
Year
Years Years Inception2
<S> <C>
<C> <C> <C>
Class A 8.57%
34.32% N/A 75.92%
(8.42%)
(34.05%) (75.56%)
Class B 7.84
30.20 97.07% 267.27
(7.69)
(29.93) (96.66%) (265.75)
Class C 7.84
N/A N/A 26.45
(7.69)
(26.19)
Class Z N/A
N/A N/A 8.18
Lipper U.S. Mtge. Fd. Avg3 8.58
34.44 116.29 ***
</TABLE>
Average Annual Total Returns1
As of 12/31/97
<TABLE>
<CAPTION>
One Five
Ten Since
Year Years
Years Inception2
<S> <C> <C>
<C> <C>
Class A 4.23% (4.08%) 5.22%
(5.17%) N/A 6.82% (6.80%)
Class B 2.84 (2.69) 5.26
(5.21) 7.02% (7.00%) 8.61 (8.58)
Class C 6.84 (6.69) N/A
N/A 7.11 (7.04)
</TABLE>
Dividends
& Yields
As of 12/31/97
<TABLE>
<CAPTION>
Total
Distributions 30-Day
Paid for 12 Mos.
SEC Yield
<S> <C>
<C>
Class A $0.90
6.08%
Class B $0.81
5.72
Class C $0.81
5.73
Class Z $0.72
6.48
</TABLE>
Past performance is not indicative of future
results. Principal and investment
return will fluctuate so that an investor's
shares, when redeemed, may be
worth more or less than their original cost.
1 Source: Prudential Investments Fund
Management and Lipper Analytical
Services. The cumulative total returns do not
take into account sales charges.
The average annual returns do take into account
applicable sales charges. The
Fund charges a maximum front-end sales load of
4% for Class A shares and a
declining, six-year contingent deferred sales
charge (CDSC) of 5%, 4%, 3%, 2%,
1% and 1% for Class B shares. Class C shares
have a 1% CDSC for one year. The
numbers in parentheses () show the Fund's
average annual returns and 30-day
SEC yield without waiver of management fees
and/or expense subsidization.
Class B shares automatically convert to Class A
shares on a quarterly basis,
after approximately seven years. Class Z shares
are not subject to a sales
charge or a distribution fee. Since Class Z
shares have been in existence less
than a year, no average annual returns are
presented.
2 Inception dates: Class A, 1/22/90; Class B,
4/2/82; Class C, 8/1/94; and
Class Z, 3/18/97.
3 This includes all funds in the Lipper U.S.
Mortgage Fund average for one-,
five-, and 10-year periods since inception of
the Class B shares on 3/25/82.
***Lipper since inceptions returns are: Class
A, 80.74%; Class B, 323.09%;
Class C, 29.46%, and Class Z, 8.81% for all
funds in each Lipper share class.
How Investments Compared.
(As of 12/31/97)
(GRAPH)
U.S. General General U.S.
Growth Bond Muni Debt
Taxable
Funds Funds Funds Money
Funds
Source: Lipper Analytical Services. Financial
markets change, so a mutual
fund's past performance should never be used to
predict future results. The
risks to each of the investments listed above
are different -- we provide 12-
month total returns for several Lipper mutual
fund categories to show you that
reaching for higher returns means tolerating
more risk. The greater the risk,
the larger the potential reward or loss. In
addition, we've included
historical 20-year average annual returns.
These returns assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal.
Investors have received higher
historical total returns from stocks than from
most other investments. Smaller
capitalization stocks offer greater potential
for long-term growth but may be
more volatile than larger capitalization
stocks.
General Bond Funds provide more income than
stock funds, which can help smooth
out their total returns year by year. But their
prices still fluctuate
(sometimes significantly) and their returns
have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds
issued by state governments,
state agencies and/or municipalities. This
investment provides income that is
usually exempt from federal and state income
taxes.
U.S. Taxable Money Funds attempt to preserve a
constant share value; they
don't fluctuate much in price but,
historically, their returns have been
generally among the lowest of the major
investment categories.
<PAGE>
Barbara L. Kenworthy and Sharon A. Fera, Fund
Managers
Portfolio
Managers' Report
(PHOTOS)
The Prudential Mortgage Income Fund seeks a
high level of income over the long
term by investing primarily in a portfolio of
mortgage backed securities,
including those issued by the Government
National Mortgage Association (GNMA)
and the Federal National Mortgage Association
(FNMA). It may also invest in
obligations using mortgages as collateral as
well as other U.S. government
obligations, corporate debt, and high quality
money market instruments. The
Fund's credit quality is investment grade and
the effective maturity is
generally in the intermediate-term range. There
can be no assurance that the
Fund will achieve its investment objective.
Is Inflation Conquered?
Inflation inched up 1.7% in 1997 and will
likely remain tame this year as U.S.
companies face increased competition from
cheaper Asian imports. This is good
news for bondholders who fear that mounting
inflationary pressures will hurt
the value of their fixed interest and principal
payments.
Strategy Session.
Inflation Fears Fade.
Early in the year, investors worried that
robust U.S. economic growth would
spur higher inflation. The economy had sped
into 1997, powered by continued
solid growth in jobs and strong consumer
spending. The Federal Reserve must
have shared investors' concerns, because it
increased the federal funds rate
(what banks charge each other for overnight
loans) by a quarter percentage
point to 5.50% on March 25 to slow economic
growth. This was the first
increase in two years.
Bond yields continued to rise in April because
some investors thought a second
interest rate increase was coming. During that
month, the yield on the 30-year
benchmark U.S. Treasury bond rose to 7.16%, its
highest level of the year.
Then yields began to edge downward as one
report after another showed
inflation remained subdued, even though the
economy continued moving ahead.
Prepayment Risk Rises.
As bond yields fell, investors fretted about
prepayment risk (the chance that
mortgage backed securities will be retired
early as consumers refinance the
underlying home loans as interest rates
decline). When this happens, investors
are forced to reinvest their cash at lower
interest rates. We addressed this
concern by seeking securities that minimized
prepayment risk.
Portfolio Composition.
Sectors expressed as a percentage
of total investments as of 12/31/97.
(PIE CHART)
<PAGE>
What Went Well.
Pass It Along.
Encouraged by benign inflationary pressures,
investors seeking higher yields
pushed up prices of mortgage backed securities,
which returned a solid 9.49%
in 1997. Within the mortgage backed market,
some sectors performed
particularly well, such as mortgage pass-
through securities, in which payments
on the underlying home loans typically pass
from a bank to a federal
government agency to investors. Mortgage pass-
through securities (66% of our
total investments as of December 31) rallied
partly because Wall Street
brokerage firms use them to make a more complex
type of security called
collateralized mortgage obligations (CMOs). To
meet the brisk demand for CMOs,
brokerage firms bid up the prices of mortgage
pass-through securities. You can
get an idea of how strong the demand was from
the fact that $127 billion of
new collateralized mortgage obligations were
issued in 1997, a 127% increase
from the previous year.
Even though prices of asset backed securities
came under pressure late in the
year, they still benefited your Fund by
providing a steady stream of generous
interest payments. Asset backed securities
comprised 15% of our total
investments at year end.
And Not So Well.
Too Much Too Soon.
A flood of asset backed securities were issued
in November while investors
were still reeling from the impact of the Asian
economic crisis. As a result,
demand for newly issued and outstanding asset
backed securities flagged,
sending prices lower and yields higher. Another
blow fell that month when
Standard & Poor's Corp. downgraded ratings of
some Green Tree Financial asset
backed securities, which accounted for more
than 4% of your Fund's total
investments as of December 31.
Shortly after the end of the reporting period,
Moody's Investors Service
lowered its ratings of some Green Tree
Financial bonds after the company
reported unexpected losses in the fourth-
quarter. We decided to sell our
Green Tree securities even though prices had
declined.
Five Largest Holdings.
4.3% Green Tree Financial
4.2% FNMA
3.9% Money Store Home
Impvt. Loan Trust
3.1% Merck and Co.
3.0% ICI Funding
Expressed as a percentage of net assetsas of
12/31/97.
Looking Ahead.
Since prices of U.S. Treasury securities will
likely hover in a fairly narrow
range, we expect growing demand for securities
that offer incremental yield
over Treasuries, such as asset backed
securities. Moreover, we believe the
sell-off in asset backed securities was
primarily the result of a temporary
imbalance in supply and demand, so we expect
prices to rebound during the new
year. Overall, we are cautiously optimistic
about the outlook for mortgage
backed and asset backed securities because we
believe the Asian economic
turmoil will likely slow U.S. economic growth
and help keep inflation in
check, which is generally positive for the bond
market. In this climate, we
are carefully monitoring the pace of
prepayments on mortgage backed securities.
- -----------------------------------------------
- --------------------------------
1
<PAGE>
President's Letter
February 2, 1998
(PHOTO)
Investing Smart.
Dear Shareholder:
This is the season when many investors receive
income tax refunds or have a CD
or two maturing. What will you do with these
assets? Investing smart can be a
challenge especially given today's new
investment choices.
The Federal Taxpayer Relief Act of 1997 is
changing the way Americans invest
and accumulate wealth, save for college or
build a nest egg for retirement.
While the law offers opportunity, it is also
complex. You may need help to put
things in perspective.
Now may be an excellent time for you and your
Prudential Financial
Professional to update your investment strategy
and retirement plan. A wise
investor does so periodically. You could find
the tax law opening doors that
may benefit you now or over the long term, such
as --
- - Revised Capital Gains Tax Rates &
Exclusions. Long-term rates are down. Is
your portfolio positioned to benefit? Also, new
rules allow you to keep more
of the profit from the sale of your home
(perhaps up to $500,000 more).
- - New Roth IRAs. The Roth IRA features tax-
free distributions and does not
require mandatory withdrawals, which should be
of particular interest to
retirees seeking to shelter assets in a tax-
free account.
- - New Education IRAs. Similar to a traditional
IRA, but specifically designed
for higher education. The new law also creates
credits and deductions to help
defray college costs.
- - Expanded IRAs. Rules governing traditional
IRAs have been extensively
revised. Deductibility and contribution limits
have been broadened as has the
list for penalty-free early withdrawals,
including first-time home buyers.
As you can see, what you don't know may cost
you! That's why I recommend you
call your Prudential Financial Professional and
get a free investment plan
checkup. Let us give you the information and
tools to invest smart.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
- -----------------------------------------------
- --------------------------------
2
<PAGE>
Portfolio of Investments
as of December 31, 1997 PRUDENTIAL
MORTGAGE INCOME FUND, INC.
- -----------------------------------------------
- -------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description
Value (Note 1)
<C> <S>
<C>
- -----------------------------------------------
- -------------
LONG-TERM INVESTMENTS--98.3%
- -----------------------------------------------
- -------------
Obligations--4.4%United States
Treasury Bonds,
$ 3,000 12.375%, 5/15/04
$ 4,043,430
2,000 7.125%, 2/15/23
2,283,120
United States Treasury Note,
1,000 6.125%, 8/15/07
1,027,660
- ------------
Total U.S. government obligations
(cost $7,193,600)
7,354,210
- ------------
- -----------------------------------------------
- -------------
U.S. Government Agency Mortgage
Pass-through Obligations--66.4%
Federal National Mortgage
Association,
7 7.00%, 4/01/08
7,051
25,401 7.50%, 6/01/10 - 12/01/24
26,157,687
19 8.00%, 10/01/24
19,780
Government National Mortgage
Association,
18,310 7.50%, 7/15/07 - 7/15/24
18,850,358
48,733 8.00%, 2/15/04 - 11/15/25
50,984,702
12,648 9.00%, 4/15/01 - 4/15/25
13,691,652
- ------------
Total U.S. government agency
mortgage pass-through
obligations
(cost $107,200,983)
109,711,230
- ------------
- -----------------------------------------------
- -------------
Collateralized Mortgage Obligations--9.9%
Federal National Mortgage
Association,
6,500 6.997%, 12/25/21, REMIC
6,719,375
ICI Funding Corp. Secured Asset
Corp.,
4,913 Ser. 97-2 1A4, 7.60%, 7/25/28
5,008,189
Merrill Lynch Mortgage Investors,
Inc.,
52,761 Ser. 96-C2, 1.535%, 11/21/28, I/O
4,591,875
- ------------
Total collateralized mortgage
obligations
(cost $15,936,176)
16,319,439
- ------------
- -----------------------------------------------
- -------------
Asset-Backed Securities--14.5%
Chase Manhattan Credit Card Trust,
1,400 Ser. 96-2 Class A, 5.955%,
12/15/02 1,405,250
Federal Home Loan Mortgage Corp.,
$ 4,000 Ser. 97-B C, 7.40%, 9/15/19
$ 4,106,250
Contimortgage Home Equity Loan,
2,875 Ser. 97-1 M2, 7.67%, 3/15/28
2,960,352
Green Tree Financial Corporation,
2,000 Ser. 97-1 B2, 7.76%, 3/15/28
2,012,500
7,000 Ser. 97-6 B2, 7.75%, 1/15/29
7,039,375
Money Store Home Impvt. Ln. Trust,
6,125 Ser. 97-1 M2, 8.07%, 5/15/23
6,433,164
- ------------
Total asset-backed securities
(cost $23,458,245)
23,956,891
- ------------
- -----------------------------------------------
- -------------
Corporate Bonds--3.1%
Merck and Co.,
5,000 5.76%, 5/03/37
(cost $5,000,000)
5,125,000
- ------------
Total long-term investments
(cost $158,789,004)
162,466,770
- ------------
SHORT-TERM INVESTMENT--1.4%
- -----------------------------------------------
- -------------
Repurchase Agreement
2,242 Joint Repurchase Agreement
Account,
6.63%, 1/02/98
(cost $2,242,000; Note 5)
2,242,000
- ------------
- -----------------------------------------------
- -------------
Total Investments--99.7%
(cost $161,031,004; Note 4)
164,708,770
Other assets in excess of
liabilities--0.3%
538,805
- ------------
Net Assets--100%
$165,247,575
- ------------
- ------------
</TABLE>
- ---------------
I/O--Interest Only
R.E.M.I.C.--Real Estate Mortgage Investment
Conduit
- -----------------------------------------------
- ---------------------------------
See Notes to Financial Statements. 3
<PAGE>
Statement of Assets and Liabilities
PRUDENTIAL MORTGAGE INCOME FUND, INC.
- -----------------------------------------------
- ---------------------------------
<TABLE>
<CAPTION>
Assets
December 31, 1997
<S>
<C>
Investments, at value (cost
$161,031,004)..................................
............................. $
164,708,770
Cash...........................................
...............................................
.......... 202
Interest
receivable.....................................
...............................................
. 1,113,020
Receivable for Fund shares
sold...........................................
..............................
17,493
Other
assets.........................................
...............................................
.... 4,520
- -----------------
Total
assets.........................................
...............................................
. 165,844,005
- -----------------
Liabilities
Accrued
expenses.......................................
...............................................
.. 345,618
Management fee
payable........................................
..........................................
70,574
Distribution fee
payable........................................
........................................
59,631
Payable for Fund shares
reacquired.....................................
.................................
56,176
Deferred Director's
fees...........................................
.....................................
38,130
Dividends
payable........................................
...............................................
26,301
- -----------------
Total
liabilities....................................
...............................................
. 596,430
- -----------------
Net
Assets.........................................
...............................................
...... $ 165,247,575
- -----------------
- -----------------
Net assets were comprised of:
Common stock, at
par............................................
..................................... $
113,842
Paid-in capital in excess of
par............................................
......................... 180,553,925
- -----------------
180,667,767
Undistributed net investment
income.........................................
......................... 764,243
Accumulated net realized loss on
investments....................................
..................... (19,862,201)
Net unrealized appreciation on
investments....................................
....................... 3,677,766
- -----------------
Net assets, December 31,
1997...........................................
................................ $
165,247,575
- -----------------
- -----------------
Class A:
Net asset value and redemption price per
share
($90,639,252 / 6,237,712 shares of common
stock issued and
outstanding)...........................
$14.53
Maximum sales charge (4% of offering
price).........................................
................. .61
- -----------------
Maximum offering price to
public.........................................
............................
$15.14
- -----------------
- -----------------
Class B:
Net asset value, offering price and
redemption price per share
($73,665,312 / 5,081,464 shares of common
stock issued and
outstanding)...........................
$14.50
- -----------------
- -----------------
Class C:
Net asset value, offering price and
redemption price per share
($904,171 / 62,370 shares of common stock
issued and
outstanding).................................
$14.50
- -----------------
- -----------------
Class Z:
Net asset value, offering price and
redemption price per share
($38,840 / 2,670 shares of common stock
issued and
outstanding)...................................
$14.54
- -----------------
- -----------------
</TABLE>
- -----------------------------------------------
- ---------------------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL MORTGAGE INCOME FUND, INC.
Statement of Operations
- -----------------------------------------------
- -------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income
December 31, 1997
<S> <C>
Income
Interest..............................
$13,380,233
---
- --------------
Expenses
Management fee........................
879,039
Distribution fee--Class A.............
136,641
Distribution fee--Class B.............
628,860
Distribution fee--Class C.............
6,428
Transfer agent's fees and expenses....
350,000
Custodian's fees and expenses.........
170,000
Reports to shareholders...............
91,000
Registration fees.....................
74,000
Legal fees and expenses...............
34,000
Audit fee.............................
28,000
Directors' fees and expenses..........
28,000
Miscellaneous.........................
14,814
---
- --------------
Total expenses.....................
2,440,782
Less: Management fee waiver..............
(238,812)
---
- --------------
Net expenses.......................
2,201,970
---
- --------------
Net investment income....................
11,178,263
---
- --------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions...............
873,036
Futures transactions..................
(199,073)
---
- --------------
673,963
---
- --------------
Net change in unrealized appreciation of
investments...........................
1,996,049
---
- --------------
Net gain on investments..................
2,670,012
---
- --------------
Net Increase in Net Assets
Resulting from Operations................
$13,848,275
---
- --------------
---
- --------------
</TABLE>
PRUDENTIAL MORTGAGE INCOME FUND, INC.
Statement of Changes in Net Assets
- -----------------------------------------------
- -------------
<TABLE>
<CAPTION>
Increase (Decrease) Year
Ended December 31,
in Net Assets 1997
1996
<S> <C>
<C>
Operations
Net investment income.......... $
11,178,263 $ 12,727,289
Net realized gain on
investments.................
673,963 186,036
Net change in unrealized
appreciation (depreciation)
of investments..............
1,996,049 (6,315,745)
-----------
- - ------------
Net increase in net assets
resulting from operations...
13,848,275 6,597,580
-----------
- - ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A.....................
(5,736,643) (5,930,278)
Class B.....................
(4,768,059) (6,261,553)
Class C.....................
(48,744) (42,633)
Class Z.....................
(571) --
-----------
- - ------------
(10,554,017) (12,234,464)
-----------
- - ------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold......
6,513,533 8,736,035
Net asset value of shares
issued in
reinvestment of dividends...
6,604,996 7,670,064
Cost of shares reacquired......
(41,590,299) (45,644,609)
-----------
- - ------------
Net decrease in net assets from
Fund share transactions.....
(28,471,770) (29,238,510)
-----------
- - ------------
Total decrease....................
(25,177,512) (34,875,394)
Net Assets
Beginning of year.................
190,425,087 225,300,481
-----------
- - ------------
End of year.......................
$165,247,575 $190,425,087
-----------
- - ------------
-----------
- - ------------
</TABLE>
- -----------------------------------------------
- ---------------------------------
See Notes to Financial Statements. 5
<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.
- -----------------------------------------------
- -------------
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.
Short-term securities which mature in more than
60 days are valued at current
market quotations. Short-term securities which
mature in 60 days or less are
valued at amortized cost which approximates
market value.
In connection with transactions in repurchase
agreements 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 accural 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.
Financial Futures Contracts: A financial
futures contract is an agreement to
purchase (long) or sell (short) an agreed
amount of securities at a set price
for delivery on a future date. Upon entering
into a financial futures contract,
the Series is required to pledge to the broker
an amount of cash and/or other
assets equal to a certain percentage of the
contract amount. This amount is
known as the 'initial margin'. Subsequent
payments, known as 'variation margin',
are made or received by the Series each day,
depending on the daily fluctuations
in the value of the underlying security. Such
variation margin is recorded for
financial statement purposes on a daily basis
as unrealized gain or loss. When
the contract expires or is closed, the gain or
loss is realized and is presented
in the statement of operations as net realized
gain (loss) on financial futures
contracts.
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.
- -----------------------------------------------
- ---------------------------------
6
<PAGE>
Notes to Financial Statements
PRUDENTIAL MORTGAGE INCOME FUND, INC.
- -----------------------------------------------
- ---------------------------------
Reclassification of Capital Accounts: The Fund
accounts and reports for
distributions to shareholders in accordance
with American Institute of Certified
Public Accountants' Statement of Position 93-2:
Determination, Disclosure, and
Financial Statement Presentation of Income,
Capital Gain, and Return of Capital
Distributions by Investment Companies. The
effect of applying this statement was
to decrease accumulated net realized losses by
$4,346,167, and decrease paid in
capital in excess of par by $4,346,167 which
represents the expiration of a
portion of the capital loss carryforward. Net
realized gains and net assets were
not affected by this change.
- -----------------------------------------------
- -------------
Note 2. Agreements
The Fund has a management agreement with
Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM
has responsibility for all
investment advisory services and supervises the
subadviser's performance of such
services. PIFM has entered into a subadvisory
agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes
investment advisory services in
connection with the management of the Fund.
PIFM pays for the cost of the
subadviser's services, the compensation of
officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the
Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily
and payable monthly, at an annual
rate of .50 of 1% of the average daily net
assets of the Fund. Prior to
September 1, 1997, PIFM agreed to waive a
portion (.20 of 1% of the Fund's
average daily net assets) of its management
fee, which amounted to $238,812
($0.02 per share; .20% of average net assets,
annualized) for the year ended
December 31, 1997. The Fund is not required to
reimburse PIFM for such waiver.
Effective September 1, 1997, PIFM eliminated
its management fee waiver.
The Fund has a distribution agreement with
Prudential Securities Incorporated
('PSI') which acts as the distributor of the
Class A, Class B, Class C and Class
Z shares of the Fund. The Fund compensates PSI
for distributing and servicing
the Fund's Class A, Class B and Class C shares,
pursuant to plans of
distribution, (the 'Class A, B and C Plans'),
regardless of expenses actually
incurred by them. The distribution fees for
Class A, B and C shares are accrued
daily and payable monthly. No distribution or
service fees are paid to PSI as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the
Fund compensates PSI for its
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,
1997.
PSI has advised the Fund that it has received
approximately $14,100 in front-end
sales charges resulting from sales of Class A
shares for the year ended December
31, 1997. From these fees, PSI paid such sales
charges to dealers, which in turn
paid commissions to salespersons and incurred
other distribution costs.
PSI advised the Fund that for the year ended
December 31, 1997, it received
approximately $162,100 in contingent deferred
sales charges imposed upon certain
redemptions by Class B and C shareholders.
PSI, PIFM and PIC are indirect, wholly owned
subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated
registered investment companies (the
'Funds'), has a credit agreement (the
'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is
$200,000,000. Interest on any such
borrowings outstanding will be at market rates.
The purpose of the Agreement is
to serve as an alternative source of funding
for capital share redemptions. The
Fund has not borrowed any amounts pursuant to
the Agreement during the year
ended December 31, 1997. The Funds pay a
commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit
facility. The commitment fee is
accrued and paid quarterly on a pro rata basis
by the Funds. The Agreement
expired on December 30, 1997 and has been
extended through December 29, 1998
under the same terms.
- -----------------------------------------------
- -------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a
wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during
the year ended December 31, 1997,
the Fund incurred fees of approximately
$269,000 for the services of PMFS. As of
December 31, 1997, approximately $21,000 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 nonaffiliates.
- -----------------------------------------------
- -------------
Note 4. Portfolio Securities
Purchases and sales of investment securities,
other than short-term investments
and dollar rolls, for the year ended December
31, 1997 aggregated $307,844,145
and $322,635,143, respectively.
The cost basis of investments for federal
income tax purposes at December 31,
1997 was $161,299,285 and, accordingly, net
unrealized appreciation of
investments for federal income tax purposes was
$3,409,485 (gross
- -----------------------------------------------
- ---------------------------------
7
<PAGE>
Notes to Financial Statements
PRUDENTIAL MORTGAGE INCOME FUND, INC.
- -----------------------------------------------
- ---------------------------------
unrealized appreciation--$3,636,659; gross
unrealized depreciation--$227,174).
The Fund had a capital loss carryforward as of
December 31, 1997 of
approximately $19,586,200 of which $2,647,800
expires in 1998, $16,220,800
expires in 2002 and $717,600 expires in 2005.
Accordingly, no capital gains
distribution is expected to be paid to
shareholders until net gains have been
realized in excess of such carryforward. During
the fiscal year ended December
31, 1997, approximately $3,073,700 of capital
loss carryforward expired unused.
- -----------------------------------------------
- -------------
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 aggregate
by U.S. Treasury or federal agency obligations.
As of December 31, 1997, the
Fund has a .19% undivided interest in the joint
account. The undivided interest
for the Fund represents $2,242,000 in the
principal amount. As of such date,
each repurchase agreement in the joint account
and the collateral therefor were
as follows:
Credit Suisse First Boston Corp., 6.75%, in the
principal amount of
$342,000,000, repurchase price $342,128,250,
due 1/2/98. The value of the
collateral including accrued interest is
$353,486,750.
Deutsche Morgan Grenfell Inc., 6.80%, in the
principal amount of $200,000,000,
repurchase price $200,075,555, due 1/2/98. The
value of the collateral including
accrued interest is $204,003,314.
SBC Warburg Dillon Read Inc., 6.55%, in the
principal amount of $142,000,000,
repurchase price $142,051,672, due 1/2/98. The
value of the collateral including
accrued interest is $144,862,841.
Morgan Stanley, Dean Witter, Discover & Co.,
5.95%, in the principal amount of
$151,553,000, repurchase price $151,603,097,
due 1/2/98. The value of the
collateral including accrued interest is
$154,584,932.
Salomon Smith Barney Inc., 6.75%, in the
principal amount of $342,000,000,
repurchase price $342,128,250, due 1/2/98. The
value of the collateral including
accrued interest is $350,295,372.
- -----------------------------------------------
- -------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and
Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4%.
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.
Effective March 18, 1997 the Fund commenced
offering Class Z shares. Class Z
shares are not subject to any sales or
redemption charge and are offered
exclusively for sale to a limited group of
investors. 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 four classes,
designated Class A, Class B, Class C and Class
Z.
Transactions in shares of common stock were as
follows:
<TABLE>
<CAPTION>
Class A Shares
Amount
- ------------------------------------ ---------
- - -------------
<S> <C>
<C>
Year ended December 31, 1997:
Shares sold.........................
196,213 $ 2,817,711
Shares issued in reinvestment of
dividends and distributions.......
272,081 3,897,976
Shares reacquired...................
(1,350,280) (19,341,070)
---------
- - -------------
Net decrease in shares outstanding
before conversion.................
(881,986) (12,625,383)
Shares issued upon conversion from
Class B...........................
554,627 7,950,244
---------
- - -------------
Net decrease in shares
outstanding.......................
(327,359) $ (4,675,139)
---------
- - -------------
---------
- - -------------
Year ended December 31, 1996:
Shares sold.........................
223,806 $ 3,184,988
Shares issued in reinvestment of
dividends and distributions.......
287,916 4,090,240
Shares reacquired...................
(1,327,376) (18,847,332)
---------
- - -------------
Net decrease in shares outstanding
before conversion.................
(815,654) (11,572,104)
Shares issued upon conversion from
Class B...........................
590,405 8,336,520
---------
- - -------------
Net decrease in shares
outstanding.......................
(225,249) $ (3,235,584)
---------
- - -------------
---------
- - -------------
<CAPTION>
Class B
- ------------------------------------
Year ended December 31, 1997:
Shares sold.........................
243,748 $ 3,481,986
Shares issued in reinvestment of
dividends and distributions.......
188,146 2,687,530
Shares reacquired...................
(1,548,780) (22,088,732)
---------
- - -------------
Net decrease in shares outstanding
before conversion.................
(1,116,886) (15,919,216)
Shares reacquired upon conversion
into Class A......................
(556,068) (7,950,244)
---------
- - -------------
Net decrease in shares
outstanding.......................
(1,672,954) $ (23,869,460)
---------
- - -------------
---------
- - -------------
</TABLE>
- -----------------------------------------------
- ---------------------------------
8
<PAGE>
Notes to Financial Statements
PRUDENTIAL MORTGAGE INCOME FUND, INC.
- -----------------------------------------------
- ---------------------------------
<TABLE>
<CAPTION>
Class B Shares
Amount
- ------------------------------------ ---------
- - -------------
<S> <C>
<C>
Year ended December 31, 1996:
Shares sold.........................
375,530 $ 5,342,866
Shares issued in reinvestment of
dividends and distributions.......
251,545 3,565,389
Shares reacquired...................
(1,892,789) (26,787,821)
---------
- - -------------
Net decrease in shares outstanding
before conversion.................
(1,265,714) (17,879,566)
Shares reacquired upon conversion
into Class A......................
(592,011) (8,336,520)
---------
- - -------------
Net decrease in shares
outstanding.......................
(1,857,725) $ (26,216,086)
---------
- - -------------
---------
- - -------------
<CAPTION>
Class C
- ------------------------------------
Year ended December 31, 1997:
Shares sold.........................
11,549 $ 166,049
Shares issued in reinvestment of
dividends and distributions.......
1,325 18,937
Shares reacquired...................
(10,595) (150,716)
---------
- - -------------
Net increase in shares
outstanding.......................
2,279 $ 34,270
---------
- - -------------
---------
- - -------------
Year ended December 31, 1996:
Shares sold.........................
14,791 $ 208,181
Shares issued in reinvestment of
dividends and distributions.......
1,020 14,435
Shares reacquired...................
(665) (9,456)
---------
- - -------------
Net decrease in shares
outstanding.......................
(15,146) $ (213,160)
---------
- - -------------
---------
- - -------------
<CAPTION>
Class Z
- ------------------------------------
March 18, 1997(a) through
December 31, 1997:
Shares sold.........................
3,313 $ 47,787
Shares issued in reinvestment of
dividends and distributions.......
38 553
Shares reacquired...................
(681) (9,781)
---------
- - -------------
Net increase in shares
outstanding.......................
2,670 $ 38,559
---------
- - -------------
---------
- - -------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- -----------------------------------------------
- ---------------------------------
9
<PAGE>
Financial Highlights
PRUDENTIAL MORTGAGE INCOME FUND, INC.
- -----------------------------------------------
- ---------------------------------
<TABLE>
<CAPTION>
Class A
- -----------------------------------------------
- --------
Year Ended December 31,
- -----------------------------------------------
- --------
1997 1996 1995(a) 1994(a)
1993(a)
- ------- ------- ------- -------
- -------
<S>
<C> <C> <C> <C>
<C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.................. $ 14.25 $ 14.61
$ 13.50 $14.75 $ 15.07
- ------- ------- ------- -------
- -------
Income from investment operations
Net investment
income...............................
.95(c) .93(c) .89 .90
.95
Net realized and unrealized gain (loss) on
investment
transactions..........................
.23 (.39) 1.18 (1.19)
(.21)
- ------- ------- ------- -------
- -------
Total from investment
operations................. 1.18
.54 2.07 (.29) .74
- ------- ------- ------- -------
- -------
Less distributions
Dividends to shareholders from net investment
income.........................................
.. (.90) (.90) (.89)
(.90) (.95)
Dividends to shareholders in excess of net
investment
income................................ -
- - -- (.07) --
(.11)
Tax return of capital
distributions................. --
- -- -- (.06) --
- ------- ------- ------- -------
- -------
Total
distributions..............................
(.90) (.90) (.96) (.96)
(1.06)
- ------- ------- ------- -------
- -------
Net asset value, end of
year........................ $ 14.53 $
14.25 $ 14.61 $13.50 $ 14.75
- ------- ------- ------- -------
- -------
- ------- ------- ------- -------
- -------
TOTAL
RETURN(b):....................................
8.57% 4.12% 15.53% (2.01)%
4.97%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of year
(000)....................... $90,639
$93,555 $99,183 $8,762 $10,863
Average net assets
(000)............................ $91,094
$93,766 $90,854 $9,874 $10,199
Ratios to average net assets:
Expenses, including distribution
fees............ .96%(c) 1.12%(c)
1.27% 1.13% 1.00%
Expenses, excluding distribution
fees............ .81%(c) .97%(c)
1.12% .98% .85%
Net investment
income............................
6.65%(c) 6.56%(c) 6.27% 6.42%
6.42%
For Class A, B, C and Z Shares:
Portfolio turnover
rate............................. 178%
65% 193% 560% 134%
</TABLE>
- ---------------
(a) Based on average shares outstanding, by
class.
(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.
(c) Net of management fee waiver.
- -----------------------------------------------
- ---------------------------------
See Notes to Financial Statements. 10
<PAGE>
Financial Highlights
PRUDENTIAL MORTGAGE INCOME FUND, INC.
- -----------------------------------------------
- ---------------------------------
<TABLE>
<CAPTION>
Class B
- -----------------------------------------------
- ------------
Year Ended December 31,
- -----------------------------------------------
- ------------
1997 1996 1995(a) 1994(a)
1993(a)
- ------- -------- -------- --------
- --------
<S>
<C> <C> <C> <C>
<C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.................. $ 14.22 $ 14.57
$ 13.47 $ 14.71 $ 15.04
- ------- -------- -------- --------
- --------
Income from investment operations
Net investment
income...............................
.88(c) .85(c) .82 .82
.87
Net realized and unrealized gain (loss) on
investment
transactions..........................
.21 (.39) 1.15 (1.19)
(.23)
- ------- -------- -------- --------
- --------
Total from investment
operations................. 1.09
.46 1.97 (.37) .64
- ------- -------- -------- --------
- --------
Less distributions
Dividends to shareholders from net investment
income.........................................
.. (.81) (.81) (.82)
(.82) (.87)
Dividends to shareholders in excess of net
investment
income................................ -
- - -- (.05) --
(.10)
Tax return of capital
distributions................. --
- -- -- (.05) --
- ------- -------- -------- --------
- --------
Total
distributions..............................
(.81) (.81) (.87) (.87)
(.97)
- ------- -------- -------- --------
- --------
Net asset value, end of
year........................ $ 14.50 $
14.22 $ 14.57 $ 13.47 $ 14.71
- ------- -------- -------- --------
- --------
- ------- -------- -------- --------
- --------
TOTAL RETURN(b):
7.84% 3.53% 14.78% (2.57)%
4.29%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of year
(000)....................... $73,665
$96,016 $125,463 $245,437 $319,401
Average net assets
(000)............................ $83,848
$109,812 $146,290 $279,946 $332,731
Ratios to average net assets:
Expenses, including distribution
fees............ 1.56%(c) 1.72%(c)
1.87% 1.73% 1.60%
Expenses, excluding distribution
fees............ .81%(c) .97%(c)
1.12% .98% .85%
Net investment
income............................
6.05%(c) 5.95%(c) 5.82% 5.82%
5.82%
</TABLE>
- ---------------
(a) Based on average shares outstanding, by
class.
(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.
(c) Net of management fee waiver.
- -----------------------------------------------
- ---------------------------------
See Notes to Financial Statements. 11
<PAGE>
Financial Highlights
PRUDENTIAL MORTGAGE INCOME FUND, INC.
- -----------------------------------------------
- ---------------------------------
<TABLE>
<CAPTION>
Class C Class Z
- -----------------------------------------------
- --- ------------
August 1, March 18,
1994(c) 1997(d)
Year Ended December 31, through
through
- --------------------------------- December
31, December 31,
1997 1996 1995(a) 1994(a)
1997
- ------- -------- -------- ---------
- --- ------------
<S>
<C> <C> <C> <C>
<C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.................. $ 14.22 $ 14.57
$ 13.47 $ 14.01 $ 14.13
- ------- -------- -------- -----
- - ------
Income from investment operations
Net investment
income...............................
.87(f) .85(f) .81 .30
.74(f)
Net realized and unrealized gain (loss) on
investment
transactions..........................
.22 (.39) 1.16 (.49)
.39
- ------- -------- -------- -----
- - ------
Total from investment
operations................. 1.09
.46 1.97 (.19)
1.13
- ------- -------- -------- -----
- - ------
Less distributions
Dividends to shareholders from net investment
income.........................................
.. (.81) (.81) (.81)
(.30) (.72)
Dividends to shareholders in excess of net
investment
income................................ -
- - -- (.06) --
- --
Tax return of capital
distributions................. --
- -- -- (.05) --
- ------- -------- -------- -----
- - ------
Total
distributions..............................
(.81) (.81) (.87) (.35)
(.72)
- ------- -------- -------- -----
- - ------
Net asset value, end of
year........................ $ 14.50 $
14.22 $ 14.57 $ 13.47 $
14.54
- ------- -------- -------- -----
- - ------
- ------- -------- -------- -----
- - ------
TOTAL RETURN(b):
7.84% 3.53% 14.78% (1.32)%
8.18%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of year
(000)....................... $904
$854 $655 $515
$39
Average net assets
(000)............................ $857
$746 $599 $460
$9
Ratios to average net assets:
Expenses, including distribution
fees............ 1.56%(f) 1.72%(f)
1.87% 1.82%(e) .81%(e)(f)
Expenses, excluding distribution
fees............ .81%(f) .97%(f)
1.12% 1.08%(e) .81%(e)(f)
Net investment
income............................
6.05%(f) 5.95%(f) 5.72%
5.32%(e) 6.88%(e)(f)
</TABLE>
- ---------------
(a) Based on average shares outstanding, by
class.
(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.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
(f) Net of management fee waiver.
- -----------------------------------------------
- ---------------------------------
See Notes to Financial Statements. 12
<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, 1997, the
results of its operations for the
year then ended, the changes in its net assets
for each of the two years in the
period then ended and the financial highlights
for each of the periods
presented, in conformity with generally
accepted accounting principles. These
financial statements and financial highlights
(hereafter referred to as
'financial statements') are the responsibility
of the Fund's management; our
responsibility is to express an opinion on
these financial statements based on
our audits. We conducted our audits of these
financial statements in accordance
with generally accepted auditing standards
which require that we plan and
perform the audit to obtain reasonable
assurance about whether the financial
statements are free of material misstatement.
An audit includes examining, on a
test basis, evidence supporting the amounts and
disclosures in the financial
statements, assessing the accounting principles
used and significant estimates
made by management, and evaluating the overall
financial statement presentation.
We believe that our audits, which included
confirmation of securities at
December 31, 1997 by correspondence with the
custodian and brokers, provide a
reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1998
Tax Information
PRUDENTIAL MORTGAGE INCOME FUND, INC.
- -----------------------------------------------
- ---------------------------------
We are required by Massachusetts, Missouri and
Oregon to inform you that
dividends which have been derived from interest
on federal obligations are not
taxable to shareholders providing the Mutual
Fund meets certain requirements
mandated by the respective state's taxing
authorities. We are pleased to report
that 4.83% of the dividends paid by Prudential
Mortgage Income Fund, Inc.
qualifies for such deduction.
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.
- -----------------------------------------------
- ---------------------------------
13
<PAGE>
Comparing A $10,000 Investment.
Prudential Mortgage Income Fund, Inc. vs. the
Lehman Mortgage-Backed Securities Index.
// Prudential Mortgage Income Fund, Inc.
- -- Lehman Mortgage-Backed Index
Class A
Average Annual Total
(CHART)
Returns - Class A
With Sales Load
6.82% Since Inception (6.80%)
5.22% for 5 Years (5.17%)
4.23% for 1 Year (4.08%)
Without Sales Load
7.37% Since Inception (7.35%)
6.08% for 5 Years (6.04%)
8.57% for 1 Year (8.42%)
Class B
Average Annual Total
(CHART)
Returns - Class B
With Sales Load
8.61% Since Inception (8.58%)
7.02% for 10 Years (7.00%)
5.26% for 5 Years (5.21%)
2.84% for 1 Year (2.69%)
Without Sales Load
8.61% Since Inception (8.58%)
7.02% for 10 Years (7.00%)
5.42% for 5 Years (5.38%)
7.84% for 1 Year (7.69%)
Class C
Average Annual Total
(CHART)
Returns - Class C
With Sales Load
7.11% Since Inception (7.04%)
6.84% for 1 Year (6.69%)
Without Sales Load
7.11% Since Inception (7.04%)
7.84% for 1 Year (7.69%)
Class Z
(CHART)
*Without waivers and expense subsidies the
value of the $10,000 investment
in the Fund and the Fund's average annual total
return, as illustrated above,
would have been lower, as indicated in
parentheses ( ).
Past performance is not indicative of future
results. Investment return and
principal value will fluctuate so an investor's
shares, when redeemed, may be
worth more or less than their original cost.
The boxes on the top of the
charts are designed to give you an idea how
much the Fund's returns can
fluctuate from year to year by measuring the
best and worst years in terms of
total annual return since inception of each
share class or for 10 years,
whichever is shorter.
These graphs are furnished to you in accordance
with SEC regulations. They
compare a $10,000 investment in the Prudential
Mortgage Income Fund, Inc.
(Class A, Class B, Class C and Class Z) with a
similar investment in the
Lehman Mortgage-Backed Securities Index by
portraying the initial account
values at the commencement of operations of
Class A, C, and Z shares and for
10 years for Class B shares, and subsequent
account values at the end of each
fiscal year (December 31), as measured on a
quarterly basis, beginning in 1990
for Class A shares, in 1987 for Class B shares,
in 1994 for Class C shares and
in 1997 for Class Z shares. For purposes of the
graphs, and unless otherwise
indicated, in the accompanying tables it has
been assumed (a) that the maximum
applicable front-end sales charge was deducted
from the initial $10,000
investment in Class A shares; (b) the maximum
applicable contingent deferred
sales charge was deducted from the value of the
investment in Class B and
Class C shares, assuming full redemption on
December 31, 1997; (c) all
recurring fees (including management fees) were
deducted; and (d) all dividends
and distributions were reinvested. Class Z
shares are not subject to a sales
charge or a distribution fee. Class B shares
will automatically convert to
Class A shares, on a quarterly basis, beginning
approximately seven years
after purchase. This conversion feature is not
reflected in the graph. Since
Class Z shares have been in existence less than
a year, no average annual
returns are presented.
The Lehman Mortgage-Backed Securities Index is
a weighted index comprised of
fixed-rate mortgage securities issued or backed
by mortgage pools of GNMA,
FNMA and FHLMC. The Index is an unmanaged index
and includes the reinvestment
of all dividends, but does not reflect the
payment of transaction costs and
advisory fees associated with an investment in
the Fund. The securities that
comprise the Index may differ substantially
from the securities in the Fund's
portfolio. The Lehman Mortgage-Backed
Securities Index is not the only index
that may be used to characterize performance of
mortgage backed securities,
and other indexes may portray different
comparative performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directorsx
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Harry A. Jacobs, Jr.
Mendel A. Melzer, CFA
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Louis A. Weil, III
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Shereff, Friedman, Hoffman & Goodman LLP
919 Third Avenue
New York, NY 10022
The views expressed in this report and
information about the Fund's portfolio
holdings are for the period covered by this
report and are subject to change
thereafter.
This report is not authorized for distribution
to prospective investors unless
preceded or accompanied by a current
prospectus.
743915209 MF102E
743915100 Cat. #44400Q3
743915308
743915407
