PRUDENTIAL GOVERNMENT INCOME FUND INC, 485BPOS, 1996-04-30

PRUDENTIAL GOVERNMENT INCOME FUND INC
485BPOS, 1996-04-30

Previous: LINCOLN LOGS LTD, 10KSB, 1996-04-30

Next: FUND FOR TAX FREE INVESTORS INC, 485BPOS, 1996-04-30

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1996

REGISTRATION NOS. 2-82976
811-3712
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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 /X/

AMENDMENT NO. 25 /X/

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

PRUDENTIAL GOVERNMENT INCOME 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):

<TABLE>
<C> <S>
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(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.
</TABLE>

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE* REGISTRATION FEE
<S> <C> <C> <C> <C>
Shares of Common Stock, par value
$.01 per share...................... 8,467,028 $9.17 $289,992.08 $100
</TABLE>

*The calculation of the maximum aggregate offering price was made pursuant to
Rule 24e-2 and was based upon an offering price of $9.17 per share, equal to
the net asset value per share as of the close of business on April 18, 1996
pursuant to Rule 457(d). The total number of shares redeemed during the fiscal
year ended February 29, 1996 amounted to 40,370,049 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
31,934,645 shares have been used for reduction pursuant to paragraph (c) of
Rule 24f-2 in all previous filings during the current year. 8,435,404
($82,270,251) of the redeemed shares for the fiscal year ended February 29,
1996 are being used for the reductions in the post-effective amendment being
filed herein.

PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF COMMON STOCK, PAR
VALUE $.01 PER SHARE. THE REGISTRANT FILED A NOTICE UNDER SUCH RULE FOR ITS
FISCAL YEAR ENDED FEBRUARY 29, 1996 ON OR ABOUT APRIL 29, 1996.

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

<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ---------------------------------------------------------------------------- ------------------------------------
<S> <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
Item 4. General Description of Registrant................................ Cover Page; Fund Highlights; How the
Fund Invests; How the Fund is
Managed; General Information
Item 5. Management of the Fund........................................... Financial Highlights; How the Fund
is Managed; General Information
Item 5A. Management's Discussion of Fund Performance...................... Not Applicable
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.................................. General Information
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
Item 20. Tax Status....................................................... Taxes, Dividends and Distributions
Item 21. Underwriters..................................................... Distributor
Item 22. Calculation of Performance Data.................................. Performance Information
Item 23. Financial Statements............................................. Financial Statements
</TABLE>

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.
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.

(Class Z Shares)
- ----------------------------------------------------

PROSPECTUS DATED APRIL 30, 1996

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

Prudential Government Income Fund, Inc. (the Fund), is an open-end, diversified,
management investment company, or mutual fund, which has as its investment
objective the seeking of a high current return. The Fund will seek to achieve
this objective primarily by investing in U.S. Government securities, including
U.S. Treasury Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury, and obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, and by engaging in various derivative transactions such as
the purchase and sale of put and call options. In an effort to hedge against
changes in interest rates and thus preserve its capital, the Fund may also
engage in transactions involving futures contracts on U.S. Government securities
and options on such futures. See "How the Fund Invests--Investment Objective and
Policies." There can be no assurance that the Fund's investment objective will
be achieved. The Fund's address is One Seaport Plaza, New York, New York 10292,
and its telephone number is (800) 225-1852.

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

Class Z shares are offered exclusively for sale to participants in the PSI
401(k) Plan, an employee benefit plan sponsored by Prudential Securities
Incorporated (the PSI 401(k) Plan or the Plan). Only Class Z shares are offered
through this Prospectus. The Fund also offers Class A, Class B and Class C
shares through the attached Prospectus dated April 30, 1996 (the Retail Class
Prospectus), which is a part hereof.

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

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 30, 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 EXPENSES

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS Z SHARES
----------------------
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...... None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends......... None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds,
whichever is lower)..................... None
Redemption Fees.......................... None
Exchange Fee............................. None

ANNUAL FUND OPERATING EXPENSES* CLASS Z SHARES
----------------------
(as a percentage of average net assets)
<S> <C>
Management Fees.......................... .50%
12b-1 Fees............................... None
Other Expenses........................... .26
-----
Total Fund Operating Expenses............ .76
-----
-----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000
investment, assuming:
(1) 5% annual return and (2)
redemption at the end of
each time period:
Class Z................. $8 $24 $42 $94
The above example is based on expenses expected to have been incurred if
Class Z shares had been in existence throughout the fiscal year ended
February 29, 1996. 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 Class Z shares of 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 and transfer agency and custodian fees.
- -------------
* Estimated based on expenses expected to have been incurred if Class Z shares had
been in existence throughout the fiscal year ended February 29, 1996. Class Z shares
commenced being offered on March 1, 1996.
</TABLE>

2
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND IS MANAGED--DISTRIBUTOR" IN
THE PROSPECTUS:

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

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

As a qualified plan, the PSI 401(k) Plan generally pays no federal income
tax. Individual participants in the Plan should consult Plan documents and their
own tax advisers for information on the tax consequences associated with
participating in the PSI 401(k) Plan.

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

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

Class Z shares of the Fund are offered exclusively for sale to participants
in the PSI 401(k) Plan. Such shares may be purchased or redeemed only by the
Plan on behalf of individual Plan participants at NAV without any sales or
redemption charge. Class Z shares are not subject to any minimum investment
requirements. The Plan purchases and redeems shares to implement the investment
choices of individual Plan participants with respect to their contributions in
the Plan. All purchases through the Plan will be for Class Z shares. As of March
1, 1996, Class A shares held through the PSI 401(k) Plan on behalf of
participants were automatically exchanged at relative net asset value for Class
Z shares. Individual Plan participants should contact the Prudential Securities
Benefits Department for information on making or changing of investment choices.
The Prudential Securities Benefits Department is located at One Seaport Plaza,
33rd Floor, New York, New York 10292 and may be reached by calling (212)
214-7194.

The average net asset value per share at which shares of the Fund are
purchased or redeemed by the Plan for the accounts of individual Plan
participants might be more or less than the net asset value per share prevailing
at the time that such participants made their investment choices or made their
contributions to the Plan.

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

Class Z shareholders of the Fund may exchange their Class Z shares for Class
Z shares of certain other Prudential Mutual Funds on the basis of relative net
asset value. You should contact the Prudential Securities Benefits Department
about how to exchange your Class Z shares. See "How to Buy Shares of the Fund"
above. Participants who wish to transfer their Class Z shares out of the PSI
401(k) Plan following separation from service (i.e., voluntary or involuntary
termination of employment or retirement) will have their Class Z shares
exchanged for Class A shares at net asset value.

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

3
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.

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

PROSPECTUS DATED APRIL 30, 1996

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

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 30, 1996, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.

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

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

FUND HIGHLIGHTS

The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.

WHAT IS PRUDENTIAL GOVERNMENT INCOME FUND, INC.?

Prudential Government 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 seek a high current return. The Fund
seeks to achieve its objective primarily by investing in U.S. Government
securities, including U.S. Treasury Bills, Notes, Bonds, and other debt
securities issued by the U.S. Treasury, and obligations issued or guaranteed by
U.S. Government agencies or instrumentalities. The Fund may also write covered
call options and covered put options and purchase put and call options. There
can be no assurance that the Fund's investment objective will be achieved. See
"How the Fund Invests--Investment Objective and Policies" at page 8.

RISK FACTORS AND SPECIAL CHARACTERISTICS

The Fund may engage in short selling and use leverage, including dollar rolls
and bank borrowings, which entail additional risks to the Fund. See "How the
Fund Invests--Other Investment Information" at page 15. The Fund may also engage
in various hedging and income enhancement strategies, including derivative
transactions such as the purchase and sale of put and call options on U.S.
Government securities, transactions involving futures contracts on U.S.
Government securities and options on such futures contracts and in interest rate
swap transactions. See "How the Fund Invests--Other Investments and Policies" at
page 9.

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 up to $3 billion and .35 of 1% of the
average daily net assets in excess of $3 billion. As of March 31, 1996, PMF
served as manager or administrator to 60 investment companies, including 38
mutual funds, with aggregate assets of approximately $53 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 17.

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 an
annual rate of .15 of 1% of the average daily net assets of the Class A shares,
at an annual rate of .825 of 1% of the average daily net assets of the Class B
shares up to $3 billion, .80 of 1% of the next $1 billion of such net assets and
.50 of 1% of such net assets in excess of $4 billion and at an annual 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 18.

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 24 and "Shareholder Guide--Shareholder Services"
at page 32.

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 20 and "Shareholder Guide--How to Buy Shares of the Fund" at page 24.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers three classes of shares through this Prospectus:

- 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.

See "Shareholder Guide--Alternative Purchase Plan" at page 24.

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 27.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

The Fund expects to declare daily and pay monthly dividends of net investment
income 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 21.

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 Imposed or Deferred
Sales Load 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 1% on redemptions made
year, decreasing by 1% within one year of
annually to 1% in the purchase
fifth and sixth years
and 0% in the seventh
year*
Redemption Fees.......................... None None None
Exchange Fee............................. None None None

ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------------ ------------------------
<S> <C> <C> <C>
Management Fees.......................... .50% .500% .50%
12b-1 Fees (After Reduction)............. .15%++ .825%++ .75%++
Other Expenses........................... .26% .260% .26%
----- ------ -----
Total Fund Operating Expenses (After
Reduction).............................. .91% 1.585% 1.51%
----- ------ -----
----- ------ -----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A................................................ $ 49 $ 68 $ 88 $ 147
Class B................................................ $ 66 $ 80 $ 96 $ 156
Class C................................................ $ 25 $ 48 $ 82 $ 180
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ $ 49 $ 68 $ 88 $ 147
Class B................................................ $ 16 $ 50 $ 86 $ 156
Class C................................................ $ 15 $ 48 $ 82 $ 180
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
THE ABOVE EXAMPLE IS BASED ON DATA FOR THE FUND'S FISCAL YEAR ENDED FEBRUARY 29, 1996. 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" include operating expenses of the Fund,
such as Directors' and professional fees, registration fees, reports to shareholders and transfer agency and
custodian fees.
<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 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, Class B and Class C Distribution and Service Plans
provide that the Fund may pay a distribution fee of up to .30 of 1% per
annum of the average daily net assets of the Class A shares, and up to 1%
per annum of the average daily net assets of the Class B and Class C
shares, the Distributor has agreed to limit its distribution fees with
respect to Class A shares of the Fund to no more than .15 of 1% of the
average daily net assets of the Class A shares, to no more than .825 of 1%
of the average daily net assets of the Class B shares and to no more than
.75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending February 28, 1997. See "How the Fund is
Managed--Distributor." Total Fund Operating Expenses without such
limitations would be 1.06% for Class A shares and 1.76% for each of the
Class B shares and Class C shares.
</TABLE>

4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A SHARES)

The following financial highlights for the Class A shares have been audited
by Deloitte & Touche LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the financial
statements and the notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class A share
of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. The information has been
determined based on data contained in the financial statements. Further
performance information is contained in the annual report, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."

<TABLE>
<CAPTION>
JANUARY 22,
1990(A)
YEARS ENDED FEBRUARY 28/29, THROUGH
---------------------------------------------------------- FEBRUARY
1996 1995 1994 1993 1992 1991 28, 1990
-------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.17
-------- -------- -------- -------- -------- -------- -----------
Income from investment operations
Net investment income......... 0.60 0.59 0.61 0.66 0.68 0.69 0.06
Net realized and unrealized
gain (loss) on investment
transactions................. 0.45 (0.54) (0.25) 0.35 0.37 0.26 (0.11)
-------- -------- -------- -------- -------- -------- -----------
Total from investment
operations............... 1.05 0.05 0.36 1.01 1.05 0.95 (0.05)
-------- -------- -------- -------- -------- -------- -----------
Less distributions
Dividends from net investment
income....................... (0.60) (0.59) (0.61) (0.66) (0.68) (0.69) (0.06)
Distributions in excess of
accumulated gains............ -- -- (0.02) -- -- -- --
Distributions from paid-in
capital in excess of par..... -- -- -- (0.12) (0.22) (0.24) (0.06)
-------- -------- -------- -------- -------- -------- -----------
Total distributions....... (0.60) (0.59) (0.63) (0.78) (0.90) (0.93) (0.12)
-------- -------- -------- -------- -------- -------- -----------
Net asset value, end of
period....................... $ 9.04 $ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00
-------- -------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -------- -----------
TOTAL RETURN(C):.............. 12.41% .83% 3.90% 11.55% 12.18% 11.21% (0.54)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $945,038 $871,145 $51,673 $61,297 $33,181 $28,971 $1,961
Average net assets (000)...... $909,169 $ 95,560 $55,921 $46,812 $29,534 $23,428 $ 501
Ratios to average net assets:
Expenses, including
distribution fees........ 0.91% 0.98% 0.84% 0.84% 0.86% 0.85% 0.92%(b)
Expenses, excluding
distribution fees........ 0.76% 0.83% 0.69% 0.69% 0.71% 0.70% 0.76%(b)
Net investment income..... 6.65% 7.49% 6.48% 7.17% 7.51% 7.76% 9.11%(b)
Portfolio turnover rate....... 123% 206% 80% 36% 187% 213% 329%
<FN>
-------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) 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 PERIODS INDICATED)
(CLASS B SHARES)

The following financial highlights for the Class B shares have been audited by
Deloitte & Touche LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the financial
statements and the notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class B share
of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. This information has been
determined 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>
YEARS ENDED FEBRUARY 28/29,
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989(A) 1988 1987
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
year............... $8.60 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.09 $ 9.85 $ 10.59 $ 10.60
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income from
investment
operations
Net investment
income............. 0.54 0.53 0.53 0.58 0.60 0.62 0.68 0.69 0.67 0.70
Net realized and
unrealized gain
(loss) on
investment
transactions....... 0.44 (0.53) (0.25) 0.35 0.37 0.26 0.15 (0.49) (0.40) 0.35
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from
investment
operations..... 0.98 -- 0.28 0.93 0.97 0.88 0.83 0.20 0.27 1.05
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Less distributions
Dividends from net
investment
income............. (0.54) (0.53) (0.53) (0.58) (0.60) (0.62) (0.68) (0.69) (0.67) (0.70)
Distributions from
net realized
gains.............. -- -- -- -- -- -- -- -- (0.24) (0.36)
Distributions in
excess of
accumulated
gains.............. -- -- (0.02) -- -- -- -- -- -- --
Distributions from
paid-in capital in
excess of par...... -- -- -- (0.12) (0.22) (0.24) (0.24) (0.27) (0.10) --
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
distributions... (0.54) (0.53) (0.55) (0.70) (0.82) (0.86) (0.92) (0.96) (1.01) (1.06)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end
of year............ $9.04 $ 8.60 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.09 $ 9.85 $ 10.59
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN:(B).... 11.54% .24% 3.03% 10.61% 11.27% 10.35% 10.49% 2.32% 3.36% 10.30%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000)......... $641,946 $ 705,732 $2,202,555 $2,680,259 $2,724,428 $3,127,587 $3,760,003 $3,814,945 $3,995,721 $4,090,417
Average net assets
(000).............. $647,515 $1,735,413 $2,487,990 $2,670,924 $2,903,704 $3,432,948 $3,814,455 $3,984,300 $3,796,998 $3,978,186
Ratios to average
net assets:
Expenses,
including
distribution
fees........... 1.58% 1.66% 1.68% 1.69% 1.71% 1.67% 1.49% 1.35% 1.60% 1.53%
Expenses,
excluding
distribution
fees........... 0.76% 0.80% 0.69% 0.69% 0.71% 0.70% 0.64% 0.63% 0.65% 0.61%
Net investment
income......... 5.99% 6.17% 5.64% 6.32% 6.66% 6.94% 7.46% 7.61% 6.88% 6.56%
Portfolio turnover
rate............... 123% 206% 80% 36% 187% 213% 329% 278% 147% 266%
<FN>
-------------
(a) On July 1, 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.
(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.
</TABLE>

6
<PAGE>

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS C SHARES)

The following financial highlights for the Class C shares have been audited by
Deloitte & Touche LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the financial
statements and the notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class C share
of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. This information has been
determined based on data contained in the financial statements. Further
performance information is contained in the annual report, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."

<TABLE>
<CAPTION>
AUGUST 1,
YEAR 1994(A)
ENDED THROUGH
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------- -------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 8.60 $ 8.69
------ -------------
Income from investment
operations
Net investment income......... 0.54 0.31
Net realized and unrealized
gain (loss) on investment
transactions................. 0.44 (0.09)
------ -------------
Total from investment
operations............... 0.98 0.22
------ -------------
Less distributions
Dividends from net investment
income....................... (0.54) (0.31)
Distributions from net
realized gains............... -- --
Distributions in excess of
accumulated gains............ -- --
Distributions from paid-in
capital in excess of par..... -- --
------ -------------
Total distributions....... (0.54) (0.31)
------ -------------
Net asset value, end of
period....................... $ 9.04 $ 8.60
------ -------------
------ -------------
TOTAL RETURN(C):.............. 11.63% 2.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $1,799 $204
Average net assets (000)...... $ 765 $111
Ratios to average net assets:
Expenses, including
distribution fees........ 1.51% 1.63%(b)
Expenses, excluding
distribution fees........ 0.76% 0.88%(b)
Net investment income..... 5.99% 6.71%(b)
Portfolio turnover rate....... 123% 206%
<FN>
-------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) 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 the 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 SEEK A HIGH CURRENT RETURN. THE FUND
WILL SEEK TO ACHIEVE THIS OBJECTIVE PRIMARILY BY INVESTING IN U.S. GOVERNMENT
SECURITIES, INCLUDING U.S. TREASURY BILLS, NOTES, BONDS AND OTHER DEBT
SECURITIES ISSUED BY THE U.S. TREASURY, AND OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES; WRITING COVERED CALL OPTIONS AND
COVERED PUT OPTIONS AND PURCHASING PUT AND CALL OPTIONS. THESE GUARANTEES APPLY
ONLY TO THE PAYMENT OF PRINCIPAL AND INTEREST ON THESE SECURITIES AND DO NOT
EXTEND TO THE SECURITIES' YIELD OR VALUE, WHICH ARE LIKELY TO VARY WITH
FLUCTUATIONS IN INTEREST RATES, NOR DO THE GUARANTEES EXTEND TO THE YIELD OR
VALUE OF THE FUND'S SHARES. SEE "INVESTMENT OBJECTIVE AND POLICIES--U.S.
GOVERNMENT SECURITIES--MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT
INSTRUMENTALITIES" IN THE STATEMENT OF ADDITIONAL INFORMATION. THE FUND HAS NO
LIMITATIONS WITH RESPECT TO THE MATURITIES OF PORTFOLIO SECURITIES IN WHICH IT
MAY INVEST. HIGH CURRENT RETURN MEANS THE RETURN RECEIVED FROM INTEREST INCOME
FROM U.S. GOVERNMENT AND OTHER DEBT SECURITIES AND FROM NET GAINS REALIZED FROM
SALES OF PORTFOLIO SECURITIES. THE FUND MAY ALSO REALIZE INCOME FROM PREMIUMS
FROM COVERED PUT AND CALL OPTIONS WRITTEN BY THE FUND ON U.S. GOVERNMENT
SECURITIES AS WELL AS OPTIONS ON FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES
AND NET GAINS FROM CLOSING PURCHASE AND SALES TRANSACTIONS WITH RESPECT TO THESE
OPTIONS. AT LEAST 65% OF THE TOTAL ASSETS OF THE FUND WILL BE INVESTED IN U.S.
GOVERNMENT SECURITIES. THERE CAN BE NO ASSURANCE THAT THE FUND'S INVESTMENT
OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and Policies" in the
Statement of Additional Information.

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

The Fund's net asset value will vary with changes in the values of the Fund's
portfolio securities, which values will generally vary inversely with changes in
interest rates. The writing of options on U.S. Government securities and options
on futures contracts on U.S. Government securities may limit the Fund's
potential for capital gains on its portfolio.

U.S. GOVERNMENT SECURITIES

U.S. TREASURY SECURITIES

THE FUND WILL INVEST IN U.S. TREASURY SECURITIES, INCLUDING BILLS, NOTES,
BONDS AND OTHER DEBT SECURITIES ISSUED BY THE U.S. TREASURY. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.

SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES

THE FUND WILL INVEST IN SECURITIES ISSUED BY AGENCIES OF THE U.S. GOVERNMENT
OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT. These obligations, including those
which are guaranteed by federal agencies or instrumentalities, may or may not be
backed by the "full faith and credit" of the United States. Obligations of the
Government National Mortgage Association (GNMA), the Farmers Home Administration
and the Export-Import Bank are backed by the full faith and credit of the United
States. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the agency

8
<PAGE>
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest which are not backed by the full faith and credit of the United States
include obligations such as those issued by the Tennessee Valley Authority, the
Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation (FHLMC) and the United States Postal Service, each of which has the
right to borrow from the United States Treasury to meet its obligations, and
obligations of the Federal Farm Credit Bank and the Federal Home Loan Bank, the
obligations of which may only be satisfied by the individual credit of the
issuing agency. GNMA, FNMA and FHLMC investments may include collateralized
mortgage obligations. See "Other Investments and Policies" below.

OBLIGATIONS ISSUED OR GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE UNITED
STATES 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 UNITED STATES 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.

MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES

THE FUND WILL INVEST IN MORTGAGE-BACKED SECURITIES, INCLUDING THOSE
REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA,
FNMA AND FHLMC CERTIFICATES. The U.S. Government or the issuing agency
guarantees the payment of interest and principal of these securities. However,
the guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. See "Investment Objective and
Policies--U.S. Government Securities--Mortgage-Related Securities Issued by U.S.
Government Instrumentalities" 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. Because the
prepayment characteristics of the underlying mortgages vary, it is not possible
to predict accurately the average life of a particular issue of pass-through
certificates. Mortgage-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying mortgage obligations.
During periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. 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 must be
reinvested in securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium could result in capital losses.

THE FUND MAY ALSO INVEST IN BALLOON PAYMENT MORTGAGE-BACKED SECURITIES. A
balloon payment mortgage-backed security is an amortizing mortgage security with
installments of principal and interest, the last installment of which is
predominantly principal.

THE FUND MAY ALSO INVEST IN MORTGAGE PASS-THROUGH SECURITIES WHERE ALL
INTEREST PAYMENTS GO TO ONE CLASS OF HOLDERS (INTEREST ONLY SECURITIES OR IOS)
AND ALL PRINCIPAL PAYMENTS GO TO A SECOND CLASS OF HOLDERS (PRINCIPAL ONLY
SECURITIES OR POS). These securities are commonly referred to as mortgage-backed
securities strips or MBS strips. The yields to maturity on IOs are very
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse 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 these securities. Conversely, if
the underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.

OTHER INVESTMENTS AND POLICIES

AT LEAST 65% OF THE TOTAL ASSETS OF THE FUND WILL BE INVESTED IN U.S.
GOVERNMENT SECURITIES, AS DESCRIBED ABOVE. U.S. Government securities which are
purchased pursuant to repurchase agreements or on a when-issued or delayed
delivery

9
<PAGE>
basis will be treated as U.S. Government securities for purposes of this
calculation. See "Repurchase Agreements" and "When-Issued and Delayed Delivery
Securities" below.

UP TO 35% OF THE TOTAL ASSETS OF THE FUND MAY BE COMMITTED TO INVESTMENTS
OTHER THAN U.S. GOVERNMENT SECURITIES. These investments would include the
securities described in this subsection as well as purchased put and call
options and purchased put options on futures contracts. See "Options
Transactions" and "Transactions in Futures Contracts on U.S. Government
Securities and Options Thereon" below.

THE FUND IS PERMITTED TO INVEST UP TO 20% OF ITS TOTAL ASSETS IN HIGH QUALITY
MONEY MARKET INSTRUMENTS, INCLUDING COMMERCIAL PAPER OF DOMESTIC CORPORATIONS
AND CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND OTHER OBLIGATIONS OF
DOMESTIC AND FOREIGN BANKS. Such obligations will, at the time of purchase, be
rated within the two highest quality grades as determined by a nationally
recognized statistical rating organization (such as Moody's Investors Service
(Moody's) or Standard & Poor's Ratings Group (S&P)) or, if unrated, will be of
equivalent quality in the judgment of the Fund's investment adviser.

THE FUND MAY INVEST IN OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF
U.S. BANKS ONLY IF AFTER GIVING EFFECT TO SUCH INVESTMENT ALL SUCH INVESTMENTS
WOULD CONSTITUTE LESS THAN 10% OF THE FUND'S TOTAL ASSETS (DETERMINED AT THE
TIME OF INVESTMENT). These investments may be subject to certain risks,
including future political and economic developments, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of foreign
deposits and foreign exchange controls or other restrictions. In addition, there
may be less publicly available information about a foreign bank or foreign
branch of a U.S. bank than about a domestic bank and such entities may not be
subject to the same accounting, auditing and financial recordkeeping standards
and requirements as domestic banks.

THE FUND MAY ALSO PURCHASE OBLIGATIONS OF THE INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT (THE WORLD BANK). Obligations of the World Bank
are supported by appropriated but unpaid commitments of its member countries,
including the U.S., and there is no assurance these commitments will be
undertaken or met in the future.

THE FUND IS PERMITTED TO INVEST IN ADJUSTABLE RATE DEBT SECURITIES, including
securities issued by U.S. Government agencies, 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. The value of adjustable rate securities will, like other debt
securities, generally vary inversely with changes in prevailing interest rates.
The value of adjustable rate securities is unlikely to rise in periods of
declining interest rates to the same extent as fixed rate instruments. 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.

THE FUND MAY INVEST IN DEBT OBLIGATIONS RATED AT LEAST A BY S&P OR MOODY'S
OR, IF UNRATED, DEEMED TO BE OF COMPARABLE CREDIT QUALITY BY THE FUND'S
INVESTMENT ADVISER. These debt securities may have adjustable or fixed rates of
interest and in certain instances may be secured by assets of the issuer.
Adjustable rate corporate debt securities may have features similar to those of
adjustable rate mortgage-backed securities, but corporate debt securities,
unlike mortgage-backed securities, are not subject to prepayment risk other than
through contractual call provisions which generally impose a penalty for
prepayment. Fixed rate debt securities may also be subject to call provisions.

THE FUND MAY ALSO PURCHASE COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND REAL
ESTATE MORTGAGE INVESTMENT CONDUITS (REMICS). A CMO is a security issued by a
corporation or a U.S. Government 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. CMOs are partitioned into several
classes with a ranked priority by which the classes of obligations are redeemed.
The Fund may invest in privately-issued CMOs which are collateralized by
mortgage-backed securities issued or guaranteed by GNMA, FHLMC or FNMA or issued
by any other agency or instrumentality of the U.S. Government. The Fund may also
invest in privately-issued CMOs collateralized by whole loans or private
mortgage pass-through securities and balloon payment mortgage-backed securities.
The Fund will invest in CMOs rated at least A by S&P or Moody's or, if unrated,
deemed to be of comparable credit quality by the Fund's investment adviser. A
REMIC may be issued by a trust, partnership, corporation, association, or a
segregated pool of mortgages, or an agency of the U.S. Government and, in each
case, must qualify and elect treatment as such under the Tax Reform Act of 1986.
A REMIC must consist of one or more

10
<PAGE>

classes of "regular interests," some of which may be adjustable rate, and a
single class of "residual interests." To qualify as a
REMIC, substantially all the assets of the entity must be in assets directly or
indirectly secured, principally by real property. The Fund does not intend to
invest in residual interests and will only invest in REMICs rated at least A by
S&P or Moody's or, if unrated, deemed to be of comparable credit quality by the
Fund's investment adviser. CMOs and REMICs issued by an agency or
instrumentality of the U.S. Government are considered U.S. Government securities
for purposes of this Prospectus. 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 limitation of the Investment
Company Act on acquiring interests in other investment companies. See
"Investment Objective and Policies--Collateralized Mortgage Obligations" in the
Statement of Additional Information.

THE FUND MAY ALSO INVEST UP TO 20% OF ITS TOTAL ASSETS IN ASSET-BACKED
SECURITIES. Through the use of trusts and special purpose subsidiaries, various
types of assets, primarily home equity loans and automobile and credit card
receivables, have been securitized in pass-through structures similar to
mortgage pass-through structures or in a pay-through structure similar to the
collateralized mortgage structure. The Fund may invest in these and other types
of asset-backed securities which may be developed in the future. Asset-backed
securities present certain risks that are not presented by mortgage-backed
securities. Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables are
generally unsecured. In connection with 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. The Fund will only invest
in asset-backed securities rated at least A by S&P or Moody's or, if unrated, of
equivalent quality in the judgment of the Fund's investment adviser.

OPTIONS TRANSACTIONS

PURCHASING OPTIONS

THE FUND MAY PURCHASE PUT AND CALL OPTIONS ON U.S. GOVERNMENT SECURITIES. The
Fund may purchase a put option in an effort to protect the value of a security
which it owns against a substantial decline in market value (protective puts),
if the Fund's investment adviser believes that a defensive posture is warranted
for a portion of the portfolio. The Fund may also purchase a put option to cover
a put option it has written or to close an existing option position.

The Fund may wish to protect certain portfolio securities against a decline in
market value at a time when put options on those particular securities are not
available for purchase. The Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While changes in the value of the put
option should generally offset changes in the value of the securities being
hedged, the correlation between the two values may not be as close in these
transactions as in transactions in which the Fund purchases a put option on an
underlying security it owns.

THE FUND MAY PURCHASE CALL OPTIONS ON DEBT SECURITIES IT INTENDS TO ACQUIRE IN
ORDER TO HEDGE AGAINST AN ANTICIPATED MARKET APPRECIATION IN THE PRICE OF THE
UNDERLYING SECURITIES AT LIMITED RISK AND WITH A LIMITED CASH OUTLAY. If the
market price does rise as anticipated, the Fund will benefit from that rise but
only to the extent that the rise exceeds the premiums paid. If the anticipated
rise does not occur or if it does not exceed the premium, the Fund will bear the
expense of the option premiums and transaction costs without gaining an
offsetting benefit. The Fund may also purchase a call option to close an
existing option position.

WRITING COVERED OPTIONS

THE FUND MAY WRITE (I.E., SELL) COVERED PUT AND CALL OPTIONS ON U.S.
GOVERNMENT SECURITIES. When the Fund writes an option, it receives a premium
which it retains whether or not the option is exercised. The Fund's principal
reason for writing options is to attempt to realize, through the receipt of
premiums, a greater current return than would be realized on the underlying
securities alone.

11
<PAGE>
THE PURCHASER OF A CALL OPTION HAS THE RIGHT, FOR A SPECIFIED PERIOD OF TIME,
TO PURCHASE THE SECURITIES SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE
EXERCISE PRICE). By writing a call option, the Fund becomes obligated during the
term of the option, upon exercise of the option, to sell the underlying
securities to the purchaser against receipt of the exercise price. When
the Fund writes a call option, the Fund loses the potential for gain on the
underlying securities during the period that the option is open.

CONVERSELY, THE PURCHASER OF A PUT OPTION HAS THE RIGHT, FOR A SPECIFIED
PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE WRITER OF
THE PUT AT A SPECIFIED EXERCISE PRICE. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price, upon exercise of the option. The Fund might,
therefore, be obligated to purchase the underlying securities for more than
their current market price.

THE FUND MAY ALSO WRITE STRADDLES (I.E., A COMBINATION OF A CALL AND A PUT
WRITTEN ON THE SAME SECURITY AT THE SAME STRIKE PRICE). In such cases, the same
issue of the security is considered "cover" for both the put and the call and
the Fund will also segregate or deposit cash, U.S. Government securities or
liquid high-grade debt obligations equivalent to the amount, if any, by which
the put is "in the money." It is contemplated that the Fund's use of straddles
will be limited to 5% of the Fund's net assets (meaning that the securities used
for cover or segregated as described above will not exceed 5% of the Fund's net
assets at the time the straddle is written).

An exchange-traded option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the Fund
will generally purchase or write only those exchange-traded options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option at
any particular time. If a secondary market does not exist, it might not be
possible to effect a closing transaction in a particular option. If the Fund, as
a covered call option writer, is unable to effect a closing purchase
transaction, it will not be able to sell the underlying securities until the
option expires or is exercised or it otherwise covers the position.

The Fund will not purchase a put or call option on U.S. Government securities
if, as a result of such purchase, more than 20% of its total assets would be
invested in premiums for such options and on options on futures contracts on
U.S. Government securities. The Fund's ability to purchase put and call options
may be 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 "Taxes, Dividends and Distributions--Listed Options and Futures" in
the Statement of Additional Information.

OTHER CONSIDERATIONS

ALL OPTIONS PURCHASED OR SOLD BY THE FUND WILL BE TRADED ON A U.S. SECURITIES
EXCHANGE OR WILL BE PURCHASED OR SOLD BY A PRIMARY GOVERNMENT SECURITIES DEALER
RECOGNIZED BY THE FEDERAL RESERVE BANK OF NEW YORK (OTC OPTIONS). While
exchange-traded options are in effect guaranteed by The Options Clearing
Corporation, the Fund relies on the dealer from whom it purchases an OTC option
to perform if the option is exercised. The Fund's investment adviser monitors
the creditworthiness of dealers with whom the Fund enters into OTC option
transactions under the general supervision of the Fund's Board of Directors. The
Fund's ability to enter into options contracts may be limited by the
requirements of the Internal Revenue Code for qualification as a regulated
investment company. See the Statement of Additional Information for additional
information on options transactions.

TRANSACTIONS IN FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES AND OPTIONS
THEREON

THE FUND MAY PURCHASE AND SELL FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES
(FUTURES CONTRACTS) THAT ARE TRADED ON U.S. COMMODITY EXCHANGES. A futures
contract on a U.S. Government security, other than GNMA's which are cash
settled, is an agreement to purchase or sell an agreed amount of such securities
at a set price for delivery on an agreed future date. The Fund may purchase a
futures contract as a hedge against an anticipated decline in interest rates,
and resulting increase in market price, in securities the Fund intends to
acquire. The Fund may sell a futures contract as a hedge against an anticipated
increase in interest rates, and resulting decline in market price, in securities
the Fund owns.

12
<PAGE>
THE FUND MAY ALSO PURCHASE AND WRITE (I.E., SELL) "COVERED" CALL AND PUT
OPTIONS ON FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES THAT ARE TRADED ON
U.S. COMMODITY EXCHANGES. THE FUND WILL WRITE OPTIONS ON FUTURES CONTRACTS FOR
HEDGING PURPOSES, AS WELL AS TO REALIZE THROUGH THE RECEIPT OF PREMIUM INCOME, A
GREATER RETURN THAN WOULD BE REALIZED ON THE FUND'S PORTFOLIO SECURITIES ALONE.
An option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.

THE FUND MAY ALSO FROM TIME TO TIME PURCHASE EURODOLLAR INSTRUMENTS TRADED ON
THE CHICAGO MERCANTILE EXCHANGE. Eurodollar instruments are essentially U.S.
dollar-denominated futures contracts or options thereon which are linked to the
London Interbank Offered Rate (LIBOR). Eurodollar futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and sellers to obtain
a fixed rate for borrowings. The Fund intends to use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which many
interest rate swaps are linked. The use of these instruments is subject to the
same limitations and risks as those applicable to the use of interest rate
futures contracts and options thereon.

THE FUND MAY ALSO ENTER INTO CLOSING TRANSACTIONS WITH RESPECT TO FUTURES
CONTRACTS AND OPTIONS THEREON TO TERMINATE EXISTING POSITIONS. The Fund's
ability to enter into transactions in futures contracts and options thereon may
be limited by the Internal Revenue Code's requirements for qualification as a
regulated investment company. In addition, the Fund may not purchase or sell
futures contracts or related options for other than bona fide hedging purposes
if immediately thereafter the sum of the amount of initial margin deposits on
the Fund's existing futures and options on futures and for premiums paid for
such related options would exceed 5% of the liquidation value of the Fund's
total assets, after taking into account unrealized profits and unrealized losses
on any such contracts the Fund has entered into; provided, however, that in the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing such 5% limitation.

CHARACTERISTICS AND PURPOSES OF INTEREST RATE FUTURES

THE FUND WILL PURCHASE AND SELL FUTURES CONTRACTS PRIMARILY TO HEDGE ITS
ACTUAL OR ANTICIPATED HOLDINGS OF U.S. GOVERNMENT SECURITIES. There is generally
an inverse relationship between interest rates and bond prices. Generally, when
interest rates increase, bond prices will decline; when interest rates decline,
bond prices will increase. For example, if the Fund holds cash reserves or
short-term debt securities at a time that interest rates are expected to
decline, the Fund might purchase futures contracts as a hedge against
anticipated increases in the price of the U.S. Government securities that the
Fund intends to acquire (an anticipatory hedge).

CHARACTERISTICS AND PURPOSES OF OPTIONS ON FUTURES CONTRACTS ON U.S.
GOVERNMENT SECURITIES When an option on a futures contract is exercised, the
writer of the option delivers the futures position as well as the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract, at exercise, exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The Fund will be required to deposit initial and
variation margin with respect to options on futures contracts written by it.

The Fund will purchase put options on futures contracts primarily to hedge its
portfolio of U.S. Government 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 purchase call options on futures contracts to hedge the
Fund's portfolio against a possible market advance at a time when the Fund is
not fully invested in U.S. Government securities (other than Treasury Bills).

The Fund also will write call options on futures contracts as a hedge against
a modest decline in prices of debt securities held in the Fund's portfolio and
to earn additional income. If the futures price at expiration of the option is
below the exercise price, the

13
<PAGE>
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 securities in the Fund's
portfolio which were being hedged.

Writing a put option on a futures contract serves as a partial hedge against
an increase in the value of debt securities the Fund intends to acquire. If the
futures price at expiration of the option is above the exercise price, the Fund
will retain the full amount of the option premium thereby partially hedging
against any increase that may have occurred in the price of the debt securities
the Fund intends to acquire. If the futures price when the option is exercised
is below the exercise price, however, the Fund will incur a loss, which may be
wholly or partially offset by the decrease of the price of the securities the
Fund intends to acquire. The Fund will also write options on futures contracts
in whole or in part to enhance its current return through the receipt of premium
income.

See "Investment Objective and Policies--Futures Contracts on U.S. Government
Securities" in the Statement of Additional Information.

RISK CONSIDERATIONS

CERTAIN RISKS ARE INHERENT IN THE FUND'S USE OF FUTURES CONTRACTS AND OPTIONS
ON FUTURES. One such risk arises because the correlation between movements in
the price of futures and movements in the price of debt securities that are the
subject of the hedge will not be perfect. Another risk is that the movements in
the price of futures or options on futures may not move inversely with changes
in interest rates. If the Fund has sold futures contracts to hedge securities
held by the Fund and the value of the futures position declines more than the
price of such securities increases, the Fund will realize a loss on the futures
contracts which is not completely offset by the appreciation in the price of the
hedged securities. Similarly, if the Fund has written a call on a futures
contract and the value of the call increases by more than the increase in the
value of the securities held as cover, the Fund may realize a loss on the call
which is not completely offset by the appreciation in the price of the
securities held as cover and the premium received for writing the call.

REPURCHASE AGREEMENTS

The Fund may on occasion enter into repurchase agreements, whereby the seller
agrees to repurchase a security from the Fund at a mutually agreed-upon time and
price. The repurchase date is usually within a day or two of the original
purchase date although it may extend over 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 security.
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 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 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.

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. As a matter of fundamental policy, the Fund cannot
lend more than 30% of the value of its total assets.

14
<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

The Fund may purchase or sell U.S. Government 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 as much as a month or more 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 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.

OTHER INVESTMENT INFORMATION

The Fund is permitted to use the following investment techniques, although it
does not anticipate that any of them will constitute a significant component of
its investment program.

ZERO COUPON BONDS

The Fund may invest up to 5% of its total assets in zero coupon U.S.
Government securities. Zero coupon bonds are purchased at a discount from the
face amount because the buyer receives only the right to receive a fixed payment
on a certain date in the future and does not receive any periodic interest
payments. The effect of owning instruments which do not make current interest
payments is that a fixed yield is earned not only on the original investment but
also, in effect, on all discount accretion during the life of the obligations.
This implicit reinvestment of earnings at the same rate eliminates the risk of
being unable to reinvest distributions at a rate as high as the implicit yield
on the zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are comparable securities which pay interest
currently, which fluctuation increases the longer the period to maturity.

SHORT SALES AGAINST-THE-BOX

The Fund may make short sales against-the-box for the purpose of deferring
realization of gain or loss for federal income tax purposes. A short sale
"against-the-box" is a short sale in which the Fund owns an equal amount of the
securities sold short or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue as, and
equal in amount to, the securities sold short. The Fund may engage in such short
sales only to the extent that not more than 10% of the Fund's net assets
(determined at the time of the short sale) are held as collateral for such
sales.

BORROWING

The Fund may borrow money in an amount up to 20% of the value of its total
assets (not including the amount of such borrowings) 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.

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.

15
<PAGE>

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.

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.

DOLLAR ROLLS

The Fund may enter into dollar rolls in which the Fund sells securities for
delivery 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.

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 to dollar rolls. Dollar
rolls involve the risk that the market value of the securities retained by the
Fund may decline below the price of the securities the Fund has sold but is
obligated to repurchase under the agreement. In the event the buyer of
securities under a dollar roll files for bankruptcy or becomes insolvent, the
Fund's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities. Dollar rolls are considered
borrowings by the Fund for purposes of the percentage limitations applicable to
borrowings.

INTEREST RATE TRANSACTIONS

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

PORTFOLIO TURNOVER AND BROKERAGE

Based on its experience in managing similar investment products, the
investment adviser expects that, under normal circumstances, if the Fund writes
substantial numbers of options, and those options are exercised, the Fund's
portfolio turnover rate may be as high as 250% or higher. Such a rate would
significantly exceed that of a fund invested exclusively in U.S. Government
securities. See "Investment Objective and Policies--Options Transactions" in the
Statement of Additional Information. While the Fund will pay commissions in
connection with its options and futures transactions, U.S. Government securities
are generally traded on a "net" basis with dealers acting as principal for their
own accounts without a stated commission. Nevertheless, high portfolio turnover
may involve correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Fund. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information.

INVESTMENT RESTRICTIONS

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

16
<PAGE>
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 February 29, 1996, the total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were 0.91%, 1.58% and 1.51%, 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 UP TO $3 BILLION AND .35 OF 1% OF THE AVERAGE DAILY NET ASSETS IN EXCESS
OF $3 BILLION. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended February 29, 1996, the Fund paid management
fees to PMF of .50% of the Fund's average daily net assets. See "Manager" in the
Statement of Additional Information.

As of March 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 $53 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 THE 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 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.

The current portfolio manager of the Fund is Barbara L. Kenworthy, a managing
director and senior portfolio manager of Prudential Mutual Fund Investment
Management, a unit of PIC. Ms. Kenworthy has responsibility for the day-to-day
management of the Fund's portfolio and has managed the Fund's portfolio since
July 1994. Ms. Kenworthy was previously employed by The Dreyfus Corporation
(from June 1985 to June 1994) and served as president and portfolio manager for
several Dreyfus fixed-income funds.

Ms. Kenworthy also serves as the portfolio manager of Prudential Diversified
Bond Fund, Inc. and Prudential Mortgage Income Fund, Inc. and has 20 years of
investment management experience in both U.S. and foreign securities and
investment grade and high yield quality bonds. Ms. Kenworthy actively manages
each fund's portfolio according to the investment adviser's interest rate
outlook. Consistent with each fund's investment objective and policies, she
will, at times, invest in different sectors of the fixed-income markets seeking
price discrepancies and more favorable interest rates. The investment adviser
conducts extensive analysis of U.S. and overseas markets in an attempt to
identify trends in interest rates, supply and demand and economic growth. The
portfolio manager then selects the sectors, maturities and individual bonds she
believes provide the best value under those conditions. Ms. Kenworthy is
assisted by two credit analysis teams, one that specializes in investment grade
bonds and one that specializes in high yield bonds.

17
<PAGE>
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 CLASS A, CLASS B AND
CLASS C 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 A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (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 up to .25 of 1%) may not exceed .30 of 1% of
the average daily net assets of the Class A shares. 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 February 28, 1997.

UNDER THE CLASS B PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B SHARES AT AN ANNUAL RATE
OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS B SHARES UP TO $3
BILLION, .80 OF 1% OF THE NEXT $1 BILLION OF SUCH NET ASSETS AND .50 OF 1% OF
SUCH NET ASSETS IN EXCESS OF $4 BILLION. 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 up to $3 billion,
.55 of 1% of the next $1 billion of such net assets and .25 of 1% of such net
assets in excess of $4 billion, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class B shares. UNDER THE CLASS C PLAN, THE FUND
MAY PAY PRUDENTIAL SECURITIES FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH
RESPECT TO THE CLASS C SHARES AT AN ANNUAL RATE OF UP TO 1% OF AVERAGE DAILY NET
ASSETS OF CLASS C SHARES. 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 B Plan to .825 of 1% of the average daily net
assets of the Class B shares and 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
February 28, 1997. Prudential Securities also receives contingent deferred sales
charges from certain redeeming shareholders. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges."

18
<PAGE>

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 who 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. (the 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 ocmpensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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 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.
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.

19
<PAGE>

FEE WAIVERS AND SUBSIDY

PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and expense subsidies will increase the Fund's total return.

PORTFOLIO TRANSACTIONS

Prudential Securities may act as a broker and/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. Its mailing
address is P .O. Box 15005, New Brunswick, New Jersey 08906-5005. PMFS is a
wholly-owned subsidiary of PMF.

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 OF THE FUND. 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 NAVs and
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, if any, will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.

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 AND 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

20
<PAGE>

performance. 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 "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 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. 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, Dividends
and Distributions" in the Statement of Additional Information.

TAXATION OF SHAREHOLDERS

All dividends out of net investment income, together with distributions of
short-term capital gains, will be taxable as ordinary income to the shareholder
whether or not reinvested. Any net long-term 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 such 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 currently
is 28%. The maximum long-term capital gains rate for corporate shareholders
currently is the same as the maximum tax rate for ordinary income.

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.

Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state, local and foreign taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.

WITHHOLDING TAXES

Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds
payable to individuals and certain noncorporate shareholders who fail to furnish
correct tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case
of certain foreign shareholders) with the required

21
<PAGE>
certifications regarding the shareholder's status under federal income tax law.
Notwithstanding the foregoing, dividends of net investment income and short-term
capital gains to a foreign shareholder will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).

DIVIDENDS AND DISTRIBUTIONS

THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET INVESTMENT
INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. In determining the amount of capital gains to be distributed, the amount
of any capital loss carryforwards from prior years will be offset against
capital gains. As of February 29, 1996, the Fund had a capital loss carryforward
for federal income tax purposes of approximately $119,847,000. Accordingly, no
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of such carryforward. 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."

Shares will begin earning daily dividends on the day following the date on
which the shares are issued, the date of issuance customarily being the
"settlement" date. Shares continue to earn daily dividends until they are
redeemed. In the event an investor redeems all the shares in his or her account
at any time during the month, all daily dividends declared to the date of
redemption will be paid at the time of redemption.

DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV OF EACH CLASS ON THE PAYMENT AND RECORD DATE, RESPECTIVELY, 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 PAYMENT 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. 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. 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. Any distributions paid shortly after a purchase by an investor will have
the effect of reducing the per share net asset value of the investor's shares by
the per share amount of the distributions. Such distributions, although in
effect a return of invested principal, are subject to federal income taxes.
Accordingly, prior to purchasing shares of the Fund, an investor should
carefully consider the impact of capital gains distributions which are expected
to be or have been announced. If you hold shares through Prudential Securities
you should contact your financial adviser to elect to receive dividends and
distributions in cash.

WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. 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 DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR
PURCHASES.

22
<PAGE>
GENERAL INFORMATION

DESCRIPTION OF COMMON STOCK

THE FUND WAS INCORPORATED IN MARYLAND ON APRIL 8, 1983. THE FUND IS AUTHORIZED
TO ISSUE TWO BILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, DIVIDED
INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z COMMON
STOCK, EACH OF WHICH CONSISTS OF 500 MILLION AUTHORIZED SHARES. Each class of
common stock represents an interest in the same assets of the Fund and is
identical in all respects except that, (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares
which are not subject to any distribution and/or service fee), (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to the participants in the PSI 401(k) Plan, an employee
benefit plan sponsored by Prudential Securities. Since Class B and Class C
shares generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fee. In accordance with the Fund's
Articles of Incorporation, the Board of Directors may authorize the creation of
additional series of common stock and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the Board
may determine. Currently, the Fund is offering four classes, designated as Class
A, Class B, Class C and Class Z shares.

The Board of Directors may increase or decrease the number of authorized
shares without approval by 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 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 of 1933. 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.

23
<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 offering 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."

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 fifth 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
Government 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 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 Government 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.

ALTERNATIVE PURCHASE PLAN

THE FUND OFFERS THREE CLASSES OF SHARES THROUGH THIS PROSPECTUS (CLASS A,
CLASS B AND CLASS C) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE
STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE

24
<PAGE>
PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (THE 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 1% (Currently being Shares convert to Class A shares
charge or CDSC of 5% of the lesser of charged at a rate of approximately seven years after
the amount invested or the redemption .825 of 1%) 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 is
subject to different sales charges and distribution and/or service fees, (ii)
each class has exclusive voting rights on any matter submitted to shareholders
that relates solely to its arrangement and has separate voting rights on any
matter submitted to shareholders in which the interests of one class differs
from the interests of any other class 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) 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 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.

If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and

25
<PAGE>
Class C shares, you would not have all of your money invested initially because
the sales charge on Class A shares is deducted at the time of purchase.

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 5 years in the case of Class B shares and 6 years in the case of 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>
SALES CHARGE SALES CHARGE DEALER
AS PERCENTAGE AS PERCENTAGE CONCESSION AS
OF OFFERING OF AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- ------------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
$0 to $49,999 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50 3.83 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 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 that participate in the Transfer Agent's PruArray Program (a
benefit plan record keeping 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

26
<PAGE>

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.

PRUDENTIAL VISTA PROGRAM. Class A shares are offered at net asset value to
certain qualified employee retirement benefit plans under Section 401 of the
Internal Revenue Code, for which Prudential Defined Contribution Services serves
as the recordkeeper provided that such plan is also participating in the
Prudential Vista Program (PruVista Plan), and provided further that (i) for
existing plans, the plan has existing assets of at least $1 million and at least
100 eligible employees or participants, and (ii) for new plans, the plan has at
least 500 eligible employees or participants. The term "existing assets" for
this purpose includes transferable cash and GICs (guaranteed investment
contracts) maturing within 4 years.

SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan, PruVista
Plan or 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 90 days of the commencement of the financial adviser's employment at
Prudential Securities, (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 Fund's Transfer Agent either directly or through
Prudential Securities or Prusec at the time of purchase that you are entitled to
a 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 per share 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."

HOW TO SELL YOUR SHARES

YOU CAN REDEEM YOUR SHARES OF THE FUND AT ANY TIME 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--Class B Shares."

IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION

27
<PAGE>
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of 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 Prudential Preferred Financial 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 would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the 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 contingent deferred sales charge
will be imposed on any involuntary redemption.

90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Fund at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any contingent deferred sales charge or 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

28
<PAGE>

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 affect
federal 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, may 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 redemptions by you which reduces the current value
of your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any CDSC will be paid to and retained by the Distributor. See "How
the Fund is Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.

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

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 generally 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 NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested

29
<PAGE>
dividend shares and the amount which represents appreciation ($260). Therefore,
$240 of the $500 redemption proceeds ($500 minus $260) would be charged at a
rate of 4% (the applicable rate in the second year after purchase) for a total
CDSC of $9.60.

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

WAIVER OF 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 Fund's 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

30
<PAGE>
shares, all shares or amounts representing Class B shares then in your account
that were acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.

For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (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 (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.

HOW TO EXCHANGE YOUR SHARES

AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENT OF SUCH FUNDS. CLASS A,
CLASS B AND CLASS C SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C
SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS ON 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 THE TELEPHONE
EXCHANGE PRIVILEGE 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 1 (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

31
<PAGE>

recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. (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 OR THROUGH A DEALER WHICH HAS
ENTERED INTO A SELECTED DEALER AGREEMENT WITH THE FUND'S DISTRIBUTOR, YOU MUST
EXCHANGE YOUR SHARES BY CONTACTING YOUR 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 SHAREHOLDERS 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 or 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

32
<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. Withdrawal of Class
B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares--
Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional Information.

-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) 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. Shareholder 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.

33
<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
Other Investments and Policies..................................... 9
Other Investment Information....................................... 15
Investment Restrictions............................................ 16
HOW THE FUND IS MANAGED.............................................. 17
Manager............................................................ 17
Distributor........................................................ 18
Fee Waivers and Subsidy............................................ 20
Portfolio Transactions............................................. 20
Custodian and Transfer and Dividend Disbursing Agent............... 20
HOW THE FUND VALUES ITS SHARES....................................... 20
HOW THE FUND CALCULATES PERFORMANCE.................................. 20
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 21
GENERAL INFORMATION.................................................. 23
Description of Common Stock........................................ 23
Additional Information............................................. 23
SHAREHOLDER GUIDE.................................................... 24
How to Buy Shares of the Fund...................................... 24
Alternative Purchase Plan.......................................... 24
How to Sell Your Shares............................................ 27
Conversion Feature--Class B Shares................................. 30
How to Exchange Your Shares........................................ 31
Shareholder Services............................................... 32
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... A-1
</TABLE>

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

MF128A 4440464

Class A: 744339-10-2
CUSIP Nos.: Class B: 744339-20-1
Class C: 744339-30-0

Prudential
Government Income
Fund, Inc.

Prudential Mutual Funds

Building Your Future On Our Strength
Prospectus -- April 30, 1996

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

APRIL 30, 1996

<PAGE>

PRUDENTIAL GOVERNMENT INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 30, 1996

Prudential Government Income Fund, Inc. (the Fund), is an open-end,
diversified management investment company, or mutual fund, which has as its
investment objective the seeking of a high current return. The Fund will seek to
achieve this objective primarily by investing in U.S. Government securities,
including U.S. Treasury Bills, Notes and Bonds and other debt securities issued
by the U.S. Treasury, and obligations issued or guaranteed by U.S. Government
agencies or instrumentalities; writing covered put and call options and
purchasing put and call options. In an effort to hedge against changes in
interest rates and thus preserve its capital, the Fund may also engage in
transactions involving futures contracts on U.S. Government securities and
options on such contracts. There can be no assurance that the Fund's investment
objective will be achieved.

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 30, 1996, a copy of
which may be obtained from the Fund at One Seaport Plaza, New York, New York
10292.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information................................... B-2 --
Investment Objective and Policies..................... B-2 8
Investment Restrictions............................... B-9 16
Directors and Officers................................ B-11 17
Manager............................................... B-14 17
Distributor........................................... B-17 18
Portfolio Transactions and Brokerage.................. B-19 20
Purchase and Redemption of Fund Shares................ B-21 24
Shareholder Investment Account........................ B-24 33
Net Asset Value....................................... B-27 20
Taxes, Dividends and Distributions.................... B-28 21
Performance Information............................... B-30 20
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.............................. B-32 20
Financial Statements.................................. B-33 --
Independent Auditors' Report.......................... B-41 --
Appendix -- Historical Performance Data............... App-1
Appendix -- General Investment Information............ App-4
Appendix -- Information Relating to The Prudential.... App-5
</TABLE>

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

MF-128B 444079V
<PAGE>
GENERAL INFORMATION

At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name from
Prudential-Bache Government Plus Fund, Inc. to Prudential Government Income
Fund, Inc.

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to seek a high current return. The Fund
will seek a high current return primarily from interest income from U.S.
Government securities, premiums from put and call options on U.S. Government
securities and net gains from closing purchase and sale transactions with
respect to options on U.S. Government securities. The Fund may also realize net
gains from sales of portfolio securities. 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.

U.S. GOVERNMENT SECURITIES

MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT
INSTRUMENTALITIES. Mortgages backing the securities purchased by the Fund
include conventional thirty-year fixed rate mortgages, graduated payment
mortgages, fifteen-year mortgages and adjustable rate mortgages. 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 individual 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. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium. The opposite is true for pass-throughs
purchased at a discount.

GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Fund purchases are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive a share of all interest and
principal payments paid and owed 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 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 effected. The
Fund's adviser would re-evaluate the Fund's investment objectives and policies
if any such legislative proposals were adopted.

GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration (FHA) or the Farmers'
Home Administration (FMHA), or guaranteed by the Veterans Administration (VA).
The GNMA guarantee is backed by the full faith and credit of the United States.
The GNMA is also empowered to borrow without limitation from the U.S. Treasury
if necessary to make any payments required under its guarantee.

B-2
<PAGE>
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.

FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation was created in
1970 through enactment of Title III of the Emergency Home Finance Act of 1970.
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 owed 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.

FNMA SECURITIES. The Federal National Mortgage Association was established
in 1938 to create a secondary market in mortgages insured by the FHA. FNMA
issues guaranteed mortgage pass-through certificates (FNMA Certificates). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a PRO RATA share of all interest and principal payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest on FNMA Certificates
and the full return of principal. Like GNMA Certificates, FNMA Certificates are
assumed to be prepaid fully in their twelfth year.

CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The market value of mortgage
securities, like other U.S. Government 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 accelerate the recognition of income which when
distributed to shareholders will be taxable as ordinary income.

COLLATERALIZED MORTGAGE OBLIGATIONS

Certain issuers of mortgage-backed 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 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 (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
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.

B-3
<PAGE>
OTHER SECURITIES

The Fund will invest in foreign banks and foreign branches of U.S. banks
only if after giving effect to such investments all such investments would
constitute less than 10% of the Fund's total assets (determined at the time of
investment). Investing in securities of foreign companies in foreign countries
involves certain considerations and risks which are not typically associated
with investing in U.S. Government securities and those of domestic companies.
Foreign companies are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may be less publicly available information about foreign
companies and governments compared to reports and ratings published about U.S.
companies. Securities of some foreign companies are less liquid and more
volatile than securities of comparable U.S. companies, and brokerage commissions
and other transaction costs on foreign securities exchanges are generally higher
than in the United States.

OPTION WRITING AND RELATED RISKS

The Fund will write (I.E., sell) covered call or put options which are
traded on registered securities exchanges (the Exchanges) and may also write
such options with primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York (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.

OPTIONS TRANSACTIONS

Exchange-traded options are issued by The Options Clearing Corporation (OCC)
which, in effect, gives its guarantee to every exchange-traded option
transaction. In contrast, OTC options represent a contract between a U.S.
Government securities dealer and the Fund with no guarantee of the OCC. Thus,
when the Fund purchases an OTC option, it relies on the dealer from which it has
purchased the OTC option to make or take delivery of the U.S. Government
securities underlying the OTC option. Failure by the dealer to do so would
result in the loss of premium paid by the Fund as well as loss of the expected
benefit of the transaction.

Exchange-traded options generally have a continuous liquid market while OTC
options do not. Consequently, the Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the issuing dealer. Similarly, when the Fund writes an OTC option, it generally
will be able to close out the OTC option prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the Fund
originally wrote the OTC option. While the Fund will enter into OTC option
transactions only with dealers who will agree to and which are expected to be
capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate an OTC option at a favorable
price at any time prior to expiration. Until the Fund, as a covered OTC call
option writer, is able to effect a closing purchase transaction, it will not be
able to liquidate securities used as cover until the option expires, is
exercised or the Fund provides substitute cover. See "How the Fund
Invests--Other Investment Information--Illiquid Securities" in the Prospectus.
In the event of insolvency of the counterparty, the Fund may be unable to
liquidate an OTC option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in material losses to
the Fund. This requirement may impair the Fund's ability to sell a portfolio
security at a time when such a sale might be advantageous.

The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the underlying securities alone. 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
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

B-4
<PAGE>
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 market value of the underlying security at that time.

So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer 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 writer effects a closing purchase
transaction by purchasing an option covering the same underlying security and
having the same exercise price and expiration date (of the same series) as the
one previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to deliver the
underlying security in the case of a call option, the writer of the option is
required to pledge for the benefit of the broker the underlying security or
other assets in accordance with the rules of the OCC, an institution created to
interpose itself between buyers and sellers of options. Technically, the OCC
assumes the other side of every purchase and sale transaction on an Exchange
and, by doing so, guarantees the transaction.

The Fund writes only "covered" options. This means that, so long as the Fund
is obligated as the writer of a call option, it will (a) own the underlying
securities subject to the option, except that, in the case of call options on
U.S. Treasury Bills, the Fund might own U.S. Treasury Bills of a different
series from those underlying the call option, but with a principal amount and
value corresponding to the option contract amount and a maturity date no later
than that of the securities deliverable under the call option or (b) deposit and
maintain with its Custodian in a segregated account cash, U.S. Government
securities or other liquid, high-grade debt obligations having a value at least
equal to the fluctuating market value of the securities underlying the call. The
Fund will be considered "covered" with respect to a put option it writes if, so
long as it is obligated as the writer of a put option, it will (a) deposit and
maintain with its Custodian in a segregated account cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the exercise price of the option, or (b) own a put option on the
same security with an exercise price the same or higher than the exercise price
of the put option sold or, if lower, deposit and maintain the differential in
cash, U.S. Government securities or other liquid high-grade debt obligations in
a segregated account with its Custodian.

To the extent that a secondary market is available on the Exchanges, the
covered option writer may close out options it has written prior to the
assignment of an exercise notice by purchasing, in a closing purchase
transaction, an option of the same series as the option previously written. If
the cost of such a closing purchase, plus transaction costs, is greater than the
premium received upon writing the original option, the writer will incur a loss
in the transaction.

Because the Fund can 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 or other cover against which it can write options.
If the Fund writes a substantial number of options, its portfolio turnover will
be higher than if it did not do so. Portfolio turnover will increase to the
extent that options written by the Fund are exercised. Because the exercise of
such options depends on changes in the price of the underlying securities, the
Fund's portfolio turnover rate cannot be accurately predicted. The Fund's
turnover rate for the fiscal years ended February 28, 1995 and February 29, 1996
was 206% and 123%, respectively.

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 availability of deliverable Treasury Bills
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

B-5
<PAGE>
corresponding to the option contract size, the Fund may be hedged from a risk
standpoint. In addition, 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 GNMA CERTIFICATES. Options on GNMA Certificates are not currently traded
on any Exchange. However, the Fund intends to purchase and write such options
should they commence trading on any Exchange.

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

A GNMA Certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Fund closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.

RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be closed
out only on an Exchange which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an Exchange will exist for any
particular option at any particular time, and for some options no secondary
market on an Exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that the Fund
would have to exercise its options in order to realize any profit and may incur
transaction costs in connection therewith. If the Fund as a covered call option
writer is unable to effect a closing purchase transaction in a secondary market,
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: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
the OCC to handle current trading volume; or (f) 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 the OCC as a result of trades on that
Exchange would generally continue to be exercisable in accordance with their
terms.

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.

FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES

CHARACTERISTICS AND PURPOSE OF INTEREST RATE FUTURES. The Fund may purchase
and sell U.S. Exchange-traded interest-rate futures. Currently, there are
futures contracts based on U.S. Treasury Bonds, U.S. Treasury Notes, three-month
U.S. Treasury Bills and GNMA certificates. A clearing corporation associated
with the commodities exchange on which a futures contract trades assumes
responsibility for the completion of transactions and guarantees that futures
contracts will be performed. Although futures contracts call for actual delivery
or acceptance of debt securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery.

CHARACTERISTICS. The Fund neither pays nor receives money upon the purchase
or sale of a futures contract. Instead, when the Fund enters into a futures
contract, it will initially be required to deposit with its Custodian for the
benefit of the broker (the futures commission merchant) an amount of "initial
margin" of cash or U.S. Treasury Bills, currently equal to

B-6
<PAGE>
approximately 1 1/2 to 2% of the contract amount for futures on Treasury Bonds
and Notes and approximately 1/10 of 1% of the contract amount for futures on
Treasury Bills. Initial margin in futures transactions is different from margin
in securities transactions in that futures contract initial margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, initial margin is in the nature of a good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the futures commission merchant are made on a
daily basis as the market price of the futures contract fluctuates. This process
is known as "marking to market." At any time prior to expiration of the futures
contract, the Fund may elect to close the position by taking an offsetting
position which will operate to terminate the Fund's position in the futures
contract. While interest rate futures contracts provide for the delivery and
acceptance of securities, most futures contracts are terminated by entering into
offsetting transactions.

Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's 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 which would adversely affect the price of securities in its
portfolio and the price of such securities increases 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
which reflect the rising market. The Fund may have to sell securities at a time
when it is disadvantageous to do so.

The hours of trading futures contracts on U.S. Government securities may not
conform to the hours during which the Fund may trade such securities. To the
extent that the futures markets close before or after the U.S. Government
securities markets, significant variations can occur in one market that cannot
be reflected in the other market.

OPTIONS ON FUTURES CONTRACTS

CHARACTERISTICS. An option on a futures contract gives the purchaser the
right, but not the obligation, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a long
position if the option is a put). Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
Currently, options can be purchased or written with respect to futures contracts
on GNMAs, U.S. Treasury Bonds and U.S. Treasury Notes on The Chicago Board of
Trade and U.S. Treasury Bills on the International Monetary Market at the
Chicago Mercantile Exchange.

The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.

The Fund will be considered "covered" with respect to a call option it
writes on a futures contract if it (a) owns a long position in the underlying
futures contract or the security underlying the futures contract, (b) owns a
security which is deliverable under the futures contract or (c) owns a separate
call option to purchase the same futures contract at a price no higher than the
exercise price of the call option written by the Fund or, if higher, the Fund
deposits and maintains the differential in cash, U.S. Government securities or
other liquid high-grade debt obligations in a segregated account with its
Custodian. The Fund is considered "covered" with respect to a put option it
writes on a futures contract if it (a) segregates and maintains with its
Custodian cash, U.S. Government securities or liquid high-grade debt obligations
at all times equal in value to the exercise price of the put (less any related
margin deposited), or (b) owns a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the Fund
or, if lower, the Fund deposits and maintains the differential in cash, U.S.
Government securities or other liquid, high-grade debt obligations in a
segregated account with its Custodian. There is no limitation on the amount of
the Fund's assets which can be placed in the segregated account.

The Fund will be required to deposit initial and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
the Fund's futures commissions merchants' requirements similar to those
applicable to futures contracts, described above.

B-7
<PAGE>
The skills needed to trade futures contracts and options thereon are
different than those needed to select U.S. Government securities. The Fund's
investment adviser has experience in managing other securities portfolios which
uses similar options and futures strategies as the Fund.

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 such of other 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.

INTEREST RATE TRANSACTIONS

The Fund may enter into interest rate swaps, on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities. Under normal circumstances, the Fund will enter into interest rate
swaps on a net basis, I.E., the two payment streams 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, U.S. Government securities or liquid
high-grade debt obligations 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. 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 Fund will enter into interest
rate swaps only with parties meeting creditworthiness standards approved by the
Fund's Board of Directors. The investment adviser will monitor the
creditworthiness of such parties under the supervision of the Board of
Directors.

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 the investment adviser is
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 rate 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.

ILLIQUID SECURITIES

The Fund may hold up to 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 (either within or outside of the United States) or legal or
contractual restrictions on resale. Historically, illiquid securities

B-8
<PAGE>
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 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 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 of 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,
convertible securities 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. (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.

The staff of the SEC has also taken the position that purchased OTC options
and the assets used as "cover" for written OTC options are illiquid securities
unless the Fund and the counterparty have provided for the Fund, at the Fund's
election, to unwind the OTC option. The exercise of such an option would
ordinarily 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."

INVESTMENT RESTRICTIONS

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

B-9
<PAGE>
The Fund may not:

1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); the deposit or
payment by the Fund of initial or variation margin in connection with interest
rate futures contracts or related options transactions is not considered the
purchase of a security on margin.

2. Make short sales of securities or maintain a short position, except
short sales "against the box."

3. 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, the
purchase or sale of securities on a when-issued or delayed delivery basis,
collateral arrangements with respect to interest rate swap transactions, reverse
repurchase agreements or dollar roll transactions or the writing of options on
debt securities or on interest rate futures contracts or other financial futures
contracts are not deemed to be a pledge of assets and neither such arrangements,
nor the purchase or sale of interest rate futures contracts or other financial
futures contracts or the purchase or sale of related options, nor obligations of
the Fund to Directors pursuant to deferred compensation arrangements are deemed
to be the issuance of a senior security.

4. Purchase any security (other than obligations of the U.S. Government,
its agencies, or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of investment) would then be invested in securities of a single issuer,
or (ii) 25% or more of the Fund's total assets (determined at the time of
investment) would be invested in a single industry.

5. Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of an issuer.

6. Purchase any security if as a result the Fund would then have more than
5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Fund may invest in the securities of any U.S. Government agency
or instrumentality, and in any security guaranteed by such an agency or
instrumentality.

7. 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, securities of companies which invest or deal in real
estate, interest rate futures contracts and other financial futures contracts
and options thereon.

8. 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.

9. Make investments for the purpose of exercising control or management.

10. Invest in securities of other registered 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 (determined at the
time of investment) would be invested in such securities, or except as part of a
merger, consolidation or other acquisition.

11. Invest in interests in oil, gas or other mineral exploration or
development programs.

12. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 30% of the Fund's total assets).

13. Purchase warrants if as a result the Fund would then have more than 5%
of its total assets (determined at the time of investment) invested in warrants.

14. Write, purchase or sell puts, calls or combinations thereof, or purchase
or sell futures contracts or related options, except that the Fund may write put
and call options on U.S. Government securities, purchase put and call options on
U.S. Government securities and purchase or sell interest rate futures contracts
and other financial futures contracts and related options.

Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.

B-10
<PAGE>
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:

1. Invest in oil, gas and mineral leases.

2. Purchase or sell real estate or interests in real estate, including real
estate limited partnerships, but excluding securities which are secured by real
estate and the securities of companies which invest in real estate which are
readily marketable.

3. 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.

4. Purchase securities of any one issuer if any officer or director of the
Fund or the Manager or Subadviser 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.

5. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.

DIRECTORS AND OFFICERS

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

B-11
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ----------------------------- ----------------------- ----------------------------------------------------------
<S> <C> <C>
Thomas T. Mooney (54) Director President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Fund Commerce; former Rochester City Manager; Trustee of
Management, Inc. Center for Governmental Research, Inc.; Director of Blue
One Seaport Plaza Cross of Rochester, Monroe County Water Authority,
New York, NY Rochester Jobs, Inc., Northeast-Midwest Institute,
Executive Service Corps of Rochester, Monroe County
Industrial Development Corporation, First Financial Fund,
Inc. and The High Yield Income Fund, Inc.
Thomas H. O'Brien (71) Director President, O'Brien Associates (financial and management
c/o Prudential Mutual Fund consultants) (since April 1984); formerly President of
Management, Inc. Jamaica Water Securities Corp. (holding company)
One Seaport Plaza (February 1989-August 1990); Chairman and Chief Executive
New York, NY Officer (September 1987-February 1989) and Director
(September 1987-August 1990) of Jamaica Water Supply
Company; Director of Yankee Energy System, Inc. and
Ridgewood Savings Bank; Trustee of Hofstra University.
Thomas A. Owens, Jr. (73) Director Consultant; Director of EMCORE Corp. (manufacturer of
c/o Prudential Mutual Fund electronic materials).
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker (52) Director and President President, Chief Executive Officer and Director (since
One Seaport Plaza October 1993), PMF; Executive Vice President, Director
New York, NY and Member of the Operating Committee (since October
1993), Prudential Securities; Director (since October
1993) of Prudential Securities Group, Inc. (PSG);
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); Director and President of The Global Yield Fund,
Inc.
</TABLE>

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

B-12
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ----------------------------- ----------------------- ----------------------------------------------------------
<S> <C> <C>
Stanley E. Shirk (79) Director Certified Public Accountant and a former Senior Partner of
c/o Prudential Mutual Fund the accounting firm of KPMG Peat Marwick; former
Management, Inc. Management and Accounting Consultant for the Association
One Seaport Plaza of Bank Holding Companies, Washington, D.C. and the Bank
New York, NY Administration Institute, Chicago, IL; Director of The
High Yield Income Fund, Inc.
David W. Drasnin (59) Vice President Vice President and Branch Manager of Prudential
39 Public Square, Securities.
Suite 500
Wilkes-Barre, PA
Robert F. Gunia (49) Vice President Director (since January 1989), Chief Administrative
One Seaport Plaza Officer (since July 1990), and Executive Vice President,
New York, NY Treasurer and Chief Financial Officer (since June 1987)
of PMF; Senior Vice President (since March 1987) of
Prudential Securities; Executive Vice President,
Treasurer and Comptroller (since March 1991) of PMFD;
Director (since June 1987) of PMFS; Vice President and
Director of The Asia Pacific Fund, Inc. (since May 1989).
Eugene S. Stark (38) Treasurer and Principal First Vice President (since January 1990) of PMF.
One Seaport Plaza Financial and
New York, NY Accounting Officer
Stephen M. Ungerman (43) Assistant Treasurer First Vice President (since February 1993) of PMF; Tax
One Seaport Plaza Director of the Money Management Group and the Private
New York, NY Asset Group of The Prudential Insurance Company of
America (since March 1996); prior thereto, Senior Tax
Manager at Price Waterhouse LLP.
S. Jane Rose (50) Secretary Senior Vice President (since January 1991) and Senior
One Seaport Plaza Counsel (since June 1987) of PMF; Senior Vice President
New York, NY and Senior Counsel of Prudential Securities (since July
1992); formerly Vice President and Associate General
Counsel of Prudential Securities.
Ellyn C. Acker (35) Assistant Secretary Vice President and Associate General Counsel (since March
One Seaport Plaza 1995) of PMF; Vice President and Associate General
New York, NY Counsel of Prudential Securities (since March 1995);
prior thereto, associated with the law firm of Fulbright
& Jaworski L.L.P.
</TABLE>

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.

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 $8,000, in addition to certain out-of-pocket
expenses.

Directors may receive their Directors' fees pursuant to a deferred fee
arrangement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees 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 at the daily rate of the Fund. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Director. The Fund's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Fund.

B-13
<PAGE>

The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr. Shirk is
scheduled to retire on December 31, 1997, Messrs. Jacobs and Owens are scheduled
to retire on December 31, 1998 and Messrs. Beach and O'Brien are scheduled to
retire on December 31, 1999.

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

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 February 29, 1996 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 Board of any other investment
companies managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for
the calender year ended December 31, 1995.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT DIRECTORS
- ---------------------------------------------- ------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Edward D. Beach, Director $ 8,000 None N/A $ 183,500(22/43)*
Delayne Dedrick Gold, Director $ 8,000 None N/A $ 183,250(24/45)*
Thomas T. Mooney, Director $ 8,000 None N/A $ 129,625(14/19)*
Thomas H. O'Brien, Director $ 8,000 None N/A $ 44,000 (6/24)*
Thomas A. Owens, Director $ 8,000 None N/A $ 87,000(12/13)*
Stanley E. Shirk, Director $ 8,000 None N/A $ 79,000(10/19)*
</TABLE>

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

As of April 12, 1996, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.

As of April 12, 1996, the only beneficial owners, directly or indirectly of
more than 5% of any class of shares of the Fund were: Attn: S.B. Urban TTEE,
F.H. Peterson Machine Corp, FBO Wilbur J. Boss, P.O. Box 617, Stoughton, MA
(approximately 8% of the outstanding Class C shares); Anthony Tarantino and
Frances Tarantino JTTEN, 656 Guy Lombardo Avenue, Freeport, New York
(approximately 6% of the outstanding Class C shares); and H-M Co. Post 237,
American Legion, 2900 Drake Avenue SW, Huntsville, Alabama (approximately 5% of
the outstanding Class C shares).

As of April 12, 1996, Prudential Securities was the record holder for other
beneficial owners of 63,595,087 Class A shares (or 62% of the outstanding Class
A shares), 38,214,686 Class B shares (or 56% of the outstanding Class B shares),
172,154 Class C shares (or 74% of the outstanding Class C shares) and no
outstanding Class Z 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 March 31, 1996, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $53
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.

B-14
<PAGE>

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, record keeping 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 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 average daily net assets of the Fund up to
$3 billion and .35 of 1% of the average daily net assets of the Fund in excess
of $3 billion. The fee is computed daily and payable monthly. The Management
Agreement also provides that, in the event the expenses of the Fund (including
the fees of 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 to 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
February 29, 1996. 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

B-15
<PAGE>

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, 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 April 10, 1996 and by the
shareholders of the Fund on March 30, 1988.

For the fiscal years ended February 29, 1996, February 28, 1995 and February
28, 1994, the Fund paid management fees to PMF of $7,787,246, $9,155,193 and
$12,719,555, respectively.

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 April 10, 1996, and by shareholders of the Fund on March 30, 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 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 year ended December 31, 1994 for the Prudential Mutual
Funds, on an average day, there are approximately $80 million in common stock
transactions, over $100 million in bond transactions and over $4.1 billion in
money market transactions. In 1994, the Prudential Mutual Funds effected more
than 57,000 trades in money market securities and held on average $21 billion of
money market securities. Based on complex-wide data for the year ended December
31, 1994, on an average day, 7,168 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
1.8 million telephone calls and approximately 1.1 million fund transactions.

B-16
<PAGE>

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

DISTRIBUTOR

Prudential Securities Incorporated, One Seaport Plaza, New York, New York
10292 (Prudential Securities or PSI), acts as the distributor of the Class A,
Class B and Class C 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 Plans of Distribution (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 a distribution agreement (the
Distribution Agreement), Prudential Securities (the Distributor) incurs the
expenses of distributing the Fund's Class A, Class B and Class C shares.
Prudential Securities serves as the Distributor of the Class Z shares and incurs
the expenses of distributing the Fund's Class Z shares under the Distribution
Agreement with the Fund, none of which are reimbursed by or paid for by the
Fund. See "How the Fund is Managed--Distributor" in the Prospectus.

On April 10, 1996, 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 Plan, Class B Plan
or Class C Plan or in any agreement related to any Plan (the Rule 12b-1
Directors), at a meeting called for the purpose of voting on each Plan, approved
the continuance of the Plans and Distribution Agreement. The Class A Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class A
shares may be used to pay for personal service and the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of up to .25 of 1%) may not exceed .30 of 1%. 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 up to $3 billion, .55 of 1% of the next $1 billion of such
assets and .25 of 1% of such assets in excess of $4 billion (not including the
service fee) may be used for distribution-related expenses with respect to the
Class B shares. The Class C Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class C shares may be paid as a service fee and
(ii) up to .75 of 1% (not including the service fee) may be used for
distribution-related expenses with respect to the Class C shares. The Class A
Plan was approved by Class A and Class B shareholders, and the Class B Plan was
approved by Class B shareholders on July 19, 1994. The Class C Plan was approved
by the sole shareholder of Class C shares on August 1, 1994.

CLASS A PLAN. For the fiscal year ended February 29, 1996, PMFD and PSI
received payments of $1,363,753 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 February
29, 1996, PMFD and PSI also received approximately $180,000 in initial sales
charges.

CLASS B PLAN. For the fiscal year ended February 29, 1996, Prudential
Securities received $5,342,002 from the Fund under the Class B Plan and spent
approximately $2,514,215 in distributing the Class B shares of the Fund. It is
estimated that of the latter amount, approximately $23,364 (.9%) was spent on
printing and mailing of prospectuses to other than current shareholders,
$471,597 (18.8%) on compensation to Pruco Securities Corporation, 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 $2,019,254 (80.3%) on the aggregate of (i) payment of commissions and
account servicing fees to financial advisers ($1,436,877 or 57.2%), and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses ($582,377 or 23.1%). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating branch
offices of Prusec and Prudential Securities 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. Prior to
August 1, 1994, the Class A and B Plans operated as "reimbursement type" plans
and, in the case of Class B, provided for the reimbursement of distribution
expenses incurred in current and prior years.

B-17
<PAGE>

Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors 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 February 29, 1996, Prudential
Securities received approximately $1,358,000 in contingent deferred sales
charges attributable to the Class B shares.

CLASS C PLAN. For the fiscal year ended February 29, 1996, Prudential
Securities received $5,740 from the Fund under the Class C Plan and spent
approximately $11,453 in distributing the Fund's Class C shares. It is estimated
that of the latter amount approximately $570 (5.0%) was spent on printing and
mailing of prospectuses to other than current shareholders; $1,866 (16.3%) on
compensation to Pruco Securities Corporation, an affiliated broker-dealer, for
commissions to its representatives and other expenses, including an allocation
of overhead and other branch office distribution-related expenses, incurred by
it for distribution of Fund shares; $9,017 (78.7%) on the aggregate of (i)
payments of commission and account servicing fees to financial advisors $7,558
(66.0%) and (ii) an allocation of overhead and other branch office
distribution-related expenses $1,459 (12.7%). The term "overhead and other
branch office distribution-related expenses" represents (a) the expenses of
operating Prudential Securities' 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 holders of Class C shares 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 February
29, 1996, Prudential Securities received approximately $100 in contingent
deferred sales charges attributable to Class C shares.

The 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 Fund by the Distributor. The report will include an itemization of
the distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the Rule
12b-1 Directors shall be committed to the Rule 12b-1 Directors.

Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act. On November 3, 1995, the Board of
Directors approved the transfer of the Distribution Agreement for Class A shares
with PMFD to Prudential Securities, and on April 10, 1996, the Board of
Directors, including a majority of the Rule 12b-1 Directors, approved a restated
distribution agreement between the Fund and Prudential Securities relating to
all four classes of shares.

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
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

B-18
<PAGE>
$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 the Fund rather than on a per shareholder basis. If aggregate sales
charges were to exceed 6.25% of total gross sales of shares 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, futures
contracts and options on such securities and futures 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. Broker-dealers may receive
brokerage commissions on Fund portfolio transactions, including options, futures
and options on futures transactions and the purchase and sale of underlying
securities upon the exercise of options. 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 the U.S. Government securities market, 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 and agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Fund will
not deal with Prudential Securities or its affiliates in any transaction in
which Prudential Securities or its affiliates act as principal. Thus, it will
not deal in U.S. Government securities with Prudential Securities or its
affiliates acting as market maker, and it will not execute a negotiated trade
with Prudential or its affiliates if execution involves Prudential Securities or
its affiliates acting as principal with respect to any part of the Fund's order.

B-19
<PAGE>
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities or its affiliates, 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.

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. Within the framework of this policy, the Manager will
consider the 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's, and the services furnished by such brokers, dealers or
futures commission merchants 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 or futures
commission merchant in the light of generally prevailing rates. The Manager's
policy is to pay higher commissions to brokers and futures commission merchants,
other than Prudential Securities, for particular transactions than might be
charged if a different broker had been selected, on occasions when, in the
Manager's opinion, this policy furthers the objective of obtaining best price
and execution. In addition, the Manager is authorized to pay higher commissions
on brokerage transactions for the Fund to brokers and futures commission
merchants other than Prudential Securities in order to secure research and
investment services described above, subject to review by the Fund's Board of
Directors from time to time as to the extent and continuation of this practice.
The allocation of orders among brokers and futures commission merchants and the
commission rates paid are reviewed periodically by the Fund's Board of
Directors.

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 such brokers or futures commission merchants
in connection with comparable transactions involving similar securities or
futures contracts 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 arms-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 fiscal years ended February 29, 1996, February 28, 1995 and
February 28, 1994, the Fund paid no brokerage commissions to Prudential
Securities.

B-20
<PAGE>
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). Class Z shares of the Fund
are not subject to any sales or redemption charge and are offered exclusively
for sale to participants in the PSI 401(k) Plan, an employee benefit plan
sponsored by Prudential Securities (the PSI 401(k) Plan). See "Shareholder
Guide--How to Buy Shares of the Fund" in the Prospectus.

Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service expenses which may affect
performance, (ii) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to participants in the
PSI 401(k) Plan. See "Shareholder Investment Account--Exchange Privilege."

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 4%, and Class
B*, Class C* and Class Z** shares are sold at net asset value. Using the Fund's
net asset value at February 29, 1996, 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............. $ 9.04
Maximum sales charge (4% of offering price)........................ .38
---------
Offering price to public........................................... $ 9.42
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*........................................................... $ 9.04
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*........................................................... $ 9.04
---------
---------
CLASS Z
Net asset value, offering price and redemption price per Class Z
share**.......................................................... $ 9.04
---------
---------
</TABLE>

- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.

** Class Z shares commenced being offered on March 1, 1996.

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);

B-21
<PAGE>
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;

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

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

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 investors holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.

RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of the 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 and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering or 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.

LETTERS 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.

B-22
<PAGE>
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>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
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>

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 purchased 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
YEAR SINCE PURCHASE -----------------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ----------------------------------- ------------------------ ----------------
<S> <C> <C>
First.............................. 3.0% 2.0%
Second............................. 2.0% 1.0%
Third.............................. 1.0% 0%
Fourth and thereafter.............. 0% 0%
</TABLE>

You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.

B-23
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If 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 Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to the
shareholders the following privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than 5 full business days
prior to the payment 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 payment 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. Such 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

B-24
<PAGE>

Fund, Inc., a money market fund. No CDSC will be payable upon such exchange, but
a CDSC may be payable upon the redemption of Class B and Class C shares acquired
as a result of the exchange. The applicable sales charge will be that imposed by
the fund in which shares were initially purchased and the purchase date will be
deemed to be the first day of the month after 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 will be subject to the CDSC calculated
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, respectively, shares 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.

CLASS Z. Class Z shares may be exchanged for Class Z shares of the funds
listed below which participate in the PSI 401(k) Plan. No fee or sales load will
be imposed upon the exchange.

Prudential Allocation Fund
(Balanced Portfolio)
Prudential Equity Income Fund
Prudential Equity Fund, Inc.
Prudential Global Fund, Inc.
Prudential Government Securities Trust
(Money Market Series)
Prudential Growth Opportunity Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Utility Fund, Inc.

For additional details about the Exchange Privilege, Class Z shareholders
should contact the Prudential Securities Benefits Department at One Seaport
Plaza, 33rd Floor, New York, New York 10292.

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.

B-25
<PAGE>

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 its 1993-1994 academic year.

(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. Stock 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 values applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."

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 be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are

B-26
<PAGE>
inadvisable because of the sales charges applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan, 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.

TAX-DEFERRED RETIREMENT ACCOUNTS

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.

<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
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 may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.

The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in a program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blends of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute a 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

Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of each
U.S. Government security for which quotations are available will be based on the
valuations provided by a pricing service which

B-27
<PAGE>
uses information with respect to transactions in bonds, quotations from bond
dealers, agency ratings, market transactions in comparable securities and
various relationships between securities in determining value. Options on U.S.
Government securities traded on an exchange are valued at the mean between the
most recently quoted bid and asked prices on the respective exchange. Futures
contracts and options thereon are valued at their last sales prices as of the
close of the commodities exchange or board of trade or, if there was no sale on
such day, the mean between the most recently quoted bid and asked prices on such
exchange or board of trade. Should an extraordinary event, which is likely to
affect the value of the security, occur after the close of an exchange on which
a portfolio security is traded, such security will be valued at fair value
considering factors determined in good faith by the investment adviser under
procedures established by and under the general supervision of the Fund's Board
of Directors.

The Fund will compute its net asset value 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 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.

Net asset value is calculated separately for each class. As long as the Fund
declares dividends daily, the net asset value of 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.

TAXES, DIVIDENDS AND DISTRIBUTIONS

GENERAL. The Fund has elected to qualify and intends to remain qualified as
a regulated investment company under Subchapter M of the Internal Revenue Code
for each taxable year. Accordingly, the Fund generally must, among other things,
(a) derive at least 90% of its gross income (without offset for losses from the
sale or other disposition of securities or foreign currencies) from dividends,
interest, proceeds from loans of securities and gains from the sale or other
disposition of securities or foreign currencies or other income related to its
business of investing in securities and currencies, including, but not limited
to, gains derived from options and futures on such securities or foreign
currencies; (b) derive less than 30% of its gross income from gains (without
offset for losses) from the sale or other disposition of securities or options
thereon and certain other financial instruments held less than three months; and
(c) diversify its holdings so that, at the end of each fiscal quarter, (i) 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 Fund's assets and no more than 10% of the
outstanding voting securities of any such issuer, and (ii) not more than 25% of
the value of its assets is invested in the securities of any one issuer (other
than U.S. Government securities). These requirements may limit the Fund's
ability to engage in or close out transactions involving options on securities,
interest rate futures and options thereon.

The Fund has received a private letter ruling from the Internal Revenue
Service (IRS) to the effect that the Fund's investments in options on U.S.
Government securities, in interest rate futures contracts and in options thereon
will be treated as "securities" for purposes of the foregoing requirements for
qualification under Subchapter M of the Internal Revenue Code.

As a regulated investment company, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, that it
distributes to its shareholders, provided that it distributes at least 90% of
its net investment income and short-term capital gains earned in each year.
Distributions of net investment income and net short-term capital gains will be
taxable to the shareholder at ordinary income rates regardless of whether the
shareholder receives such distributions in additional shares or in cash.
Distributions of net long-term capital gains, if any, are taxable as long-term
capital gains regardless of how long the investor has held his or her Fund
shares. However, if a shareholder holds shares in the Fund for not more than six
months, then any loss recognized on the sale of such shares will be treated as
long-term capital loss to the extent of any distribution on the shares which was
treated as long-term capital gain. Shareholders will be notified annually by the
Fund as to the federal tax status of distributions made by the Fund. Dividends
paid by the Fund will not be subject to the dividends received deduction
available to corporations.

B-28
<PAGE>
A 4% nondeductible excise tax will be imposed on the Fund to the extent the
Fund does not meet certain distribution requirements by the end of each calendar
year. Distributions may be subject to additional state and local taxes. See
"Taxes, Dividends and Distributions" in the Prospectus.

Although the Fund does not receive interest payments on zero-coupon bonds in
cash, it is required to accrue interest on such bonds for tax purposes.
Accordingly, in order to meet the distribution requirements discussed above, the
Fund may have to liquidate securities or borrow money. To date, the Fund has not
engaged in borrowing or liquidated securities solely or primarily for the
purpose of meeting income distribution requirements attributable to investments
in zero coupon bonds.

The Fund has a capital loss carryforward for federal income tax purposes as
of February 29, 1996 of approximately $119,847,000, of which $11,970,000 expires
in 1998, $41,965,000 expires in 1999 and $65,912,000 expires in 2003.

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 or distribution will
constitute a replacement of shares.

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 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."

LISTED OPTIONS AND FUTURES. Exchange-traded futures contracts, listed
options on futures contracts and listed options on U.S. Government securities
constitute "Section 1256 contracts" under the Internal Revenue Code. Section
1256 contracts are required to be "marked-to-market" at the end of the Fund's
tax year; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized as a result of such "deemed sales" will be treated
as long-term capital gain or loss and the remainder will be treated as
short-term capital gain or loss. The Fund has received a private letter ruling
from the IRS to the effect that a "deemed sale" of a security held for less than
three months at the end of a tax year will not result in gain from the sale of
securities held for less than three months for purposes of determining
qualification of the Fund as a regulated investment company.

If the Fund holds a U.S. Government security which is offset by a Section
1256 contract, the Fund is considered to hold a "mixed straddle". The Fund may
elect whether to make a straddle-by-straddle identification of mixed straddles.
By electing to identify its mixed straddles, the Fund can avoid the application
of certain rules which could, in some circumstances, cause deferral or
disallowance of losses, the change of long-term capital gains into short-term
capital gains, or the change of short-term capital losses into long-term capital
losses. Nevertheless, the Fund would be subject to the following rules.

If the Fund owns a U.S. Government security and acquires an offsetting
Section 1256 contract in a transaction which the Fund elects to identify as a
mixed straddle, the acquisition of the offsetting position will result in
recognition of the unrealized gain or loss on the U.S. Government security. This
gain or loss will be long-term or short-term depending on the holding period of
the security at the time the mixed straddle is entered into. This recognition of
unrealized gain or loss will be taken into account in determining the amount of
income available for the Fund's quarterly distributions, and can result in an
amount which is greater or less than the Fund's net realized gains being
available for such distributions. If an amount which is less than the Fund's net
realized gains is available for distribution, the Fund may elect to distribute
more than such available amount, up to the full amount of such net realized
gains.

The rules for determining whether gain or loss upon exercise, expiration or
termination of an identified mixed straddle will be treated as long-term,
short-term, or sixty percent long-term and forty percent short-term are complex.
In general, which treatment applies will depend upon the order of disposition of
the Section 1256 and the non-Section 1256 positions of a straddle and whether
all or fewer than all of such positions are disposed of on any day.

If the Fund does not elect to identify a mixed straddle, no recognition of
gain or loss on the U.S. Government securities in the Fund's portfolio will
result when the mixed straddle is entered into. However, any gains or losses
realized on the straddle will be governed by a number of tax rules which might,
under certain circumstances, defer or disallow the

B-29
<PAGE>

losses in whole or in part, change long-term gains into short-term gains, change
short-term losses into long-term losses, or change capital gains into ordinary
income. A deferral or disallowance of recognition of a realized loss may result
in the Fund being required to distribute an amount greater than the Fund's net
realized gains.

The Fund may also elect under Section 1256(d) of the Internal Revenue Code
that the provisions of Section 1256 will not apply. In the case of such an
election, the taxation of options on U.S. Government securities and the taxation
of futures will be governed by provisions of the Internal Revenue Code dealing
with taxation of capital assets generally.

OTC OPTIONS. Non-listed options on U.S. Government securities (OTC options)
are not Section 1256 contracts. If an OTC option written by the Fund on U.S.
Government securities expires, the amount of the premium will be treated as
short-term capital gain. If the option is terminated through a closing purchase
transaction, the Fund will generally recognize a short-term capital gain or
loss, depending on whether the premium income is greater or less than the amount
paid by the Fund in the closing transaction. If U.S. Government securities are
delivered by the Fund upon exercise of a written call option, or sold to the
Fund upon exercise of a written put option, the premium received when the option
was written will be treated as an addition to the proceeds received in the case
of the call option, or a decrease in the cost basis of the security received in
the case of a put option. The gain or loss realized on the exercise of a written
call option will be long-term or short-term depending upon the holding period of
the U.S. Government security delivered.

The premium paid for a purchased put or call option is a capital
expenditure, and loss will be realized on the expiration, and gain or loss will
be realized upon the sale of, a put or call option. The characterization of the
gain or loss as short-term or long-term will depend upon the holding period of
the option. If U.S. Government securities are purchased by the Fund upon
exercise of a purchased call option, or delivered by the Fund upon exercise of a
purchased put option, the premium paid when the option was purchased will be
treated as an addition to the basis of the securities purchased in the case of a
call option, or as a decrease in the proceeds received for the securities
delivered in the case of a put option.

Losses realized on straddles which include a purchased put option, can,
under certain circumstances, be subject to a number of tax rules which might
defer or disallow the losses in whole or in part, change long-term gains into
short-term gains, change short-term losses into long-term losses, or change
capital gains into ordinary income. As noted above, a deferral or disallowance
of recognition of realized loss can result in the Fund being required to
distribute an amount greater than the Fund's net realized gains.

PENNSYLVANIA PERSONAL PROPERTY TAX. The Fund has obtained a written letter
of determination from the Pennsylvania Department of Revenue that the Fund is
subject to the Pennsylvania foreign franchise and corporate net income tax.
Accordingly, it is expected that Fund shares will be 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.

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

Yield is calculated according to the following formula:

a - b
YIELD = 2[( ------- +1)to the 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.

The yield for the 30-day period ended February 29, 1996 for the Fund's Class
A, Class B and Class C shares was 6.64%, 5.96% and 6.04%, respectively. No Class
Z shares were outstanding on February 29, 1996.

B-30
<PAGE>
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. Actual yields will depend upon not only changes in interest rates
generally during the period in which the investment in the Fund is held, but
also on any realized or unrealized gains and losses and changes in the Fund's
expenses.

AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time 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 of a hypothetical $1000 investment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).

Average annual 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 commencement of offering of Class A shares (January 22, 1990)
periods ended on February 29, 1996 was 7.9%, 7.2% and 7.8%, respectively. The
average annual total return with respect to the Class B shares of the Fund for
the one, five and ten year periods ended February 29, 1996 was 6.5%, 7.1% and
7.2%, respectively. The average annual total return for Class C shares for the
one year and since commencement of offering Class C shares (August 1, 1994)
periods ended February 29, 1996, was 10.5% and 9.1%, respectively. Class Z
shares were not available on February 29, 1996.

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

Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:

ERV - P
-------
P

Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).

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

The aggregate total return for Class A shares for the one year, five year
and since commencement of offering Class A shares (January 22, 1990) periods
ended February 29, 1996 was 12.4%, 47.4% and 63.0%, respectively. The aggregate
total return for Class B shares for the one, five and ten year periods ended
February 29, 1996 was 11.54%, 41.78% and 99.61%, respectively. The aggregate
total return for Class C shares for the one year and since commencement of
offering Class C shares (August 1, 1994) periods ended February 29, 1996 was
11.6% and 14.7%, respectively. Class Z shares were not available on February 29,
1996.

B-31
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)

A LOOK AT PERFORMANCE OVER THE LONG TERM (1926-1992)

<TABLE>
<CAPTION>
AVERAGE ANNUAL
RETURN
<S> <C>
Common Stocks 10.2
Long-Term Government Bonds 4.8
Inflation 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). 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.

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
AND INDEPENDENT ACCOUNTANTS

Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
It is a wholly-owned subsidiary of 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, 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 February 29, 1996, the Fund incurred fees of approximately $2,246,000 for
the services of PMFS.

Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.

B-32
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF PRUDENTIAL GOVERNMENT INCOME FUND
FEBRUARY 29, 1996
- ------------------------------------------ ---------------------------------
<TABLE>
<CAPTION>

PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
------------------------------------------------------------
<C> <S> <C>

LONG-TERM INVESTMENTS--97.1%
------------------------------------------------------------

U.S. GOVERNMENT OBLIGATIONS--42.2%
United States Treasury Bonds,
$25,000 7.125%, 2/15/23 $ 26,511,750
3,000 7.625%, 2/15/25 3,396,090
25,000 8.75%, 8/15/20 31,300,750
11,500 9.875%, 11/15/15 15,656,215
45,000 10.75%, 2/15/03 57,058,650
32,000 11.25%, 2/15/15 48,289,920
50,000 12.00%, 8/15/13 73,679,500
100,500 12.50%, 8/15/14 154,753,920
25,000 13.25%, 5/15/14 40,000,000
28,000 14.00%, 11/15/11 44,668,680
United States Treasury Notes,
87,000 7.50%, 2/15/05 94,952,670
40,000 7.875%, 11/15/04 44,618,800
5,000 8.875%, 5/15/00 5,593,750
United States Treasury Strip,
70,200 Zero Coupon, 2/15/09 30,375,540
--------------
Total U. S. Government Obligations
(cost $666,655,379) 670,856,235
- ------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGHS--38.8%
Federal Home Loan Mortgage Corp.,
42,623 7.50%, 2/01/22 - 4/01/25 43,077,793
75,401 8.00%, 1/01/22 - 9/01/24 77,388,981
6,776 8.50%, 6/01/07 - 4/01/20 7,085,394
3,042 11.50%, 10/01/19 3,418,862
Federal National Mortgage Assoc.,
24,535 6.50%, 10/01/23 - 6/01/24 23,674,643
52,864 7.00%, 2/01/24 - 5/01/24 52,271,090
38,359 7.50%, 4/01/07 - 5/01/10 39,149,837
52,763 8.50%, 6/01/17 - 3/01/25 54,837,685
13,708 9.00%, 8/01/24 - 4/01/25 14,417,557
Government National Mortgage
Assoc.,
$56,446 6.50%, 5/15/23 - 10/15/24 $ 54,581,792
110,353 7.00%, 12/15/22 - 11/15/24 109,489,490
27,813 7.50%, 5/15/02 - 6/15/25 28,173,404
43,508 8.00%, 7/15/16 - 3/15/24 45,048,487
27,964 9.00%, 4/15/01 - 12/15/09 29,743,648
25,670 9.50%, 10/15/09 - 12/15/17 28,069,121
Government National Mortgage
Assoc. II,
5,254 9.50%, 5/20/18 - 8/20/21 5,587,842
--------------
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $590,619,241) 616,015,626
- ------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES--14.5%
Federal Home Loan Bank,
1,000 6.78%, 7/24/02 1,007,500
Federal Home Loan Mortgage Corp.,
39,000 6.71%, 6/11/02 39,548,340
24,810 6.99%, 5/24/02 25,383,607
8,000 7.215%, 7/27/05 8,206,240
25,000 8.20%, 1/16/98 25,613,250
Federal National Mortgage Assoc.,
55,000 Zero Coupon, 7/05/14 15,391,200
25,000 6.85%, 9/12/05 24,968,750
Financing Corp. Strip,
5,000 Zero Coupon, 3/07/04 3,002,050
Israel AID,
37,600 Zero Coupon, 5/15/15 9,945,200
37,600 Zero Coupon, 5/15/16 9,223,280
Small Business Administration
Participation Certificate,
25,504 6.45%, 12/01/15 24,898,280
Tennessee Valley Authority,
41,800 6.235%, 7/15/45 42,474,234
--------------
Total U. S. Government Agency
Securities (cost $220,720,123) 229,661,931
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-33

<PAGE>
PORTFOLIO OF INVESTMENTS AS OF PRUDENTIAL GOVERNMENT INCOME FUND
FEBRUARY 29, 1996
- ------------------------------------------ ---------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
------------------------------------------------------------
<C> <S> <C>

COLLATERALIZED MORTGAGE OBLIGATIONS--0.3%
Federal National Mortgage Assoc.,
$ 12 Trust 1991 G-37 Class C I/O(a) $ 30,941
Resolution Trust Corp.,
5,713 7.75%, 9/25/29 5,416,288
--------------
Total Collateralized Mortgage
Obligations (cost $9,636,886) 5,447,229
- ------------------------------------------------------------
SUPRANATIONAL BOND--0.7%
International Bank for
Reconstruction & Development,
10,000 8.625%, 10/15/16
(cost $12,400,900) 11,793,700
- ------------------------------------------------------------
ASSET-BACKED SECURITY--0.3%
Structured Asset Securities Corp.,
5,000 7.375%, 9/25/24
(cost $4,568,150) 4,900,000
- ------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE PASS-THROUGH--0.3%
Ryland Mortgage Securities
Corporation,
4,879 Mortgage Participation Securities,
Series 1993-3 Class A-3,
7.61%, 9/25/24
(cost $4,976,551) 4,782,930
- ------------------------------------------------------------
Total long-term investments
(cost $1,509,577,230) 1,543,457,651
--------------
SHORT-TERM INVESTMENTS--2.5%
- ------------------------------------------------------------
COMMERCIAL PAPER--2.5%
Associates Corp. of North America,
$39,005 5.55%, 3/01/96
(cost $39,005,000) $ 39,005,000
------------------------------------------------------------
TOTAL INVESTMENTS--99.6%
(cost $1,548,582,230; Note 4) 1,582,462,651
Other assets in excess of
liabilities--0.4% 6,319,866
--------------
Net Assets--100% $1,588,782,517
--------------
--------------
</TABLE>
- ---------------
AID--Agency for International Development
I/O--Interest Only
(a) REMIC--Real Estate Mortgage Investment Conduit
- -------------------------------------------------------------------------------
B-34 See Notes to Financial Statements.

<PAGE>
STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL GOVERNMENT INCOME FUND
- ------------------------------------------- ---------------------------------
<TABLE>

<S> <C>
ASSETS FEBRUARY 29, 1996
-----------------
Investments, at value (cost $1,548,582,230).............................................................. $ 1,582,462,651
Receivable for investments sold.......................................................................... 26,065,590
Interest receivable...................................................................................... 12,340,252
Receivable for Fund shares sold.......................................................................... 3,010,368
Deferred expenses and other assets....................................................................... 68,606
-----------------
Total assets.......................................................................................... 1,623,947,467
-----------------
LIABILITIES
Payable for investments purchased........................................................................ 27,393,673
Payable for Fund shares reacquired....................................................................... 2,942,271
Accrued expenses and other liabilities................................................................... 2,496,445
Dividends payable........................................................................................ 1,142,438
Management fee payable................................................................................... 643,966
Distribution fee payable................................................................................. 546,157
-----------------
Total liabilities..................................................................................... 35,164,950
-----------------
NET ASSETS............................................................................................... $ 1,588,782,517
-----------------
-----------------
Net assets were comprised of:
Common stock, at par.................................................................................. $ 1,757,735
Paid-in capital in excess of par...................................................................... 1,672,990,495
-----------------
1,674,748,230
Accumulated net realized losses on investments........................................................ (119,846,134)
Net unrealized appreciation on investments............................................................ 33,880,421
-----------------
Net assets at February 29, 1996.......................................................................... $ 1,588,782,517
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($945,037,722 divided by 104,588,322 shares of common stock issued and outstanding)......................... $9.04
Maximum sales charge (4.0% of offering price)......................................................... .38
-----------------
Maximum offering price to public...................................................................... $9.42
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($641,945,812 divided by 70,986,190 shares of common stock issued and outstanding).......................... $9.04
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($1,798,983 divided by 198,916 shares of common stock issued and outstanding)............................... $9.04
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-35

<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME FEBRUARY 29, 1996
-----------------
<S> <C>
Income
Interest................................... $ 117,578,274
Income from securities loaned-net.......... 280,669
-----------------
117,858,943
-----------------
Expenses
Management fee............................. 7,787,246
Distribution fee--Class A.................. 1,363,753
Distribution fee--Class B.................. 5,342,002
Distribution fee--Class C.................. 5,740
Transfer agent's fees and expenses......... 2,250,000
Custodian's fees and expenses.............. 690,000
Franchise taxes............................ 314,000
Reports to shareholders.................... 406,000
Registration fees.......................... 100,000
Audit fee.................................. 65,000
Legal fees................................. 58,000
Insurance expense.......................... 49,000
Directors` fees............................ 48,000
Miscellaneous.............................. 31,373
-----------------
Total expenses.......................... 18,510,114
-----------------
Net investment income........................ 99,348,829
-----------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss):
Investment transactions.................... 53,598,710
Written option transactions................ (113,281)
-----------------
53,485,429
Net change in unrealized appreciation on
investments................................ 34,676,738
-----------------
Net gain on investments...................... 88,162,167
-----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................... $ 187,510,996
-----------------
-----------------
</TABLE>

PRUDENTIAL GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED FEBRUARY 29/28,
--------------------------------
IN NET ASSETS 1996 1995
-------------- --------------
<S> <C> <C>

Operations
Net investment income........ $ 99,348,829 $ 114,223,550
Net realized gain (loss) on
investment transactions... 53,485,429 (93,893,429)
Net change in unrealized
appreciation/depreciation
on investments............ 34,676,738 (39,470,823)
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations................ 187,510,996 (19,140,702)
-------------- --------------
Dividends to shareholders from
net investment income
(Note 1)
Class A................... (60,495,599) (7,117,500)
Class B................... (38,807,245) (107,101,716)
Class C................... (45,985) (4,334)
-------------- --------------
(99,348,829) (114,223,550)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
subscribed................ 226,050,700 79,769,541
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions......... 57,501,726 64,092,911
Cost of shares reacquired.... (360,013,003) (687,645,132)
-------------- --------------
Decrease in net assets from
Fund share transactions... (76,460,577) (543,782,680)
-------------- --------------
Total increase (decrease)...... 11,701,590 (677,146,932)
NET ASSETS
Beginning of year.............. 1,577,080,927 2,254,227,859
-------------- --------------
End of year.................... $1,588,782,517 $1,577,080,927
-------------- --------------
-------------- --------------
</TABLE>
- -------------------------------------------------------------------------------
B-36 See Notes to Financial Statements.

<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
Prudential Government Income Fund, (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Investment operations commenced on April 22, 1985.

The Fund's investment objective is to seek a high current return. The Fund will
seek to achieve this objective by investing primarily in U.S. Government and
agency securities and writing and purchasing put and call options and net gains
from closing purchase and sale transactions.
- ------------------------------------------------------------
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 current
market quotations provided by dealers or by a pricing service approved by the
Board of Directors, which uses information such as quotations from dealers,
market transactions in comparable securities, various relationships between
securities and calculations on yield to maturity in determining values. Options
and financial futures contracts listed on exchanges are valued at their closing
price on the applicable exchange. When market quotations are not readily
available, a security is valued at fair value as determined in good faith by or
under the direction of the Board of Directors.

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.

In connection with repurchase agreement transactions, the Fund's 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. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. 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.

OPTIONS: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. The Fund's principal reason for writing options is
to realize, through receipt of premiums, a greater current return than would be
realized on the underlying security alone. When the Fund purchases an option, it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.

The Fund, as a writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
underlying the written option. The Fund, as purchaser of an option, bears the
risk of the potential inability of the counterparties to meet the terms of their
contracts. As of February 29, 1996, the Fund did not have any open written
options.

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
sales proceeds and the lower repurchase price is recorded as interest income.
The Fund maintains a segregated account, the dollar value of which is at least
equal to its obligations, in respect of dollar rolls. There were no dollar rolls
outstanding as of February 29, 1996.

SECURITIES LENDING: The Fund may lend its U.S. Government securities to
broker-dealers or government securities dealers. The loans are secured by
collateral at least equal at all times to the market value of the securities
loaned. The Fund may bear the risk of delay in recovery of, or even loss of
rights in, the securities loaned should the borrower of the securities fail
financially. The Fund receives compensation for lending its securities in
- --------------------------------------------------------------------------------
B-37

<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
the form of fees or it retains a portion of interest on the investment of any
cash received as collateral. The Fund also continues to receive interest on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund. There were no loans outstanding as of February 29, 1996.

SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. 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. Expenses are recorded on the accrual basis which may
require the use of certain estimates by management.

DIVIDENDS AND DISTRIBUTIONS: The Fund declares daily and pays monthly dividends
from net investment income. 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.

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 to its shareholders.
Therefore, no federal income tax provision is required.
- ------------------------------------------------------------
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 up to $3 billion and
.35 of 1% of the average daily net assets of the Fund in excess of $3 billion.

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''),
became the distributor of the Class A shares of the Fund effective January 2,
1996 and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD and continues as the distributor of the Class B and Class
C shares of the Fund. The Fund compensates 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.

Pursuant to the Class A Plan, the Fund compensates PSI for its
distribution-related expenses 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. Such
expenses under the Class A Plan were .15 of 1% of the average daily net assets
of the Class A shares for the year ended February 29, 1996.

Pursuant to the Class B Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class B shares at
an annual rate of up to 1% of the average daily net assets up to $3 billion, .80
of 1% of the next $1 billion of such net assets and .50 of 1% over $4 billion
of the average daily net assets of the Class B shares. Such expenses under the
Class B Plan were charged at an effective rate of .825 of 1% of the average
daily net assets of Class B shares.

Pursuant to the Class C Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class C shares at an annual rate
of up to .825 of 1% of the average daily net assets up to $3 billion, .80 of 1%
of the next $1 billion of such net assets and .50 of 1% over $4 billion of the
average daily net assets of the Class C shares. Such expenses under Class C Plan
were charged at an effective rate of .75 of 1% of average daily net assets.

PMFD and PSI advised the Fund that they have received approximately $180,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended February 29, 1996. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to salespersons.

PSI has advised the Fund that for the year ended February 29, 1996 it received
approximately $1,358,000 in contingent deferred sales charges imposed upon
redemptions by certain Class B and Class C shareholders.
- -------------------------------------------------------------------------------
B-38

<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
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. During the year ended February 29,
1996, the Fund incurred fees of approximately $2,246,000 for the services of
PMFS. As of February 29, 1996, approximately $184,000 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations also
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,
for the year ended February 29, 1996, were $1,859,915,930 and $1,873,106,042,
respectively.

The federal income tax cost basis of the Fund's investments, at February 29,
1996 was the same as for book purposes and, accordingly, net unrealized
appreciation for federal income tax purposes was $33,880,421 (gross unrealized
appreciation-$46,282,078; gross unrealized depreciation-$12,401,657).

The Fund had a capital loss carryforward as of February 29, 1996 of
approximately $119,847,000 of which $11,970,000 expires in 1998, $41,965,000
expires in 1999 and $65,912,000 expires in 2003. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such amounts.

Transactions in written options during the year ended February 29, 1996 were as
follows:
<TABLE>
<CAPTION>
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ----------
<S> <C> <C>
Options written...................... 260 $1,257,811
Options terminated in closing
purchase transactions.............. (150) (840,624)
Options expired...................... (110) (417,187)
--------- ----------
Options outstanding at February 29,
1996............................... 0 0
--------- ----------
--------- ----------
</TABLE>

The average balance of dollar rolls outstanding during the year ended February
29, 1996 was approximately $7,400,000.

NOTE 5. 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 4.0%. 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 automatically
convert to Class A shares on a quarterly basis approximately seven years after
purchase.

There are 2 billion shares of common stock, $.01 par value per share, divided
into three classes, designated Class A, B and Class C common stock, each of
which consists of 666,666,666.67 authorized shares.

Transactions in shares of common stock were as follows:

<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
- -------------------------------- ------------ ---------------
<S> <C> <C>
Year ended February 29, 1996:
Shares sold..................... 11,604,764 $ 103,313,788
Shares issued in reinvestment of
dividends..................... 3,905,262 35,174,408
Shares reacquired............... (23,885,431) (215,512,733)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (8,375,405) (77,024,537)
Shares sold upon conversion from
Class B....................... 11,556,901 103,626,580
------------ ---------------
Net increase in shares
outstanding................... 3,181,496 $ 26,602,043
------------ ---------------
------------ ---------------
Year end February 28, 1995:
Shares sold..................... 1,650,843 $ 14,143,438
Shares issued in reinvestment of
dividends..................... 517,170 4,416,369
Shares reacquired............... (3,871,087) (33,161,047)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (1,703,074) (14,601,240)
Shares sold upon conversion from
Class B....................... 97,449,952 825,401,064
------------ ---------------
Net increase in shares
outstanding................... 95,746,878 $ 810,799,824
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-39
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES AMOUNT
- -------------------------------- ------------ ---------------
<S> <C> <C>
Year ended February 29, 1996:
Shares sold..................... 14,021,663 $ 120,993,355
Shares issued in reinvestment of
dividends..................... 2,476,368 22,291,045
Shares reacquired............... (16,054,530) (144,301,708)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 443,501 (1,017,308)
Shares reacquired upon
conversion into Class A....... (11,547,682) (103,626,580)
------------ ---------------
Net decrease in shares
outstanding................... (11,104,181) $ (104,643,888)
------------ ---------------
------------ ---------------
Year ended February 28, 1995:
Shares sold..................... 7,582,662 $ 65,420,737
Shares issued in reinvestment of
dividends..................... 5,979,498 59,672,362
Shares reacquired............... (75,332,177) (654,474,203)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (61,770,017) (529,381,104)
Shares reacquired upon
conversion into Class A....... (97,449,952) (825,401,064)
------------ ---------------
Net decrease in shares
outstanding................... (159,219,969) $(1,354,782,168)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- --------------------------------
<S> <C> <C>
Year ended February 29, 1996:
Shares sold..................... 192,911 $ 1,743,557
Shares issued in reinvestment of
dividends..................... 3,991 36,273
Shares reacquired............... (21,707) (198,562)
------------ ---------------
Net increase in shares
outstanding................... 175,195 $ 1,581,268
------------ ---------------
------------ ---------------
August 1, 1994 through February
28, 1995:
Shares sold..................... 24,418 $ 205,366
Shares issued in reinvestment of
dividends..................... 498 4,180
Shares reacquired............... (1,195) (9,882)
------------ ---------------
Net increase in shares
outstanding................... 23,721 $ 199,664
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.

NOTE 6. ACQUISITION OF PRUDENTIAL U.S.
GOVERNMENT FUND

On January 19, 1996, the Fund acquired all the net assets of Prudential U.S.
Government Fund, Inc. (``U.S. Government'') pursuant to a plan of reorganization
approved by U.S. Government shareholders on May 15, 1995. The acquisition was
accomplished by a tax-free exchange of 13,428,984 shares of the Fund (consisting
of 5,313,064 Class A shares of the Fund for 4,730,048 Class A shares of U.S.
Government, 8,091,414, Class B shares of the Fund for 7,209,020 Class B shares
of U.S. Government and 24,506 Class C shares of the Fund for 21,833 Class C
shares of U.S. Government) valued at $125,507,871 in the aggregate on January
19, 1996. The aggregate net assets of the Fund and U.S. Government immediately
before the acquisition were $1,528,998,838 and $125,507,871 (including
$11,995,410 of net unrealized depreciation), respectively.
- -------------------------------------------------------------------------------
B-40

<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
YEAR ENDED FEBRUARY 29/28,
---------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... 0.60 0.59 0.61 0.66 0.68
Net realized and unrealized gain (loss) on
investment transactions.................... 0.45 (0.54) (0.25) 0.35 0.37
-------- -------- ------- ------- -------
Total from investment operations............ 1.05 0.05 0.36 1.01 1.05
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (0.60) (0.59) (0.61) (0.66) (0.68)
Distributions in excess of accumulated
gains...................................... -- -- (0.02) -- --
Distributions from paid-in capital in excess
of par..................................... -- -- -- (0.12) (0.22)
-------- -------- ------- ------- -------
Total distributions......................... (0.60) (0.59) (0.63) (0.78) (0.90)
-------- -------- ------- ------- -------
Net asset value, end of year.................. $ 9.04 $ 8.59 $ 9.13 $ 9.40 $ 9.17
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
TOTAL RETURN(c):.............................. 12.41% .83% 3.90% 11.55% 12.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $945,038 $871,145 $51,673 $61,297 $33,181
Average net assets (000)...................... 909,169 $95,560 $55,921 $46,812 $29,534
Ratios to average net assets:
Expenses, including distribution fees....... 0.91% 0.98% 0.84% 0.84% 0.86%
Expenses, excluding distribution fees....... 0.76% 0.83% 0.69% 0.69% 0.71%
Net investment income....................... 6.65% 7.45% 6.48% 7.17% 7.51%
For Class A, B and C shares:
Portfolio turnover rate..................... 123% 206% 80% 36% 187%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) 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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-41

<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------
YEAR ENDED FEBRUARY 29/28,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.60 $ 9.13 $ 9.40 $ 9.17 $ 9.02
-------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... 0.54 0.53 0.53 0.58 0.60
Net realized and unrealized gain (loss) on
investment transactions.................... 0.44 (0.53) (0.25) 0.35 0.37
-------- ---------- ---------- ---------- ----------
Total from investment operations............ 0.98 -- 0.28 0.93 0.97
-------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (0.54) (0.53) (0.53) (0.58) (0.60)
Distributions in excess of accumulated
gains...................................... -- -- (0.02) -- --
Distributions from paid-in capital in excess
of par..................................... -- -- -- (0.12) (0.22)
-------- ---------- ---------- ---------- ----------
Total distributions......................... (0.54) (0.53) (0.55) (0.70) (0.82)
-------- ---------- ---------- ---------- ----------
Net asset value, end of period................ $ 9.04 $ 8.60 $ 9.13 $ 9.40 $ 9.17
-------- ---------- ---------- ---------- ----------
-------- ---------- ---------- ---------- ----------
TOTAL RETURN(c):.............................. 11.54% .24% 3.03% 10.61% 11.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $641,946 $ 705,732 $2,202,555 $2,680,259 $2,724,428
Average net assets (000)...................... $647,515 $1,735,413 $2,487,990 $2,670,924 $2,903,704
Ratios to average net assets:
Expenses, including distribution fees....... 1.58% 1.66% 1.68% 1.69% 1.71%
Expenses, excluding distribution fees....... 0.76% 0.80% 0.69% 0.69% 0.71%
Net investment income....................... 5.99% 6.17% 5.64% 6.32% 6.66%
<CAPTION>

CLASS C AUGUST 1,
----------- 1994(A)
YEAR ENDED THROUGH
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.60 $ 8.69
----- -----

INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... 0.54 0.31
Net realized and unrealized gain (loss) on
investment transactions.................... 0.44 (0.09)
----- -----

Total from investment operations............ 0.98 0.22
----- -----

LESS DISTRIBUTIONS
Dividends from net investment income.......... (0.54) (0.31)
Distributions in excess of accumulated
gains...................................... -- --
Distributions from paid-in capital in excess
of par..................................... -- --
----- -----

Total distributions......................... (0.54) (0.31)
----- -----

Net asset value, end of period................ $ 9.04 $ 8.60
----- -----
----- -----

TOTAL RETURN(c):.............................. 11.63% 2.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $1,799 $ 204
Average net assets (000)...................... $ 765 $ 111
Ratios to average net assets:
Expenses, including distribution fees....... 1.51% 1.63%(b)
Expenses, excluding distribution fees....... 0.76% 0.88%(b)
Net investment income....................... 5.99% 6.69%(b)
</TABLE>

- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported
and includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
- -------------------------------------------------------------------------------
B-42 See Notes to Financial Statements.

<PAGE>
INDEPENDENT AUDITORS' REPORT PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors
Prudential Government Income Fund, Inc.:

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Government Income Fund, Inc. as of
February 29, 1996, the related statements of operations for the year then ended
and of changes in net assets for each of the two years in the period then ended
and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
February 29, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Government Income Fund, Inc. as of February 29, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP
New York, New York
April 10, 1996

- --------------------------------------------------------------------------------
B-43
<PAGE>

APPENDIX--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.

EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(VALUE OF $1 INVESTED ON 12/31/25)

[CHART]
Source: Prudential Investment Corporation based on data from Ibbotson
Associates, ENCORR Software, Chicago, Illinois. Used with permission. All rights
reserved. This chart is for illustrative purposes only and is not indicative of
the past, present or future performance of any asset class or any Prudential
Mutual Fund.

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

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

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

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

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
through 1995. The total returns of the indices

App-1
<PAGE>

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

[CHART]
(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.

App-2

<PAGE>

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

[CHART]
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. The 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.

App-3

<PAGE>

APPENDIX--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

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

DIVERSIFICATION

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

DURATION

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

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

MARKET TIMING

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

POWER OF COMPOUNDING

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

App-4

<PAGE>

APPENDIX--INFORMATION RELATING TO THE PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. 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 more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.

INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.

MONEY MANAGEMENT. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
In July 1995, INSTITUTIONAL INVESTOR ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1994. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential's Money
Management Group (of which Prudential Mutual Funds is a key part) manages over
$190 billion in assets of institutions and individuals.

REAL ESTATE. 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.(2)

HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.

FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

Prudential Mutual Fund Management is one of the sixteenth largest mutual
fund companies in the country, with over 2.5 million shareholders invested in
more than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.

The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.

(1) Prudential Mutual Fund Investment Management, a unit of PIC, serves as
the Subadviser to substantially all of the Prudential Mutual Funds.
Wellington Management Company serves as the subadviser to Global Utility
Fund, Inc., Nicholas-Applegate Capital Management as subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Fund, Inc. and BlackRock Financial
Management, Inc. as subadviser to The BlackRock Government Income Trust.
There are multiple subadvisers for The Target Portfolio Trust.

(2) As of December 31, 1994.

App-5

<PAGE>

EQUITY FUNDS. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.

HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.

Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.

Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.

Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.

Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.

Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.

Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).

TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets. Prudential Mutual Funds' money market desk traded
$3.2 billion in money market securities on an average day, or over $800 billion
a year. They made a trade every 3 minutes of every trading day. In 1994, the
Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)

(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.

(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts
managed by Prudential Mutual Fund Investment Management, a division of
PIC, for the year ended December 31, 1995.

(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment
Grade Debt, General U.S. Treasury, General U.S. Government and Mortgage
funds.

(6) As of December 31, 1994.

App-6

<PAGE>

Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.

INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)

Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of Registered Rep,
an industry publication, Prudential Securities' Financial Advisor training
programs received a grade of A- (compared to an industry average of B+) .

In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.(8)

In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.

For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.

(7) As of December 31, 1994.

(8) On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.

App-7

<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 February 29, 1996 (audited).

Statement of Assets and Liabilities at February 29, 1996 (audited).

Statement of Operations for the year ended February 29, 1996
(audited).

Statement of Changes in Net Assets for the years ended February 29,
1996 and February 28, 1995 (audited).

Notes to Financial Statements.

Financial Highlights with respect to the five-year period ended
February 29, 1996 (audited).

Independent Auditors' Report.

(b) EXHIBITS:

(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A (File No. 2-82976).

6. (a) Distribution Agreement with respect to Class A shares between
Registrant and Prudential Mutual Fund Distributors, Inc.,
incorporated by reference to Exhibit 6(a) to Post-Effective Amendment
No. 18 to the Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR.

(b) Distribution Agreement with respect to Class B shares between
Registrant and Prudential Securities Incorporated, incorporated by
reference to Exhibit 6(b) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.

(c) Distribution Agreement with respect to Class C shares between
Registrant and Prudential Securities Incorporated, incorporated by
reference to Exhibit 6(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.

(d) Dealer Agreement between Prudential-Bache Securities Inc. and
dealer or dealers to be determined, incorporated by reference to
Exhibit No. 6(b) to Post-Effective Amendment No. 2 to Registration
Statement on Form N-1A (File No. 2-82976).
</TABLE>

C-1
<PAGE>

<TABLE>
<S> <C>
(e) Form of Distribution Agreement for Class Z shares incorporated by
reference to Exhibit 6(e) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A (File No. 2-82976 filed via
EDGAR.

7. Not Applicable.

8. (a) Revised Custodian Agreement between the Registrant and State
Street Bank and Trust Company, incorporated by reference to Exhibit
No. 8(d) to Post-Effective Amendment No. 11 to Registration Statement
on Form N-1A (File No. 2-82976).

(b) Special Custody Agreement among the Registrant, State Street Bank
and Trust Company, and Goldman, Sachs & Co., incorporated by
reference to Exhibit No. 8(b) to Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A (File No. 2-82976).

(c) Customer Agreement between the Registrant and Goldman, Sachs &
Co., incorporated by reference to Exhibit No. 8(c) to Post-Effective
Amendment No. 2 to the Registration Statement on Form N-1A (File No.
2-82976).

(d) Form of Amendment to Revised Custodian Agreement incorporated by
reference to Exhibit 8(d) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.

9. Transfer Agency Agreement between the Registrant and Prudential
Mutual Fund Services, Inc., incorporated by reference to Exhibit No.
9 to Post-Effective Amendment No. 6 to Registration Statement on Form
N-1A (File No. 2-82976).

10. (a) Opinion and Consent, incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 2 to Registration Statement on Form N-1A
(File No. 2-82976).

(b) Opinion and Consent of Counsel.*

11. Consent of Independent Accountants.*

12. Not Applicable.

13. Purchase Agreement, incorporated by reference to Exhibit No. 13 to
Post-Effective Amendment No. 2 to Registration Statement on Form N-1A
(File No. 2-82976).

14. Not Applicable.

15. (a) Distribution and Service Plan for Class A shares, incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.

(b) Distribution and Service Plan for Class B shares, incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.

(c) Distribution and Service Plan for Class C shares, incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.

16. (a) Schedule of computation of performance (Class A), incorporated by
reference to Exhibit 16(a) of Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A (File No. 2-82976).

(b) Schedule of computation of performance (Class B), incorporated by
reference to Exhibit 16(a) of Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A (File No. 2-82976).

(c) Schedule of computation of performance (Class C), incorporated by
reference to Exhibit 16(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.

17. Financial Data Schedules filed as Exhibit 27 for electronic
purposes.*

18. Rule 18f-3 Plan, filed as Exhibit 18 to Post-Effective Amendment No.
21 to the Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR on March 1, 1996.
</TABLE>

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

C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of April 12, 1996 there were 76,793, 55,218, 221 and 1,534 record holders
of Class A, Class B, Class C and Class Z shares of common stock, respectively,
$.01 par value per share, of the Registrant.

ITEM 27. INDEMNIFICATION.

As permitted by Section 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 each Distribution Agreement (Exhibit 6 to
the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (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 duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.

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

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 28, 1996).

C-3
<PAGE>
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>
Stephen P. Fisher Senior Vice Senior Vice President, PMF; Senior Vice President, Prudential
President 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, Prudential
Counsel, Secretary Securities; Director, Prudential Mutual Fund Services, Inc.
and Director (PMFS)
Robert F. Gunia Executive Vice Executive Vice President, Chief Financial and Administrative
President, Chief Officer, Treasurer and Director, PMF; Senior Vice
Financial and President, Prudential Securities; Executive Vice President,
Administrative Treasurer, Comptroller and Director, PMFD; Director, PMFS
Officer, Treasurer
and 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); President,
Presidential Mutual Fund Investment Management (PMFIM)
Timothy J. O'Brien Director President, Chief Executive Officer, Chief Operating Officer,
Raritan Plaza One and Director, PMFD; Chief Executive Officer and Director,
Edison, NJ 08837 PMFS; Director, PMF
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF;
Executive Officer Executive Vice President, Director and Member of the
and Director Operating Committee, Prudential Securities; Director,
Prudential Securities Group, Inc. (PSG); Executive Vice
President, PIC; Director, PMFD; Director, PMFS
S. Jane Rose Senior Vice Senior Vice President, Senior Counsel and Assistant
President, Senior Secretary, PMF; Senior Vice President and Senior Counsel,
Counsel and Prudential Securities
Assistant Secretary
</TABLE>

(b) The Prudential Investment Corporation (PIC)

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 07101.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------- -------------------- -------------------------------------------------------------
<S> <C> <C>
William M. Bethke Senior Vice Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center President
Newark, NJ 07102

Barry M. Gillman Director Director, PIC

Theresa A. Hamacher Vice President Director, PMF; Vice President, Prudential; Vice President,
PIC; President, PMFIM
</TABLE>

C-4
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------- -------------------- -------------------------------------------------------------
<S> <C> <C>
Richard A. Redeker Executive Vice President, Chief Executive Officer and Director, PMF;
One Seaport Plaza President Executive Vice President, Director and Member of the
New York, NY 10292 Operating Committee, Prudential Securities; Director, PSG;
Executive Vice President, PIC; Director, PMFD; Director,
PMFS

John L. Reeve Senior Vice Managing Director, Prudential Asset Management Group; Senior
President Vice President, PIC

Eric A. Simonson Vice President and Vice President and Director, PIC; Executive Vice President,
Director Prudential
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) Prudential Securities

Prudential Securities is distributor for Command Government Fund, Command
Money Fund, Command Tax-Free Fund, Prudential Government Securities Trust
(Short-Intermediate Term Series, Money Market Series and U.S. Treasury Money
Market Series), Prudential MoneyMart Assets, Inc., Prudential Institutional
Liquidity Portfolio, Inc., Prudential Special Money Market Fund, Inc.,
Prudential Tax-Free Money Fund, Inc., 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 Utility Fund, Inc., The
Global Government Plus Fund, Inc., The Global Total Return Fund, Inc., Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund) and The BlackRock Government Income Trust. Prudential Securities is
also a depositor for the following unit investment trust:

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

C-5
<PAGE>
(b) Information concerning the directors and officers 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, N.Y. 10292
Alan D. Hogan....................... Executive Vice President, Chief Administrative Officer and None
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, N.Y. 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, N.Y. 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, Secretary and None
Director
<FN>
- ------------------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>

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 Registrant, One Seaport Plaza, New York, New York, and
Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New Jersey.
Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and
31a-1(f) will be kept at 2 Gateway Center, 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 "Management of the Fund-Distributor" in the Prospectus and the captions
"Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.

ITEM 32. UNDERTAKINGS.

Registrant makes the following undertaking:

(a) To furnish each person to whom a prospectus is delivered with a copy of
the Fund's latest annual report upon request and without charge.

C-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this 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 April, 1996.

PRUDENTIAL GOVERNMENT 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/ Edward D. Beach Director April 29, 1996
- ------------------------------------
EDWARD D. BEACH

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

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

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

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

/s/ Thomas A. Owens, Jr. Director April 29, 1996
- ------------------------------------
THOMAS A. OWENS, JR.

/s/ Richard A. Redeker President and Director April 29, 1996
- ------------------------------------
RICHARD A. REDEKER

/s/ Stanley E. Shirk Director April 29, 1996
- ------------------------------------
STANLEY E. SHIRK

/s/ Eugene S. Stark Treasurer and Principal April 29, 1996
- ------------------------------------ Financial and Accounting
EUGENE S. STARK Officer
</TABLE>

<PAGE>
EXHIBIT INDEX

<TABLE>
<S> <C>
1. Articles of Restatement.*
2. Amended and Restated By-laws of the Registrant, incorporated by
reference to Exhibit 2 to Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
3. Not applicable.
4. Instruments defining rights of holders of securities being offered,
incorporated by reference to Exhibit 4 to Post-Effective Amendment
No. 15 to Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR.
5. (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc, incorporated by reference to Exhibit No. 5(a)
to Post-Effective Amendment No. 6 to Registration Statement on Form
N-1A (File No. 2-82976).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A (File No. 2-82976).
6. (a) Distribution Agreement with respect to Class A shares between
Registrant and Prudential Mutual Fund Distributors, Inc.,
incorporated by reference to Exhibit 6(a) to Post-Effective Amendment
No. 18 to the Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR.
(b) Distribution Agreement with respect to Class B shares between
Registrant and Prudential Securities Incorporated, incorporated by
reference to Exhibit 6(b) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(c) Distribution Agreement with respect to Class C shares between
Registrant and Prudential Securities Incorporated, incorporated by
reference to Exhibit 6(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(d) Dealer Agreement between Prudential-Bache Securities Inc. and
dealer or dealers to be determined, incorporated by reference to
Exhibit No. 6(b) to Post-Effective Amendment No. 2 to Registration
Statement on Form N-1A (File No. 2-82976).
(e) Form of Distribution Agreement for Class Z shares incorporated by
reference to Exhibit 6(e) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
7. Not Applicable.
8. (a) Revised Custodian Agreement between the Registrant and State
Street Bank and Trust Company, incorporated by reference to Exhibit
No. 8(d) to Post-Effective Amendment No. 11 to Registration Statement
on Form N-1A (File No. 2-82976).
(b) Special Custody Agreement among the Registrant, State Street Bank
and Trust Company, and Goldman, Sachs & Co., incorporated by
reference to Exhibit No. 8(b) to Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A (File No. 2-82976).
(c) Customer Agreement between the Registrant and Goldman, Sachs &
Co., incorporated by reference to Exhibit No. 8(c) to Post-Effective
Amendment No. 2 to the Registration Statement on Form N-1A (File No.
2-82976).
(d) Form of Amendment to Custodian Contract incorporated by reference
to Exhibit 8(d) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
9. Transfer Agency Agreement between the Registrant and Prudential
Mutual Fund Services, Inc., incorporated by reference to Exhibit No.
9 to Post-Effective Amendment No. 6 to Registration Statement on Form
N-1A (File No. 2-82976).
10. (a) Opinion and Consent, incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 2 to Registration Statement on Form N-1A
(File No. 2-82976).
(b) Opinion and Consent of Counsel.*
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Purchase Agreement, incorporated by reference to Exhibit No. 13 to
Post-Effective Amendment No. 2 to Registration Statement on Form N-1A
(File No. 2-82976).
</TABLE>

<PAGE>

<TABLE>
<S> <C>
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A shares, incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(b) Distribution and Service Plan for Class B shares, incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(c) Distribution and Service Plan for Class C shares, incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
16. (a) Schedule of computation of performance (Class A), incorporated by
reference to Exhibit 16(a) of Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A (File No. 2-82976).
(b) Schedule of computation of performance (Class B), incorporated by
reference to Exhibit 16(a) of Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A (File No. 2-82976).
(c) Schedule of computation of performance (Class C), incorporated by
reference to Exhibit 16(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
17. Financial Data Schedules, filed as Exhibit 27 for electronic
purposes.*
18. Rule 18f-3 Plan, filed as Exhibit 18 to Post-Effective Amendment No.
21 to the Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR on March 1, 1996.
</TABLE>

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

<PAGE>

PRUDENTIAL GOVERNMENT INCOME FUND, INC.

ARTICLES OF RESTATEMENT

Prudential Government Income Fund, Inc., a Maryland corporation, having
its principal office in the city of Baltimore, (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:

FIRST: The Corporation desires to restate its charter as currently in
effect, such restatement to be effective on March 7, 1996, and is restated as
follows:

ARTICLE I.

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

ARTICLE II.

PURPOSES

The purpose for which the Corporation is formed is to act as an open-end
investment company of the management type registered as such with the
Securities and Exchange Commission pursuant to the Investment Company Act of
1940 and to exercise and generally to enjoy all of the powers, rights and
privileges granted to, or conferred upon, corporations by the General Laws of
the State of Maryland now or hereafter in force.

ARTICLE III.

ADDRESS IN MARYLAND

The post office address of the place at which the principal office of
the Corporation in the State of Maryland is located is c/o The Corporation
Trust Incorporated, 32 South Street, Baltimore, Maryland 21202.

<PAGE>

The name of the Corporation's resident agent is The Corporation Trust
Incorporated, and its post office address is 32 South Street, Baltimore,
Maryland 21202. Said resident agent is a corporation of the State of
Maryland.

ARTICLE IV.

COMMON STOCK

Section 1. The total number of shares of capital stock which the
Corporation shall have authority to issue is 2,000,000,000 shares of common
stock of the par value of $.01 per share, having an aggregate par value of
$20,000,000, divided into four classes, consisting of 500,000,000 shares of
Class A Common Stock, 500,000,000 shares of Class B Common Stock, 500,000,000
shares of Class C Common Stock and 500,000,000 shares of Class Z Common Stock.

(a) Each share of Class A, Class B, Class C and Class Z Common Stock
of the Corporation shall represent the same interest in the Corporation and
have identical voting, dividend, liquidation and other rights except that
(i) Expenses related to the distribution of each class of shares shall be
borne solely by such class; (ii) The bearing of such expenses solely by
shares of each class shall be appropriately reflected (in the manner
determined by the Board of Directors) in the net asset value, dividends,
distribution and liquidation rights of the shares of such class; (iii) The
Class A Common Stock shall be subject to a front-end sales load and a Rule
12b-1 distribution fee as determined by the

-2-

<PAGE>

Board of Directors from time to time; (iv) The Class B Common Stock
shall be subject to a contingent deferred sales charge and a Rule 12b-1
distribution fee as determined by the Board of Directors from time to
time; (v) The Class C Common Stock shall be subject to a contingent
deferred sales charge and a Rule 12b-1 distribution fee as determined
by the Board of Directors from time to time and (vi) The Class Z Common
Stock shall not be subject to a front-end sales load, a contingent
deferred sales charge nor a 12b-1 distribution fee. All shares of each
particular class shall represent an equal proportionate interest in
that class, and each share of any particular class shall be equal to
each other share of that class.

(b) Each share of the Class B Common Stock of the Corporation shall be
converted automatically, and without any action or choice on the part of
the holder thereof, into shares (including fractions thereof) of the Class
A Common Stock of the Corporation (computed in the manner hereinafter
described), at the applicable net asset value per share of each Class, at
the time of the calculation of the net asset value of such Class B Common
Stock at such times, which may vary between shares originally issued for
cash and shares purchased through the automatic reinvestment of dividends
and distributions with respect to Class B Common Stock (each "Conversion
Date"), determined by the Board of Directors in accordance with applicable
laws, rules, regulations, and

-3-

<PAGE>

interpretations of the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. and pursuant to such procedures
as may be established from time to time by the Board of Directors and
disclosed in the Corporation's then current prospectus for such Class A
and Class B Common Stock.

(c) The number of shares of the Class A Common Stock of the
Corporation into which a share of the Class B Common Stock is converted
pursuant to Paragraph (1)(b) hereof shall equal the number (including for
this purpose fractions of a share) obtained by dividing the net asset value
per share of the Class B Common Stock for purposes of sales and redemptions
thereof at the time of the calculation of the net asset value on the
Conversion Date by the net asset value per share of the Class A Common
Stock for purposes of sales and redemptions thereof at the time of the
calculation of the net asset value on the Conversion Date.

(d) On the Conversion Date, the shares of the Class B Common Stock of
the Corporation converted into shares of the Class A Common Stock will
cease to accrue dividends and will no longer be outstanding and the rights
of the holders thereof will cease (except the right to receive declared but
unpaid dividends to the Conversion Date).

(e) The Board of Directors shall have full power and authority to
adopt such other terms and conditions concerning the conversion of shares
of Class B Common Stock to shares of

-4-

<PAGE>

the Class A Common Stock as they deem appropriate; provided such terms
and conditions are not inconsistent with the terms contained in this
Section 1 and subject to any restrictions or requirements under the
Investment Company Act of 1940 and the rules, regulations and
interpretations thereof promulgated or issued by the Securities and
Exchange Commission, any conditions or limitations contained in an
order issued by the Securities and Exchange Commission applicable to
the Corporation, or any restrictions or requirements under the Internal
Revenue Code of 1986, as amended, and the rules, regulations and
interpretations promulgated or issued thereunder.

Section 2. The Board of Directors may, in its discretion, classify and
reclassify any unissued shares of the capital stock of the Corporation into
one or more additional or other classes or series by setting or changing in
any one or more respects the designations, conversion or other rights,
restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares and pursuant to such classification
or reclassification to increase or decrease the number of authorized shares
of any existing class or series. If designated by the Board of Directors,
particular classes or series of capital stock may relate to separate
portfolios of investments.

Section 3. Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or series
of capital stock, the holders of each class and

-5-

<PAGE>

series of capital stock of the Corporation shall be entitled to dividends and
distributions in such amounts and at such times as may be determined by the
Board of Directors, and the dividends and distributions paid with respect to
the various classes or series of capital stock may vary among such classes or
series. Expenses related to the distribution of, and other identified
expenses that should properly be allocated to, the shares of a particular
class or series of capital stock may be charged to and borne solely by such
class or series and the bearing of expenses solely by a class or series may
be appropriately reflected (in a manner determined by the Board of Directors)
and cause differences in the net asset value attributable to, and the
dividend, redemption and liquidation rights of, the shares of each such class
or series of capital stock.

Section 4. Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, on each matter submitted to a vote of stockholders,
each holder of a share of capital stock of the Corporation shall be entitled
to one vote for each share standing in such holder's name on the books of the
Corporation, irrespective of the class or series thereof, and all shares of
all classes and series shall vote together as a single class; provided,
however, that (a) as to any matter with respect to which a separate vote of
any class or series is required by the Investment Company Act of 1940, as
amended, and in effect from time to time, or any rules, regulations or orders
issued thereunder, or

-6-

<PAGE>

by the Maryland General Corporation Law, such requirement as to a separate
vote by that class or series shall apply in lieu of a general vote of all
classes and series as described above; (b) in the event that the separate
vote requirements referred to in (a) above apply with respect to one or more
classes or series, then subject to paragraph (c) below, the shares of all
other classes and series not entitled to a separate vote shall vote together
as a single class; and (c) as to any matter which in the judgment of the
Board of Directors (which shall be conclusive) does not affect the interest
of a particular class or series, such class or series shall not be entitled
to any vote and only the holders of shares of the one or more affected
classes and series shall be entitled to vote.

Section 5. Unless otherwise expressly provided in the charter of the
Corporation, including any Articles Supplementary creating any class or
series of capital stock, in the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, holders of
shares of capital stock of the Corporation shall be entitled, after payment
or provision for payment of the debts and other liabilities of the
Corporation (as such liabilities may affect one or more of the classes of
shares of capital stock of the Corporation), to share ratably in the
remaining net assets of the Corporation; provided, however, that in the event
the capital stock of the Corporation shall be classified or reclassified into
series, holders of any shares of capital stock within such series shall be
entitled to share ratably out of assets

-7-

<PAGE>

belonging to such series pursuant to the provisions of Section 7(c) of this
Article IV.

Section 6. Each share of any class of the capital stock of the
Corporation, and in the event the capital stock of the Corporation shall be
classified or reclassified into series, each share of any class of Capital
Stock of the Corporation within such series shall be subject to the following
provisions:

(a) The net asset value of each outstanding share of capital
stock of the Corporation (or of a class or series, in the event the
capital stock of the Corporation shall be so classified or
reclassified), subject to subsection (b) of this Section 6, shall be
the quotient obtained by dividing the value of the net assets of the
Corporation (or the net assets of the Corporation attributable or
belonging to that class or series as designated by the Board of
Directors pursuant to Articles Supplementary) by the total number of
outstanding shares of capital stock of the Corporation (or of such
class or series, in the event the capital stock of the Corporation
shall be classified or reclassified into series). Subject to
subsection (b) of this Section 6, the value of the net assets of the
Corporation (or of such class or series, in the event the capital
stock of the Corporation shall be classified or reclassified into
series) shall be determined pursuant to the procedures or methods
(which procedures or methods, in the event the capital stock of

-8-

<PAGE>

the Corporation shall be classified or reclassified into series, differ
from class to class or from series to series) prescribed or approved
by the Board of Directors in its discretion, and shall be determined
at the time or times (which time or times may, in the event the
capital stock of the Corporation shall be classified into classes or
series, differ from series to series) prescribed or approved by the
Board of Directors in its discretion. In addition, subject to
subsection (b) of this Section 6, the Board of Directors, in its
discretion, may suspend the daily determination of net asset value of
any share of any series or class of capital stock of the Corporation.

(b) The net asset value of each share of the capital stock of
the Corporation or any class or series thereof shall be determined in
accordance with any applicable provision of the Investment Company Act
of 1940, as amended (the "Investment Company Act"), any applicable
rule, regulation or order of the Securities and Exchange Commission
thereunder, and any applicable rule or regulation made or adopted by
any securities association registered under the Securities Exchange
Act of 1934.

(c) All shares now or hereafter authorized shall be subject to
redemption and redeemable at the option of the stockholder pursuant to
the applicable provisions of the

-9-

<PAGE>

Investment Company Act and laws of the State of Maryland,
including any applicable rules and regulations thereunder.
Each holder of a share of any class or series, upon request to
the Corporation (if such holder's shares are certificated, such
request being accompanied by surrender of the appropriate stock
certificate or certificates in proper form for transfer), shall be
entitled to require the Corporation to redeem all or any part of such
shares outstanding in the name of such holder on the books of the
Corporation (or as represented by share certificates surrendered to
the Corporation by such redeeming holder) at a redemption price per
share determined in accordance with subsection (a) of this Section 6.

(d) Notwithstanding subsection (c) of this Section 6, the Board
of Directors of the Corporation may suspend the right of the holders
of shares of any or all classes or series of capital stock to require
the Corporation to redeem such shares or may suspend any purchase of
such shares:

(i) for any period (A) during which the New York Stock
Exchange is closed, other than customary weekend and holiday
closings, or (B) during which trading on the New York Stock
Exchange is restricted;

-10-

<PAGE>

(ii) for any period during which an emergency, as
defined by the rules of the Securities and Exchange
Commission or any successor thereto, exists as a result of
which (A) disposal by the Corporation of securities owned by
it and belonging to the affected series of capital stock (or
the Corporation, if the shares of capital stock of the
Corporation have not been classified or reclassified into
series) is not reasonably practicable, or (B) it is not
reasonably practicable for the Corporation fairly to
determine the value of the net assets of the affected series
of capital stock; or

(iii) for such other periods as the Securities and
Exchange Commission or any successor thereto may by order
permit for the protection of the holders of shares of
capital stock of the Corporation.

(e) All shares of the capital stock of the Corporation now or
hereafter authorized shall be subject to redemption and redeemable at
the option of the Corporation. The Board of Directors may by
resolution from time to time authorize the Corporation to require the
redemption of all or any part of the outstanding shares of any class
or series upon the sending of written

-11-

<PAGE>

notice thereof to each holder whose shares are to be redeemed
and upon such terms and conditions as the Board of Directors,
in its discretion, shall deem advisable, out of funds legally
available therefor, at the net asset value per share of that
class or series determined in accordance with subsections (a)
and (b) of this Section 6 and take all other steps deemed
necessary or advisable in connection therewith.

(f) The Board of Directors may by resolution from time to time
authorize the purchase by the Corporation, either directly or through
an agent, of shares of any class or series of the capital stock of the
Corporation upon such terms and conditions and for such consideration
as the Board of Directors, in its discretion, shall deem advisable out
of funds legally available therefor at prices per share not in excess
of the net asset value per share of that class or series determined in
accordance with subsections (a) and (b) of this Section 6 and to take
all other steps deemed necessary or advisable in connection therewith.

(g) Except as otherwise permitted by the Investment Company Act
of 1940, payment of the redemption price of shares of any class or
series of the capital stock of the Corporation surrendered to the
Corporation for redemption pursuant to the provisions of subsection
(c) of this Section 6 or for purchase by the Corporation pursuant to

-12-

<PAGE>

the provisions of subsection (e) or (f) of this Section 6 shall be
made by the Corporation within seven days after surrender of such
shares to the Corporation for such purpose. Any such payment may be
made in whole or in part in portfolio securities or in cash, as the
Board of Directors, in its discretion, shall deem advisable, and no
stockholder shall have the right, other than as determined by the
Board of Directors, to have his or her shares redeemed in portfolio
securities.

(h) In the absence of any specification as to the purposes for
which shares are redeemed or repurchased by the Corporation, all
shares so redeemed or repurchased shall be deemed to be acquired for
retirement in the sense contemplated by the laws of the State of
Maryland. Shares of any class or series retired by repurchase or
redemption shall thereafter have the status of authorized but unissued
shares of such class or series.

Section 7. In the event the Board of Directors shall authorize the
classification or reclassification of shares into classes or series, the Board
of Directors may (but shall not be obligated to) provide that each class or
series shall have the following powers, preferences and voting or other special
rights, and the qualifications, restrictions and limitations thereof shall be as
follows:

(a) All consideration received by the Corporation for the issue
or sale of shares of capital stock of each

-13-

<PAGE>

series, together with all income, earnings, profits,
and proceeds received thereon, including any proceeds
derived from the sale, exchange or liquidation thereof, and any
funds or payments derived from any reinvestment of such proceeds
in whatever form the same may be, shall irrevocably belong to
the series with respect to which such assets, payments or funds were
received by the Corporation for all purposes, subject only to the
rights of creditors, and shall be so handled upon the books of account
of the Corporation. Such assets, payments and funds, including any
proceeds derived from the sale, exchange or liquidation thereof, and
any assets derived from any reinvestment of such proceeds in whatever
form the same may be, are herein referred to as "assets belonging to"
such series.

(b) The Board of Directors may from time to time declare and pay
dividends or distributions, in additional shares of capital stock of
such series or in cash, on any or all series of capital stock, the
amount of such dividends and the means of payment being wholly in the
discretion of the Board of Directors.

(i) Dividends or distributions on shares of any series
shall be paid only out of earned surplus or other lawfully
available assets belonging to such series.

-14-

<PAGE>

(ii) Inasmuch as one goal of the Corporation is to
qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended, or any successor
or comparable statute thereto, and Regulations promulgated
thereunder, and inasmuch as the computation of net income
and gains for federal income tax purposes may vary from the
computation thereof on the books of the Corporation, the
Board of Directors shall have the power, in its discretion,
to distribute in any fiscal year as dividends, including
dividends designated in whole or in part as capital gains
distributions, amounts sufficient, in the opinion of the
Board of Directors, to enable the Corporation to qualify as
a regulated investment company and to avoid liability for
the Corporation for federal income tax in respect of that
year. In furtherance, and not in limitation of the
foregoing, in the event that a series has a net capital loss
for a fiscal year, and to the extent that the net capital
loss offsets net capital gains from such series, the amount
to be deemed available for distribution to that series with
the net capital gain may be reduced by the amount offset.

-15-

<PAGE>

(c) In the event of the liquidation or dissolution of the
Corporation, holders of shares of capital stock of each series shall
be entitled to receive, as a series, out of the assets of the
Corporation available for distribution to such holders, but other than
general assets not belonging to any particular series, the assets
belonging to such series; and the assets so distributable to the
holders of shares of capital stock of any series shall be distributed,
subject to the provisions of subsection (d) of this Section 7, among
such stockholders in proportion to the number of shares of such series
held by them and recorded on the books of the Corporation. In the
event that there are any general assets not belonging to any
particular series and available for distribution, such distribution
shall be made to the holders of all series in proportion to the net
asset value of the respective series determined in accordance with the
charter of the Corporation.

(d) The assets belonging to any series shall be charged with the
liabilities in respect to such series, and shall also be charged with its
share of the general liabilities of the Corporation, in proportion to the
asset value of the respective series determined in accordance with the
Charter of the Corporation. The determination of the Board of Directors
shall be conclusive as to the amount of liabilities, including accrued
expenses and reserves, as to the allocation of the

-16-

<PAGE>

same as to a given series, and as to whether the same or general assets
of the Corporation are allocable to one or more classes.

Section 8. Any fractional shares shall carry proportionately all the
rights of a whole share, excepting any right to receive a certificate
evidencing such fractional share, but including, without limitation, the
right to vote and the right to receive dividends.

Section 9. No holder of shares of Common Stock of the Corporation
shall, as such holder, have any pre-emptive right to purchase or subscribe
for any shares of the Common Stock of the Corporation of any class or series
which it may issue or sell (whether out of the number of shares authorized by
the Articles of Incorporation, or out of any shares of the Common Stock of
the Corporation acquired by it after the issue thereof, or otherwise).

Section 10. All persons who shall acquire any shares of capital stock
of the Corporation shall acquire the same subject to the provisions of the
charter and By-Laws of the Corporation. All shares of Common Stock of the
Corporation issued on or before the date of the filing of the amendment filed
January 17, 1990 to the Articles of Incorporation shall without further act
of the Board of Directors or the holders of such shares be deemed to be
shares of Class B Common Stock.

Section 11. Notwithstanding any provision of law requiring action to be
taken or authorized by the affirmative vote of the holders of a designated
proportion greater than a majority of the

-17-

<PAGE>

shares of common stock, such action shall be valid and effective if taken or
authorized by the affirmative vote of the holders of a majority of the total
number of Shares of common stock outstanding and entitled to vote thereupon
pursuant to the provisions of these Articles of Incorporation.

ARTICLE V.

DIRECTORS

The By-Laws of the Corporation may fix the number of directors at a number
other than four and may authorize the Board of Directors, by the vote of a
majority of the entire Board of Directors, to increase or decrease the number of
directors within a limit specified in the By-Laws, provided that in no case
shall the number of directors be less than three, and to fill the vacancies
created by any such increase in the number of directors. Unless otherwise
provided by the By-Laws of the Corporation, the directors of the Corporation
need not be stockholders.

The By-Laws of the Corporation may divide the Directors of the Corporation
into classes and prescribe the tenure of office of the several classes; but no
class shall be elected for a period shorter than that from the time of the
election of such class until the next annual meeting and thereafter for a period
shorter than the interval between annual meetings or for a longer period than
five years, and the term of office of at least one class shall expire each year.

-18-

<PAGE>

ARTICLE VI.

LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS

A director or officer of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director or officer, except to the extent such exemption from
liability or limitation thereof is not permitted by law (including the
Investment Company Act of 1940) as currently in effect or as the same may
hereafter be amended.

No amendment modification or repeal of this Article VI shall adversely
affect any right or protection of a director or officer that exists at the time
of such amendment, modification or repeal.

ARTICLE VII.

MISCELLANEOUS

The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and for creating,
defining, limiting and regulating the powers of the Corporation, the directors
and the stockholders.

Section 1. The Board of Directors shall have the management and control of
the property, business and affairs of the Corporation and is hereby vested with
all the powers possessed by the Corporation itself so far as is not inconsistent
with law or these Articles of Incorporation. In furtherance and without
limitation of the foregoing provisions, it is expressly declared that, subject
to these Articles of Incorporation, the Board of Directors shall have power:

-19-

<PAGE>

(a) To make, alter, amend or repeal from time to time the By-
Laws of the Corporation except as such power may otherwise be limited
in the By-Laws.

(b) To issue shares of any class or series of the capital stock
of the Corporation.

(c) To authorize the purchase of shares of any class or series
in the open market or otherwise, at prices not in excess of their net
asset value for shares of that class, series or class within such
series determined in accordance with subsections (a) and (b) of
Section 6 of Article IV hereof, provided that the Corporation has
assets legally available for such purpose, and to pay for such shares
in cash, securities or other assets then held or owned by the
Corporation.

(d) To declare and pay dividends and distributions from funds
legally available therefor on shares of such class or series, in such
amounts, if any, and in such manner (including declaration by means of
a formula or other similar method of determination whether or not the
amount of the dividend or distribution so declared can be calculated
at the time of such declaration) and to the holders of record as of
such date, as the Board of Directors may determine.

-20-

<PAGE>

(e) To take any and all action necessary or appropriate to
maintain a constant net asset value per share for shares of any class,
series or class within such series.

Section 2. Any determination made in good faith and, so far as
accounting matters are involved, in accordance with generally accepted
accounting principles applied by or pursuant to the direction of the Board of
Directors or as otherwise required or permitted by the Securities and
Exchange Commission, shall be final and conclusive, and shall be binding upon
the Corporation and all holders of shares, past, present and future, of each
class or series, and shares are issued and sold on the condition and
undertaking, evidenced by acceptance of certificates for such shares by, or
confirmation of such shares being held for the account of, any stockholder,
that any and all such determinations shall be binding as aforesaid.

Nothing in this Section 2 shall be construed to protect any director or
officer of the Corporation against liability to the Corporation or its
stockholders to which such director or officer would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.

Section 3. The directors of the Corporation may receive compensation
for their services, subject, however, to such limitations with respect
thereto as may be determined from time to time by the holders of shares of
capital stock of the Corporation.

-21-

<PAGE>

Section 4. Except as required by law, the holders of shares of capital
stock of the Corporation shall have only such right to inspect the records,
documents, accounts and books of the Corporation as may be granted by the
Board of Directors of the Corporation.

Section 5. Any vote of the holders of shares of capital stock of the
Corporation authorizing liquidation of the Corporation or proceedings for its
dissolution may authorize the Board of Directors to determine, as provided
herein, or if provision is not made herein, in accordance with generally
accepted accounting principles, which assets are the assets belonging to the
Corporation or any series thereof available for distribution to the holders
of the Corporation or any series thereof (pursuant to the provisions of
Section 7 of Article IV hereof) and may divide, or authorize the Board of
Directors to divide, such assets among the stockholders of the shares of
capital stock of the Corporation or any series thereof in such manner as to
ensure that each such holder receives an amount from the proceeds of such
liquidation or dissolution that such holder is entitled to, as determined
pursuant to the provisions of Sections 3 and 7 of Article IV hereof.

ARTICLE VIII

DEFINITIONS

Section 1. As used in these Articles of Incorporation and in the
By-Laws of the Corporation, the following terms shall have the meanings
indicated:

-22-

<PAGE>

"Gross Assets" shall mean the total value of the assets of the
Corporation determined as provided in Section 3 below.

"Person" shall mean a natural person, corporation, joint stock
company, firm association, partnership, trust, syndicate, combination,
organization, government or agency or subdivision thereof.

"Securities" shall mean any stock, shares, bonds, debentures,
notes, mortgages or other obligations, and any certificates, receipts,
warrants or other instruments representing rights to receive, purchase
or subscribe for the same, or evidencing or representing any other
rights or interests therein, or in any property or assets created or
issued by any Person.

Section 2. Net asset value shall be determined by dividing:

(a) The total value of the assets of the Corporation determined
as provided in Section 3 below less, to the extent determined by or
pursuant to the direction of the Board of Directors in accordance with
generally accepted accounting principles, all debts, obligations and
liabilities of the Corporation (which debts, obligations and
liabilities shall include, without limitation of the generality of the
foregoing, any and all debts, obligations, liabilities or claims, of
any and every kind and nature, fixed, accrued or unmatured, including
the estimated accrued expense of investment

-23-

<PAGE>

advisory and administrative services, and any reserves or charges for any
or all of the foregoing, whether for taxes, expenses, contingencies, or
otherwise, and the price of common stock redeemed but not paid for)
but excluding the Corporation's liability upon its shares and its
surplus, by

(b) The total number of shares of the Corporation outstanding
(shares sold by the Corporation whether or not paid for being treated
as outstanding and shares purchased or redeemed by the Corporation
whether or not paid for and treasury shares being treated as not
outstanding).

Section 3. In determining for the purposes of these Articles of
Incorporation the total value of the assets of the Corporation at any time,
securities shall be taken at their market value or, in the absence of readily
available market quotations, at fair value, both as determined pursuant to
methods approved by the Board of Directors and all other assets at fair value
determined in such manner as may be approved from time to time by or pursuant
to the direction of the Board of Directors.

Section 4. Any determination made in good faith and, so far as
accounting matters are involved, in accordance with generally accepted
accounting principles or with any order, rule, regulation or release of the
Securities and Exchange Commission by or pursuant to the direction of the
Board of Directors, shall be final and

-24-

<PAGE>

conclusive, and shall be binding upon the Corporation and all holders of its
shares, past, present and future, and shares of the Corporation are issued
and sold on the condition and undertaking, evidenced by acceptance of
certificates for such shares by, or confirmation of such shares being held
for the account of any stockholder, that any and all such determinations
shall be binding as aforesaid.

Nothing in this Section 4 shall be construed to protect any director or
officer of the Corporation against any liability to the Corporation or its
stockholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.

ARTICLE IX.

AMENDMENTS

From time to time any of these provisions of these Articles of
Incorporation may be amended, altered or repealed (including any amendment
that changes the terms of any of the outstanding stock by classification,
reclassification or otherwise), and other provisions that may, under the
statutes of the State of Maryland at the time in force, be lawfully contained
in articles of incorporation may be added or inserted, upon the vote of the
holders of a majority of the shares of common stock of the Corporation at the
time outstanding and entitled to vote, and all rights at any time conferred
upon the stockholders of the

-25-

<PAGE>

Corporation by these Articles of Incorporation are subject to the provisions
of this Article IX."

SECOND: The provisions set forth in these Articles of Restatement are
all provisions of the Charter as currently in effect.

THIRD: The restatement of the Charter has been approved by a majority
of the entire Board of Directors.

FOURTH: The Charter is not amended by these Articles of Restatement.

FIFTH: The Corporation's principal office in the state of Maryland is
c/o CT Corporation, 32 South Street, Baltimore, Maryland 21202.

SIXTH: The name and address of the Corporation's resident agent is CT
Corporation, 32 South Street, Baltimore, Maryland 21202.

SEVENTH: The Corporation currently has eight directors. The names of the
directors currently in office are as follows:

Edward D. Beach
Delayne D. Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Thomas A. Owens, Jr.
Richard A. Redeker
Stanley E. Shirk

-26-

<PAGE>

IN WITNESS WHEREOF, PRUDENTIAL GOVERNMENT INCOME FUND, INC., has caused
these presents to be signed in its name and on its behalf by its President
and attested by its Assistant Secretary on February 28, 1996.

PRUDENTIAL GOVERNMENT INCOME FUND, INC.

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

Attest: /s/ Ellyn C. Acker
------------------------------
Ellyn C. Acker
Assistant Secretary

THE UNDERSIGNED, President of Prudential Government Income Fund, Inc.,
who executed on behalf of the Corporation the foregoing Articles of
Restatement of which this certificate is made a part, hereby acknowledges in
the name and on behalf of said Corporation the foregoing Articles of
Restatement to be the corporate act of said Corporation and hereby certifies
that to the best of his knowledge, information and belief the matters and
facts set forth therein with respect to the authorization and approval
thereof are true in all material respects under the penalties of perjury.

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

-27-

<PAGE>

Exhibit 10(b)

Shereff, Friedman, Hoffman & Goodman, LLP
818 Third Avenue
New York, New York 10022-9998

April 30, 1996

Prudential Government Income Fund, Inc.
One Seaport Plaza - 25th Floor
New York, New York 10292

Dear Sirs:

Prudential Government Income Fund, Inc. (the "Fund"), a Maryland
corporation, is filing with the Securities and Exchange Commission (the
"Commission") Post-Effective Amendment No. 22 to its Registration Statement
under the Securities Act of 1933 (the "Act") on Form N-1A (File No. 02-82976)
relating, among other things, to the registration under the Act of 8,467,028
additional shares of Common Stock, par value one cent ($0.01) per share (the
"additional shares"), which are to be offered and sold by the Fund in the manner
and on the terms set forth in the prospectus current and effective under the
Act at the time of sale. 8,435,404 of the additional shares are previously
outstanding shares of Common Stock of the Fund which were redeemed by the
Fund during the fiscal year ended February 29, 1996 but have not previously
been used by the Fund for a redemption pursuant to paragraph (a) of Rule
24e-2 under the Investment Company Act of 1940 (the "1940 Act") during the
current fiscal year or pursuant to paragraph (e) of Rule 24f-2 under the 1940
Act in all previous filings during the current fiscal year.

We have, as counsel, participated in various proceedings relating to the
Fund and to the proposed issuance of the additional shares. We have examined
copies, either certified or otherwise proven to our satisfaction to be
genuine, of the Fund's Articles of Incorporation and By-laws, as currently in
effect, and a certificate issued by the State Department of Assessments and
Taxation of the State of Maryland, dated April 18, 1996, certifying the
existence and good standing of the Fund. We are generally familiar with the
corporate affairs of the Fund.

Based upon the foregoing, it is our opinion that:

1. The Fund has been duly organized and is legally existing under
the laws of the State of Maryland.

<PAGE>

Prudential Government Income Fund, Inc.
April 30, 1996
Page 2

2. The Fund is authorized by its Articles of Incorporation to issue
two billion (2,000,000,000) shares. Under Maryland law (i) the
Board of Directors of the Fund may increase or decrease the
number of shares that the Fund has authority to issue, and (ii)
shares which were issued and which have subsequently been
redeemed by the Fund are, by virtue of such redemption, restored
to the status of authorized and unissued shares.

3. Subject to the effectiveness of the above-mentioned
Post-Effective Amendment No. 22 to the Fund's Registration
Statement and compliance with applicable state securities laws,
upon the issuance of the additional shares for a consideration
not less than the par value thereof as required by the laws of
Maryland, and not less than the net asset value thereof as
required by the 1940 Act and in accordance with the terms of the
Registration Statement, such shares will be legally issued and
outstanding and fully paid and non-assessable.

We hereby consent to the filing of this opinion with the Commission as a
part of the above-mentioned Post-Effective Amendment No. 22 to the
Registration Statement and with any state securities commission where such
filing is required. In giving this consent we do not admit that we come
within the category of persons whose consent is required under Section 7 of
the Act.

We are members of the Bar of the State of New York and do not hold
ourselves out as being conversant with the laws of any jurisdiction other
than those of the United States of America and the State of New York. We note
that we are not licensed to practice law in the State of Maryland, and to the
extent that any opinion herein involves the law of Maryland, such opinion
should be understood to be based solely upon our review of the documents
referred to above, the published statutes of the State of Maryland and, where
applicable, published cases, rules or regulations of regulatory bodies of
that State.

Very truly yours,

/s/ Shereff, Friedman, Hoffman & Goodman, LLP

Shereff, Friedman, Hoffman & Goodman, LLP

<PAGE>
EXHIBIT 11

CONSENT OF INDEPENDENT AUDITORS

We consent to the use in Post-Effective Amendment No. 22 to Registration
Statement No. 2-82976 of Prudential Government Income Fund, Inc. of our
report dated April 10, 1996, appearing in the Statement of Additional
Information, which is a part of such Registration Statement, and to the
references to us under the headings "Financial Highlights" in the Prospectus,
which is a part of such Registration Statement, and "Custodian, Transfer
and Dividend Disbursing Agent and Independent Accountants" in the Statement
of Additional Information.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
New York, New York
April 26, 1996

<PAGE>
<ARTICLE> 6
<CIK> 0000717819
<NAME> PRUDENTIAL GOVERNMENT INCOME FUND
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL GOVERNMENT INCOME FUND - CLASS A

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> FEB-29-1996
<INVESTMENTS-AT-COST> 1,548,582,230
<INVESTMENTS-AT-VALUE> 1,582,462,651
<RECEIVABLES> 41,416,210
<ASSETS-OTHER> 68,606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,623,947,467
<PAYABLE-FOR-SECURITIES> 27,393,673
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,771,277
<TOTAL-LIABILITIES> 35,164,950
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,674,748,230
<SHARES-COMMON-STOCK> 175,773,428
<SHARES-COMMON-PRIOR> 171,167,697
<ACCUMULATED-NII-CURRENT> (119,846,134)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 33,880,421
<NET-ASSETS> 1,588,782,517
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 117,578,274
<OTHER-INCOME> 280,669
<EXPENSES-NET> 18,510,114
<NET-INVESTMENT-INCOME> 99,348,829
<REALIZED-GAINS-CURRENT> 53,485,429
<APPREC-INCREASE-CURRENT> 34,676,738
<NET-CHANGE-FROM-OPS> 187,510,996
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (99,348,829)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 226,050,700
<NUMBER-OF-SHARES-REDEEMED> (360,013,003)
<SHARES-REINVESTED> 57,501,726
<NET-CHANGE-IN-ASSETS> 11,701,590
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (173,331,563)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,787,246
<INTEREST-EXPENSE> 10,722,868
<GROSS-EXPENSE> 18,510,114
<AVERAGE-NET-ASSETS> 909,169,000
<PER-SHARE-NAV-BEGIN> 8.59

<PER-SHARE-NII> 1.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.60)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.04
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000717819
<NAME> PRUDENTIAL GOVERNMENT INCOME FUND
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL GOVERNMENT INCOME FUND - CLASS B

<PER-SHARE-NII> 0.98
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.04
<EXPENSE-RATIO> 0.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0000717819
<NAME> PRUDENTIAL GOVERNMENT INCOME FUND
<SERIES>
<NUMBER> 003
<NAME> PRUDENTIAL GOVERNMENT INCOME FUND - CLASS C

<PER-SHARE-NII> 0.98
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.04
<EXPENSE-RATIO> 1.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>