FIRST AUSTRALIA PRIME INCOME FUND INC, 497, 1996-05-06

FIRST AUSTRALIA PRIME INCOME FUND INC
497, 1996-05-06

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PROSPECTUS
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31,129,561 Shares of Common Stock

THE FIRST AUSTRALIA PRIME
INCOME FUND, INC.

Issuable Upon Exercise of Non-Transferable
Rights to Subscribe for Such Shares of Common Stock

American Stock Exchange Symbol: FAX
Pacific Stock Exchange Symbol: FAX
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The First Australia Prime Income Fund, Inc. (the "Fund") is issuing to its
stockholders of record as of the close of business on May 1, 1996 (the "Record
Date") non-transferable rights (the "Rights") entitling the holders thereof to
subscribe for up to an aggregate of 31,129,561 shares (the "Shares") of the
Fund's common stock (the "Common Stock"), at the rate of one share of Common
Stock for each whole Right held (the "Offer"). Stockholders of record will
receive one-fifth of a non-transferable Right for each share of Common Stock
held and stockholders who fully exercise their Rights will have, subject to
certain limitations and subject to allotment, an over-subscription privilege
(the "Over-Subscription Privilege"). Fractional shares will not be issued upon
the exercise of Rights; accordingly only whole Rights may be exercised. The
Rights are non-transferable and will not be admitted for trading on the American
Stock Exchange (the "AMEX") or any other exchange. The Fund's Common Stock is
traded on the AMEX under the symbol "FAX." See "The Offer." THE SUBSCRIPTION
PRICE (THE "SUBSCRIPTION PRICE") PER SHARE WILL BE 95% OF THE LOWER OF (a) THE
AVERAGE OF THE LAST REPORTED SALES PRICE OF A SHARE OF THE FUND'S COMMON STOCK
ON THE AMEX ON MAY 23, 1996 (THE "PRICING DATE") AND THE FOUR PRECEDING BUSINESS
DAYS OR (b) THE NET ASSET VALUE PER SHARE AS OF THE PRICING DATE.

THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MAY 23, 1996, UNLESS
EXTENDED (THE "EXPIRATION DATE").

The Fund is a non-diversified, closed-end management investment company. The
Fund's principal investment objective is current income through investment
primarily in Australian dollar-denominated debt securities. The Fund may also
achieve incidental capital appreciation. See "Investment Objective and Policies;
Investment Restrictions." Investment in the Fund involves certain risks and
special considerations, including risks associated with currency fluctuations
and the Fund's leveraged capital structure. The Fund may issue additional
Preferred Stock after this Offer, which together with the Preferred Stock
presently outstanding will represent up to 25% of the Fund's capital. See "RISK
FACTORS AND SPECIAL CONSIDERATIONS." The Fund's Investment Manager is EquitiLink
International Management Limited, an affiliate of EquitiLink Australia Limited,
the Fund's Investment Adviser. The Prudential Insurance Company of America acts
as the Fund's Consultant, and Prudential Mutual Fund Management, Inc. acts as
the Fund's Administrator. The address of the Fund is One Seaport Plaza, New
York, New York 10292, and its telephone number is (212) 214-1665.

The Fund announced the Offer prior to the commencement of trading on the AMEX on
April 8, 1996. The net asset values ("NAV") per share of Common Stock at the
close of business on April 4, 1996 and April 26, 1996 were $9.52 and $9.69,
respectively, and the last reported sales prices of a share of the Fund's Common
Stock on the AMEX on those dates were $8.875 and $8.625, respectively.

As a result of the terms of the Offer, stockholders who do not fully exercise
their Rights will, upon the completion of the Offer, own a smaller proportional
interest in the Fund than they owned prior to the Offer. In addition, because
the Subscription Price per share will be less than the current NAV per share,
the Offer will result in an immediate dilution of the NAV per share for all
existing stockholders. Such dilution, which might be substantial, is not
currently determinable because it is not known how many Shares will be
subscribed for, what the NAV or market price of the Common Stock will be on the
Pricing Date or what the Subscription Price will be. Stockholders on the Record
Date will experience a decrease in the NAV per share held by them, irrespective
of whether they exercise all or any portion of their Rights. See "The Offer" and
"Risk Factors and Special Considerations."
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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.

<TABLE>
<S> <C> <C> <C>
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ESTIMATED ESTIMATED ESTIMATED PROCEEDS
SUBSCRIPTION PRICE(1) SALES LOAD(2) TO FUND(3)
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Per Share....................... $8.41 $0.305 $8.105
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Total Maximum................... $261,799,608 $9,494,516 $252,305,092
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</TABLE>

Footnotes set forth on next page
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND TO RETAIN IT FOR FUTURE
REFERENCE.

MAY 1, 1996
<PAGE> 2

(continued from previous page)
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(1) Estimated on the basis of the average of the last reported sales prices of a
share of the Fund's Common Stock on the AMEX on April 26, 1996 and the four
preceding business days. Pursuant to the Over-Subscription Privilege, the
Fund may increase the number of shares subject to subscription by up to 25%
of the Shares offered hereby. If the Fund increases the number of shares
subject to subscription by 25%, the total maximum Estimated Subscription
Price will be approximately $327,249,508, the total maximum Estimated Sales
Load will be approximately $11,868,145 and the total maximum Estimated
Proceeds to the Fund will be approximately $315,381,363.

(2) In connection with the Offer, the Fund has agreed to pay Prudential
Securities Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
PaineWebber Incorporated and Smith Barney Inc. (the "Dealer Managers") a fee
for their financial advisory, marketing and soliciting services equal to
3.625% of the aggregate Subscription Price for the Shares issued pursuant to
the Offer and to reimburse Prudential Securities Incorporated for
out-of-pocket expenses up to $225,000. The Dealer Managers will reallow to
certain broker-dealers a concession of 2.50% of the Subscription Price per
Share for Shares issued pursuant to the Offer. See "Distribution
Arrangements." These fees and expense reimbursement will be borne by the
Fund and indirectly by all of the Fund's stockholders, including those who
do not exercise their Rights. The Fund and the Investment Manager have
agreed to indemnify the Dealer Managers against certain liabilities
including liabilities under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended.

(3) Before deduction of expenses incurred by the Fund, estimated at
approximately $1,364,300, including $225,000 to be paid to Prudential
Securities Incorporated in reimbursement of its expenses.

Unless otherwise specified, all references in this Prospectus to "U.S. dollars,"
"dollars," "US $" or "$" are to the United States dollar, all references to "A$"
are to the Australian dollar and all references to "NZ$" are to the New Zealand
dollar. On April 30, 1996, the noon buying rates in New York City for cable
transfers payable in A$ and NZ$, as certified for customs purposes by the
Federal Reserve Bank of New York, were A$1.2732 per U.S. dollar and NZ$1.4558
per U.S. dollar. See "Risks and Special Considerations -- Currency and Interest
Rate Fluctuations."

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes that the allowable
increase of 25% of the Shares offered hereby pursuant to the Over-Subscription
Privilege will not occur. Unless otherwise indicated, references in the
Prospectus to "stockholders" refer only to holders of the Fund's Common Stock.

THE FUND

INFORMATION REGARDING THE FUND

The First Australia Prime Income Fund, Inc. (the "Fund") is a
non-diversified, closed-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"). The Fund commenced operations
in April 1986 and was the first publicly offered United States registered
investment company organized to invest primarily in Australian
dollar-denominated debt securities. The Fund is also permitted to invest in New
Zealand debt securities. The Fund's outstanding Common Stock, par value $.01 per
share (the "Common Stock"), is listed and traded on the American Stock Exchange
(the "AMEX") and Pacific Stock Exchange under the symbol "FAX". The average
weekly trading volume of the Common Stock on the AMEX during the Fund's fiscal
year ended October 31, 1995 was approximately 872,400 shares. As of April 26,
1996, the Fund had 155,647,805 shares of Common Stock as well as 19,000 shares
of its Auction Market Preferred Stock, par value $.01 per share (the "Preferred
Stock"), outstanding. As of April 26, 1996, the total net assets of the fund
were $1,982,831,657 of which $1,507,831,657 were attributable to the common
stock. See "Net Asset Value of Common Stock."

EquitiLink International Management Limited (the "Investment Manager") acts
as the Fund's investment manager and EquitiLink Australia Limited (the
"Investment Adviser") acts as the Fund's investment adviser. The Investment
Manager and the Investment Adviser also serve in these capacities for The First
Australia Fund, Inc., a diversified closed-end management investment company,
the shares of which are listed on the AMEX (under the symbol "IAF"), organized
to invest primarily in Australian dollar-denominated equity securities; The
First Australia Prime Income Investment Company Limited, a closed-end management
investment company, the shares of which are listed on the Toronto Stock Exchange
(under the symbol "FAP"), organized to invest primarily in Australian
dollar-denominated debt securities; and The First Commonwealth Fund, Inc., a
non-diversified closed-end management investment company, the shares of which
are listed on the New York Stock Exchange (under the symbol "FCO"), organized to
invest in high-grade, fixed income securities denominated in the currencies of
Australia, Canada, New Zealand and the United Kingdom. In addition, the
Investment Adviser currently manages eight Australian public unit trusts and two
other closed-end management investment companies, the shares of which are listed
on the Australian Stock Exchange Limited, as well as two open-end funds marketed
in Taiwan and institutional and private advisory accounts. The Prudential
Insurance Company of America (the "Consultant") acts as the Fund's consultant.
Prudential Mutual Fund Management, Inc. (the "Administrator") is the Fund's
administrator. See "Management of the Fund."

The Fund pays the Investment Manager a fee at the annual rate of 0.65% of
the Fund's average weekly net assets applicable to Common and Preferred Stock up
to $200 million, 0.60% of such assets between $200 million and $500 million,
0.55% of such assets between $500 million and $900 million and 0.50% of such
assets in excess of $900 million, computed based upon net assets applicable to
Common and Preferred Stock at the end of each week and payable at the end of
each calendar month. The Investment Manager has agreed to reduce its fee to
0.45% of such assets in excess of $1,750 million upon completion of the Offer.
Under the Management Agreement, the Investment Manager pays the Investment
Adviser an advisory fee at the annual rate of 0.25% of the Fund's average weekly
net assets applicable to Common and Preferred Stock up to $1,200 million and
0.20% of such assets in excess of $1,200 million at the end of each week and
payable at the end of each calendar month.

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<PAGE> 4

The Administrator is paid a fee by the Fund at the annual rate of 0.15% of
the Fund's average weekly net assets applicable to the Common Stock and
Preferred Stock up to $900 million and 0.10% of such assets in excess of $900
million valued and paid in the same manner as fees paid the Investment Manager
and the Investment Adviser by the Fund. The Fund's Administrator has agreed to
reduce its fee to 0.07% of such assets in excess of $1,750 million upon
completion of the Offer. See "Management of the Fund." The Fund's Investment
Manager and Investment Adviser, as well as the Administrator, will benefit from
the Offer because their fees are based on the average net assets applicable to
Common and Preferred Stock of the Fund.

TERMS OF THE OFFER

The Fund is issuing to stockholders of record as of the close of business
on May 1, 1996 (the "Record Date") non-transferable rights (the "Rights") to
subscribe for an aggregate of 31,129,561 shares of Common Stock (sometimes
referred to herein as the "Shares") of the Fund. Each such stockholder is being
issued one-fifth of a non-transferable right for each full share of Common Stock
owned on the Record Date. The Rights entitle the holder to acquire at the
Subscription Price (as hereinafter defined) one Share for each whole Right held.
Rights may be exercised at any time during the Subscription Period, which
commences on May 6, 1996 and ends at 5:00 p.m. New York City time, on May 23,
1996, unless extended (the "Expiration Date"). A stockholder's right to acquire
during the Subscription Period at the Subscription Price one additional Share
for each whole Right held is hereinafter referred to as the "Primary
Subscription." Fractional shares will not be issued upon the exercise of Rights.
The Rights will be evidenced by Subscription Certificates which will be mailed
to stockholders of record at the close of business on the Record Date.

In addition, any stockholder who fully exercises all Rights issued to him
(other than those Rights which cannot be exercised because they represent the
right to acquire less than one Share) is entitled to subscribe for additional
Shares (the "Over-Subscription Privilege"). For purposes of determining the
number of Shares a stockholder may acquire pursuant to the Offer,
broker-dealers, trust companies, banks or others whose shares are held of record
by Cede & Co. Inc. ("Cede"), nominee for The Depository Trust Company, or by any
other depository or nominee will be deemed to be the holders of the Rights that
are issued to Cede or such other depository or nominee on their behalf. Shares
acquired pursuant to the Over-Subscription Privilege are subject to allotment or
increase, as is more fully discussed under "The Offer -- Over-Subscription
Privilege."

The Subscription Price per Share will be 95% of the lower of (a) the
average of the last reported sales price of a share of the Fund's Common Stock
on the AMEX on May 23, 1996 (the "Pricing Date") and the four preceding business
days or (b) the NAV per share as of the Pricing Date. Since the Expiration Date
and the Pricing Date are each May 23, 1996, stockholders who choose to exercise
their Rights will not know at the time of exercise the Subscription Price for
Shares acquired pursuant to such exercise. Stockholders will have no right to
rescind a purchase after receipt of their payment for Shares by the Subscription
Agent. There is no minimum number of Rights which must be exercised in order for
the Offer to close.

The Rights are non-transferable. Therefore, only the underlying Shares will
be listed for trading on the AMEX or any other exchange.

4
<PAGE> 5

The information agent (the "Information Agent") for the Offer is:

SHAREHOLDER
COMMUNICATIONS CORPORATION

Toll Free: (800) 733-8481, Extension 345
or
Call Collect: (212) 805-7000

Stockholders may also contact their brokers or nominees for information with
respect to the Offer.

IMPORTANT DATES TO REMEMBER

<TABLE>
<CAPTION>
EVENT DATE
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<S> <C>
Record Date....................................................... May 1, 1996
Subscription Period............................................... May 6, 1996-May 23, 1996
Expiration Date................................................... May 23, 1996
Pricing Date...................................................... May 23, 1996
Deadline for delivery of Exercise Form together with Estimated
Subscription Price payment or for delivery of Notice of
Guaranteed
Delivery........................................................ May 23, 1996
Deadline for payment pursuant to Notice of Guaranteed Delivery.... May 29, 1996
Confirmation Date to registered shareholders...................... June 6, 1996
Deadline for payment of unpaid balance by registered shareholders
if Final Subscription Price is higher than Estimated
Subscription Price.............................................. June 20, 1996
</TABLE>

RISK FACTORS AND SPECIAL CONSIDERATIONS

The following summarizes certain matters that should be considered, among
others, in connection with the Offer. This Prospectus contains certain
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of certain uncertainties
set forth below and elsewhere in the Prospectus.

Dilution -- Net Asset Value
and Non-Participation in
the Offer.................. As a result of the terms of the Offer, stockholders
who do not fully exercise their Rights will, upon
the completion of the Offer, own a smaller
proportional interest in the Fund than they owned
prior to the Offer. In addition, an immediate
dilution of the NAV per share will be experienced
by all stockholders as a result of the Offer
irrespective of whether they exercise all or any of
their Rights because the Subscription Price will be
less than the then current NAV per share, and the
number of shares outstanding after the Offer will
increase in greater percentage than the increase in
the size of the Fund's assets. Although it is not
possible to state precisely the amount of such a
decrease in value, because it is not known at this
time how many Shares will be subscribed for or what
the Subscription Price will be, such dilution could
be minimal or it could be substantial. For example,
if the Subscription Price per Share is $8.41,
representing a price which is 86.8% of an assumed
NAV per share of $9.69, assuming that all Rights
are exercised and the Fund increases the number of
shares subject to subscription by 25% in order to
satisfy over-subscriptions, the Fund's NAV per
share would be reduced by approximately $0.33 per
share. If, on the other hand, the Subscription
Price represents a further discount to the Fund's
NAV, the dilution would be greater. For example, if
the Subscription Price per Share is $8.13,
representing a price which is only 83.9% of the
assumed NAV per share, assuming that all Rights are
exercised and the Fund increases the number of
shares subject to subscription by 25% in order to
satisfy over-subscriptions, the Fund's NAV per
share would be reduced

5
<PAGE> 6

by approximately $0.38 per share. The foregoing
examples assume Subscription Prices of $8.41 and
$8.13, respectively, per Share. However, the actual
Subscription Price may be greater or less than such
assumed Subscription Prices. The Offer may also
have a dilutive impact on investment income per
share available for distribution.

Currency and Interest Rate
Fluctuations............. It is expected that normally at least 65% of the
Fund's total assets will be invested in Australian
dollar-denominated debt securities of Australian
banks, federal and state government entities and
companies. Accordingly, a change in the value of
the Australian dollar against the U.S. dollar will
generally result in a change in the U.S. dollar
value of the Fund's assets. Such a change may
either increase or decrease the Fund's NAV.
Similarly, an increase in interest rates in
Australia can be expected to result in a decline in
the value of the Fund's portfolio securities
denominated in Australian dollars. In addition,
although most of the Fund's income is received or
realized primarily in Australian dollars, the Fund
is required to compute and distribute its income in
U.S. dollars. Therefore, for example, if the
exchange rate for the Australian dollar declines
after the Fund's income has been accrued and
translated into U.S. dollars, but before the income
has been received, the Fund could be required to
liquidate portfolio securities to make such
distributions.

Currency exchange rate fluctuations can decrease or
eliminate income available for distribution or
conversely increase income available for
distribution. For example, in some situations, if
certain currency exchange losses exceed other net
investment income for a taxable year, the Fund
would not be able to make ordinary income
distributions, or distributions made before the
losses were realized would be recharacterized as a
return of capital to stockholders for U.S. federal
income tax purposes thus reducing each
stockholder's cost basis in his or her Fund shares,
or as capital gain rather than as an ordinary
dividend.

Interest rates in Australia and New Zealand have
remained consistently higher than interest rates in
the United States since the inception of the Fund
in 1986. Currently, investments in Australia and
New Zealand offer higher yields than are available
from investments in comparable U.S.
dollar-denominated investments of similarly rated
quality; however, no assurance can be given that
this situation will continue in the future.

Fluctuations in interest rates in the relevant bond
markets can affect NAV and the dividend rate. The
Fund's NAV is adversely affected during periods of
rising interest rates in those bond markets and is
favorably affected during periods when interest
rates fall. In addition, the Fund may recognize
capital loss, impacting its ability to supplement
distributable income, when bonds in the Fund's
portfolio are sold or mature at a price which is
less than the Fund's cost.

Current Distribution
Rate....................... The Fund intends to continue to pay monthly
distributions from net investment income which may
be supplemented from realized long- or short-term
capital gains. Although a purpose of the Offer is
to seek to sustain the current monthly distribution
rate of 7 cents per share for as long as possible,
there can be no assurance that the Fund will be
able to maintain the current dividend level
indefinitely. The Board of Directors, in accordance
with its policy, reviews the level of monthly
dividends on a continuing basis at its quarterly
Board meetings, with the next review scheduled to
take place at its meeting to be held in June 1996.

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<PAGE> 7

Other Risks of Foreign
Investments.............. The Fund's investments could in the future be
adversely affected by any increase in taxes or by
political, economic or diplomatic developments in
Australia, or, to a lesser extent, New Zealand.
Moreover, in relation to companies in which the
Fund may invest, accounting, auditing and financial
reporting standards and other regulatory practices
and requirements vary from those applicable to
entities subject to regulation in the United
States.

Non-Diversified Status..... The Fund is classified as a "non-diversified"
investment company under the 1940 Act, which means
that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in
the securities of a single issuer. As a
non-diversified investment company, the Fund may
invest a greater proportion of its assets in the
obligations of a smaller number of issuers and, as
a result, will be subject to greater risk with
respect to its portfolio securities. Although the
Fund must diversify its holdings in order to be
treated as a registered investment company under
the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the Fund may be more
susceptible to any single economic, political or
regulatory occurrence than would be the case if it
had elected to diversify its holdings sufficiently
to be classified as a "diversified" investment
company under the 1940 Act. See "Investment
Objective and Policies; Investment Restrictions"
and "Taxation -- United States."

Discount from Net
Asset Value.............. The Fund's shares have traded in the market below,
at and above NAV since the commencement of the
Fund's operations. This characteristic of shares of
closed-end investment companies is a risk separate
and distinct from the risk that the Fund's NAV will
decrease. In the twelve months ended March 31,
1996, the Fund's shares have traded in the market
at an average discount to NAV of 9%. See
"Description of Common Stock."

Tax Considerations......... Withholding and/or other taxes may apply in the
countries in which the Fund invests, which will
reduce the Fund's cash return in those countries.
The Fund intends to elect, when eligible, to
"pass-through" to the Fund's stockholders, as a
deduction or credit, the amount of foreign income
and similar taxes paid by the Fund. See "Taxation."

Preferred
Stock -- Leverage.......... The Fund's Articles of Amendment and Restatement,
as amended to date (the "Articles"), authorize the
Fund, by action of its Board of Directors, to issue
up to 100 million shares of Preferred Stock in one
or more series and from time to time. There are
currently outstanding 19,000 shares of Preferred
Stock with an aggregate liquidation value of $475
million.

The Fund may issue additional shares of Preferred
Stock at a time the Board of Directors deems
appropriate after completion of this Offer which,
together with the Preferred Stock currently
outstanding, will represent up to approximately 25%
of the Fund's capital immediately after the
issuance of such additional Preferred Stock. There
can be no assurance, however, that additional
Preferred Stock will actually be issued. Issuance
of Preferred Stock results in the leveraging of the
Common Stock. Although the terms of any Preferred
Stock offering will be determined by the Fund's
Board of Directors, it is anticipated that any
additional Preferred Stock issued (like each series
of Preferred Stock

7
<PAGE> 8

currently outstanding) will pay dividends that will
be adjusted over relatively short periods of time
(generally seven to 28 days) and will have a
dividend rate based upon prevailing U.S. short-term
interest rates. It is also anticipated that the
proceeds of any additional Preferred Stock offering
will be invested in debt obligations in accordance
with the Fund's investment objectives.

Because under historical market conditions,
Australian and New Zealand long-term debt
obligations have produced higher yields than U.S.
short-term obligations, the difference between the
U.S. short-term rates paid by the Fund and the net
Australian and New Zealand long-term debt rates
received by the Fund, over the life of the Fund,
generally has provided holders of Common Stock with
a higher yield. However, no assurance can be given
that this situation will continue in the future.
Investors should note, however, that leverage
creates certain risks for holders of Common Stock,
including higher volatility of both the NAV and
market value of the Common Stock, and that
fluctuations in the dividend rates on Preferred
Stock will affect the yield to holders of Common
Stock. See "Risk Factors and Special
Considerations -- Preferred Stock" and "Capital
Stock -- Leverage." Holders of the Common Stock
receive all net income of the Fund remaining after
payment of dividends on the Preferred Stock, and
generally are entitled to a pro rata share of net
realized capital gains, if any. Upon any
liquidation of the Fund, the holders of Preferred
Stock will be entitled to receive liquidating
distributions (expected to equal the liquidation
value of $25,000 per share of Preferred Stock plus
any accumulated and unpaid dividends thereon)
before any distribution is made to holders of
Common Stock. See "Capital Stock -- Liquidation
Preference."

Holders of Preferred Stock, voting as a separate
class, are entitled to elect two of the Fund's
Directors, and the remaining Directors are elected
by holders of Common Stock. If at any time
dividends on the Fund's Preferred Stock were to be
in arrears in an amount equal to two full years of
dividend payments, the holders of all outstanding
shares of Preferred Stock, voting as a separate
class, would be entitled to elect a majority of the
Fund's Directors. The holders of Preferred Stock
will also vote separately on certain other matters
as required under the Fund's Articles, the 1940 Act
and Maryland law but otherwise will have equal
voting rights with holders of Common Stock (one
vote per share) and will vote together with holders
of Common Stock as a single class. See "Capital
Stock -- Voting Rights."

The leverage obtained through the outstanding
Preferred Stock, since its issuance in January
1989, generally has provided holders of Common
Stock with a higher yield than such holders would
have otherwise received. However, there can be no
assurance that the Fund will be able to continue to
realize such a higher net return on its investment
portfolio. Changes in certain factors could cause
the relationship between the U.S. short-term
dividend rates paid by the Fund on the Preferred
Stock and the rates received by the Fund on its
investment portfolio to change so that such U.S.
short-term rates may substantially increase
relative to rates on the Australian and New Zealand
long-term debt obligations in which the Fund may be
invested. Under such conditions, the benefit of
leverage to holders of Common Stock will be reduced
and the Fund's

8
<PAGE> 9

leveraged capital structure could result in a lower
rate of return to holders of Common Stock than if
the Fund were not leveraged. Since dividends or any
other distributions on Preferred Stock are payable
in U.S. dollars, a decline in the value of the
Australian dollar to the U.S. dollar also could
impact negatively the rate of return to holders of
the Common Stock. The Fund has the authority to
redeem the Preferred Stock for any reason and may
redeem all or part of the Preferred Stock if it
anticipates that the Fund's leveraged capital
structure will result in a lower rate of return to
holders of the Common Stock than that obtainable if
the Common Stock were unleveraged for any
significant amount of time. The Fund may also need
to redeem all or a portion of the Preferred Stock
to the extent required by the 1940 Act, the terms
of the Preferred Stock or by rating agencies rating
the Preferred Stock. The leveraging of the Common
Stock would be eliminated during any period that
Preferred Stock is not outstanding.

Anti-Takeover Provision.... The Fund presently has a provision in its By-Laws
that could have the effect of limiting the ability
of other entities or persons to acquire control of
the Fund. The By-Laws provide for a staggered
election of those Directors who are elected by the
holders of Common Stock, with such Directors
divided into three classes, each having a term of
three years. Accordingly, only those Directors in
one class may be changed in any one year and it
would require two years to change a majority of the
Board of Directors. This system of electing
Directors may be regarded as "anti-takeover," have
the effect of maintaining the continuity of
management and thus make it more difficult for the
Fund's stockholders to change the majority of
Directors. See "Capital Stock" and "Certain
Provisions of the Articles of Amendment and
Restatement and By-Laws."

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<PAGE> 10

FUND EXPENSES

The following table is intended to assist Fund investors in understanding
the various costs and expenses associated with investing in the Fund through the
exercise of Rights.

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C>
Sales Load (as a percentage of the Subscription Price)(1).......... 3.625%
Dividend Reinvestment and Cash Purchase Plan Fees.................. None
</TABLE>

ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) ATTRIBUTABLE TO COMMON
STOCK(2)

<TABLE>
<S> <C>
Management Fee.................................................... .66%
Administration Fee................................................ .14%
Other Expenses.................................................... .38%
----
Total Annual Expenses(3).................................. 1.18%
====
</TABLE>

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

(1) The Fund has agreed to pay the Dealer Managers a fee for their financial
advisory, marketing and soliciting services equal to 3.625% of the aggregate
Subscription Price for the Shares issued pursuant to the Offer and to
reimburse Prudential Securities Incorporated for out-of-pocket expenses up
to $225,000. In addition, the Fund has agreed to pay a fee to each of the
Subscription Agent and the Information Agent estimated to be $250,000 and
$300,000, respectively, which includes reimbursement for their out-of-pocket
expenses related to the Offer. These fees will be borne by the Fund and
indirectly by all of the Fund's stockholders, including those who do not
exercise their Rights. See "Distribution Arrangements."

(2) Fees payable under the Management Agreement and Administration Agreement are
calculated on the basis of the Fund's total assets. "Other Expenses" have
been estimated for the current fiscal year. Fees payable under the
Management Agreement and Administration Agreement are calculated on the
basis of the Fund's total assets and incorporate the fee reductions proposed
by the Investment Manager and the Administrator. "Other Expenses" have been
estimated for the current fiscal year and incorporate an agreed fee
reduction by the Fund's Custodian. See "Management Agreement and Advisory
Agreement" and "Administration Agreement."

(3) The indicated 1.18% expense ratio assumes that the Offer (including the
Over-Subscription Privilege) is fully subscribed, yielding estimated net
proceeds of approximately $314.0 million (assuming an estimated Subscription
Price of $8.41 per share) and that, as a result, based on the Fund's net
assets attributable to common stockholders on April 26, 1996, the average
net assets attributable to common stockholders would be $1,821.8 million. It
also assumes that net assets attributable to common stockholders will not
increase or decrease due to currency fluctuations. The indicated ratio
reflects all expenses of the Offer; it does not reflect any expenses
associated with the issuance of additional Preferred Stock.

HYPOTHETICAL EXAMPLE

An investor would directly or indirectly pay the following expense on a
$1,000 investment in the Fund, assuming a 5% annual return:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- -------- ----------- ---------- ---------
<S> <C> <C> <C>
$12 $37 $65 $143
</TABLE>

This Hypothetical Example assumes that all dividends and other
distributions are reinvested at NAV and that the percentage amounts listed under
Annual Expenses above remain the same in the years shown. See also Note (3)
above for assumptions made in calculating the expenses in this Hypothetical
Example. The above tables and the assumption in the Hypothetical Example of a 5%
annual return are required by regulation of the Securities and Exchange
Commission (the "Commission") applicable to all investment companies; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Fund's Shares. For more complete
descriptions of certain of the Fund's costs and expenses, see "Management of the
Fund."

This Hypothetical Example should not be considered a representation of past
or future expenses, and the Fund's actual expenses may be more or less than
those shown.

10
<PAGE> 11

FINANCIAL HIGHLIGHTS

The following information has been audited by Price Waterhouse LLP,
independent accountants, whose reports thereon were unqualified. This
information should be read in conjunction with the Financial Statements and
Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
APRIL 24,
1986##
YEARS ENDED OCTOBER 31, THROUGH
---------------------------------------------------------------------------------------------- OCTOBER 31,
1995** 1994 1993 1992 1991 1990 1989 1988 1987 1986
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value per
common share,
beginning of
period............. $ 8.82 $ 10.09 $ 9.61 $ 11.31 $ 10.02 $ 9.31 $ 10.81 $ 8.74 $ 8.26 $ 9.33++
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment
income............. .93 1.01 1.19 1.29 1.40 1.49 1.32 .97 1.02 .49
Net realized and
unrealized gain
(loss) on
investments and
foreign
currencies......... 1.16 (1.03) .58 (1.42) 1.37 .73 (1.22) 2.50 .52 (1.46)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations ...... 2.09 (.02) 1.77 (.13) 2.77 2.22 .10 3.47 1.54 (.97)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Dividends from net
investment income
to preferred
shareholders....... (.17) (.12) (.11) (.14) (.24) (.30) (.20) -- -- --
Dividends from net
investment income
to common
shareholders....... (.83) (.84) (1.08) (1.10) (1.24) (1.13) (1.08) (1.40) (1.06) (.08)
Distributions from
net capital and
currency gains to
preferred
shareholders....... (.01) (.01) (.01) (.01) -- -- -- -- -- --
Distributions from
net capital and
currency gains to
common
shareholders....... (.15) (.17) (.08) (.29) -- (.08) (.23) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions.... (1.16) (1.14) (1.28) (1.54) (1.48) (1.51) (1.51) (1.40) (1.06) (.08)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Capital charge in
respect to issuance
of shares.......... (.39) (.11) (.01) (.03) -- -- (.09) -- -- (.02)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value per
common share, end
of period.......... $ 9.36 $ 8.82 $ 10.09 $ 9.61 $ 11.31 $ 10.02 $ 9.31 $ 10.81 $ 8.74 $ 8.26
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Market price per
common share, end
of period.......... $ 9.31 $ 9.56 $ 10.25 $ 10.00 $ 10.94 $ 8.94 $ 8.88 $ 9.56 $ 7.25 $ 8.38
TOTAL INVESTMENT
RETURN BASED ON+:
Market value......... 8.78% 3.32% 15.00% 4.11% 38.36% 14.95% 7.38% 54.42% (2.09)% (9.31)%
Net asset value...... 18.54% (3.19)% 17.80% (3.22)% 27.62% 22.88% (.44)% 44.84% 19.74% (10.65)%
RATIOS TO AVERAGE NET
ASSETS OF COMMON
SHAREHOLDERS/
SUPPLEMENTAL DATA#:
Expenses............. 1.47%++ 1.41%++ 1.44%++ 1.43%++ 1.59%++ 1.54%++ 1.35%++ 1.04% 1.11% 1.09%*
Net investment income
before preferred
stock dividends.... 10.83% 10.68% 12.13% 12.14% 13.42% 15.47% 13.46% 9.51% 11.61% 11.75%*
Preferred stock
dividends.......... 1.87% 1.20% 1.13% 1.25% 2.31% 3.11% 2.07% -- -- --
Net investment income
available to common
shareholders....... 8.96% 9.48% 11.00% 10.89% 11.11% 12.36% 11.39% 9.51% 11.61% 11.75%*
Portfolio turnover
rate............... 50% 34% 23% 17% 83% 80% 46% 60% 52% 13%
Net assets of common
shareholders end of
period (000
omitted)........... $1,452,205 $1,088,631 $1,050,084 $977,933 $972,569 $861,379 $800,166 $928,689 $751,129 $ 708,012
Average net assets of
common shareholders
(000 omitted)...... $1,201,383 $1,174,394 $1,011,324 $938,072 $899,175 $826,862 $832,779 $875,609 $756,274 $ 703,339
Senior securities
(preferred stock)
outstanding (000
omitted)........... $ 475,000 $ 400,000 $ 350,000 $300,000 $300,000 $300,000 $300,000 -- -- --
Asset coverage of
preferred stock at
period end......... 406% 372% 400% 426% 424% 387% 367% -- -- --
</TABLE>

(Footnotes on next page)

11
<PAGE> 12

- ---------------
+ Total investment return based on market value is calculated based on
the Fund's market value on the first and last day of each period and
total investment return based on NAV is calculated based on the Fund's
NAV on such days. Dividends and distributions are assumed, for purposes
of the calculations, to be reinvested at prices obtained under the
Fund's dividend reinvestment and cash purchase plan. Total investment
returns do not reflect brokerage commissions. Total investment returns
for periods of less than one full year are not annualized. Generally,
total investment returns based on NAV will be higher than total
investment returns based on market value in periods where there is an
increase in the discount or a decrease in the premium of the market
value to the NAV from the beginning to the end of such periods.
Conversely, total investment returns based on NAV will be lower than
total investment returns based on market value in years where there is
a decrease in the discount or an increase in the premium of the market
value to the NAV from the beginning to the end of such periods.

++ Includes expenses of both Preferred and Common Stock.

# Ratios calculated on the basis of income, expenses and preferred share
dividends applicable to both the Common and Preferred Stock shares
relative to the average net assets of Common Stockholders.

## Commencement of investment operations.

++ NAV immediately after the closing of the initial public offering was
$9.31.

* Annualized.

** Calculated based upon weighted average shares outstanding during the
year.

NOTE: Contained above is audited operating performance for a share of Common
Stock outstanding, total investment return, ratios to average net assets
of Common Stockholders and other supplemental data for each of the
periods indicated. This information has been determined based upon
financial information provided in the financial statements and market
value data for the Fund's Common Stock.

12
<PAGE> 13

According to Lipper Analytical Services ("Lipper") (a company that
calculates and publishes rankings of closed-end and open-end management
investment companies), in the five-year period ended March 31, 1996, the Fund
ranked among the top four funds in the Developed Nations Category of Closed-End
World Income Funds (the "Category", defined by Lipper to include closed-end
management investment companies that have a policy of investing at least 65% of
their total assets in securities of issuers in, and securities denominated in
the currency of, one or more countries (other than the United States) that
appear on the International Bank for Reconstruction and Development's list of
"Developed Nations"):

<TABLE>
<CAPTION>
PERIODS TO TOTAL NUMBER OF FUNDS
MARCH 31, 1996 RANKING(1) RETURN(1) IN CATEGORY(2)
---------------------------------------------- ---------- --------- ---------------
<S> <C> <C> <C>
Three months.................................. 2 +4.35% 13
One year...................................... 4 +24.76% 13
Two years..................................... 3 +27.41% 12
Three years................................... 1 +33.58% 9
Four years.................................... 1 +45.59% 9
Five years.................................... 1 +72.75% 6
</TABLE>

Investors should note that past performance is no guarantee of future results.
- ---------------
(1) Ranking is based on total return. Total return is measured on the basis of
NAV at the beginning and end of each period, assuming the reinvestment of
all dividends and distributions, as adjusted to eliminate the dilutive
effect of subscription rights offerings.

(2) In each period, only two of the funds in the Category (including the Fund)
had a policy of investing at least 65% of their total assets in securities
of Australian issuers.

Senior Securities

The Fund currently has outstanding an aggregate of 19,000 shares of
Preferred Stock. The Preferred Stock has been issued in seven series, Series A
through G. The first three series were issued on January 19, 1989, the fourth
series on August 1, 1989, the fifth series on December 16, 1992, the sixth
series on December 20, 1993, and the seventh on July 27, 1995. The shares of
Preferred Stock are senior securities having priority over the shares of Common
Stock as to distribution of assets and payment of dividends. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Fund, the
holders of Preferred Stock are entitled to receive a preferential liquidating
distribution of $25,000 per share (the "Liquidation Preference"), plus accrued
and unpaid dividends (whether or not declared), before any payment is made to
holders of Common Stock. The average market value of a share of Preferred Stock
has been equal to the Liquidation Preference. The following tables set forth
certain information relating to the Preferred Stock.

PREFERRED STOCK, SERIES A-G

<TABLE>
<CAPTION>
ASSET
COVERAGE
PER LIQUIDATION
TOTAL AMOUNT $25,000 PREFERENCE
OF PREFERRED SHARE OF PER
STOCK PREFERRED $25,000
AT 10/31/ OUTSTANDING(1) STOCK(2) SHARE(3)(4)
- --------- -------------- ----------- ------------
<S> <C> <C> <C>
1986... -- -- --
1987... -- -- --
1988... -- -- --
1989... $300,000,000 $ 91,747.25 $ 25,000
1990... $300,000,000 $ 96,883.75 $ 25,000
1991... $300,000,000 $106,141.00 $ 25,000
1992... $300,000,000 $106,520.50 $ 25,000
1993... $350,000,000 $100,006.00 $ 25,000
1994... $400,000,000 $ 93,039.50 $ 25,000
1995... $475,000,000 $101,431.75 $ 25,000
</TABLE>

(Footnotes continued on next page)

13
<PAGE> 14

Investors should note that past performance is no guarantee of future results.

According to Lipper, the Fund's ranking in the Category for the following
periods to December 31, 1995, was:

<TABLE>
<CAPTION>
PERIODS TO TOTAL NUMBER OF FUNDS
DECEMBER 31, 1995 RANKING(1) RETURN(1) IN CATEGORY(2)
---------------------------------------------- ---------- --------- ---------------
<S> <C> <C> <C>
One year...................................... 1 +29.00% 13
Two years..................................... 2 +10.00% 11
Three years................................... 2 +26.53% 9
Four years.................................... 1 +27.50% 7
Five years.................................... 1 +70.65% 6
</TABLE>

Investors should note that past performance is no guarantee of future results.

- ---------------
(1) Ranking is based on total return. Total return is measured on the basis of
NAV at the beginning and end of each period, assuming the reinvestment of
all dividends and distributions, as adjusted to eliminate the dilutive
effect of subscription rights offerings.

(2) In each period, only two of the funds in the Category (including the Fund)
had a policy of investing at least 65% of their total assets in securities
of Australian issuers.

Senior Securities

13
<PAGE> 15

PREFERRED STOCK, SERIES A-G

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

(1) Based on the number of shares of Preferred Stock outstanding multiplied by
the Liquidation Preference per share.

(2) Asset coverage per share of Preferred Stock is derived by subtracting the
aggregate Liquidation Preference of all of the series of Preferred Stock
outstanding ($300,000,000 through 1992, $350,000,000 in 1993, $400,000,000
in 1994 and $475,000,000 in 1995) from the total assets of the Fund less (i)
all liabilities and indebtedness not represented by the Preferred Stock and
(ii) any accrued but unpaid dividends on the Preferred Stock as at the end
of the fiscal periods indicated. This sum is then divided by the number of
shares of Preferred Stock outstanding.

(3) Plus accrued and unpaid dividends, if any.

(4) The liquidation preference as of October 31, 1995 was $100,000 per share of
Preferred Stock, Series A-F, and $25,000 per share of Preferred Stock,
Series G. Effective April 25, 1996, by means of stock splits, the
liquidation preference of Preferred Stock, Series A-F was reduced to $25,000
per share and an additional aggregate 12,000 shares of Preferred Stock,
Series A-F was issued.

The dividend rates on the outstanding Preferred Stock are established
through an auction process. The dividend rates on the series A-D shares are set
every 28 days and the dividend rates on the Series E, F and G shares are set
every 7 days. Generally, the dividend rate has represented a premium over the 30
day commercial paper rate. At March 7, 1996, the annual dividend rates on Series
A through G were, respectively, 5.25%, 5.20%, 5.23%, 5.24%, 5.21%, 5.30% and
5.09%. At such rates, the annual return the Fund's portfolio must experience
(net of expenses) in order to cover dividend payments on all series is 1.29%.

The following table is designed to illustrate the effect on return to a
holder of the Fund's Common Stock of the leverage obtained by the issuance of
the Preferred Stock, assuming hypothetical annual returns on the Fund's
portfolio of minus 10 to plus 10 percent. As can be seen, leverage generally
increases the return to stockholders when portfolio return is positive and
decreases return when the portfolio return is negative. Actual returns may be
greater or less than those appearing in the table and may be enhanced or
diminished by fluctuations in foreign currency. See "Risk Factors and Special
Considerations -- Preferred Stock."

<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of
expenses)............................... - 10% - 5% 0% 5% 10%
Corresponding Common Stock Return(1)...... - 15.15% - 8.51% - 1.88% 4.76% 11.39%
</TABLE>

- ---------------
(1) In order to compute "Corresponding Common Stock Return," the "Assumed
Portfolio Return" is multiplied by the total value of Fund assets as of the
beginning of the fiscal year (November 1, 1995) to obtain an assumed return
to the Fund. This rate is then reduced by the value of Preferred Stock
dividends that would be paid during the year based on the dividend rates in
effect at the beginning of the fiscal year in order to determine the return
available to holders of the Fund's Common Stock. Return available to holders
of the Fund's Common Stock is then divided by the total value of the Fund's
assets attributable to common stockholders as of the beginning of the fiscal
year to determine "Corresponding Common Stock Return."

14
<PAGE> 16

has continued to adopt a prudent approach to monetary and fiscal policies
aimed at producing a structurally balanced budget by 1997. However, based
on the experience of recent economic cycles, the Investment Adviser
believes that the Australian bond market has priced in an unduly
pessimistic expectation that the authorities in Australia will be unable
to prevent inflation from accelerating, and as a result, ten year bond
yields have risen to 8.9% at March 31, 1996 from 8.0% in early February
1996.

- A cyclical boost to commodity prices as a result of a pick up in economic
growth in the major economies should provide support for the Australian
dollar. Because Australia is a major exporter of commodities, the
Australian dollar has tended to rise against the U.S. dollar during
periods of strength in international commodity prices. Stronger world
economic growth, in particular the recovery in the Japanese economy, is
expected to increase demand for Australian products, thereby increasing
Australian exports. In addition, Australia's current account deficit has
decreased to 4.6% of GDP in February 1996 compared with 5.9% in June
1995. The differentials between Australia's official cash rates and those
of its major trading partners have also been a positive factor in the
strength of the Australian dollar.

The Fund also intends to continue its investment approach of emphasizing
the Eurobond markets, where securities are exempt from the 10% withholding tax
imposed on domestic Australian issues. See "Taxation -- Foreign
Taxes -- Australia."

The Investment Adviser believes that an increase in the size of the Fund
should result in a modest reduction in the Fund's expense ratio, which would be
of long-term benefit to stockholders. The Offer also seeks to reward
stockholders by giving them the right to purchase additional Shares at a
discount, although stockholders who do not fully exercise their Rights will own,
upon completion of the Offer, a smaller proportional interest in the Fund than
they owned prior to the Offer. The Board of Directors took this into account by
adopting the subscription price formula applicable to the Offer and selecting a
Rights ratio by which dilution could be minimized. See "The Offer" and "Risk
Factors and Special Considerations." There can be no assurance that the Fund or
its stockholders will achieve any of the foregoing objectives or benefits
through the Offer.

The Fund has made three prior rights offerings. In each case, tactical
investment of the proceeds enabled the Fund to maintain a stable distribution
policy despite declining interest rates. Offerings were made in 1992 and 1993
for the stated purposes of giving the Fund the flexibility to adjust the average
maturity of its portfolio, and to make appropriate tactical adjustments to its
portfolio, to permit it to increase its investments in the Australian dollar
Eurobond market and, if possible, to reduce the Fund's expense ratio. The
purpose of the 1995 rights offering was to increase Fund assets available for
investment in the Australian and New Zealand bond markets in light of the higher
yields available compared with U.S. dollar-denominated investments of similar
quality. The Fund also sought to continue to emphasize investments in the
Eurobond markets and to provide a modest reduction in the Fund's expense ratio.

In the case of the 1992 rights offering and the 1995 rights offering, the
Fund used the proceeds to capture higher yields then available for long-term
securities, and in 1993 it sought to reduce the Fund's exposure to long-term
securities in order to reduce volatility in the Fund's NAV in a period of
changing market conditions. Overall, the Fund's investment in Australian dollar
Eurobonds rose from 15.8% of its total assets at October 31, 1992, immediately
prior to the investment of the proceeds of the 1992 offering, to 24% of the
Fund's total assets at January 31, 1994, the last day of the quarter in which
the proceeds of the 1993 offer were invested. Prior to the 1995 rights offering
at April 30, 1995, 33.3% of the Fund's total assets were invested in Eurobonds.
Following the investment of the proceeds of that offering at July 31, 1995, the
Fund's holding in Eurobonds represented 25.7% of its assets.

For the quarter ended January 31, 1996 and the four fiscal years ended
October 31, 1995, 1994, 1993 and 1992, the Fund's expense ratios were,
respectively, 1.45%, 1.47%, 1.41%, 1.44% and 1.43%, compared with expense ratios
of 1.59% and 1.54% for the 1991 and 1990 fiscal years. In the opinion of the
Investment Adviser, the expense ratios for the 1995, 1994 and 1992 fiscal years
(which are the fiscal years in which the proceeds of the 1995, 1993 and 1992
rights offerings were invested) were favorably affected by the rights

16
<PAGE> 17

has continued to adopt a prudent approach to monetary and fiscal policies aimed
at producing a structurally balanced budget by 1997. However, based on the
experience of recent economic cycles, the Investment Adviser believes that the
Australian bond market has priced in an unduly pessimistic expectation
that the authorities in Australia will be unable to prevent inflation from
accelerating, and as a result, ten year bond yields have risen to 8.9% at
March 31, 1996 from 8.0% in early February 1996.

In the case of the 1992 rights offering and the 1995 rights offering, the
Fund used the proceeds to capture higher yields then available for long-term
securities, and in 1993 it sought to reduce the Fund's exposure to long-term
securities in order to reduce volatility in the Fund's NAV in a period of
changing market conditions. Overall, the Fund's investment in Australian dollar
Eurobonds rose from 15.8% of its total assets at October 31, 1992, immediately
prior to the investment of the proceeds of the 1992 offering, to 24% of the
Fund's total assets at January 31, 1994, the last day of the quarter in which
the proceeds of the 1993 offer were invested. Prior to the investment of the
proceeds of the 1995 rights offering at April 30, 1995, 33.8% of the Fund's
total assets were invested in Eurobonds. Following the investment of the
proceeds of that offering at July 31, 1995, the Fund's holding in Eurobonds
represented 36.9% of its assets.

16
<PAGE> 18

than the Investment Manager are honored, then the Investment Manager will not
receive Shares pursuant to its Over-Subscription Privilege. Any Shares purchased
by the Investment Manager will be "restricted shares" which can be publicly sold
by the Investment Manager only if registered under the Securities Act of 1933,
as amended (the "Securities Act"), or pursuant to an exemption from
registration, including pursuant to the exemption for limited resales provided
by Rule 144 promulgated thereunder. In general, under Rule 144, as currently in
effect, an "affiliate" of the Fund is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock or the average weekly reported trading volume
of the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain restrictions on the manner of sale,
to notice requirements and to the availability of current public information
about the Fund. In addition, any profit resulting from the Investment Manager's
sale of shares within a period of less than six months from such purchases will
be returned to the Fund.

The Fund will not offer or sell any Shares which are not subscribed for
pursuant to the Primary Subscription or the Over-Subscription Privilege.

THE SUBSCRIPTION PRICE

The Subscription Price for the Shares to be issued pursuant to the Rights
will be 95% of the lower of (a) the average of the last reported sales price of
a share of the Fund's Common Stock on the AMEX on May 23, 1996 (the "Pricing
Date") and the four preceding business days or (b) the NAV per share as of the
Pricing Date. For example, if the average of the last reported sales price on
the AMEX on the Pricing Date and the four preceding business days of a share of
the Fund's Common Stock is $8.85, and the NAV is $9.69, the Subscription Price
will be $8.41 (95% of $8.85). If, however, the average of the last reported
sales price of a share on the AMEX on the Pricing Date and the four preceding
business days is $9.75, and the NAV is $9.69, the Subscription Price will be
$9.21 (95% of $9.69). See "Description of Common Stock."

The Fund announced the Offer prior to the commencement of trading on the
AMEX on April 8, 1996. The NAVs per share of Common Stock at the close of
business on April 4, 1996 and April 26, 1996 were $9.52 and $9.69, respectively,
and the last reported sales prices of a share of the Fund's Common Stock on the
AMEX on those dates were $8.875 and $8.625, respectively.

EXPIRATION OF THE OFFER

The Offer will expire at 5:00 p.m., New York City time, on May 23, 1996,
unless extended (the "Expiration Date"). Rights will expire on the Expiration
Date and thereafter may not be exercised. Since the Expiration Date and the
Pricing Date are each May 23, 1996, stockholders who decide to acquire Shares on
Primary Subscription or pursuant to the Over-Subscription Privilege will not
know, when they make such decision, the final Subscription Price for such
Shares.

SUBSCRIPTION AGENT

The Subscription Agent is State Street Bank and Trust Company, Two Heritage
Drive, North Quincy, Massachusetts 02171, which will receive, for its
administrative, processing, invoicing and other services as subscription agent,
a fee estimated to be $250,000, including reimbursement for all out-of-pocket
expenses related to the Offer. The Subscription Agent is also the Fund's
Custodian, Dividend Paying Agent, Transfer Agent and Registrar with respect to
the Common Stock. Stockholder communications should be directed to State Street
Bank and Trust Company, Two Heritage Drive, North Quincy, Massachusetts 02171
(telephone: (800) 426-5523). SIGNED EXERCISE FORMS SHOULD BE SENT TO STATE
STREET BANK AND TRUST COMPANY, by one of the methods described below. The Fund
reserves the right to accept Exercise Forms actually received on a timely basis
at any of the addresses listed.

18
<PAGE> 19

(1) BY FIRST CLASS MAIL:
State Street Bank and Trust Company
Corporate Reorganization
P.O. Box 9061
Boston, MA 02205-8686

(2) BY EXPRESS MAIL OR OVERNIGHT COURIER:
State Street Bank and Trust Company
Two Heritage Drive
North Quincy, MA 02171

(3) BY HAND:
State Street Bank and Trust Company
225 Franklin Street -- Concourse Level
Boston, MA 02110

Bank of Boston
55 Broadway -- 3rd Floor
New York, NY 10006

DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE DOES NOT CONSTITUTE GOOD DELIVERY.

INFORMATION AGENT

Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:

The Information Agent for the Offer is:

SHAREHOLDER
COMMUNICATIONS CORPORATION

New York, New York
Toll Free: (800) 733-8481, Extension 345
or
Call Collect: (212) 805-7000

Stockholders may also contact their brokers or nominees for information
with respect to the Offer.

The Information Agent will receive a fee estimated to be $25,000 and
reimbursement for all out-of-pocket expenses related to the Offer.

METHOD OF EXERCISE OF RIGHTS

Rights may be exercised by filling in and signing the Exercise Form and
mailing it in the envelope provided, or otherwise delivering the completed and
signed Exercise Form to the Subscription Agent, together with payment for the
Shares as described below under "Payment for Shares." Stockholders may also
exercise Rights by contacting their broker, banker or trust company who can
arrange, on their behalf, to guarantee delivery of payment and of a properly
completed and executed Exercise Form. A fee may be charged for this service.
Fractional Shares will not be issued, and stockholders who receive, or who are
left with less than a whole Right will not be able to exercise such Rights.
Completed Exercise Forms must be received by the Subscription Agent prior to
5:00 p.m., New York City time, on the Expiration Date (unless payment is
effected by means of a notice of guaranteed delivery as described below under
"Payment for Shares") at the offices of the Subscription Agent at the address
set forth above.

19
<PAGE> 20

Stockholders Who Are Record Owners. Stockholders who are owners of record
may choose between either option set forth under "Payment for Shares" below. If
time is of the essence, option (2) will permit delivery of the Exercise Form and
payment after the Expiration Date.

Investors Whose Shares Are Held By A Nominee. Stockholders whose shares
are held by a nominee such as a broker or trustee must contact the nominee to
exercise their Rights. In that case, the nominee will complete the Exercise
Forms on behalf of the stockholder and arrange for proper payment by one of the
methods set forth under "Payment for Shares" below.

Nominees. Nominees who hold shares for the account of others should notify
the respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights.

If the beneficial owner so instructs, the nominee should complete the
Exercise Form and submit it to the Subscription Agent with the proper payment
described under "Payment for Shares" below.

PAYMENT FOR SHARES

Stockholders who acquire Shares on Primary Subscription or pursuant to the
Over-Subscription Privilege may choose between the following methods of payment:

(1) A stockholder can send the Exercise Form together with payment for the
Shares acquired on Primary Subscription and for additional Shares such
stockholder would like to subscribe for pursuant to the Over-Subscription
Privilege to the Subscription Agent based on the Estimated Subscription Price of
$8.41 per Share. To be accepted, such payment, together with the executed
Exercise Form, must be received by the Subscription Agent at one of the
Subscription Agent's offices set forth above, prior to 5:00 p.m., New York City
time, by the Expiration Date. The Subscription Agent will deposit all the Share
purchase checks received by it prior to the final due date into a segregated
interest bearing account (which interest will accrue to the benefit of the Fund)
pending proration and distribution of Shares. A PAYMENT PURSUANT TO THIS METHOD
MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE
UNITED STATES, MUST BE PAYABLE TO THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
AND MUST ACCOMPANY AN EXECUTED EXERCISE FORM FOR SUCH EXERCISE FORM TO BE
ACCEPTED.

(2) Alternatively, a subscription will be accepted by the Subscription
Agent if, prior to 5:00 p.m., New York City time, on the Expiration Date, the
Subscription Agent has received a notice of guaranteed delivery by facsimile
(telecopy) or otherwise from a bank, a trust company, or a New York Stock
Exchange member guaranteeing delivery of (i) payment of the full Subscription
Price for the Shares subscribed for on Primary Subscription and any additional
Shares subscribed for pursuant to the Over-Subscription Privilege, and (ii) a
properly completed and executed Exercise Form. The Subscription Agent will not
honor a notice of guaranteed delivery if a properly completed and executed
Exercise Form and full payment for the Shares is not received by the
Subscription Agent by the close of business on the third business day after the
Expiration Date.

Within fourteen calendar days following the Expiration Date (the
"Confirmation Date"), a confirmation will be sent by the Subscription Agent to
each registered stockholder (or, if the Fund's Shares are held by Cede or any
other depository or nominee, to Cede or such depository or nominee), showing (i)
the number of Shares acquired pursuant to Primary Subscription, (ii) the number
of Shares, if any, acquired pursuant to the Over-Subscription Privilege, (iii)
the per Share and total purchase price for the Shares, and (iv) any additional
amount payable by such stockholder to the Fund or any excess to be refunded by
the Fund to such stockholder, in each case based on the Subscription Price as
determined on the Pricing Date. If any stockholder exercises his right to
acquire Shares pursuant to the Over-Subscription Privilege, any such excess
payment which would otherwise be refunded to him will be applied by the Fund
toward payment for Shares acquired pursuant to exercise of the Over-Subscription
Privilege. Any additional payment required from a stockholder must be received
by the Subscription Agent within ten business days after the Confirmation Date.
Any excess payment to be refunded by the Fund to a stockholder will be mailed by
the Subscription Agent to

20
<PAGE> 21

him as promptly as possible. All payments by a stockholder must be in U.S.
dollars by money order or check drawn on a bank located in the United States and
payable to The First Australia Prime Income Fund, Inc.

Whichever of the two methods described above is used, issuance and delivery
of certificates for the Shares purchased are subject to collection of checks and
actual payment pursuant to any notice of guaranteed delivery.

STOCKHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER RECEIPT
OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT.

If a stockholder who acquires Shares pursuant to the Primary Subscription
or Over-Subscription Privilege does not make payment of any additional amounts
due, the Fund reserves the right to take remedial action, including without
limitation, (i) applying any payment actually received by it toward the purchase
of the greatest number of Shares which could be acquired by such holder upon
exercise of the Primary Subscription and/or Over-Subscription Privilege; (ii)
allocating the Shares subject to subscription rights to one or more other
stockholders; and (iii) selling all or a portion of the Shares deliverable upon
exercise of subscription rights on the open market and applying the proceeds
thereof to the amount owed.

NOTICE OF NET ASSET VALUE DECLINE

The Fund has, as required by the Commission's registration form, undertaken
to suspend the Offer until it amends this Prospectus if subsequent to the date
of this Prospectus, the Fund's NAV declines more than 10% from its NAV as of
that date. Accordingly, the Fund will notify stockholders of any such decline
and thereby permit them to cancel their exercise of Rights.

PURCHASE AND SALE OF RIGHTS

The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted for trading on the AMEX or Pacific Stock
Exchange. However, the Shares to be issued pursuant to the Rights will be
admitted for trading on both exchanges.

DELIVERY OF STOCK CERTIFICATES

Participants in the Fund's Dividend Reinvestment and Cash Purchase Plan
(the "Plan") will have any Shares that they acquire on Primary Subscription and
pursuant to the Over-Subscription Privilege credited to their stockholder
dividend reinvestment accounts in the Plan. Stockholders whose Shares are held
of record by Cede or by any other depository or nominee on their behalf or their
broker-dealers' behalf will have any Shares that they acquire on Primary
Subscription and pursuant to the Over-Subscription Privilege credited to the
account of Cede or such other depository or nominee. With respect to all other
stockholders, stock certificates for all Shares acquired on Primary Subscription
and pursuant to the Over-Subscription Privilege will be mailed after payment for
all the Shares subscribed for has cleared, which clearance may take up to
fifteen days from the date of receipt of the payment. Shares purchased pursuant
to the Offer will be issued after the record date for the monthly dividend
declared in April, and accordingly, the Fund will not pay such monthly dividend
with respect to such Shares.

FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER

For federal income tax purposes, neither the receipt nor the exercise of
the Rights by stockholders will result in taxable income to holders of Common
Stock, and no loss will be realized if the Rights expire without exercise.

A stockholder's holding period for a Share acquired upon exercise of a
Right begins with the date of exercise. A stockholder's basis for determining
gain or loss upon the sale of a Share acquired upon the exercise of a Right will
be equal to the sum of the stockholder's basis in the Right, if any, and the
Subscription Price per Share. The stockholder's basis in the Right will be zero
unless either (i) the fair market value of the Right on the date of distribution
is 15% or more of the fair market value on such date of the Shares with respect
to which the Right was distributed, or (ii) the stockholder elects, in its
federal income tax return for the taxable

21
<PAGE> 22

year in which the Right is received, to allocate part of the basis of such
Shares to the Right. If either of clauses (i) and (ii) is applicable, then if
the Right is exercised, the stockholder will allocate its basis in the Shares
with respect to which the Right was distributed between such Shares and the
Right in proportion to the fair market values of each on the date of
distribution. A stockholder's gain or loss recognized upon a sale of a Share
acquired upon the exercise of a Right will be capital gain or loss (assuming the
Share was held as a capital asset at the time of sale) and will be long-term
capital gain or loss if the Share was held at the time of sale for more than one
year.

The foregoing is a general summary of the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and Treasury regulations
presently in effect, and does not cover state or local taxes. The Code and such
regulations are subject to change by legislative or administrative action.
Stockholders should consult their tax advisers regarding specific questions as
to federal, state or local taxes.

INVESTMENT CONSIDERATIONS

As a result of the terms of the Offer, stockholders who do not exercise
their Rights will, at the completion of the Offer, own a smaller proportional
interest in the Fund than they owned prior to the Offer. In addition, an
immediate dilution of the NAV per share will be experienced by all stockholders
as a result of the Offer irrespective of whether they exercise all or any
portion of their Rights, because the Subscription Price of each such Share will
be less than the current NAV per share of the Fund's Common Stock and the number
of shares outstanding after the Offer will increase by a greater percentage than
the increase in the size of the Fund's assets. Although it is not possible to
state precisely the amount of dilution of the NAV per share, because it is not
known at this time how many Shares will be subscribed for or what the
Subscription Price will be, such dilution could be minimal or it could be
substantial. In addition, the Offer may have a dilutive impact on investment
income available for distribution.

USE OF PROCEEDS

If 31,129,561 Shares are sold at the Estimated Subscription Price of $8.41
per Share, the net proceeds of the Offer are estimated to be approximately
$250,940,792, after deducting commissions and expenses payable by the Fund
estimated at approximately $10,858,816. If the Fund in its sole discretion
increases the number of Shares subject to the Offer by 25% in order to satisfy
over-subscriptions, the additional net proceeds will be approximately
$63,076,271. The Investment Manager anticipates that investment of proceeds, in
accordance with the Fund's investment objective and policies, will take up to
thirty days from their receipt by the Fund, depending on market conditions and
the availability of appropriate securities. The Fund's investment objective is
current income through investment primarily in Australian debt securities. See
"The Offer -- Purpose of the Offer" and "Investment Objective and Policies;
Investment Restrictions."

DESCRIPTION OF COMMON STOCK

The Fund, which was incorporated under the laws of the State of Maryland on
March 14, 1986, is authorized to issue 200,000,000 shares of Common Stock, par
value $.01 per share. Each share has equal voting, dividend, distribution and
liquidation rights. The shares outstanding and the Shares offered hereby, when
issued and paid for pursuant to the terms of the Offer, will be fully paid and
non-assessable. Shares of Common Stock are not redeemable and have no
preemptive, conversion or cumulative voting rights.

The number of shares of Common Stock outstanding as of January 31, 1996 was
155,647,805. The number of shares outstanding as of January 31, 1996 adjusted to
give effect to the Offer, assuming that all Rights and the Over-Subscription
Privilege are exercised and the applicable Shares issued, would be 194,559,756.

The Fund's shares are publicly held and listed and traded on the AMEX and
the Pacific Stock Exchange. The NAV of the Fund is determined on the last
business day of each week. The following table sets forth for the quarters
indicated the highest and lowest Friday (or other last business day of a week)
closing prices on the AMEX per share of Common Stock and the NAV and the premium
or discount from NAV on the date of

22
<PAGE> 23

each of the high and low market prices. The table also sets forth the number of
shares traded on the AMEX during the respective quarter.

<TABLE>
<CAPTION>
NAV
PER SHARE ON AMEX
DATE OF MARKET PRICE PER SHARE
MARKET PRICE AND RELATED DISCOUNT (-)/
HIGH AND LOW(1) PREMIUM(+)(2)(3) REPORTED
--------------- ----------------------------------- AMEX
QUARTER ENDED HIGH LOW HIGH LOW VOLUME
- ------------------------ ----- ----- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
January 31, 1993........ 9.56 9.22 10.38 (+6.41%) 9.31 (+1.01%) 5,110,000
April 30, 1993.......... 10.36 9.90 11.06 (+6.79%) 9.94 (+0.38%) 5,290,200
July 31, 1993........... 10.44 9.63 11.19 (+7.16%) 10.38 (+7.74%) 4,781,800
October 31, 1993........ 10.20 9.85 11.25 (+10.30%) 9.88 (+0.25%) 6,804,100
January 31, 1994........ 10.61 10.21 10.88 (+2.50%) 10.00 (-2.06%) 7,390,300
April 30, 1994.......... 10.69 10.11 11.00 (+2.90%) 10.25 (+1.38%) 5,300,000
July 31, 1994........... 9.71 9.44 10.75 (+10.71%) 10.13 (+7.26%) 3,659,400
October 31, 1994........ 9.40 9.08 10.56 (+12.34%) 9.56 (+5.29%) 5,037,800
January 31, 1995........ 8.94 9.37 9.13 (+2.07%) 8.19 (-12.61%) 5,661,000
April 30, 1995.......... 8.80 8.84 8.81 (+0.14%) 7.88 (-10.92%) 15,062,000
July 31, 1995........... 8.88 8.85 8.94 (+0.65%) 8.13 (-8.19%) 17,974,000
October 31, 1995........ 9.46 9.03 9.31 (-1.56%) 8.88 (-1.72%) 6,669,800
January 31, 1996........ 9.22 9.10 9.56 (+3.71%) 9.13 (+0.27%) 8,086,200
March 31, 1996.......... 9.38 9.40 9.63 (+2.61%) 8.88 (-5.59%) 5,517,400
</TABLE>

- ---------------
(1) Based on the Fund's computations.

(2) Highest and lowest Friday (or other last business day of the week) closing
market price per share as reported on the AMEX.

(3) "Related Discount (-)/Premium (+)" represents the discount or premium from
NAV of the shares on the date of the respective high and low Friday (or
other last business day of the week) market price for the respective
quarter.

On April 26, 1996, the per share NAV was $9.69 and the last reported sales
price was $8.625, representing a 10.99% discount from such NAV.

The Fund's shares have traded in the market above, at and below NAV since
the commencement of the Fund's operations. The Fund cannot determine the reasons
for the Fund's shares trading at a premium or discount to NAV, nor can the Fund
predict whether its shares will trade in the future at a premium or discount to
NAV, and if so, the level of such premium or discount. Shares of closed-end
investment companies frequently trade at a discount from NAV.

23
<PAGE> 24

THE FUND

The Fund is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Fund commenced operations in April 1986 and
was the first publicly offered United States registered investment company
organized to invest primarily in Australian debt securities. The Fund's
investment objective is current income through investment primarily in
Australian debt securities. The Fund may also achieve incidental capital
appreciation.

It is expected that normally at least 65% of the Fund's total assets will
be invested in Australian dollar-denominated debt securities of Australian
banks, federal and state governmental entities and companies. To achieve its
investment objective, the Fund may invest the remainder of its assets in debt
securities of comparable quality which are denominated in Australian or New
Zealand dollars of other issuers, whether or not domiciled in Australia or New
Zealand, and in U.S. securities. During periods when, in the Investment
Manager's judgment, changes in the market for Australian and New Zealand debt
securities or other economic conditions warrant a temporary defensive investment
policy, the Fund may temporarily reduce its position in such securities and
invest in U.S. securities.

The Fund may enter into repurchase agreements with banks and broker-dealers
pursuant to which the Fund may acquire a security for a relatively short period
(usually no more than one week) subject to the obligations of the seller to
repurchase and the Fund to resell such security at a fixed time and price. See
"Investment Objective and Policies; Investment Restrictions."

The Fund's Investment Manager is EquitiLink International Management
Limited, an investment management company organized in Jersey, Channel Islands.
The Investment Manager manages, in accordance with the Fund's stated investment
objective, policies and limitations and subject to the supervision of the Fund's
Board of Directors, the Fund's investments and makes investment decisions on
behalf of the Fund, including the selection of, and placing of orders with,
broker-dealers to execute portfolio transactions on behalf of the Fund and the
making of investments in U.S. dollar-denominated securities. The Investment
Manager's affiliate, EquitiLink Australia Limited, an Australian corporation,
acts as the Fund's Investment Adviser, providing portfolio recommendations to
the Investment Manager with respect to Australian dollar-denominated securities.
The Investment Manager and the Investment Adviser also serve in these capacities
for The First Australia Fund, Inc., a diversified closed-end management
investment company, the shares of which are listed on the AMEX and the Pacific
Stock Exchange, organized to invest primarily in Australian equity securities,
which commenced operations in 1985, and First Australia Prime Income Investment
Company Limited, a closed-end management investment company, the shares of which
are listed on the Toronto Stock Exchange, organized to invest primarily in
Australian debt securities, which commenced operations in 1986. In addition, the
Investment Manager and Adviser provide management and advisory services to The
First Commonwealth Fund, Inc., a non-diversified, closed-end management
investment company whose shares are traded on the New York Stock Exchange,
organized to invest in high-grade, fixed income securities denominated in the
currencies of Australia, Canada, New Zealand and the United Kingdom. The
Investment Adviser also manages eight Australian public unit trusts and two
other closed-end management investment companies, the shares of which are listed
on the Australian Stock Exchange Limited, as well as two open-ended funds
managed in Taiwan and institutional and private advisory accounts. The
Investment Manager and the Investment Adviser are registered with the Commission
under the Investment Advisers Act of 1940. The Prudential Insurance Company of
America, as Consultant, consults with the Investment Manager and the Investment
Adviser with respect to the Fund's investments in U.S. Government securities,
general world economic conditions affecting the Fund and currency movements
affecting the Fund. See "Management of the Fund."

24
<PAGE> 25

RISK FACTORS AND SPECIAL CONSIDERATIONS

This Prospectus contains certain forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of certain uncertainties set forth below and elsewhere in the
Prospectus. Investing in the Shares involves certain risks and considerations
not typically associated with investing in the United States. The following
discusses risks and special considerations with respect to the Offer and with
respect to an investment in the Fund.

DILUTION -- NET ASSET VALUE AND NON-PARTICIPATION IN THE OFFER

As a result of the terms of the Offer, stockholders who do not fully
exercise their Rights will, at the completion of the Offer, own a smaller
proportional interest in the Fund than they owned prior to the Offer. In
addition, an immediate dilution of the NAV per share will be experienced by all
stockholders as a result of the Offer irrespective of whether they exercise all
or any portion of their Rights, because the Subscription Price of each such
Share will be less than the then current NAV per share, and the number of shares
outstanding after the Offer will increase by a greater percentage than the
increase in the size of the Fund's assets. Although it is not possible to state
precisely the amount of the dilution of the NAV per share, because it is not
known at this time how many Shares will be subscribed for or what the
Subscription Price will be, such dilution could be minimal or it could be
substantial. For example, if the Subscription Price per Share is $8.41,
representing a price which is 86.8% of an assumed NAV per share of $9.69,
assuming that all Rights are exercised and the Fund increases the number of
shares subject to subscription by 25% in order to satisfy over-subscriptions,
the Fund's NAV per share would be reduced by approximately $0.33 per share. If,
on the other hand, the Subscription Price represents a further discount to the
Fund's NAV, the dilution would be greater. For example, if the Subscription
Price per Share is $8.13, representing a price which is only 83.9% of the
assumed NAV per share, assuming that all Rights are exercised and the Fund
increases the number of shares subject to subscription by 25% in order to
satisfy over-subscriptions, the Fund's NAV per share would be reduced by
approximately $0.38 per share.

The foregoing examples assumed Subscription Prices of $8.41 and $8.13,
respectively, per Share. However, the actual Subscription Price may be greater
or less than such assumed Subscription Prices.

The Offer may also have a dilutive impact on investment income available
for distribution.

To the extent the Fund incurs expenses in connection with the issuance of
additional Preferred Stock, such expenses would have a dilutive effect on the
NAV per share.

CURRENCY AND INTEREST RATE FLUCTUATIONS

It is expected that normally at least 65% of the Fund's total assets will
be invested in Australian dollar-denominated debt securities of Australian
banks, federal and state governmental entities and companies. Accordingly, a
change in the value of the Australian dollar against the U.S. dollar will
generally result in a change in the U.S. dollar value of the Fund's assets. Such
a change may either increase or decrease the Fund's NAV. Similarly, an increase
in interest rates in Australia can be expected to result in a decline in the
value of the Fund's portfolio securities denominated in Australian dollars. See
Appendix A. In addition, although most of the Fund's income will be received or
realized primarily in Australian dollars, the Fund will be required to compute
and distribute its income in U.S. dollars. Therefore, for example, if the
exchange rate for the Australian dollar declines after the Fund's income has
been accrued and translated into U.S. dollars, but before the income has been
received, the Fund could be required to liquidate portfolio securities to make
such distributions. Similarly, if the exchange rate declines between the time
the Fund incurs expenses in U.S. dollars and the time such expenses are paid,
the amount of Australian dollars required to be converted into U.S. dollars in
order to pay such expenses in U.S. dollars will be greater than the Australian
dollar equivalent of such expenses at the time they were incurred.

Currency exchange rate fluctuations can decrease or eliminate income
available for distribution or conversely increase income for distribution. For
example, in some situations, if certain currency exchange losses exceed other
net investment income for a taxable year, the Fund would not be able to make
ordinary

25
<PAGE> 26

income distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to stockholders for U.S. federal
income tax purposes thus reducing each stockholder's cost basis in his or her
Fund shares, or as capital gain, rather than as an ordinary dividend. In recent
currency movements, the Australian dollar has strengthened against the U.S.
dollar; however, no assurance can be given that this situation will continue in
the future.

Although interest rates in Australia and New Zealand have remained
consistently higher than interest rates in the United States since the inception
of the Fund in 1986, interest rates in both countries have generally declined,
affecting the Fund's dividend rate. Currently, investments in Australia and New
Zealand offer higher yields than are available from investments in comparable
U.S. dollar-denominated investments of similarly rated quality; however, no
assurance can be given that this situation will continue in the future.

Fluctuations in interest rates in the relevant bond markets can affect NAV
and the dividend rate. The Fund's NAV is adversely affected during periods of
rising interest rates in those bond markets and is favorably affected during
periods when interest rates fall. In addition, the Fund may recognize capital
loss, impacting its ability to supplement distributable income, when bonds in
the Fund's portfolio are sold or mature at a price which is less than the Fund's
cost.

The Fund intends to continue to pay monthly distributions from net
investment income which may be supplemented from realized long- or short-term
capital gains. Although a purpose of the Offer is to seek to sustain the current
monthly distribution rate of 7 cents per share for as long as possible, there
can be no assurance that the Fund will be able to maintain the current dividend
level indefinitely. The Board of Directors, in accordance with its policy,
reviews the level of monthly dividends on a continuing basis at its quarterly
Board meetings, with the next review scheduled to take place at its meeting to
be held in June 1996.

OTHER RISKS OF FOREIGN INVESTMENTS

The Fund's investments could in the future be adversely affected by any
increase in taxes or by political, economic or diplomatic developments in
Australia or, to a lesser extent, New Zealand. Moreover, in relation to
companies in which the Fund may invest, accounting, auditing and financial
reporting standards and other regulatory practices and requirements vary from
those applicable to entities subject to regulation in the United States.

NET ASSET VALUE DISCOUNT

Shares of closed-end investment companies frequently trade at a discount
from NAV. This characteristic is a risk separate and distinct from the risk that
NAV will decrease. The Fund's shares have frequently traded at prices below NAV
since the commencement of the Fund's operations. In the twelve months ended
March 31, 1996, the Fund's shares have traded in the market at an average
discount to NAV of 9%. The Fund cannot predict whether its shares in the future
will trade at, below or above NAV. The risk that shares of a closed-end fund
might trade at a discount is more significant for investors who wish to sell
their shares in a relatively short period of time. For those investors,
realization of gain or loss on their investment is likely to be more dependent
upon the existence of a premium or discount than upon portfolio performance.

PREFERRED STOCK

The leverage obtained through the outstanding Preferred Stock, since its
issuance in January, 1989, has generally provided holders of Common Stock with a
higher yield than such holders would otherwise have received. However, there can
be no assurance that the Fund will be able to continue to realize such a higher
net return on its investment portfolio. Changes in certain factors could cause
the relationship between the U.S. short-term dividend rates paid by the Fund on
the Preferred Stock and the rates received by the Fund on its investment
portfolio to change so that such U.S. short-term rates may substantially
increase relative to rates on the Australian and New Zealand long-term debt
obligations in which the Fund may be invested. Under such conditions, the
benefit of leverage to holders of Common Stock will be reduced and the Fund's
leveraged capital structure could result in a lower rate of return to holders of
Common Stock than if the Fund were not leveraged. Since dividends or other
distributions on the Preferred Stock are payable in U.S. dollars, a decline

26
<PAGE> 27

in the value of the Australian dollar to the U.S. dollar also could impact
negatively the rate of return to holders of Common Stock. See "Capital
Stock -- Preferred Stock" and "Capital Stock -- Leverage." The Fund has the
authority to redeem the Preferred Stock for any reason and may redeem all or
part of the Preferred Stock if it anticipates that the Fund's leveraged capital
structure will result in a lower rate of return to holders of the Common Stock
than that obtainable if the Common Stock were unleveraged for any significant
amount of time. The Fund may also need to redeem all or a portion of the
Preferred Stock to the extent required by the 1940 Act, the terms of the
Preferred Stock or by rating agencies rating the Preferred Stock. The leveraging
of the Common Stock would be eliminated during any period that Preferred Stock
is not outstanding. See "Financial Highlights -- Senior Securities."

TAX CONSIDERATIONS

Subject to certain limitations imposed by the Code, foreign taxes withheld
from distributions or otherwise paid by the Fund may be creditable or deductible
by U.S. stockholders for U.S. income tax purposes, if the Fund is eligible to
and makes an election to treat the stockholders as having paid those taxes for
U.S. federal income tax purposes. No assurance can be given that the Fund will
be eligible to make such an election each year but it intends to do so if it is
eligible. If the election is made, the foreign withholding taxes paid by the
Fund will be includable in the U.S. federal taxable income of stockholders.
Non-U.S. investors may not be able to credit or deduct such foreign taxes, but
they may be deemed to have additional income from the Fund, equal to their share
of such foreign taxes, that is subject to the U.S. withholding tax. Investors
should review carefully the information discussed under the heading "Taxation"
and should discuss with their tax advisers the specific tax consequences of
investing in the Fund.

NON-DIVERSIFIED STATUS

The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. As a non-diversified investment company, the Fund may invest a greater
proportion of its assets in the obligations of a smaller number of issuers and,
as a result, will be subject to greater risk with respect to its portfolio
securities. Although the Fund must diversify its holdings in order to be treated
as a registered investment company under the provisions of the Code, the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than would be the case if it had elected to diversify its holdings
sufficiently to be classified as a "diversified" investment company under the
1940 Act. See "Investment Objective and Policies; Investment Restrictions" and
"Taxation -- United States."

ARTICLES OF AMENDMENT AND RESTATEMENT AND BY-LAW PROVISIONS

The Fund presently has provisions in its Articles that could have the
effect of limiting (i) the ability of other entities or persons to acquire
control of the Fund, (ii) the Fund's freedom to engage in certain transactions
or (iii) the ability of the Fund's Directors or stockholders to amend the
Articles or effect changes in the Fund's management. The By-Laws provide for a
staggered election of those Directors who are elected
by the holders of Common Stock, with such Directors divided into three classes,
each having a term of three years. Accordingly, only those Directors in one
class may be changed in any one year and it would require two years to change a
majority of the Board of Directors. This system of electing Directors may have
the effect of maintaining the continuity of management and, thus, make it more
difficult for the Fund's stockholders to change the majority of Directors. Other
provisions require the approval of holders of 75% of the outstanding shares of
the Common and Preferred Stock voting both together as a single class and
separately as to each class to approve certain transactions including certain
mergers, asset dispositions and conversion of the Fund to open-end status. The
foregoing provisions may be regarded as "anti-takeover" provisions and may have
the effect of depriving stockholders of an opportunity to sell their shares at a
premium over prevailing market prices. See "Capital Stock -- Common Stock" and
"Certain Provisions of the Articles of Amendment and Restatement and ByLaws."
The Fund's Articles authorize the Fund, by action of its Board of Directors, to
issue up to 100,000,000 shares of Preferred Stock in one or more series and from
time to time. See "Risk Factors and Special Considerations -- Preferred Stock."

27
<PAGE> 28

PORTFOLIO COMPOSITION

The following sets forth certain information with respect to the
composition of the Fund's investment portfolio in terms of percentages of total
market value (excluding $82,362,559 held in U.S. and Australian
dollar-denominated short-term investments) as of January 31, 1996.

THE PORTFOLIO

[EDGAR REPRESENTATION OF DATA POINTS USED IN GRAPHIC]

<TABLE>
<S> <C>
AUSTRALIA AND NEW ZEALAND GOVERNMENT SECURITIES 33.51
AUSTRALIAN STATE AND SEMI-GOVERNMENT SECURITIES 35.57
AUSTRALIA AND NEW ZEALAND CORPORATE BONDS 11.06
EUROBONDS 19.86
</TABLE>

RATINGS OF SECURITIES HELD IN THE PORTFOLIO*

[EDGAR REPRESENTATION OF DATA POINTS USED IN GRAPHIC]
<TABLE>
<S> <C>
AAA/AAA BY MOODY'S OR S&P 67
AA/AA BY MOODY'S OR S&P 30
A/A BY MOODY'S OR S&P 3
</TABLE>

- ---------------
* Reflects the lower of the Moody's or S&P rating

COMPARISON OF FUND TOTAL RETURN TO THE CBBI
IN AUSTRALIAN DOLLARS

The following chart sets forth a comparison of the total return based on
NAV of the Fund to that of the Commonwealth Bank All Series, All Maturities,
Accumulation Bond Index (the "CBBI") in Australian Dollars. The CBBI reflects
the total return on all outstanding Australian government bonds, adjusted to
reflect capital gains and losses and reinvestment of income. The Fund's
performance reflects the reinvestment of dividends at the first net asset value
calculated after distribution. In addition, for comparative purposes, the
performance of the CBBI, as presented below, has been reduced to reflect the
imposition of the 10% withholding tax levied by Australia on interest income
derived from Australian sources by non-resident investors in order to account
for the same 10% tax levied on the Fund's Australian source income. While there
are several differences between both the composition and the performance of the
CBBI and the Fund's portfolio of investments, the Investment Adviser believes
that this comparison is the most representative available method of
demonstrating the correlation of the Fund's performance with that of Australian
government bonds.

28
<PAGE> 29

PORTFOLIO COMPOSITION

THE PORTFOLIO

<TABLE>
<S> <C> <C> <C> <C>
AUSTRALIA AND NEW ZEALAND GOV-
ERNMENT SECURITIES 33.51
AUSTRALIAN STATE AND SEMI-GOV-
ERNMENT SECURITIES 41.55
AUSTRALIA AND NEW ZEALAND COR-
PORATE BONDS 14.36
OTHER BONDS 10.58
</TABLE>

RATINGS OF SECURITIES HELD IN THE PORTFOLIO*

<TABLE>
<S> <C> <C> <C> <C>
AAA/AAA BY MOODY'S OR S&P 67
AA/AA BY MOODY'S OR S&P 30
A/A BY MOODY'S OR S&P 3
</TABLE>

- ---------------
* Reflects the lower of the Moody's or S&P rating

COMPARISON OF FUND TOTAL RETURN TO THE CBBI
IN AUSTRALIAN DOLLARS

28
<PAGE> 30

Among the factors distinguishing the CBBI from the Fund are the following:
(i) the CBBI is an unmanaged index that bears none of the costs associated with
the portfolio management activities of an investment company such as the Fund
and, therefore, the performance of the CBBI, as measured against the
after-expenses performance of the Fund, is favorably affected; (ii) the CBBI is
made up entirely of Australian government bonds, while the Fund also invests in
Australian semi-government bonds, Australian corporate bonds, and Eurobonds;
(iii) Australian semi-government bonds, Australian corporate bonds, and
Eurobonds, which, over the life of the Fund, have represented between 28% and
77% of the total assets of the Fund (on a quarterly basis), generally yield
slightly higher returns than those of Australian government bonds and therefore
the performance of the Fund, as measured against the CBBI, is favorably
affected; and (iv) while the CBBI is adjusted to reflect the imposition of the
10% withholding tax levied by Australia on interest income derived from
Australian sources in order to account for the same 10% tax levied on the Fund's
Australian source income, the portion of the Fund's portfolio held in Eurobonds,
which, since April, 1993, has averaged approximately 30% on a quarterly basis,
is not subject to such tax and therefore the performance of the Fund, as
measured against the adjusted CBBI, is favorably affected.

<TABLE>
<CAPTION>
Fund Per-
formance Fund Per-
Before Ex- formance Af-
Measurement Period penses & ter Expenses
(Fiscal Year Covered) Fees(1)(2) & F ees(1) CBBI(3)
<S> <C> <C> <C>
04/24/86 0.00 0.00 0.00
-0.13 -0.13 -0.60
0.96 0.96 -0.09
1.38 1.29 -3.23
1.15 0.97 -2.92
0.42 -0.69 -2.51
4.45 3.21 0.13
2.71 1.39 1.45
12/31/86 3.61 2.19 2.60
7.16 5.60 2.71
6.43 4.77 1.70
8.20 6.43 5.74
10.43 8.53 8.31
11.66 9.64 10.66
14.29 12.13 11.40
15.70 13.41 12.82
18.54 16.09 14.12
23.81 21.15 18.22
17.90 15.27 14.90
21.47 18.66 16.26
12/31/87 27.08 24.04 20.22
30.65 27.43 22.97
32.22 28.86 23.64
34.24 30.73 26.37
36.75 33.09 28.81
32.54 28.88 25.85
39.90 35.95 28.98
36.23 32.14 30.01
37.59 33.22 30.52
38.20 33.58 30.93
39.37 34.54 30.82
38.62 33.64 30.44
12/31/88 37.98 32.85 29.98
36.24 31.18 28.91
36.98 31.77 28.44
38.84 33.44 30.25
41.35 35.74 32.44
41.44 35.59 31.06
44.21 38.00 34.19
46.69 40.13 35.95
49.51 42.82 39.79
48.05 41.30 38.33
49.77 42.80 39.47
53.76 46.47 43.17
12/31/89 56.48 48.93 46.57
59.04 51.22 49.12
59.30 51.34 47.35
60.93 52.75 48.78
63.06 54.63 48.84
64.45 55.81 51.60
66.46 57.58 53.76
69.80 60.59 56.65
72.20 62.69 58.08
74.51 64.70 60.06
78.80 68.58 63.77
83.93 73.23 68.86
12/31/90 86.50 75.47 71.53
90.85 79.38 75.93
92.79 81.05 78.17
94.49 82.50 79.80
98.77 86.36 84.00
103.77 90.86 87.31
102.65 89.63 85.86
105.47 92.10 88.66
108.90 95.09 91.44
114.61 100.21 96.30
121.90 106.80 103.38
123.58 108.17 105.05
12/31/91 129.98 113.94 110.99
124.51 108.65 105.51
126.47 110.27 106.98
128.62 112.08 108.88
135.23 118.01 115.16
137.93 120.30 119.01
144.25 125.95 124.31
152.05 132.96 131.32
144.23 125.53 123.54
146.35 127.28 125.37
148.25 127.92 127.25
148.60 128.04 126.64
12/31/92 154.96 133.07 129.86
157.86 135.51 133.65
167.09 143.73 141.33
171.52 147.56 144.45
174.98 150.51 148.51
178.98 153.93 147.76
181.55 156.04 152.35
188.43 162.07 157.64
194.47 167.32 161.29
195.02 167.58 160.07
200.34 172.17 164.85
197.04 167.88 162.46
12/31/93 200.79 170.89 165.59
205.98 175.36 169.76
198.06 168.02 162.21
188.56 159.26 154.44
186.56 157.24 151.45
182.74 153.60 150.52
173.58 145.17 143.60
176.41 147.49 145.76
181.27 151.60 149.04
173.54 144.45 142.21
172.56 143.33 141.42
173.09 143.59 140.96
12/31/94 177.25 147.08 145.76
179.72 149.05 144.59
186.53 154.89 152.48
186.97 155.05 154.74
194.63 161.63 158.23
207.20 171.19 169.44
210.51 173.89 168.42
205.54 169.06 167.28
211.21 173.82 171.98
217.17 178.84 178.15
218.72 179.96 177.46
227.44 187.39 186.23
229.14 188.64 187.99
233.57 192.29 191.12
</TABLE>

- ---------------
(1) Fund total return measured in Australian dollars for the period from the
Fund's inception on April 24, 1986 through January 31, 1996 after expenses
and fees is 192.3% or 11.6% per annum and before expenses and fees is 233.6%
or 13.1% per annum. Past performance is no guarantee of future results. The
Fund's total return as reflected in the chart is based on the Fund's NAV
rather than on market value. The Fund's shares have traded in the market
above, at and below NAV since the commencement of the Fund's operations.
(2) The "Before Expenses and Fees" calculation is derived by adding back the
operating expenses of the Fund, including those relating to the Preferred
Stock, which are subtracted in the "After Expenses and Fees" calculation.
The one-time offering and underwriting expenses associated with each of the
Preferred Stock issues and the prior rights offerings, which are subtracted
in the "After Expenses and Fees" calculation, have also been added back.

(3) CBBI total return, which is shown in the chart after adjustment to reflect
the imposition of the 10% withholding tax levied by Australia in order to
account for the 10% tax levied on that portion of the Fund's income that is
Australian source income, for the period from April 24, 1986 through January
31, 1996 is 191.1% or 11.6% per annum. Before such adjustment, CBBI total
return for the same period is 234.8% or 13.2% per annum.

For further information, reference should be made to "Financial Statements"
and "Appendix A -- Australian Economy" and "-- New Zealand Economy."

29
<PAGE> 31

INVESTMENT OBJECTIVE AND POLICIES; INVESTMENT RESTRICTIONS

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is current income through investment
primarily in Australian debt securities. The Fund may also achieve incidental
capital appreciation. The objective and the policies set forth in the following
three paragraphs and under the caption "Investment Restrictions" may not be
changed without the approval of the holders of a majority of the outstanding
shares of the Common Stock and the Preferred Stock, voting together as a single
class, as well as by the holders of a majority of the outstanding shares of the
Fund's Preferred Stock voting as a separate class without regard to series. A
majority vote, as defined by the 1940 Act, means the affirmative vote of the
lesser of (i) 67% of the relevant shares represented at a meeting at which more
than 50% of such shares are represented, or (ii) more than 50% of the relevant
shares.

PORTFOLIO STRUCTURE

It is expected that normally at least 65% of the Fund's total assets will
be invested in Australian dollar-denominated debt securities of Australian
banks, federal and state governmental entities and companies. To achieve its
investment objective, the Fund may invest the remainder of its assets in debt
securities of comparable quality which are denominated in Australian or New
Zealand dollars of other issuers, whether or not domiciled in Australia or New
Zealand, and in U.S. securities. The Fund will invest only in debt securities
for which there is an active secondary market and will not purchase securities
as to which there would be any legal restrictions on sale or disposition by the
Fund except that the Fund may invest up to 10% of its assets in privately placed
debt securities which (i) are Australian or New Zealand dollar-denominated, (ii)
are not subject to legal or contractual restriction on their resale, (iii)
mature in four years or less, and (iv) are issued or guaranteed by banks or
companies whose debt securities are rated Aa or better by Moody's or AA or
better by S&P. The Fund will not invest in convertible debt securities. During
periods when, in the Investment Manager's judgment, changes in the market for
Australian and New Zealand debt securities or other economic conditions warrant
a temporary defensive investment policy, the Fund may temporarily reduce its
position in such securities and invest in U.S. securities.

It is the Fund's policy to limit its investments, as to 65% of its total
assets, to issuers or debt securities rated at the time of investment AA or
better by S&P, or Aa or better by Moody's, or which, in the judgment of the
Investment Manager, are of equivalent quality. The remainder of the Fund's
investments will be rated A by those rating agencies or will in the Investment
Manager's judgment be of equivalent quality.

The Fund may enter into repurchase agreements with banks and broker-dealers
pursuant to which the Fund may acquire a security for a relatively short period
(usually no more than a week) subject to the obligations of the seller to
repurchase and the Fund to resell such security at a fixed time and price. The
Fund will enter into repurchase agreements only with parties who meet
creditworthiness standards approved by the Fund's Board of Directors, i.e.,
banks or broker-dealers which have been determined by the Fund's Investment
Manager to present no serious risk of becoming involved in bankruptcy
proceedings within the period contemplated by the repurchase transaction.

The Fund will not purchase or sell put or call options, enter into swaps or
futures contracts, or engage in any other type of derivative security
transaction.

As a non-diversified company, there is no investment restriction on the
percentage of the Fund's assets that may be invested at any time in the
securities of any issuer. However, the Fund intends to limit its investments in
the securities of any issuer, except for securities issued or guaranteed as to
payment of principal and interest by Australian or New Zealand commonwealth or
state governments or their instrumentalities, to 5% of its assets at the time of
purchase. The Fund may invest without limitation in securities of Australian
governments or governmental entities and may invest up to 25% of its assets at
the time of purchase in New Zealand government securities. The Fund intends to
invest in a variety of debt securities, with differing issuers, maturities and
interest rates, and to comply with the diversification and other requirements of
the Code applicable to regulated investment companies so that the Fund will not
be subject to U.S. federal income taxes

30
<PAGE> 32

on its net investment income. See "Taxation -- United States." The average U.S.
dollar weighted maturity of the Fund's portfolio is not expected to exceed 10
years, and as of January 31, 1996, was 6.4 years.

INVESTMENT RESTRICTIONS

The Fund may not:

1. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions.

2. Make short sales of securities or maintain a short position.

3. (a) Issue senior securities, except (i) insofar as the Fund may be
deemed to have issued a senior security in connection with any repurchase or
securities lending agreement or any borrowing agreement permitted by these
investment restrictions and (ii) that the Fund may issue one or more series of
its preferred stock, if permitted by the Articles; or (b) borrow money or pledge
its assets, except that the Fund may borrow on an unsecured basis from banks for
temporary or emergency purposes or for the clearance of transactions in amounts
not exceeding 10% of its total assets (not including the amount borrowed) and
will not make additional investments while any such borrowings are outstanding.

4. Buy or sell commodities, commodity contracts, real estate or interests
in real estate (except that the Fund may purchase and sell Australian
mortgage-backed securities).

5. Make loans (except that the Fund may purchase debt securities whether or
not publicly traded or privately placed or may enter into repurchase and
securities lending agreements consistent with the Fund's investment policies).

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

7. Act as an underwriter (except to the extent the Fund may be deemed to be
an underwriter in connection with the sale of securities in the Fund's
investment portfolio).

8. Invest more than 25% of its total assets at the time of purchase in any
one industry (including banking) except that the Fund will invest over 25% of
its total assets in securities issued or guaranteed, as to payment of principal
and interest, by Australian governments or governmental entities. U.S.
government securities are excluded from this restriction.

DESCRIPTION OF DEBT SECURITIES

The types of debt securities in which the Fund is permitted to invest
include those described below.

Australian Securities

Commercial Banks. The Fund is permitted to invest in bills of exchange,
certificates of deposit and promissory notes issued or guaranteed, as to payment
of principal and interest, by Australian commercial banks. Australian commercial
banks are generally comparable to U.S. banks and are subject to regulation by
Australian government authorities. The Investment Adviser does not believe that
there are any special risks associated with such securities arising out of the
fact that they are issued by banks. Bills of exchange are negotiable
instruments, issued to finance current transactions, which generally mature
within six months and which are accepted or endorsed by a commercial bank and
thus carry the bank's credit. Certificates of deposit are negotiable instruments
issued by commercial banks with maturities ranging from a few days to several
years. Promissory notes are negotiable instruments endorsed and therefore
guaranteed by a commercial bank or backed by a bank letter of credit as to
payment of principal and interest. Maturities generally range up to 180 days.
Bank bills, certificates of deposit and promissory notes are usually issued at a
discount from face value and are traded by dealers in an active public secondary
market.

Governmental Entities. The Fund is permitted to invest in Federal
Commonwealth of Australia (the "Commonwealth") government bonds and treasury
notes and state government and semi-government bonds and notes. Commonwealth
government bonds and treasury notes represent the obligations of the Common-

31
<PAGE> 33

wealth and are sold by the Reserve Bank of Australia (the central bank) through
public tenders. Bonds have maturities up to 15 years while notes are issued in
maturities of 13 and 26 weeks. The Commonwealth also guarantees as to payment of
principal and interest similar debt obligations issued by its instrumentalities.
State government and semi-government bonds and notes are issued by various
states and state instrumentalities and, in the case of state instrumentalities,
are guaranteed by the applicable state government. Maturities range from less
than one year to 15 years. Australian federal and state government debt
securities are frequently listed on the Australian Stock Exchange Limited but
most trading is by dealers in an active public secondary market.

Companies. The Fund is permitted to invest in publicly-traded notes and
debentures or bills of exchange issued or guaranteed as to the payment of
principal and interest by Australian companies, whether or not guaranteed or
backed by a commercial bank. Such securities have maturities generally ranging
from less than one year to five years and are traded by dealers in an active
public secondary market.

Mortgage-Backed Securities. The Fund is permitted to invest in Australian
mortgage-backed securities, which represent part ownership by the Fund in a pool
of mortgage loans. These loans are made by private lenders and may have
guarantees from Australian federal and state governmental entities, companies
and agencies. These securities would have to satisfy the Fund's general credit
criteria to qualify for purchase. Characteristics of several of the major
mortgage-backed securities are summarized below:

FANMACs: FANMAC securities are securities issued by a trustee against
housing loans made through the New South Wales Department of Housing and consist
of a series of closed trusts or pools. The mortgage manager is the First
Australian National Mortgage Acceptance Corporation Ltd. ("FANMAC"). FANMAC is
owned 26% by the Government of the State of New South Wales with the remainder
owned by other institutions. The Government of the State of New South Wales has
provided the FANMAC Trust with a guarantee as to availability of funds to meet
payment. The securities have been rated by Australian Ratings Pty. Ltd.
("Australia Ratings") and S&P. FANMAC securities are subject to a call provision
under which borrowers (mortgagors) can repay early and the investors in a
particular pool can be repaid on a pro rata basis.

NMMC AUSSIE MACs and National Mortgage Market Bonds: National Mortgage
Market Corporation Ltd. ("NMMC") has issued both AUSSIE MACs, which are
medium-term bearer securities, and National Mortgage Market Bonds. NMMC is a
private company which is 26% owned by the Government of the State of Victoria
and 74% by private institutions. Both AUSSIE MACs and National Mortgage Market
Bonds are rated by Australian Ratings.

MTCs: Mortgage Trust Certificates ("MTCs") are securities issued against
specific mortgages by a trustee and are similar to "pass through" certificates.
MTCs are issued on a continuous basis, insured by Australian insurance companies
against both mortgage default and an early call, and rated by Australian
Ratings.

MMSs and ANNIE MAEs: MMSs are mortgage-backed securities issued by MGICA
Securities Ltd., a wholly-owned subsidiary of AMP Society Ltd., an Australian
insurance company. ANNIE MAEs are securities issued by Australian National
Mortgage Pool Agency Ltd., an affiliate of Bank of America. Both MMSs and ANNIE
MAEs are issued against pools of mortgages and are rated by Australian Ratings.

Other Debt Securities. Subject to its investment policy of investing at
least 65% of its assets in Australian dollar-denominated debt securities of
Australian issuers, the Fund is permitted to invest in Australian and New
Zealand dollar-denominated debt securities, similar in nature to those described
above, regardless of the domicile of the issuers. Thus, the Fund is permitted to
invest in publicly-traded debt securities of New Zealand issuers and in
publicly-traded debt securities denominated in Australian or New Zealand dollars
of issuers not domiciled in those countries. The latter securities are usually
issued in the Eurodollar market by multi-national banks and companies which may
have operations in Australia or New Zealand.

The Fund is also permitted to invest up to 10% of its assets in privately
placed debt securities which are Australian and New Zealand dollar-denominated,
mature in four years or less and which are issued or guaranteed by banks or
companies whose debt securities are rated at the time of investment Aa or better
by

32
<PAGE> 34

Moody's or AA or better by S&P. The Fund may not purchase privately placed
securities which are subject to legal or contractual restrictions on their
resale. However, although such securities will be freely transferable, the
resale markets for privately placed securities are frequently limited, and the
Fund may either be required to dispose of such securities at a substantial
discount from face value or to hold such securities until maturity. The value of
such securities for NAV purposes will be determined by the Fund's Board of
Directors.

U.S. Securities

Government. The Fund is permitted to invest in U.S. government securities,
including obligations issued or guaranteed by U.S. government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. treasury (such as direct pass-through certificates of the Government
National Mortgage Association), some of which are supported by the right of the
issuer to borrow from the U.S. government (such as obligations of Federal Home
Loan Banks), and some of which are backed only by the credit of the issuer
itself. Government obligations do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from U.S. government obligations are generally
lower than the yields available from corporate interest bearing securities. Like
other interest bearing securities, however, the value of Government obligations
changes as interest rates fluctuate.

Corporations and Banks. The Fund is permitted to invest for defensive and
other temporary purposes in U.S. corporate debt instruments rated at the time of
investment Aa or better by Moody's or AA or better by S&P and finance company
and corporate commercial paper and other short-term obligations, in each case
rated at the time of investment Prime-1 or Prime-2 by Moody's or A-2 or better
by S&P. The Fund is also permitted to invest in obligations of U.S. federal or
state chartered banks and bank holding companies rated at the time of investment
Aa or better by Moody's or AA or better by S&P (including certificates of
deposit, bankers' acceptances and other short-term debt obligations).

Repurchase Agreements

The Fund is permitted to invest in repurchase agreements with banks and
broker-dealers. A repurchase agreement is a contract under which the Fund
acquires a security for a relatively short period (usually no more than one
week) subject to the obligations of the seller to repurchase and the Fund to
resell such security at a fixed time and price (representing the Fund's cost
plus interest). The Investment Manager monitors the value of such securities
daily to determine that the value equals or exceeds the repurchase price. Under
the 1940 Act, repurchase agreements are considered to be loans made by the Fund
which are collateralized by the securities subject to repurchase. Repurchase
agreements may involve risks in the event of default or insolvency of the
seller, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities. The Fund will enter into repurchase
agreements only with parties who meet creditworthiness standards approved by the
Fund's Board of Directors, i.e., banks or broker-dealers which have been
determined by the Investment Manager to present no serious risk of becoming
involved in bankruptcy proceedings within the time frame contemplated by the
repurchase transaction.

33
<PAGE> 35

MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

The names and addresses of the Directors and officers of the Fund are set
forth below, together with their positions and their principal occupations
during the past five years and, in the case of the Directors, their positions
with certain other organizations and companies. Directors who are "interested
persons" of the Fund, as defined by the 1940 Act, are indicated by an asterisk.

While the Fund is a Maryland corporation, certain of its Directors and
officers (Messrs. Calvert-Jones, Maddock, Sacks, Fraser, Sherman, Cutler, Elsum,
Freedman, Manor, Yontef and Randall) are non-residents of the United States and
have all, or a substantial part, of their assets located outside the United
States. None of such Directors or officers has authorized an agent for service
of process in the United States. As a result, it may be difficult for U.S.
investors to effect service of process upon such Directors and officers within
the United States or to effectively enforce judgments of courts of the United
States predicated upon civil liabilities of such Directors or officers under the
federal securities laws of the United States. The Fund has been advised that it
is unlikely that the courts of Jersey would adjudge civil liability against
Directors and officers resident in Jersey in an original action predicated
solely on the federal securities laws of the United States. Although there is no
arrangement in place between Jersey and the United States for the reciprocal
enforcement of judgements, a judgement against such Directors and officers in an
original action predicated on such provisions rendered by a court in the United
States would be enforceable by action or counterclaim or be recognized by the
Jersey courts as a defence to an action or as conclusive of an issue in that
action unless obtained by fraud or otherwise than in accordance with the
principles of natural justice or unless contrary to public policy or unless the
proceedings in the United States court were not duly served on the defendant in
the original action. There is doubt as to the enforceability in Australia and
Canada, the countries in which other Directors and officers are resident, of
these civil liability provisions, whether or not such liabilities are based upon
judgments of courts in the United States or are pursuant to original actions.

34
<PAGE> 36

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND OTHER
NAME AND ADDRESS THE FUND** AFFILIATIONS
- -------------------------- --------------- -----------------------------------------
<S> <C> <C>
ROGER C. MADDOCK* Class I Director, The First Australia Fund,
Union House Director Inc.and The First Commonwealth Fund, Inc.
Union Street (since 1992); Chairman and Managing
St. Helier Director, EquitiLink International
Jersey, Channel Islands Management Limited (since 1985); Partner,
United Kingdom Jackson Fox, Chartered Accountants (since
1981); Director, Worthy Trust Company
Limited (since 1981); Director,
Professional Consultancy Services Limited
(since 1983); Director, Honeywell Spring
Limited (since 1987); Director, The
EquitiLink Private Gold Investment Fund
Limited (since 1992); Director,
CentraLink-EquitiLink Investment Company
Limited (since September 1994).
JOHN T. SHEEHY++ Class I Director, The First Australia Fund, Inc.
1 Southwest Columbia Director (since 1985), First Australia Prime
12th Floor Income Investment Company Limited (since
Portland, OR 97258 1986) and The First Commonwealth Fund,
Inc. (since 1992); Managing Director,
Black & Company (broker-dealer and
investment bankers); Director, Greater
Pacific Food Holdings, Inc. (food
industry investment company) (since
1993); Partner, Sphere Capital Partners
(corporate consulting) (since 1987);
Director, Sphere Capital Advisors
(investment adviser); Director, Sandy
Corporation (corporate consulting,
communication and training) (1986-1996);
Associate Director, Bear Stearns & Co.
Inc. (1985-1987); previously, Limited
Partner, Bear Stearns & Co. Inc.
RT. HON. MALCOLM FRASER+ Class II Director, The First Australia Fund, Inc.
A.C., C.H. Director (since 1985), First Australia Prime
55 Collins Street Income Investment Company Limited (since
Melbourne, Victoria 3000 1986) and The First Commonwealth Fund,
Australia Inc. (since 1992); Partner, Nareen
Pastoral Company (agriculture); Fellow,
Center for International Affairs, Harvard
University; International Council of
Associates, Claremont University;
Chairman, CARE Australia (since 1987);
President, CARE International
(1990-1995); Member, Byrnes International
Advisory Board, University of South
Carolina (1985-1990); ANZ International
Board of Advice (1987-1993); InterAction
Council for Former Heads of Government;
Co-Chairman, Commonwealth Eminent Persons
Group on Southern Africa (1985-1986);
Chairman, United Nations Committee on
African Commodity Problems (1989-1990);
Consultant, The Prudential Insurance
Company of America; International
Consultant on Political, and Strategic
Affairs (since 1983); Parliamentarian-
Prime Minister of Australia (1975-1983).
</TABLE>

35
<PAGE> 37

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND OTHER
NAME AND ADDRESS THE FUND** AFFILIATIONS
- -------------------------- --------------- -----------------------------------------
<S> <C> <C>
HARRY A. JACOBS, JR.* Class II Director, The First Australia Fund, Inc.
One New York Plaza Director (since 1985); Chairman and Chief
New York, NY 10292 Executive Officer, Prudential Mutual Fund
Management, Inc. (June-September 1993);
Senior Director, Prudential Securities
Incorporated (since 1986); previously,
Chairman of the Board, Prudential
Securities Incorporated (1982-1985);
Chairman of the Board and Chief Executive
Officer, Bache Group, Inc. (1977-1982);
Director, Center for National Policy;
Trustee, The Trudeau Institute
(eleemosynary); Director of 26 investment
companies affiliated with Prudential
Securities Incorporated.
HOWARD A. KNIGHT Class II Director, The First Australia Fund, Inc.
300 Park Avenue Director (since 1993); Private Investor and
New York, NY 10022 Consultant; President of Investment
Banking, Equity Transactions and
Corporate Strategy, Prudential Securities
Incorporated (1991-1994); former Chairman
and Chief Executive Officer, Avalon
Corporation (1984-1990); Managing
Director, President and Chief Executive
Officer, Weeks Petroleum Limited
(1982-1984); previously, General Counsel,
member of the Executive Committee and
Director, Farrell Lines Incorporated
(1976-1982); Partner, Cummings & Lockwood
(1969-1976); Director, Scandinavian
Broadcasting System, S.A.
PETER D. SACKS++ Class II Director, The First Commonwealth Fund,
33 Yonge Street Director Inc. (since 1992); President and
Suite 706 Director, Toron Capital Markets, Inc.
Toronto, Ontario M5E 1G4 (currency, interest rate and commodity
Canada risk management) (since 1988); Director,
Toran Capital Management Ltd. (commodity
trading adviser) (since 1994); Vice
President and Treasurer, Midland Bank
Canada (1987-1988); Vice President and
Treasurer, Chase Manhattan Bank of Canada
(1985-1987).
</TABLE>

36
<PAGE> 38

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND OTHER
NAME AND ADDRESS THE FUND** AFFILIATIONS
- -------------------------- --------------- -----------------------------------------
<S> <C> <C>
BRIAN M. SHERMAN* Class II President and Director, The First
Level 3, Director; Australia Fund, Inc. (since 1985); Joint
190 George Street President Managing Director (since 1986) and
Sydney, N.S.W. 2000 (since 1986) Chairman (since 1995), First Australia
Australia Prime Income Investment Company Limited;
Director and sole Vice President (since
1992) and Chairman (since 1995), The
First Commonwealth Fund, Inc.; President
of the Fund (since 1986); Chairman and
Joint Managing Director, EquitiLink
Limited (since 1986); Chairman and Joint
Managing Director, EquitiLink Australia
Limited (since 1981); Director,
EquitiLink International Management
Limited (since 1985); Joint Managing
Director, MaxiLink Securities Limited
(since 1987); Director, First Resources
Development Fund Limited (since 1994);
Director, Ten Group Limited (since 1994);
Director, Telecasters North Queensland
Limited (since 1993); Director, Sydney
Organizing Committee for The Olympic
Games; Fund and Portfolio Manager,
Westpac Banking Corporation (1976-1981);
Manager-Investments, Outwich Limited (an
affiliate of Baring Brothers & Co. Ltd.)
(merchant bank) (1972-1976).
SIR RODEN CUTLER+ Class III Director (since 1985) and Chairman of the
V.C., A.K., K.C.M.G., Director; Board (1986-1995) The First Australia
K.C.V.O., C.B.E., Chairman of the Fund, Inc., First Australia Prime Income
K.St.J. Board Investment Company Limited (since 1986)
222 Ginahgulla Road (1986-1995) and The First Commonwealth Fund, Inc.
Bellevue Hill, (since 1992); Australia Director,
N.S.W. 2023 Rothmans Holding Ltd. (formerly Rothmans
Australia Pall Mall) (tobacco) (1981-1994);
Chairman, State Bank of New South Wales
(1981-1986); Governor of New South Wales,
Australia (1966-1981).
</TABLE>

37
<PAGE> 39

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND OTHER
NAME AND ADDRESS THE FUND** AFFILIATIONS
- -------------------------- --------------- -----------------------------------------
<S> <C> <C>
DAVID LINDSAY ELSUM + Class III Director, The First Australia Fund, Inc.
9 May Grove Director (since 1985), First Australia Prime
South Yarra, Victoria 3141 Income Investment Company Limited (since
Australia 1986) and The First Commonwealth Fund,
Inc. (since 1992); President, State
Superannuation Fund of Victoria
(1986-1993); Director, MaxiLink Limited;
Managing Director, The MLC Limited
(insurance) (1984-1985); Managing
Director, Renison Goldfields Consolidated
Limited (mining) (1983-1984); Member,
Administrative Appeals Tribunal; Member,
Corporations and Securities Panel of the
Australian Securities Commission of
Australian States and Territories;
Chairman, Queen Victoria Market;
Director, First Resources Development
Fund Limited and Statewide Friendly
Society.
LAURENCE S. FREEDMAN* Class III Chairman (since 1995) and Sole Vice
Level 3 Director; President (since 1986) of the Fund;
190 George Street Chairman (since Chairman (since 1995) and Sole Vice
Sydney, N.S.W. 2000 1995); Sole President and Director (since 1986), The
Australia Vice President First Australia Fund, Inc. (since 1985);
(since 1986) Joint Managing Director, First Australia
Prime Income Investment Company Limited
(since 1986); President and Director, The
First Commonwealth Fund, Inc. (since
1992); Founder and Joint Managing
Director, EquitiLink Limited (since
1986); Joint Managing Director,
EquitiLink Australia Limited (since
1981); Director, EquitiLink International
Management Limited (since 1985); Chairman
and Joint Managing Director, MaxiLink
Limited (since 1987); Executive Director
MaxiLink Securities Limited (since 1987);
Chairman and Director, First Resources
Development Fund Limited (since 1994);
Director, Ten Group Limited (since 1994);
Director, Telecasters North Queensland
Limited (since 1993); Managing Director,
Link Enterprises (International) Pty.
Limited (an investment management
company) (since 1980); Manager of
Investments, Bankers Trust Australia
Limited (1978-1980); Investment Manager,
Consolidated Goldfields (Australia)
Limited (natural resources investments),
(1975-1978).
</TABLE>

38
<PAGE> 40

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND OTHER
NAME AND ADDRESS THE FUND** AFFILIATIONS
- -------------------------- --------------- -----------------------------------------
<S> <C> <C>
MICHAEL R. HORSBURGH Class III Director, The First Australia Fund, Inc.
675 Third Avenue Director (since 1985); Director, The First
22nd Floor Commonwealth Fund, Inc. (since 1994);
New York, NY 10017 Director and Managing Director, Carlson
Investment Management (U.S.), Inc. (since
1991); Director, The First Hungary Fund;
Managing Director, Barclays de Zoete Wedd
Investment Management (U.S.A.)
(1990-1991); Special Associate Director,
Bear Stearns & Co, Inc. (1989-1990);
Senior Managing Director, Bear Stearns &
Co. Inc. (1985-1989); General Partner,
Bear, Stearns & Co. Inc. (1981-1985);
previously Limited Partner, Bear, Stearns
& Co. Inc.
WILLIAM J. POTTER+ Class III Director, The First Australia Fund, Inc.
156 W. 56th Street Director (since 1985), The First Australia Prime
17th Floor Income Investment Company Limited (since
New York, NY 10019 1986) and The First Commonwealth Fund,
Inc. (since 1992); Partner, Sphere
Capital Partners (corporate consulting)
(since 1989); President, Ridgewood
Partners, Ltd. (investment banking)
(since 1989); Managing Director,
Prudential-Bache Securities Inc.
(1984-1989); Director, National Foreign
Trade Association; Director, Alexandria
Bancorp Limited; Director, Battery
Technologies, Inc.; Director, Compuflex
Inc.; Director, Impulsora del Fondo
Mexico; Director, Canadian Health
Foundation; First Vice President,
Barclays Bank, plc (1982-1984);
previously various positions with Toronto
Dominion Bank.
DAVID MANOR* Preferred Treasurer, The First Australia Fund, Inc.
Level 3, Director; (since 1987); Director and Treasurer, The
190 George Street Treasurer First Commonwealth Fund, Inc. (since
Sydney, (since 1987) 1992) and Treasurer, First Australia
New South Wales Prime Income Investment Company Limited
2000 Australia (since 1987); Executive Director,
EquitiLink Australia Limited and
EquitiLink Limited (since 1986);
Director, EquitiLink International
Management Limited (since 1987) and
EquitiLink U.S.A., Inc.; Director,
Telecasters Australia Limited (since
1995).
MARVIN YONTEF* Preferred Partner, Stikeman, Elliott (Canadian law
P.O. Box 85 Director firm); Director of and counsel to First
5300 Commerce Court West Australia Prime Income Investment Company
Toronto, Ontario Limited.
Canada M5L 1B9
EUGENE S. STARK Chief Financial First Vice President (since 1990) and
One Seaport Plaza Officer and Vice President (1987-1989), Prudential
New York, NY 10292 Assistant Mutual Fund Management, Inc.
Treasurer
</TABLE>

39
<PAGE> 41

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION AND OTHER
NAME AND ADDRESS THE FUND** AFFILIATIONS
- -------------------------- --------------- -----------------------------------------
<S> <C> <C>
KENNETH T. KOZLOWSKI Assistant Vice President, Prudential Mutual Fund
One Seaport Plaza Treasurer Management, Inc. (since 1992) and Fund
New York, NY 10292 Accounting Manager, Pruco Life Insurance
Company (life insurance division of The
Prudential Insurance Company) (1990-
1992); Assistant Treasurer, The
Prudential Series Fund, Inc. (1990- 1992).
OUMA SANANIKONE-FLETCHER Assistant Vice Director (since 1995) and Investment
Level 3 President and Director (since 1994), EquitiLink
190 George Street Chief Australia Limited; Managing Director,
Sydney, Investment Banque Nationale de Paris Group (1991-
New South Wales Officer 1994).
2000 Australia
BARRY G. SECHOS Assistant Director (since 1994) and General Counsel
Level 3 Treasurer (since 1993), EquitiLink Australia
190 George Street Limited, Senior Associate Lawyer, Allen
Sydney, Allen & Hemsly (1986-1993)
New South Wales
2000 Australia
ROY M. RANDALL Secretary Partner, Freehill, Hollingdale & Page,
19-29 Martin Place Australian counsel to the Fund.
Sydney,
New South Wales
2000 Australia
MARGARET A. BANCROFT Assistant Partner, Dechert Price & Rhoads, U.S.
477 Madison AVenue Secretary counsel to the Fund.
New York, NY 10022
ALLAN S. MOSTOFF Assistant Partner, Dechert Price & Rhoads, U.S.
1500 K Street, N.W. Secretary counsel to the Fund.
Washington, D.C. 20005
</TABLE>

- ---------------
* Directors considered by the Fund and its counsel to be persons who are
"interested persons" (as defined in the 1940 Act) of the Fund or of the
Fund's Investment Manager or Investment Adviser. Mr. Jacobs is deemed to be
an interested person because of his affiliation with Prudential Securities
Incorporated, a broker-dealer registered under the Securities Exchange Act of
1934, as amended, which is acting as a Dealer Manager in connection with the
Offer. Messrs. Freedman, Maddock, Manor and Sherman are deemed to be
interested persons because of their affiliation with the Fund's Investment
Manager and Investment Adviser, or because they are officers of the Fund or
both. Mr. Yontef is deemed to be an interested person because the law firm of
which he is a partner acts as legal counsel for the Investment Adviser and
its parent.

** The Board of Directors is currently divided into three classes (not including
the Preferred Directors). The terms of the Class I, II and III Directors
expire in 1998, 1999 and 1997 respectively. Section 18 of the 1940 Act
requires that the holders of any preferred shares, voting separately as a
class without regard to series, have the right to elect at least two
Directors at all times. The Preferred Directors were elected by the holders
of the Preferred Stock in accordance with Section 18.

+ Member, Contract Review Committee.

++ Member, Audit Committee.

40
<PAGE> 42

BOARD COMMITTEES

The Board of Directors has a standing Audit Committee, which consists of
certain Directors who are not interested persons of the Fund as defined in the
1940 Act. The principal purpose of the Audit Committee is to review the scope
and results of the annual audit conducted by the Fund's independent accountants
and the evaluation by such accountants of the accounting procedures followed by
the Fund. The Board of Directors also has a standing Contract Review Committee
which also consists of Directors who are not interested persons of the Fund. The
Contract Review Committee reviews and makes recommendations to the Board with
respect to entering into, renewing or amending the Management Agreement, the
Advisory Agreement, the Consultant Agreement and the Administration Agreement.
The Board of Directors does not have a standing nominating committee.

RELATIONSHIP OF DIRECTORS OR NOMINEES WITH THE INVESTMENT ADVISER AND THE
INVESTMENT MANAGER

EquitiLink Australia Limited, the Investment Adviser, is a wholly-owned
subsidiary of EquitiLink Limited, a public company whose ordinary shares are
listed on the Australian Stock Exchange Limited.

Messrs. Freedman, Sherman and Manor, all Directors of the Fund, also serve
as directors of EquitiLink International Management Limited, the Investment
Manager. Mr. Maddock, a Director of the Fund, is also chairman and managing
director of the Investment Manager. In addition, Messrs. Freedman and Sherman
are the principal shareholders of the Investment Manager, of which Mr. Manor is
also a shareholder. Messrs. Freedman, Sherman and Manor also serve as,
respectively, joint managing director, joint managing director and chairman, and
executive director of the Investment Adviser. Messrs. Freedman and Sherman are
the principal shareholders of EquitiLink Limited, of which Messrs. Maddock and
Manor are also shareholders.

During the fiscal year ended October 31, 1995, Professional Consultancy
Services Limited, a limited company organized under the laws of Jersey, Channel
Islands, provided administrative services to the Investment Manager in
connection with its activities on behalf of the Fund and other U.S. and foreign
investment companies and entities in return for a fee in the amount of $930,000
paid by the Investment Manager. Mr. Maddock is a director and a principal
shareholder of Professional Consulting Services Limited.

41
<PAGE> 43

COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS

The following table sets forth certain information regarding compensation
of Directors by the Fund and by the Fund and by the fund complex of which the
Fund is a part (the "Fund Complex") for the fiscal year ended October 31, 1995.
(The Fund Complex consists of all investment companies having EquitiLink
Australia Limited as investment adviser.) Officers of the Fund and Directors who
are interested persons of the Fund do not receive any compensation from the Fund
or any other investment company in the Fund Complex that is a U.S. registered
investment company.

COMPENSATION TABLE
FISCAL YEAR ENDED OCTOBER 31, 1995

<TABLE>
<CAPTION>
PENSION TOTAL
OR COMPENSATION
RETIREMENT FROM
BENEFITS REGISTRANT
ACCRUED AND
AS ESTIMATED FUND
AGGREGATE PART ANNUAL COMPLEX
COMPENSATION OF BENEFITS PAID
FROM FUND UPON TO
NAME OF PERSON, POSITION REGISTRANT EXPENSES RETIREMENT DIRECTORS+
- ------------------------------------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Directors:
Anthony E. Aaronson........................ $ 13,750 N/A N/A $ 21,250(2)
John A. Calvert-Jones...................... 13,750 N/A N/A 21,250(2)
Sir Roden Cutler........................... 13,750 N/A N/A 29,250(3)
David Lindsay Elsum........................ 13,750 N/A N/A 29,250(3)
Rt. Hon. Malcolm Fraser.................... 13,750 N/A N/A 29,250(3)
Laurence S. Freedman....................... 0 N/A N/A 0(3)
Michael R. Horsburgh....................... 13,750 N/A N/A 29,250(3)
Harry A. Jacobs, Jr........................ 0 N/A N/A 0(2)
Howard A. Knight........................... 13,750 N/A N/A 21,250(2)
Roger C. Maddock........................... 0 N/A N/A 0(3)
William J. Potter.......................... 13,750 N/A N/A 29,250(3)
Peter D. Sacks............................. 13,750 N/A N/A 21,750(2)
John T. Sheehy............................. 13,750 N/A N/A 29,250(3)
Brian M. Sherman........................... 0 N/A N/A 0(3)
Preferred Directors:
David Manor................................ 0 N/A N/A 0(2)
Marvin Yontef.............................. 0 N/A N/A 0(1)
</TABLE>

- ---------------
+ The number in parentheses indicates the total number of boards of investment
companies in the Fund Complex on which the Director serves.

SHARE OWNERSHIP

As of January 31, 1996, the Directors and officers of the Fund as a group
owned an aggregate of less than 1/4 of 1% of the outstanding Common Stock. No
Director or officer of the Fund owns any outstanding Preferred Stock.

42
<PAGE> 44

MANAGEMENT AGREEMENT AND ADVISORY AGREEMENT

EquitiLink International Management Limited (the "Investment Manager")
serves as investment manager to the Fund and EquitiLink Australia Limited (the
"Investment Adviser") serves as investment adviser to the Fund pursuant to a
management agreement dated February 1, 1990 (the "Management Agreement") and an
advisory agreement dated December 15, 1992 (the "Advisory Agreement"). The
current Management Agreement was initially approved on December 12, 1989 by a
majority of the Fund's Board of Directors and by a majority of the Fund's
Directors who were not interested persons (as defined in the 1940 Act) of the
Fund, the Investment Manager or the Investment Adviser (the "Disinterested
Directors") and the current Advisory Agreement was similarly approved by the
Fund's Board of Directors on December 15, 1992. The current Management Agreement
and Advisory Agreement were respectively approved by the stockholders of the
Fund at annual meetings held on March 15, 1990 and March 15, 1993. Since those
dates, the continuance of each of the Management Agreement and the Advisory
Agreement has been approved annually in accordance with their respective terms
by the Fund's Board of Directors. Pursuant to the existing and previous
management agreements and advisory agreements with the Fund, the Investment
Manager and Investment Adviser have served in these capacities since the Fund
was organized in 1986.

The Investment Manager is a Jersey, Channel Islands corporation organized
in October 1985 with its registered office located at Union House, Union Street,
St. Helier, Jersey, Channel Islands. EquitiLink U.S.A., located at 45 Broadway,
New York, NY 10006, acts as the Investment Manager's agent for service of
process in the United States. The Investment Manager's shares are principally
owned by Laurence S. Freedman and Brian M. Sherman.

The Investment Adviser is a wholly owned subsidiary of EquitiLink Limited,
an Australian corporation. The registered offices of both the Investment Adviser
and EquitiLink Limited are located at Level 3, 190 George Street, Sydney,
N.S.W., Australia. EquitiLink U.S.A. is also the Investment Adviser's agent for
service of process in the United States. EquitiLink Limited is a public company
whose ordinary shares are listed on the Australian Stock Exchange Limited. The
directors of EquitiLink Limited (Messrs. B.M. Sherman, L.S. Freedman, D. Manor,
E.F. Herbert and N. Spatt) and their affiliates hold approximately 56% of the
issued capital of EquitiLink Limited. The shares of EquitiLink Limited are
principally owned by Laurence S. Freedman and Brian M. Sherman.

Each of the Investment Manager and the Investment Adviser has all, or a
substantial part of, its assets located outside the United States. As a result,
it may be difficult for U.S. investors to enforce judgments of the courts of the
United States against the Investment Manager and the Investment Adviser
predicated on the civil liability provisions of the federal securities laws of
the United States The Fund has been advised that it is unlikely that the courts
of Jersey would adjudge civil liability against the Investment Manager in an
original action predicated solely on the federal securities laws of the United
States. However, although there is no arrangement in place between Jersey and
the United States for the reciprocal enforcement of judgements, a judgement
rendered by a court in the United States against the Investment Manager
predicated upon such provisions would be enforceable by action or counterclaim
or be recognized by the Jersey courts as a defence to an action or as conclusive
of an issue in an action unless obtained by fraud or otherwise than in
accordance with the principles of natural justice or unless contrary to public
policy or unless the proceedings in the United States court were not duly served
on the defendant in the original action. The Investment Manager and the
Investment Adviser are advised by U.S. counsel with respect to the federal
securities laws of the United States.

TERMS OF THE MANAGEMENT AGREEMENT

The Management Agreement provides that the Investment Manager will manage,
in accordance with the Fund's stated investment objective, policies and
limitations and subject to the supervision of the Fund's Board of Directors, the
Fund's investments and make investment decisions on behalf of the Fund including
the selection of, and placing of orders with, brokers and dealers to execute
portfolio transactions on behalf of the Fund. The Management Agreement further
provides that the Investment Manager will not be liable for any error of
judgment or for any loss suffered by the Fund in connection with matters to
which the Management

43
<PAGE> 45

Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to receipt of compensation for services (in which case any award of
damages shall be limited as provided in the 1940 Act) or a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of, or from reckless disregard by the Investment Manager of, its
duties and obligations under the Management Agreement.

The Management Agreement provides that the Investment Manager may, at its
expense, employ, consult or associate with itself, such person or persons as it
believes necessary to assist it in carrying out its obligations thereunder,
provided however, that if any such person would be an "investment adviser" as
defined under the 1940 Act, that (a) the Fund is a party to any contract with
such a person and (b) the contract is approved by the Fund's Directors,
Disinterested Directors, and stockholders, as required by the 1940 Act.

Management Fee. The Management Agreement provides that, as compensation
for its services to the Fund, the Fund will pay the Investment Manager a fee
computed at the annual rate of 0.65% of the Fund's average weekly net assets
applicable to Common and Preferred Stock up to $200 million, 0.60% of such
assets between $200 million and $500 million, 0.55% of such assets between $500
million and $900 million, and 0.50% of such assets in excess of $900 million
computed upon net assets applicable to Common and Preferred Stock at the end of
each week and payable at the end of each calendar month. The Investment Manager
has agreed to reduce its fee to 0.45% of such assets in excess of $1,750 million
upon completion of the Offer. Because of the Fund's objective of investing in
Australian and New Zealand securities, its expense ratio, of which this fee is a
component, may be higher than that of closed-end investment companies of
comparable size investing in U.S. securities.

For the fiscal years ended October 31, 1995, 1994 and 1993, the Fund paid
or accrued on behalf of the Investment Manager aggregate management fees of
$9,165,046, $8,681,243 and $7,618,656, respectively. During the same periods,
the Investment Manager informed the Fund that it paid aggregate advisory fees of
$3,952,767, $3,668,127 and $3,403,309, respectively, to the Investment Adviser
and aggregate consultant fees of $701,026, $662,270 and $581,303 respectively,
to the Consultant.

Payment of Expenses. The Management Agreement obligates the Investment
Manager to bear all expenses of its employees and overhead incurred in
connection with its duties under the Management Agreement and to pay all
salaries and fees of the Fund's Directors and officers who are interested
persons (as defined in the 1940 Act) of the Investment Manager. Pursuant to the
Management Agreement, the Fund will bear all of its own expenses including:
expenses of organizing the Fund; fees of the Fund's Disinterested Directors;
out-of-pocket travel expenses for all Directors; interest expense; taxes and
governmental fees, brokerage commissions and other expenses incurred in
acquiring or disposing of the Fund's portfolio securities; expenses of preparing
stock certificates; expenses in connection with the issuance, offering,
distribution, sale or underwriting of securities issued by the Fund; expenses of
registering and qualifying the Fund's shares for sale with the Commission and in
various states and foreign jurisdictions; auditing, accounting, insurance and
legal costs; custodian, dividend disbursing and transfer agent expenses of
obtaining and maintaining stock exchange listings of the Fund's shares; and the
expenses of shareholders' meetings and of the preparation and distribution of
proxies and reports to shareholders.

Duration and Termination. The Management Agreement provides that it will
continue in effect for 12-month periods, provided that each continuance is
specifically approved annually by (1) the vote of the majority of the Fund's
Disinterested Directors cast in person at a meeting called for the purpose of
voting on such approval and (2) either (a) the vote of a majority of the
outstanding voting securities of the Fund, or (b) the vote of a majority of the
Fund's Board of Directors. The Management Agreement may be terminated at any
time by the Fund without the payment of any penalty, upon vote of a majority of
the Fund's Directors or a majority of the outstanding voting securities of the
Fund on 60 days' written notice to the Investment Manager. The Management
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act). In addition, the Investment Manager may terminate the
Management Agreement on 90 days' written notice to the Fund.

44
<PAGE> 46

TERMS OF THE ADVISORY AGREEMENT

The Advisory Agreement provides that the Investment Adviser will make
recommendations to the Investment Manager as to specific portfolio securities
which are denominated in Australian or New Zealand dollars, to be purchased,
retained or sold by the Fund and will provide or obtain such research and
statistical data as may be necessary in connection therewith. The Advisory
Agreement further provides that the Investment Adviser will give the Investment
Manager and the Fund the benefit of the Investment Adviser's best judgment and
efforts in rendering services under the Advisory Agreement.

The Advisory Agreement provides that neither the Investment Manager nor the
Investment Adviser will be liable for any error of judgment or for any loss
suffered by the Fund in connection with matters to which the Advisory Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
receipt of compensation for services (in which case any award of damages shall
be limited as provided in the 1940 Act) or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Manager
or the Investment Adviser, as appropriate, in the performance of, or from
reckless disregard by such party of such party's obligations and duties under,
the Advisory Agreement.

Advisory fee. Under the Management Agreement, the Investment Manager pays
the Investment Adviser an advisory fee at the annual rate of 0.25% of the Fund's
average weekly net assets applicable to Common and Preferred Stock up to $1,200
million and 0.20% of such assets in excess of $1,200 million at the end of each
week and payable at the end of each calendar month.

Payment of Expenses. The Advisory Agreement obligates the Investment
Adviser to bear all expenses of its employees and overhead incurred in
connection with its duties under the Advisory Agreement and to pay all salaries
and fees of the Fund's Directors and officers who are interested persons (as
defined in the 1940 Act) of the Investment Adviser but who are not interested
persons of the Investment Manager.

Duration and Termination. The Advisory Agreement provides that it will
continue in effect for 12-month periods, provided that each continuance is
specifically approved annually by (1) the vote of the majority of the Fund's
Disinterested Directors cast in person at a meeting called for the purpose of
voting on such approval and (2) either (a) the vote of a majority of the
outstanding voting securities of the Fund, or (b) the vote of a majority of the
Fund's Board of Directors. The Advisory Agreement may be terminated with respect
to the Fund at any time by the Fund without the payment of any penalty, upon
vote of a majority of the Fund's Directors or a majority of the outstanding
voting securities of the Fund on 60 days' written notice to the Investment
Manager and the Investment Adviser. The Advisory Agreement will terminate
automatically as to any party in the event of its assignment (as defined in the
1940 Act) by that party. In addition, the Investment Manager or the Investment
Adviser may terminate the Advisory Agreement as to such party on 90 days'
written notice to the Fund and the other party.

PORTFOLIO MANAGEMENT

The Fund's investment decisions are made in a collegial manner. Two
Investment Adviser Committees, the Asset Allocations Committee and the
Investment Strategy Committee, make broad decisions as to the allocation of
assets and investments, leaving decisions with respect to the selection of
particular securities to an employee of the Investment Adviser who then
recommends to the Investment Manager that certain securities be bought or sold.

ADMINISTRATION AGREEMENT

Pursuant to an Administration Agreement effective as of December 13, 1988
(the "Administration Agreement"), Prudential Mutual Fund Management, Inc. (the
"Administrator"), an indirect wholly owned subsidiary of the Fund's Consultant,
provides office facilities and personnel adequate to perform the following
services for the Fund: oversee the determination and publication of the Fund's
NAV in accordance with its policy as adopted from time to time by the Board of
Directors; oversee the maintenance of the books and records of the Fund required
under Rule 31a-1(b)(4) under the 1940 Act; prepare the Fund's U.S. federal,
state and local income tax returns; prepare financial information for the Fund's
proxy statements and quarterly

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and annual reports to stockholders; prepare the fund's periodic financial
reports to the Commission; and respond to or refer to the Fund's officers or
transfer agent stockholder inquiries relating to the Fund.

The Fund pays the Administrator a fee computed at the annual rate of 0.15%
of the Fund's average weekly net assets applicable to Common and Preferred Stock
up to $900 million, and 0.10% of such assets in excess of $900 million, based
upon NAV applicable to Common and Preferred Stock at the end of each week and
payable at the end of each calendar month. The Fund's Administrator has agreed
to reduce its fee to 0.07% of such assets in excess of $1,750 million upon
completion of the Offer. For the fiscal years ended October 31, 1995, 1994 and
1993, the Fund paid the Administrator a fee of $2,120,097, $2,023,337 and
$1,814,528, respectively. The Administrator's offices are located at One Seaport
Plaza, New York, New York 10292.

CONSULTANT AGREEMENT

Pursuant to a Consultant Agreement dated December 14, 1995, between the
Fund, The First Australia Fund, Inc., and The Prudential Insurance Company of
America, The Prudential Insurance Company of America acts as Consultant to the
Investment Manager and the Investment Adviser with respect to economic factors
and trends and currency movements affecting the Fund and The First Australia
Fund, Inc. The Investment Manager pays the Consultant a fee at the annual rate
of $250,000, payable in four equal quarterly installments.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Fund's transactions in portfolio securities are effected with dealers
acting on a principal basis for their own accounts. For the fiscal year ended
October 31, 1992, the Fund paid brokerage commissions for the execution of its
portfolio transactions on an agency basis in the amount of approximately $8,000
to SBC Australia Limited, equaling 100% of brokerage commissions paid by the
Fund for that year. The amount of such transactions aggregated approximately
$39,000,000. SBC Australia was affiliated with the Investment Adviser from June
1990 through June 1994. During the fiscal years ended October 31, 1994 and 1995,
the Fund paid no brokerage commissions.

NET ASSET VALUE OF COMMON STOCK

The NAV per share of Common Stock is determined no less frequently than the
close of business (generally 5:00 p.m. New York City time) on the last business
day of each week (generally Friday) by dividing the value of net assets of the
Fund (the value of its assets less its liabilities, its accumulated and unpaid
dividends (whether or not earned or declared) on outstanding shares of Preferred
Stock and the aggregate liquidation value of such outstanding shares of
Preferred Stock) by the total number of shares of Common Stock outstanding. In
valuing the Fund's assets, all securities for which market quotations are
readily available on an Australian, New Zealand or United States exchange are
valued, where practicable, at the last reported sales price prior to the time of
determination. If there were no sales price on that date or if the securities
are not quoted on any such exchange, the value will be based on the lower of the
quotations from two leading brokers in the relevant debt securities market.
Investments having a maturity of 60 days or less are valued at amortized cost.
Securities and assets for which market quotations are not readily available are
valued at fair value using methods determined in good faith by or under the
direction of the Board of Directors of the Fund, including valuations that
reference other securities which are considered comparable in quality, interest
rate and maturity.

The Australian and New Zealand values of the Fund's assets and liabilities
are translated into U.S. dollars at the closing selling rate of the U.S. dollar
against the Australian dollar and New Zealand dollar at the end of each calendar
week quoted by a money center bank or, if no such rate is quoted at such time,
at such other appropriate rate as may be determined by the Fund's Board of
Directors.

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<PAGE> 48

The Common Stock is listed on the AMEX and the Pacific Stock Exchange.
Shares of closed-end investment companies frequently trade at a discount from
NAV, but in certain instances have traded above NAV. The Fund's shares have
traded in the market below, at or above NAV since the commencement of the Fund's
operations. The Fund cannot predict whether its shares will trade above or below
NAV in the future.

DIVIDENDS AND DISTRIBUTIONS;
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

The Fund distributes to stockholders, at least annually, substantially all
of its net investment income and net realized capital gains. To the extent
practicable, the Fund attempts to maintain a constant level of monthly
distributions to stockholders, although there can be no assurance that it will
continue to be able to do so. See "Risk Factors and Special
Considerations -- Currency and Interest Rate Fluctuations." The Offer may have a
dilutive impact on investment income available for distribution. Shares
purchased pursuant to the Offer will be issued after the record date for the
monthly dividend declared in May, and accordingly, the Fund will not pay such
monthly dividend with respect to such Shares.

Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
stockholders may elect to have all distributions automatically reinvested by
State Street Bank and Trust Company, the Plan Agent, in Fund Shares on a monthly
basis. Stockholders who do not participate in the Plan will receive all
distributions in cash paid by check in U.S. dollars mailed directly to the
stockholder.

Any stockholder may enroll in the Plan by contacting the Plan Agent.

If shares are held of record by a stockholder, the stockholder can
participate directly in the Plan. If shares are held in the name of a brokerage
firm, bank, or other nominee, a stockholder must instruct its nominee to
participate on the stockholder's behalf. If the stockholder's brokerage firm,
bank or other nominee is unable to participate on its behalf, the stockholder
must request it to re-register such shares in the stockholder's own name which
will enable the stockholder's participation in the Plan.

The Plan Agent will administer the Plan on the basis of the number of
shares certified from time to time as representing the total amount registered
in a stockholder's name or held by a nominee. Nominees should provide to the
Plan Agent a listing of participating beneficial owners.

If the Fund declares an income dividend or capital gains distribution
payable in stock to stockholders who are not Plan participants, the participants
will receive that dividend or distribution in newly issued shares on identical
terms and conditions.

In every other case Plan participants will receive shares on the following
basis: If the market price of the Fund's Common Stock plus any brokerage
commission is equal to or exceeds NAV, stockholders will receive newly issued
shares valued at the greater of NAV or 95% of current market price. If, on the
other hand, the NAV plus any brokerage commission exceeds the market price, the
Plan Agent will buy shares in the open market. If the market price plus any
applicable brokerage commission exceeds NAV before the Plan Agent has completed
its purchases, the Fund will issue new shares to complete the program. All
reinvestments are in full and fractional shares carried to three decimal places.

Participants in the Plan have the option of making additional cash payments
to the Plan Agent, in any amount of at least US$100 monthly. The Plan Agent will
use all funds received from participants (as well as any dividends and capital
gains distributions received in cash) to purchase Fund shares in the open market
on or about the fifteenth of each month. Interest will not be paid on any
uninvested cash payments. To avoid unnecessary cash accumulations, and also to
allow ample time for receipt and processing by the Plan Agent, participants
should send in voluntary cash payments to be received by the Plan Agent not
earlier than ten or later than five business days before the fifteenth of the
month. Cash payments received within five business days of the investment date
will be held by the Plan Agent until the following month's investment date. A
participant may withdraw a voluntary cash payment by written notice, if the
notice is received by the Plan Agent not less than 48 hours before such payment
is to be invested.

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<PAGE> 49

The Plan Agent maintains all stockholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by stockholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant, and each stockholder's proxy will include those
shares purchased pursuant to the Plan.

In the case of stockholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
stockholders as representing the total amount registered in the stockholder's
name or held for the account of beneficial owners who are to participate in the
Plan.

There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of reinvestment of
dividends and distributions will be paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or capital gains distributions payable either in stock or in cash.
However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends or capital gains distributions. A participant
also will pay brokerage commissions incurred in purchases from voluntary cash
payments made by the participant.

With respect to purchases from voluntary cash payments, the Plan Agent will
charge US$0.75 for each such purchase from a participant, plus a pro rata share
of the brokerage commissions. Brokerage charges for purchasing small amounts of
stock for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions because the Plan Agent will be
purchasing stock for all participants in blocks and prorating the lower
commission thus attainable.

The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax that may be payable on such dividends or
distributions.

The Fund reserves the right to amend or terminate the Plan as applied to
any voluntary cash payments made and any dividend or distribution paid
subsequent to notice of the change sent to the members of the Plan at least 90
days before the record date for such dividend or distribution. The Plan also may
be amended or terminated by the Plan Agent by at least 90 days' written notice
to members of the Plan. All correspondence concerning the Plan should be
directed to the Plan Agent at State Street Bank and Trust Company, P.O. Box
8200, Boston, Massachusetts 02266-8200 Attention: Dividend Reinvestment
Department.

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<PAGE> 50

TAXATION

The following is intended to be a general summary of certain tax
consequences that may result to the Fund and its stockholders. It is not
intended as a complete discussion of all such tax consequences, nor does it
purport to deal with all categories of investors. Investors are therefore
advised to consult with their tax advisers before making an investment in the
Fund. The summary is based on the laws in effect on the date of this Prospectus,
which are subject to change.

UNITED STATES TAXES

TAX TREATMENT OF THE FUND -- GENERAL

The Fund intends to continue to qualify annually to be treated as a
regulated investment company under the Code.

To qualify as a regulated investment company, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies ("Qualifying Income Requirement"); (b) derive in each
taxable year less than 30% of its gross income from the sale or other
disposition of certain assets (namely (i) stock or securities, (ii) options,
futures and forward contracts (other than those on foreign currencies), and
(iii) foreign currencies (including options, futures and forward contracts on
such currencies) not directly related to the Fund's principal business of
investing in stocks or securities (or options and futures with respect to stocks
and securities)) held less than three months; (c) diversify its holdings so
that, at the end of each quarter of the taxable year (i) at least 50% of the
market value of the Fund's assets is represented by cash and cash items, U.S.
government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. government securities or
the securities of other regulated investment companies); and (d) distribute at
least 90% of its investment company taxable income (which includes, among other
items, dividends, interest, and net short-term capital gains in excess of net
long-term capital losses) each taxable year. The U.S. Treasury Department has
authority to promulgate regulations pursuant to which gains from foreign
currency (and options, futures and forward contracts on foreign currency) not
directly related to a regulated investment company's business of investing in
stocks and securities would not be treated as qualifying income for purposes of
the Qualifying Income Requirement. To date, such regulations have not been
promulgated.

As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (net long-term capital gains in excess of the sum of net shortterm
capital losses and capital loss carryovers from prior years), if any, that it
distributes to stockholders. However, the Fund would be subject to corporate
income tax (currently at a 35% rate) on any undistributed income. The Fund
intends to distribute to its stockholders, at least annually, substantially all
of its investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the tax, the Fund must distribute during each calendar year an amount equal
to the sum of (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the 12-month period ending on October 31 of the calendar year, and
(3) all such ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as having been
paid on December 31 if it is declared by the Fund in October, November or
December with a record date in such month and is paid by the Fund in January of
the following year. Accordingly, such distributions will be taxable to
stockholders in the calendar year in which the distributions are declared. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution

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requirement. The Fund may distribute net capital gains at least annually and
designate them as capital gain dividends where appropriate, or, alternatively,
the Fund may choose to retain net capital gains and pay corporate income tax
(and, possibly, an excise tax) thereon. In the event that the Fund retains net
capital gains, the Fund would most likely make an election which would require
each stockholder of record on the last day of the Fund's taxable year to include
in gross income for U.S. federal tax purposes his or her proportionate share of
the Fund's undistributed net capital gain. If such an election were made, each
stockholder would be entitled to credit his or her proportionate share of the
tax paid by the Fund against his or her federal income tax liabilities and to
claim a refund to the extent that the credit exceeds such liabilities.
Tax-qualified pension plans and individual retirement accounts ("IRAs") (through
their custodian or trustee), as well as nonresident aliens and foreign
corporations, can obtain a refund of their proportionate shares of the tax paid
by the Fund by filing a U.S. federal income tax return. In addition, the
stockholder would be entitled to increase the basis of the shares for U.S.
federal tax purposes by an amount equal to 65% of his or her proportionate share
of the undistributed net capital gain.

If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code, the Fund would be taxed in the same manner as an
ordinary corporation and distributions to its stockholders would not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, would constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to stockholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the stockholders' hands
as longterm capital gains. If the Fund fails to qualify as a regulated
investment company in any year, it must pay out its earnings and profits
accumulated in that year and may be required to recognize any net unrealized
gains on its entire portfolio in order to requalify as a regulated investment
company.

DISTRIBUTIONS

For federal income tax purposes, dividends paid by the Fund out of its
investment company taxable income will be taxable to a U.S. stockholder as
ordinary income. Because none of the Fund's income is expected to consist of
dividends paid by U.S. corporations, none of the dividends paid by the Fund is
expected to be eligible for the corporate dividends received deduction. To the
extent that the Fund designates distributions of net capital gains as capital
gain dividends, such distributions will be taxable to a stockholder as long-term
gain, regardless of how long the stockholder has held the Fund's shares, and are
not eligible for the dividends-received deduction. Distributions in excess of
the Fund's investment company taxable income and net capital gains will first
reduce a stockholder's basis in his shares and, after the stockholder's basis is
reduced to zero, will constitute capital gains to a stockholder who holds his
shares as capital assets.

Stockholders participating in the Plan receiving a distribution in the form
of newly issued shares will be treated for U.S. federal income tax purposes as
receiving a distribution in an amount equal to the fair market value, determined
as of the distribution date, of the shares received and will have a cost basis
in each share received equal to the fair market value of a share of the Fund on
the distribution date. Stockholders participating in the Plan receiving a
distribution in the form of shares purchased by the Plan Agent in the open
market will be treated for U.S. federal income tax purposes as receiving a
distribution of the cash that such stockholder would have received had it not
elected to have such distribution reinvested and will have a cost basis in such
shares equal to the amount of such distribution. Stockholders will be notified
annually as to the U.S. federal tax status of distributions, and stockholders
receiving distributions in the form of newly issued shares will receive a report
as to the fair market value of the shares received.

The Fund presently intends that it will designate as capital gain dividends
a proportionate part of the dividends paid to holders of Preferred and Common
Stock.

SALE OF SHARES

Upon the sale or other disposition of shares of the Fund, or upon receipt
of a distribution in complete liquidation of the Fund, a stockholder may realize
a taxable gain or loss depending upon his basis in his shares.

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<PAGE> 52

Such gain or loss generally will be treated as capital gain or loss if the
shares are capital assets in the stockholder's hands. Such gain or loss
generally will be long-term or short-term gain, depending upon the stockholder's
holding period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced within a period of
61 days beginning 30 days before and ending 30 days after the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by a stockholder on a
disposition of Fund shares held by the stockholder for six months or less will
be treated as long-term capital loss to the extent of any distributions of
capital gain dividends received by the stockholder with respect to such shares.

ISSUANCE OF PREFERRED STOCK

The Internal Revenue Service has in a revenue ruling taken the position
that a regulated investment company which has two or more classes of shares
cannot effectively designate distributions made to each class in any year as
consisting of more than that class's proportionate share of particular types of
income including capital gain and foreign source income. When both Common Stock
and Preferred Stock are outstanding, the Fund intends to designate distributions
made to each class as consisting of particular types of income in accordance
with the class's proportionate shares of such income. Thus, the Fund intends to
designate as capital gain dividends a proportionate part of the dividends paid
to holders of Preferred and Common Stock. Also, if the Fund is eligible to and
does elect to pass foreign taxes through to its stockholders, the Fund intends
to designate dividends paid to each class of stockholders as consisting of a
proportionate share of the foreign taxes paid by the Fund.

If the Fund does not meet its asset maintenance requirements (See "Capital
Stock -- Asset Coverage"), it may be required to suspend distributions to the
holders of its Common and/or Preferred Stock until such coverage is restored.
Such suspension of distributions might prevent the Fund from qualifying as a
regulated investment company for federal income tax purposes, or, if the Fund
retains such qualification, may cause the Fund to incur income and excise taxes
on its undistributed income. Further, the Fund may be required to redeem
Preferred Stock in order to restore asset coverage to an acceptable level. In
order to effect such redemptions, the Fund may be required to dispose of assets
for cash. Such dispositions may result in recognition of gain or loss to the
Fund for tax purposes. This gain or loss (or gain or loss from the remittance to
the United States of proceeds from the disposition of assets) may be treated, in
whole or in part for federal income tax purposes, as gain or loss due to
fluctuations in foreign currency values, which under current law is ordinary
rather than capital in character. Ordinary gain or loss will increase, decrease,
or possibly eliminate the Fund's investment company taxable income distributable
to holders of Common Stock. For example, if losses attributable to foreign
currency fluctuations exceed other investment company taxable income during a
taxable year, the Fund would not be able to make ordinary dividend
distributions, or distributions made would be treated as a return of capital to
stockholders for federal income tax purposes, rather than as an ordinary
dividend, reducing each stockholder's tax basis in his Fund shares. Conversely,
gain (including gain attributable to foreign currency fluctuations) arising from
the sale of Fund assets to redeem Preferred Stock would increase the amounts
required to be distributed to holders of Common Stock in order for the Fund to
retain its qualification as a regulated investment company and/or to avoid
imposition of income or excise taxes on the Fund. In addition, a sale of the
Fund's assets could adversely affect its status as a regulated investment
company, particularly in light of U.S. tax law limitations on the ability of a
company such as the Fund to dispose of assets held for less than three months
while retaining its status as a regulated investment company.

CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR LOSSES

Under the Code, the gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues receivables or
liabilities denominated in a currency which is not a functional currency for the
Fund and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a currency which is
not a functional currency of the Fund, gains or losses attributable to
fluctuations in the value of the currency between the date of acquisition of the
security and the date of disposition are also treated as ordinary gain or loss.
These gains or losses, referred to under the Code as

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"Section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its stockholders as
ordinary income.

The Fund uses the Australian dollar as its functional currency in
accounting for its investments in Australia and New Zealand. As a result, the
Fund is not required to take into account gains or losses attributable to
fluctuations in the value of this functional currency, which otherwise would be
treated as Section 988 gains or losses, described above. However, remittances
from Australia or New Zealand to the United States will result in recognition of
ordinary gains or losses attributable to fluctuations in the value of the
Australian dollar.

FOREIGN WITHHOLDING TAXES

Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. For example,
the Fund's interest income derived from Australian sources generally is subject
to a 10% Australian withholding tax. If more than 50% of the value of the Fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible and intends to elect to "pass-through"
to the Fund's stockholders the amount of foreign taxes paid by the Fund.
Pursuant to this election, a stockholder will be required to include in gross
income (in addition to taxable dividends actually received) his proportionate
share of the foreign taxes paid by the Fund, and will be entitled either to
deduct (as an itemized deduction) his pro rata share of foreign taxes in
computing his taxable income or to use it as a foreign tax credit against his
U.S. federal income tax liability, subject to limitations. No deduction for
foreign taxes may be claimed by an individual stockholder who does not itemize
deductions. The deduction for foreign taxes is not allowable in computing
alternative minimum taxable income of non-corporate stockholders. A foreign
stockholder may be subject to U.S. withholding tax on such foreign taxes
included in income, and may be unable to claim a deduction or credit for such
taxes. Each stockholder will be notified within 60 days after the close of the
Fund's taxable year whether the foreign taxes paid by the Fund will
"pass-through" for the year and of the amount of such taxes deemed paid by the
stockholder.

Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the stockholder's U.S. tax attributable to his foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of the Fund's income flows through to its stockholders. With respect to
the Fund, certain gain from the sale of securities will be treated as derived
from U.S. sources and currency fluctuation gains, including fluctuation gains
from certain foreign currency denominated debt securities, receivables and
payables, may be treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income (as defined for purposes of the foreign tax credit), including
the foreign source passive income passed through by the Fund. Stockholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign taxes paid by the Fund. The foreign tax credit can be used to offset
only 90% of the alternative minimum tax (as computed under the Code for purposes
of this limitation) imposed on corporations and individuals. If the Fund is not
eligible to make the election to "pass through" to its stockholders its foreign
taxes, the foreign taxes it pays will reduce its income and distributions by the
Fund will be treated as U.S. source income.

The foregoing is only a general description of the foreign tax credit and,
because application of the credit depends on the particular circumstances of
each stockholder, stockholders are advised to consult their own tax advisers.

Assuming that the Fund is eligible and does elect to pass foreign taxes
through to its stockholders, the Fund currently intends to designate Common and
Preferred stockholders' proportionate shares of foreign taxes in the same
proportion as the income subject to such taxes is distributed to each such
stockholder.

BACKUP WITHHOLDING

The Fund may be required to withhold U.S. federal income tax at the rate of
31% of all taxable distributions payable to stockholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or when the Internal Revenue Service has notified the Fund or a

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stockholder that the stockholder is subject to backup withholding. Corporate
stockholders and certain other stockholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the stockholder's U.S. federal
income tax liability.

FOREIGN SHAREHOLDERS

The tax consequences to a foreign stockholder of an investment in the Fund
may be different from and more adverse than the tax consequences to U.S.
investors described herein. Foreign shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.

FOREIGN TAXES

The following discussions are based upon the advice of Freehill,
Hollingdale & Page, Australian counsel for the Fund, and Chapman Tripp Sheffield
Young, New Zealand counsel for the Fund and are general and unexhaustive
summaries of Australian and New Zealand tax considerations which may be
applicable to the Fund under current law.

AUSTRALIA

Under current Australian law, the Fund will be regarded as a non-resident
of Australia. Pursuant to the United States Australia Double Tax Agreement (the
"Agreement") and assuming the Fund to be a resident of the United States for the
purposes of the Agreement, the Fund will not be regarded as having a permanent
establishment in Australia if it has no fixed place of business or place of
management in Australia and if there is no person (other than a broker or other
agent of independent status) in Australia who has authority to conclude
contracts on behalf of the Fund and habitually exercises that authority. The
Fund does not intend to have a fixed place of business or place of management in
Australia or to give any person (other than a broker or other agent of
independent status) in Australia the authority to conclude contracts on behalf
of the Fund, and accordingly none of the Fund's profits arising from the
disposal of its assets should be subject to Australian taxes. The Fund will be
subject to an interest withholding tax at the rate of 10% on all interest
payments (including discounts on money market securities) under corporate debt
instruments, money market securities and Australian Commonwealth Government and
State Government securities (unless a certificate of exemption from the interest
withholding tax is obtained by the issuer in respect of a particular issue).
Australian interest withholding tax does not apply to interest on Eurodollar
obligations issued by non-residents of Australia where the interest is not an
expense incurred by that person in carrying on business in Australia at or
through a permanent establishment in Australia of that non-resident. See
"Taxation" United States -- Foreign Withholding Taxes." Generally, the Fund will
not be subject to a stamp duty on its investments in government and
semi-government securities, promissory notes and bills of exchange.

NEW ZEALAND

Under current New Zealand law, the Fund will be regarded as a non-resident
of New Zealand and will be relieved of New Zealand taxes on business profits
under the Convention between the United States of America and New Zealand for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income (the "Convention"), if the Fund does not have a
permanent establishment in New Zealand, and assuming that the Fund will be a
resident of the United States as that phrase is defined in the Convention, and
that the Fund's principal class of shares will be the subject of regular and
substantial trading on a recognized stock exchange (as so defined).

Pursuant to the Convention, the Fund will not be regarded as having a
permanent establishment in New Zealand if it has no fixed place of business,
place of management, branch or office in New Zealand and if there is no person
(other than a broker, general commission agent, or other agent of independent
status acting, in each case, in the ordinary course of business) who acts on
behalf of the Fund and has and habitually exercises in New Zealand an authority
to conclude contracts in the name of the Fund. The Fund does not intend to have

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<PAGE> 55

a fixed place of business, place of management, branch, or office in New Zealand
or to give any person (other than a broker, general commission agent, or other
agent of independent status acting in each case, in the ordinary course of
business) the authority to conclude contracts in the name of the Fund in New
Zealand, and accordingly none of the business profits or gains from the
alienation of debt securities except for interest (as provided below) of the
Fund should be subject to New Zealand taxes. Interest (as defined for New
Zealand tax law purposes) paid to the Fund by an "approved issuer" on debt
obligations that the "approved issuer" has issued and in respect of which a
prescribed "approved issuer levy" has been paid, will be subject to New Zealand
interest non-resident withholding tax at the rate of zero percent. All other
interest (as so defined) paid to the Fund will be subject to a New Zealand
interest non-resident withholding tax at the rate of 10% on the gross amount of
all payments of interest (as so defined) deemed to be derived from New Zealand
under corporate debt instruments, money market securities and New Zealand
Government and local authority debt securities, except, in the latter two cases,
where interest is payable out of New Zealand, and, in the case of local
authority debt securities, the approval of the New Zealand Government has been
given for that interest payable on such debt securities to be exempted from New
Zealand income tax.

The issue to and transfer by the Fund of debt instruments will not be
subject to New Zealand stamp duty or Goods and Services Tax.

CAPITAL STOCK

GENERAL

Set forth below is information with respect to the Fund's outstanding
securities as of April 26, 1996:

<TABLE>
<CAPTION>
NUMBER OF
SHARES HELD NUMBER OF
NUMBER OF BY THE FUND SHARES
SHARES OR FOR ITS ISSUED AND
TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING
--------------------------------------- ------------------- ----------- -----------
<S> <C> <C> <C>
Common Stock........................... 200,000,000 shares -0- 155,647,805
Auction Market Preferred Stock......... 100,000,000 shares -0- 19,000
</TABLE>

COMMON STOCK

The Fund's Articles authorize the issuance of up to 200,000,000 shares of
Common Stock having a par value of $.01 per share. At April 26, 1996, there were
155,647,805 outstanding shares of Common Stock of the Fund, all of which are
fully paid and nonassessable. All shares of Common Stock are equal as to
dividends, assets and voting privileges and have no conversion, preemptive or
other subscription rights. In the event of liquidation, each share of Common
Stock is entitled to its proportion of the Fund's assets after the payment of
debts and expenses and after payment of the aggregate liquidation preferences to
holders of Preferred Stock, including the liquidation preference of $25,000 per
share, plus accumulated but unpaid dividends (whether or not earned or
declared), on the outstanding shares of Preferred Stock. Holders of shares of
Common Stock are entitled to one vote per share and do not have cumulative
voting rights.

PREFERRED STOCK

The Fund's Articles authorize the issuance of up to 100,000,000 shares of
Preferred Stock, having a par value of $.01 per share, in one or more series,
with rights as determined by the Board of Directors, by action by the Board of
Directors without the approval of the holders of Common Stock. As of April 26,
1996, an aggregate of 19,000 shares of Preferred Stock in seven series,
designated as Series A, Series B, Series C, Series D, Series E, Series F and
Series G, with an aggregate liquidation preference of $475,000,000, was
outstanding. Under the 1940 Act, the Fund is permitted to have outstanding more
than one series of Preferred Stock so long as no single series has a priority
over another series as to the distribution of assets of the Fund or the payment
of dividends. The Fund intends to issue additional shares of Preferred Stock at
a time the Board deems appropriate after completion of this Offer which,
together with the Preferred Stock currently

54
<PAGE> 56

outstanding, will represent up to approximately 25% of the Fund's capital
immediately after the issuance of such additional Preferred Stock. There can be
no assurance that the Preferred Stock will actually be issued.

Although the terms of any Preferred Stock offering will be determined by
the Fund's Board of Directors, it is anticipated that any additional Preferred
Stock issued (like each series of Preferred Stock currently outstanding) will
pay dividends that will be adjusted over relatively short periods of time
(generally seven to 28 days) and will have a dividend rate based upon prevailing
U.S. short-term interest rates. It is also anticipated that the proceeds of any
additional Preferred Stock offering will be invested in debt obligations in
accordance with the Fund's investment objectives.

NO PREEMPTIVE RIGHTS

No holder of shares of the Fund has any preemptive right to acquire from
the Fund any capital stock of the Fund whether now or hereafter authorized.

LIQUIDATION PREFERENCE

In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Fund, the holders of shares of any series of Preferred Stock
will be entitled to receive a preferential liquidating distribution (to equal
the liquidation value of $25,000 per share plus accrued and unpaid dividends,
whether or not declared) before any distribution of assets is made to holders of
Common Stock. After payment of the full amount of the liquidating distribution
to which they are entitled, the Preferred Stockholders will not be entitled to
any further participation in any distribution of assets by the Fund.

VOTING RIGHTS

Except as otherwise required by applicable law, or by terms of the Fund's
Articles or as may be established at the time of the issuance of any series of
Preferred Stock, holders of shares of Preferred Stock, voting as a separate
class, are entitled to elect two of the Fund's Directors, and the remaining
Directors will be elected by holders of Common Stock. If at any time dividends
on shares of the Fund's Preferred Stock are unpaid in an amount equal to two
full years' dividends, the holders of outstanding shares of Preferred Stock,
voting as a separate class, will be entitled to elect a majority of the Fund's
Directors until all dividends in default have been paid or declared and set
apart for payment.

The terms of the Preferred Stock will require a separate class vote of the
Preferred Stock with respect to matters which would affect adversely any
preferences, rights, or powers applicable to the Preferred Stock. Moreover, the
affirmative vote of the holders of a majority of the outstanding shares of
Preferred Stock, voting as a separate class, will be required to approve any
plan of reorganization adversely affecting such shares or any action requiring a
vote of security holders under Section 13(a) of the 1940 Act.

REDEMPTION, PURCHASE AND SALE OF PREFERRED STOCK BY THE FUND

The terms of the Preferred Stock provide that it is redeemable by the Fund
in whole or in part, at the liquidation value of $25,000 per share plus accrued
dividends per share, that the Fund may tender for or purchase shares of
Preferred Stock and that the Fund may subsequently resell any shares so tendered
for or purchased. Any redemption or purchase of shares of Preferred Stock by the
Fund will reduce the leverage applicable to shares of Common Stock, while any
resale of shares by the Fund will increase such leverage.

LEVERAGE

The Preferred Stock results in leveraging. Utilization of leverage, which
is usually considered speculative, however, involves certain risks to the
holders of Common Stock. These risks include a higher volatility of the NAV of
the Common Stock, potentially more volatility in the market value of the Common
Stock and the relatively greater effect on the NAV of the Common Stock caused by
favorable or adverse changes in currency exchange rates. In addition,
fluctuations in the dividend rates on the Preferred Stock will affect the return
to holders of Common Stock, with increases in such rates decreasing such return.
So long as the Fund is able to

55
<PAGE> 57

realize a higher net return on its investment portfolio than the then current
dividend rate of the Preferred Stock, the effect of leverage will be to cause
holders of Common Stock to realize a higher current rate of return than if the
Fund were not leveraged. On the other hand, interest rates on U.S.
dollar-denominated and foreign currency-denominated obligations change from time
to time as does their relationship to each other depending upon such factors as
supply and demand forces, monetary and tax policies within each country and
investor expectations. Changes in such factors could cause the relationship
between such rates to change so that rates on U.S. dollar-denominated
obligations may substantially increase relative to the foreign currency-
denominated obligations in which the Fund may be invested. To the extent that
the current dividend rate on the Preferred Stock approaches the net return on
the Fund's investment portfolio, the benefit of leverage to holders of Common
Stock will be reduced, and if the current dividend rate on the Preferred Stock
were to exceed the net return on the Fund's portfolio, the Fund's leverage
capital structure would result in a lower rate of return to holders of Common
Stock than if the Fund were not leveraged. Similarly, since any decline in the
NAV of the Fund's investments will be borne entirely by holders of Common Stock,
the effect of leverage in a declining market would result in a greater decrease
in NAV to holders of the Fund's Common Stock than if the Fund were not
leveraged, which would likely be reflected in a greater decline in the market
price for shares of Common Stock. In an extreme case, if the Fund's current
investment income were not sufficient to meet dividend requirements on Preferred
Stock, it could be necessary for the Fund to liquidate certain of its
investments, thereby reducing the NAV attributable to the Fund's Common Stock.
The Fund may also need to redeem all or a portion of the Preferred Stock to
support the issuance of Preferred Stock by either the 1940 Act or by rating
agencies rating the Preferred Stock. The leveraging of the Common Stock would be
eliminated during any period that Preferred Stock is not outstanding.

ASSET COVERAGE

Under the 1940 Act, the Fund is not permitted to issue shares of Preferred
Stock unless immediately after such issuance the asset coverage of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding Preferred
Stock ($25,000 plus any accrued and unpaid dividends). In addition, the Fund is
not permitted to declare any cash dividend or other distribution on its Common
Stock unless, at the time of such declaration, the NAV of the Fund's portfolio
(determined after deducting the amount of such dividend or other distribution)
is at least 200% of the liquidation value of the Preferred Stock.

Under the terms of any Preferred Stock that might be issued, the Fund may
be required to suspend distributions to holders of Common Stock in order to
maintain the asset coverage required by the 1940 Act upon issuance of such
Preferred Stock. Such suspension of distributions might prevent the Fund from
qualifying as a regulated investment company for federal income tax purposes,
or, if the Fund retains such qualification, may cause the Fund to incur income
and excise taxes on its undistributed income. Further, the Fund may be required
to redeem Preferred Stock in order to restore asset coverage to an acceptable
level. In order to effect such redemptions, the Fund may be required to dispose
of assets for cash. Such dispositions may result in recognition of gain or loss
to the Fund for tax purposes. This gain or loss may be treated, in whole or in
part for federal income tax purposes, as gain or loss due to fluctuations in
foreign currency values, which under current law is ordinary rather than capital
in character. Ordinary gain or loss will increase, decrease, or possibly
eliminate the Fund's investment company taxable income distributable to holders
of Common Stock. For example, if losses attributable to foreign currency
fluctuations exceed other investment company taxable income during a taxable
year, the Fund would not be able to make ordinary dividend distributions, or
distributions made would be treated as a return of capital to stockholders for
federal income tax purposes, rather than as an ordinary dividend, reducing each
stockholder's tax basis in his Fund shares. Conversely, gain (including gain
attributable to foreign currency fluctuations) arising from the sale of Fund
assets to redeem Preferred Stock would increase the amounts required to be
distributed to holders of Common Stock in order

56
<PAGE> 58

for the Fund to retain its qualification as a regulated investment company
and/or avoid imposition of income or excise taxes on the Fund. In addition, a
sale of the Fund's assets could adversely affect its status as a regulated
investment company, particularly in light of U.S. tax law limitations on the
ability of a company such as the Fund to dispose of assets held for less than
three months while retaining its status as a regulated investment company. See
"Taxation."

The Fund's outstanding Preferred Stock is currently rated "aa" and AA by
Moody's and S&P, respectively. In order to obtain these ratings, the Fund is
required to maintain portfolio holdings meeting specified guidelines of such
rating agencies. These guidelines impose asset coverage requirements that are
more stringent than those imposed by the 1940 Act.

RATING AGENCY GUIDELINES

The Fund intends that, so long as shares of Preferred Stock are
outstanding, the composition of its portfolio will reflect guidelines
established by the Rating Agencies in connection with the Fund's receipt of a
rating for such shares of at least "Aa" from Moody's and at least AA from S&P.
Moody's and S&P issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred stock will be sufficiently
varied and will be of sufficient quality and amount to justify investment grade
ratings. The guidelines do not have the force of law but have been adopted by
the Fund in order to receive the above-described ratings for shares of Preferred
Stock, which ratings are generally relied upon by institutional investors in
purchasing such securities. The guidelines provide a set of tests for portfolio
composition and asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements under the 1940 Act.

The Fund intends to maintain a portfolio value at least equal to the
discounted value of the assets in its portfolio which satisfies minimum values
set by each of the Rating Agencies. Upon any failure to maintain such criteria,
the Fund will seek to alter the composition of its portfolio to satisfy the
Rating Agency. To the extent it is not able to do so in a timely basis, the Fund
may redeem shares of Preferred Stock in accordance with their terms.

CERTAIN PROVISIONS OF THE ARTICLES OF AMENDMENT
AND RESTATEMENT AND BY-LAWS

Article Ninth of the Fund's Articles stipulates that a "fair price" be paid
for the Fund's shares in the event of a proposed merger or other business
combination which is not approved by either 75% of the Continuing Directors of
the Board of Directors (as defined therein) or the holders of 75% of the
outstanding shares of the Fund voting both as a single class and separately as
to each class (the "Fair Price Provision"). The stipulated "fair price" is the
higher of:

(i) the highest per share price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid by an Interested Party
(as hereinafter defined) for any shares acquired by it (a) within the
two-year period immediately prior to the first public announcement of the
proposal of a business combination (the "Announcement Date"), or (b) in the
transaction in which an Interested Party first becomes the beneficial owner
of voting shares of the Fund (a "Threshold Transaction"), whichever is
higher; and

57
<PAGE> 59

(ii) in the case of Common Stock, the NAV per share of such Common
Stock on the Announcement Date or on the date of the Threshold Transaction,
whichever is higher, and in the case of any Preferred Stock, the highest
preferential amount per share to which the holders of shares of such class
of Preferred Stock would be entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Fund, regardless of whether the business combination to be consummated
constitutes such an event.

Article Ninth requires the same super-majority vote to amend the Articles
to "open end" the Fund by making the Fund's Common Stock redeemable or to adopt
any stockholder proposal as to specific investment decisions with respect to the
Fund's assets. Stockholders of an open-end investment company may require the
company to redeem their shares in kind or in cash at any time (except in certain
circumstances authorized by the 1940 Act) at their NAV less any redemption
charge. If shares are redeemed in kind, stockholders may incur brokerage
commissions. Conversion to open-end status would require the redemption of all
outstanding shares of Preferred Stock.

An "Interested Party" includes any person, other than an investment company
advised by the Investment Manager or any of its affiliates, which proposes to
enter into a business combination with the Fund.

CUSTODIAN, DIVIDEND PAYING AGENTS, TRANSFER AGENTS,
REGISTRARS AND AUCTION AGENT

State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, acts as the Fund's custodian for assets of the Fund held in
the United States and the Fund's dividend paying agent, transfer agent and
registrar for the Fund's Common Stock. Chemical Bank acts as Auction Agent for
the Preferred Stock and also acts as transfer agent, registrar, dividend
disbursing agent and redemption agent for the Preferred Stock.

Rules adopted under the 1940 Act permit the Fund to maintain its foreign
securities and cash in the custody of certain eligible foreign banks and
securities depositories. Pursuant to such rules, the Fund's portfolio of
securities and cash, when invested in foreign securities, are held by its
subcustodians, Australia and New Zealand Banking Group Limited, Westpac Banking
Corporation, and State Street London Limited. Selection of the subcustodians has
been made by the directors of the Fund following a consideration of a number of
factors, including, but not limited to, the reliability and financial stability
of the institution; the ability of the institution to perform capably custodial
services for the Fund; the reputation of the institution in its national market;
the political and economic stability of the countries involved; and the risks of
potential nationalization and expropriation of Fund assets.

EXPERTS

The financial statements, insofar as they relate to the periods through
October 31, 1995, included in this Prospectus have been so included in reliance
on the report of Price Waterhouse LLP, the Fund's independent accountants, given
on the authority of said firm as experts in accounting and auditing. The
principal place of business of Price Waterhouse LLP is located at 1177 Avenue of
the Americas, New York, New York, 10036. The audit services it provides include
examination of the financial statements of the Fund, services relating to
filings by the Fund with the Commission and consultation on matters related to
the preparation and filing of tax returns.

DISTRIBUTION ARRANGEMENTS

Prudential Securities Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, PaineWebber Incorporated and Smith Barney Inc. (the "Dealer
Managers") will act as dealer managers for the Offer. Under the terms and
subject to the conditions contained in a Dealer Manager Agreement dated the date
hereof, the Dealer Managers will provide financial advisory, marketing and
soliciting services. The Fund has agreed to pay the Dealer Managers a fee for
their financial advisory, marketing and soliciting services equal to

58
<PAGE> 60

3.625% of the aggregate Subscription Price for the Shares issued pursuant to the
Offer (the "Dealer Manager Fee"). The Dealer Managers will reallow to the
broker-dealer designated on the related Exercise Form a concession of 2.50% of
the Subscription Price per Share for each Share issued pursuant to the Offer,
provided that the designated broker-dealer has executed a confirmation accepting
the terms of the Soliciting Dealer Agreement relating to the Offer. The Dealer
Manager Fee will be borne by the Fund and indirectly by all of the Fund's
stockholders, including those who do not exercise their Rights.

In addition, the Fund has agreed to reimburse Prudential Securities
Incorporated for its out-of-pocket expenses up to $225,000 incurred in
connection with the Offer, and the Fund and the Investment Manager will
indemnify the Dealer Managers against certain liabilities, including liabilities
under the Securities Act and the 1940 Act.

Prudential Mutual Fund Management, Inc., an affiliate of Prudential
Securities Incorporated, acts as the Fund's Administrator and receives
compensation from the Fund in connection with such services. See "Administration
Agreement." The Prudential Insurance Company of America acts as the Fund's
Consultant and receives compensation from the Fund in connection with such
services. See "Consultant Agreement." Prudential Securities Incorporated and
Prudential Mutual Fund Management, Inc. are each indirect wholly-owned
subsidiaries of The Prudential Insurance Company of America.

LEGAL MATTERS

The validity of the Shares offered hereby will be passed on for the Fund by
Dechert Price & Rhoads, New York, New York, who will rely as to matters of
Maryland law on the opinion of Venable, Baetjer and Howard, LLP, Baltimore,
Maryland. Matters of Australian law will be passed on for the Fund by Freehill,
Hollingdale & Page, Sydney, Australia. Matters of New Zealand law will be passed
on for the Fund by Chapman Tripp Sheffield Young, Wellington, New Zealand. Roy
M. Randall, a partner of Freehill, Hollingdale & Page, serves as Secretary of
the Fund. Margaret A. Bancroft and Allan S. Mostoff, members of Dechert Price &
Rhoads, each serves as an Assistant Secretary of the Fund. Certain legal matters
will be passed on for the Dealer Managers by Brown & Wood, New York, New York.

ADDITIONAL INFORMATION

The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required to
file reports, proxy statements and other information with the Commission. Any
such reports, proxy statements and other information can be inspected and copies
at the public reference facilities of the Commission, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's New York Regional
Office, Seven World Trade Center, New York, New York 10048 and Midwest Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60611. Copies of such materials can be obtained from the public reference
section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Reports, proxy statements and other information concerning the
Fund can also be inspected at the offices of the AMEX, 86 Trinity Place, New
York, New York 10005.

Additional information regarding the Fund and the shares of Common Stock is
contained in the Registration Statement on Form N-2, including amendments,
exhibits and schedules thereto, relating to such shares filed by the Fund with
the Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For information with respect to the Fund and the
shares offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
other documents referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other documents filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The tabular and other statistical information
set forth in this Prospectus is, unless otherwise indicated, based upon or
derived from public official documents or information of the Australian or New
Zealand governments, its ministries, the Reserve Bank of Australia, the Reserve

59
<PAGE> 61

Bank of New Zealand, SBC Australia Limited, the Australian Bureau of Statistics,
the New Zealand Institute of Economic Research, the Organization for Economic
Cooperation and Development and the publications Datastream and Main Economic
Indicators. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.

60
<PAGE> 62

- -----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Portfolio of Investments
October 31, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ----------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--121.0%
AUSTRALIA--118.5%
Government and Semi-government--80.5%
Commonwealth of Australia--36.9%
Australian Capital
Territory,
A$ 10,000 12.00%, 11/15/01............ $ 8,662,289
Commonwealth of Australia,
4,000 13.50%, 5/15/97............. 3,293,341
35,000 12.50%, 1/15/98............. 29,104,579
5,000 13.00%, 4/15/98............. 4,229,046
25,000 6.25%, 3/15/99.............. 18,065,139
15,000 14.00%, 4/15/99............. 13,419,215
35,000 12.00%, 7/15/99............. 29,959,868
50,000 7.00%, 4/15/00.............. 36,417,860
114,900 13.00%, 7/15/00............. 103,568,310
5,000 13.00%, 12/15/00............ 4,534,696
40,000 12.00%, 11/15/01............ 35,438,866
26,000 9.50%, 8/15/03.............. 20,790,347
125,000 7.50%, 7/15/05.............. 87,822,673
20,000 6.75%, 11/15/06............. 13,061,724
30,000 10.00%, 10/15/07............ 24,839,738
25,000 8.75%, 8/15/08.............. 18,750,428
Commonwealth Bank of
Australia,
75,000 12.00%, 7/15/99............. 63,994,302
Telecom,
14,000 12.00%, 9/1/98.............. 11,703,289
Treasury Adjustable Bond,
10,000 8.00%, 10/18/00 F.R.N....... 7,613,910
--------------
535,269,620
--------------
New South Wales--11.0%
New South Wales Treasury
Corporation,
55,400 12.50%, 4/1/97.............. 44,776,549
10,000 7.50%, 2/1/98............... 7,550,209
8,000 11.50%, 7/1/99.............. 6,736,893
27,000 12.00%, 12/1/01............. 23,858,377
10,000 7.00%, 4/1/04............... 6,826,105
30,000 6.50%, 5/1/06............... 18,877,443
54,000 12.60%, 5/1/06.............. 50,406,540
--------------
159,032,116
--------------
- ----------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ----------------------------------------------------------
Northern Territory--2.4%
Northern Territory
Authority,
A$ 40,000 12.50%, 7/15/01............. $ 35,161,023
--------------
Queensland--7.2%
Queensland Treasury
Corporation,
35,000 8.00%, 5/14/97.............. 26,694,487
10,000 8.00%, 7/14/99.............. 7,576,251
10,000 8.00%, 8/14/01.............. 7,433,754
20,000 8.00%, 5/14/03.............. 14,587,077
20,000 6.50%, 6/14/05.............. 12,768,771
40,000 12.00%, 6/15/05............. 35,826,872
--------------
104,887,212
--------------
South Australia--6.2%
Electricity Trust of South
Australia,
5,000 13.00%, 10/1/05............. 4,701,159
South Australian Financing
Authority,
30,000 12.50%, 3/15/98............. 25,054,283
70,000 10.00%, 1/15/03............. 56,646,632
3,000 17.20%, 6/30/08............. 3,562,199
--------------
89,964,273
--------------
Tasmania--6.0%
Tasmanian Public Finance
Corporation,
13,000 12.50%, 1/15/01............. 11,520,599
94,000 9.00%, 11/15/04............. 71,299,931
5,000 11.00%, 4/15/06............. 4,219,117
--------------
87,039,647
--------------
Victoria--5.0%
Treasury Corporation of
Victoria,
30,000 12.50%, 7/15/00............. 26,468,910
36,000 12.50%, 10/15/03............ 33,080,089
15,500 10.25%, 11/15/06............ 12,757,804
--------------
72,306,803
--------------
</TABLE>

See Notes to Financial Statements.

F-1

<PAGE> 63
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ----------------------------------------------------------
<C> <S> <C>
Western Australia--5.8%
Western Australia Treasury
Corporation,
A$ 10,000 12.50%, 4/1/98.............. $ 8,366,872
18,000 9.00%, 4/15/99.............. 14,066,159
34,000 12.00%, 8/1/01.............. 29,896,182
40,000 10.00%, 7/15/05............. 32,484,232
--------------
84,813,445
--------------
Total Australian government
and semi-government bonds
(cost US$1,125,144,156)..... 1,168,474,139
--------------
Eurobonds--22.8%
Diversified Industrials--1.1%
Australian National Railway,
4,000 9.50%, 2/25/99.............. 3,137,621
BMW Australia Finance,
1,700 10.25%, 3/17/97............. 1,322,999
Eksport Finance & Insurance,
8,000 11.00%, 12/29/04............ 6,776,942
Eksport Finans,
4,000 7.00%, 6/28/00.............. 2,825,651
Finnish Eksport Credit,
2,925 9.25%, 12/30/99............. 2,269,239
--------------
16,332,452
--------------
Natural Resources--0.4%
Mobil Australia Corp.,
1,000 12.00%, 4/18/97............. 798,677
Shell Australia,
5,000 10.125%, 4/1/97............. 3,890,947
1,786 10.00%, 12/19/97............ 1,401,641
--------------
6,091,265
--------------
Semi-Government--6.7%
Queensland Treasury
Corporation,
30,000 8.00%, 7/14/99.............. 22,653,890
45,000 8.00%, 8/14/01.............. 33,352,607
3,000 12.00%, 8/15/01............. 2,633,265
25,000 8.00%, 5/14/03.............. 18,147,876
15,000 10.50%, 5/15/03............. 12,336,904
South Australia Financing
Authority,
1,500 12.00%, 6/12/01............. 1,297,894
State Electricity Commission
of
Victoria,
1,000 12.25%, 5/30/01............. 872,490
3,000 11.00%, 4/9/02.............. 2,503,717
Tasmanian Public Finance
Authority,
2,000 10.75%, 11/20/01............ 1,646,533
- ----------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ----------------------------------------------------------
Treasury Corporation of
Victoria,
A$ 2,000 11.00%, 3/12/02............. $ 1,667,942
--------------
97,113,118
--------------
Services--5.6%
Banque National de Paris,
14,000 9.00%, 8/13/02.............. 10,665,120
Commerzbank Overseas
Finance,
10,000 10.25%, 4/28/00............. 8,054,564
Commonwealth Bank of
Australia,
2,000 8.75%, 9/14/00.............. 1,538,592
Credit Lyonnais Australia,
5,000 8.625%, 12/29/97............ 3,801,801
GG Securities,
5,000 9.25%, 3/24/03.............. 3,830,084
McDonald's Australia,
1,000 10.50%, 11/5/98............. 800,534
Province Aples Cotes D'Azur,
12,000 8.25%, 9/15/99.............. 9,013,014
Province of Quebec,
16,000 9.50%, 10/2/02.............. 12,204,776
Rural & Industries Bank of
Western Australia,
5,000 8.75%, 9/9/99............... 3,843,436
2,000 7.75%, 6/9/03............... 1,418,026
State Bank of New South
Wales,
1,000 14.25%, 9/28/99............. 893,458
5,500 12.25%, 2/26/01............. 4,795,182
5,000 10.75%, 3/12/02............. 4,142,353
10,000 9.25%, 2/18/03.............. 7,744,311
State Bank of South
Australia,
10,000 9.50%, 10/15/02............. 7,812,631
--------------
80,557,882
--------------
Supranational Global--9.0%
Credit Locale de France,
10,000 7.50%, 9/15/97.............. 7,550,285
10,000 10.25%, 4/12/05............. 8,133,763
Eurofima,
56,170 9.875%, 1/17/07............. 45,137,790
European Bank of
Reconstruction &
Development,
50,000 9.00%, 10/15/02............. 38,462,884
European Investment Bank,
38,000 10.25%, 10/1/01............. 31,145,077
--------------
130,429,799
--------------
Total Australian eurobonds
(cost US$317,707,891)....... 330,524,516
--------------
</TABLE>

See Notes to Financial Statements.

F-2

<PAGE> 64
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ----------------------------------------------------------
<C> <S> <C>
Corporate Bonds--15.2%
Asset-Backed--2.0%
FANMAC Limited,
Mortgage Series 25,
A$ 699 10.33%, 6/15/02............. $ 559,951
Premier Trust 22,
3,160 11.40%, 12/15/01............ 2,594,214
Mortgage Power Company,
15,000 8.4692%, 6/12/06 F.R.N...... 11,411,051
Securitized Australia
Mortgage Trust,
15,000 7.8324%, 11/15/25 F.R.N..... 11,378,756
Super Members Home Loan
Program,
5,000 7.8308%, 12/15/21 F.R.N..... 3,803,227
--------------
29,747,199
--------------
Services--13.2%
Australia Post,
20,000 7.62%, 3/25/99 F.R.N........ 15,214,735
Australian & Overseas
Telecommunication
Corporation,
55,350 12.50%, 11/15/00............ 48,915,148
40,000 11.50%, 10/15/02............ 34,192,375
2,000 7.80%, 7/17/03.............. 1,394,390
41,000 12.00%, 5/15/06............. 37,008,894
2,000 8.75%, 1/15/20.............. 1,389,856
10,000 10.50%, 1/15/20............. 7,986,017
2,000 12.50%, 1/15/20............. 1,941,951
Federal Airports
Corporation,
5,000 10.50%, 7/15/99............. 4,030,516
10,000 8.25%, 6/2/03............... 7,204,525
17,000 7.00%, 2/16/04.............. 11,151,755
Ford Credit Australia
Limited,
3,000 8.00%, 4/27/98 F.R.N........ 2,282,324
Gio Australia Holdings
Limited
14,500 7.99%, 11/16/98 F.R.N....... 11,031,345
Macquarie Bank Limited,
1,000 9.75%, 8/1/00............... 776,615
Primary Industry Bank of
Australia,
5,000 8.00%, 5/15/98.............. 3,782,191
5,000 6.75%, 2/25/99.............. 3,621,340
--------------
191,923,977
--------------
Total Australian corporate
bonds
(cost US$207,869,936)..... 221,671,176
--------------
Total Australian long-term
investments
(cost US$1,650,721,983)... 1,720,669,831
--------------
NEW ZEALAND--2.5%
Government Bonds--2.0%
New Zealand Government
Bonds,
NZ$ 5,000 10.00%, 7/15/97............. 3,432,929
20,000 10.00%, 3/15/02............. 15,058,234
- ----------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ----------------------------------------------------------
Government Bonds (cont'd.)
New Zealand Government
Bonds,
NZ$ 15,000 8.00%, 11/15/06............. $ 10,479,918
--------------
Total New Zealand government
bonds
(cost US$28,065,179)...... 28,971,081
--------------
Eurobonds--0.5%
Telecom New Zealand Finance,
1,500 9.25%, 7/1/02............... 1,078,283
Transport Power Finance
Limited,
10,000 8.00%, 3/15/02.............. 6,765,284
--------------
Total New Zealand eurobonds
(cost US$7,756,955)......... 7,843,567
--------------
Total New Zealand long-term
investments
(cost US$35,822,134)...... 36,814,648
--------------
Total long-term investments
(cost US$1,686,544,117)..... 1,757,484,479
--------------
SHORT-TERM INVESTMENTS--6.7%
Australia--4.5%
Government and Semi-government--2.8%
Commonwealth of Australia--0.6%
Telecom,
A$ 10,000 13.00%, 2/1/96.............. 7,704,978
1,000 12.50%, 10/1/96............. 792,340
--------------
8,497,318
--------------
New South Wales--2.2%
New South Wales Treasury
Corporation,
10,500 8.50%, 3/1/96............... 8,004,352
State Bank of New South
Wales,
30,000 13.00%, 3/15/96............. 23,263,061
--------------
31,267,413
--------------
Total Australian government
and semi-government bonds
(cost US$39,247,333)...... 39,764,731
--------------
Eurobonds--0.9%
Services--0.1%
International Bank for
Reconstruction &
Development,
1,000 14.50%, 6/7/96.............. 788,238
Tasmanian Public Finance
Authority,
1,000 14.00%, 12/22/95............ 765,814
--------------
1,554,052
--------------
Supranational Global--0.8%
Swedish National Housing,
15,000 7.50%, 8/22/96.............. 11,384,461
--------------
</TABLE>

See Notes to Financial Statements.

F-3

<PAGE> 65
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Principal
Amount
Local
Currency Value
(000) Description (US$)
- ----------------------------------------------------------
<C> <S> <C>
Total Australian eurobonds
(cost US$12,390,832)...... $ 12,938,513
--------------
Corporate Bonds--0.8%
Services
Macquarie Bank Limited,
A$ 10,000 14.20%, 1/3/96.............. 7,689,001
Securities Asset Funding
Entity,
5,000 12.10%, 7/10/96............. 3,912,820
ANZ Banking Group,
1,000 8.50%, 3/15/96.............. 763,117
--------------
Total Australian corporate
bonds
(cost US$13,269,956)...... 12,364,938
--------------
Total Australian short-term
investments
(cost US$64,908,121).... 65,068,182
--------------
NEW ZEALAND--0.8%
Corporate Bonds
National Bank of New
Zealand,
NZ$ 17,200 7.9179%, 1/30/96
(cost US$11,118,862)...... 11,118,862
--------------
United States--1.4%
US$ 20,763 Repurchase Agreement, State
Street Bank and Trust
Company, 5.78% 10/31/95,
due 11/1/95 in the amount
of $20,766,334 (cost
$20,763,000;
collateralized by
$20,640,000 United States
Treasury Note, 6.00%, due
12/31/97; value including
accrued interest
US$21,202,272)............ 20,763,000
--------------
Total short-term investments
(cost US$96,789,983)...... 96,950,044
--------------
Total Investments--127.7%
(cost US$1,783,334,100;
Note 3)................... 1,854,434,523
Other assets in excess of
other
liabilities--5.0%......... 72,770,587
Liquidation value of
preferred
stock--(32.7%)............ (475,000,000)
--------------
Net Assets Applicable to
Common
Shareholders--100%........ $1,452,205,110
--------------
--------------
</TABLE>

- ----------------
F.R.N.-Floating Rate Note. The interest rate reflected is the rate in effect at
October 31, 1995.

See Notes to Financial Statements.

- -----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Statement of Assets and Liabilities
October 31, 1995
- -----------------------------------------------------------
<TABLE>
<S> <C>
Assets
Investments, at value (cost
$1,783,334,100)..................... $1,854,434,523
Foreign currency, at value (cost
$50,373,077)........................ 50,683,528
Cash.................................. 89,340
Interest receivable................... 51,178,626
Other assets.......................... 74,590
--------------
Total assets...................... 1,956,460,607
--------------
Liabilities
Dividends payable-common stock........ 11,630,933
Payable for investments purchased..... 11,118,862
Withholding taxes payable............. 3,347,939
Accrued expenses and other
liabilities......................... 1,449,510
Dividends payable-preferred stock..... 719,474
Investment management fee payable..... 825,393
Administration fee payable............ 163,386
--------------
Total liabilities................. 29,255,497
--------------
Total Net Assets...................... $1,927,205,110
--------------
--------------
Total net assets were composed of:
Common stock:
Par value ($.01 per share,
applicable to
155,079,102 shares)............. $ 1,550,791
Paid-in capital in excess of
par............................. 1,370,164,651
Preferred stock ($.01 par value per
share and $100,000 liquidation
value per share applicable to
4,000 shares and $25,000 liquidation
value per share applicable to 3,000
shares; Note 4)................... 475,000,000
--------------
1,846,715,442
Undistributed net investment
income.............................. 12,065,169
Accumulated net realized gains on
investments....................... 5,217,167
Net unrealized depreciation on
investments......................... (21,830,550)
Accumulated net realized and
unrealized foreign exchange
gains............................. 85,037,882
--------------
Total net assets.................... $1,927,205,110
--------------
--------------
Net assets applicable to common
shareholders...................... $1,452,205,110
--------------
--------------
Net asset value per common share:
($1,452,205,110 / 155,079,102 shares
of common stock issued and
outstanding)........................ $9.36
--------------
--------------
</TABLE>

See Notes to Financial Statements.

F-4

<PAGE> 66
- -----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Statement of Operations
Year Ended October 31, 1995
- -----------------------------------------------------------
<TABLE>
<S> <C>
Net Investment Income
Income
Interest and discount earned (net of
foreign
withholding taxes of
$11,591,620)....................... $147,796,119
------------
Expenses
Investment management fee............ 9,165,046
Custodian's fees and expenses........ 2,251,000
Administration fee................... 2,120,097
Auction agent's fees and expenses.... 1,230,000
Shareholder communications........... 810,000
Transfer agent's fees and expenses... 608,000
Directors' fees and expenses......... 460,000
Legal fees and expenses.............. 360,000
Independent accountant's fees and
expenses............................. 212,000
Insurance expense.................... 112,000
Miscellaneous........................ 55,483
------------
Total operating expenses............. 17,383,626
------------
Net investment income before excise
tax.................................. 130,412,493
Excise tax........................... (252,248)
------------
Net investment income.................. 130,160,245
------------
Realized and Unrealized
Gain on Investments
and Foreign Currencies
Net realized gain on investment
transactions......................... 18,189,710
Net change in unrealized depreciation
on investments....................... 89,317,008
------------
Net gain on investments................ 107,506,718
------------
Net increase in total net assets from
operations before net foreign
exchange gains....................... 237,666,963
Net realized and unrealized foreign
exchange gains....................... 54,519,666
------------
Net Increase In Total Net Assets
Resulting From Operations.............. $292,186,629
------------
------------
</TABLE>

See Notes to Financial Statements.

- -----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Statement of Cash Flows
Year Ended October 31, 1995
- -----------------------------------------------------------
<TABLE>
<S> <C>
Increase (Decrease) in Cash
(Including Foreign Currency)
Cash flows used for operating
activities
Interest received (net of foreign
withholding taxes)................. $ 140,412,986
Expenses paid........................ (16,867,851)
Sales of short-term portfolio
investments, net..................... 5,931,000
Purchases of long-term portfolio
investments.......................... (992,102,160)
Proceeds from sales of long-term
portfolio investments.............. 759,387,006
Other................................ 28,665
-------------
Net cash used for operating
activities....................... (103,210,354)
-------------
Cash flows provided from financing
activities
Net proceeds from issuance of
preferred shares................... 73,620,000
Net proceeds from rights offering.... 224,618,810
Dividends and distributions paid to
preferred shareholders............. (24,547,016)
Dividends and distributions paid to
common shareholders (net of
$7,688,453 paid in the issuance
of shares)......................... (124,854,077)
-------------
Net cash provided from financing
activities....................... 148,837,717
-------------
Effect of changes in exchange rate..... 852,330
-------------
Net increase in cash................... 46,479,693
Cash at beginning of year............ 4,645,594
-------------
Cash at end of year.................. $ 51,125,287
-------------
-------------
Reconciliation of Net Increase in Total
Net Assets from Operations to Net Cash
(Including Foreign Currency) Used For
Operating Activities
Net increase in total net assets
resulting from operations............ $ 292,186,629
-------------
Increase in investments.............. (237,903,017)
Increase in interest receivable...... (7,704,488)
Net decrease in other assets......... 28,665
Increase in accrued expenses and
other liabilities.................. 1,089,379
Increase in payable for investments
purchased.......................... 11,118,862
Net realized gain on investment
transactions....................... (18,189,710)
Net change in unrealized depreciation
on investments..................... (89,317,008)
Net realized and unrealized foreign
exchange gains..................... (54,519,666)
-------------
Total adjustments.................. (395,396,983)
-------------
Net cash used for operating
activities........................... $(103,210,354)
-------------
-------------
</TABLE>

See Notes to Financial Statements.

F-5

<PAGE> 67
- -----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME
FUND, INC.
Statement of Changes in Net Assets
- -----------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) -------------------------------
in Total Net Assets 1995 1994
<S> <C> <C>
-------------- --------------
Operations
Net investment income... $ 130,160,245 $ 125,416,048
Net realized gain on
investment
transactions.......... 18,189,710 29,213,379
Net change in unrealized
appreciation
(depreciation) on
investments........... 89,317,008 (310,171,836)
-------------- --------------
Net increase (decrease)
in total net assets
resulting from
operations before net
foreign exchange
gains................. 237,666,963 (155,542,409)
Net realized and
unrealized foreign
exchange gains........ 54,519,666 156,775,702
-------------- --------------
Net increase in total net
assets resulting from
operations.............. 292,186,629 1,233,293
-------------- --------------
Dividends to shareholders
from net investment
income
Common shares........... (114,007,842) (102,870,871)
Preferred shares........ (22,484,591) (14,114,110)
-------------- --------------
(136,492,433) (116,984,981)
-------------- --------------
Distributions to
shareholders
from net realized
capital gains
Common shares........... (20,904,930) (21,110,324)
Preferred shares........ (2,142,800) (1,577,675)
-------------- --------------
(23,047,730) (22,687,999)
-------------- --------------
Fund share transactions
Net proceeds from
issuance of preferred
shares................ 73,620,000 48,885,000
Net proceeds from rights
offering of Fund
shares................ 224,618,810 156,956,449
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions and in
connection with
dividends paid in
stock................. 7,688,453 21,145,354
-------------- --------------
305,927,263 226,986,803
-------------- --------------
Total increase............ 438,573,729 88,547,116
Total Net Assets
Beginning of year......... 1,488,631,381 1,400,084,265
-------------- --------------
End of year............... $1,927,205,110 $1,488,631,381
-------------- --------------
-------------- --------------
</TABLE>

See Notes to Financial Statements.

- -----------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Notes to Financial Statements
- -----------------------------------------------------------
The First Australia Prime Income Fund, Inc. (the ``Fund'') was incorporated
in Maryland on March 14, 1986 as a closed-end, non-diversified investment
company. The Fund's investment objective is current income through investment
primarily in Australian debt securities. The Fund may also achieve incidental
capital appreciation. It is expected that normally at least 65% of the Fund's
total assets will be invested in Australian dollar denominated debt securities
of Australian banks and federal and state governmental and corporate entities.
To achieve its investment objective, the Fund may invest the remainder of its
assets in debt securities of comparable quality which are denominated in
Australian or New Zealand dollars of other issuers, whether or not domiciled in
Australia or New Zealand, and in U.S. Government securities and corporate and
bank debt securities of U.S. issuers rated Aa or Prime-2 or better by Moody's
Investors Service, Inc. (``Moody's'') or AA or A-2 or better by Standard &
Poor's Corporation (``S&P''). It is the Fund's policy to limit its investments,
as to 65% of its total assets, to issuers of debt securities rated AA or better
by S&P--Australian Ratings Pty. Ltd. or S&P or Aa or better by Moody's or which,
in the judgement of the Investment Manager, are of equivalent quality. The
remainder of the Fund's investments will be rated A by those rating agencies or,
if unrated, will in the Investment Manager's judgement be of equivalent quality.
The ability of issuers of debt securities, including foreign currency balances
on deposit with the Fund's Australian and New Zealand subcustodian banks, held
by the Fund to meet their obligations may be affected by economic or political
developments in a specific industry or region.

Note 1. Accounting The following is a summary of significant
Policies accounting policies followed by the Fund in the
preparation of its financial statements.

Basis of Presentation: The financial statements of the Fund are prepared in
accordance with United States generally accepted accounting principles using the
United States dollar as both the functional and reporting currency.

Security Valuation: Investments are stated at value. Investments for which
market quotations are readily available are valued based on prices provided by
a pricing service or the lower of the quotations from two leading Australian or
New Zealand brokers in the debt securities market, in the event that

F-6

<PAGE> 68
a price cannot be obtained by the pricing service. Securities for which market
quotations are not readily available are valued at fair value using methods
determined in good faith by or under the direction of the Fund's 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 transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian take 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 collateral is
valued on a daily basis to determine its adequacy. 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.

Foreign Currency Translation: Australian dollar (``A$'') and New Zealand dollar
(``NZ$'') amounts are translated into United States dollars on the following
basis:

(i) market value of investment securities, other assets and liabilities
at the exchange rates at the end of the fiscal year;

(ii) purchases and sales of investment securities, income and expenses at
the rates of exchange prevailing on the respective dates of such
transactions.

The Fund isolates that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the fluctuations arising
from changes in the market prices of the securities held at fiscal year end.
Similarly, the Fund isolates the effect of changes in foreign exchange rates
from the fluctuations arising from changes in the market prices of portfolio
securities sold during the fiscal year.

Net realized and unrealized foreign exchange gains of $54,519,666 include
realized foreign exchange gains and losses from sales and maturities of
portfolio securities, sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of interest, discount and foreign withholding
taxes recorded on the Fund's books and the US dollar equivalent amounts actually
received or paid and changes in unrealized foreign exchange gains and losses in
the value of portfolio securities and other assets and liabilities arising as
a result of changes in the exchange rate. Accumulated net realized and
unrealized foreign exchange gains shown in the composition of net assets at
October 31, 1995 represent foreign exchange gains for book purposes that have
not yet been recognized for tax purposes.

Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
U.S. dollar.

The exchange rate at October 31, 1995 was US$.7608 to A$1.00 for the
Australian dollar and US$.6595 to NZ$1.00 for the New Zealand dollar.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income is recorded on an accrual basis. Discounts on short-term
securities are accreted over the life of the security.

Dividends and Distributions: It is the Fund's current policy to pay dividends
from net investment income monthly. The Fund will also declare and pay
distributions at least annually from net realized gains on investment
transactions and net realized foreign exchange gains, if any. Dividends and
distributions to common shareholders are recorded on the ex-dividend date.
Dividends and distributions to preferred shareholders are accrued on a weekly
basis and are determined as described in Note 4.

Income distributions and capital and currency gains distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for foreign currencies, loss deferrals and recognition
of market discount.

Taxes: For federal income and excise tax purposes, substantially all of the
Fund's transactions are accounted for using the Australian dollar as the
functional currency. Accordingly, only realized currency gains and losses
resulting from the repatriation of Australian dollars into United States dollars
or transactions in New Zealand dollars are recognized for tax purposes.

No provision has been made for United States income taxes because it is the
Fund's policy to continue to meet the requirements of the United States Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to shareholders. Provision has been made for United States
excise taxes incurred during the fiscal year. Australia and New Zealand impose
a withholding tax of 10% on most interest and discount earned.

Cash Flow Information: The Fund invests in securities and distributes dividends
from net investment income and net realized gains from investment and currency
transactions which are paid in cash or are reinvested at the discretion of

F-7

<PAGE> 69
shareholders. These activities are reported in the Statement of Changes in Net
Assets and additional information on cash receipts and cash payments is
presented in the Statement of Cash Flows. Cash includes domestic and foreign
currency.

Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
During the fiscal year ended October 31, 1995, the Fund increased undistributed
net investment income by $10,559,903, decreased accumulated net realized gains
on investments by $2,500,322, decreased accumulated net realized foreign
exchange gains by $7,807,333 and decreased paid-in capital in excess of par by
$252,248. Net investment income, net realized gains and net assets were not
affected by this change.

Note 2. Agreements The Fund has agreements with EquitiLink
International Management Limited (the
``Investment Manager''), EquitiLink Australia Limited (the ``Investment
Adviser''), The Prudential Insurance Company of America (the ``Consultant''),
and Prudential Mutual Fund Management, Inc. (the ``Administrator''). The
Investment Manager and the Investment Adviser are affiliated companies; the
Administrator is an indirect wholly-owned subsidiary of the Consultant.

The Investment Manager makes investment decisions on behalf of the Fund on
the basis of recommendations and information furnished to it by the Investment
Adviser and the Consultant, including the selection of and the placement of
orders with brokers and dealers to execute portfolio transactions on behalf of
the Fund.

The management agreement provides the Investment Manager with a fee, computed
weekly and payable monthly, at the following annual rates: 0.65% of the Fund's
average weekly total net assets of common and preferred shareholders up to $200
million, 0.60% of such assets between $200 million and $500 million, 0.55% of
such assets between $500 million and $900 million and 0.50% of such assets in
excess of $900 million. The administration agreement provides the Administrator
with a fee at the annual rate of 0.15% of the Fund's average weekly total net
assets of common and preferred shareholders up to $900 million and 0.10% of such
assets in excess of $900 million. The Investment Manager pays fees to the
Investment Adviser and the Consultant for their services rendered. The
Investment Manager informed the Fund that it paid $3,952,767 to the Investment
Adviser and $701,026 to the Consultant during the fiscal year ended October 31,
1995.

Note 3. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the fiscal year ended
October 31, 1995 aggregated $992,102,160 and $759,387,006, respectively.

The United States federal income tax basis of the Fund's investments at
October 31, 1995 was $1,878,746,238 and accordingly, net unrealized depreciation
for United States federal income tax purposes was $24,311,715 (gross unrealized
appreciation--$30,095,810; gross unrealized depreciation--$54,407,525).

Note 4. Capital There are 200 million shares
of common stock authorized. Of the 155,079,102
common shares outstanding at October 31, 1995, the Investment Manager owned
41,153 shares.

In connection with a rights offering, shareholders of record on March 17,
1995 were issued one-fifth of a non-transferable right for each full share of
common stock owned, entitling shareholders the opportunity to acquire one newly
issued share of common stock for every whole right held at a subscription price
equal to a 5% discount from the lesser of net asset value on the expiration date
(April 20, 1995) or the average market value on that date and the three business
days preceding the expiration date. On May 5, 1995 the Fund issued 30,723,350
shares of common stock at $7.64 per share. Rights offering costs of $1,305,345
($.01 per share) and brokerage and dealer-manager commissions of $8,802,239
($.06 per share) were charged to paid-in capital of common shareholders
resulting in net proceeds to the Fund of $224,618,810. The net asset value per
share of the Fund's common shareholders was reduced by approximately $0.38 per
share as a result of this share issuance. Prudential Securities Incorporated,
an affiliate of the Consultant and the Administrator, and its financial
advisors earned approximately $1,772,000 of the aforementioned commissions with
respect to its participation in the rights offering.

The Fund also issued 177,377 shares during the fiscal year ended October 31,
1995 in connection with the reinvestment of dividends and distributions paid to
shareholders enrolled in the dividend reinvestment plan and 702,496 shares in
connection with a cash dividend paid in stock.

During the fiscal year ended October 31, 1994 the Fund issued 17,311,869
shares of common stock (net proceeds $156,956,449) in connection with a rights
offering of the Fund's shares. The Fund also issued 2,128,167 shares during the
fiscal year ended October 31, 1994 in connection with the reinvestment of
dividends and distributions paid to shareholders enrolled in the dividend
reinvestment plan.

F-8

<PAGE> 70
There are 100 million shares of $.01 par value of preferred stock authorized
with an aggregate liquidation preference of up to $500 million. The preferred
shares have rights as determined by the Board of Directors. The 7,000 shares of
Auction Market Preferred Stock (``Preferred Stock'') outstanding consist of
seven series as follows: Series A--750 shares, Series B--750 shares, Series
C--500 shares, Series D--1,000 shares, Series E--500 shares, Series F--500
shares and Series G--3,000 shares. Series F preferred shares wrere issued on
December 20, 1993, (net proceeds $48,885,000). On July 27, 1995 the Fund issued
$75,000,000 in liquidation value of Series G preferred shares. Preferred share
offering costs of $255,000 and underwriting discounts of $1,125,000 were charged
to paid-in capital of common shareholders resulting in net proceeds to the Fund
of $73,620,000. Prudential Securities Incorporated advised the Fund that it
received approximately $562,500 in underwriting fees in connection with the
Series G preferred share offering. The Series A through F Preferred Stock has
a liquidation value of $100,000 per share plus any accumulated but unpaid
dividends and the Series G Preferred Stock has a liquidation value of $25,000
per share plus any accumulated but unpaid dividends.

Dividends on each series of preferred shares are cumulative at a rate
established at the initial public offering and are typically reset every 28 days
for Series A through D and every seven days for Series E through G based on the
results of an auction. Dividend rates ranged from 4.80% to 6.625% during the
fiscal year ended October 31, 1995. Under the Investment Company Act of 1940,
the Fund may not declare dividends or make other distributions on shares of
common stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, asset coverage with respect to the outstanding
Preferred Stock would be less than 200%.

The Preferred Stock is redeemable at the option of the Fund, in whole or in
part, on any dividend payment date at liquidation value plus any accumulated but
unpaid dividends. The Preferred Stock is also subject to mandatory redemption
at liquidation value plus any accumulated but unpaid dividends if certain
requirements relating to the composition of the assets and liabilities of the
Fund as set forth in the Articles of Incorporation are not satisfied.

The holders of Preferred Stock have voting rights equal to the holders of
common stock (one vote per share) and will vote together with holders of shares
of common stock as a single class. However, holders of Preferred Stock are also
entitled to elect two of the Fund's directors.

Note 5. Dividends On November 13, 1995 the
and Distributions Board of Directors of the Fund
declared a distribution from undistributed net
investment income of $.075 per common share payable on December 15, 1995 to
common shareholders of record on November 30, 1995. On December 12, 1995 the
Board of Directors of the Fund declared a distribution of $.075 per common share
comprised of $.032 per share from capital gains and $.043 per share from net
investment income payable on January 12, 1996 to shareholders of record on
December 29, 1995.

Subsequent to October 31, 1995, dividends and distributions declared and paid
on preferred shares totalled approximately $3,191,500 for the seven outstanding
preferred share series in the aggregate through December 12, 1995.

F-9

<PAGE> 71
Note 6.
Quarterly Data
(Unaudited)

<TABLE>
<CAPTION>
Net realized and Net increase
unrealized (decrease)
gains (losses) on in net assets
Net investment investments and resulting from
income foreign currencies operations
Per Per Per
Quarterly Total common common common
period income Amount share Amount share Amount share
- ------------ ----------- ---------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
11/1/93 to
1/31/94 $35,611,751 $31,643,294 $.26 $ 96,221,242 $ .78 $127,864,536 $1.04

2/1/94 to
4/30/94 35,940,426 31,877,989 .26 (134,738,538) (1.10) (102,860,549) (.84 )

5/1/94 to
7/31/94 35,375,916 31,328,526 .25 (35,788,451) (.29) (4,459,925) (.04 )

8/1/94 to
10/31/94 35,030,311 30,566,239 .24 (49,877,008) (.42) (19,310,769) (.18 )

11/1/94 to
1/31/95 34,633,348 30,535,230 .22 35,683,598 .26 66,218,828 .48

2/1/95 to
4/30/95 34,066,973 29,863,113 .21 (16,000,067) (.12) 13,863,046 .09

5/1/95 to
7/31/95 38,962,050 34,485,255 .25 44,665,313 .32 79,150,568 .57

8/1/95 to
10/31/95 40,133,748 35,276,647 .25 97,677,540 .70 132,954,187 .95

Common
share price
Dividends and distributions on the
Common shares Preferred shares American
Per Per Stock
Quarterly common common Exchange
period Amount share Amount share High Low
- - ----------- ------------- ------ --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
11/1/93 to
1/31/94 $32,858,529 $.27 $3,056,070 $.03 $11 $10
2/1/94 to
4/30/94 31,166,968 .25 3,507,996 .03 11 9 7/8
5/1/94 to
7/31/94 30,382,609 .25 4,301,424 .03 10 13/16 10
8/1/94 to
10/31/94 29,573,089 .24 4,826,295 .04 10 5/8 9
11/1/94 to
1/31/95 37,148,664 .30 5,561,027 .05 9 9/16 8
2/1/95 to
4/30/95 27,980,044 .225 6,112,523 .05 8 7/8 7 1/2
5/1/95 to
7/31/95 34,892,032 .225 6,021,369 .04 9 7 13/16
8/1/95 to
10/31/95 34,892,032 .225 6,932,472 .04 9 7/16 8 3/4
</TABLE>
F-10

<PAGE> 72
- -----------------------------------------------------------------------------
THE FIRST AUSTRALIA PRIME INCOME FUND, INC.
Financial Highlights
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended October 31,
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1995* 1994 1993 1992 1991
---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value per common share, beginning of
year............................................... $ 8.82 $ 10.09 $ 9.61 $ 11.31 $ 10.02
---------- ----------- ---------- -------- --------
Net investment income................................ .93 1.01 1.19 1.29 1.40
Net realized and unrealized gain (loss) on
investments and foreign currencies................. 1.16 (1.03) .58 (1.42) 1.37
---------- ----------- ---------- -------- --------
Total from investment operations................... 2.09 (.02) 1.77 (.13) 2.77
---------- ----------- ---------- -------- --------
Dividends from net investment income to preferred
shareholders....................................... (.17) (.12) (.11) (.14) (.24)
Dividends from net investment income to common
shareholders....................................... (.83) (.84) (1.08) (1.10) (1.24)
Distributions from net capital and currency gains to
preferred shareholders............................. (.01) (.01) (.01) (.01) --
Distributions from net capital and currency gains to
common shareholders................................ (.15) (.17) (.08) (.29) --
---------- ----------- ---------- -------- --------
Total dividends and distributions.................. (1.16) (1.14) (1.28) (1.54) (1.48)
---------- ----------- ---------- -------- --------
Capital charge in respect to issuance of shares...... (.39) (.11) (.01) (.03) --
---------- ----------- ---------- -------- --------
Net asset value per common share, end of year........ $ 9.36 $ 8.82 $ 10.09 $ 9.61 $ 11.31
---------- ----------- ---------- -------- --------
---------- ----------- ---------- -------- --------
Market price per common share, end of year........... $ 9.31 $ 9.56 $ 10.25 $ 10.00 $ 10.94
---------- ----------- ---------- -------- --------
---------- ----------- ---------- -------- --------
TOTAL INVESTMENT RETURN BASED ON(D):
Market value......................................... 8.78% 3.32% 15.00% 4.11% 38.36%
Net asset value...................................... 18.54% (3.19)% 17.80% (3.22)% 27.62%
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS/SUPPLEMENTAL DATA#:
Expenses(D)(D)....................................... 1.47% 1.41% 1.44% 1.43% 1.59%
Net investment income before preferred stock
dividends.......................................... 10.83% 10.68% 12.13% 12.14% 13.42%
Preferred stock dividends............................ 1.87% 1.20% 1.13% 1.25% 2.31%
Net investment income available to common
shareholders....................................... 8.96% 9.48% 11.00% 10.89% 11.11%
Portfolio turnover rate.............................. 50% 34% 23% 17% 83%
Net assets of common shareholders, end of period (000
omitted)........................................... $1,452,205 $1,088,631 $1,050,084 $977,933 $972,569
Average net assets of common shareholders (000
omitted)........................................... $1,201,383 $1,174,394 $1,011,324 $938,072 $899,175
Senior securities (preferred stock) outstanding (000
omitted)........................................... $ 475,000 $ 400,000 $ 350,000 $300,000 $300,000
Asset coverage of preferred stock at year end........ 406% 372% 400% 426% 424%
</TABLE>

- ----------------
* Calculated based upon weighted average shares outstanding during the
year.
(D) Total investment return is calculated assuming a purchase of common
stock on the first day and a sale on the last day of each year
reported. Dividends and distributions are assumed, for purposes of this
calculation, to be reinvested at prices obtained under the Fund's
dividend reinvestment plan. Total investment return does not reflect
brokerage commissions.
(D)(D) Includes expenses of both preferred and common stock.
# Ratios calculated on the basis of income, expenses and preferred share
dividends applicable to both the common and preferred shares relative
to the average net assets of common shareholders.
NOTE: Contained above is operating performance for a share of common stock
outstanding, total investment return, ratios to average net assets of
common shareholders and other supplemental data for each of the years
indicated. This information has been determined based upon financial
information provided in the financial statements and market value data
for the Fund's common shares.

See Notes to Financial Statements.
F-11

<PAGE> 73
REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of
The First Australia Prime Income Fund, Inc.

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of cash
flows and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of The First Australia Prime
Income Fund, Inc. (the ``Fund'') at October 31, 1995, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as ``financial statements'') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

PRICE WATERHOUSE LLP

1177 Avenue of the Americas
New York, New York
December 11, 1995
F-12

<PAGE> 74

APPENDIX A

AUSTRALIAN ECONOMY

Certain information relating to Australia has been extracted from various
governmental and private publications as indicated herein. For a listing of such
publications, see "Additional Information" in the Prospectus.

OVERVIEW

The Commonwealth of Australia comprises an area of about 2,773,000 square
miles -- almost the same as that of the United States, excluding Alaska. In
September 1995, Australia's population was estimated to be approximately 18.1
million people.

The Commonwealth of Australia was formed as a federal union in 1901, when
six British colonies of New South Wales, Victoria, Queensland, South Australia,
Western Australia and Tasmania were united as states in a "Federal Commonwealth"
under the authority of the Commonwealth of Australia Constitution Act enacted by
the British Parliament.

Federal legislative powers in Australia are vested in the Federal
Parliament which consists of the Queen, the Senate and the House of
Representatives. The Queen is represented throughout Australia by the
Governor-General. The Senate and the House of Representatives are both elected
by the compulsory vote of all eligible persons. Under the Constitution, the
Parliament is empowered to make laws on certain specified matters such as
defense, external affairs, interstate and overseas trade and commerce, taxation,
currency and banking. Powers not conferred on the parliament remain with the
States subject to certain Constitutional limitations.

The executive power of the Commonwealth under the Constitution is formally
vested in the Governor-General. There is a Federal Executive Council to advise
the Governor-General in the government of Australia. This council is comprised
of the Prime Minister and other Federal Ministers of State, all of whom belong
to the party or coalition of parties which has a majority in the House of
Representatives. Such Ministers form the Government with the practical result
that executive power is exercised by the Prime Minister and other Ministers.

Prior to World War II, the Australian economy was highly dependent on the
rural sector. The 1950's and 1960's saw strong growth in the economy and
diversification through developments in the mining sector. There have been some
significant structural changes in the past 20 years, with the tertiary sector
(i.e., all areas of the economy excluding agriculture, mining and manufacturing)
and the mining sector growing strongly. In 1994-95, the rural sector accounted
for approximately 3% of Gross Domestic Product ("GDP"), 5% of employment and 22%
of total exports of goods and services by value. During the same period, the
mining sector accounted for approximately 4% of GDP and 1% of employment, and
exports of mining commodities accounted for approximately 34% of exports by
value. The tertiary sector accounted for approximately 76% of GDP, approximately
80% of employment and around 25% of exports by value during such period.

SELECTED ECONOMIC DATA

Domestic Economy. Since 1980-81, the Australian economy has recorded
average GDP growth of 3.1%. However, there were severe recessions in 1982-83 and
1990-91, with strong growth in the intervening years. Following the 1990-91
recession, economic activity accelerated with strong growth in private
consumption and housing investment. Concern about the possible inflation
consequences of strong growth prompted the Reserve Bank of Australia to raise
interest rates in the second half of 1994. The tightening in monetary policy saw
growth return to more sustainable levels. Annual GDP growth peaked at 6.3% in
the September quarter of 1994 and has slowed to an annual rate of 3.1% in the
December quarter of 1995. The table below shows GDP over the past five years.

A-1
<PAGE> 75

GROSS DOMESTIC PRODUCT
(AUSTRALIAN $ IN MILLIONS)

<TABLE>
<CAPTION>
1990/91 1991/92 1992/93 1993/94 1994/95
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
GDP, income-based measure
(current prices)........... A$377,682 A$386,284 A$403,694 A$426,388 A$454,639
GDP, average measure
(constant 1989-90
prices).................... A$366,308 A$368,522 A$379,917 A$395,545 A$414,742
% change..................... -1.0% 0.6% 3.1% 4.1% 4.9%
</TABLE>

- ---------------
Source: Australian Bureau of Statistics, Australian National Accounts (Cat. No.
5206.0).

Prices. Since 1980-81 Australian CPI inflation has averaged 6.4% with a
peak rate of 12.5% in September 1982. Inflation has been trending down since
this peak. Following the 1990-91 recession, CPI inflation fell to a low of 0.3%
in December 1992. Since then, as the economic recovery has gathered pace, higher
wages and import prices have begun to filter through into the underlying
inflation rate. (The underlying inflation rate excludes seasonal and
administered prices as well as mortgage interest charges.) The "headline" CPI
inflation rate has also been boosted by the increase in mortgage interest
charges.

In the year to March quarter 1996, CPI inflation was 3.7% with the
underlying rate at 3.3%. In recent years, the Reserve Bank of Australia has
adopted a target for the underlying rate of 2-3% (averaged over a number of
years). The following table shows headline CPI over the past five years.

PRICES

<TABLE>
<CAPTION>
CONSUMER % CHANGE OVER
PRICE PRIOR
INDEX PERIOD
-------- -------------
<S> <C> <C>
1990-91.............................................. 105.3 5.3
1991-92.............................................. 107.3 1.9
1992-93.............................................. 108.4 1.0
1993-94.............................................. 110.4 1.8
1994-95.............................................. 113.9 3.2
</TABLE>

- ---------------
Source: Australian Bureau of Statistics, Consumer Price Index (Cat. No. 6401.0).

Note: Indices used year-end June 30 figures; Consumer Price Index 1989-90 = 100;
weighted average of eight capital cities.

Foreign Trade and Balance of Payments. External trade plays an important
part in the Australian economy. In the five years ended June 30, 1995,
merchandise exports and imports in current prices, calculated on a balance of
payments basis both averaged approximately 14.5% of GDP.

Australia has traditionally been a net importer of capital, facilitating
the development of a rich endowment of natural resources at a faster pace than
would have been possible if domestic savings were the only source of investment
funds. Australia has, therefore, traditionally run a current account deficit.

Since 1980-81 the current account deficit has averaged 4.4% of GDP, with
significant cyclical variations reflecting the state of the economy and
fluctuation in Australia's terms of trade. In 1994-95 the current account
deficit represented 6% of GDP, boosted by strong import demand (in part
reflecting the business investment recovery) and higher debt servicing costs. As
the economy has slowed, monthly deficits have fallen

A-2
<PAGE> 76

from a peak of A$3.2 billion in May 1995 to A$1.6 billion in January 1996. The
following table shows the current account balance for the five years ended June
30, 1995.

CURRENT ACCOUNT BALANCE
(Australian $ in millions)

<TABLE>
<CAPTION>
MERCHANDISE MERCHANDISE
EXPORTS IMPORTS MERCHANDISE EXPORTS CURRENT
------------------ ------------------ TRADE AS A INVISIBLES ACCOUNT
% % BALANCE % OF BALANCE(2) BALANCE
A$M CHANGE(1) A$M CHANGE(1) A$M IMPORTS(1) A$M A$M
------ --------- ------ --------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990-91............. 52,230 7.3 49,416 (3.2) 2,814 105.7 (18,237) (15,423)
1991-92............. 54,875 5.1 50,968 3.1 3,907 107.7 (15,404) (11,497)
1992-93............. 60,078 9.5 59,536 16.8 542 100.9 (15,460) (14,918)
1993-94............. 63,976 6.5 64,441 8.2 (465) 99.3 (15,977) (16,442)
1994-95............. 66,407 3.8 74,878 16.2 (8,471) 88.7 (19,291) (27,762)
</TABLE>

- ---------------
Source: Australian Bureau of Statistics, Balance of Payments (Cat. No. 5301.0)

(1) Data may not be calculable due to rounding.

(2) Net total of invisible transactions, consisting primarily of financial and
other services, interest, profit and dividends on external assets and
liabilities, and government and other transfer payments.

Australia's net foreign debt as of September 30, 1995 was A$181.2 billion,
which is equivalent to approximately 40% of its GDP. In comparison, Australia's
net foreign debt as of September 30, 1994 was A$163.3 billion, which was
approximately 38% of its GDP.

Interest Rates. The following table sets forth certain historical
short-term Australian bank interest rates and interest rates for medium and
long-term Australian Government securities.

<TABLE>
<CAPTION>
90-DAY BANK BUSINESS LOAN 2-YEAR 10-YEAR
UNOFFICIAL BILL INDICATOR TREASURY TREASURY
YEAR(1) CASH RATE(2) YIELD(3) RATE(4) BONDS(5) BONDS(5)
- ----------------------------------- ------------ ----------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
1991............................... 10.55 10.50 14.00 10.55 11.15
1992............................... 6.55 6.40 10.25 6.35 8.90
1993............................... 5.25 5.25 9.40 5.45 7.35
1994............................... 4.75 5.45 8.95 8.05 9.65
1995............................... 7.50 7.55 10.60 7.90 9.20
</TABLE>

- ---------------
Source: Reserve Bank of Australia Bulletin, August 1995, Bloomberg.

(1) June 30, unless otherwise indicated; all quoted rates are in per cent per
annum terms.

(2) Average of daily 11:00 a.m. calls for the month.

(3) Average of daily figures for the week ended last Wednesday of the month.

(4) Indicator rate on overdraft loans of A$100,000 or more by large businesses.

(5) Assessed secondary market yields on the last business day of the month.

A-3
<PAGE> 77

The following table compares average interest rates of Australian and U.S.
ten-year government bonds over the past five years.

COMPARISON OF AVERAGE INTEREST RATES
OF U.S. AND AUSTRALIAN BONDS
(% PER ANNUM)

<TABLE>
<CAPTION>
10-YEAR U.S. 10-YEAR AUSTRALIAN
FIVE YEAR TREASURY BONDS GOVERNMENT BONDS
- --------- -------------- ------------------
<C> <C> <S> <C> <C>
1991 Qtr. 1 ...................................... 8.02 11.48
2 ...................................... 8.13 10.97
3 ...................................... 7.94 10.65
4 ...................................... 7.35 9.67
1992 Qtr. 1 ...................................... 7.30 10.02
2 ...................................... 7.38 9.15
3 ...................................... 6.62 8.73
4 ...................................... 6.74 8.98
1993 Qtr. 1 ...................................... 6.28 8.13
2 ...................................... 5.99 7.53
3 ...................................... 5.62 6.80
4 ...................................... 5.61 6.67
1994 Qtr. 1 ...................................... 6.07 7.12
2 ...................................... 7.08 8.97
3 ...................................... 7.33 9.75
4 ...................................... 7.84 10.33
1995 Qtr. 1 ...................................... 7.48 10.03
2 ...................................... 6.60 9.21
3 ...................................... 6.32 8.97
4 ...................................... 5.89 8.43
1996 January ...................................... 5.64 8.12
February ...................................... 5.81 8.25
March ...................................... 6.26 8.79
</TABLE>

- ---------------
Source: Organization for Economic Cooperation and Development ("OECD"); Main
Economic Indicators; Datastream; SBC Warburg Australia Limited.

The following table compares the value of an Australian dollar per U.S.
dollar for the periods indicated.

EXCHANGE RATES (PER U.S.$)

<TABLE>
<CAPTION>
AT MONTH ENDING A$
--------------- -------
<S> <C> <C>
1991.................................... March 1.2900
June 1.3019
September 1.2508
December 1.3161
1992.................................... March 1.3014
June 1.3355
September 1.4006
December 1.4535
1993.................................... March 1.4168
June 1.4877
September 1.5497
December 1.4769
</TABLE>

A-4
<PAGE> 78

<TABLE>
<CAPTION>
AT MONTH ENDING A$
--------------- -------
<S> <C> <C>
1994.................................... March 1.4269
June 1.3716
September 1.3526
December 1.2873
1995.................................... March 1.3736
June 1.4085
September 1.3236
December 1.3441
1996.................................... January 1.3441
February 1.3080
March 1.2771
</TABLE>

- ---------------
Source: RBA Bulletin; Datastream, SBC Warburg Australia Limited.

Public Finance. The following table summarizes the outstanding Australian
Commonwealth Government debt.

GOVERNMENT SECURITIES ON ISSUE AT JUNE 30, 1991 TO 1995
(AUSTRALIAN $ IN MILLIONS)

- ---------------
Source: Australian Government Budget Papers; Budget Related Paper No. 1,
1992-93, 1993-94.

The following table summarizes Australian Commonwealth Government budget
transactions for the five fiscal years ended June 30, 1995. The Government
currently expects a deficit of A$280 million for the 1994-95 financial year. The
new Coalition Government has announced that its aim is to return the Budget to
an underlying balance in 1997-98.

SUMMARY OF AUSTRALIAN GOVERNMENT BUDGET TRANSACTIONS
(AUSTRALIAN $ IN MILLIONS)

<TABLE>
<CAPTION>
TOTAL TOTAL BUDGET
OUTLAYS REVENUE BALANCE
------- ------- -------
$M $M $M
<S> <C> <C> <C>
1990-91....................................... 96,171 98,085 1,913
1991-92....................................... 102,846 93,503 (9,342)
1992-93....................................... 109,623 95,059 (14,564)
1993-94....................................... 114,154 100,488 (13,667)
1994-95....................................... 121,877 110,247 (11,630)
1995-96F...................................... 122,585 122,700 115
</TABLE>

- ---------------
Source: Budget Related Paper No. 1, 1995-96; RBA Bulletin December 1994:
Treasurer's press releases dated 21 December 1995 and 9 July 1995.

AUSTRALIAN DEBT SECURITIES

Primary Market. Australian semi-government bonds and corporate notes and
debentures are issued through tender panels, private placements or by direct
solicitation to the public through prospectuses registered with the Australian
Securities Commission of Australian States and Territories (the regulatory
authority which administers comprehensive laws relating to, among other things,
prospectus disclosure requirements) and are not generally listed on the
Australian Stock Exchange ("ASX"). The Commonwealth and State Governments of
Australia and their agencies and instrumentalities issue bonds and notes which
are

A-5
<PAGE> 79

generally listed on the ASX. Australian corporations and Government entities
also issue Australian dollar-denominated bonds and notes in the Euromarket.

Secondary Market. As with the U.S. secondary market, most trading in
Australian debt securities takes place off the ASX. Trading in Eurobonds also
takes place off the European stock exchanges. Certain major commercial banks,
stockbrokers and other financial institutions have been designated by the
Reserve Bank as reporting bond dealers through which the Reserve Bank usually
conducts transactions in Commonwealth Government securities with maturities of
more than one year. In addition, commercial banks and investment banking
institutions operate an unofficial secondary market in the debt securities of
corporations and Government entities.

Short-Term Debt Instruments. Short-term marketable debt instruments are
usually issued with a maturity period of 90 to 180 days. These instruments
include notes and bills from Government entities, bank and commercial bills,
promissory notes, and certificates of deposit. Short-term non-marketable debt
instruments include deposits with banks or merchant banks on a fixed-term basis,
varying from 24 hours to 365 days. These securities are traded by commercial
banks and investment banking institutions on an unofficial secondary market.

Recent data on the Australian debt securities market is summarized in the
table below.

AUSTRALIAN DEBT SECURITIES
(AUSTRALIAN $ IN BILLIONS AS OF MARCH 31, 1996)

<TABLE>
<CAPTION>
NOMINAL VALUE MARKET VALUE
------------- ------------
<S> <C> <C>
Commonwealth Government................................... A$ 80.799 A$ 83.721
Semi-government........................................... 48.893 51.108
Corporate................................................. 3.078 3.516
---------- ----------
Total........................................... A$132.771 A$ 138.346
</TABLE>

- ---------------
Source: Warburg Australia Bond Indices, February 1996.

NEW ZEALAND ECONOMY

Certain information relating to New Zealand has been extracted from various
governmental and private publications as indicated herein. For a listing of such
publications, see "Additional Information" in the Prospectus.

OVERVIEW

New Zealand is situated on the South Pacific Ocean and has a land area of
103,000 square miles, similar in size to Japan. In March 1995, New Zealand's
population was estimated to be approximately 3.6 million people.

New Zealand is a sovereign state with the democratic government based on
the Westminster system. Legislative power is vested in Parliament, a unicameral
body designated the House of Representatives. The executive government of New
Zealand is carried out by the Executive Council. This is a formal body made up
of the Cabinet and the Governor-General, who acts on Cabinet advice. The Cabinet
itself consists of the Prime Minister and his Ministers, who must be chosen from
among elected Members of Parliament.

New Zealand has a market economy with sizeable manufacturing and services
sectors complementing an export-oriented agricultural sector. Energy based
industries, forestry, mining, horticulture and tourism have expanded rapidly
over the last decade. These, together with growth in manufacturing, have
contributed to a movement away from pastoral agriculture as the dominant
economic sector. In recent years the economy has undergone a program of
wide-ranging economic reform, designed to foster the development of a
competitive economy.

A-6
<PAGE> 80

SELECTED ECONOMIC DATA

Domestic Economy. New Zealand's economic growth slowed commencing in
mid-1985, reflecting, among other factors, the adjustment of the economy to
structural reform. The economy experienced a "flat" period from 1987 through
1991. Since 1992, the economy has been growing. Gross Domestic Product grew by
2.3% for the year ended December 31, 1995.

The following table shows GDP for the five years ended March 31, 1995.

GROSS DOMESTIC PRODUCT
(NEW ZEALAND $ IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 1990-91 1991-92 1992-93 1993-94 1994-95
- ---------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current Prices GDP................ NZ$72,863 NZ$72,780 NZ$75,525 NZ$80,711 NZ$85,684
Index of Real GDP (constant
1982-83 prices, base = 100)..... 112.5 111.8 114.0 120.4 127.6
% change(1)....................... (0.5)% (0.6)% 2.0% 5.6% 6.0%
</TABLE>

- ---------------
Source: Datastream.

(1) Data may not be calculable due to rounding.

Prices. Macroeconomic policies have had as one of their principal
medium-term objectives price stability. The Government has reached agreement
with the Reserve Bank of New Zealand (the "Reserve Bank") for a policy target of
price stability. Firm monetary policy led to a steady decline in the rate of
inflation until 1991. In more recent years, there has been a moderate increase
in the rate of inflation. The following table shows annual inflation rates over
the five years ended December 31, 1995.

PRICES

<TABLE>
<CAPTION>
% CHANGE
CONSUMER PRICE OVER
END OF DECEMBER INDEX(1) PRIOR PERIOD
------------------------------------------------- -------------- ------------
<S> <C> <C>
1991............................................. 973 0.9
1992............................................. 986 1.3
1993............................................. 1,000 1.4
1994............................................. 1,028 2.8
1995............................................. 1,058 2.9
</TABLE>

- ---------------
Source: Datastream.

(1) Base: December quarter 1993 = 1,000.

Foreign Trade and Balance of Payments. External trade is of fundamental
importance to New Zealand. A reliance on imports for raw materials and capital
equipment for industry has made the country strongly trade- oriented. Meat, wool
and dairy products are the most important export items and together account for
around 40% of total merchandise export earnings.

A-7
<PAGE> 81

New Zealand's current account deficit declined steadily during the early
1990s, although it increased in 1994. Details for the last five years are
summarized in the table below.

CURRENT ACCOUNT BALANCE(1)
(NEW ZEALAND $ IN MILLIONS)

<TABLE>
<CAPTION>
EXPORTS
MERCHANDISE MERCHANDISE MERCHANDISE AS A CURRENT
EXPORTS IMPORTS TRADE % OF INVISIBLES ACCOUNT
------------------ ------------------ BALANCE IMPORTS BALANCE(2) BALANCE
% % ----------- ------- ---------- -------
YEAR ENDED MARCH 31: NZ$M CHANGE(1) NZ$M CHANGE(1) NZ$M $(1) NZ$M NZ$M
- --------------------------- ------- --------- ------- --------- ----------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991....................... 15,637 5.0 13,920 2.8 1,717 112.3 (3,806) (2,089 )
1992....................... 16,823 7.6 13,280 (4.6) 3,543 126.7 (3,849) (306 )
1993....................... 18,604 10.6 15,192 14.4 3,412 122.5 (4,806) (1,394 )
1994....................... 19,516 4.9 16,382 7.8 3,134 119.1 (4,444) (1,310 )
1995....................... 20,617 5.6 18,524 13.1 2,093 111.3 (4,686) (2,593 )
</TABLE>

- ---------------
Source: New Zealand Reserve Bank Bulletin, December 1995; Datastream.

(1) Data may not be calculable due to rounding.

(2) Net total of invisible transactions, consisting primarily of financial and
other services, interest, profit, and dividends on external assets and
liabilities and government and other transfer payments.

Interest Rates. The following table sets forth certain historical
short-term New Zealand bank interest rates and interest rates for medium and
long-term New Zealand Government securities.

KEY MARKET RATES(%)(1)

<TABLE>
<CAPTION>
GOVERNMENT BOND
YIELD ON
CALL SECONDARY MARKET BASE
MONEY 90-DAY ------------------ LENDING
MARKET BANK BILLS 2-YEAR 10-YEAR RATE(1)
------ ---------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Average rate over 12 months ended Dec. 31:
1990.......................................... 13.4.. 13.9 13.2 12.4 16.0
1991.......................................... 9.9.. 10.0 9.8 10.1 14.0
1992.......................................... 6.6.. 6.7 7.2 8.4 11.4
1993.......................................... 6.3.. 6.3 6.5 6.9 10.3
1994.......................................... 6.1.. 6.7 7.3 7.6 9.7
10 months to October 1995..................... 9.0 9.1 8.4 7.9 12.2
</TABLE>

- ---------------
Source: New Zealand Reserve Bank Bulletin, various editions.

(1) Average of twelve months of the year, based on monthly figures.

(2) Weighted average base lending rates of the four largest banks.

A-8
<PAGE> 82

The following table compares average interest rates in New Zealand and U.S.
ten-year government bond rates over the past five years.

COMPARISON OF AVERAGE INTEREST RATES
OF U.S. AND NEW ZEALAND BONDS (% PER ANNUM)

<TABLE>
<CAPTION>
10-YEAR U.S. 10-YEAR NEW
TREASURY ZEALAND
YEAR BONDS GOVERNMENT BONDS
- --------------------------------------------------------------- ------------- ----------------
<S> <C> <C>
1991
Qtr. 1.................................................... 8.02 11.63
2.................................................... 8.13 10.19
3.................................................... 7.94 9.71
4.................................................... 7.35 8.91
1992
Qtr. 1.................................................... 7.30 9.12
2.................................................... 7.38 8.78
3.................................................... 6.62 7.92
4.................................................... 6.74 7.78
1993
Qtr. 1.................................................... 6.28 7.70
2.................................................... 5.99 7.31
3.................................................... 5.62 6.59
4.................................................... 5.61 6.14
1994
Qtr. 1.................................................... 6.07 5.79
2.................................................... 7.08 7.23
3.................................................... 7.33 8.44
4.................................................... 7.84 8.94
1995
Qtr. 1.................................................... 7.48 8.52
2.................................................... 6.60 7.59
3.................................................... 6.32 7.78
4.................................................... 5.89 7.22
1996
January................................................... 5.64 7.07
February.................................................. 5.81 7.22
March..................................................... 6.26 7.82
</TABLE>

- ---------------
Source: New Zealand Reserve Bank Bulletin; SBC Warburg Australia Limited.

The following table compares the value of the New Zealand dollar per U.S.
dollar for the periods indicated.

EXCHANGE RATES (PER US$)

<TABLE>
<CAPTION>
AT MONTH ENDING NZ$
- ------------------------------------------------------------------------------------- -------
<C> <S> <C>
1991 March......................................................................... 1.7030
June.......................................................................... 1.7319
September..................................................................... 1.7558
December...................................................................... 1.8529
</TABLE>

A-9
<PAGE> 83

<TABLE>
<CAPTION>
AT MONTH ENDING NZ$
- ------------------------------------------------------------------------------------- -------
<C> <S> <C>
1992 March......................................................................... 1.8261
June.......................................................................... 1.8365
September..................................................................... 1.8650
December...................................................................... 1.9455
1993 March......................................................................... 1.8762
June.......................................................................... 1.8563
September..................................................................... 1.8192
December...................................................................... 1.7863
1994 March......................................................................... 1.7758
June.......................................................................... 1.6813
September..................................................................... 1.6589
December...................................................................... 1.5583
1995 March......................................................................... 1.5423
June.......................................................................... 1.4950
September..................................................................... 1.5181
December...................................................................... 1.5302
1996 January....................................................................... 1.4879
February...................................................................... 1.4861
March......................................................................... 1.4671
</TABLE>

- ---------------
Source: Australian Bureau of Statistics, Balance of Payments; Reserve Bank of
Australia Bulletin; SBC Warburg Australia.

Public Finance. The following table summarizes the outstanding direct debt
(National Debt) of the New Zealand Government on the dates indicated.

FIVE-YEAR SUMMARY OF DIRECT GOVERNMENT DEBT
(NEW ZEALAND $ IN MILLIONS AS AT JUNE 30)

- ---------------
Source: New Zealand Institute of Economic Research.

* estimate

The following table summarizes New Zealand Government budget transactions
for the five fiscal years ended June 30, 1995. The Government currently expects
a surplus of NZ$2.603 million for the 1995-96 fiscal year.

SUMMARY OF NEW ZEALAND GOVERNMENT BUDGET TRANSACTIONS
(NEW ZEALAND $ IN MILLIONS)

<TABLE>
<CAPTION>
SURPLUS TOTAL DEBT
TOTAL OUTLAYS TOTAL REVENUE (DEFICIT) OUTSTANDING $M
------------- ------------- --------- --------------
<S> <C> <C> <C> <C>
1990-91............................... NZ$30,298 NZ$29,010 NZ$(1,288) NZ$43,935
1991-92............................... 29,175 27,636 (1,539) 47,104
1992-93............................... 29,418 27,629 (1,789) 47,478
1993-94............................... 29,639 30,394 755 46,429
1994-95 (estimate).................... 30,400 33,650 2,700 44,100
1995-96 (forecast).................... 30,690 33,860 3,490 43,370
</TABLE>

- ---------------
Source: NZ Budget Papers; New Zealand Institute of Economic Research.

A-10
<PAGE> 84

NEW ZEALAND DEBT SECURITIES

Primary Market. The New Zealand Government and its agencies and
instrumentalities are the most frequent issuers of bonds in New Zealand. Such
issuers' bonds are generally publicly issued through the Reserve Bank and may
bear fixed or variable rates of interest. Persons who wish to bid for such
securities must be registered with the Reserve Bank. State-owned enterprises
have also been frequent issuers of bonds in New Zealand, as are New Zealand
municipalities and local authorities, and corporations, including industrial and
financial companies. New Zealand dollar-denominated Eurobond securities are also
issued by private and public corporations.

Secondary Market. Generally, secondary market transactions are negotiated
between dealers or between dealers and their clients. Dealers usually act as
principals in these transactions. Some bonds are traded on the New Zealand Stock
Exchange. Debt securities are traded and quoted on a yield to maturity basis and
markets are made by some of the registered banks, a small number of merchant
banks and a small number of stockbrokers and investment banks. The degree to
which markets are made varies according to the instrument and the type of
security.

Short-Term Debt Instruments. The short-term money market includes
instruments such as Reserve Bank Bills, Certificates of Deposit, Bills of
Exchange, which includes Bank Bills and Commercial Bills, and Promissory Notes.

New Zealand Government debt securities on issue as at September 30, 1995,
are summarized in the following table.

NEW ZEALAND GOVERNMENT DEBT SECURITIES ON ISSUE
(NEW ZEALAND $ IN MILLIONS AS AT SEPTEMBER 30, 1995)

<TABLE>
<S> <C>
Government Bonds............................................... NZ$22,729.6
Treasury Bills................................................. 6,954.0
Other Debt Securities.......................................... 771.2
-----------
Total................................................ NZ$30,454.8
</TABLE>

- ---------------
Source: Reserve Bank of New Zealand Bulletin, Vol. 58 No. 4 1995.

A-11
<PAGE> 85

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

NO DEALER, SALESPERSON 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 MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE INVESTMENT ADVISER OR ANY OF THE DEALER MANAGERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THE
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY SUCH PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THE PROSPECTUS WILL BE AMENDED OR
SUPPLEMENTED ACCORDINGLY.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Fund Expenses............................. 10
Financial Highlights...................... 11
The Offer................................. 15
Use of Proceeds........................... 22
Description of Common Stock............... 22
The Fund.................................. 24
Risk Factors and Special Considerations... 25
Portfolio Composition..................... 28
Comparison of Fund Total Return to the
CBBI in Australian Dollars.............. 28
Investment Objective and Policies;
Investment Restrictions................. 30
Management of the Fund.................... 34
Management Agreement and Advisory
Agreement............................... 43
Administration Agreement.................. 45
Consultant Agreement...................... 46
Portfolio Transactions and Brokerage...... 46
Net Asset Value of Common Stock........... 46
Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan..... 47
Taxation.................................. 49
Capital Stock............................. 54
Certain Provisions of the Articles of
Amendment and Restatement and By-Laws... 57
Custodian, Dividend Paying Agents,
Transfer Agents, Registrars and Auction
Agent................................... 58
Experts................................... 58
Distribution Arrangements................. 58
Legal Matters............................. 59
Additional Information.................... 59
Financial Statements...................... F-1
Report of Independent Accountants......... F-12
Appendix A................................ A-1
</TABLE>

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

31,129,561

Shares of Common Stock

THE FIRST AUSTRALIA PRIME

INCOME FUND, INC.

Issuable Upon Exercise of

Non-Transferable Rights to

Subscribe for Such

Shares of Common Stock

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

PROSPECTUS
----------------

May 1, 1996

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