PRUDENTIAL MUNICIPAL BOND FUND, 497, 1999-07-02

PRUDENTIAL MUNICIPAL BOND FUND
497, 1999-07-02

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<PAGE>
FUND TYPE:
- ------------------------------------------
Municipal bond

INVESTMENT OBJECTIVE:
- ------------------------------------------
Insured Series: Maximum amount of income that is eligible for exclusion from
federal income taxes consistent with the preservation of capital

High Income Series: Maximum amount of income that is eligible for exclusion
from federal income taxes

PRUDENTIAL
MUNICIPAL BOND FUND
[LOGO]

- ---------------------------------------------------------------
INSURED SERIES
HIGH INCOME SERIES
PROSPECTUS: JUNE 30, 1999

As with all mutual funds, the
Securities and Exchange Commission
has not approved or disapproved the
Fund's shares, nor has the SEC
determined that this prospectus is
complete or accurate. It is a
criminal offense to state otherwise. [LOGO]
<PAGE>
TABLE OF CONTENTS
- -------------------------------------

<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
Insured Series:
1 Investment Objective and Principal Strategies
2 Principal Risks
3 Evaluating Performance
4 Fees and Expenses of the Series
High Income Series:
6 Investment Objective and Principal Strategies
6 Principal Risks
8 Evaluating Performance
9 Fees and Expenses of the Series

11 HOW THE FUND INVESTS
11 Insured Series: Investment Objective and Policies
12 High Income Series: Investment Objective and Policies
13 Other Investments
16 Derivative Strategies
16 Additional Strategies
17 Investment Risks

21 HOW THE FUND IS MANAGED
21 Board of Directors
21 Manager
21 Investment Adviser
21 Portfolio Managers
22 Distributor
22 Year 2000 Readiness Disclosure

23 FUND DISTRIBUTIONS AND TAX ISSUES
23 Distributions
24 Tax Issues
25 If You Sell or Exchange Your Shares
</TABLE>

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PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
- -------------------------------------------------------------------
<TABLE>
<S> <C>
26 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
26 How to Buy Shares
32 How to Sell Your Shares
35 How to Exchange Your Shares

37 FINANCIAL HIGHLIGHTS
38 Insured Series:
38 Class A Shares
39 Class B Shares
40 Class C Shares
41 Class Z Shares
42 High Income Series:
42 Class A Shares
43 Class B Shares
44 Class C Shares
45 Class Z Shares

46 THE PRUDENTIAL MUTUAL FUND FAMILY

48 APPENDIX A: DESCRIPTION OF SECURITY RATINGS

FOR MORE INFORMATION (Back Cover)
</TABLE>

- --------------------------------------------------------------------------------
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------

This prospectus provides information about the PRUDENTIAL MUNICIPAL BOND FUND
(the Fund), which consists of two separate series--the INSURED SERIES and the
HIGH INCOME SERIES (each, a Series). While the two Series have some common
attributes, each one has its own portfolio managers, investment objective and
policies, performance information, financial highlights and risks. Therefore,
some sections of this prospectus deal with each Series separately, while other
sections address both Series at the same time.
In sections that concern just the Insured Series, "the Series" refers to the
Insured Series. In sections that concern just the High Income Series, "the
Series" refers to the High Income Series.
This section highlights key information about each Series. Additional
information follows this summary.

INSURED SERIES
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to provide THE MAXIMUM AMOUNT OF INCOME THAT IS
ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES, CONSISTENT WITH THE
PRESERVATION OF CAPITAL. To achieve our objective, we normally invest at least
80% of the Series' net assets in municipal bonds, which are fixed-income
securities issued by states and municipalities. The Series' portfolio consists
primarily of MUNICIPAL BONDS THAT ARE (1) INSURED BY AN ENTITY WHOSE
CLAIMS-PAYING ABILITY AT THE TIME OF PURCHASE IS RATED AAA BY MOODY'S INVESTORS
SERVICE (MOODY'S) OR AAA BY STANDARD AND POOR'S RATINGS SERVICE (S&P) OR
COMPARABLY RATED BY ANOTHER MAJOR RATING SERVICE SO THAT THE BOND IS RATED AAA
OR AAA OR MEETS THE ELIGIBILITY CRITERIA IMPOSED BY SUCH INSURERS, (2) RATED AAA
OR AAA BY MOODY'S OR S&P, RESPECTIVELY, OR COMPARABLY RATED BY ANOTHER MAJOR
RATING SERVICE, OR (3) BACKED BY THE FULL FAITH AND CREDIT OF THE U.S.
GOVERNMENT. Under normal market conditions, at least 70% of the Series' total
assets will consist of insured municipal bonds, which are municipal bonds whose
interest and/or principal payments are insured by the bond issuers or other
parties. The Series may hold certain municipal bonds, the interest on which is
subject to the federal alternative minimum tax (AMT).
In determining which securities to buy and sell, the investment adviser will
consider, among other things, yield, maturity, issue, quality characteristics
and expectations regarding economic and political developments, including
movements in interest rates and demand for municipal bonds. The investment
adviser will seek to anticipate interest rate movements and will purchase and
sell municipal bonds accordingly. The investment adviser will also consider the
claims-paying ability with respect to insurers of municipal bonds. The
investment adviser will also seek to take advantage of differentials in yields
with

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1 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------

respect to securities with similar credit ratings and maturities, but which vary
according to the purpose for which they were issued. The investment adviser will
also seek to take advantage of differentials in yields with respect to
securities issued for similar purposes with similar maturities, but which vary
according to ratings. While we make every effort to achieve our objective, we
can't guarantee success.

PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the Series
invests at least 80% of its net assets in municipal bonds, there is the risk
that the bonds may lose value because interest rates change or because there is
a lack of confidence in the issuer or in the bond's insurer. Bonds with longer
maturity dates typically produce higher yields and are subject to greater price
fluctuations as a result of changes in interest rates than bonds with shorter
maturity dates.
Bond prices and the Series' net asset value generally move in opposite
directions from interest rates--if interest rates go up, the prices of the bonds
in the Series' portfolio may fall because the bonds the Series holds won't, as a
rule, pay as well as the newer bonds issued. Bonds that are issued when interest
rates are high generally increase in value when interest rates fall.
In addition to interest rate changes, municipal bonds are subject to the
risk that the issuer may be unable to make principal and interest payments when
they are due. The Series purchases insured municipal bonds to reduce such credit
risks. Although insurance coverage reduces credit risks by providing that the
insurer will make timely payment of interest and/or principal, it does not
provide protection against the market fluctuations of insured bonds or
fluctuations in the price of the shares of the Series. An insured municipal bond
fluctuates in value largely based on factors relating to the insurer's
creditworthiness or ability to satisfy its obligations.
Municipal bonds and, in particular, municipal leases may be subject to the
risk that the borrower may not set aside funds to make the bond or lease
payments.
Like any mutual fund, an investment in the Series could lose value, and you
could lose money. For more detailed information about the risks associated with
the Series, see "How the Fund Invests--Investment Risks."
An investment in the Series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.

- --------------------------------------------------------------------------------
2
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------

EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Insured Series performs. The
following bar chart shows the Series' performance for each full calendar year of
operation for the last 10 years. The table shows how the Series' average annual
returns for the periods indicated compare with those of a broad-based securities
index and a group of similar mutual funds. They demonstrate the risk of
investing in the Series and how returns can change. Past performance does not
mean that the Series will achieve similar results in the future.

ANNUAL RETURNS(1) (Class B shares)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C>
1989 9.63
1990 6.12
1991 11.69
1992 7.98
1993 11.37
1994 (5.67)
1995 16.3
1996 2.42
1997 8.37
1998 5.55
BEST QUARTER:6.25% (1st quarter of 1995) WORST QUARTER: (6.03%) (1st quarter of 1994)
</TABLE>

1 THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. THE TOTAL
RETURN OF THE CLASS B SHARES FOR THE QUARTER ENDED MARCH 31, 1999 WAS .25%.

AVERAGE ANNUAL RETURNS(1) (AS OF 12/31/98)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
5 10
1 YEAR YEARS YEARS SINCE INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares 2.79% 4.93% N/A 7.11% (since 1-22-90)
Class B shares 0.55% 4.98% 7.22% 7.67% (since 9-17-87)
Class C shares 3.24% N/A N/A 6.27% (since 8-1-94)
Class Z shares 5.98% N/A N/A 7.82% (since 9-16-96)
Lehman Muni Bond Index(2) 6.20% 7.43% 8.24% N/A
Lipper Insured Average(3) 5.02% 6.76% 7.39% N/A
</TABLE>

1 THE SERIES' RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
2 THE LEHMAN BROTHERS MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX OF OVER
21,000 MUNICIPAL BONDS WHICH ARE GENERALLY REPRESENTATIVE OF THE LONG-TERM
INVESTMENT-GRADE MUNICIPAL BOND MARKET. THESE RETURNS DO NOT INCLUDE THE
EFFECT OF ANY SALES CHARGES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED
THE EFFECT OF THE SALES CHARGES. THE LEHMAN INSURED MUNI BOND INDEX RETURNS
SINCE THE INCEPTION OF EACH CLASS ARE 7.95% FOR CLASS A, 8.51% FOR CLASS B,
7.51% FOR CLASS C AND 7.67% FOR CLASS Z SHARES. SOURCE: LEHMAN BROS.
3 THE LIPPER INSURED MUNICIPAL DEBT FUNDS CATEGORY IS BASED ON THE AVERAGE
RETURN OF ALL MUTUAL FUNDS IN THIS CATEGORY. THESE RETURNS DO NOT INCLUDE
THE EFFECT OF ANY SALES CHARGES. THESE RETURNS WOULD BE LOWER IF THEY
INCLUDED THE EFFECT OF SALES CHARGES. THE LIPPER RETURNS SINCE THE
INCEPTION OF EACH CLASS ARE 7.23% FOR CLASS A, 7.98% FOR CLASS B, 6.66% FOR
CLASS C AND 6.63% FOR CLASS Z SHARES. SOURCE: LIPPER, INC.

- -------------------------------------------------------------------
3 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------

FEES AND EXPENSES OF THE SERIES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of the Insured Series--Class A, B, C and
Z. Each share class has different sales charges--known as loads--and expenses,
but represents an investment in the same fund. Class Z shares are available only
to a limited group of investors. For more information about which share class
may be right for you, see "How to Buy, Sell and Exchange Shares of the Fund."

SHAREHOLDER FEES(1) (paid directly from your investment)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering
price) 3% None 1% None
Maximum deferred sales
charge (load) (as a
percentage of the lower of
original purchase price or
sale proceeds) None 5% (2) 1% (3) None
Maximum sales charge (load)
imposed on reinvested
dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>

ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees .50% .50% .50% .50%
+ Distribution and service
(12b-1) fees(4) .30% .50% 1.00% None
+ Other expenses .10% .10% .10% .10%
= Total annual Series
operating expenses(4) .90% 1.10% 1.60% .60%
- Fee waiver(4) .05% None .25% None
= Net annual Series
operating expenses .85% 1.10% 1.35% .60%
</TABLE>

1 YOUR BROKER MAY CHARGE A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND SALES
OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER
PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
4 THE FUND'S DISTRIBUTION AND SERVICE FEES HAVE BEEN RESTATED TO REFLECT
CURRENT FEE LEVELS FOR CLASS A SHARES. FOR THE FISCAL YEAR ENDING APRIL 30,
2000, THE DISTRIBUTOR OF THE FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS
DISTRIBUTION AND SERVICE (12b-1) FEES FOR CLASS A SHARES TO .25 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES AND .75 OF 1% OF THE
CLASS C SHARES.

- --------------------------------------------------------------------------------
4
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------

EXAMPLE
This example will help you compare the fees and expenses of the Insured Series'
different share classes and the cost of investing in the Series with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Series for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Series' operating expenses remain the same. After the first year, the
example does not take into account the Distributor's agreement to reduce
distribution and service (12b-1) fees for Class A and Class C shares. Although
your actual costs may be higher or lower, based on these assumptions, your costs
would be:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $384 $574 $779 $1,370
Class B shares $612 $650 $706 $1,210
Class C shares $336 $576 $939 $1,960
Class Z shares $61 $192 $335 $750
</TABLE>

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

<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $384 $574 $779 $1,370
Class B shares $112 $350 $606 $1,210
Class C shares $236 $576 $939 $1,960
Class Z shares $61 $192 $335 $750
</TABLE>

- -------------------------------------------------------------------
5 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------

HIGH INCOME SERIES
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to provide the MAXIMUM AMOUNT OF INCOME THAT IS
ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES. To achieve our objective we
normally invest at least 80% of the Series' net assets in municipal bonds, which
are fixed-income securities issued by states and muncipalities. The Series'
portfolio consists primarily of municipal bonds which are rated B or better by
Moody's or S&P and bonds either rated by another major rating service or unrated
bonds of comparable quality in the opinion of the Subadviser. Bonds rated B or
Ba by Moody's or B or BB by S&P are considered to be speculative with respect to
their capacity to make interest and principal payments and are commonly referred
to as JUNK BONDS. The municipal bonds in which the Series invests generally have
maturities in excess of 10 years at the time of purchase, although the Series
also will invest in municipal bonds having maturities ranging from one year to
10 years, provided that the weighted average maturity of the Series' investment
portfolio remains within the 15- to 30- year range. The Series may hold certain
municipal bonds, the interest on which is subject to the federal alternative
minimum tax (AMT).
In determining which securities to buy and sell, the investment adviser will
consider, among other things, yield, maturity, issue, quality characteristics
and expectations regarding economic and political developments, including
movements in interest rates and demand for municipal bonds. The investment
adviser will seek to anticipate interest rate movements and will purchase and
sell municipal bonds accordingly. The investment adviser will also seek to take
advantage of differentials in yields with respect to securities with similar
credit ratings and maturities, but which vary according to the purpose for which
they were issued. The investment adviser will also seek to take advantage of
differentials in yields with respect to securities issued for similar purposes
with similar maturities, but which vary according to ratings. While we make
every effort to achieve our objective, we can't guarantee success.

PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The securities
in which the Series invests are generally subject to the risk that the issuer
may be unable to make principal and interest payments when they are due, as well
as the risk that the securities may lose value because interest rates

- --------------------------------------------------------------------------------
6
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------

change or because there is a lack of confidence in the issuer. Bonds with longer
maturity dates typically produce higher yields and are subject to greater price
fluctuations as a result of changes in interest rates than bonds with shorter
maturity dates. Since the Series invests in lower-rated bonds, commonly known as
junk bonds, there is a greater risk of default of payment of principal and
interest. Furthermore, junk bonds tend to be less liquid than higher-rated
securities. Therefore, an investment in the Series may not be appropriate for
short-term investing.
Bond prices and the Series' net asset value generally move in opposite
directions from interest rates--if interest rates go up, the prices of the bonds
in the Series' portfolio may fall because the bonds the Series holds won't, as a
rule, pay as well as the newer bonds issued. Bonds that are issued when interest
rates are high generally increase in value when interest rates fall.
Municipal bonds and, in particular, municipal leases may be subject to the
risk that the borrower may not set aside funds to make the bond or lease
payments.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Series, see "How the Fund Invests--Investment Risks."
An investment in the Series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.

- --------------------------------------------------------------------------------
7 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------

EVALUATING PERFORMANCE
A number of factors--including risk--affect how the High Income Series performs.
The following bar chart shows the Series' performance for each full calendar
year of operation for the last 10 years. The table shows how the Series' average
annual returns for the periods indicated compare with those of a broad-based
securities index and a group of similar mutual funds. They demonstrate the risk
of investing in the Series and how returns can change. Past performance does not
mean that the Series will achieve similar results in the future.

ANNUAL RETURNS(1) (CLASS B SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
10.84 4.10 11.95 8.28 10.95 (3.41) 16.32 3.23 10.05 5.00
BEST QUARTER: 5.86% (1st quarter of 1995) WORST QUARTER:(4.14)% (1st quarter of 1994)
</TABLE>

AVERAGE ANNUAL RETURNS(1) (as of 12/31/98)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
5 10
1 YEAR YEARS YEARS SINCE INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares 2.25% 5.81% N/A 7.39% (since 1-22-90)
Class B shares 0.00% 5.87% 7.60% 8.15% (since 9-17-87)
Class C shares 2.69% N/A N/A 6.76% (since 8-1-94)
Class Z shares 5.52% N/A N/A 8.52% (since 9-16-96)
Lehman Muni Bond Index(2) 6.20% 7.43% 8.24% N/A
Lipper High Yield Average(3) 4.64% 7.26% 7.86% N/A
</TABLE>

1 THE SERIES' RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
2 THE LEHMAN BROTHERS MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX OF OVER
21,000 MUNICIPAL BONDS WHICH ARE GENERALLY REPRESENTATIVE OF THE LONG-TERM
INVESTMENT-GRADE MUNICIPAL BOND MARKET. THESE RETURNS DO NOT INCLUDE THE
EFFECT OF ANY SALES CHARGES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED
THE EFFECT OF SALES CHARGES. THE LEHMAN HIGH-YIELD MUNI BOND INDEX RETURNS
SINCE THE INCEPTION OF EACH CLASS ARE 7.95% FOR CLASS A, 8.51% FOR CLASS B,
7.51% FOR CLASS C AND 7.67% FOR CLASS Z SHARES. SOURCE: LEHMAN BROS.
3 THE LIPPER HIGH YIELD MUNICIPAL DEBT FUNDS CATEGORY IS BASED ON THE AVERAGE
RETURN OF MUTUAL FUNDS IN THIS CATEGORY. THESE RETURNS DO NOT INCLUDE THE
EFFECT OF ANY SALES CHARGES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED
THE EFFECT OF SALES CHARGES. THE LIPPER RETURNS SINCE THE INCEPTION OF EACH
CLASS ARE 7.38% FOR CLASS A, 8.07% FOR CLASS B, 7.08% FOR CLASS C AND 7.49%
FOR CLASS Z SHARES. SOURCE: LIPPER, INC.

- --------------------------------------------------------------------------------
8
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------

FEES AND EXPENSES OF THE SERIES
This table shows the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of the High Income Series-- Class A, B,
C and Z. Each share class has different sales charges--known as loads--and
expenses, but represents an investment in the same fund. Class Z shares are
available only to a limited group of investors. For more information about which
share class may be right for you, see "How to Buy, Sell and Exchange Shares of
the Fund."

SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)

ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees .50% .50% .50% .50%
+ Distribution and service
(12b-1) fees(4) .30% .50% 1.00% None
+ Other expenses .06% .06% .06% .06%
= Total annual Series
operating expenses(4) .86% 1.06% 1.56% .56%
- Fee waivers(4) .05% None .25% None
= Net annual Series
operating expenses .81% 1.06% 1.31% .56%
</TABLE>

1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.

2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER
PURCHASE.

3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.

4 THE FUND'S DISTRIBUTION AND SERVICE FEES HAVE BEEN RESTATED TO REFLECT
CURRENT FEE LEVELS FOR CLASS A SHARES. FOR THE FISCAL YEAR ENDING APRIL 30,
2000, THE DISTRIBUTOR OF THE FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS
DISTRIBUTION AND SERVICE (12b-1) FEES FOR CLASS A SHARES TO .25 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES AND .75 OF 1% OF THE
CLASS C SHARES.

- --------------------------------------------------------------------------------
9 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------

EXAMPLE
This example will help you compare the fees and expenses of the High Income
Series' different share classes and the cost of investing in the Series with the
cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Series for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Series' operating expenses remain the same. After the first year, the
example does not take into account the Distributor's agreement to reduce
distribution and service (12b-1) fees for Class A and Class C shares. Although
your actual costs may be higher or lower, based on these assumptions, your costs
would be:

<TABLE>
<CAPTION>
- ------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $380 $561 $758 $1,324
Class B shares $608 $637 $685 $1,163
Class C shares $332 $563 $918 $1,917
Class Z shares $57 $179 $313 $701
</TABLE>

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

<TABLE>
<CAPTION>
- ------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $380 $561 $758 $1,324
Class B shares $108 $337 $585 $1,163
Class C shares $232 $563 $918 $1,917
Class Z shares $57 $179 $313 $701
</TABLE>

- --------------------------------------------------------------------------------
10
<PAGE>
HOW THE FUND INVESTS
- -------------------------------------

Each Series invests substantially all and, in any event, at least 80% of the
value of the Series' net assets in MUNICIPAL BONDS, which include MUNICIPAL
NOTES and other municipal securities. Municipal bonds pay interest that
generally is eligible for exclusion from federal income taxation. Each Series,
however, may hold private activity bonds, which are municipal bonds, the
interest on which is subject to the federal alternative minimum tax (AMT).
Municipal notes, like municipal bonds, are fixed-income securities issued by
states and municipalities, except that municipal notes mature in one year or
less.
Municipal bonds include GENERAL OBLIGATION BONDS and REVENUE BONDS. General
obligation bonds are obligations supported by the credit of an issuer that has
the power to tax and are payable from that issuer's general revenues and not
from any specific source. Revenue bonds, on the other hand, are payable from
revenues from a particular source.

INSURED SERIES: INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Series is to provide the MAXIMUM AMOUNT OF
INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES CONSISTENT WITH
PRESERVATION OF CAPITAL. While we make every effort to achieve our objective, we
can't guarantee success.
THE SERIES' PORTFOLIO CONSISTS PRIMARILY OF MUNICIPAL BONDS THAT ARE (1)
INSURED BY AN ENTITY WHOSE CLAIMS-PAYING ABILITY AT THE TIME OF PURCHASE IS
RATED Aaa BY MOODY'S OR AAA BY S&P, OR COMPARABLY RATED BY ANOTHER MAJOR RATING
SERVICE SO THAT THE BOND IS RATED AAA OR Aaa OR MEETS THE ELIGIBILITY CRITERIA
IMPOSED BY SUCH INSURERS, (2) RATED Aaa OR AAA BY MOODY'S OR S&P, RESPECTIVELY,
OR COMPARABLY RATED BY ANOTHER MAJOR RATING SERVICE, OR (3) BACKED BY THE FULL
FAITH AND CREDIT OF THE U.S. GOVERNMENT. Under normal market conditions, at
least 70% of the Series total assets will consist of insured municipal bonds.
A rating is an assessment of the likelihood of timely payment of debt (with
respect to a municipal bond) or claims (with respect to an insurer of a

- -------------------------------------------------------------------
MUNICIPAL BONDS
States and municipalities issue bonds in order to borrow money to finance a
project. You can think of bonds as loans that investors make to the state, local
government or other issuer. The government gets the cash needed to complete the
project and investors earn income on their investment.
- -------------------------------------------------------------------

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11 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

municipal bond), and can be useful when comparing different municipal bonds.
These ratings are not a guarantee of quality. The opinions of the ratings
agencies do not reflect market risk and they may, at times, lag behind the
current financial condition of an issuer or insurer. The Series may also invest
in municipal bonds that are not rated if, based upon a credit analysis by the
Series' investment adviser, the investment adviser believes that such securities
are of comparable quality to other municipal bonds that the Series may purchase.
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investments and Risks." The Statement
of Additional Information--which we refer to as the SAI--contains more
information about the Series. To obtain a copy, see the back cover page of this
prospectus.
The Series' investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.

HIGH INCOME SERIES: INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Series is to provide the MAXIMUM AMOUNT OF
INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES. While we make
every effort to achieve our objective, we can't guarantee success.
The Series' portfolio consists primarily of MUNICIPAL BONDS RATED B OR
BETTER BY MOODY'S OR S&P OR BONDS EITHER RATED BY ANOTHER MAJOR RATING SERVICE
OR UNRATED BONDS OF COMPARABLE QUALITY. Municipal bonds rated Ba or BB or lower
by Moody's or S&P, respectively, are generally considered lower-rated or
HIGH-YIELD or JUNK BONDS. Municipal bonds rated Baa by Moody's or BBB by S&P are
regarded as investment-grade, but have speculative characteristics and are
riskier than higher-rated municipal bonds. A description of bond ratings is
contained in Appendix A to this prospectus.
Lower-rated bonds tend to offer higher yields, but also offer greater risks
than higher-rated securities. Under certain economic conditions, however, lower
or medium-rated bonds might not yield significantly more than higher-rated
bonds, or comparable unrated bonds. If that happens, the Series may invest in
higher-rated bonds that offer similar yields but have less risk. Furthermore, if
issuers redeem their high-yield bonds at a higher than expected rate, which
might happen during periods of declining interest

- --------------------------------------------------------------------------------
12
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

rates, the Series could be forced to buy higher-rated, lower-yielding
securities, which would decrease the Series' return.
During the year ended April 30, 1999, the monthly dollar-weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total investments, were as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
- -----------------------------------------------------------------------
<S> <C>
AAA/Aaa 27.6%
AA/Aa 4.8%
A/A .8%
BBB/Baa 12.0%
BB/Ba 3.2%
B/B 1.1%
CCC/Caa .3%
Unrated
AAA/Aaa 7.8%
AA/Aa 0%
A/A .3%
BBB/Baa 3.3%
BB/Ba 17.4%
B/B 18.2%
CCC/Caa 2.0%
D 1.2%
</TABLE>

The Series' investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investments and Risks." The Statement
of Additional Information--which we refer to as the SAI--contains more
information about the Series. To obtain a copy, see the back cover page of this
prospectus.

OTHER INVESTMENTS
In addition to the above principal strategies, each Series may also invest in
the following other investments to try to increase the Series' returns or
protect their assets if market conditions warrant.

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13 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

FLOATING RATE BONDS, VARIABLE RATE BONDS AND INVERSE FLOATERS
Each Series may invest in floating rate bonds, variable rate bonds and inverse
floaters. FLOATING RATE BONDS are municipal bonds that have an interest rate
that is set as a specific percentage of a designated rate, such as the rate on
Treasury bonds or the prime rate at major commercial banks. The interest rate on
floating rate bonds changes when there is a change in the designated rate.
VARIABLE RATE BONDS are municipal bonds that have an interest rate that is
adjusted, based on the market rate at a specified period. They generally allow
the Series to demand payment of the bond on short notice for an amount that may
be more or less than the amount paid. INVERSE FLOATERS are municipal bonds with
a floating or variable interest rate that moves in the opposite direction of the
interest rate on another security or the value of an index.

MUNICIPAL LEASE OBLIGATIONS
Each Series may invest in MUNICIPAL LEASE OBLIGATIONS. The interest and
principal on municipal lease obligations are paid out of lease payments made by
the party leasing the facilities that were built with the bonds. Typically,
municipal lease obligations are issued by states or financing authorities to
provide money for construction projects such as schools, offices or stadiums.
The entity that leases the building or facility would be responsible for paying
the interest and principal on the obligation.

MUNICIPAL ASSET-BACKED SECURITIES
Each Series may invest in MUNICIPAL ASSET-BACKED SECURITIES. A municipal
asset-backed security is a type of pass-through instrument that pays interest
which is eligible for exclusion from federal income taxation based upon the
income from an underlying pool of municipal bonds.

WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each Series may purchase municipal bonds on a "WHEN-ISSUED" or
"DELAYED-DELIVERY" basis, without limit. When the Series makes this type of
purchase, the price and rate are fixed at the time of purchase, but delivery and
payment for the bonds take place at a later time. The Series does not earn
interest income until the date the bonds are delivered.

- --------------------------------------------------------------------------------
14
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

REPURCHASE AGREEMENTS
Each Series may use REPURCHASE AGREEMENTS where a party agrees to sell a
security to the Series and then repurchase it at an agreed-upon price at a
stated time. A repurchase agreement is like a loan by the Series to the other
party which creates a fixed return for the Series.

LIQUIDITY PUTS
Each Series may purchase and exercise PUTS on municipal bonds without limit.
Puts give a Series the right to sell securities at a specified price and date.
Puts may be acquired to reduce the risk of the securities subject to the puts,
but puts may involve additional costs to the Series, which could reduce the
Series' return.

BORROWING
Each Series may BORROW an amount equal to no more than 33 1/3% of the value of
its total assets (calculated at the time of the borrowing) from banks for
temporary, extraordinary or emergency purposes, for the clearance of
transactions or for investment purposes. Borrowing for investment purposes is
generally known as LEVERAGING. Leveraging is a speculative investment technique
and exaggerates the effect of any increase or decrease in the market value of
the Fund's portfolio.

DISTRESSED SECURITIES
The High Income Series may invest up to 10% of its assets in DISTRESSED
SECURITIES, that is, securities of issuers that are financially troubled and
which we believe are currently valued at less than their long-term potential.
The Series is also permitted to invest in defaulted bonds and in bonds having a
rating of D or better by Moody's, S&P or another major rating service or unrated
bonds of comparable quality.

TEMPORARY DEFENSIVE STRATEGY
For temporary defensive purposes, each Series may hold up to 100% of its assets
in cash or investment-grade taxable bonds, including bonds that are exempt from
state, but not federal, income taxation. Investing heavily in these securities
can limit our ability to achieve each Series' objective of the maximum amount of
income that is eligible for exclusion from federal income taxes, but can help to
preserve the Series' assets.

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15 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve both Series' returns
or protect their assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Series will not lose money. Derivatives--such as FUTURES
CONTRACTS, OPTIONS AND OPTIONS ON FUTURES-- involve costs and can be volatile. A
futures contract is an agreement to buy or sell a set quantity of an underlying
product at a future date, or to make or receive a cash payment based on the
value of a securities index. An option is the right to buy or sell securities
or, in the case of an option on a futures contract, the right to buy or sell a
futures contract in exchange for a premium.
With derivatives, the investment adviser tries to predict if the underlying
investment, whether a security, market index, currency, interest rate or some
other benchmark, will go up or down at some future date. We may use derivatives
to try to reduce risk or to increase return consistent with a Series' overall
investment objective. Any derivatives we may use may not match a Series'
underlying holdings. For more information about these strategies, see the SAI,
"Description of the Fund, Its Investments and Risks--Hedging Strategies."

ADDITIONAL STRATEGIES
Each Series also follows certain policies when it PURCHASES SHARES OF OTHER
INVESTMENT COMPANIES (each Series may hold up to 10% of its total assets in such
securities, which entail duplicate management and advisory fees to
shareholders); LENDS ITS SECURITIES to others (each Series can lend portfolio
securities in an amount up to 33% of the value of its total assets to brokers,
dealers and financial institutions, provided that such loans are callable at any
time by the Fund, and are at all times secured by cash or equivalent
collateral); and HOLDS ILLIQUID SECURITIES (each Series may hold up to 15% of
its net assets in illiquid securities, including certain securities with legal
or contractual restrictions, those without a readily available market and
repurchase agreements with maturities longer than seven days). Each Series is
subject to certain investment restrictions that are fundamental policies, which
means they cannot be changed without shareholder approval. For more information
about these restrictions, see the SAI.

- --------------------------------------------------------------------------------
16
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

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

INVESTMENT TYPE

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
% OF EACH SERIES' TOTAL
ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS -- Credit risk--the risk -- Tax-exempt interest
BOTH SERIES: that the borrower income, except with
can't pay back the respect to certain
AT LEAST 80% OF EACH money borrowed or bonds, such as
SERIES' NET ASSETS make interest private activity
UNDER NORMAL payments (lower for bonds, which are
CONDITIONS insured and subject to the
higher-rated bonds) federal alternative
-- Market risk--the risk minimum tax (AMT)
that bonds will lose -- If interest rates
value in the market decline, long-term
because interest yields should be
rates change or higher than money
there is a lack of market yields
confidence in the
borrower
-- Concentration
risk--the risk that
bonds may lose value
because of political
or economic events
in the geographic
region where the
Series' investments
are focused
-- The risk that federal
income tax rates may
decrease, which
could decrease
demand for municipal
bonds
-- Illiquidity risk--the
risk that it may be
difficult to value
precisely and sell
at time or price
desired
-- Nonappropriation
risk-- the risk
that the
municipality may not
include the bond
obligations in
future budgets
- --------------------------------------------------------------------------------
</TABLE>

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17 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

INVESTMENT TYPE (CONT'D)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
% OF EACH SERIES' TOTAL
ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGH-YIELD MUNICIPAL -- Higher market risk -- May offer higher
BONDS (JUNK BONDS) than higher-grade interest income than
HIGH INCOME SERIES municipal bonds higher-grade
ONLY: -- Higher credit risk municipal bonds
UP TO 100% than higher-grade
municipal bonds
-- Certain high-yield
municipal bonds may
be more illiquid
(harder to value and
sell), in which case
valuation would
depend more on
investment adviser's
judgment than is
generally the case
with higher-rated
municipal bonds
- --------------------------------------------------------------------------------
DISTRESSED SECURITIES -- Very high credit risk -- May offer greater
HIGH INCOME SERIES -- Very high market risk capital appreciation
ONLY: -- More likely to and a higher rate of
UP TO 10% default, especially return if companies
during economic fulfill their
downturns anticipated
-- Illiquidity risk potential
-- Subject to greater
volatility than
securities of more
stable companies
-- To the extent the
Series invests in
bankrupt companies,
the Series may be
subject to
litigation risks and
costs
- --------------------------------------------------------------------------------
</TABLE>

- --------------------------------------------------------------------------------
18
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

INVESTMENT TYPE (CONT'D)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
% OF EACH SERIES' TOTAL
ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Fund could make
BOTH SERIES: futures and options money and protect
PERCENTAGE VARIES may not fully offset against losses if
the underlying the investment
positions and this analysis proves
could result in correct
losses to the Fund -- One way to manage the
that would not have Fund's risk/return
otherwise occurred balance is to lock
-- Derivatives used for in the value of an
risk management may investment ahead of
not have the time
intended effects and -- Derivatives that
may result in losses involve leverage
or missed could generate
opportunities substantial gains or
-- The other party to a low cost
derivatives contract
could default
-- Derivatives that
involve leverage
(borrowing for
investment) could
magnify losses
-- Certain types of
derivatives involve
costs to the Fund
which can reduce
returns
- --------------------------------------------------------------------------------
MUNICIPAL LEASE -- Credit risk -- Tax-exempt interest
OBLIGATIONS -- Market risk income (except with
BOTH SERIES: -- Concentration risk respect to certain
PERCENTAGE VARIES -- Potential risk that bonds, such as
federal income tax private activity
rates may decrease, bonds, which are
which could decrease subject to the AMT)
demand for municipal -- If interest rates
lease obligations decline, long-term
-- Illiquidity risk yields should be
-- Nonappropriation risk higher than money
market yields
- --------------------------------------------------------------------------------
</TABLE>

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19 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------

INVESTMENT TYPE (CONT'D)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
% OF EACH SERIES' TOTAL
ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MUNICIPAL ASSET-BACKED -- Prepayment risk--the -- Regular interest
SECURITIES risk that the income
BOTH SERIES: underlying bonds may -- Pass-through
PERCENTAGE VARIES be prepaid, instruments provide
partially or greater
completely, diversification than
generally during direct ownership of
periods of falling municipal bonds
interest rates,
which could
adversely effect
yield to maturity
and could require
the Series to
reinvest in lower
yielding bonds.
-- Credit risk--the risk
that the underlying
municipal bonds will
not be paid by
issuers or by credit
insurers or
guarantors of such
instruments. Some
municipal
asset-backed
securities are
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- Market risk
- --------------------------------------------------------------------------------
BORROWING -- Leverage (borrowing -- Leverage may magnify
BOTH SERIES: for investment) may investment gains
UP TO 33 1/3% magnify losses
-- Interest costs and
borrowing fees may
exceed potential
investment gains
- --------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to -- May offer more
BOTH SERIES: value precisely attractive yield or
UP TO 15% OF NET -- May be difficult to potential for growth
ASSETS sell at the time or than more widely
price desired traded securities
- --------------------------------------------------------------------------------
</TABLE>

- --------------------------------------------------------------------------------
20
<PAGE>
HOW THE FUND IS MANAGED
- -------------------------------------

BOARD OF DIRECTORS
The Board of Directors oversees the actions of the Manager, Investment Adviser
and Distributor and decides on general policies. The Board also oversees the
Fund's officers who conduct and supervise the daily business operation of the
Fund.

MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077

Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended April 30, 1999, the Insured Series and High Income Series paid PIFM
management fees of .50% and .45% of their respective average net assets.
As of March 31, 1999, PIFM served as the Manager to all 46 of the Prudential
Mutual Funds, and as Manager or administrator to 22 closed-end investment
companies with aggregate assets of approximately $71.6 billion.

INVESTMENT ADVISER
The Prudential Investment Corporation (PIC), called Prudential Investments, is
each Series' investment adviser (the subadviser). Its address is Prudential
Plaza, 751 Broad Street, Newark, NJ 07102. PIFM is responsible for all
investment advisory services, supervises the subadvisers and reimburses each of
them for its reasonable costs and expenses.

PORTFOLIO MANAGERS
Prudential Investments' Fixed-Income Group is organized by teams that specialize
by sector. The Fixed Income Investment Policy Committee, which is comprised of
senior investment staff from each sector team, provides guidance to the teams
regarding duration risk, asset allocations and general risk parameters.
Portfolio managers PETER J. ALLEGRINI and CHRISTIAN SMITH contribute bottom-up
securities selection within those guidelines and are responsible for the
day-to-day management of the High Income Series and Insured Series,
respectively. Mr. Allegrini is a member of the Fixed Income Investment Policy
Committee.
Mr. Allegrini, a Managing Director of Prudential Investments, has managed
the High Income Series' Portfolio since July 1994. Before joining Prudential
Investments as a portfolio manager in July 1994, he worked at Fidelity
Investments from 1982 to 1994, first as a senior bond analyst and then as a
porfolio manager. He earned a B.S. from Mount St. Mary's

- -------------------------------------------------------------------
21 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------

College and an M.B.A. from the University of Hartford.
Mr. Smith, a Vice President of Prudential Investments, has managed the
Insured Series' portfolio since October 1997 and has been employed by PIC in
various capacities since 1988, and as a portfolio manager since 1991. He earned
a B.S. from Rutgers University and an M.B.A. from New York University.

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

YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000. The Fund and its Board receive, and have
received since early 1998, satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the service providers (or other securities market
participants) will successfully complete the necessary changes in a timely
manner. Moreover, the Fund, at this time, has not considered retaining
alternative service providers or directly undertaken efforts to achieve year
2000 readiness, the latter of which would involve substantial expenses without
an assurance of success.
Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/ or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Fund.

- --------------------------------------------------------------------------------
22
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- -------------------------------------

Investors who buy shares of each Series should be aware of some important tax
issues. For example, each Series pays DIVIDENDS of net investment income monthly
and distributes LONG-TERM CAPITAL GAINS, if any, at least annually. Dividends
generally will be exempt from federal income taxes. If, however, the Series
invests in taxable obligations, it will pay dividends that are not exempt from
federal income taxes. Dividends and distributions from, and gain from the sale
of shares of, each Series may also be subject to state income tax in the state
in which you reside.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.

DISTRIBUTIONS
Each Series distributes DIVIDENDS of any net investment income to shareholders,
typically every month. For example, if the Series owns a City XYZ bond and the
bond pays interest, the Series will pay out a portion of this interest as a
dividend to its shareholders, assuming the Series' income is more than its costs
and expenses. These dividends will generally be EXEMPT FROM FEDERAL INCOME
TAXES, as long as 50% or more of the value of the Series' assets at the end of
each quarter is invested in state, municipal and other obligations. This
interest is excluded from gross income for federal income tax purposes. As we
mentioned before, at least 80% of each Series' net assets will be invested in
such obligations during normal market conditions. Dividends attributable to the
taxable bonds held by the Series, market discount and to short-term capital
gains, however, will be subject to federal, state and local income tax at
ordinary income tax rates. Some shareholders may be subject to federal
alternative minimum tax liability. Tax-exempt interest from certain bonds is
treated as an item of tax preference, and may be attributed to shareholders. A
portion of all tax-exempt interest is includable as an upward adjustment in
determining a corporation's alternative minimum taxable income. These rules
could make you liable for the alternative minimum tax (AMT).
Each Series also distributes LONG-TERM CAPITAL GAINS to shareholders
(typically once a year). Long-term capital gains are generated when the Series
sells assets that it held for more than 12 months, for a profit. For an
individual, the maximum long-term capital gains rate is 20%.

- -------------------------------------------------------------------
23 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------

For your convenience, distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the respective Series without any sales charge. If
you ask us to pay the distributions in cash, we will send you a check if your
account is with the Transfer Agent. Otherwise, if your account is with a broker,
you will receive a credit to your account. Either way, the distributions may be
subject to taxes, unless your shares are held in a qualified tax-deferred plan
or account. For more information about Automatic Reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.

TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and long-term capital gains we distributed to you during the prior year.
Fund distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders may be eligible for the 70% dividends-received deduction for
certain dividends paid out of dividend income of the Fund.

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

- --------------------------------------------------------------------------------
24
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------

IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of a Series for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax unless you hold shares in a qualified tax-deferred
plan or account. If you sell shares of a Series for a loss, you may have a
capital loss, which you may use to offset any capital gains you have.

<TABLE>
<S> <C> <C>
+$ CAPITAL GAIN
(taxes owed)
RECEIPTS OR
FROM SALE
-$ CAPITAL LOSS
(offset against gain)
</TABLE>

Exchanging your shares of a Series for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging a Series' shares
will not be reported on the Form 1099; however, proceeds from the sale or
exchange will be reported on Form 1099-B. Therefore, you or your financial
adviser should keep track of the dates on which you buy and sell-- or
exchange--Series shares, as well as the amount of any gain or loss on each
transaction. For tax advice, please see your tax adviser.

AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event." This opinion, however, is not binding on the
Internal Revenue Service (IRS). For more information about the automatic
conversion of Class B shares, see "Class B Shares Convert to Class A Shares
After Approximately Seven Years" in the next section.

- -------------------------------------------------------------------
25 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- -------------------------------------

HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of a Series for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020

To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of a Series, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into a Series) or suspend or modify a Series' sale of its
shares.

STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C, and Class Z
shares of a Series, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
the varying distribution fees
-- The different sales charges that apply to each share class-- Class
A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front-end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges

- --------------------------------------------------------------------------------
26
<PAGE>
HOW TO BUY, SELL AND
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- ------------------------------------------------

-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
-- Whether you qualify to purchase Class Z shares.

See "How to Sell Your Shares" for a description of the impact of CDSCs.

SHARE CLASS COMPARISON. Use this chart to help you compare each Series'
different share classes. The discussion following this chart will tell you
whether you are entitled to a reduction or waiver of any sales charges.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum purchase amount(1) $1,000 $1,000 $2,500 None
Minimum amount for $100 $100 $100 None
subsequent purchases(1)
Maximum initial sales charge 3% of the public None 1% of the public None
offering price offering price
Contingent Deferred Sales None If Sold During: 1% on sales made None
Charge (CDSC)(2) Year 1, 5% within 18 months
Year 2, 4% of purchase(2)
Year 3, 3%
Year 4, 2%
Year 5/6, 1%
Year 7, 0%
Annual distribution and .30 of 1% .50% of 1% 1% None
service (12b-1) fees (shown (.25 of 1% (.75% of 1%
as a percentage of average currently) currently)
net assets)(3)
</TABLE>

1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM
INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC
INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "STEP 4: ADDITIONAL
SHAREHOLDER SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES-- CONTINGENT DEFERRED SALES CHARGES (CDSC)." CLASS C
SHARES BOUGHT BEFORE NOVEMBER 2, 1998, HAVE A 1% CDSC IF SOLD WITHIN ONE
YEAR.
3 THESE DISTRIBUTION FEES ARE PAID FROM THE SERIES' ASSETS ON A CONTINUOUS
BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR INVESTMENT AND
MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES. THE SERVICE FEE
FOR CLASS A, CLASS B AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE
IS LIMITED TO .25 OF 1% (INCLUDING THE .25 OF 1% SERVICE FEE) AND .75 OF 1%
FOR CLASS A SHARES AND CLASS C SHARES, RESPECTIVELY.

- -------------------------------------------------------------------
27 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
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- ------------------------------------------------

REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.

INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's initial
sales charge by increasing the amount of your investment. This table shows
you how the sales charge decreases as the amount of your investment
increases.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $99,000 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50% 2.56% 2.50%
$250,000 to $499,999 1.50% 1.52% 1.50%
$500,000 to $999,999 1.00% 1.01% 1.00%
$1 million and above* None None None
</TABLE>

* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES.

To satisfy the purchase amounts above, you can

-- Invest with an eligible group of related investors

-- Buy the Class A shares of two or more Prudential mutual funds at the
same time

-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the
applicable sales charge (note: you must notify the Transfer Agent if
you qualify for Rights of Accumulation)

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

MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:

-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades and charges its clients a management, consulting
or other fee for its services;

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

Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of

- --------------------------------------------------------------------------------
28
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.

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

WAIVING CLASS C'S INITIAL SALES CHARGE
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one of
the following:
-- Purchase your shares through an account at Prudential Securities
-- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
-- Purchase your shares through other brokers.

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

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

-- Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades, links its clients' accounts to a master account
in the sponsor's name and charges its clients a

- -------------------------------------------------------------------
29 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

management, consulting or other fee for its services
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.

OTHER TYPES OF INVESTORS. Class Z shares of the Fund can also be purchased by
any of the following:
-- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
-- Prudential, with an investment of $10 million or more.

In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.

CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Series
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."

STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of a Series is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV-- is
determined by a simple calculation: it's the total value of a Series

- --------------------------------------------------------------------------------
30
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

(assets minus liabilities) divided by the total number of shares outstanding.
For example, if the value of the investments held by fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the price of mutual
funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York time on days that the New York Stock Exchange is open for trading. We do
not determine NAV with respect to a Series on days when we have not received any
orders to purchase, sell or exchange the Series' shares, or when changes in the
value of the Series' portfolio do not materially affect the NAV.

WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge a separate or additional fee for purchases of
shares.

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

AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, a Series pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Series at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.

- -------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds City ABC bonds in
its portfolio and the price of City ABC bonds goes up, while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.

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

- -------------------------------------------------------------------
31 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

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

AUTOMATIC INVESTMENT PLAN. You can make regular purchases of a Series for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.

THE PRUTECTOR PROGRAM. Optional group-term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.

SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.

REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about your Series. To reduce the Series' expenses, we will
send one annual shareholder report, one semi-annual shareholder report and one
annual prospectus per household, unless you instruct us or your broker
otherwise.

HOW TO SELL YOUR SHARES
You can sell your shares of a Series for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Series--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York time to
process the sale on that day. Otherwise, contact:

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

Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell

- --------------------------------------------------------------------------------
32
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.

RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business trust and
you hold shares directly with the Transfer Agent, you will need to have the
signature on your sell order guaranteed by a financial institution. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale
of Shares--Signature Guarantee."

CONTINGENT DEFERRED SALES CHARGES (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase, you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:

-- Amounts representing shares you purchased with reinvested dividends
and distributions

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

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

Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.

- -------------------------------------------------------------------
33 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares-- which is applied to
shares sold within 18 months of purchase. For both Class B and Class C shares,
the CDSC is the lesser of the original purchase price or the redemption
proceeds. For purposes of determining how long you've held your shares, all
purchases during the month are grouped together and considered to have been made
on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.

WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:

-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy (with rights of survivorship), provided the shares were
purchased before the death or disability

-- On certain sales from a Systematic Withdrawal Plan.

For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charges--Class B Shares."

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

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

- --------------------------------------------------------------------------------
34
<PAGE>
HOW TO BUY, SELL AND
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- ------------------------------------------------

90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Series without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares to
reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."

HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of a Series for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of a Series for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:

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

There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding period for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."

- -------------------------------------------------------------------
35 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- ------------------------------------------------

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

FREQUENT TRADING
Frequent trading of a Series' shares in response to short-term fluctuations in
the market--also known as "market timing"--may make it very difficult to manage
the Series' investments. When market timing occurs, the Series may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Series' performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Series will
have to invest. When, in our opinion, such activity would have a disruptive
effect on portfolio management, each Series reserves the right to refuse
purchase orders and exchanges into the Series by any person, group or commonly
controlled account. The Series may notify a market timer of rejection of an
exchange or purchase order after the day the order is placed. If the Series
allows a market timer to trade Series shares, it may require the market timer to
enter into a written agreement to follow certain procedures and limitations.

- --------------------------------------------------------------------------------
36
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------

The financial highlights will help you evaluate the financial performance of
each Series. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Series, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the SAI and are available upon request. Additional
performance information for each share class is contained in the annual report,
which you can receive at no charge.

- -------------------------------------------------------------------
37 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

INSURED SERIES: CLASS A SHARES
The financial highlights for the three years ended April 30, 1999 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the two years ended April 30, 1996 were audited by other
independent auditors, whose reports were unqualified.

CLASS A SHARES (FISCAL YEARS ENDED 4-30)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.05 $10.90 $10.94 $10.83 $10.71
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .53 .53(2) .55(2) .58(2) .58(2)
Net realized and unrealized gain
on investment transactions .23 .40 .08 .11 .12
TOTAL FROM INVESTMENT OPERATIONS .76 .93 .63 .69 .70
- ----------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment
income (.53) (.53) (.55) (.58) (.58)
Distributions in excess of net
investment income (.01) --(3) (.01) -- --
Distributions from capital gains (.09) (.25) (.11) -- --
TOTAL DISTRIBUTIONS (.63) (.78) (.67) (.58) (.58)
NET ASSET VALUE, END OF YEAR $11.18 $11.05 $10.90 $10.94 $10.83
TOTAL RETURN(1) 6.88% 8.67% 5.74% 6.47% 6.73%
- -------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $251,300 $224,409 $208,411 $139,548 $75,800
Average net assets (000) $240,652 $222,115 $187,371 $102,456 $39,471
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 0.75% 0.69%(2) 0.68%(2) 0.68%(2) 0.74%(2)
Expenses, excluding distribution
fees 0.60% 0.59%(2) 0.58%(2) 0.58%(2) 0.64%(2)
Net investment income 4.61% 4.75%(2) 4.95%(2) 5.20%(2) 5.45%(2)
Portfolio turnover 15% 85% 110% 68% 64%
</TABLE>

1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED.
2 NET OF MANAGEMENT FEE WAIVER.
3 LESS THAN $.005 PER SHARE.

- --------------------------------------------------------------------------------
38
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

INSURED SERIES: CLASS B SHARES
The financial highlights for the three years ended April 30, 1999 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the two years ended April 30, 1996 were audited by other
independent auditors, whose reports were unqualified.

CLASS B SHARES (FISCAL YEARS ENDED 4-30)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.06 $10.91 $10.95 $10.84 $10.71
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .48 .49(2) .50(2) .54(2) .54(2)
Net realized and unrealized gain
on investment transactions .23 .40 .08 .11 .13
TOTAL FROM INVESTMENT OPERATIONS .71 .89 .58 .65 .67
- ----------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment
income (.48) (.49) (.50) (.54) (.54)
Distributions in excess of net
investment income (.01) --(3) (.01) -- --
Distributions from capital gains (.09) (.25) (.11) -- --
TOTAL DISTRIBUTIONS (.58) (.74) (.62) (.54) (.54)
NET ASSET VALUE, END OF YEAR $11.19 $11.06 $10.91 $10.95 $10.84
TOTAL RETURN(1) 6.50% 8.23% 5.32% 6.04% 6.40%
- ----------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $175,520 $236,370 $298,005 $443,391 $567,648
Average net assets (000) $208,775 $270,553 $365,891 $524,452 $660,237
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 1.10% 1.09%(2) 1.08%(2) 1.08%(2) 1.14%(2)
Expenses, excluding distribution
fees 0.60% 0.59%(2) 0.58%(2) 0.58%(2) 0.64%(2)
Net investment income 4.25% 4.35%(2) 4.54%(2) 4.80%(2) 4.99%(2)
Portfolio turnover 15% 85% 110% 68% 64%
</TABLE>

- -------------------------------------------------------------------
39 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

INSURED SERIES: CLASS C SHARES
The financial highlights for the three years ended April 30, 1999 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the year ended April 30, 1996 and the period from August 1, 1994
through April 30, 1995 were audited by other independent auditors, whose reports
were unqualified.

CLASS C SHARES (FISCAL YEARS ENDED 4-30)

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $11.06 $10.91 $10.95 $10.84 $10.79
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .45 .46(3) .48(3) .51(3) .39(3)
Net realized and unrealized gain
on investment transactions .23 .40 .08 .11 .05
TOTAL FROM INVESTMENT OPERATIONS .68 .86 .56 .62 .44
- ----------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.45) (.46) (.48) (.51) (.39)
Distributions in excess of net
investment income (.01) --(5) (.01) -- --
Distributions from capital gains (.09) (.25) (.11) -- --
TOTAL DISTRIBUTIONS (.55) (.71) (.60) (.51) (.39)
NET ASSET VALUE, END OF PERIOD $11.19 $11.06 $10.91 $10.95 $10.84
TOTAL RETURN(2) 6.24% 7.96% 5.06% 5.78% 4.03%
- ----------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $2,708 $1,509 $888 $1,137 $525
Average net assets (000) $1,856 $1,142 $973 $827 $224
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 1.35% 1.34%(3) 1.33%(3) 1.33%(3) 1.39%(3),(4)
Expenses, excluding distribution
fees 0.60% 0.59%(3) 0.58%(3) 0.58%(3) 0.64%(3),(4)
Net investment income 4.03% 4.11%(3) 4.29%(3) 4.56%(3) 4.92%(3),(4)
Portfolio turnover 15% 85% 110% 68% 64%
</TABLE>

1 INFORMATION SHOWN IS FOR THE PERIOD 8-1-94 (WHEN CLASS C SHARES WERE FIRST
OFFERED) THROUGH 4-30-95.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURN FOR A PERIOD OF LESS THAN A FULL YEAR IS NOT
ANNUALIZED.
3 NET OF MANAGEMENT FEE WAIVER.
4 ANNUALIZED.
5 LESS THAN $.005 PER SHARE.

- --------------------------------------------------------------------------------
40
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

INSURED SERIES: CLASS Z SHARES
The financial highlights for the two years ended April 30, 1999 and for the
period from September 16, 1996, through April 30, 1997 were audited by
PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.

CLASS Z SHARES (FISCAL YEARS ENDED 4-30)

<TABLE>
<CAPTION>
- --------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997(1)
- --------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $11.05 $10.91 $11.05
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .54 .54(3) .36(3)
Net realized and unrealized gain
(loss) on investment transactions .23 .39 (.02)
TOTAL FROM INVESTMENT OPERATIONS .77 .93 .34
- ----------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.54) (.54) (.36)
Distributions in excess of net
investment income (.01) --(5) (.01)
Distributions from capital gains (.09) (.25) (.11)
TOTAL DISTRIBUTIONS (.64) (.79) (.48)
NET ASSET VALUE, END OF PERIOD $11.18 $11.05 $10.91
TOTAL RETURN(2) 7.04% 8.68% 2.86%
- --------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997
- --------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $4,312 $418 $15
Average net assets (000) $3,523 $173 $10
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees .60% 0.60%(3) 0.58%(3),(4)
Expenses, excluding distribution
fees .60% 0.60%(3) 0.58%(3),(4)
Net investment income 4.77% 4.92%(3) 4.18%(3),(4)
Portfolio turnover 15% 85% 110%
</TABLE>

1 INFORMATION SHOWN IS FOR THE PERIOD 9-16-96 (WHEN CLASS Z SHARES WERE FIRST
OFFERED) THROUGH 4-30-97.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURN FOR A PERIOD OF LESS THAN A FULL YEAR IS NOT
ANNUALIZED.
3 NET OF MANAGEMENT FEE WAIVER.
4 ANNUALIZED.
5 LESS THAN $.005 PER SHARE.

- -------------------------------------------------------------------
41 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

HIGH INCOME SERIES: CLASS A SHARES
The financial highlights for the three years ended April 30, 1999 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the two years ended April 30, 1996 were audited by other
independent auditors, whose reports were unqualified.

CLASS A SHARES (FISCAL YEARS ENDED 4-30)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.31 $10.84 $10.70 $10.72 $10.74
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) .63 .67 .70 .72 .72
Net realized and unrealized gain
(loss) on investment transactions (.10) .47 .14 (.02) (.02)
TOTAL FROM INVESTMENT OPERATIONS .53 1.14 .84 .70 .70
- ----------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.63) (.67) (.70) (.72) (.72)
NET ASSET VALUE, END OF YEAR $11.21 $11.31 $10.84 $10.70 $10.72
TOTAL RETURN(1) 4.96% 10.80% 8.03% 6.55% 6.90%
- -----------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $514,952 $421,504 $334,062 $223,073 $115,501
Average net assets (000) $474,901 $381,735 $294,940 $162,329 $65,207
RATIOS TO AVERAGE NET ASSETS:(2)
Expenses, including distribution
fees(2) 0.66% 0.62% 0.64% 0.64% 0.69%
Expenses, excluding distribution
fees(2) 0.51% 0.52% 0.54% 0.54% 0.59%
Net investment income(2) 5.73% 6.03% 6.44% 6.58% 6.83%
Portfolio turnover 16% 13% 26% 35% 39%
</TABLE>

1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED. TOTAL RETURN FOR A PERIOD OF LESS THAN A FULL YEAR IS NOT
ANNUALIZED.
2 NET OF MANAGEMENT FEE WAIVER.

- --------------------------------------------------------------------------------
42
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

HIGH INCOME SERIES: CLASS B SHARES
The financial highlights for the three years ended April 30, 1999 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the two years ended April 30, 1996 were audited by other
independent auditors, whose reports were unqualified.

CLASS B SHARES (FISCAL YEARS ENDED 4-30)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.31 $10.84 $10.69 $10.72 $10.74
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) .59 .63 .66 .68 .68
Net realized and unrealized gain
(loss) on investment transactions (.10) .47 .15 (.03) (.02)
TOTAL FROM INVESTMENT OPERATIONS .49 1.10 .81 .65 .66
- ----------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.59) (.63) (.66) (.68) (.68)
NET ASSET VALUE, END OF YEAR $11.21 $11.31 $10.84 $10.69 $10.72
TOTAL RETURN(1) 4.59% 10.36% 7.71% 6.12% 6.37%
- ----------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $649,706 $669,223 $665,525 $799,048 $934,725
Average net assets (000) $666,885 $669,132 $725,305 $900,115 $1,024,132
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees(2) 1.01% 1.02% 1.04% 1.04% 1.09%
Expenses, excluding distribution
fees(2) .51% 0.52% 0.54% 0.54% 0.59%
Net investment income(2) 5.38% 5.63% 6.05% 6.19% 6.37%
Portfolio turnover 16% 13% 26% 35% 39%
</TABLE>

1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED. TOTAL RETURN FOR A PERIOD OF LESS THAN A FULL YEAR IS NOT
ANNUALIZED.
2 NET OF MANAGEMENT FEE WAIVER.

- -------------------------------------------------------------------
43 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

HIGH INCOME SERIES: CLASS C SHARES
The financial highlights for the three years ended April 30, 1999 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the year ended April 30, 1996 and the period from August 1, 1994
through April 30, 1995 were audited by other independent auditors, whose reports
were unqualified.

CLASS C SHARES (FISCAL YEARS ENDED 4-30)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $11.31 $10.84 $10.69 $10.72 $10.79
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(3) .57 .61 .63 .65 .49
Net realized and unrealized gain
(loss) on investment transactions (.10) .47 .15 (.03) (.07)
TOTAL FROM INVESTMENT OPERATIONS .47 1.08 .78 .62 .42
- ----------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.57) (.61) (.63) (.65) (.49)
NET ASSET VALUE, END OF PERIOD $11.21 $11.31 $10.84 $10.69 $10.72
TOTAL RETURN(2) 4.33% 10.09% 7.44% 5.86% 3.91%
- ----------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $32,939 $20,554 $9,563 $6,471 $3,208
Average net assets (000) $26,114 $14,932 $8,060 $5,608 $1,385
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees(3) 1.26% 1.27% 1.29% 1.29% 1.34%(4)
Expenses, excluding distribution
fees(3) .51% 0.52% 0.54% 0.54% 0.59%(4)
Net investment income(3) 5.15% 5.39% 5.80% 5.93% 6.34%(4)
Portfolio turnover 16% 13% 26% 35% 39%
</TABLE>

- --------------------------------------------------------------------------------
44
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------

HIGH INCOME SERIES: CLASS Z SHARES
The financial highlights for the two years ended April 30, 1999 were audited by
PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the period from September 16, 1996 through April 30, 1997 were
audited by other independent auditors, whose reports were unqualified.

CLASS Z SHARES (FISCAL YEARS ENDED 4-30)

<TABLE>
<CAPTION>
- -----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997(1)
- -----------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $11.30 $10.83 $10.79
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(3) .65 .68 .45
Net realized and unrealized gain
(loss) on investment transactions (.10) .47 .04
TOTAL FROM INVESTMENT OPERATIONS .55 1.15 .49
- -----------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.65) (.68) (.45)
NET ASSET VALUE, END OF PERIOD $11.20 $11.30 $10.83
TOTAL RETURN(2) 5.11% 10.91% 4.36%
- -----------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997
- -----------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $13,839 $9,919 $2,719
Average net assets (000) $13,648 $6,064 $704
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees(3) .51% 0.52% 0.54%(4)
Expenses, excluding distribution
fees(3) .51% 0.52% 0.54%(4)
Net investment income(3) 5.89% 6.14% 6.55%(4)
Portfolio turnover 16% 13% 26%
</TABLE>

1 INFORMATION SHOWN IS FOR PERIOD 9-16-96 THROUGH 4-30-97.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS.
IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON
THE LAST DAY OF EACH PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS
THAN A FULL YEAR ARE NOT ANNUALIZED. TOTAL RETURN INCLUDES THE EFFECT OF
EXPENSE SUBSIDIARIES/RECOVERIES, AS APPLICABLE.
3 NET OF MANAGEMENT FEE WAIVER.
4 ANNUALIZED.

- -------------------------------------------------------------------
45 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------

Prudential offers a broad range of mutual funds designed to meet your individual
needs. For more information about these funds, contact your financial adviser or
call us at (800) 225-1852. Read the prospectus carefully before you invest or
send money.

STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH & INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SERVICES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND

ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
PRUDENTIAL DEVELOPING MARKETS EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY FUND
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
GLOBAL SERIES
INTERNATIONAL STOCK SERIES
GLOBAL UTILITY FUND, INC.

GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
LIMITED MATURITY PORTFOLIO
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.

- --------------------------------------------------------------------------------
46
<PAGE>
- -------------------------------------

BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
SHORT-INTERMEDIATE TERM SERIES
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO

TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.

MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.

TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
MASSACHUSETTS MONEY MARKET SERIES
NEW JERSEY MONEY MARKET SERIES
NEW YORK MONEY MARKET SERIES

COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND

INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
INSTITUTIONAL MONEY MARKET SERIES

- -------------------------------------------------------------------
47 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
APPENDIX A
- -------------------------------------

DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment some time in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.

- --------------------------------------------------------------------------------
48
<PAGE>
APPENDIX A
- ------------------------------------------------

Bonds rated within the Aa, A, Baa, Ba and B categories that Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
P-3: Issuers rate "Prime-3" or "P-3" (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.

SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality. All
security elements are accounted for but there is lacking the undeniable

- -------------------------------------------------------------------
49 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
APPENDIX A
- ------------------------------------------------

strength of the preceding grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.

STANDARD & POOR'S RATINGS GROUP

DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.

COMMERCIAL PAPER RATINGS
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.

- --------------------------------------------------------------------------------
50
<PAGE>
APPENDIX A
- ------------------------------------------------

A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues with the A-3 designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.

MUNICIPAL NOTES
A municipal note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. Municipal notes are rated SP-1, SP-2 or SP-3. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
Those issues determined to possess extremely strong characteristics are given a
plus (+) designation. An SP-2 designation indicates a satisfactory capacity to
pay principal and interest. An SP-3 designation indicates speculative capacity
to pay principal and interest.

- -------------------------------------------------------------------
51 PRUDENTIAL MUNICIPAL BOND FUND [LOGO] (800) 225-1852
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------

Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:

PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)

- --------------------------------
Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 225-1852

- ------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com

- --------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:

STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)

ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)

SEMI-ANNUAL REPORT

You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:

By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)

In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call 1(800) SEC-0330)

Via the Internet:
http://www.sec.gov

- --------------------------------
CUSIP Numbers:
Insured Series
Class A Shares--74435L-30-1
Class B Shares--74435L-40-0
Class C Shares--74435L-80-6
Class Z Shares--74435L-86-3
High Income Series
Class A Shares--74435L-10-3
Class B Shares--74435L-20-2
Class C Shares--74435L-70-7
Class Z Shares--74435L-87-1

Investment Company Act File No:

811-4930

MF133A [LOGO]
Printed on Recycled Paper
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND

Statement of Additional Information
dated June 30, 1999

Prudential Municipal Bond Fund (the Fund) is an open-end, diversified,
management investment company, or mutual fund, consisting of two separate
portfolios--the High Income Series and the Insured Series. The investment
objectives of the Series are as follows: (i) the objective of the High Income
Series is to provide the maximum amount of income that is eligible for exclusion
from federal income taxes and (ii) the objective of the Insured Series is to
provide the maximum amount of income that is eligible for exclusion from federal
income taxes consistent with the preservation of capital. Although each Series
will seek income that is eligible for exclusion from federal income taxes, a
portion of the dividends and distributions paid by each Series (and, in
particular, the High Income Series) may be treated as a preference item for
purposes of the alternative minimum tax. Each Series seeks to achieve its
objective through the separate investment policies described under "Description
of the Fund, Its Investments and Risks." There can be no assurance that the
Series' investment objectives will be achieved.

The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated June 30, 1999, a copy of
which may be obtained from the Fund upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund History......................................... B-2
Description of the Fund, Its Investments and Risks... B-2
Investment Restrictions.............................. B-14
Management of the Fund............................... B-15
Control Persons and Principal Holders of
Securities......................................... B-18
Investment Advisory and Other Services............... B-19
Brokerage Allocation and Other Practices............. B-23
Capital Shares, Other Securities and Organization.... B-24
Purchase, Redemption and Pricing of Fund Shares...... B-24
Shareholder Investment Account....................... B-33
Net Asset Value...................................... B-36
Taxes, Dividends and Distributions................... B-36
Performance Information.............................. B-40
Financial Statements................................. B-44
Independent Accountants' Report...................... B-80
Appendix I -- General Investment Information......... I-1
Appendix II -- Historical Performance Data........... II-1
Appendix III -- Information Relating to Prudential... III-1
</TABLE>

MF133B
<PAGE>
FUND HISTORY

The Fund was organized in Massachusetts on November 3, 1986. On May 3, 1995,
the Trustees approved a change in the name of the Modified Term Series to the
Intermediate Series, effective June 29, 1995. On June 23, 1998, the Trustees
approved a change in the name of the High Yield Series to the High Income
Series, effective July 1, 1998. On January 22, 1999, shareholders of
Intermediate Series received shares of Prudential National Municipals Fund
pursuant to an Agreement and Plan of Reorganization, approved by shareholders at
a Special Meeting of Shareholders of Intermediate Series held on January 14,
1999, under which the assets of Intermediate Series were transferred to the
Prudential National Municipals Fund in exchange for shares of Prudential
National Municipals Fund and Prudential National Municipals Fund assumed the
liabilities, if any, of Intermediate Series. Shares of Intermediate Series are
no longer offered pursuant to the Fund's Prospectus.

DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS

(a) CLASSIFICATION. The Fund is a diversified, open-end, management
investment company.

(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment
objectives of the Series are as follows: (i) the objective of the High Income
Series is to provide the maximum amount of income that is eligible for exclusion
from federal income taxes and (ii) the objective of the Insured Series is to
provide the maximum amount of income that is eligible for exclusion from federal
income taxes consistent with the preservation of capital. There can be no
assurance that either Series will achieve its objective. Although each Series
will seek income that is eligible for exclusion from federal income taxes, a
portion of the dividends and distributions paid by each Series (and, in
particular, the High Income Series) may be treated as a preference item for
purposes of the alternative minimum tax. See "Fund Distributions and Tax Issues"
in the Prospectus.

Each Series will seek to achieve its investment objective by investing in a
diversified portfolio of obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which is eligible for exclusion from federal income taxation (municipal
obligations or municipal securities). From time to time, a Series may own the
majority of a municipal obligation. Such majority-owned holdings may present
additional market and credit risks.

GENERAL

The Prudential Investment Corporation (PIC), doing business as Prudential
Investments (PI, the Subadviser or the investment adviser), maintains a
fixed-income research group which provides credit analysis and research on
fixed-income securities. The portfolio manager consults routinely with the
research group in managing the Fund's portfolios. The fixed-income research
group, which currently maintains a staff of credit analysts, reviews on an
ongoing basis issuers of fixed-income obligations, including prospective
purchases and portfolio holdings of the Series. Credit analysts have broad
access to research and financial reports, data retrieval services and industry
analysts. They review financial and operating statements supplied by state and
local governments and other issuers of municipal securities to evaluate revenue
projections and the financial soundness of municipal issuers. They study the
impact of economic and political developments on state and local governments,
evaluate industry sectors and meet periodically with public officials and other
representatives of state and local governments and other tax-exempt issuers to
discuss such matters as budget projections, debt policy, the strength of the
regional economy and, in the case of revenue bonds, the demand for facilities.
They also make site inspections to review specific projects and to evaluate the
progress of construction or the operation of a facility.

Each Series may invest in municipal securities which are not rated if, based
upon a credit analysis by the Subadviser, the Subadviser believes that the
securities are of comparable quality to other municipal securities that the
Series may purchase. A description of the ratings is set forth under the heading
"Description of Security Ratings" in the Fund's Prospectus. The ratings of
Moody's and S&P represent the respective opinions of those firms of the quality
of the securities each undertakes to rate. The ratings are general and are not
absolute standards of quality. In determining the suitability for investment in
a particular unrated security, the Subadviser will take into consideration asset
and debt service coverage, the purpose of the financing, the history of the
issuer, the existence of other rated securities of the issuer, any credit
enhancement by virtue of a letter of credit or other financial guaranty deemed
suitable by the investment adviser and other factors as may be relevant,
including comparability to other issuers.

After its purchase by a Series of the Fund, an issue of municipal bonds or
notes may cease to be rated or its rating(s) may be reduced. Neither event
requires the elimination of that obligation from the portfolio of the Series,
but each event will be a factor in determining whether the Series should
continue to hold that issue in its portfolio.

B-2
<PAGE>
Each Series will attempt to invest substantially all of its net assets in
municipal securities. Under normal market conditions, each Series anticipates
that its assets will be invested so that at least 80% of its net assets will be
invested in municipal securities. Each Series will continuously monitor its
portfolio to ensure that the asset investment test is met at all times, except
for temporary defensive positions during abnormal market conditions.

A Series may invest its assets from time to time on a temporary basis in
debt securities, the interest on which is subject to federal, state or local
income tax: (i) pending the investment or reinvestment in municipal securities
of the proceeds from the sale of shares of the Series or sales of portfolio
securities, (ii) in order to avoid the necessity of liquidating portfolio
investments to meet redemptions of shares by investors, or (iii) where market
conditions due to rising interest rates or other adverse factors warrant
temporary investing. Investments in taxable securities may include: obligations
of the U.S. Government, its agencies or instrumentalities; commercial paper
rated in the two highest grades by either Moody's or S&P (A-1 and A-2, or P-1
and P-2, respectively), except that the Insured Series may invest only in
commercial paper rated A-1 or P-1; certificates of deposit and bankers'
acceptances; other debt securities rated within the three highest grades by
either Moody's or S&P or, if unrated, judged by the Subadviser to possess
comparable creditworthiness; and repurchase agreements with respect to any of
the foregoing investments. Each Series does not intend to invest more than 5% of
its assets in any one category of the foregoing taxable securities. A Series may
also hold its assets in other cash equivalents or in cash.

The Fund, as well as each Series of the Fund, is classified as diversified
under the Investment Company Act of 1940, as amended (the Investment Company
Act). This means that with respect to 75% of the assets of a Series, (i) the
Series may not invest more than 5% of its total assets in the securities of any
one issuer (except U.S. Government obligations) and (ii) the Series may not own
more than 10% of the outstanding voting securities of any one issuer. For
purposes of diversification and concentration under the Investment Company Act,
the identification of the issuer of the municipal obligation depends upon the
terms and conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, the subdivision is regarded
as the sole issuer. Similarly, in the case of an industrial development revenue
bond or pollution control revenue bond, if the bond is backed only by the assets
and revenues of the non-governmental user, the non-governmental user is regarded
as the sole issuer. If, in either case, the creating government or another
entity guarantees an obligation, the guaranty may be regarded as a separate
security and treated as an issue of the guarantor.

Each Series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded bonds, except to the extent there are
amounts in excess of funds necessary for such debt service, (iii) principal and
interest on the escrowed securities will be sufficient to satisfy all scheduled
principal, interest and premiums on the refunded bonds and a verification report
prepared by a party acceptable to a nationally recognized statistical rating
agency, or counsel to the holders of the refunded bonds, so verifies, (iv) the
escrow agreement provides that the issuer of the refunded bonds grants and
assigns to the escrow agent, for the equal and ratable benefit of the holders of
the refunded bonds, an express first lien on, pledge of and perfected security
interest in the escrowed securities and the interest income thereon, (v) the
escrow agent had no lien of any type with respect to the escrowed securities for
payment of its fees and expenses except to the extent there are excess
securities, as described in (ii) above, and (vi) the Series will not invest more
than 25% of its total assets in pre-refunded bonds of the same municipal issuer.

Since securities issued or guaranteed by states or municipalities are not
voting securities, there is no limitation on the percentage of a single issuer's
securities which a Series may own so long as, with respect to 75% of its assets,
it does not invest more than 5% of its total assets in the securities of that
issuer (except obligations issued or guaranteed by the U.S. Government). As for
the other 25% of the assets of a Series not subject to the limitation described
above, there is no minimum limitation as to the number of issuers in whose
securities these assets may be invested.

The Fund expects that normally a Series will not invest 25% or more of its
total assets in any one sector of the municipal obligations market.

A portion of the dividends and distributions paid on the shares of each
Series of the Fund may be treated as a preference item for purposes of the
alternate minimum tax for individuals and corporations. Such treatment may cause
certain investors, depending upon other aspects of their individual tax
situation, to incur some federal income tax liability. In addition, corporations
are subject to an alternative minimum tax which treats as a tax preference item
75% of a corporation's adjusted current earnings. A corporation's adjusted
current earnings would include interest paid on municipal obligations and
dividends paid on shares of the Fund. See "Taxes, Dividends and Distributions."

From time to time, proposals have been introduced to limit the use, or tax
and other advantages, of municipal securities which, if enacted, could adversely
affect each Series' NAV and investment practices. Such proposals could also
adversely affect

B-3
<PAGE>
the secondary market for high yield municipal securities, the financial
condition of issuers of these securities and the value of outstanding high yield
municipal securities. Reevaluation of each Series' investment objective and
structure might be necessary in the future due to market conditions which may
result from future changes in state or federal law.

Unlike many issues of common and preferred stock and corporate bonds which
are traded between brokers acting as agents for their customers on securities
exchanges, municipal obligations are customarily purchased from or sold to
dealers who are selling or buying for their own account. Most municipal
obligations are not required to be registered with or qualified for sale by
federal or state securities regulators. Since there are large numbers of
municipal obligation issues of many different issuers, most issues do not trade
on any single day. On the other hand, most issues are always marketable, since a
major dealer will normally, on request, bid for any issue, other than obscure
ones. Regional municipal securities dealers are frequently more willing to bid
on issues of municipalities in their geographic area.

Although almost all municipal obligations are marketable, the structure of
the market introduces its own element of risk; a seller may find, on occasion,
that dealers are unwilling to make bids for certain issues that the seller
considers reasonable. If the seller is forced to sell, he or she may realize a
capital loss that would not have been necessary in different circumstances.
Because the net asset value of a Series' shares reflects the degree of
willingness of dealers to bid for municipal obligations, the price of a Series'
shares may be subject to greater fluctuation than shares of other investment
companies with different investment policies.

MUNICIPAL SECURITIES

Municipal securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is generally eligible for exclusion from federal income tax
and, in certain instances, applicable state or local income and personal
property taxes. Such securities are traded primarily in the over-the-counter
market.

MUNICIPAL BONDS. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works and gas and electric utilities.
Municipal bonds also may be issued in connection with the refunding of
outstanding obligations and obtaining funds to lend to other public institutions
or for general operating expenses.

The two principal classifications of municipal bonds are general obligation
and revenue. General obligation bonds are secured by the issuer's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source.

Industrial development bonds (IDBs) are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business and manufacturing, housing, sports, pollution control, and for airport,
mass transit, port and parking facilities. Although IDBs are issued by municipal
authorities, they are generally secured by the revenues derived from payments of
the industrial user. The payment of the principal and interest on IDBs is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for the payment.

MUNICIPAL NOTES. Municipal notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include:

1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use and
business taxes, and are payable from these specific future taxes.

2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in the
expectation of reception of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.

3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the Notes.

4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the Government National Mortgage Association (GNMA) to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan.

B-4
<PAGE>
TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper, the
interest on which is generally exempt from federal income taxes, typically are
represented by short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.

THE HIGH INCOME SERIES

The High Income Series will invest primarily in municipal obligations which
are rated B or better by Moody's Investors Service (Moody's) or Standard &
Poor's Ratings Group (S&P) or a similar nationally recognized statistical rating
organization (NRSRO) and which generally have maturities in excess of ten years
at the time of purchase, although the Series also will invest in municipal
obligations having maturities ranging from one year to ten years, provided that
the weighted average maturity of the Series' investment portfolio remains within
the fifteen to thirty year range. Securities rated Baa by Moody's or BBB by S&P,
although considered to be investment grade, lack outstanding investment
characteristics and in fact have speculative characteristics as well. Securities
rated Ba or BB or lower by Moody's or S&P, respectively, are generally
considered to be predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal and are commonly referred to as junk bonds.
While such securities may have some quality and protective characteristics,
those are outweighed by large uncertainties or major risk exposures to adverse
conditions. See "Description of Security Ratings" in the Prospectus.

The Series may also invest in municipal securities which are not rated if,
based upon a credit analysis by the Fund's investment adviser, the investment
adviser believes that such securities are of comparable quality to rated
municipal securities in which the Series may invest. The High Income Series
normally can be expected to offer the highest yields of the two Series, but it
will also be subject to the greatest market and credit risk.

The Series also may invest in short-term municipal obligations (that is,
cash equivalents) that are, at the time of purchase, rated within the four
highest quality grades as determined by either Moody's (currently MIG 1, MIG 2,
MIG 3 and MIG 4 for notes and P-1, P-2 and P-3 for commercial paper) or S&P
(currently A-1, A-2 and A-3 for commercial paper and SP-1 and SP-2 for notes).

The Series may also invest up to 10% of its total assets in debt securities
of financially troubled and operationally troubled obligors (distressed
securities). Financially troubled obligors include obligors involved in
bankruptcy or reorganization proceedings or financial restructurings or
otherwise in default on their obligations. Operationally troubled obligors are
ones experiencing poor operating results that may have severely depressed
earnings or have special competitive or product obsolescence problems.

The Series is permitted to invest in defaulted securities and in low quality
debt securities having a rating of D or better as determined by S&P or Moody's
or having a comparable rating determined by another NRSRO, or in unrated
securities which, in the opinion of the investment adviser, are of equivalent
quality. See "Description of Security Ratings" in the Prospectus. Such lower-
quality debt securities are considered to have speculative characteristics, and
involve greater risk of default or price changes due to changes in the obligor's
creditworthiness, or they may already be in default. The market prices of these
securities may fluctuate more than higher-quality securities and may decline
significantly in periods of general or regional economic difficulty.

The Series' portfolio manager may consult the Subadviser's fixed-income
research group in managing the portfolio and in researching financially troubled
and operationally troubled obligors. The Series' portfolio manager reviews on an
ongoing basis financially troubled and operationally troubled obligors,
including prospective purchases and portfolio holdings of the Series. The
portfolio manager has broad access to research and financial reports, data
retrieval services and industry analysts.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Fixed-income
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations (credit risk) and may also be subject
to price volatility due to such factors as interest rate sensitivity and the
market perception of the creditworthiness of the issuer (market risk). Lower
rated (that is, high yield) securities or non-rated securities of comparable
quality are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates. The investment adviser considers both
credit risk and market risk in making investment decisions for the Series.
Investors should carefully consider the relative risks of investing in high
yield securities and understand that such securities are not generally meant for
short-term trading.

An economic downturn could severely affect the ability of highly leveraged
issuers to service their debt obligations or to repay their obligations upon
maturity. Furthermore, changes in economic conditions and other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade bonds. In addition, the secondary
market for high yield securities, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities. Under adverse market or economic conditions, the secondary market
for high

B-5
<PAGE>
yield securities could contract further, independent of any specific adverse
changes in the condition of a particular issuer. As a result, the investment
adviser could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated securities,
under these circumstances, may be less than the prices used in calculating the
Series' NAV. If the investment adviser becomes involved in activities such as
reorganizations of obligors of troubled investments held by the Series, this may
prevent the Series from disposing of the securities, due to its possession of
material, non-public information concerning the obligor.

Debt rated Ba, B, Caa, Ca and C by Moody's, and debt rated BB, B, CCC, CC
and C by S&P is regarded by the rating agency, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. Among junk bonds,
Ba/BB indicates the lowest degree of speculation and C/D the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Debt rated C by S&P is the lowest rated debt
that is not in default as to principal or interest and such issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing. Such securities are also generally considered to be subject
to greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. Debt rated D by S&P is in payment
default. Moody's does not have a D rating. See the "Description of Security
Ratings" in the Prospectus.

Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the portfolio and increasing the
exposure of the Series to the risks of high yield securities.

THE INSURED SERIES

The Insured Series will invest primarily in municipal obligations which are
(i) insured by an entity whose claims-paying ability at the time of purchase is
rated Aaa by Moody's or AAA by S&P, or a similar NRSRO, so that the obligation
is rated AAA or Aaa or meets the eligibility criteria imposed by such insurers,
(ii) rated Aaa or AAA by Moody's or S&P, respectively, or a similar NRSRO (or,
in the case of notes or variable rate securities, A-1, P-1, MIG 1 or SP-1),
based on the credit of the issuer or (iii) backed by the full faith and credit
of the U.S. Government. The Series may also invest up to 5% of its total assets
in municipal obligations which are rated A/A or Aa/AA by Moody's or S&P,
respectively, or a similar NRSRO. See "Description of Security Ratings" in the
Prospectus. The Series may also invest in municipal securities which are not
rated if, based upon a credit analysis by the Fund's investment adviser, the
investment adviser believes that such securities are of comparable quality to
other municipal securities that the Series may purchase.

Under normal conditions, at least 70% of the Series' total assets will
consist of insured obligations. This insurance may be provided either (i) under
a new issue insurance policy obtained by the issuer or underwriter of a bond or
note or (ii) under a secondary market insurance policy on a particular bond or
note purchased either by the Series or a previous bondholder or noteholder. See
"Insurance" below. As noted above, the Series will acquire insurance only from,
and purchase municipal bonds and notes insured by, insurers whose claims-paying
ability is rated AAA or Aaa at the time of purchase. Changes in the financial
condition of an insurer could result in a subsequent reduction or withdrawal of
this rating. In each case, the insurance policies protect only against the
timely payment of principal and interest on the insured municipal bonds and
notes. The price of the municipal obligations, which may fluctuate due to
changes in interest rates generally or factors affecting the credit of the
insurer, and the stability of the Series' NAV are not insured.

INSURANCE. The Series may at times purchase secondary market insurance on
municipal bonds and notes which it holds or acquires. Secondary market insurance
would be reflected in the market value of the municipal obligation and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.

Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the municipal bonds and notes held by the Insured Series
reduces credit risk by providing that the insurance company will make timely
payment of principal and interest if the issuer defaults on its obligation to
make such payment, it does not afford protection against fluctuation in the
price, that is, the market value, of the municipal obligations caused by changes
in interest rates and other factors, nor in turn against fluctuations in the NAV
of the shares of the Insured Series.

The ratings of insured municipal obligations depend, in substantial part, on
the creditworthiness of the insurer; thus their value will fluctuate largely on
the basis of factors relating to the insurer's ability to satisfy its
obligations, as well as on market factors generally. It is anticipated that,
under current market conditions, a great majority of the municipal obligations
held by the Insured Series will be insured by the following entities: MBIA
Insurance Corporation (MBIA Corp.) (formerly known as Municipal Bond Investors
Assurance Corporation), AMBAC Assurance Corporation (AMBAC) (formerly known as
AMBAC Indemnity

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Corporation), Financial Guaranty Insurance Company (FGIC) and Financial Security
Assurance Inc. (FSA). Each of these entities is described more fully below. S&P
and Moody's rates the claims paying ability of such insurers AAA and Aaa,
respectively. The Insured Series may, from time to time, purchase municipal
securities insured by other entities or acquire insurance coverage for
individual uninsured municipal securities directly from another insurer provided
any such entity has a claims-paying ability rated AAA or Aaa by S&P or Moody's,
respectively. The Series will not invest in obligations insured by The
Prudential Insurance Company of America (Prudential), except as may be permitted
by applicable law, nor will it settle any claim under portfolio insurance
provided by an insurer whose insurance obligations are reinsured by an affiliate
of Prudential for less than full payment except in accordance with an exemptive
order obtained from the Securities and Exchange Commission (Commission).

MBIA Corp. is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. As of September 30, 1998, MBIA Corp. had admitted
assets of approximately $6.318 billion, total liabilities of approximately
$4.114 billion and total policyholders' surplus of approximately $2.204 billion.
MBIA Corp. is domiciled in the state of New York and licensed to do business in
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Virgin Islands of the United States and the Territory of Guam.

FGIC Corporation, the owner of FGIC, is a wholly-owned subsidiary of General
Electric Capital Corporation. Neither FGIC Corporation nor General Electric
Capital Corporation is obligated to pay the debts of or claims against FGIC. As
of September 30, 1998, FGIC had admitted assets of approximately $2.642 billion,
total liabilities of approximately $1.354 billion and total policyholders'
surplus of approximately $1.289 billion.

AMBAC is a Wisconsin-domiciled stock insurance corporation regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin and licensed
to do business in 50 states, the District of Columbia, the Territory of Guam and
the Commonwealth of Puerto Rico, with admitted assets of approximately $3.290
billion, total liabilities of approximately $2.127 billion and total
policyholders' surplus of approximately $1.163 billion as of December 31, 1998.
Statutory capital consists of AMBAC policyholders' surplus and statutory
contingency reserve. AMBAC is a wholly-owned subsidiary of AMBAC Financial
Group, Inc. a 100% publicly-held company.

FSA is a wholly-owned subsidiary of Financial Security Assurance Holdings,
Ltd. (Holdings), a New York Stock Exchange listed company. Holdings is owned
approximately 40.4% by US West Capital Corporation (US WEST), 11.5% by Fund
American Enterprises Holdings, Inc. (Fund American), and 6.4% by the Tokio
Marine and Fire Insurance Co., Ltd. (Tokio Marine). Neither US WEST, Fund
American, Tokio Marine nor any other shareholder of Holdings is obligated to pay
the debts of or claims against FSA. As of December 31, 1998, FSA had admitted
assets of approximately $1.673 billion, total liabilities of approximately
$1.016 billion and total policyholders' surplus of approximately $.657 billion.
The company formerly known as Capital Guaranty Insurance Company is now a
subsidiary of FSA.

New issue insurance is obtained by the issuer or underwriter upon issuance
of a bond or note, and the insurance premiums are reflected in the price of such
bond or note. Insurance premiums with respect to secondary insurance may, on the
other hand, be paid by the Series. Premiums paid for secondary market insurance
will be treated as capital costs, increasing the cost basis of the investment
and thereby reducing the effective yield of the investment.

FLOATING RATE AND VARIABLE RATE SECURITIES. Each Series may invest more than
5% of its assets in floating rate and variable rate securities, including
participation interests therein and inverse floaters. Floating or variable rate
securities often have a rate of interest that is set as a specific percentage of
a designated base rate, such as the rate on Treasury Bonds or Bills or the prime
rate at a major commercial bank. These securities also allow the holder to
demand payment of the obligation on short notice at par plus accrued interest,
which amount may be more or less than the amount the holder paid for them.
Variable rate securities provide for a specified periodic adjustment in the
interest rate. The interest rate on floating rate securities changes whenever
there is a change in the designated base interest rate. Floating rate and
variable rate securities typically have long maturities but afford the holder
the right to demand payment at earlier dates. Such floating rate and variable
rate securities will be treated as having maturities equal to the period of
adjustment of the interest rate.

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

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Series may purchase
municipal obligations on a when-issued or delayed delivery basis and may from
time to time sell obligations on a delayed delivery basis, in each case without
limit. When municipal obligations are offered on a when-issued or delayed
delivery basis, the price and coupon rate are fixed at the time the commitment
to purchase is made, but delivery and payment for the when-issued securities
take place at a later date. During the

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period between purchase and settlement, no interest accrues to the purchaser. In
the case of purchases by a Series, the price that the Series is required to pay
on the settlement date may be in excess of the market value of the municipal
obligations on that date. While securities may be sold prior to the settlement
date, each Series intends to purchase these securities with the purpose of
actually acquiring them unless a sale would be desirable for investment reasons.
At the time a Series makes the commitment to purchase a municipal obligation on
a when-issued basis, it will record the transaction and reflect the value of the
obligation, each day, in determining its NAV. This value may fluctuate from day
to day in the same manner as values of municipal obligations otherwise held by
the Series. If the seller defaults in the sale, the Series could fail to realize
the appreciation, if any, that had occurred. Each Series will establish a
segregated account in which it will maintain cash or other liquid assets having
a value equal to or greater than the Series' purchase commitments.

As in the case of purchases, the price of the municipal obligations sold on
a delayed delivery basis is determined at the time of the commitment. The price
that a Series may be required to accept on the settlement date may be less than
the market value of the obligation on that date.

Each Series may also purchase municipal forward contracts. A municipal
forward contract is a municipal security which is purchased on a when-issued
basis with delivery taking place up to five years from the date of purchase. The
investment adviser will monitor the liquidity, value, credit quality and
delivery of the security under the supervision of the Trustees.

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

MUNICIPAL ASSET BACKED SECURITIES. Each Series may invest in municipal asset
backed securities. A municipal asset backed security is a debt or equity
interest in a trust, special purpose corporation or other pass-through
structure, the interest or income on which generally is eligible for exclusion
from federal income taxation based upon the income from an underlying pool of
municipal bonds.

LIQUIDITY PUTS. Each Series may purchase and exercise puts on municipal
bonds and notes. Puts give the Series the right to sell securities held in the
portfolio at a specified exercise price on a specified date. Puts may be
acquired to reduce the volatility of the market value of securities subject to
puts. The acquisition of a put may involve an additional cost to the Series
compared to the cost of securities with similar credit ratings, stated
maturities and interest coupons but without applicable puts. This increased cost
may be paid either by way of an initial or periodic premium for the put or by
way of a higher purchase price for securities to which the put is attached. In
addition, there is a credit risk associated with the purchase of puts in that
the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, each Series will acquire a put only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and the security is rated within the quality grades in which the Series
is permitted to invest; (2) the put is written by a person other than the issuer
of the underlying security and that person has securities outstanding which are
rated within the quality grades in which the Series is permitted to invest; or
(3) the put is backed by a letter of credit or similar financial guaranty issued
by a person having securities outstanding which are rated within the quality
grades in which the Series is permitted to invest.

Puts will be valued at an amount equal to the difference between the value
of the underlying security taking the put into consideration and the value of
the same or a comparable security without taking the put into consideration.

LENDING OF SECURITIES. Consistent with applicable regulatory requirements,
each Series may lend its portfolio securities to brokers, dealers and financial
institutions, provided that outstanding loans do not exceed in the aggregate 33%
of the value of the Series' total assets and provided that such loans are
callable at any time by the Series and are at all times secured by cash or
equivalent collateral or obtains a letter of credit that is equal to at least
the market value, determined daily, of the loaned securities. The advantage of
such loans is that the Series continues to receive payments in lieu of the
interest and dividends on the loaned securities, while at the same time earning
interest either directly from the borrower or on the collateral which will be
invested in short-term obligations.

A loan may be terminated by the borrower on one business day's notice or by
the Series any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Series can use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail

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financially. However, these loans of portfolio securities will only be made to
firms determined to be creditworthy pursuant to procedures approved by the
Fund's Trustees. On termination of the loan, the borrower is required to return
the securities to the Series, and any gain or loss in the market price during
the loan would inure to the Series.

Since voting or consent rights which accompany loaned securities pass to the
borrower, the Series will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Series' investment in the
securities which are the subject of the loan. The Series will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.

HEDGING STRATEGIES

Each Series is authorized to purchase and sell certain derivatives,
including financial futures contracts (futures contracts) and options thereon
for the purpose of attempting to hedge its investment in municipal obligations
against fluctuations in value caused by changes in prevailing market interest
rates and attempting to hedge against increases in the cost of securities the
Series intends to purchase. A Series, and thus an investor, may lose money
through unsuccessful use of these strategies. The successful use of futures
contracts and options thereon by a Series involves additional transaction costs,
is subject to various risks and depends upon the investment adviser's ability to
predict the direction of the market and interest rates.

Each Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intend to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series. A Series may purchase and sell
futures contracts and options thereon for bona fide hedging transactions, except
that a Series may purchase and sell futures contracts and options thereon for
any other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the liquidation value of the Series' total assets.
In addition, a Series may not purchase or sell futures contracts or purchase
options thereon if, immediately thereafter, the sum of initial and net
cumulative variation margin on outstanding futures contracts, together with
premiums paid on options thereon, would exceed 20% of the total assets of the
Series. There are no limitations on the percentage of a portfolio which may be
hedged and no limitations on the use of a Series' assets to cover futures
contracts and options thereon, except that the aggregate value of the
obligations underlying put options will not exceed 50% of a Series' assets.

FUTURES CONTRACTS. A futures contract obligates the seller of a contract to
deliver to the purchaser of a contract cash equal to a specific dollar amount
times the difference between the value of a specific fixed-income security or
index at the close of the last trading day of the contract and the price at
which the agreement is made. No physical delivery of the underlying securities
is made. A Series will engage in transactions in only those futures contracts
and options thereon that are traded on a commodities exchange or a board of
trade.

Each Series may engage in transactions in financial futures contracts as a
hedge against interest rate related fluctuations in the value of securities
which are held in the investment portfolio or which the Series intends to
purchase. A clearing corporation associated with the commodities exchange on
which a futures contract trades assumes responsibility for the completion of
transactions and guarantees that open futures contracts will be closed. Although
interest rate futures contracts call for actual delivery or acceptance of debt
securities, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery.

When the futures contract is entered into, each party deposits in a
segregated account approximately 5% of the contract amount, called the initial
margin. Subsequent payments to and from the broker, called variation margin,
will be made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more or
less valuable, a process known as "marking to market." In the case of options on
futures contracts, the holder of the option pays a premium and receives the
right, upon exercise of the option at a specified price during the option
period, to assume a position in the futures contract (a long position if the
option is a call and a short position if the option is a put). If the option is
exercised by the holder before the last trading day during the option period,
the option writer delivers the futures position, as well as any balance in the
writer's futures margin account. If it is exercised on the last trading day, the
option writer delivers to the option holder cash in an amount equal to the
difference between the option exercise price and the closing level of the
relevant index on the date the option expires.

When a Series purchases a futures contract, it will maintain an amount of
cash or other liquid assets in a segregated account so that the amount so
segregated plus the amount of initial and variation margin held in the account
of its broker equals the market value of the futures contract, thereby ensuring
that the use of such futures contract is unleveraged. A Series that has sold a
futures contract may cover that position by owning the instruments underlying
the futures contract or by holding a call option on such

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futures contract. A Series will not sell futures contracts if the value of such
futures contracts exceeds the total market value of the securities of the
Series. It is not anticipated that transactions in futures contracts will have
the effect of increasing portfolio turnover.

Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury Bonds and Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills and bank certificates of deposit. Futures
contracts are also available on a municipal bond index, based on THE BOND BUYER
Municipal Bond Index, an index of 40 actively traded municipal bonds. Each
Series may also engage in transactions in other futures contracts that become
available, from time to time, in other fixed-income securities or municipal bond
indices and in other options on such contracts if the investment adviser
believes such contracts and options would be appropriate for hedging investments
in municipal obligations.

OPTIONS ON FINANCIAL FUTURES. Each Series may purchase call options and
write put and call options on futures contracts and enter into closing
transactions with respect to such options to terminate an existing position.
Each Series will use options on futures in connection with hedging strategies.

An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date. Currently options can be
purchased or written with respect to futures contracts on U.S. Treasury Bonds,
among other fixed-income securities, and on municipal bond indices on the
Chicago Board of Trade. As with options on debt securities, the holder or writer
of an option may terminate his or her position by selling or purchasing an
option of the same series. There is no guaranty that such closing transactions
can be effected.

When a Series hedges its portfolio by purchasing a put option, or writing a
call option, on a futures contract, it will own a long futures position or an
amount of debt securities corresponding to the open option position. When a
Series writes a put option on a futures contract, it may, rather than establish
a segregated account, sell the futures contract underlying the put option or
purchase a similar put option.

LIMITATIONS ON PURCHASE AND SALE. Under regulations of the Commodity
Exchange Act, investment companies registered under the Investment Company Act
are exempted from the definition of commodity pool operator, subject to
compliance with certain conditions. The exemption is conditioned upon a Series'
purchasing and selling futures contracts and options thereon for BONA FIDE
hedging transactions, except that a Series may purchase and sell futures
contracts and options thereon for any other purpose, to the extent that the
aggregate initial margin and option premiums do not exceed 5% of the liquidation
value of the Series' total assets. Each Series will use financial futures in a
manner consistent with these requirements. Each Series will continue to invest
at least 80% of its net assets in municipal bonds and municipal notes except in
certain circumstances, as described in the Prospectus under "How the Fund
Invests--Investment Objective and Policies." A Series may not enter into futures
contracts if, immediately thereafter, the sum of the amount of initial and net
cumulative variation margin on outstanding futures contracts, together with
premiums paid on options thereon, would exceed 20% of the total assets of the
Series.

RISKS OF HEDGING STRATEGIES

Participation in the options or futures markets involves investment risks
and transaction costs to which a Series would not be subject absent the use of
these strategies. Each Series, and thus its investors, may lose money through
the unsuccessful use of these strategies. If the investment adviser's
predictions of movements in the direction of the securities and interest rate
markets are inaccurate, the adverse consequences to the Series may leave the
Series in a worse position than if such strategies were not used. Risks inherent
in the use of options and futures contracts and options on futures contracts
include (1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates and securities prices; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities or currencies
being hedged; (3) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (5) the possible inability of the Series to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the fund to sell a portfolio security at a disadvantageous
time, due to the need for the Series to maintain cover or to segregate
securities in connection with hedging transactions.

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A Series may sell a futures contract to protect against the decline in the
value of securities held by the Series. However, it is possible that the futures
market may advance and the value of securities held in the Series' portfolio may
decline. If this were to occur, the Series would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.

When a Series purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Series may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.

There is a risk that the prices of securities subject to futures contracts
(and thereby the futures contract prices) may correlate imperfectly with the
behavior of the cash prices of the Series' portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the changes
in prevailing interest rates against which the Series seeks a hedge. A
correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.

There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Series and the movements in the prices of the
securities which are the subject of the hedge. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin deposit requirements, distortions in the normal relationships
between the debt securities and futures market could result. Price distortions
could also result if transactions due to the resultant reduction in the
liquidity of the futures market. In addition, due to the fact that, from the
point of view of speculators, the deposit requirement in the futures markets are
less onerous than margin requirements in the cash market, increased
participation by speculators in the futures markets could cause temporary price
distortions. Due to the possibility of price distortions in the futures market
and because of the imperfect correlation between movements in the prices of
securities (or currencies) and movements in the prices of futures contracts, a
correct forecast of interest rate trends by the investment adviser may still not
result in a successful hedging transaction.

The risk of imperfect correlation increases as the composition of a Series'
securities portfolio diverges from the securities that are the subject of the
futures contract, for example, those included in the municipal index. Because
the change in price of the futures contract may be more or less than the change
in prices of the underlying securities, even a correct forecast of interest rate
changes may not result in a successful hedging transaction.

Pursuant to the requirements of the Commodity Exchange Act, all futures
contracts and options thereon must be traded on an exchange. Each Series intends
to purchase and sell futures contracts only on exchanges where there appears to
be a market in such futures sufficiently active to accommodate the volume of its
trading activity. The Series' ability to establish and close out positions in
futures contracts and options on futures contracts would be impacted by the
liquidity of these exchanges. Although the Series generally would purchase or
sell only those futures contracts and options thereon for which there appeared
to be a liquid market, there is no assurance that a liquid market on an exchange
will exist for any particular futures contract or option at any particular time.
In the event no liquid market exists for a particular futures contract or option
thereon in which the Series maintains a position, it would not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the Series would have to either make or take delivery under the
futures contract or, in the case of a written call option, wait to sell
underlying securities until the option expired or was exercised or, in the case
of a purchased option, exercise the option and comply with the margin
requirements for the underlying futures contract to realize any profit. In the
case of a futures contract or an option on a futures contract which the Series
had written and which the Series was unable to close, the Series would be
required to maintain margin deposits on the futures contract or option and to
make variation margin payments until the contract was closed. In the event
futures contracts have been sold to hedge portfolio securities, such securities
will not be sold until the offsetting futures contracts can be executed.
Similarly, in the event futures have been bought to hedge anticipated securities
purchases, such purchases will not be executed until the offsetting futures
contracts can be sold.

Exchanges on which futures and related options trade may impose limits on
the positions that a Series may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Series may trade the underlying
securities. To the extent the futures markets close before the securities
markets, significant price and rate movements can take place in the securities
markets that cannot be reflected in the futures markets.

Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
commodity pool operator, subject to compliance with certain conditions. Each
Series may purchase and sell futures and related options contracts without limit
for BONA FIDE hedging purchases within the meaning of the regulations of the
CFTC.

In order to determine that a Series is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either: (1)
a substantial majority (that is, approximately 75%) of all anticipatory hedge
transactions

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(transactions in which the Series does not own at the time of the transaction,
but expects to acquire, the securities underlying the relevant futures contract)
involving the purchase of futures contracts will be completed by the purchase of
securities, which are the subject of the hedge, or (2) the underlying value of
all long positions in futures contracts will not exceed the total value of (a)
all short-term debt obligations held by the Series; (b) cash held by the Series;
(c) cash proceeds due to the Series on investments within thirty days; (d) the
margin deposited on the contracts; and (e) any unrealized appreciation in the
value of the contracts.

If a Series maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account, cash or liquid assets equal
in value (when added to any initial or variation margin on deposit) to the
market value of the securities underlying the futures contract. Such a position
may also be covered by owning the securities underlying the futures contract, or
by holding a call option permitting the Series to purchase the same contract at
a price no higher than the price at which the short position was established.

In addition, if a Series holds a long position in a futures contract, it
will hold cash or liquid assets equal to the purchase price of the contract
(less the amount of initial or variation margin on deposit) in a segregated
account. Alternatively, the Series could cover its long position by purchasing a
put option on the same futures contract with an exercise price as high or higher
than the price of the contract held by the Series.

Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Series would continue
to be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Series has insufficient cash, it may be
disadvantageous to do so. In addition, the Series may be required to take or
make delivery of the instruments underlying futures contracts it holds at a time
when it is disadvantageous to do so. The ability to close out options and
futures positions could also have an adverse impact on the Series' ability to
effectively hedge its portfolio.

In the event of the bankruptcy of a broker through which the Series engages
in transactions in futures or options thereon, the Series could experience
delays and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Transactions are entered into by the Series only with brokers or
financial institutions deemed creditworthy by the investment adviser.

RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid secondary market.
Compared to the sale of financial futures, the purchase of put options on
financial futures involves less potential risk to a Series because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the purchase of a put option on a
financial future would result in a loss to a Series when the sale of a financial
future would not, such as when there is no movement in the price of debt
securities.

An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a Series generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options
with the result that a Series would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options.

Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange
may not at all times be adequate to handle current trading volume; or (6) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange could continue to be exercisable in accordance with
their terms.

There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.

REPURCHASE AGREEMENTS. Each Series may on occasion enter into repurchase
agreements, whereby the seller of a security agrees to repurchase that security
from the Series at a mutually agreed-upon time and price. The period of maturity
is usually quite

B-12
<PAGE>
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the repurchase agreement. The Series' repurchase agreements will at
all times be fully collateralized by U.S. Government obligations in an amount at
least equal to the resale price. The instruments held as collateral are valued
daily and, if the value of the instruments declines, the Series will require
additional collateral. If the seller defaults and the value of the collateral
securing the repurchase agreement declines, the Series may incur a loss.

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

SECURITIES OF OTHER INVESTMENT COMPANIES. Each Series may invest up to 10%
of its total assets in shares of other investment companies. To the extent that
a Series does invest in securities of other investment companies, shareholders
of the Series may be subject to duplicate management and advisory fees.

ILLIQUID SECURITIES. Each Series may hold up to 15% of its net assets in
illiquid securities, including repurchase agreements which have a maturity of
longer than seven days, securities with legal or contractual restrictions on
resale (restricted securities) and securities that are not readily marketable.
Securities, including municipal lease obligations, that have a readily available
market are not considered illiquid for purposes of this limitation. The
Subadviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. A Series' investment in Rule 144A securities could
have the effect of increasing illiquidity to the extent that qualified
institutional buyers become, for a limited time, uninterested in purchasing Rule
144A securities. Repurchase agreements subject to demand are deemed to have a
maturity equal to the applicable notice period.

Municipal lease obligations and certain other securities for which there is
a readily available market will not be considered illiquid for purposes of the
each Series' 15% limitation on illiquid securities only when deemed liquid under
procedures established by the Fund. In reaching liquidity decisions, the
investment adviser will consider, among others, the following factors: (1) the
frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (for
example, the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer). With respect to municipal lease
obligations, the investment adviser also considers: (1) the willingness of the
municipality to continue, annually or biannually, to appropriate funds for
payment of the lease; (2) the general credit quality of the municipality and the
essentiality to the municipality of the property covered by the lease; (3) in
the case of unrated municipal lease obligations, an analysis of factors similar
to that performed by nationally recognized statistical rating organizations in
evaluating the credit quality of a municipal lease obligation, including (i)
whether the lease can be cancelled; (ii) if applicable, what assurance there is
that the assets represented by the lease can be sold; (iii) the strength of the
lessee's general credit (for example, its debt, administrative, economic and
financial characteristics); (iv) the likelihood that the municipality will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the operations of the municipality (for
example, the potential for an event of nonappropriation); (v) the legal recourse
in the event of failure to appropriate; and (4) any other factors unique to
municipal lease obligations as determined by the investment adviser.

BORROWING. Each Series may borrow an amount equal to no more than 33 1/3% of
the value of its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes and to take advantage of investment
opportunities or for the clearance of transactions. Each Series may pledge up to
33 1/3% of the value of its total assets to secure these borrowings. If a
Series' asset coverage for borrowings falls below 300%, the Series will take
prompt action to reduce its borrowings. If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, the Series may be
required to sell portfolio securities to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time.

If a Series borrows to invest in securities, any investment gains made on
the securities in excess of interest paid on the borrowing will cause the NAV of
the shares to rise faster than would otherwise be the case. On the other hand,
if the investment performance of the additional securities purchased fails to
cover their cost (including any interest paid on the money borrowed) to the
Series, the Series' NAV will decrease faster than would otherwise be the case.
This is the speculative factor known as leverage. Money borrowed for leveraging
will be subject to interest costs which may or may not be recovered by
appreciation of the securities purchased and may exceed the income from the
securities purchased. In addition, the Series may be required to maintain
minimum average balances in connection with such borrowing or pay a commitment
fee to maintain a line of credit which would increase the cost of borrowing over
the stated interest rate.

B-13
<PAGE>
(d) TEMPORARY DEFENSIVE STRATEGY

When the investment adviser believes that market conditions warrant a
temporary defensive investment posture or when necessary to meet large
redemptions, a Series may hold more than 20% of its net assets in cash, cash
equivalents or investment grade taxable obligations, including obligations that
are generally exempt from state, but not federal, taxation. Investing heavily in
these securities can limit our ability to achieve our investment objective of a
high level of current income exempt from federal income taxes, but can help to
preserve a Series' assets.

(e) PORTFOLIO TURNOVER

A Series may engage in short-term trading consistent with its investment
objective. Portfolio transactions will be undertaken in response to anticipated
movements in the general level of interest rates. Municipal securities or
futures contracts may be sold in anticipation of a market decline (resulting
from a rise in interest rates) or purchased in anticipation of a market rise
(resulting from a decline in interest rates) and later sold. In addition, a
security may be sold and another purchased at approximately the same time to
take advantage of what the investment adviser believes to be a temporary
disparity in the normal yield relationship between the two securities. Yield
disparities may occur for reasons not directly related to the investment quality
of particular issues or the general movement of interest rates, due to factors
such as changes in the overall demand for or supply of various types of
municipal securities or changes in the investment objectives of investors.

SEGREGATED ACCOUNTS

When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or other liquid assets in a
segregated account. "Liquid assets" means cash, U.S. Government securities,
foreign securities, equity securities, debt obligations or other liquid,
unencumbered assets marked-to-market daily.

INVESTMENT RESTRICTIONS

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

Each Series may not:

1. Purchase securities on margin (but the Series may obtain such short-term
credits as may be necessary for the clearance of transactions and for margin
payments in connection with transactions in financial futures contracts and
options thereon).

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

3. Issue senior securities, borrow money or pledge its assets, except that
each Series may borrow up to 33 1/3% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes and to take advantage of investment opportunities or for the clearance
of transactions. The Series may pledge up to 33 1/3% of the value of its total
assets to secure such borrowings. For purposes of this restriction, the
preference as to shares of a Series in liquidation and as to dividends over all
other Series of the Fund with respect to assets specifically allocated to that
Series, the purchase or sale of securities on a when-issued or delayed delivery
basis, the purchase and sale of financial futures contracts and collateral
arrangements with respect thereto and obligations of the Series to Trustees,
pursuant to deferred compensation arrangements, are not deemed to be the
issuance of a senior security or a pledge of assets.

4. Purchase any security if as a result, with respect to 75% of the total
assets of the Series, more than 5% of the total assets of the Series would be
invested in the securities of any one issuer (provided that this restriction
shall not apply to obligations issued or guaranteed as to principal and interest
by the U.S. Government or its agencies or instrumentalities).

5. Purchase securities (other than municipal obligations and obligations
guaranteed as to principal and interest by the U.S. Government or its agencies
or instrumentalities) if, as a result of such purchase, 25% or more of the total
assets of the Series (taken at current market value) would be invested in any
one industry. (For purposes of this restriction, industrial development bonds,
where the payment of the principal and interest is the ultimate responsibility
of companies within the same industry, are grouped together as an "industry.")

6. Buy or sell commodities or commodity contracts, except financial futures
contracts and options thereon.

B-14
<PAGE>
7. Buy or sell real estate or interests in real estate, although it may
purchase and sell securities which are secured by real estate and securities of
companies which invest or deal in real estate.

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

9. Purchase securities of other investment companies, except in the open
market involving only customary brokerage commissions and as a result of which
no more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.

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

11. Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Series' total assets).

12. Purchase or write puts, calls or combinations thereof except as
described in the Prospectus and this Statement of Additional Information with
respect to puts and options on futures contracts.

13. Invest for the purpose of exercising control or management of another
company.

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

MANAGEMENT OF THE FUND

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(1) AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- -----------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (74) Trustee President and Director of BMC Fund, Inc., a closed-end investment
company; previously, Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the
Board of Trustees of Mars Hill College; Director of The High
Yield Income Fund, Inc.
Eugene C. Dorsey (72) Trustee Retired President, Chief Executive Officer and Trustee of the
Gannett Foundation (now Freedom Forum); former Publisher of four
Gannett newspapers and Vice President of Gannett Company; past
Chairman of Independent Sector (national coalition of
philanthropic organizations); former Chairman of the American
Council for the Arts; former Director of the Advisory Board of
Chase Manhattan Bank of Rochester, Director of The High Yield
Income Fund, Inc. and First Financial Fund, Inc.
Delayne Dedrick Gold (60) Trustee Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (52) Trustee Vice President of The Prudential Insurance Company of America
(Prudential) (since September 1997); Executive Vice President
and Treasurer (since December 1996), Prudential Investments Fund
Management LLC (PIFM); Senior Vice President (since March 1987)
of Prudential Securities Incorporated (Prudential Securities);
formerly Chief Administrative Officer (July 1990-September
1996), Director (January 1989-September 1996) and Executive Vice
President, Treasurer and Chief Financial Officer (June
1987-December 1996) of Prudential Mutual Fund Management, Inc.
(PMF); Vice President and Director of The Asia Pacific Fund,
Inc. (since May 1989); Director of The High Yield Income Fund,
Inc.
</TABLE>

B-15
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(1) AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- -----------------------------------------------------------------
<S> <C> <C>
Thomas T. Mooney (57) Trustee President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for
Governmental Research, Inc.; Director of Blue Cross of
Rochester, The Business Council of New York State, Monroe County
Water Authority, Rochester Jobs, Inc., Northeast Midwest
Institute, Executive Service Corps of Rochester, Monroe County
Industrial Development Corporation and The High Yield Income
Fund, Inc.; Director and Treasurer of First Financial Fund, Inc.
and The High Yield Plus Fund, Inc.
Thomas H. O'Brien (74) Trustee President, O'Brien Associates (Financial and Management
Consultants) (since April 1984); formerly President of Jamaica
Water Securities Corp. (holding company) (February 1989-August
1990); Chairman and Chief Executive Officer (September
1987-February 1989) and Director (September 1987-August 1990) of
Jamaica Water Supply Company; Director and President of Winthrop
Regional Health System and United Presbyterian Home at Syoset
Inc.; Director of Ridgewood Savings Bank and The High Yield
Income Fund; Trustee of Hofstra University.
Richard A. Redeker (55) Trustee Formerly President, Chief Executive Officer and Director (October
1993-September 1996), Prudential Mutual Fund Management, Inc.;
Executive Vice President, Director and Member of the Operating
Committee (October 1993-September 1996), Prudential Securities;
Director (October 1993-September 1996) of Prudential Securities
Group, Inc. (PSG); Executive Vice President, The Prudential
Investment Corporation (January 1994-September 1996); Director
(January 1994-September 1996) of Prudential Mutual Fund
Distributors, Inc. (PMFD) and Prudential Mutual Fund Services,
Inc. (PMFS); formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc. (September
1978-September 1993); Director of The High Yield Income Fund,
Inc.
*John R. Strangfeld, Jr. (45) Trustee and President Chief Executive Officer, Chairman, President and Director of The
Prudential Investment Corporation (since January 1990);
Executive Vice President of the Prudential Global Asset
Management Group of Prudential (since February 1998); Chairman
of Pricoa Capital Group (since August 1989); Chief Executive
Officer of Private Asset Management Group of Prudential
(November 1994-December 1998).
Nancy H. Teeters (68) Trustee Economist; formerly Vice President and Chief Economist of
International Business Machines Corporation (March 1986-June
1990); Director of Inland Steel Industries (since July 1991) and
The High Yield Income Fund, Inc.
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of his affiliation with Prudential Securities,
Prudential or PIFM.
</TABLE>

B-16
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(1) AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ----------------------- -----------------------------------------------------------------
<S> <C> <C>
Louis A. Weil, III (57) Trustee Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman (since January 1996), Publisher and Chief Executive
Officer of Phoenix Newspapers, Inc. (August 1991-December 1995);
formerly, Publisher of Time Magazine (May 1989-March 1991);
President, Publisher and Chief Executive Officer of the Detroit
News (February 1986-August 1989); formerly member of the
Advisory Board, Chase Manhattan Bank-Westchester; Director of
The High Yield Income Fund, Inc.
Grace Torres (39) Treasurer and Principal First Vice President (since December 1995) of PIFM; formerly
Financial and First Vice President (March 1994-September 1996) of Prudential
Accounting Officer Mutual Fund Management, Inc.; First Vice President of Prudential
Securities (since March 1994); and Vice President (July
1989-March 1994) of Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Treasurer Tax Director of Prudential Investments (since March 1996);
formerly First Vice President of Prudential Mutual Fund
Management, Inc. (February 1993-September 1996) and Senior Tax
Manager (1981-January 1993) at Price Waterhouse LLP.
Deborah A. Docs (41) Secretary Vice President (since December 1996) of PIFM; Vice President and
Associate General Counsel of Prudential Securities (since
December 1996); Vice President and Associate General Counsel
(June 1991-September 1996) of PMF.
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of affiliation with Prudential Securities,
Prudential or PIFM.
(1) Unless otherwise indicated the address for each of the above persons is c/o: Prudential Investments Fund Management
LLC, Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.
</TABLE>

Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.

The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Investment Advisory and Other Services--Manager and Investment Adviser" and
"--Principal Underwriter, Distributor and Rule 12b-1 Plans," review such actions
and decide on general policy.

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

The Fund pays each of its Trustees who is not an affiliated person of PIFM
or Prudential Investments annual compensation of $5,875, in addition to certain
out-of-pocket expenses, the amount of annual compensation paid to each Trustee
may change as a result of the introduction of additional funds upon which the
Trustee will be asked to serve.

Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Trustee's fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Trustee. The
Fund's obligation to make payments of deferred Trustees' fees, together with
interest thereon, is a general obligation of the Fund.

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

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

B-17
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
to the Trustees who are not affiliated with the Manager for the fiscal year
ended April 30, 1999 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and that of all other funds managed by PIFM (Fund
Complex) for the calendar year ended December 31, 1998.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FUND COMPLEX
COMPENSATION AS PART OF FUND BENEFITS UPON PAID TO
NAME OF TRUSTEE FROM FUND EXPENSES RETIREMENT DIRECTORS
- ----------------------------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Edward D. Beach, Trustee $5,875 None N/A $135,000(44/71)*
Eugene C. Dorsey, Trustee** $5,875 None N/A $ 70,000(17/46)*
Delayne Dedrick Gold, Trustee $5,875 None N/A $135,000(44/71)*
Robert F. Gunia, Trustee+ -- -- -- --
Mendel A. Melzer, Former Trustee+ -- -- -- --
Thomas T. Mooney, Trustee** $5,875 None N/A $115,000(35/70)*
Thomas H. O'Brien, Trustee $5,875 None N/A $ 45,000(12/30)*
Richard A. Redeker, Trustee $1,750 -- -- --
Brian M. Storms, Former Trustee+ -- -- -- --
John R. Strangfeld, Jr., Trustee
and President+ -- -- -- --
Nancy H. Teeters, Trustee $5,875 None N/A $ 90,000(26/47)*
Louis A. Weil, III, Trustee $5,875 None N/A $ 90,000(30/54)*
</TABLE>

- ------------------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
** Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1998, includes amounts deferred at the election of
Directors. Including accrued interest, total compensation amounted to $85,445
and $119,740 for Eugene C. Dorsey and Thomas T. Mooney, respectively.
+ Robert F. Gunia, Mendel A. Melzer, Brian M. Storms and John R. Strangfeld,
Jr., who are each current or former interested Trustees, do not receive
compensation from the Fund or any fund in the Prudential Mutual Fund family.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

Trustees of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without an initial sales charge or contingent deferred sales
charge.

As of June 4, 1999, the Trustees and officers of the Fund, as a group, owned
beneficially less than 1% of the outstanding shares of beneficial interest of
each Class of each Series of the Fund.

As of June 4, 1999, Prudential Securities was record holder for other
beneficial owners of 32,665,673 Class A shares of the High Income Series (72% of
such shares outstanding), 45,110,530 Class B shares of the High Income Series
(78% of such shares outstanding), 2,765,191 Class C shares of the High Income
Series (92% of such shares outstanding) and 1,249,470 Class Z shares of the High
Income Series (98% of such shares outstanding). Prudential Securities was also
record holder for other beneficial owners of 9,814,200 Class A shares of the
Insured Series (44% of such shares outstanding), 5,535,307 Class B shares of the
Insured Series (36% of such shares outstanding), 224,281 Class C shares of the
Insured Series (83% of such shares outstanding) and 308,994 Class Z shares of
the Insured Series (98% of such shares outstanding). In the event of any
meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy material to the beneficial owners for which it is the
record holder.

As of June 4, 1999, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding shares of any class of beneficial interest of a
Series were: Mary D. Howard, 7010 Shallow Lake Rd, Prospect, KY 40059-9361, who
held 94,657 Class Z shares of the High Income Series (7.8%); John D. Cooke,
13665 E. 114th St., Fishers, IN 46038-9712, who held 221,869 Class Z shares of
the High Income Series (18.4%); Roaring Creek Ltd, Partnership, James V. Atria,
Jr., 310 San Marco Dr., Ft. Lauderdale, FL 33301-2542, who held 128,549 Class Z
shares of the High Income Series (10.6%); Elizabeth A. Straubmuller, 1598 Silver
Run Rd, Millville, NJ 08332-7334 who held 35,077 Class C shares of the Insured
Series (12.9%); Mrs. Lilian E. Knoop, 4140 Kensington Ave., Detroit, MI
48224-2728, who held 16,818 Class C shares of the Insured Series (6.2%); Mrs.
Lois Clara Stewart, Succ OHL-48868, Trustee, Russell M. Stewart, Rev Liv Trust
UA DTD 07/01/92, 1350 Ala Moana Blvd. Apt. 2910, Honolulu, HI 96815-4228, who
held 26,592 Class C shares of the Insured Series (9.8%); Mrs. Judith Messner,
Trustee Rev Liv Trust, UA DTD 04/20/98, FBO Judith M. Messner, 58890 River
Forest Dr. Goshen, IN 46528-8306, who held 17,825 Class Z shares of the Insured
Series (5.6%); and Roaring Creek Ltd, Partnership, James V. Atria, Jr., 310 San
Marco Dr., Ft. Lauderdale, FL 33301-2542, who held 222,313 Class Z shares
(70.8%).

B-18
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES

(a) MANAGER AND INVESTMENT ADVISER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, Newark, 100 Mulberry Street, New Jersey
07102-4077. The Manager serves as manager to all of the other open-end
management investment companies that, together with the Fund, comprise the
Prudential Mutual Funds. See "How the Fund is Managed--Fund Manager" in the
Prospectus. As of May 31, 1999, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $73
billion and, according to the Investment Company Institute, as of November 30,
1998, the Prudential Mutual Funds were the 18th largest family of mutual funds
in the United States.

The Manager is a subsidiary of Prudential Securities and Prudential.
Prudential Mutual Fund Services LLC (the Transfer Agent), a wholly owned
subsidiary of the Manager, serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.

Pursuant to the Management Agreement with the Fund (the Management
Agreement), the Manager, subject to the supervision of the Fund's Trustees and
in conformity with the stated policies of the Fund, manages both the investment
operations of each Series and the composition of each Series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, the Manager is obligated to keep certain books and records
of the Fund. The Manager also administers the Fund's business affairs and, in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Fund's custodian, and the Fund's
transfer and dividend disbursing agent. The services of the Manager for the Fund
are not exclusive under the terms of the Management Agreement and the Manager is
free to, and does, render management services to others.

For its services, the Manager receives, pursuant to the Management
Agreement, a fee at an annual rate of .50 of 1% of the average daily net assets
of each Series up to $1 billion and .45 of 1% of the average daily net assets in
excess of $1 billion. PIFM has agreed to waive 10% of its management fee
(approximately .05 of 1% of average net assets, as annualized) with respect to
the High Income Series. The fee is computed daily and payable monthly. The
Management Agreement also provides that, in the event the expenses of the Fund
(including the fees of the Manager, but excluding interest, taxes, brokerage
commissions, distribution fees and litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of the Fund's
business) for any fiscal year exceed the lowest applicable annual expense
limitation established and enforced pursuant to the statutes or regulations of
any jurisdiction in which the Fund's shares are qualified for offer and sale,
the compensation due the Manager will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to the Manager will be
paid by the Manager to the Fund. No such reductions were required during the
fiscal year ended April 30, 1999. No jurisdiction currently limits the Fund's
expenses.

In connection with its management of the business affairs of the Fund, the
Manager bears the following expenses:

(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Subadviser;

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

(c) the costs and expenses payable to the Subadviser pursuant to the
subadvisory agreement between the Manager and the Subadviser (the Subadvisory
Agreement).

Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Subadviser, (c) the fees and certain expenses of the Custodian and Transfer
Agent, including the cost of providing records to the Manager in connection with
its obligation of maintaining required records of the Fund and of pricing the
Fund's shares, (d) the charges and expenses of legal counsel and independent
accountants for the Fund, (e) brokerage commissions and any issue or transfer
taxes chargeable to the Fund in connection with its securities transactions, (f)
all taxes and corporate fees payable by the Fund to governmental agencies, (g)
the fees of any trade associations of which the Fund may be a member, (h) the
cost of share certificates representing shares of the Fund, (i) the cost of
fidelity and liability insurance, (j) certain organization expenses of the Fund
and the fees and expenses involved in registering and maintaining registration
of the Fund and of its shares with the Commission, and the states under state
securities laws, including the preparation and printing of the Fund's
registration statements and prospectuses for such purposes and paying the fees
and expenses of notice filings made in accordance with state securities laws,
(k) allocable communications expenses with respect to investor services and all
expenses of shareholders' and

B-19
<PAGE>
Trustees' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.

The Management Agreement provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Fund in connection with
the matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.

For the fiscal year ended April 30, 1999, the Fund paid PIFM a management
fee of $2,274,028 and $5,816,965 for the Insured Series and High Income Series,
respectively.

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

The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or the Subadviser upon not more than 60 days', nor
less than 30 days', written notice. The Subadvisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.

(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS

Prudential Investment Management Services LLC (the Distributor) Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts as the
distributor of the shares of the Fund. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities), One Seaport Plaza, New York,
New York 10292, served as the distributor of the shares of the Fund. PIMS and
Prudential Securities are subsidiaries of Prudential.

Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
incurs the expenses of distributing the Fund's Class Z shares under the
Distribution Agreement, none of which are reimbursed or paid for by the Fund.
See "How the Fund is Managed--Distributor" in the Prospectus.

The expenses incurred under the Plans include commissions and account
servicing fees paid to or on account of brokers or financial institutions that
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares
including lease, utility, communications and sales promotion expenses.

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

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

CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares of
each Series. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares of each Series may be used to pay for
personal service and/or the maintenance of shareholder accounts (service fee)
and (2) total distribution fees (including the service fee of .25 of 1%) may not
exceed .30 of 1% of each Series.

B-20
<PAGE>
For the fiscal year ended April 30, 1999, the Distributor and Prudential
Securities received payments of $725,526 and $364,183 on behalf of the High
Income Series and the Insured Series, respectively, under the Class A Plan.
These amounts were primarily for payment of account servicing fees to financial
advisers and other persons who sell Class A shares. For the fiscal year ended
April 30, 1999, the Distributor and Prudential Securities also received
approximately $600,700 and $54,100 on behalf of the High Income Series and the
Insured Series, respectively, in initial sales charges.

CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund may
pay the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to .50 of 1% and up to 1% of
the average daily net asset of the Class B and Class C shares, respectively, of
each Series. The Class B Plan provides for the payment to the Distributor of (1)
an asset-based sales charge of up to .50 of 1% of the average daily net assets
of the Class B shares of each Series, and (2) a service fee of up to .25 of 1%
of the average daily net assets of the Class B shares of each Series, provided
that the total distribution-related fee does not exceed .50 of 1% of each
Series. The Class C Plan provides for the payment to the Distributor of (1) an
asset-based sales charge of up to .75 of 1% of the average daily net assets of
the Class C shares of each Series, and (2) a service fee of up to .25 of 1% of
the average daily net assets of the Class C shares of each Series. The service
fee is used to pay for personal service and/or the maintenance of shareholder
accounts.

CLASS B PLAN. For the fiscal year ended April 30, 1999, the Distributor and
Prudential Securities received $3,334,425 and $1,043,873 on behalf of the High
Income Series and the Insured Series, respectively, under the Class B Plan. For
the fiscal year ended April 30, 1999, the Distributor and Prudential Securities
spent approximately the following amounts on behalf of each Series of the Fund:

<TABLE>
<CAPTION>
COMPENSATION TO APPROXIMATE
COMMISSION DISTRIBUTOR/PRUDENTIAL TOTAL
PAYMENTS TO SECURITIES FOR AMOUNT
FINANCIAL COMMISSION SPENT BY
ADVISERS OF OVERHEAD COSTS PAYMENTS TO DISTRIBUTOR/PRUDENTIAL
DISTRIBUTOR/ OF DISTRIBUTOR/ REPRESENTATIVES SECURITIES
PRUDENTIAL PRUDENTIAL AND OTHER ON BEHALF OF
SERIES PRINTING SECURITIES SECURITIES* EXPENSES* SERIES
- ---------------------- ------- -------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
High Income Series $ 0 $ 2,948,554 $3,656,253 $ 301,305 $5,906,112
Insured Series $ 0 $ 417,408 $ 136,862 $ 215,998 $ 770,268
- ------------------------
* Including lease, utility and sales promotion expenses.
</TABLE>

The Distributor also receives the proceeds of contingent deferred sales
charges paid by shareholders upon certain redemptions of Class B shares. See
"How to Buy, Sell and Exchange Shares of the Fund--How to Sell Your
Shares--Contingent Deferred Sales Charges (CDSC)" in the Prospectus. For the
fiscal year ended April 30, 1999, the Distributor and Prudential Securities
received approximately $765,300 and $179,700 on behalf of the High Income Series
and the Insured Series, respectively, in contingent deferred sales charges
attributable to Class B shares.

CLASS C PLAN. For the fiscal year ended April 30, 1999, the Distributor and
Prudential Securities received $195,856 and $13,918 on behalf of the High Income
Series and the Insured Series, respectively, under the Class C Plan. For the
fiscal year ended April 30, 1998, Prudential Securities spent approximately the
following amounts on behalf of each Series of the Fund:

<TABLE>
<CAPTION>
APPROXIMATE
TOTAL
AMOUNT
COMMISSION COMPENSATION TO SPENT BY
PAYMENTS TO DISTRIBUTOR/ PRUDENTIAL DISTRIBUTOR/
FINANCIAL SECURITIES FOR PRUDENTIAL
ADVISERS OF OVERHEAD COSTS COMMISSION SECURITIES
DISTRIBUTOR/ OF DISTRIBUTOR/ PAYMENTS TO ON BEHALF
PRUDENTIAL PRUDENTIAL REPRESENTATIVES AND OF
SERIES PRINTING SECURITIES SECURITIES* OTHER EXPENSES* SERIES
- -------------------- --------- ----------- ----------------------- --------------------------------- -----------
<S> <C> <C> <C> <C> <C>
High Income Series $ 0 $136,837 $ 98,742 $ 4,804 $240,383
Insured Series $ 0 $10,455 $ 9,843 $ 3,007 $ 23,305
- ------------------------
* Including lease, utility and sales promotion expenses.
</TABLE>

For the fiscal year ended April 30, 1999 the Distributor received
approximately $78,300 and $8,000 on behalf of the High Income Series and the
Insured Series, respectively in initial sales charges.

The Distributor also receives the proceeds of contingent deferred sales
charges paid by shareholders upon certain redemptions of Class C shares. See
"How to Buy, Sell and Exchange Shares of the Fund--How to Sell Your
Shares--Contingent

B-21
<PAGE>
Deferred Sales Charges (CDSC)" in the Prospectus. For the fiscal year ended
April 30, 1999, the Distributor and Prudential Securities received approximately
$11,200 and $100 on behalf of the High Income Series and Insured Series,
respectively, in contingent deferred sales charges attributable to Class C
shares.

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

The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Trustees, including a majority vote of the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the Class A, Class B or Class C Plan or on any agreement related to
the Plans (Rule 12b-1 Trustees) cast in person at a meeting called for the
purpose of voting on such continuance. A Plan may be terminated at any time,
without penalty, by the vote of a majority of the Rule 12b-1 Trustees or by the
vote of the holders of a majority of the outstanding shares of the applicable
class on not more than 30 days' written notice to any other party to the Plan.
The Plans may not be amended to increase materially the amounts to be spent for
the services described therein without approval by the shareholders of the
applicable class (by both Class A and Class B shareholders, voting separately,
in the case of material amendments to the Class A Plan), and all material
amendments are required to be approved by the Board of Trustees in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.

Pursuant to each Plan, the Board of Trustees will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report will include an itemization
of the distribution expenses and the purposes of such expenditures. In addition,
as long as the Plans remain in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.

Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities law.

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

FEE WAIVERS/SUBSIDIES

PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. The
Distributor may from time to time waive all or a portion of its distribution
related fees of the Fund. For the fiscal year ending April 30, 2000, the
Distributor has contractually agreed to limit its distribution related fees
payable under the Class A and Class C Plans to .25 of 1% and .75 of 1% of Class
A and Class C shares, respectively.

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

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

Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the

B-22
<PAGE>
maintenance of shareholder account records, the payment of dividends and
distributions and related functions. For these services, PMFS receives an annual
fee of $13.00 per shareholder account, a new account set-up fee of $2.00 for
each manually established shareholder account and a monthly inactive zero
balance account fee of $.20 per shareholder account. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationary,
printing, allocable communication expenses and other costs.

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

BROKERAGE ALLOCATION AND OTHER PRACTICES

The Manager is responsible for decisions to buy and sell securities and
financial futures for each Series of the Fund, the selection of brokers, dealers
and futures commission merchants to effect the transactions and the negotiation
of brokerage commissions, if any. The term "Manager" as used in this section
includes the Subadviser. Purchases and sales of securities on a securities
exchange, which are not expected to be a significant portion of the portfolio
securities of any Series, are effected through brokers who charge a commission
for their services. Orders may be directed to any broker or futures commission
merchant including, to the extent and in the manner permitted by applicable law,
the Distributor and its affiliates. Brokerage commissions on United States
securities, options and futures exchanges or boards of trade are subject to
negotiation between the Manager and the broker or futures commission merchant.

In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with the Distributor
or an affiliate in any transaction in which the Distributor or an affiliate acts
as principal. Thus it will not deal in over-the-counter securities with the
Distributor or an affiliate acting as a market-maker, and it will not execute a
negotiated trade with the Distributor or an affiliate if the execution involves
the Distributor or an affiliate acting as principal with respect to any part of
the Fund's order.

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

Subject to the above considerations, the Distributor or an affiliate may act
as a securities broker or futures commission merchant for the Fund. In order for
the Distributor or an affiliate to effect any portfolio transactions for the
Fund, the commissions, fees or other remuneration received by the Distributor or
an affiliate must not exceed certain rates set forth in the Investment Company
Act and must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers or

B-23
<PAGE>
futures commission merchants in connection with comparable transactions
involving similar securities or futures being purchased or sold on an exchange
during a comparable period of time. This standard would allow the Distributor or
an affiliate to receive no more than the remuneration which would be expected to
be received by an unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the non-interested Trustees, have adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to the Distributor or an affiliate are consistent with the
foregoing standard. In accordance with Section 11(a) of the Securities Exchange
Act of 1934, the Distributor or an affiliate may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless the
Fund has expressly authorized the retention of such compensation. The
Distributor and its affiliates must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by the
Distributor and its affiliates from transactions effected for the Fund during
the applicable period. Brokerage and futures transactions with the Distributor
or an affiliate are also subject to such fiduciary standards as may be imposed
upon the Distributor (or such affiliate) by applicable law.

During the fiscal years ended April 30, 1999, 1998 and 1997 the Fund paid
$102,621, $136,400, and $163,500, respectively, in brokerage commissions on
certain options and/or futures transactions. No such brokerage commissions were
paid to the Distributor or any affiliate thereof.

The Fund is required to disclose its holdings of its regular brokers and
dealers (as defined under Rule 10b-1 of the Investment Company Act) and their
parents at April 30, 1999. At April 30, 1999, the Fund did not hold any
securities of its regular brokers and dealers.

CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION

The Fund is authorized to issue an unlimited number of shares of beneficial
interest, divided into four classes, designated Class A, Class B, Class C and
Class Z. Each class of beneficial interest with respect to each Series
represents an interest in the same assets of the Series and is identical in all
respects except that (1) each class is subject to different sales charges and
distribution and/or service fees (except for Class Z shares, which are not
subject to any sales charge or distribution and/or service fees), which may
affect performance, (2) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature, and (5) Class Z shares are offered exclusively for sale to a
limited group of investors. Currently, the Fund is offering Class A, Class B,
Class C and Class Z shares of beneficial interest. In accordance with the Fund's
Declaration of Trust, the Board of Trustees may authorize the creation of
additional series and classes within such series, which such preferences,
privileges, limitations and voting and dividend rights as the Board may
determine.

Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share of
each class of each Series is equal as to earnings, assets and voting privileges,
except as noted above, and each class (with the exception of Class Z shares,
which are not subject to any distribution and/or service fees) bears the
expenses related to the distribution of its shares. Except for the conversion
feature applicable to the Class B shares, there are no conversion, preemptive or
other subscription rights. In the event of liquidation, each share of beneficial
interest of each Series is entitled to its portion of all of the Series' assets
after all debts and expenses of the Series have been paid. Since Class B and
Class C shares generally bear higher distribution expenses than Class A shares,
the liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fees. The Fund's shares do not have
cumulative voting rights for the election of Directors.

The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% or more
of the Fund's outstanding shares for the purpose of voting on the removal of one
or more Trustees or to transact any other business.

PURCHASE, REDEMPTION AND PRICING OF FUND SHARES

Shares of each Series of the Fund may be purchased at a price equal to the
next determined net asset value per share (NAV) plus a sales charge which, at
the election of the investor, may be imposed either (1) at the time of purchase
(Class A or Class C shares) or (2) on a deferred basis (Class B or Class C
shares). Class Z shares of the Fund are offered to a limited group of investors
at NAV without any sales charges. See "How to Buy, Sell and Exchange Shares of
the Fund--How to Buy Shares" in the Prospectus.

B-24
<PAGE>
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company (State Street), Boston, Massachusetts, Custody and Shareholder Services
Division. Attention: Prudential Municipal Bond Fund, specifying on the wire the
account number assigned by PMFS and your name and identifying the Series
(Insured or High Income) and the class in which you are eligible to invest
(Class A, Class B, Class C or Class Z shares).

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

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

ISSUANCE OF FUND SHARES FOR SECURITIES

Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objectives and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 3% and Class
C* shares are sold with a 1% sales charge, and Class B* and Class Z shares are
sold at NAV. Using the Fund's NAV at April 30, 1999, the maximum offering price
of the Fund's shares is as follows:

<TABLE>
<CAPTION>
HIGH
INCOME INSURED
CLASS A SERIES SERIES
---------- -------
<S> <C> <C>
Net asset value and redemption price per
Class A share.............................. $11.21 $ 11.18
Maximum sales charge (3% of offering
price)..................................... .35 .35
---------- -------
Offering price to public..................... $11.56 $ 11.53
---------- -------
---------- -------
CLASS B
Net asset value, redemption price and
offering price to public per Class B
share*..................................... $11.21 $ 11.19
---------- -------
---------- -------
CLASS C
Net asset value and redemption price per
Class C share*............................. $11.21 $ 11.19
Sales charge (1% of offering price).......... .11 .11
---------- -------
Offering price to public..................... 11.32 11.30
---------- -------
---------- -------
CLASS Z
Net asset value, offering price and
redemption price per Class Z share......... $11.20 $ 11.18
---------- -------
---------- -------
</TABLE>

- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "How to Buy, Sell and Exchange Shares of the
Fund--How to Sell Your Shares--Contingent Deferred Sales Charges (CDSC)" in
the Prospectus.

SELECTING A PURCHASE ALTERNATIVE

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

If you intend to hold your investment in a Fund for less than 3 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 3% and Class B shares are
subject to a CDSC of 5% which declines to zero over 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.

If you intend to hold your investment for more than 3 years, but more than 4
years, or for more than 5 years, but less than 6 years, you should consider
purchasing Class A shares because that maximum 3% initial sales charge plus the
cumulative annual distribution-related fee on Class A shares would be lower
than: (i) the contingent deferred sales charge plus the cumulative annual
distribution-related fee on Class B shares; and (ii) the 1% initial sales charge
plus the cumulative annual distribution-related fee on Class C shares.

B-25
<PAGE>
If you intend to hold your investment for more than 4 years, but less than 5
years, you may consider purchasing Class A or Class B shares because: (i) the
maximum 3% initial sales charge plus the cumulative annual distribution-related
fee on Class A shares and (ii) the contingent deferred sales charge plus the
cumulative annual distribution-related fee on Class B shares would be lower than
the 1% initial sales charge plus the cumulative annual distribution-related fee
on Class C shares.

If you intend to hold your investment for more than 6 years and do not
qualify for a reduced sales charge on Class A shares, since Class shares convert
to Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.

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

If you do not qualify for a reduced sales charge on Class A shares and your
purchase Class C shares, your would have to hold your investment for more than 3
years for the 1% initial sales charge plus the higher cumulative annual
distribution-related fee on the Class C shares to exceed the initial sales
charge plus cumulative annual distribution-related fee on Class A shares. This
does not take into account the time value of money, which further reduces the
impact of the higher Class C distribution-related fee on the investment
fluctuations in NAV, the effect on the return on the investment over this period
of time or redemptions when the CDSC is applicable.

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

Class A shares may be purchased at NAV, through the Distributor or the
Transfer Agent by:

- officers of the Prudential mutual funds (including the Fund),

- employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent,

- employees or subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,

- members of the Board of Directors of The Prudential Insurance Company of
America,

- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service
with Prudential or one of its subsidiaries,

- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer,

- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities (2) the purchase
is made with proceeds of a redemption of shares of any open-end non-money
market fund sponsored by the financial adviser's previous employer (other
than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (3) the financial adviser served as the client's broker on the
previous purchase,

- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for the services (for example, mutual
fund "wrap" or asset allocation program), and

- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket programs").

Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the

B-26
<PAGE>
Fund in connection with different pricing options for their programs. Investors
should consider carefully any separate transaction and other fees charged by
these programs in connection with investing in each available share class before
selecting a share class.

For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.

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

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
Mutual Funds, the purchases may be combined to take advantage of the reduced
sales charge applicable to larger purchases. See the table of breakpoints under
"How to Buy, Sell and Exchange Shares of the Fund--Reducing or Waiving Class A's
Initial Sales Charge" in the Prospectus.

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

- an individual;

- the individual's spouse, their children and their parents;

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

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

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

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

- one or more employee benefit plans of a company controlled by an
individual.

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

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

RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through the Distributor or a Dealer will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through your broker. The value of existing holdings for
purposes of determining the reduced sales charge is calculated using the maximum
offering price (net asset value plus maximum sales charge) as of the previous
business day. See "Risk/Return Summary--Evaluating Performance" in the
Prospectus.

The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The reduced
sales charges will be granted subject to confirmation of the investors'
holdings. Rights of accumulation are not available to individual participants in
any retirement or group plans.

LETTER OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors) who enter into a written Letter of
Intent providing for the purchase, within a thirteen-month period, of shares of
a Series of the Fund and shares of other Prudential mutual funds (Investment
Letter of Intent).

B-27
<PAGE>
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential mutual funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through the Distributor or a Dealer will not be aggregated to determine the
reduced sales charge.

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

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

The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings.

CLASS B SHARES

The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Redemptions of Class B shares may be subject to a CDSC. See
"Contingent Deferred Sales Charges" below.

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

CLASS C SHARES

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

WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES

INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (2) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Prusec; and (3) investors purchasing shares
through other brokers. This waiver is not available to investors who purchase
shares directly from the Transfer Agent. You must notify the Transfer Agent
directly or through your broker if you are entitled to this waiver and provide
the Transfer Agent with such supporting documents as it may deem appropriate.

CLASS Z SHARES

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

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

B-28
<PAGE>
- Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services

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

OTHER TYPES OF INVESTORS. Class Z shares currently are also available for
purchase by the following categories of investors:

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

- current and former Directors/Trustees of the Prudential mutual funds
(including the Fund); and

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

In connection with the sale of Class Z shares,the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.

SALE OF SHARES

You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charges"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for the day (that is,
4:15 P.M., New York time) in order to receive that day's NAV. Your broker will
be responsible for furnishing all necessary documentation to the Distributor and
may charge you for its services in connection with redeeming shares of the Fund.

If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.

If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence of
authority acceptable to the Transfer Agent must be submitted before such request
will be accepted. All correspondence and documents concerning redemptions should
be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010, the Distributor or to your broker.

SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, the signature(s)
on the redemption request and on the certificates, if any, or stock power must
be guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquires of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices. In the case of redemptions from a PruArray Plan, if the proceeds of the
redemption are invested in another investment option of the plan in the name of
the record holder and at the time same address as reflected in the Transfer
Agent's records, a signature is not required.

Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker payment for shares presented for redemption will be
credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (4) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.

B-29
<PAGE>
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, which may take up to 10 calendar days from the time of receipt of the
purchase check by the Transfer Agent. Such delay may be avoided by purchasing
shares by wire or by certified or cashier's check.

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

INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder whose account has a net
asset value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days, prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.

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

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase (or one year in the case of shares
purchased prior to November 2, 1998) will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduced the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and 18 months, in the case of Class C shares (one year for Class
C shares purchased before November 2, 1998). A CDSC will be applied on the
lesser of the original purchase price or the current value of the shares being
redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor.

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

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

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

In determining whether a CDSC is applicable to redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the

B-30
<PAGE>
reinvestment of dividends and distribution; then of amounts representing the
increase in NAV above the total amount of payments for the purchase of Fund
shares made during the preceding six years; then of amounts representing the
cost of shares held beyond the applicable CDSC period; and finally, of amounts
representing the cost of shares held for the longest period of time within the
applicable CDSC period.

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

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

WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES

The CDSC will be waived in the case of a redemption following the death or
disability of a shareholder or, in the case of a trust account, following the
death or disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.

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

You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.

In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.

<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.

Disability - An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and must also indicate the date of disability.
indefinite duration.

The Transfer Agent reserves the right to request such additional documents as it may
deem appropriate.
</TABLE>

SYSTEMATIC WITHDRAWAL PLAN

The CDSC will be waived (or reduced) on certain redemptions from a
Systematic Withdrawal Plan. On an annual basis, up to 12% of the total dollar
amount subject to the CDSC may be redeemed without charge. The Transfer Agent
will calculate the total amount available for this waiver annually on the
anniversary date of your purchase or, for shares purchased prior to March 1,
1998, on March 1 of the current year. The CDSC will be waived (or reduced) on
redemptions until this threshold 12% is reached.

QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994

The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of a Series of the Fund owned by you in a
single account exceeded $500,000. For example, if you purchased $100,000 of
Class B shares of the Fund and the following year purchased an additional
$450,000 of Class B shares with the result that the aggregate cost of your Class
B shares of the Fund following the

B-31
<PAGE>
second purchase was $550,000, the quantity discount would be available for the
second purchase of $450,000 but not for the first purchase of $100,000. The
quantity discount will be imposed at the following rates depending on whether
the aggregate value exceeded $500,000 or $1 million:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE AS A
PERCENTAGE OF DOLLARS INVESTED OR
REDEMPTION PROCEEDS
----------------------------------------
YEAR SINCE PURCHASE PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- --------------------------------------------- ---------------------- ---------------
<S> <C> <C>
First........................................ 3.0% 2.0%
Second....................................... 2.0% 1.0%
Third........................................ 1.0% 0%
Fourth and thereafter........................ 0% 0%
</TABLE>

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

CONVERSION FEATURE--CLASS B SHARES

Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.

Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (1)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (2) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.

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

Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.

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

The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Service Code and (2) that the conversion of shares does not constitute a

B-32
<PAGE>
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject, possibly
indefinitely, to their higher annual distribution and service fee.

SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

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

EXCHANGE PRIVILEGE

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

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

In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.

If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.

If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.

You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.

In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.

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

B-33
<PAGE>
The following money market funds participate in the Class A exchange
privilege:

Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.

CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and Class
C shares acquired as a result of the exchange. The applicable sales charge will
be that imposed by the fund in which shares were initially purchased and the
purchase date will be deemed to be the first day of the month after the initial
purchase, rather than the date of the exchange.

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

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

CLASS Z Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.

SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise. Similarly,
shareholders who qualify to purchase Class Z shares will will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B and Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B and Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.

B-34
<PAGE>
Participants in any fee-based program for which a Series is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.

Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or your Dealer. The exchange privilege may be modified, terminated
or suspended on sixty days' notice and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares. See "How to Buy, Sell and Exchange Shares of the Fund--Frequent
Trading" in the Prospectus.

DOLLAR COST AVERAGING

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

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

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

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 years.............................. $ 110 $ 165 $ 220 $ 275
20 years.............................. 176 264 352 440
15 years.............................. 296 444 592 740
10 years.............................. 555 833 1,110 1,388
5 years.............................. 1,371 2,057 2,742 3,428
See "Automatic Investment Plan (AIP)" below.
- ------------------------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees and
room and board for the 1993-1994 academic year.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>

AUTOMATIC INVESTMENT PLAN (AIP)

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan. See "Automatic Reinvestment of Dividends and Distributions" above.

B-35
<PAGE>
The Distributor, the Transfer Agent or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.

Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.

Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (1) the purchase of Class
A and Class C shares and (2) the redemption of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the systematic withdrawal plan, particularly if used in
connection with a retirement plan.

MUTUAL FUND PROGRAM

From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
marketed with an investment theme, for example, to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.

The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser, Prudential/Pruco Securities Representative, or
other Dealer concerning the appropriate blends of portfolios for them. If
investors elect to purchase the individual mutual funds that constitute the
program in an investment ratio different from that offered by the program, the
standard minimum investment requirements for the individual mutual funds will
apply.

NET ASSET VALUE

The NAV is the net worth of a Series (assets, including securities at value,
minus liabilities) divided by the number of shares outstanding. NAV is
calculated separately for each class. Under the Investment Company Act, the
Trustees are responsible for determining in good faith the fair value of
securities of each Series of the Fund. The Trustees have fixed the specific time
of day for the computation of each Series' NAV to be at 4:15 P.M., New York
time. In the event the New York Stock Exchange closes early on any business day,
the NAV of the Series' shares shall be determined at a time between such closing
and 4:15 P.M., New York time.

Portfolio securities for which market quotations are readily available are
valued at their bid quotations. Futures contracts are valued daily at 4:15 P.M.,
New York time, at market quotations provided by the Chicago Board of Trade.
Under the Investment Company Act, the Trustees are responsible for determining
in good faith the fair value of securities and other assets of the Fund for
which market quotations are not readily available. Securities for which market
quotations are not readily available are valued at fair value in accordance with
procedures adopted by the Trustees. Under these procedures, the Manager values
municipal securities on the basis of valuations provided by a pricing service
which uses information with respect to transactions in securities, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining value. This service is furnished
by Kenny-S&P, a division of J.J. Kenny Information Systems. Reliable market
quotations generally are not readily available for purposes of valuing municipal
securities. As a result, depending on the particular municipal securities owned
by the Fund, it is likely that most of the valuations for such securities will
be based upon fair value determined under the foregoing procedures. Short-term
investments are valued at amortized cost if their original term to maturity was
less than 60 days, or by amortizing their value on the 61st day prior to
maturity if their original term to maturity when acquired by the Fund was more
than 60 days, unless this valuation is determined not to represent fair value by
the Trustees.

NAV is calculated separately for each class. As long as long as a Series
declares dividends daily, the NAV of the Class A, Class B, Class C and Class Z
shares of the Series will generally be the same. Series' dividends will differ
by approximately the amount any distribution and/or service fee expense accrual
differential among the classes.

TAXES, DIVIDENDS AND DISTRIBUTIONS

Each Series of the Fund has elected to qualify and intends to remain
qualified to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code. In general, such election relieves each Series (but
not its

B-36
<PAGE>
shareholders) from paying federal income tax on income which is distributed to
shareholders, and permits net capital gains of the Series (that is, the excess
of net capital gains from the sale of assets held for more than 12 months over
net short-term capital losses) to be treated as long-term capital gains of the
shareholders, regardless of how long shares in the Series are held.

Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the annual gross income of each Series (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans and
gains from the sale or other disposition of securities or options thereof or
foreign currencies, or other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) each Series diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of the assets of the Series is represented by cash, U.S.
Government securities and other securities limited in respect of any one issuer
to an amount not greater than 5% of the market value of the assets of the Series
and 10% of the outstanding voting securities of the issuer, and (ii) not more
than 25% of the value of the assets of the Series is invested in the securities
of any one issuer (other than U.S. Government securities); and (c) each Series
distribute to its shareholders at least 90% of each of (i) its net tax-exempt
interest income and (ii) its net investment income and net short-term gains
(that is, the excess of net short-term capital gains over net long-term capital
losses) in each year.

Qualification as a regulated investment company will be determined at the
level of each Series and not at the level of the Fund. Accordingly, the
determination of whether any particular Series qualifies as a regulated
investment company will be based on the activities of that Series, including the
purchases and sales of securities and the income received and expenses incurred
in that Series. Net capital gains of a Series which are available for
distribution to shareholders will be computed by taking into account any capital
loss carryforward of the Series.

Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to flow through as tax-exempt interest to its
shareholders provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to shareholders of tax-exempt interest earned by any Series of the
Fund for the taxable year are generally not subject to federal income tax (see
the discussion of the alternative minimum tax below). Distributions of taxable
net investment income (including market discount on municipal obligations) and
of the excess of net short-term capital gain over net long-term capital loss are
taxable to shareholders as ordinary income.

The federal alternative minimum tax may affect corporations and other
shareholders in the Fund. Interest on certain categories of tax-exempt
obligations (that is, most private activity bonds issued after August 7, 1986)
will constitute a preference item for purposes of the alternative minimum tax.
Each Series has invested in such obligations and, therefore, receives interest
that will be treated as a preference item. Preference items received by a Series
will be allocated between the Series and its shareholders. It is possible that a
Series will incur some liability under the alternative minimum tax to the extent
preference items are allocated to it. Corporate shareholders in any of the
Series will also have to take into account interest on all municipal obligations
for purposes of the adjustment for current earnings for alternative minimum tax
purposes.

The alternative minimum tax is a tax equal to 20% of a corporation's
so-called alternative minimum taxable income and 26% of a non-corporate
taxpayer's so-called alternative minimum taxable income up to $175,000 and 28%
of such income in excess of $175,000. Individual taxpayers may reduce their
alternative minimum taxable income by a standard exemption amount of $45,000
($33,750 if filing singly), although the exemption amount is reduced for
taxpayers with adjusted gross incomes of more than $150,000 ($112,500 if filing
singly). Alternative minimum taxable income is determined by adding to the
taxpayer's regularly-computed taxable income items of tax preference and certain
other adjustments. All shareholders should consult their tax advisers to
determine whether their investment in the Fund will cause them to incur
liability for the alternative minimum tax.

The High Income Series has a net capital loss carryforward as of April 30,
1999 of approximately $20,684,000 of which $2,024,000 expires in 2002,
$5,361,000 expires in 2003, $6,383,000 expires in 2004, $3,225,000 expires in
2005, $554,000 expires in 2006 and $3,137,000 expires in 2007. No capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of the aggregate of such amounts. In addition, the High
Income Series and the Insured Series elected to treat net realized capital
losses of approximately $2,765,000 and $600,700, respectively, incurred in the
year ended April 30, 1999, as having been incurred in the following year.

Each Series may purchase debt securities (such as zero coupon bonds) that
contain original issue discount. Original issue discount that accrues in a
taxable year is treated as income earned by the Series and therefore is subject
to the distribution requirements of the Internal Revenue Code. Because the
original issue discount income earned by the Series in a taxable year may not be
represented by cash income, the Series may have to dispose of other securities
and use the proceeds to make distributions to satisfy the Internal Revenue
Code's distribution requirements.

B-37
<PAGE>
Special rules will apply to futures contracts and options thereon in which
the Series invest. These investments will generally constitute "Section 1256
contracts" and will be required to be "marked to market" for federal income tax
purposes at the end of each Series' taxable year; that is, treated as having
been sold at market value. Sixty percent of any gain or loss recognized on such
"deemed sales" and on actual dispositions will be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss.

Each Series gains and losses on the sale, lapse, or other termination of
call options it holds on financial futures contracts will generally be treated
as gains and losses from the sale of financial futures contracts. If call
options written by a Series expire unexercised, the premiums received by the
Series give rise to short-term capital gains at the time of expiration. Each
Series may also have short-term gains and losses associated with closing
transactions with respect to call options written by them. If call options
written by a Series are exercised, the selling price of the financial futures
contract is increased by the amount of the premium received by the Series, and
the character of the capital gain or loss on the sale of the futures contract
depending on the contract's holding period.

Upon the exercise of a put held by a Series, the premium initially paid for
the put is offset against the amount received for the futures contract, bond or
note sold pursuant to the put thereby decreasing any gain (or increasing any
loss) realized on the sale. Generally, such gain or loss is capital gain or
loss, the character of which depends on the holding period of the futures
contract, bond or note. However, in certain cases in which the put is not
acquired on the same day as the underlying securities identified to be used in
the put's exercise, gain on the exercise, sale or disposition of the put is
short-term capital gain. If a put is sold prior to exercise, any gain or loss
recognized by a Series would be capital gain or loss, depending on the holding
period of the put. If a put expires unexercised, a Series would realize
short-term or long-term capital loss, the character of which depends on the
holding period of the put, in an amount equal to the premium paid for the put.
In certain cases in which the put and securities identified to be used in its
exercise are acquired on the same day, however, the premium paid for the
unexercised put is added to the basis of the identified securities.

Distributions of taxable net investment income and of the excess of net
short-term capital gains over net long-term capital losses are taxable to
shareholders as ordinary income. None of the income distributions of a Series
will be eligible for the deduction for dividends received by corporations.

Any net capital gains (that is, the excess of net capital gains from the
sale of assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals with respect to asset gains recognized by a Series is 20%. The
maximum capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.

If any net capital gains are retained by a Series for investment, requiring
federal income taxes to be paid thereon by the Series, the Series will elect to
treat these capital gains as having been distributed to shareholders. As a
result, these amounts will be taxed to shareholders as capital gains, and
shareholders will be able to claim their proportionate share of the federal
income taxes paid by the Series on the gains as a credit against their own
federal income tax liabilities and will be entitled to increase the adjusted tax
basis of their shares in that Series by the difference between their PRO RATA
share of such gains and their tax credit.

Distributions of taxable net investment income and net capital gains will be
taxable as described above, whether made in shares or in cash. Shareholders
electing to receive distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each share so received equal to
the NAV of a share of the applicable Series of the Fund on the distribution
date.

Any gain or loss realized upon a sale or redemption of shares of a Series by
a shareholder who is not a dealer in securities will be treated as capital gain
or loss. Any such capital gain or loss will be treated as a long-term capital
gain or loss if the shares were held for more than 12 months.

Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.

Any short-term capital loss realized upon the sale or redemption of shares
within six months (or such shorter period as may be established by Treasury
regulations) from the date of purchase of such shares and following receipt of
an exempt-interest dividend will be disallowed to the extent of such tax-exempt
dividend. Any loss realized upon the redemption of shares within 6 months from
the date of purchase of the shares and following receipt of a capital gain
distribution from the sale of assets held more than 12 months will be treated as
long-term capital loss to the extent of the capital gain distribution.

Interest on indebtedness and other expenses incurred by shareholders to
purchase or carry shares of the Fund will generally not be deductible for
federal income tax purposes under Section 265 of the Internal Revenue Code. In
addition, under rules used by

B-38
<PAGE>
the Internal Revenue Service for determining when borrowed funds are considered
to be used for the purpose of purchasing or carrying particular assets, the
purchase of shares may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the purchase of shares.

Persons holding certain municipal obligations who are also substantial users
(or persons related thereto) of facilities financed by such obligations may not
exclude interest on such obligations from their gross income. No investigation
as to the users of the facilities financed by municipal obligations in the
portfolios of the Series has been made by the Fund. Potential investors should
consult their tax advisers with respect to this matter before purchasing shares
of the Fund.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of state or municipal obligations for investment by
each Series of the Fund and the value of portfolio securities held by the Series
would be affected. In addition, each Series of the Fund would reevaluate its
investment objective and policies.

All distributions of taxable net investment income and net capital gains,
whether received in shares or cash, must be reported by each shareholder on his
or her federal income tax return. In addition, each shareholder must disclose on
his or her return the amount of tax-exempt dividends received from the Fund.
Under federal income tax law, each Series of the Fund will be required to report
to the Internal Revenue Service all distributions of taxable income and capital
gains as well as gross proceeds from the redemption or exchange of shares of
such Series, except in the case of certain exempt shareholders. Further, all
such distributions and proceeds from the redemption or exchange of shares may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the appropriate Series of the Fund
with their taxpayer identification numbers on IRS Form W-9 and with required
certifications regarding their status under the federal income tax law. If the
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Investors may wish to consult their tax advisers about
the applicability of the backup withholding provisions.
Each Series is required under the Internal Revenue Code to distribute 98% of
its ordinary income in the same calendar year in which it is earned. Each Series
is also required to distribute during the calendar year 98% of the capital gain
net income it earned during the twelve months ending on October 31 of such
calendar year. In addition, the Series must distribute during the calendar year
any undistributed ordinary income and undistributed capital gain net income from
the prior year or the 12 month period ending on October 31 of such prior
calendar year, respectively. To the extent it does not meet these distribution
requirements, a Series will be subject to a non-deductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the
Series pays income tax is treated as distributed.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
Each Series may be subject to state or local tax in certain other states
where it is deemed to be doing business. Further, in those states which have
income tax laws, the tax treatment of a Series and of its shareholders with
respect to distributions by such Series may differ from federal tax treatment.
The exemption of interest income for federal income tax purposes may not result
in a similar exemption under the laws of a particular state or local taxing
authority. Each Series will report annually to its shareholders the percentage
and source, on a state-by-state basis, of interest income on municipal
obligations received by such Series during the preceding year and on other
aspects of the federal income tax status of distributions made by such Series.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for each Class of shares. The per share dividends on Class A shares will
be lower than the per share dividends on Class Z shares, since Class Z shares
bear no distribution-related fee.

B-39
<PAGE>
PERFORMANCE INFORMATION

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

a - b
YIELD = 2[( ------- +1)TO THE POWER OF 6 - 1]
cd

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

Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The yield for the 30 days ended April 30, 1999 was 4.53% (4.48% without the
management fee waiver) and 3.95% for Class A shares of the High Income Series
and Insured Series, respectively. The yield for the 30 days ended April 30, 1999
was 4.43% (4.38% without the management fee waiver) and 3.82% for Class B shares
of the High Income Series and Insured Series, respectively. The yield for the 30
days ended April 30, 1999 was 4.14% (4.09% without the management fee waiver)
and 3.54% for Class C shares of the High Income Series and Insured Series,
respectively. The yield for the 30 days ended April 30, 1999 was 4.93% (4.88%
without the management fee waiver) and 4.32% for Class Z shares of the High
Income Series and Insured Series, respectively.

Each Series may also calculate the tax equivalent yield over a 30-day
period. The tax equivalent yield will be determined by first computing the yield
as discussed above. The Series will then determine what portion of that yield is
attributable to securities, the income of which is exempt for federal income tax
purposes. This portion of the yield will then be divided by one minus 39.6% (the
assumed maximum tax rate for individual taxpayers not subject to alternative
minimum tax) and then added to the portion of the yield that is attributable to
other securities. For the 30 days ended April 30, 1999, the tax equivalent yield
for the Class A shares of the High Income Series and Insured Series was 7.50%
(7.42% without the management fee waiver) and 6.54%, respectively. For the 30
days ended April 30, 1999, the tax equivalent yield for the Class B shares of
the High Income Series and Insured Series was 7.33% (7.25% without the
management fee waiver) and 6.32%, respectively. For the 30 days ended April 30,
1999, the tax equivalent yield for the Class C shares of the High Income Series
and Insured Series was 6.85% (6.77% without the management fee waiver) and
5.86%, respectively. For the 30 days ended April 30, 1999, the tax equivalent
yield for the Class Z shares of the High Income Series and Insured Series was
8.16% (8.08% without the management fee waiver) and 7.15%, respectively.

The following chart shows the tax-equivalent yield of an investment at
varying rates:
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C>
3.5% 4.0% 4.5% 5.0% 5.5% 6% 6.5%

<CAPTION>
FEDERAL
TAX RATE IS EQUIVALENT TO A TAXABLE RATE OF:
<S> <C> <C> <C> <C> <C> <C> <C>
28% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
31% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
39.6% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
</TABLE>

Income earned on this portfolio could be subject to the federal alternative
minimum tax. The above information is for illustrative purposes only and is not
intended to imply actual performance.

AVERAGE ANNUAL TOTAL RETURN. Each Series may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "Risk/Return
Summary--Evaluating Performance" in the Prospectus.

Average annual total return is computed according to the following formula:
P(1+T) TO THE POWER OF n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 payment
made at the beginning of the 1, 5 or 10 year periods.

B-40
<PAGE>
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.

The average annual total return and subsidy/waiver adjusted average annual
total return from the inception of the Class A shares (January 22, 1990) and for
the one year and five year periods ended April 30, 1999 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
----------------------------------
YEAR
FIVE YEARS FIVE YEARS ENDED
ENDED YEAR ENDED ENDED APRIL
FROM APRIL 30, APRIL 30, FROM APRIL 30, 30,
SERIES INCEPTION 1999 1999 INCEPTION 1999 1999
- ---------------------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 7.21% 6.78% 1.81% 7.17% 6.74% 1.72%
Insured Series 6.92% 6.24% 3.68% 6.84% 6.21% N/A
</TABLE>

The average annual total return and subsidy/waiver adjusted average annual
total return of the Class B shares for the one, five and ten year periods ended
April 30, 1999 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
-------------------------------------
TEN YEARS FIVE YEARS TEN YEARS FIVE YEARS
ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30,
SERIES 1999 1999 1999 1999 1999 1999
- ---------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 7.28% 6.86% (0.41)% 7.22% 6.84% (0.50)%
Insured Series 6.90% 6.34% 1.50% 6.78% 6.46% N/A
</TABLE>

The average annual total return and subsidy/waiver adjusted average annual
total return from inception of the Class C shares (August 1, 1994) and for the
one year ended April 30, 1999 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
YEAR -----------------------
ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1999 INCEPTION 1999
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 6.43% 2.29% 6.39% 2.20%
Insured Series 5.90% 4.18% 5.86% N/A
</TABLE>

The average annual total return and subsidy/waiver adjusted average annual
total return from inception of the Class Z shares (September 16, 1996) and for
the one year ended April 30, 1999 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
YEAR -----------------------
ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1999 INCEPTION 1999
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 7.78% 5.11% 7.74% 5.02%
Insured Series 7.10% 7.04% 7.06% N/A
</TABLE>

B-41
<PAGE>
AGGREGATE TOTAL RETURN. Each Series may also advertise its aggregate total
return. Aggregate annual total return is determined separately for Class A,
Class B, Class C and Class Z shares. See "How the Fund Calculates Performance"
in the Prospectus.

Aggregate total return represents the cumulative change in the value of an
investment in a Series and is computed according to the following formula:

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

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

The aggregate total return and subsidy/waiver adjusted aggregate total
return from the inception of the Class A shares (January 22, 1990) and for the
one year and five year periods ended April 30, 1999 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
FIVE YEARS FIVE YEARS
ENDED YEAR ENDED ENDED YEAR ENDED
FROM APRIL 30, APRIL 30, FROM APRIL 30, APRIL 30,
SERIES INCEPTION 1999 1999 INCEPTION 1999 1999
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 96.59% 43.09% 4.96% 95.89% 42.84% 4.87%
Insured Series 91.60% 39.55% 6.88% 90.40% 39.30% N/A
</TABLE>

The aggregate total return and subsidy/waiver adjusted aggregate total
return of the Class B shares for the one, five and ten year periods ended April
30, 1999 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
TEN YEARS FIVE YEARS TEN YEARS FIVE YEARS
ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30,
SERIES 1999 1999 1999 1999 1999 1999
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 101.86% 40.34% 4.59% 100.78% 40.09% 4.50%
Insured Series 94.93% 36.97% 6.50% 92.66% 36.73% N/A
</TABLE>

The aggregate total return and subsidy/waiver adjusted aggregate total
return from inception of the Class C shares (August 1, 1994) and for the one
year period ended April 30, 1999 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
-----------------------
YEAR ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1999 INCEPTION 1999
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 35.74% 4.33% 35.50% 4.24%
Insured Series 32.61% 6.24% 32.37% N/A
</TABLE>

The aggregate total return and subsidy/waiver adjusted aggregate total
return from inception of the Class Z shares (September 16, 1996) and for the one
year ended April 30, 1999 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
-----------------------
YEAR ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1999 INCEPTION 1999
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 21.66% 5.11% 21.55% 5.02%
Insured Series 19.66% 7.04% 19.55% N/A
</TABLE>

B-42
<PAGE>
From time to time, the performance of the Series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)

PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS OVER THE LONG TERM
(12/31/25-12/31/98)

[EDGAR REPRESENTATION OF DATA USED IN PRINTED GRAPHIC]
- ------------------------
(1)Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard and Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad
stock price movements. This chart is for illustrative purposes only,
and is not intended to represent the performance of any particular
investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.

B-43
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--96.5%
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--1.7%
Coconino Cnty. Pol. Ctrl. Corp. Rev.
Tucson Elec. Pwr., Navajo A, A.M.T. B2 7.125% 10/01/32 $ 5,000 $ 5,519,050
Tucson Elec. Pwr., Navajo B B2 7.00 10/01/32 1,700 1,880,506
Pima Cnty. Ind. Dev. Auth.,
Multifam. Mtge. Rev., La Cholla Proj., A.M.T. NR 8.50 7/01/20 9,575 10,712,797
Tuscon Elec. Pwr. Co., Ser. A, A.M.T. B2 6.10 9/01/25 2,000 2,008,360
--------------
20,120,713
- ------------------------------------------------------------------------------------------------------------------------------
Arkansas--0.9%
Northwest Arkansas Reg'l. Arpt. Auth.
Rev., A.M.T. NR 7.00 2/01/10 3,000 3,279,750
Rev., A.M.T. NR 7.625 2/01/27 7,000 8,027,810
--------------
11,307,560
- ------------------------------------------------------------------------------------------------------------------------------
California--9.7%
Abag Fin. Auth. For Nonprofit Corps. Ref. Amer. Baptist
Homes.,
Ser. A BBB(b) 6.20 10/01/27 3,200 3,383,488
California Hsg. Fin. Agcy. Rev., Home Mtge., Ser. G,
A.M.T. Aa2 8.15 8/01/19 655 668,965
Corona Ctfs. of Part., Vista Hosp. Sys. Inc., Ser. C NR 8.375 7/01/11 10,000(e) 9,992,800
Delano Ctfs. of Part., Reg'l. Med. Ctr., Ser. A NR 9.25 1/01/22 6,620(c) 8,039,791
Folsom Spec. Tax Dist. No. 2 NR 7.70 12/01/19 3,130(c) 3,273,135
Long Beach Harbor Rev. Ref., Ser. A., F.G.I.C., A.M.T. Aaa 6.00 5/15/19 4,000 4,497,120
Long Beach Redev. Agcy. Hsg.,
Multifam. Hsg. Rev., Pacific Court Apts. NR 6.95 9/01/23 6,195(e) 3,407,312
Multifam. Hsg. Rev., Pacific Court Apts., Issue B NR 6.80 9/01/13 3,805(e) 2,092,788
Los Angeles Regl. Arpts. Impvt. Corp., Cont. Air
Sublease, A.M.T. NR 9.25 8/01/24 10,185 11,943,338
Orange Cnty. Cmnty. Loc. Trans. Auth., Reg. Linked
Savrs. & Ribs NR 6.20 2/14/11 7,000 8,105,160
Richmond Redev. Agcy. Rev., Multifam. Bridge Affordable
Hsg. NR 7.50 6/01/23 10,000 10,539,200
Roseville Joint Union H.S. Dist.,
Ser. B, F.G.I.C. Aaa Zero 8/01/09 1,740 1,103,648
Ser. B, F.G.I.C. Aaa Zero 8/01/11 1,890 1,068,398
Ser. B, F.G.I.C. Aaa Zero 8/01/14 2,220 1,056,187
Sacramento City Fin. Auth. Rev., Tax Alloc., M.B.I.A. Aaa Zero 11/01/15 5,695 2,524,935
Sacramento Cnty. Spec. Tax Rev., Dist. No. 1 NR 8.25 12/01/20 4,500(c) 4,915,080
San Joaquin Hills Trans. Corr. Agcy.,
Toll Rd. Rev. Aaa Zero 1/01/14 8,420 4,168,826
Toll Rd. Rev. Aaa Zero 1/01/25 10,000 2,696,200
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-44
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
San Luis Obispo Ctfs. of part., Vista Hosp. Sys., Inc. NR 8.375% 7/01/29 $ 4,000 $ 3,995,720
Santa Margarita/Dana Point Auth., Impvt. Dist.,
Ser. A, M.B.I.A. Aaa 7.25 8/01/13 1,990 2,538,345
Ser. B, M.B.I.A. Aaa 7.25 8/01/12 3,000 3,801,990
So. California Pub. Pwr. Auth. Trans., Cap. Apprec. Aa Zero 7/01/14 8,500 4,036,395
So. San Francisco Redev. Agcy., Tax Alloc., Gateway
Redev. Proj. NR 7.60 9/01/18 2,375(c) 2,713,936
So. Tahoe Joint Pwrs. Fin. NR 8.00 10/01/01 5,795(c) 5,807,517
Turlock Irrigation Dist. Rev., Ser. A, M.B.I.A. Aaa 6.25 1/01/12 5,000 5,827,050
Victor Valley Union H.S. Dist.,
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/12 3,605 1,935,128
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/14 4,740 2,273,020
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/16 3,990 1,706,443
--------------
118,111,915
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--3.3%
Denver Urban Ren. Auth. Tax,
Inc. Rev. NR 7.50 9/01/04 3,000 3,246,570
Inc. Rev. NR 7.75 9/01/16 4,000 4,584,160
Denver Co. Hlth & Hosp. Rev., Ser. A Baa2 5.375 12/01/28 5,000 4,845,050
Lake Creek Affordable Hsg. Corp. Multifamily Rev.,
Ser. A NR 6.25 12/01/23 13,215 13,292,704
Ser. B NR 7.00 12/01/23 1,050 1,055,848
San Migual Cnty., Mountain Vlge. Met. Dist. NR 8.10 12/01/11 2,160(c) 2,486,463
San Migual Cnty., Mountain Vlge. Met. Dist. NR 8.10 12/01/11 1,040 1,164,914
Superior Met. Dist. No. 1, Wtr. & Swr., Rev. NR 8.50 12/01/13 8,900 9,862,802
--------------
40,538,511
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--1.3%
Connecticut St. Dev. Auth. Mystic Marinelife Aquarium
Proj. Rev. NR 7.00 12/01/27 1,500 1,585,935
Connecticut St. Dev. Auth. Pollutn. Ctl. Rev.
Ref. Connecticut Light & Pwr., A.M.T. Ba3 5.95 9/01/28 5,000 4,984,400
Connecticut St. Dev. Auth. Swr., Netco Waterbury Ltd. NR 9.375 6/01/16 7,600 8,893,140
--------------
15,463,475
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--1.0%
Dist. of Columbia Ref., Ser. B., M.B.I.A. Aaa 6.00 6/01/20 2,000 2,250,280
Dist. of Columbia Rev., Nat'l. Public Radio NR 7.625 1/01/18 8,800 9,482,968
--------------
11,733,248
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-45
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Florida--4.1%
Bayside Impt. Cmmty. Dev. Dist. Ser. B NR 6.375% 5/01/18 $ 1,020 $ 1,024,794
Crossings At Fleming Island Cmnty. Dev. Dist., Clay City NR 8.25 5/01/16 7,550 8,292,618
Florida Hsg. Fin. Agcy., Palm Aire Proj., Multifam.
Mtge. Rev., A.M.T. NR 10.00 1/01/20 9,102(e) 8,692,574
Florida Hsg. Fin. Corp. Rev.,
Cypress Trace Apts., Ser. G, A.M.T. NR 6.60 7/01/38 4,750 4,790,517
Westchase Apts., Ser. B, A.M.T. NR 6.61 7/01/38 4,000 4,034,080
No. Springs Impvt. Dist. Wtr. Mgt.,
Ser. A NR 8.20 5/01/24 1,935 2,264,221
Ser. A NR 8.30 5/01/24 1,680 1,853,006
Northern Palm Beach Cnty. Impt. Ref., Wtr. Ctl. & Impt.
Unit Dev. NR 6.00 8/01/10 2,990 3,048,514
Orlando Util. Comm., Wtr. & Elec. Rev., Ser. D Aa2 6.75 10/01/17 2,000 2,428,660
Palm Beach Cnty. Hsg. Auth., Banyan Club Apts. NR 7.75 3/01/23 4,410 4,767,960
Sarasota Hlth. Facs., Kobernick Hsg. Meadow Park Proj. Aaa 10.00 7/01/22 6,785(c) 8,108,550
--------------
49,305,494
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--3.2%
Atlanta Arpt. Facs. Rev., M.B.I.A., A.M.T. Aaa Zero 1/01/10 2,000 1,131,920
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm.
Proj. NR 9.25 6/01/10 4,255(c) 4,607,824
Atlanta Wtr. Rev. Ser. A, F.G.I.C. Aaa 5.50 11/01/22 3,000 3,210,330
Effingham Cnty. Dev. Auth., Ft. Howard Corp. Baa3 7.90 10/01/05 10,000 10,422,800
Fulton Cnty. Wtr. & Swr. Rev., F.G.I.C. Aaa 6.375 1/01/14 5,810(c) 6,779,921
Fulton Cnty. Wtr. & Swr. Rev., F.G.I.C. Aaa 6.375 1/01/14 190 220,125
Henry Cnty. Wtr. & Swg. Auth. Rev., A.M.B.A.C. Aaa 6.15 2/01/20 3,000 3,459,090
Rockdale Cnty. Dev. Auth., Solid Wste. Disp. Rev. NR 7.50 1/01/26 8,100 8,573,445
--------------
38,405,455
- ------------------------------------------------------------------------------------------------------------------------------
Hawaii--0.6%
Hawaii Cnty. Impvt. Dist. No. 17 NR 9.50 8/01/11 6,320 6,771,564
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--9.1%
Chicago Brd. of Edl.,
Capital Appreciation Schl. Ref. Ser. A, F.G.I.C. Aaa Zero 12/01/20 5,745 1,849,603
Lease Ctfs., Ser. A, M.B.I.A. Aaa 6.00 1/01/20 10,000 11,264,600
Ref. Schl. Ser. A, F.G.I.C. Aaa 5.25 12/01/23 4,775 4,908,413
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-46
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Illinois (cont'd.)
Chicago O'Hare Int'l. Arpt.,
Amer. Airlines Proj., Ser. B Baa2 8.20% 12/01/24 $ 1,000 $ 1,173,690
United Airlines, Ser. B, A.M.T. Baa2 8.45 5/01/07 6,000 6,354,060
United Airlines, Ser. B, A.M.T. Baa2 8.50 5/01/18 6,500 6,889,025
United Airlines, Ser. B Baa2 8.85 5/01/18 2,585 2,829,334
United Airlines, Ser. B, A.M.T. Baa2 8.95 5/01/18 2,225 2,435,085
Chicago Pub. Bldg.
Comm. Rev., Ser. A, M.B.I.A. Aaa 7.00 1/01/20 6,530 8,170,858
Ref. Schl. Ref. Ser. B, F.G.I.C. Aaa 5.25 12/01/18 3,720 3,854,032
Chicago Wtr. Rev., F.G.I.C. Aaa 6.50 11/01/15 3,005 3,575,139
Hennepin Ind. Dev. Rev., Exolon-Esk Co. Proj. NR 8.875 1/01/18 7,900 8,738,269
Illinois Reg'l. Trans. Auth. Ref., F.G.I.C. Aaa 6.00 6/01/14 3,530 3,993,065
Illinois St. Hlth. Facs. Auth. Rev.,
Adventist Living Ctr. NR 11.00 12/01/15 2,245(e) 202,010
Beacon Hill Proj., Ser. A NR 9.00 8/15/19 7,021 7,217,869
Midwest Physician Group Ltd. Proj. BBB-(b) 8.10 11/15/14 3,010(c) 3,650,437
Midwest Physician Group Ltd. Proj. BBB-(b) 8.125 11/15/19 3,285(c) 3,987,826
Illinois, Ser. K, A.M.B.A.C. Aaa 6.25 1/01/13 5,000 5,758,300
Kane And De Kalb Cntys. Sch.,
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/11 3,360 1,833,720
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/13 4,065 1,975,183
Metropolitan Pier & Exposition Auth. Dedicated St. Tax
Rev., F.G.I.C. Aaa 5.50 6/15/29 7,000 7,446,110
Vlge. of Robbins, Cook Cnty. Robbins Res. Rec., A.M.T. NR 8.375 10/15/16 14,000(e) 7,525,000
Winnebago Cnty. Hsg. Auth., Park Tower Assoc., Sec. 8 NR 8.125 1/01/11 3,769 4,056,636
--------------
109,688,264
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--2.2%
Bluffton Econ. Dev. Rev., Kroger Co. Proj. Baa3 7.85 8/01/15 7,500 8,317,725
Indiana Transn. Fin. Auth. Hwy. Rev., Ser. A Aa2 5.50 12/01/22 3,990 4,218,627
Indianapolis Int'l. Arpt. Auth. Rev., Federal Express
Corp. Proj., A.M.T. Baa2 7.10 1/15/17 6,000 6,685,620
Wabash Econ. Dev. Rev. Bonds, Connell Ltd., A.M.T. NR 8.50 11/24/17 7,250 7,885,825
--------------
27,107,797
- ------------------------------------------------------------------------------------------------------------------------------
Iowa--2.5%
City of Cedar Rapids Rev.,
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/18 9,375(c) 11,895,563
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/25 4,435(c) 5,627,394
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-47
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Iowa (cont'd.)
Iowa St. Fin. Auth., Hlth. Care Facs. Rev., Mercy Hlth.
Initiatives Proj. NR 9.25% 7/01/25 $ 10,000 $ 13,161,500
--------------
30,684,457
- ------------------------------------------------------------------------------------------------------------------------------
Kentucky--0.9%
Kentucky St. Tpke. Auth. Rev., F.G.I.C. Aaa Zero 1/01/10 8,250 5,041,410
Owensboro Elec. Lt. & Pwr. Rev.,
Ser. B, A.M.B.A.C. Aaa Zero 1/01/14 5,000 2,436,850
Ser. B, A.M.B.A.C. Aaa Zero 1/01/16 6,650 2,881,711
--------------
10,359,971
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--2.8%
Hodge Util. Rev., Stone Container Corp., A.M.T. NR 9.00 3/01/10 7,000 7,314,020
New Orleans Home Mtge. Auth. Rev., Sngl. Fam. Mtge.,
Ser. A, G.N.M.A., A.M.T. Aaa 8.60 12/01/19 1,670(f) 1,722,204
New Orleans Ind. Dev. Rev. BBB(b) 8.75 10/01/19 3,600 4,276,476
New Orleans, Gen Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/18 3,090 1,142,991
St. Charles Parish Poll. Ctrl. Rev.,
Pwr. & Lt. Co. Baa3 8.25 6/01/14 10,000 10,325,800
Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 3,500 3,668,875
West Feliciana Parish Poll. Ctrl. Rev., Gulf St. Util.
Co. Proj. NR 9.00 5/01/15 5,250 5,633,513
--------------
34,083,879
- ------------------------------------------------------------------------------------------------------------------------------
Maryland--1.3%
Northeast Wste. Disp. Auth.,
Sludge Comp. Fac. NR 7.25 7/01/07 3,769 4,132,181
Sludge Comp. Fac., A.M.T. NR 8.50 7/01/07 2,995 3,345,864
Washington Sub. San. Dist.
Ref., Gen. Const. Aa1 6.00 6/01/18 3,705 4,226,330
Ref., Gen. Const. Aa1 6.00 6/01/19 3,940 4,500,741
--------------
16,205,116
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--3.9%
Boston Ind. Dev. Fin. Auth. Rev.,
First Mtge. Springhouse Proj. NR 9.25 7/01/15 8,000(c) 10,088,000
First Mtge. Springhouse Proj. NR 6.00 7/01/28 4,000 3,994,120
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-48
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts (cont'd.)
Mass. Bay Trans. Auth., Gen. Trans. Sys., Ser. A,
F.G.I.C. Aaa 7.00% 3/01/21 $ 7,500 $ 9,432,300
Mass. St. Coll. Bldg. Proj. and Ref. Bonds Aa3 7.50 5/01/14 1,750 2,247,245
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Cardinal Cushing Gen. Hosp. NR 8.875 7/01/18 7,500 7,727,700
St. Josephs Hosp., Ser. C NR 9.50 10/01/20 5,610(c) 5,863,348
Massachusetts St. Indl. Fin. Agcy.
Ref., Chestnut Knoll Proj. A NR 5.50 2/15/18 1,250 1,213,562
Ref., Chestnut Knoll Proj. A NR 5.625 2/15/25 1,250 1,209,438
Randolph Hsg. Auth., Multifam. Hsg., Liberty Place Proj.
A, Ser. A NR 9.00 12/01/21 5,810 6,016,894
--------------
47,792,607
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--4.4%
Dexter Cmnty. Schs., F.G.I.C. Aaa 5.10 5/01/18 2,250 2,299,635
Grand Rapids Dev. Auth.
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/10 3,000 1,788,600
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/11 3,160 1,776,994
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/12 3,000 1,594,230
Gratiot Cnty. Econ. Dev. Corp., Danley Die Proj. Connell
L.P. NR 7.625 4/01/07 3,200 3,433,056
Holland Sch. Dist., Cap. Apprec., A.M.B.A.C. Aaa Zero 5/01/17 2,950 1,178,968
Lowell Area Sch., F.G.I.C. Aaa Zero 5/01/14 5,000 2,379,900
Michigan St. Hosp. Fin. Auth. Rev., Saratoga Cmnty.
Hosp. NR 8.75 6/01/10 6,065(c) 6,909,248
Michigan St. Strategic Fd. Res. Recovery Ltd. Oblig.
Rev.,
Central Wayne Energy Rec. A, A.M.T. NR 6.90 7/01/19 1,500 1,532,835
Central Wayne Energy Rec. A NR 7.00 7/01/27 3,500 3,603,950
Michigan Strategic Fund, Great Lakes Pulp & Fiber Proj. NR 8.00 12/01/27 13,085 9,159,507
Michigan Strategic Fund, Solid Wste. Disp., Gennese Pwr.
Station, A.M.T. NR 7.50 1/01/21 10,000 10,721,400
Wayne Cnty. Bldg. Auth., Ser. A, A.M.T. Baa2 8.00 3/01/17 3,500(c) 3,951,290
West Ottawa Sch. Dist.,
F.G.I.C. Aaa Zero 5/01/15 4,825 2,168,741
F.G.I.C. Aaa Zero 5/01/18 3,000 1,128,900
--------------
53,627,254
- ------------------------------------------------------------------------------------------------------------------------------
Mississipi--1.5%
Claiborne Cnty. Poll. Ctrl. Rev., Mid. So. Engy. Sys.,
Ser. A Ba1 9.50 12/01/13 8,260 8,536,214
Mississippi Bus. Fin. Corp. Pollutn. Ctl. Rev., Sys.
Engy. Res., Inc. Ba1 5.875 4/01/22 9,500 9,532,205
--------------
18,068,419
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-49
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--2.2%
Bridgeton Ind. Dev. Auth. SR. Hsg. Rev., Sarah Cmnty.
Proj. NR 5.90% 5/01/28 $ 4,250 $ 4,163,342
Sikeston Elec. Rev. Ref., M.B.I.A. Aaa 6.00 6/01/15 9,250 10,562,297
St. Louis Cnty. Ind. Dev. Auth. Rev.,
Soemm Proj. NR 10.25 7/01/08 1,475 1,479,912
Soemm Proj., A.M.T. NR 10.25 7/01/08 560 561,865
St. Louis Cnty. Reg. Conv. & Sports Comp., Ser. C Aaa 7.90 8/15/21 8,820 10,245,665
--------------
27,013,081
- ------------------------------------------------------------------------------------------------------------------------------
Nebraska--0.4%
Kearney Ind. Dev. Rev.,
Cap. Apprec. Great Platte Rvr. Rd. NR Zero 1/01/17 4,000 2,451,120
Great Platte Rvr. Rd. NR 6.75 1/01/28 2,750 2,645,748
--------------
5,096,868
- ------------------------------------------------------------------------------------------------------------------------------
Nevada--0.3%
Clark Cnty. Ind. Dev. Rev., Ref. Pwr. Co., Ser. B,
A.M.T. BBB-(b) 5.90 10/01/30 3,500 3,582,740
- ------------------------------------------------------------------------------------------------------------------------------
New Hampshire--1.5%
New Hampshire Higher Edl. & Hlth. Facs. Auth. Rev.,
Antioch College NR 7.875 12/01/22 5,260 5,808,302
Havenwood/Heritage Heights NR 9.75 12/01/19 7,385(c) 7,876,841
New Hampshire St. Bus. Pollutn. Ref., Pub. Svc. Co.,
A.M.T. Ba3 6.00 5/01/21 5,000 4,984,850
--------------
18,669,993
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--6.7%
Hudson Cnty. Improvement Auth. Rev., A.M.T. BBB-(b) 6.125 1/01/29 3,000 2,991,150
New Jersey Econ. Dev. Auth. Rev.,
Development Rev. NR Zero 4/01/12 1,115 502,519
Fellowship Vlge., Proj. A Aaa 9.25 1/01/25 11,500(c) 14,613,625
Kaplowski Rd., Ser. A NR 6.375 4/01/31 7,000 7,193,550
Leisure Park Proj. Ser. A NR 5.875 12/01/27 1,000 979,070
Ref. Newark Arpt. Marriot Hotel NR 7.00 10/01/14 3,800 4,153,362
New Jersey Hlthcare Facs., Fin. Auth. Rev. NR 8.00 7/01/27 5,000 5,418,700
New Jersey St. Edl. Facs. Auth. Rev., Felician College
of Lodi,
Ser. D. NR 7.375 11/01/22 4,000 4,365,160
New Jersey St. Ref., Ser. E Aa1 6.00 7/15/10 10,000 11,346,000
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000 13,094,290
New Jersey St. Trans. Trust Fund Auth., Trans. Sys.,
M.B.I.A. Aaa 6.50 6/15/11 14,500 17,096,950
--------------
81,754,376
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-50
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.4%
Farmington Pollutn. Ctrl. Rev.,
Ref., Pub. Svc. Co. A Ba1 5.80% 4/01/22 $ 1,500 $ 1,508,205
Ref., Pub. Svc. Co. B Ba1 5.80 4/01/22 3,000 3,016,410
--------------
4,524,615
- ------------------------------------------------------------------------------------------------------------------------------
New York--4.4%
Met. Trans. Auth. Facs. Rev., Ser. N, F.G.I.C. Aaa Zero 7/01/13 8,340 4,211,783
New York City Ind. Dev. Agcy.,
Bklyn. Navy Yard Cogen Partners, A.M.T. Baa3 6.20 10/01/22 8,175 9,078,665
Mesorah Pub. Ltd., A.M.T. NR 10.25 3/01/19 1,834 1,911,908
Visy Paper Inc. Proj., A.M.T. NR 7.95 1/01/28 4,000 4,406,600
New York N.Y.
Prerefunded, Ser. I A3 6.25 4/15/27 1,480 1,690,811
Unrefunded Balance, Ser. I A3 6.25 4/15/27 1,520 1,676,864
New York N.Y.C. Ind. Dev. Agcy. Rev.,
Ref. Laguardia Assoc. L.P. Proj. NR 6.00 11/01/28 4,000 4,025,760
New York St. Dorm. Auth. Rev. Comm. College Ser. A BBB+(b) 5.00 7/01/28 4,275 4,085,318
New York St. Dorm. Auth. Rev.,
Colgate Univ., M.B.I.A. Aaa 6.00 7/01/21 3,350 3,805,299
Memorial Sloan Kettering Cancer Ctr. M.B.I.A. Aaa 5.75 7/01/20 5,000 5,513,700
Port Auth. of New York & New Jersey, USAir LaGuardia
Arpt., A.M.T. Ba2 9.125 12/01/15 4,000 4,346,680
Rockland Cnty. Ind. Dev. Agcy. Rev.,
Dominican Coll. Proj. NR 5.90 5/01/10 2,090 2,117,003
Dominican Coll. Proj. NR 6.25 5/01/28 3,000 3,035,670
Suffolk County Ind. Dev. Agcy. Ind. Dev. Revenue, A.M.T. NR 5.50 1/01/23 3,000 3,007,950
--------------
52,914,011
- ------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.0%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C. Aaa 7.20 6/30/13 10,000 12,358,900
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--4.4%
Cleveland Pub. Pwr. Sys. Rev.,
1st Mtge., M.B.I.A. Aaa Zero 11/15/12 1,000 521,910
1st Mtge., M.B.I.A. Aaa Zero 11/15/13 1,500 738,780
1st Mtge., Ser. A, M.B.I.A., A.M.T. Aaa Zero 11/15/09 3,000 1,863,180
Franklin Cnty. Hosp. Rev., Senior Doctors Hlth. Corp. Baa3 5.60 12/01/28 10,000 9,759,600
Mahoning Valley San. Dist. Wtr. Rev. NR 7.75 5/15/19 8,000 8,813,440
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-51
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Ohio (cont'd.)
Montgomery Cnty. Hlthcare. Facs. Rev., Friendship Vlge.
Dayton,
Proj. B NR 9.25% 2/01/16 $ 4,500(c) $ 4,779,495
Ohio St. Air Quality Dev. Auth. Ref., Amt. Coll. Poll.
Ctrl.,
Ser. A Ba1 6.10 8/01/20 3,000 3,075,480
Ohio St. Solid Wste. Rev.,
Cscltd. Proj., A.M.T. NR 8.50 8/01/22 7,000 7,257,600
Rep. Eng. Steels Inc., A.M.T. NR 9.00 6/01/21 2,250 2,446,808
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs., 1st Mtge.,
Toledo Edison, A.M.T. Ba1 8.00 10/01/23 5,500 6,240,630
Stark Cnty. Hlthcare. Facs. Rev., Rose Lane Inc. Proj. NR 9.00 12/01/23 6,135(c) 7,334,883
--------------
52,831,806
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.9%
Grand River Dam Auth. Rev., A.M.B.A.C. Aaa 6.25 6/01/11 12,000 13,855,680
Oklahoma Dev. Fin. Auth. Rev. Ref. Healthcare Ser. A Baa2 5.625 8/15/29 4,000 3,980,000
Tulsa Ind. Dev. Auth., Univ. Tulsa, Ser. A, M.B.I.A. Aaa 6.00 10/01/16 4,250(f) 4,809,427
--------------
22,645,107
- ------------------------------------------------------------------------------------------------------------------------------
Oregon--0.4%
Klamath Falls Elec. Rev. Ref. Sr. Lien NR 6.00 1/01/25 5,000 5,032,850
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--3.7%
Allegheny Cnty. Hosp. Rev., West Penn. Hosp. Hlth. Ctr. NR 8.50 1/01/20 2,800 2,934,764
Berks Cnty. Mun. Auth. Rev.,
Adventist Living Ctrs. Proj. NR 11.00 12/01/15 367(e) 33,072
Alvernia Coll. Proj. NR 7.75 11/15/16 5,240 5,757,921
Dauphin Cnty. Gen. Auth. Hosp. Rev., NW Med. Ctr. Proj. BBB-(b) 8.625 10/15/13 6,370 7,493,095
Philadelphia Auth., Ind. Dev. Rev. NR 7.75 12/01/17 5,000 5,554,650
Philadelphia Hosps. & Higher Ed. Facs. Auth. Rev.,
Grad. Hlth. Sys. Ca 7.00 7/01/05 2,500(e) 950,000
Grad. Hlth. Sys. Ca 7.25 7/01/18 3,435(e) 1,305,300
Grad. Hlth. Sys., Ser. A Ca 6.25 7/01/13 3,050(e) 1,159,000
Philadelphia Wtr. & Wstewtr. Auth. Rev.,
M.B.I.A. Aaa 6.25 8/01/10 2,500 2,851,900
M.B.I.A. Aaa 6.25 8/01/12 3,000 3,451,350
Somerset Cnty. Hosp. Auth. Rev.,
Hlthcare 1st Mtge. NR 8.40 6/01/09 2,185 2,421,789
Hlthcare 1st Mtge. NR 8.50 6/01/24 8,805 9,768,619
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-52
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania (cont.d)
Wilkes Barre Gen. Mun. Auth. Coll. Rev., Misericordia
Coll., Ser. A NR 7.75% 12/01/12 $ 1,245 $ 1,348,472
--------------
45,029,932
- ------------------------------------------------------------------------------------------------------------------------------
Rhode Island--0.9%
Rhode Island Redev. Agcy., Ser. A NR 8.00 9/01/24 10,430 11,326,459
- ------------------------------------------------------------------------------------------------------------------------------
South Carolina--0.4%
So. Carolina St. Hsg. Fin. & Dev. Auth., Homeownership
Mtge., A.M.T. Aa2 7.75 7/01/22 4,345 4,519,539
- ------------------------------------------------------------------------------------------------------------------------------
South Dakota--0.7%
Education Lns. Inc. Student Ln. Rev., A.M.T. A2 5.60 6/01/20 3,300 3,323,661
So. Dakota Econ. Dev. Fin. Auth., Dakota Park, A.M.T. NR 10.25 1/01/19 4,855 5,031,188
--------------
8,354,849
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee--2.9%
Memphis Center City Rev. Fin. Corp. Ser. B NR 6.50 9/01/28 26,000 26,382,720
Rutherford Cnty. Hlth. & Edl. Facs., Brd. 1st Mtge. Rev. NR 9.50 12/01/19 7,300 8,391,423
--------------
34,774,143
- ------------------------------------------------------------------------------------------------------------------------------
Texas--3.4%
Austin Rev., Ref. Sub. Lien, M.B.I.A. Aaa 5.25 5/15/25 5,000 5,151,200
Beaumont Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev. A 9.20 3/01/12 1,165 1,280,207
Brazos River Auth. Texas Rev. Reliant Energy Proj. A Baa1 5.375 4/01/19 4,000 3,988,000
Houston Wtr. & Swr. Sys. Rev., Ser. C, A.M.B.A.C. Aaa Zero 12/01/10 5,000 2,908,950
Keller Ind. Sch. Dist., Cap. Apprec. Ref., Ser. A,
P.S.F.G. Aaa Zero 8/15/17 4,075 1,601,923
Meadow Parc Dev. Inc. Multifamily Rev. Housing Meadow
Proj. NR 6.50 12/01/30 5,000 5,006,700
New Braunfels Ind. Sch. Dist.,
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/08 2,365 1,600,656
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/09 2,365 1,516,296
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/12 2,365 1,275,610
Round Rock Ind. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa Zero 8/15/11 4,385 2,438,937
San Antonio Elec. & Gas Rev.,
F.G.I.C. Aaa Zero 2/01/09 5,000 3,205,700
F.G.I.C., Ser. B Aaa Zero 2/01/12 7,500 4,045,275
Texas Mun. Pwr. Agcy. Rev., M.B.I.A. Aaa Zero 9/01/15 16,300 7,194,005
--------------
41,213,459
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-53
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Utah--0.5%
Carbon Cnty. Solid Wste. Disp. Rev. Ref., Laidlaw
Environmental, Ser. A, A.M.T. NR 7.45% 7/01/17 $ 1,500 $ 1,631,655
Tooele Cnty Poll. Ctrl. Rev. Ref., Laidlaw
Environmental, Ser. A, A.M.T. NR 7.55 7/01/27 4,000 4,372,320
--------------
6,003,975
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--1.8%
Loudoun Cnty. Ind. Dev. Auth., Rev. NR 7.125 9/01/15 2,000 2,182,600
Norfolk Redev. & Hsg. Auth., Multifam. Rental Hsg. Fac.
Rev., A.M.T. NR 8.00 9/01/26 6,000 6,207,360
Pittsylvania Cnty. Ind. Dev. Auth. Rev. Multitrade,
A.M.T. NR 7.55 1/01/19 9,000 9,802,890
Pocahontas Pkwy. Assoc. Toll Rd. Rev.,
Cap. Apprec., Ser. B Baa3 Zero 8/15/16 7,000 2,604,560
Cap. Apprec., Ser. C Ba1 Zero 8/15/16 3,300 1,169,487
--------------
21,966,897
- ------------------------------------------------------------------------------------------------------------------------------
Washington--2.5%
Bellevue Conv. Ctr. Auth.,
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/10 870 524,062
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/11 1,200 681,684
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/12 1,300 698,568
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/14 1,385 663,609
Chelan Cnty. Pub. Util., Dist. No. 1, Columbia River
Rock, Hydro Elec. Sys. Rev. M.B.I.A. Aaa Zero 6/01/15 7,585 3,347,564
Thurston Cnty. Sch. Dist. 333,
F.G.I.C. Aaa Zero 12/01/12 6,830 3,524,212
F.G.I.C., Ser. B Aaa Zero 12/01/11 6,415 3,500,986
Washington St. Ref., Ser R, 97A Aa1 Zero 7/01/16 7,000 2,953,300
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. B Aa1 7.25 7/01/09 5,000 5,907,550
Nuclear Proj. No. 3, M.B.I.A. Aaa Zero 7/01/17 5,000 1,967,400
Nuclear Proj. No. 3, Ser. B, M.B.I.A. Aaa 7.125 7/01/16 5,000 6,240,900
--------------
30,009,835
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-54
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
West Virginia--0.9%
So. Charleston Ind. Dev. Rev., Union Carbide Chem. &
Plastics Co., A.M.T. Baa2 8.00% 8/01/20 $ 2,450 $ 2,592,737
Weirton Poll. Ctrl. Rev., Weirton Steel Proj. B2 8.625 11/01/14 4,000 4,048,440
West Virginia St. Pkwys. Econ. Dev. & Tourism Auth.,
F.G.I.C. Aaa 8.022 5/16/19 3,250(d) 3,668,438
--------------
10,309,615
- ------------------------------------------------------------------------------------------------------------------------------
Wisconsin--0.8%
Oconto Falls Cmnty. Dev. Auth. Dev. Rev., Oconto Falls
Tissue, Inc. Proj., A.M.T. NR 7.75 12/01/22 4,000 4,241,880
Southeast Prof. Baseball Pk. Dist. Sales Tax Rev., Ser.
A Aaa 5.50 12/15/26 2,500 2,666,450
Wisconsin St. Health & Edl. Fac., Ser. A A-(b) 5.60 2/15/29 3,000 2,961,180
--------------
9,869,510
--------------
Total long-term investments (cost $1,099,591,130) 1,169,178,259
--------------
SHORT-TERM INVESTMENTS--1.9%
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--0.1%
Dist. of Columbia, Gen. Oblig., Ser. 92A-6, F.R.D.D. VMIG1 4.30 5/03/99 1,000 1,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.1%
Calcasieu Parish Inc. Indl. Dev. Rev., Ser. 95 F.R.D.D.,
A.M.T. VMIG1 4.30 5/03/99 400 400,000
West Baton Rouge Parish Ind. Dist. No. 3 Rev.,
Dow Chemical Co. Proj., Ser. 94A, F.R.D.D., A.M.T. P-1 4.35 5/03/99 500 500,000
Dow Chemical Co. Proj., Ser. 95, F.R.D.D., A.M.T. P-1 4.35 5/03/99 500 500,000
--------------
1,400,000
- ------------------------------------------------------------------------------------------------------------------------------
Rhode Island--0.1%
Rhode Island Hlth. & Edl. Corp., Institution Rev.,
F.R.D.D. A-1(b) 4.30 5/03/99 500 500,000
- ------------------------------------------------------------------------------------------------------------------------------
South Carolina--0.2%
So. Carolina Jobs Econ. Dev. Auth., Wellman Inc. Proj.,
Ser. 90, F.R.D.D., A.M.T. CPS-1 4.40 5/03/99 2,600 2,600,000
- ------------------------------------------------------------------------------------------------------------------------------
Texas--1.3%
Brazos River Harbor Nav. Dist. Rev.,
Dow Chemical Co., Ser. 92A, F.R.D.D., A.M.T. P-1 4.35 5/03/99 100 100,000
Dow Chemical Co., Ser. 93, F.R.D.D., A.M.T. P-1 4.35 5/03/99 4,600 4,600,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-55
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 HIGH INCOME SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Texas (cont'd.)
Brazos River Harbor Nav. Dist. Rev.,
Dow Chemical Co., Ser. 97, F.R.D.D., A.M.T. P-1 4.35% 5/03/99 $ 8,500 $ 8,500,000
Dow Chemical Co., Ser.98 F.R.D.D., A.M.T. NR 4.35 5/03/99 2,000 2,000,000
Gulf Coast Wste. Displ. Auth. Fac. Rev. Ser. 97,
F.R.D.D., A.M.T. P-1 4.30 5/03/99 700 700,000
--------------
15,900,000
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--0.0%
Campbell Cnty. Ind. Dev. Auth. Rev., Hadson Pwr., Ser.
90A F.R.D.D., A.M.T. Aa2 4.40 5/03/99 300 300,000
- ------------------------------------------------------------------------------------------------------------------------------
Washington--0.1%
Washington Hsg. Fin. Comm., Canyon Lakes II Proj., Ser.
94 F.R.D.D., A.M.T. VMIG1 4.45 5/03/99 1,100 1,100,000
--------------
Total short-term investments (cost $22,800,000) 22,800,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments--98.4%
(cost $1,122,391,130; Note 4) 1,191,978,259
Other assets in excess of liabilities--1.6% 19,457,961
--------------
Net Assets--100% $1,211,436,220
--------------
--------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
A.M.T.--Alternative Minimum Tax
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate (Daily) Demand Note (g)
G.N.M.A.--Government National Mortgage Association
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
(b) Standard & Poor's Rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Issuer in default of interest payment. Non-income producing security.
(f) All or partial principal amount segregated as initial margin on financial
futures contracts.
(g) The maturity date shown is the later of the next date on which the security
can be redeemed at par or the next date on which the rate of interest is
adjusted.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-56
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities HIGH INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets April 30, 1999
<S> <C>
Investments, at value (cost $1,122,391,130)................................................................. $1,191,978,259
Cash........................................................................................................ 72,938
Interest receivable......................................................................................... 22,668,362
Receivable for investments sold............................................................................. 5,694,643
Receivable for Series shares sold........................................................................... 1,563,898
Due from broker - variation margin.......................................................................... 203,125
Other assets................................................................................................ 15,488
--------------
Total assets............................................................................................. 1,222,196,713
--------------
Liabilities
Payable for investments purchased........................................................................... 4,792,139
Payable for Series shares reacquired........................................................................ 3,116,449
Dividends payable........................................................................................... 1,873,928
Management fee payable...................................................................................... 440,650
Distribution fee payable.................................................................................... 393,442
Accrued expenses............................................................................................ 143,885
--------------
Total liabilities........................................................................................ 10,760,493
--------------
Net Assets.................................................................................................. $1,211,436,220
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 1,080,836
Paid-in capital in excess of par......................................................................... 1,164,895,754
--------------
1,165,976,590
Accumulated net realized loss on investments............................................................. (24,311,874)
Net unrealized appreciation of investments............................................................... 69,771,504
--------------
Net assets, April 30, 1999.................................................................................. $1,211,436,220
--------------
--------------
Class A:
Net asset value and redemption price per share
($514,952,068 / 45,940,859 shares of beneficial interest issued and outstanding)...................... $11.21
Maximum sales charge (3% of offering price).............................................................. .35
--------------
Maximum offering price to public......................................................................... $11.56
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($649,706,164 / 57,968,234 shares of beneficial interest issued and outstanding)...................... $11.21
--------------
--------------
Class C:
Net asset value and redemption price per share
($32,939,296 / 2,938,864 shares of beneficial interest issued and outstanding)........................ $11.21
Sales charge (1% of offering price)...................................................................... .11
--------------
Offering price to public................................................................................. $11.32
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($13,838,692 / 1,235,626 shares of beneficial interest issued and outstanding)........................ $11.20
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-57
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1999
<S> <C>
Income
Interest.................................. $ 75,573,140
--------------
Expenses
Management fee............................ 5,816,965
Distribution fee--Class A................. 725,526
Distribution fee--Class B................. 3,334,425
Distribution fee--Class C................. 195,856
Transfer agent's fees and expenses........ 434,000
Custodian's fees and expenses............. 152,000
Reports to shareholders................... 81,000
Registration fees......................... 64,000
Insurance expense......................... 24,000
Legal fees and expenses................... 19,000
Trustees' fees and expenses............... 16,000
Audit fees and expenses................... 15,000
Miscellaneous............................. 10,812
--------------
Total expenses......................... 10,888,584
Less: Management fee waiver............... (590,774)
Custodian fee credit................... (6,191)
--------------
Net expenses........................... 10,291,619
--------------
Net investment income........................ 65,281,521
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 2,580,571
Financial futures contract transactions... (1,954,344)
--------------
626,227
--------------
Net change in unrealized appreciation (depreciation) of:
Investments............................... (12,185,440)
Financial futures contracts............... 184,375
--------------
(12,001,065)
--------------
Net loss on investments...................... (11,374,838)
--------------
Net Increase in Net Assets
Resulting from Operations.................... $ 53,906,683
--------------
--------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income....... $ 65,281,521 $ 61,876,042
Net realized gain (loss) on
investment transactions.. 626,227 (6,450,845)
Net change in unrealized
appreciation
(depreciation) of
investments.............. (12,001,065) 50,351,593
-------------- --------------
Net increase in net assets
resulting from
operations............... 53,906,683 105,776,790
-------------- --------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (27,230,164) (23,016,599)
Class B.................. (35,903,105) (37,682,645)
Class C.................. (1,344,435) (804,495)
Class Z.................. (803,817) (372,303)
-------------- --------------
(65,281,521) (61,876,042)
-------------- --------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed............... 271,203,411 194,658,081
Net asset value of shares
issued in reinvestment of
dividends................ 30,134,516 27,600,737
Cost of shares reacquired... (199,757,462) (156,797,816)
-------------- --------------
Net increase in net assets
from Series share
transactions............. 101,580,465 65,461,002
-------------- --------------
Total increase................. 90,205,627 109,361,750
Net Assets
Beginning of year.............. 1,121,230,593 1,011,868,843
-------------- --------------
End of year.................... $1,211,436,220 $1,121,230,593
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-58
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 INSURED SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.9%
- ------------------------------------------------------------------------------------------------------------------------------
Alabama--0.8%
Huntsville Solid Wste. Disp. Auth., F.G.I.C., A.M.T. Aaa 7.00% 10/01/08 $ 2,000 $ 2,124,020
Jefferson Cnty. Swr. Rev. Wste., Ser. D, F.G.I.C. Aaa 5.75 2/01/22 1,200 1,281,444
------------
3,405,464
- ------------------------------------------------------------------------------------------------------------------------------
Alaska--2.1%
Anchorage Hosp. Rev., Sisters of Providence, A.M.B.A.C. Aaa 7.125 10/01/05 5,000 5,473,150
No. Slope Boro., Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/30/06 5,000 3,678,250
------------
9,151,400
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--1.9%
Maricopa Cnty. Ind. Dev. Auth. Rev.,
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.00 12/01/00 1,210 1,255,762
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,045(c) 1,128,767
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,205 1,297,882
Maricopa Cnty. Unified Sch. Dist. No. 69, Paradise
Valley,
Ser. E, F.G.I.C. Aaa 6.80 7/01/12 3,700(e) 4,470,858
------------
8,153,269
- ------------------------------------------------------------------------------------------------------------------------------
California--6.3%
California St. Pub. Wks. Brd.,
Comm. Coll. Proj., Ser. A, A.M.B.A.C. Aaa 5.625 3/01/16 2,000 2,126,420
Dept. of Corrections, A.M.B.A.C. Aaa 5.75 1/01/12 2,000 2,174,680
Contra Costa Wtr. Dist. Wtr. Rev., Ser. E, A.M.B.A.C. Aaa 6.25 10/01/12 1,455 1,706,133
Inland Empire Solid Wste. Fin. Auth., Landfill Impvt.
Fin., Proj. B, F.S.A. Aaa 6.00 8/01/16 2,000 2,178,880
Metropolitan Wtr Dist. So. Cal., Election 1966, Ser. H,
F.G.I.C. Aaa 4.75 3/01/28 3,000 2,837,790
Roseville Joint Union H.S. Dist., Ser. B, F.G.I.C. Aaa Zero 8/01/13 2,015 1,016,346
San Diego Cnty. Wtr. Auth. Wtr. Rev., Ctfs. of Part.,
F.G.I.C Aaa 7.696 4/26/06 5,800(d) 6,844,000
So. Orange Cnty. Pub. Fin. Auth.,
Foothill Area Proj., F.G.I.C Aaa 8.00 8/15/08 2,000(e) 2,563,500
Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 2,725(e) 3,237,763
Victor Valley Element. Sch. Dist.,
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/17 3,550 1,427,775
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/18 3,700 1,407,147
------------
27,520,434
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-59
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 INSURED SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--1.3%
Denver City & Cnty. Arpt. Rev., Ser. C, M.B.I.A. Aaa 5.60% 11/15/11 $ 5,000 $ 5,303,700
Jefferson Cnty. Sngl. Fam. Mtge. Rev., Ser. A, M.B.I.A. Aaa 8.875 10/01/13 275 291,132
------------
5,594,832
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--7.2%
Dist. of Columbia, Assoc. American Med. Colleges,
A.M.B.A.C. Aaa 5.375 2/15/27 4,500 4,572,540
Dist. of Columbia Gen. Oblig.,
Ser. A, M.B.I.A. Aaa 6.50 6/01/10 6,000(e) 6,941,700
Ser. B, F.S.A. Aaa 5.50 6/01/10 7,565 8,096,441
Dist. of Columbia Hosp. Rev. Medlantic Hlthcare Grp.,
M.B.I.A. Aaa 5.875 8/15/19 3,500 3,844,365
M.B.I.A. Aaa 5.75 8/15/26 3,000 3,262,320
Dist. of Columbia Met. Area Trans. Auth.,
Gross Rev., F.G.I.C. Aaa 6.00 7/01/09 2,400 2,705,640
Gross Rev., F.G.I.C. Aaa 6.00 7/01/10 1,500 1,691,505
------------
31,114,511
- ------------------------------------------------------------------------------------------------------------------------------
Florida--3.7%
Brevard Hlth. Facs. Auth. Rev., Holmes Reg'l. Med. Ctr.,
M.B.I.A. Aaa 5.60 10/01/10 6,000 6,455,280
Dade Cnty. Edl. Facs. Auth. Rev. Ref., Univ. Miami, Ser.
A, M.B.I.A. Aaa 5.625 4/01/06 3,000 3,265,560
Orange Cnty. Hlth. Facs. Auth. Rev. Hosp., Orlando Reg'l.
Hlthcare,
Ser. A, M.B.I.A. Aaa 6.25 10/01/07 3,160(e) 3,579,363
Palm Beach Cnty. Solid Wste. Auth. Rev. Ref.,
Ser. A, A.M.B.A.C. Aaa 6.00 10/01/09 2,500 2,824,143
------------
16,124,346
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--2.9%
Atlanta Arpt. Facs. Rev., A.M.B.A.C. Aaa 6.50 1/01/10 2,000 2,322,920
Georgia Mun. Elec. Auth.,
Proj. No. 1, A.M.B.A.C. Aaa 6.00 1/01/06 5,570(e) 6,137,360
Pwr. Rev., M.B.I.A. Aaa 6.20 1/01/10 3,495(e) 3,971,578
------------
12,431,858
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-60
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 INSURED SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Hawaii--3.2%
Hawaii St. Dept. Bud. & Fin. Spec. Purpose Rev., Hawaiian
Elec. Co. Inc., Ser. A, M.B.I.A., A.M.T. Aaa 5.65% 10/01/27 $ 12,000 $ 12,642,360
Honolulu Hawaii City & County Wstewtr. Sys.
Revenue, Cap. Apprec., F.G.I.C. Aaa Zero 7/01/18 1,465 542,504
Revenue, Cap. Apprec., F.G.I.C. Aaa Zero 7/01/19 2,305 807,280
------------
13,992,144
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--11.2%
Arlington Hts. Park Dist. Cap. Apprec., Ser. E, F.G.I.C. Aaa Zero 12/01/13 4,175 2,028,632
Chicago Bd. Edl.
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/11 5,000 2,712,000
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/12 6,000 3,075,480
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/13 3,500 1,688,575
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/14 7,195 3,277,035
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/15 3,245 1,393,922
Chicago Bd. Edl. Sch. Ref., A.M.B.A.C. Aaa 5.75 12/01/27 10,000 10,652,500
Chicago Midway Arpt. Rev., Ser. B, M.B.I.A., A.M.T. Aaa 5.75 1/01/22 6,835 7,160,004
Chicago O' Hare Int'l. Arpt. Rev., Pass. Facs. Chrg.,
Ser. A, A.M.B.A.C. Aaa 5.625 1/01/15 2,000 2,105,600
Chicago Skyway Toll Brdg. Rev., M.B.I.A. Aaa 5.50 1/01/23 650 670,105
Chicago Wstewtr. Trans. Rev.,
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/20 7,275 2,482,521
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/21 8,655 2,791,930
Chicago Wtr. Rev. Cap. Apprec., F.G.I.C. Aaa Zero 11/01/16 3,055 1,258,874
Onterie Ctr. Hsg. Fin. Corp. Mtge. Rev.,
Ser. A, M.B.I.A. Aaa 7.00 7/01/12 1,575 1,679,186
Ser. A, M.B.I.A. Aaa 7.05 7/01/27 5,400(e) 5,768,226
------------
48,744,590
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--1.3%
Trans. Fin. Auth. Hwy., Ser. A Aa2 5.50 12/01/22 5,500 5,815,150
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.6%
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/09 4,000 2,502,360
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-61
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 INSURED SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Maryland--1.3%
Baltimore Cons. Pub. Improv.
Cap. Apprec. Ref., F.G.I.C. Aaa Zero 10/15/10 $ 1,550 $ 916,360
Ref., Ser. C, F.G.I.C. Aaa 5.50% 10/15/15 2,620 2,858,289
Cap. Apprec. Ref., F.G.I.C. Aaa Zero 10/15/11 3,000 1,673,610
------------
5,448,259
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--0.6%
Massachusetts St. Hlth. & Edl. Facs. Auth. Rev., Baystate
Med. Ctr., Ser. E, F.S.A. Aaa 6.00 7/01/26 2,475 2,668,025
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--4.0%
Detroit Dwntwn. Dev., Ser. A, A.M.B.A.C. Aaa 5.75 7/15/15 1,820 1,947,072
Detroit Michigan Sewage Disposal Rev.
Prerefunded Aaa 7.822 7/09/23 5,000(c)(d) 5,831,250
Non-prerefunded Aaa 7.822 7/09/23 1,500(d) 1,648,125
Michigan St. Hosp. Fin. Auth. Rev., Mid. Michigan Oblig.,
M.B.I.A. Aaa 7.50 6/01/15 2,350(c) 2,496,734
Saginaw Hosp. Fin. Auth., St. Luke's Hosp., Ser. C,
M.B.I.A. Aaa 6.50 7/01/11 4,000 4,276,360
St. Johns Public Sch. Ref., Gen. Oblig., F.G.I.C. Aaa 5.10 5/01/25 1,000 1,005,750
------------
17,205,291
- ------------------------------------------------------------------------------------------------------------------------------
Mississipi--0.6%
Harrison Cnty. Wste. Wtr. Mgmt. Dist. Rev., Wste. Wtr.
Treatmt.,
Facs. Auth., F.G.I.C. Aaa 6.50 2/01/06 2,400 2,556,168
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--0.4%
Missouri St. Hlth. & Edl. Facs. Rev.,
SSM Hlthcare Ref, Ser. AA, M.B.I.A. NR 6.25 6/01/16 285(c) 311,177
SSM Hlthcare, Unref., Ser. AA, M.B.I.A. Aaa 6.25 6/01/16 1,215 1,312,127
------------
1,623,304
- ------------------------------------------------------------------------------------------------------------------------------
Montana--0.5%
Forsyth Poll. Ctrl. Rev., Puget Sound Pwr. & Lt. Co., 1st
Mtge.,
Ser. A, A.M.B.A.C. Aaa 7.05 8/01/21 2,000 (e) 2,159,900
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-62
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 INSURED SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--7.0%
East Orange Bd. Edl. Ctfs. Part.,
Cap. Apprec., F.S.A. Aaa Zero 2/01/15 $ 1,425 $ 654,559
Cap. Apprec., F.S.A. Aaa Zero 2/01/16 1,000 434,360
Cap. Apprec., F.S.A. Aaa Zero 2/01/17 1,425 584,849
Cap. Apprec., F.S.A. Aaa Zero 2/01/18 2,845 1,102,409
Cap. Apprec., F.S.A. Aaa Zero 8/01/18 1,425 538,394
Cap. Apprec., F.S.A. Aaa Zero 2/01/20 1,845 640,971
Cap. Apprec., F.S.A. Aaa Zero 8/01/21 2,845 910,514
Cap. Apprec., F.S.A. Aaa Zero 8/01/23 1,400 402,528
Jersey City Swr. Auth.,
A.M.B.A.C. Aaa 6.00% 1/01/10 2,585(e) 2,905,850
A.M.B.A.C. Aaa 6.25 1/01/14 4,255(e) 4,952,990
New Jersey Econ. Dev. Auth. Rev., Natural Gas Facs. Rev.,
M.B.I.A., A.M.T. Aaa 5.70 6/01/32 5,000 5,294,700
New Jersey Econ. Dev. Auth.,
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.875 7/01/11 5,900 6,467,108
Mkt. Trans. Facs. Rev., Sr. Lien, M.B.I.A. Aaa 5.80 7/01/09 3,340 3,657,668
New Jersey Impvt. Auth. Rev., Util. Sys., M.B.I.A. Aaa 5.75 7/01/27 1,500 1,618,095
------------
30,164,995
- ------------------------------------------------------------------------------------------------------------------------------
New York--12.0%
Islip Res. Rec., Ser. B, A.M.B.A.C. Aaa 7.20 7/01/10 1,750 2,126,320
Met. Trans. Auth. N.Y. Trans. Facs. Rev., F.S.A. Aaa 5.75 7/01/11 5,000 5,438,850
New York City Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys.
Rev., M.B.I.A. Aaa 5.75 6/15/26 5,000 5,369,200
New York City,
Ser. G, M.B.I.A. Aaa 5.75 2/01/14 3,000 3,211,290
Cap. Apprec., Ser. G, M.B.I.A. Aaa Zero 8/01/07 4,000 2,804,280
Cap. Apprec., Ser. G, M.B.I.A. Aaa Zero 8/01/08 3,325 2,218,772
New York St. Dorm. Auth. Rev., Montefiore Med. Ctr.,
A.M.B.A.C. Aaa 6.00 8/01/08 3,400 3,809,564
New York St. Envir. Facs. Corp.,
Poll. Ctrl. Rev. Aaa 5.70 7/15/12 3,375 3,645,236
Poll. Ctrl. Rev. Aaa 5.75 7/15/13 1,060 1,149,708
Poll. Ctrl. Rev. Aaa 5.80 7/15/14 3,755 4,067,153
New York St. Thrwy. Auth. Gen. Rev.,
Ser. D Aa3 5.40 1/01/11 5,370 5,717,439
Ser. D Aa3 5.50 1/01/12 3,865 4,133,772
Port Auth. New York & New Jersey Cons., Ser. 99,
F.G.I.C., A.M.T. Aaa 5.90 11/01/11 7,665 8,207,529
------------
51,899,113
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-63
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 INSURED SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--2.7%
Cleveland City Sch. Dist., Rev. Antic. Nts., A.M.B.A.C. Aaa 5.75% 6/01/07 $ 5,870 $ 6,445,906
Kent City Sch. Dist., F.G.I.C. Aaa 5.75 12/01/21 1,000 1,072,230
Lorain Cnty. Hosp. Rev., Catholic Hlthcare Partners,
M.B.I.A. Aaa 5.50 9/01/27 4,000 4,149,800
------------
11,667,936
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.6%
Norman Reg'l. Hosp. Auth., Rev. Ref., Ser. A, M.B.I.A. Aaa 5.50 9/01/11 4,110 4,346,325
Oklahoma City Arpt. Trust, Jr. Lien, Ser. 24, A.M.B.A.C.,
A.M.T. Aaa 5.75 2/01/18 2,620 2,741,358
------------
7,087,683
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--1.3%
Philadelphia Mun. Auth. Rev., Criminal Justice Ctr., Ser.
A, M.B.I.A. Aaa 6.90 11/15/03 3,000(e) 3,282,360
Philadelphia, Sch. Dist., Ser. B, A.M.B.A.C. Aaa 5.375 4/01/27 2,500 2,545,850
------------
5,828,210
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--2.8%
Puerto Rico Gen. Oblig., M.B.I.A. Aaa 6.25 7/01/13 1,250 1,465,750
Puerto Rico Pub. Bldgs. Auth. Rev., Gov't. Facs., Ser. A,
A.M.B.A.C. Aaa 6.25 7/01/13 1,700 1,993,420
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A., R.I.B.S. Aaa 6.91 1/25/07 4,100(c) 4,561,250
Ser. I, M.B.I.A., R.I.B.S. Aaa 7.574 1/16/15 3,800(c) 4,279,750
------------
12,300,170
- ------------------------------------------------------------------------------------------------------------------------------
South Dakota--1.4%
So. Dakota Hsg. Dev. Auth., Homeownership Mtge., Ser. F,
A.M.T. Aa1 5.80 5/01/28 6,000 6,221,160
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.3%
Metro. Gov't. Nashville & Davidson Cnty. Wtr. & Swr.
Rev., A.M.B.A.C., R.I.B.S. Aaa 8.723 1/01/22 5,000(c) 5,750,000
- ------------------------------------------------------------------------------------------------------------------------------
Texas--5.7%
Austin Util. Sys. Rev. Comb., Ser. A, M.B.I.A. Aaa 4.875 11/15/10 5,500 5,591,850
Austin Util. Sys. Rev., M.B.I.A. Aaa Zero 5/15/03 8,000 6,827,440
Houston Arpt. Sys. Rev. Aaa 7.20 7/01/13 3,900 4,676,958
Houston Arpt. Sys. Rev., Spec. Facs. People Mover, Ser.
A, F.S.A., A.M.T. Aaa 6.00 7/15/05 3,255 3,555,306
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-64
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 INSURED SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Texas (cont'd.)
Keller Ind. Sch. Dist., P.S.F.G. Aaa Zero 8/15/15 $ 4,945 $ 2,187,322
Texas Wtr. Res. Fin. Auth. Rev., A.M.B.A.C. Aaa 7.50% 8/15/13 1,725 1,746,062
------------
24,584,938
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--5.2%
Chesapeake Bay Brdg. & Tunn. Comm., Dist. Rev., F.G.I.C. Aaa 5.875 7/01/10 5,000 5,522,300
Richmond Met. Auth. Expwy. Rev. Ref., F.G.I.C. Aaa 5.25 7/15/22 5,265 5,451,539
Virginia Beach Hosp. Facs. Rev.,
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/10 1,220 1,377,221
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/13 1,455 1,654,801
Virginia Coll. Bldg. Auth. Edl. Facs. Rev., M.B.I.A. Aaa 5.25 1/01/26 8,275 8,552,461
------------
22,558,322
- ------------------------------------------------------------------------------------------------------------------------------
Washington--7.0%
Central Puget Sound Washington Regional Transit Auth. Tax
Rev., F.G.I.C. Aaa 5.25 2/01/21 8,725 8,999,838
Washington St. Hlthcare Facs. Auth. Rev., Yakima Valley
Memorial Hosp. Assoc. AAA(b) 5.25 12/01/20 2,500 2,461,800
Washington St. Pub. Pwr. Supply Sys.,
Nuclear Proj. No. 1, Ser. A, M.B.I.A. Aaa 5.75 7/01/10 7,000 7,582,960
Nuclear Proj. No. 2, Ser. A, M.B.I.A. Aaa Zero 7/01/11 5,210 2,900,928
Nuclear Proj. No. 2, Ser. B, F.G.I.C. Aaa 7.25 7/01/03 3,000(c) 3,185,220
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa 7.00 7/01/05 2,000(c) 2,087,340
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/08 4,500 2,981,520
------------
30,199,606
------------
Total long-term investments (cost $395,361,689) 424,473,438
------------
SHORT-TERM INVESTMENTS--1.1%
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--0.2%
Dist. of Columbia., Gen. Oblig., Ser. 92A-1, F.R.D.D. VMIG1 4.30 5/03/99 800 800,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-65
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1999 INSURED SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Texas--0.9%
Gulf Coast Wste Disp. Auth., Poll. Ctrl. Rev., Ser. 95,
F.R.D.D., A.M.T. VMIG1 4.30% 5/03/99 $ 2,600 $ 2,600,000
Port Corpus Christi Indl Dev Corp., Ser. 98-2, F.R.D.D.,
A.M.T. VMIG1 4.30 5/03/99 1,500 1,500,000
------------
4,100,000
------------
Total short-term investments (cost $4,900,000) 4,900,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments--99.0%
(cost $400,261,689; Note 4) 429,373,438
Other assets in excess of liabilities--1.0% 4,466,870
------------
Net Assets--100% $433,840,308
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
A.M.T.--Alternative Minimum Tax
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate (Daily) Damand Note(f)
F.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
R.I.B.S.--Residual Interest Bearing Securities
(b) Standard & Poor's rating.
(c) Prerefunded issues are secured by escrowed cash or direct U.S. guaranteed
obligations.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at period end.
(e) All or partial principal amount segregated as initial margin for financial
futures contracts.
(f) The maturity date shown is the later of the next date on which the security
can be redeemed at par or the next date on which the rate of interest is
adjusted.
The Fund's current prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-66
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets April 30, 1999
<S> <C>
Investments, at value (cost $400,261,689)................................................................... $ 429,373,438
Interest receivable......................................................................................... 5,759,068
Due from broker - variation margin.......................................................................... 70,469
Receivable for Series shares sold........................................................................... 27,576
Receivable for investments sold............................................................................. 25,185
Other assets................................................................................................ 7,939
--------------
Total assets............................................................................................. 435,263,675
--------------
Liabilities
Bank overdraft.............................................................................................. 32,409
Dividends payable........................................................................................... 529,078
Payable for Series shares reacquired........................................................................ 421,005
Management fee payable...................................................................................... 179,645
Accrued expenses............................................................................................ 134,902
Distribution fee payable.................................................................................... 126,328
--------------
Total liabilities........................................................................................ 1,423,367
--------------
Net Assets.................................................................................................. $ 433,840,308
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 387,964
Paid-in capital in excess of par......................................................................... 404,782,410
--------------
405,170,374
Accumulated net realized loss on investments............................................................. (474,853)
Net unrealized appreciation on investments............................................................... 29,144,787
--------------
Net assets, April 30, 1999.................................................................................. $ 433,840,308
--------------
--------------
Class A:
Net asset value and redemption price per share
($251,299,998 / 22,482,087 shares of beneficial interest issued and outstanding)...................... $11.18
Maximum sales charge (3% of offering price).............................................................. .35
--------------
Maximum offering price to public......................................................................... $11.53
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($175,520,479 / 15,686,477 shares of beneficial interest issued and outstanding)...................... $11.19
--------------
--------------
Class C:
Net asset value and redemption price per share
($2,707,851 / 242,004 shares of beneficial interest issued and outstanding)........................... $11.19
Sales charge (1% of offering price)...................................................................... .11
--------------
Offering price to public................................................................................. $11.30
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($4,311,980 / 385,789 shares of beneficial interest issued and outstanding)........................... $11.18
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-67
<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1999
<S> <C>
Income
Interest.................................. $ 24,355,689
--------------
Expenses
Management fee............................ 2,274,028
Distribution fee--Class A................. 364,183
Distribution fee--Class B................. 1,043,873
Distribution fee--Class C................. 13,918
Transfer agent's fees and expenses........ 203,000
Custodian's fees and expenses............. 93,000
Reports to shareholders................... 52,000
Registration fees......................... 43,000
Trustees' fees and expenses............... 16,000
Audit fees and expenses................... 15,000
Insurance expense......................... 12,000
Legal fees and expenses................... 11,000
Miscellaneous............................. 5,576
--------------
Total expenses......................... 4,146,578
Less: Custodian fee credit................ (304)
--------------
Net expenses........................... 4,146,274
--------------
Net investment income........................ 20,209,415
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 2,613,118
Financial futures contract transactions... (1,527,854)
--------------
1,085,264
--------------
Net change in unrealized
appreciation (depreciation) on:
Investments............................... 8,706,158
Financial futures contracts............... (73,025)
--------------
8,633,133
--------------
Net gain on investments...................... 9,718,397
--------------
Net Increase in Net Assets
Resulting from Operations.................... $ 29,927,812
--------------
--------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income.......... $ 20,209,415 $ 22,374,316
Net realized gain on investment
transactions................ 1,085,264 7,419,069
Net change in unrealized
appreciation of
investments................. 8,633,133 10,877,794
------------ ------------
Net increase in net assets
resulting from operations... 29,927,812 40,671,179
------------ ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (11,087,816) (10,553,524)
Class B..................... (8,878,895) (11,765,355)
Class C..................... (74,699) (46,954)
Class Z..................... (168,005) (8,483)
------------ ------------
(20,209,415) (22,374,316)
------------ ------------
Dividends in excess of net
investment income
Class A..................... (165,620) (80,333)
Class B..................... (128,222) (90,260)
Class C..................... (1,348) (469)
Class Z..................... (2,596) (60)
------------ ------------
(297,786) (171,122)
------------ ------------
Distributions from net capital
gains
Class A..................... (2,053,682) (4,980,680)
Class B..................... (1,589,957) (5,596,092)
Class C..................... (16,718) (29,102)
Class Z..................... (32,185) (3,703)
------------ ------------
(3,692,542) (10,609,577)
------------ ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed.................. 56,402,154 17,849,201
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 13,991,834 19,222,401
Cost of shares reacquired...... (104,987,356) (89,200,577)
------------ ------------
Net decrease in net assets from
Series share transactions... (34,593,368) (52,128,975)
------------ ------------
Total decrease.................... (28,865,299) (44,612,811)
Net Assets
Beginning of year................. 462,705,607 507,318,418
------------ ------------
End of year....................... $433,840,308 $462,705,607
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-68
<PAGE>

Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Prudential Municipal Bond Fund (the 'Fund') is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The Fund was organized as an unincorporated business trust in Massachusetts on
November 3, 1986 and consists of two series: the High Income Series and the
Insured Series. Investment operations for Class A, Class B, Class C and Class Z
shares of each series commenced on January 22, 1990, September 17, 1987, August
1, 1994 and September 16, 1996, respectively.
The investment objectives of the series are as follows: (i) the objective of the
High Income Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes, (ii) the objective of the Insured
Series is to provide the maximum amount of income that is eligible for exclusion
from federal income taxes consistent with the preservation of capital. The
ability of issuers of debt securities held by the Fund to meet their obligations
may be affected by economic and political developments in a specific state,
region or industry.
- ------------------------------------------------------------
Note 1. Accounting Policies
Securities Valuation: Municipal securities (including commitments to purchase
such securities on a 'when-issued' basis) are valued on the basis of prices
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
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.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the 'initial margin.' Subsequent payments, known as 'variation
margin,' are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. When the Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Fund writes an option, it receives a premium and an amount equal to that
premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost basis of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions.
The Fund, as writer of an option, has no control over whether the underlying
securities may be sold (called) or purchased (put). As a result, the Fund bears
the market risk of an unfavorable change in the price of the security underlying
the written option. The Fund, as purchaser of an option, bears the risk of the
potential inability of the counterparties to meet the terms of their contracts.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund amortizes premiums and accretes original issue discount
on portfolio securities as adjustments to interest income. Net investment
income, other than distribution fees, and realized and unrealized gains or
losses are allocated daily to each class of shares based upon the relative
proportion of net assets of each class at the
- --------------------------------------------------------------------------------

B-69
<PAGE>

Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
beginning of the day. Expenses are recorded on the accrual basis which may
require the use of certain estimates by management.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate tax paying entity. It is the intent of each series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all net income to shareholders.
For this reason no federal income tax provision is required.
Dividends and Distributions: Dividends from net investment income are declared
daily and paid monthly. The Fund will distribute at least annually any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
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. For
the fiscal year ended April 30, 1999, the effect of applying this statement was
to increase undistributed net investment income and increase accumulated net
realized losses by $297,786 due to the sale of securities purchased with market
discount for the Insured Series.
Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'), doing business as Prudential Investments ('PI,'
the Subadviser or the investment adviser); PIC furnishes investment advisory
services in connection with the management of the Fund. PIFM pays for the cost
of the subadviser's services, the compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .50 of 1% of the average daily net assets of each series up to $1
billion and .45 of 1% of the average daily net assets of each series in excess
of $1 billion. PIFM has agreed to voluntarily waive a portion of the High Income
Series management fee, which amounted to $590,774. Such amount represents .05 of
1% of average daily net assets, or $.005 cents per share for the year ended
April 30, 1999. The Series is not required to reimburse PIFM for such waiver.
The Fund had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ('PIMS') became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the arrangement with PSI. The Fund compensated PSI and PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly. No distribution or service fees were paid to PSI or PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI and PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1%, of the average daily net assets of the Class A, B and C shares,
respectively, for the year ended April 30, 1999. Effective January 1, 1999, such
expenses for the Fund were .25 of 1%, .50 of 1% and .75 of 1% of the average
daily net assets of the Class A, B and C shares, respectively. Prior to January
1, 1999, such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of 1%
of the average daily net assets of the Class A, B and C shares, respectively.
PSI and PIMS have advised the High Income Series and Insured Series that they
received approximately $679,000 ($600,700-Class A; $78,300-Class C) and $62,100
($54,100-Class A; $8,000-Class C), respectively, in front-end sales charges
during the year ended April 30, 1999. From these fees, PSI and PIMS paid such
sales charges to affiliated broker-dealers which in turn paid commissions to
salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended April 30, 1999, they
received approximately $776,500 ($765,300-Class B; $11,200-Class C) and $179,800
($179,700-Class B; $100-Class C), respectively, in contingent deferred sales
charges imposed upon certain redemptions by Class B and C shareholders.
PSI, PIC, PIMS and PIFM are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
- --------------------------------------------------------------------------------

B-70
<PAGE>

Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on the
unused portion of the credit facility, which is accrued and paid quarterly on a
pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March
11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was .055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the year ended April 30, 1999. The purpose of the agreements is
to serve as an alternative source of funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended April 30, 1999, the
Fund incurred fees of approximately $559,800 ($363,800-High Income Series;
$196,000-Insured Series) for the services of PMFS. As of April 30, 1999,
approximately $46,600 ($30,800-High Income Series; $15,800-Insured Series) of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations also include certain out of pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended April 30, 1999, were as follows:
<TABLE>
<CAPTION>
Series Purchases Sales
- -------------------------------- ------------ ------------
<S> <C> <C>
High Income..................... $259,477,461 $183,381,647
Insured......................... 69,662,835 114,331,334
</TABLE>

At April 30, 1999, the High Income Series sold 100 U.S. Treasury bond futures
expiring in June 1999 and the Insured Series sold 55 U.S. Treasury bond futures
expiring in June 1999. The values of these financial futures contracts at April
30, 1999 were as follows:
<TABLE>
<CAPTION>
Financial Futures
Contracts Sold
-------------------------
High Income Insured
Series Series
----------- ----------
<S> <C> <C>
Value at disposition............... $12,018,750 $6,808,351
Value at April 30, 1999............ 12,203,125 6,775,313
----------- ----------
Unrealized gain.................... $ 184,375 $ 33,038
----------- ----------
----------- ----------
</TABLE>

The federal income tax basis of the Fund's investments, at April 30, 1999 was
$1,123,106,081 for High Income Series and $400,262,989 for Insured Series and,
accordingly, net unrealized appreciation of investments for federal income tax
purposes was as follows:
<TABLE>
<CAPTION>
Gross Gross
Net unrealized unrealized unrealized
Series appreciation appreciation depreciation
- -------------------- -------------- ----------- -----------
<S> <C> <C> <C>
High Income......... $ 68,872,178 $92,086,875 $23,214,697
Insured............. 29,110,449 29,414,544 304,095
</TABLE>

The High Income Series has a net capital loss carryforward as of April 30, 1999
of approximately $20,684,000, of which $2,024,000 expires in 2002, $5,361,000
expires in 2003, $6,383,000 expires in 2004, $3,225,000 expires in 2005,
$554,000 expires in 2006 and 3,137,000 expires in 2007. No capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of the aggregate of such amounts.
In addition, the High Income Series and Insured Series elected to treat net
realized capital losses of approximately $2,765,000 and $600,700, respectively
incurred in the six month period ended April 30, 1999 as having been incurred in
the following fiscal year.
- ------------------------------------------------------------
Note 5. Capital
The High Income Series and Insured Series offers Class A, Class B, Class C and
Class Z shares. Class A shares are sold with a front-end sales charge of up to
3.0%. Class B shares are sold with a contingent deferred sales charge which
declines from 5% to zero depending on the period of time the shares are held.
Prior to November 2, 1998 Class C shares were sold with a contingent deferred
sales charge of 1% during the first year. Effective November 2, 1998, Class C
shares are sold with a front-end sales charge of 1% and a contingent deferred
sales charge of 1% during the first 18 months. Class B shares automatically
convert to Class A shares on a quarterly basis approximately seven years after
purchase. A special exchange privilege is also available for shareholders who
qualify to purchase Class A shares at net asset value. Class Z shares are not
subject to any sales or redemption charge and are offered exclusively for sale
to a limited group of investors.

B-71
<PAGE>

Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of
beneficial interest were as follows:

<TABLE>
<CAPTION>
High Income Series Insured Series
Class A Class A
------------------------------ ----------------------------
Year ended April 30, 1999 Shares Amount Shares Amount
- ------------------------------------------------------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares issued............................................... 9,922,785 $ 112,624,489 3,150,940 $ 35,684,005
Shares issued in reinvestment of dividends and
distributions............................................ 1,173,562 13,319,273 669,267 7,562,399
Shares reacquired........................................... (7,359,450) (83,429,491) (3,182,291) (35,899,590)
----------- ------------- ---------- ------------
Net increase in shares outstanding before conversion........ 3,736,897 42,514,271 637,916 7,346,814
Shares issued upon conversion from Class B.................. 4,930,525 56,076,061 1,531,912 17,371,217
----------- ------------- ---------- ------------
Net increase in shares outstanding.......................... 8,667,422 $ 98,590,332 2,169,828 $ 24,718,031
----------- ------------- ---------- ------------
----------- ------------- ---------- ------------
<CAPTION>
High Income Series Insured Series
Class A Class A
------------------------------ ----------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount
- ------------------------------------------------------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares issued............................................... 5,097,999 $ 57,395,615 569,674 $ 6,395,067
Shares issued in reinvestment of dividends and
distributions............................................ 962,597 10,829,429 785,872 8,843,968
Shares reacquired........................................... (6,025,736) (67,587,666) (3,276,382) (36,775,017)
----------- ------------- ---------- ------------
Net increase (decrease) in shares outstanding before
conversion............................................... 34,860 637,378 (1,920,836) (21,535,982)
Shares issued upon conversion from Class B.................. 6,417,324 71,773,373 3,118,260 35,134,908
----------- ------------- ---------- ------------
Net increase in shares outstanding.......................... 6,452,184 $ 72,410,751 1,197,424 $ 13,598,926
----------- ------------- ---------- ------------
----------- ------------- ---------- ------------
<CAPTION>
High Income Series Insured Series
Class B Class B
------------------------------ ----------------------------
Year ended April 30, 1999 Shares Amount Shares Amount
- ------------------------------------------------------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares issued............................................... 11,345,964 $ 128,924,744 1,204,352 $ 13,614,748
Shares issued in reinvestment of dividends and
distributions............................................ 1,343,215 15,249,705 547,328 6,190,618
Shares reacquired........................................... (8,975,019) (101,906,384) (5,908,598) (66,872,772)
----------- ------------- ---------- ------------
Net increase (decrease) in shares outstanding before
conversion............................................... 3,714,160 42,268,065 (4,156,918) (47,067,406)
Shares reaquired upon conversion to Class A................. (4,931,462) (56,076,061) (1,530,249) (17,371,217)
----------- ------------- ---------- ------------
Net decrease in shares outstanding.......................... (1,217,302) $ (13,807,996) (5,687,167) $(64,438,623)
----------- ------------- ---------- ------------
----------- ------------- ---------- ------------
<CAPTION>
High Income Series Insured Series
Class B Class B
Class B Class B
------------------------------ ----------------------------
------------------------------ ----------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount
- ------------------------------------------------------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares issued............................................... 10,261,223 $ 115,317,304 894,372 $ 10,051,980
Shares issued in reinvestment of dividends and
distributions............................................ 1,416,916 15,920,018 915,681 10,310,964
Shares reacquired........................................... (7,485,320) (84,004,151) (4,626,069) (51,987,346)
----------- ------------- ---------- ------------
Net increase (decrease) in shares outstanding before
conversion............................................... 4,192,819 47,233,171 (2,816,016) (31,624,402)
Shares reacquired upon conversion to Class A................ (6,418,319) (71,773,373) (3,114,481) (35,134,908)
----------- ------------- ---------- ------------
Net decrease in shares outstanding.......................... (2,225,500) $ (24,540,202) (5,930,497) $(66,759,310)
----------- ------------- ---------- ------------
----------- ------------- ---------- ------------
</TABLE>
- --------------------------------------------------------------------------------

B-72
<PAGE>

Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Income Series Insured Series
Class C Class C
------------------------------ ----------------------------
Year ended April 30, 1999 Shares Amount Shares Amount
- ------------------------------------------------------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares issued............................................... 1,518,505 $ 17,214,668 125,361 $ 1,422,776
Shares issued in reinvestment of dividends and
distributions............................................ 76,753 870,798 4,553 51,493
Shares reacquired........................................... (474,223) (5,378,215) (24,331) (273,385)
----------- ------------- ---------- ------------
Net increase in shares outstanding.......................... 1,121,035 $ 12,707,251 105,583 $ 1,200,884
----------- ------------- ---------- ------------
----------- ------------- ---------- ------------
<CAPTION>
High Income Series Insured Series
Class C Class C
------------------------------ ----------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount
- ------------------------------------------------------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares issued............................................... 1,210,837 $ 13,633,168 75,353 $ 851,857
Shares issued in reinvestment of dividends and
distributions............................................ 45,608 514,159 4,949 55,759
Shares reacquired........................................... (321,058) (3,613,378) (25,249) (284,339)
----------- ------------- ---------- ------------
Net increase in shares outstanding.......................... 935,387 $ 10,533,949 55,053 $ 623,277
----------- ------------- ---------- ------------
----------- ------------- ---------- ------------
<CAPTION>
High Income Series Insured Series
Class Z Class Z
------------------------------ ----------------------------
Year ended April 30, 1999 Shares Amount Shares Amount
- ------------------------------------------------------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares issued............................................... 1,096,115 $ 12,439,510 503,141 $ 5,680,625
Shares issued in reinvestment of dividends and
distributions............................................ 61,271 694,740 16,560 187,324
Shares reacquired........................................... (799,663) (9,043,372) (171,745) (1,941,609)
----------- ------------- ---------- ------------
Net increase in shares outstanding.......................... 357,723 $ 4,090,878 347,956 $ (3,926,340)
----------- ------------- ---------- ------------
----------- ------------- ---------- ------------
<CAPTION>
High Income Series Insured Series
Class Z Class Z
------------------------------ ----------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount
- ------------------------------------------------------------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares issued............................................... 737,972 $ 8,311,994 49,053 $ 550,297
Shares issued in reinvestment of dividends and
distributions............................................ 29,882 337,131 1,039 11,710
Shares reacquired........................................... (141,036) (1,592,621) (13,642) (153,875)
----------- ------------- ---------- ------------
Net increase in shares outstanding.......................... 626,818 $ 7,056,504 36,450 $ 408,132
----------- ------------- ---------- ------------
----------- ------------- ---------- ------------
</TABLE>
- ------------------------------------------------------------
Note 6. Subsequent Event
Effective June 1, 1999, PIFM decided to eliminate its voluntary waiver of a
portion of its management fee (see Note 2).
- --------------------------------------------------------------------------------

B-73
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Years Ended April 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.31 $ 10.84 $ 10.70 $ 10.72 $ 10.74
-------- -------- -------- -------- --------
Income from investment operations
Net investment income(b)............. .63 .67 .70 .72 .72
Net realized and unrealized gain
(loss) on investment
transactions...................... (.10) .47 .14 (.02) (.02)
-------- -------- -------- -------- --------
Total from investment
operations..................... .53 1.14 .84 .70 .70
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income............................ (.63) (.67) (.70) (.72) (.72)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 11.21 $ 11.31 $ 10.84 $ 10.70 $ 10.72
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):..................... 4.96% 10.80% 8.03% 6.55% 6.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $514,952 $421,504 $334,062 $223,073 $115,501
Average net assets (000)............. $474,901 $381,735 $294,940 $162,329 $ 65,207
Ratios to average net assets:(b)
Expenses, including distribution
fees........................... .66% .62% 0.64% 0.64% 0.69%
Expenses, excluding distribution
fees........................... .51% .52% 0.54% 0.54% 0.59%
Net investment income............. 5.73% 6.03% 6.44% 6.58% 6.83%
For Class A, B, C and Z shares:
Portfolio turnover rate........... 16% 13% 26% 35% 39%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-74
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------
Years Ended April 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.31 $ 10.84 $ 10.69 $ 10.72 $ 10.74
-------- -------- -------- -------- ----------
Income from investment operations
Net investment income(b)............. .59 .63 .66 .68 .68
Net realized and unrealized gain
(loss) on investment
transactions...................... (.10) .47 .15 (.03) (.02)
-------- -------- -------- -------- ----------
Total from investment
operations..................... .49 1.10 .81 .65 .66
-------- -------- -------- -------- ----------
Less distributions
Dividends from net investment
income............................ (.59) (.63) (.66) (.68) (.68)
-------- -------- -------- -------- ----------
Net asset value, end of year......... $ 11.21 $ 11.31 $ 10.84 $ 10.69 $ 10.72
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
TOTAL RETURN(a):..................... 4.59% 10.36% 7.71% 6.12% 6.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $649,706 $669,223 $665,525 $799,048 $ 934,725
Average net assets (000)............. $666,885 $669,132 $725,305 $900,115 $1,024,132
Ratios to average net assets:(b)
Expenses, including distribution
fees........................... 1.01% 1.02% 1.04% 1.04% 1.09%
Expenses, excluding distribution
fees........................... .51% .52% 0.54% 0.54% 0.59%
Net investment income............. 5.38% 5.63% 6.05% 6.19% 6.37%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-75
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------------------- -------------------
August 1,
1994(c) Years Ended April
Years Ended April 30, Through 30,
------------------------------------------------- April 30, -------------------
1999 1998 1997 1996 1995 1999 1998
------- --------- --------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.31 $ 10.84 $ 10.69 $ 10.72 $10.79 $ 11.30 $ 10.83
------- --------- --------- --------- ----- ------- -------
Income from investment operations
Net investment income(b)............. .57 .61 .63 .65 .49 .65 .68
Net realized and unrealized gain
(loss) on investment
transactions...................... (.10) .47 .15 (.03) (.07) (.10) .47
------- --------- --------- --------- ----- ------- -------
Total from investment
operations..................... .47 1.08 .78 .62 .42 .55 1.15
------- --------- --------- --------- ----- ------- -------
Less distributions
Dividends from net investment
income............................ (.57) (.61) (.63) (.65) (.49) (.65) (.68)
------- --------- --------- --------- ----- ------- -------
Net asset value, end of period....... $ 11.21 $ 11.31 $ 10.84 $ 10.69 $10.72 $ 11.20 $ 11.30
------- --------- --------- --------- ----- ------- -------
------- --------- --------- --------- ----- ------- -------
TOTAL RETURN(a):..................... 4.33% 10.09% 7.44% 5.86% 3.91% 5.11% 10.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $32,939 $20,554 $ 9,563 $ 6,471 $3,208 $13,839 $ 9,919
Average net assets (000)............. $26,114 $14,932 $ 8,060 $ 5,608 $1,385 $13,648 $ 6,064
Ratios to average net assets:(b)
Expenses, including distribution
fees........................... 1.26% 1.27% 1.29% 1.29% 1.34%(e) .51% .52%
Expenses, excluding distribution
fees........................... .51% .52% 0.54% 0.54% 0.59%(e) .51% .52%
Net investment income............. 5.15% 5.39% 5.80% 5.93% 6.34%(e) 5.89% 6.14%
<CAPTION>

<S> <C>
September 16,
1996(d)
Through
April 30,
1997
-------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.79
-----
Income from investment operations
Net investment income(b)............. .45
Net realized and unrealized gain
(loss) on investment
transactions...................... .04
-----
Total from investment
operations..................... .49
-----
Less distributions
Dividends from net investment
income............................ (.45)
-----
Net asset value, end of period....... $ 10.83
-----
-----
TOTAL RETURN(a):..................... 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 2,719
Average net assets (000)............. $ 704
Ratios to average net assets:(b)
Expenses, including distribution
fees........................... 0.54%(e)
Expenses, excluding distribution
fees........................... 0.54%(e)
Net investment income............. 6.55%(e)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-76
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Years Ended April 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.05 $ 10.90 $ 10.94 $ 10.83 $ 10.71
-------- -------- -------- -------- -------
Income from investment operations
Net investment income................ .53 .53(b) .55(b) .58(b) .58(b)
Net realized and unrealized gain on
investment transactions........... .23 .40 .08 .11 .12
-------- -------- -------- -------- -------
Total from investment
operations..................... .76 .93 .63 .69 .70
-------- -------- -------- -------- -------
Less distributions
Dividends from net investment
income............................ (.53) (.53) (.55) (.58) (.58)
Distributions in excess of net
investment income................. (.01) --(c) (.01) -- --
Distributions from capital gains..... (.09) (.25) (.11) -- --
-------- -------- -------- -------- -------
Total distributions............... (.63) (.78) (.67) (.58) (.58)
-------- -------- -------- -------- -------
Net asset value, end of year......... $ 11.18 $ 11.05 $ 10.90 $ 10.94 $ 10.83
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
TOTAL RETURN(a):..................... 6.88% 8.67% 5.74% 6.47% 6.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $251,300 $224,409 $208,411 $139,548 $75,800
Average net assets (000)............. $240,652 $222,115 $187,371 $102,456 $39,471
Ratios to average net assets:
Expenses, including distribution
fees........................... 0.75% 0.69%(b) 0.68%(b) 0.68%(b) 0.74(b)
Expenses, excluding distribution
fees........................... 0.60% 0.59%(b) 0.58%(b) 0.58%(b) 0.64(b)
Net investment income............. 4.61% 4.75%(b) 4.95%(b) 5.20%(b) 5.45(b)
For Class A, B, C and Z shares:
Portfolio turnover rate........... 15% 85% 110% 68% 64%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-77
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Years Ended April 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.06 $ 10.91 $ 10.95 $ 10.84 $ 10.71
-------- -------- -------- -------- --------
Income from investment operations
Net investment income............................... .48 .49(b) .50(b) .54(b) .54(b)
Net realized and unrealized gain on investment
transactions..................................... .23 .40 .08 .11 .13
-------- -------- -------- -------- --------
Total from investment operations................. .71 .89 .58 .65 .67
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................ (.48) (.49) (.50) (.54) (.54)
Distributions in excess of net investment income.... (.01) --(c) (.01) -- --
Distributions from capital gains.................... (.09) (.25) (.11) -- --
-------- -------- -------- -------- --------
Total distributions.............................. (.58) (.74) (.62) (.54) (.54)
-------- -------- -------- -------- --------
Net asset value, end of year........................ $ 11.19 $ 11.06 $ 10.91 $ 10.95 $ 10.84
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):.................................... 6.50% 8.23% 5.32% 6.04% 6.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $175,520 $236,370 $298,005 $443,391 $567,648
Average net assets (000)............................ $208,775 $270,553 $365,891 $524,452 $660,237
Ratios to average net assets:
Expenses, including distribution fees............ 1.10% 1.09%(b) 1.08%(b) 1.08%(b) 1.14(b)
Expenses, excluding distribution fees............ 0.60% 0.59%(b) 0.58%(b) 0.58%(b) 0.64(b)
Net investment income............................ 4.25% 4.35%(b) 4.54%(b) 4.80%(b) 4.99(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-78
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
--------------------------------------------------------------- -----------------
August 1,
1994(c) Years Ended
Years Ended April 30, Through April 30,
------------------------------------------------ April 30, -----------------
1999 1998 1997 1996 1995 1999 1998
------ --------- --------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $11.06 $ 10.91 $ 10.95 $ 10.84 $10.79 $11.05 $10.91
------ --------- --------- --------- ----- ------ ------
Income from investment operations
Net investment income................ .45 .46(b) .48(b) .51(b) .39(b) .54(b) .54(b)
Net realized and unrealized gain
(loss) on investment
transactions...................... .23 .40 .08 .11 .05 .23 .39
------ --------- --------- --------- ----- ------ ------
Total from investment
operations..................... .68 .86 .56 .62 .44 .77 .93
------ --------- --------- --------- ----- ------ ------
Less distributions
Dividends from net investment
income............................ (.45) (.46) (.48) (.51) (.39) (.54) (.54)
Distributions in excess of net
investment income................. (.01) --(f) (.01) -- -- (.01) --(f)
Distributions from capital gains..... (.09) (.25) (.11) -- -- (.09) (.25)
------ --------- --------- --------- ----- ------ ------
Total distributions............... (.55) (.71) (.60) (.51) (.39) (.64) (.79)
------ --------- --------- --------- ----- ------ ------
Net asset value, end of period....... $11.19 $ 11.06 $ 10.91 $ 10.95 $10.84 $11.18 $11.05
------ --------- --------- --------- ----- ------ ------
------ --------- --------- --------- ----- ------ ------
TOTAL RETURN(a):..................... 6.24% 7.96% 5.06% 5.78% 4.03% 7.04% 8.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $2,708 $ 1,509 $ 888 $ 1,137 $ 525 $4,312 $ 418
Average net assets (000)............. $1,856 $ 1,142 $ 973 $ 827 $ 224 $3,523 $ 173
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.35% 1.34%(b) 1.33%(b) 1.33%(b) 1.39%(b)(e) 0.60% 0.60%(b)
Expenses, excluding distribution
fees........................... 0.60% 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b)(e) 0.60% 0.60%(b)
Net investment income............. 4.03% 4.11%(b) 4.29%(b) 4.56%(b) 4.92%(b)(e) 4.77% 4.92%(b)
<CAPTION>

<S> <C>
September 16,
1996(d)
Through
April 30,
1997
-------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.05
-----
Income from investment operations
Net investment income................ .36(b)
Net realized and unrealized gain
(loss) on investment
transactions...................... (.02)
-----
Total from investment
operations..................... .34
-----
Less distributions
Dividends from net investment
income............................ (.36)
Distributions in excess of net
investment income................. (.01)
Distributions from capital gains..... (.11)
-----
Total distributions............... (.48)
-----
Net asset value, end of period....... $ 10.91
-----
-----
TOTAL RETURN(a):..................... 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 15
Average net assets (000)............. $ 10
Ratios to average net assets:
Expenses, including distribution
fees........................... 0.58%(b
Expenses, excluding distribution
fees........................... 0.58%(b
Net investment income............. 4.18%(b
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
(f) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-79
<PAGE>

Report of Independent Accountants PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
Prudential Municipal Bond Fund

In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of High Income Series and Insured
Series (constituting Prudential Municipal Bond Fund, hereafter referred to as
the 'Fund') at April 30, 1999, the results of each of their operations for the
year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for each of the
three 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 April 30, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above. The accompanying financial highlights for each of the two years in the
period ended April 30, 1996 were audited by other independent accountants, whose
opinion dated June 13, 1996 was unqualified.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
June 18, 1999
- --------------------------------------------------------------------------------

B-80

<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

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

DIVERSIFICATION

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

DURATION

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

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

MARKET TIMING

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

POWER OF COMPOUNDING

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

STANDARD DEVIATION

Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.

I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA

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

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

EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY.

[EDGAR REPRESENTATION OF DATA USED IN PRINTED GRAPHIC]

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

Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
are usually more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.

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

II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

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

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

<TABLE>
<CAPTION>
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
- -----------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
- -----------------------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- -----------------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7% 17.1% 8.4%
</TABLE>

(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.

(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).

(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year. Data retrieved from Lipper, Inc.

(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.

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

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

Long Term U.S. Treasury Bond Yield in Percent (1926-1998)

[EDGAR REPRESENTATION OF DATA USED IN PRINTED GRAPHIC]

- ------------------------
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1998. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.

II-3
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 79,000 persons worldwide, and maintains a sales force of approximately
11,500 agents and 6,500 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.

INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of life insurance, Prudential has 25 million life insurance
policies in force today with a face value of $1 trillion. Prudential has the
largest capital base ($12.1 billion) of any life insurance company in the United
States. Prudential provides auto insurance for more than 1.5 million cars and
insures more than 1.2 million homes.

MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part) manages over $211 billion in assets of
institutions and individuals. In INSTITUTIONAL INVESTOR, July 1998 Prudential
was ranked eighth in terms of total assets under management as of December 31,
1997.

REAL ESTATE. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents with over 1,400 offices
across the United States.(2)

HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 4.9 million
Americans receive healthcare from a Prudential managed care membership.(3)

FINANCIAL SERVICES. The Prudential Bank (FSB), a wholly-owned subsidiary of
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states.

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

As of November 30, 1998, Prudential Investments Fund Management was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.

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

From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
- ------------------------
(1) PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Mercator Asset
Management LP as the subadvisor to International Stock Series, a portfolio
of Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.

(2) As of December 31, 1997.

(3)On December 10, 1998, Prudential announced its intention to sell Prudential
Health Care to Aetna, Inc. for $1 billion.

III-1
<PAGE>
EQUITY FUNDS. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth Fund, a growth-style equity fund managed by Jennison Associates Capital
Corp., a premier institutional equity manager and a subsidiary of Prudential.

HIGH YIELD FUNDS. Investing in high-yield bonds is a complex and research
intensive pursuit. A separate team of high-yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high-yield
bonds, which may be considered for purchase.(4) Non-investment grade bonds, also
known as junk bonds or high-yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high-yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.

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

Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.

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

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

INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(5)

Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment and financial planning
areas.

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

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

- ------------------------
(4) As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.

(5) As of December 31, 1998.

III-2