BLACKROCK GOVERNMENT INCOME TRUST, 497, 1996-09-04

BLACKROCK GOVERNMENT INCOME TRUST
497, 1996-09-04

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THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
Prospectus dated August 29, 1996
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The Fund may also invest in high quality debt securities rated AAA by Standard &
Poor's Ratings Group or Aaa by Moody's Investors Service, including fixed rate
and adjustable rate mortgage-backed securities, asset-backed securities,
corporate debt securities and money market instruments of a comparable
short-term rating. The Fund may engage in various hedging and return enhancement
strategies, including the use of derivatives, short-selling and leverage,
including reverse repurchase agreements and dollar rolls, which entail
additional risks not usually associated with a government fund. See "How the
Fund Invests--Hedging and Return Enhancement Strategies." An investment in the
Fund is neither insured nor guaranteed by the U.S. Government and there can be
no assurance that the Fund's investment objective will be achieved. The Fund's
address is One Seaport Plaza, New York, New York 10292, and its telephone number
is (800) 225-1852.

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

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

Investors are advised to read this Prospectus and retain it for future
reference.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS

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

WHAT IS THE BLACKROCK GOVERNMENT INCOME TRUST?

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

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to provide low volatility of net asset
value and high monthly income. There can be no assurance that the Fund's
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 6.

RISK FACTORS AND SPECIAL CHARACTERISTICS

The Fund seeks to achieve its objective by investing at least 65% of its
total assets in fixed-income U.S. Government Securities, including U.S. Treasury
Bills, Notes, Bonds and other debt securities issued by the U.S. Treasury, and
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The Fund may also invest in high quality debt securities
rated AAA by Standard & Poor's Ratings Group or Aaa by Moody's Investors
Service, including fixed rate and adjustable rate mortgage-backed securities,
asset-backed securities, corporate debt securities and money market instruments
of comparable short-term ratings. The Fund's net asset value per share and the
volatility of its portfolio securities will vary. See "How the Fund
Invests--Other Investments and Policies" at page 8. The Fund may also engage in
various hedging and return enhancement strategies, including the use of
derivatives, short-selling and leverage, including reverse repurchase agreements
and dollar rolls, which entail additional risks not usually associated with a
government fund. See "How the Fund Invests--Hedging and Return Enhancement
Strategies" at page 14.

WHO MANAGES THE FUND?

Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .50 of 1%
of the Fund's average daily net assets. As of July 31, 1996, PMF served as
manager or administrator to 64 investment companies, including 39 mutual funds,
with aggregate assets of approximately $52 billion. See "How the Fund is
Managed--Manager" at page 20. BlackRock Financial Management, Inc. (BFM or the
Subadviser) furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PMF. See "How the Fund
is Managed--Subadviser" at page 20.

WHO DISTRIBUTES THE FUND'S SHARES?

Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A and Class C shares and is currently reimbursed
for expenses related to the distribution of Class A shares at the annual rate of
up to .15 of 1% of the average daily net assets of the Class A shares and is
paid a distribution and service fee with respect to the Class C shares which is
currently being charged at the annual rate of .75 of 1% of the average daily net
assets of the Class C shares. See "How the Fund is Managed--Distributor" at page
21.

2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?

The minimum initial investment for Class A shares is $2,500 and $5,000 for
Class C shares. Thereafter, the minimum investment is $100 for both classes.
There is no minimum investment requirement for certain retirement plans and
employee savings plans or custodial accounts for the benefit of minors. For
purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Guide--How to Buy
Shares of the Fund" at page 28 and "Shareholder Guide--Shareholder Services" at
page 36.

HOW DO I PURCHASE SHARES?

You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class C shares). In addition, Class A shares of the Fund may be
purchased through a dealer which has entered into a selected dealer agreement
with the Fund's Distributor. See "How the Fund Values its Shares" at page 24 and
"Shareholder Guide--How to Buy Shares of the Fund" at page 28.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers two classes of shares:

. Class A Shares: Sold with an initial sales charge of up to 3% of the
offering price.

. Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% contingent deferred
sales charge or CDSC on redemptions. Class C shares are
subject to higher ongoing distribution-related expenses
than Class A shares.

You should understand that over time the deferred sales charge plus the
distribution and service fee of the Class C shares will exceed the initial sales
charge plus the distribution and service fee of the Class A shares.

See "Shareholder Guide--Alternative Purchase Plan" at page 29.

HOW DO I SELL MY SHARES?

You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class C shares may be subject to a CDSC. See
"Shareholder Guide--How to Sell Your Shares" at page 32.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

The Fund expects to declare daily and to pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 25.

3
<PAGE>
FUND EXPENSES

<TABLE>
<CAPTION>
CLASS A SHARES CLASS C SHARES
-------------- --------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 3% None
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends.................................... None None
Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, whichever is lower)....... None 1% during the
first year and
0% thereafter
Redemption Fees.......................................... None None
Exchange Fee............................................. None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)

<CAPTION>
CLASS A SHARES CLASS C SHARES
-------------- --------------
<S> <C> <C>
Management Fees.......................................... .50% .50%
12b-1 Fees............................................... .15%++ .75%++
Other Expenses........................................... .82% .82%
----- -----
Total Fund Operating Expenses............................ 1.47% 2.07%
----- -----
----- -----
</TABLE>

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------ ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming
(1) 5% annual return and (2) redemption at the end of
each time period:
Class A............................................ $ 45 $75 $ 108 $200
Class C............................................ $ 31 $65 $ 111 $240
You would pay the following expenses on the same
investment, assuming no redemption:
Class A............................................ $ 45 $75 $ 108 $200
Class C............................................ $ 21 $65 $ 111 $240
</TABLE>

The above example with respect to Class A and Class C shares is based on
data for the Fund's fiscal year ended June 30, 1996. The example should not
be considered a representation of past or future expenses. Actual expenses
may be greater or less than those shown.

The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund is Managed." "Other Expenses" includes an
estimate of operating expenses of the Fund, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.

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

+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on each class of the Fund rather than on a per shareholder basis.
Therefore, long-term shareholders of the Fund may pay more in total sales
charges than the economic equivalent of 6.25% of such shareholder's
investment in such shares. See "How the Fund is Managed--Distributor."

++ Although the Class A and Class C Distribution and Service Plans
provide that the Fund may pay a distribution fee of up to .30 of 1% per
annum of the average daily net assets of the Class A shares and 1% per annum
of the average daily net assets of the Class C shares, respectively, the
Distributor has agreed to limit its distribution expenses with respect to
the Class A shares to .15 of 1% of the average daily net assets of the Class
A shares and to limit its distribution fees with respect to the Class C
shares to no more than .75 of 1% of the average daily net assets of the
Class C shares for the fiscal year ending June 30, 1997. Total Fund
Operating Expenses without such limitations would be 1.62% for the Class A
shares and 2.32% for the Class C shares. See "How the Fund is
Managed--Distributor."

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

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

<TABLE>
<CAPTION>
CLASS A CLASS C
----------------------------------------------------- ------------------------
SEPTEMBER 9, NOVEMBER 1,
1991(A) 1994(D)
YEAR ENDED JUNE 30, THROUGH YEAR ENDED THROUGH
-------------------------------------- JUNE 30, JUNE 30, JUNE 30,
1996 1995(C)* 1994(C) 1993 1992 1996 1995(C)*
------- ------- ------- -------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period......................... $ 9.37 $ 9.29 $ 9.67 $ 10.07 $ 10.00 $ 9.37 $ 9.26
------- ------- ------- -------- ------------ --- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.......... .51 .51 .45 .64 .57 .45 .23
Net realized and unrealized
gains (losses) on investments
and foreign currency
transactions................... (.06) .09 (.35) (.41) .10 (.06) .21
------- ------- ------- -------- ------------ --- -----
Total from investment
operations..................... .45 .60 .10 .23 .67 .39 .44
------- ------- ------- -------- ------------ --- -----
LESS DISTRIBUTIONS
Dividends from net investment
income......................... (.51) (.52) (.40) (.63) (.57) (.46) (.33)
Tax return of capital
distributions.................. (.03) -- (.08) -- -- (.02) --
Distributions in excess of net
realized capital gains........ -- -- -- -- (.03) -- --
------- ------- ------- -------- ------------ --- -----
Total distributions............ (.54) (.52) (.48) (.63) (.60) (.48) (.33)
------- ------- ------- -------- ------------ --- -----
Net asset value, end of
period......................... $ 9.28 $ 9.37 $ 9.29 $ 9.67 $ 10.07 $ 9.28 $ 9.37
------- ------- ------- -------- ------------ --- -----
------- ------- ------- -------- ------------ --- -----
TOTAL RETURN(F):............... 4.98% 6.55% 1.02% 2.40% 6.69% 4.31% 4.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).......................... $37,049 $46,450 $69,912 $113,623 $143,856 $ 66 $ 7,121(e)
Average net assets (000)....... $42,598 $56,395 $91,849 $131,371 $134,585 $ 33 $ 1,335(e)
Ratios to average net assets:
Total expenses................ 3.74% 2.19% 1.89% 1.94% 1.34%(b) 4.10% 2.24%(b)
Expenses, including
distribution fees.............. 1.47% 1.31% 1.17% 1.05% 1.03%(b) 2.07% 1.91%(b)
Expenses, excluding
distribution fees.............. 1.32% 1.16% 1.05% .95% .93%(b) 1.32% 1.16%(b)
Net investment income......... 5.51% 5.49% 4.94% 6.71% 6.95%(b) 4.91% 4.89%(b)
Portfolio turnover rate........ 173% 254% 209% 228% 137% 173% 254%
</TABLE>

<TABLE>
<CAPTION>
AVERAGE AMOUNT OF
BORROWINGS: AMOUNT OF DEBT AVERAGE AMOUNT OF AVERAGE NUMBER OF DEBT PER SHARE
OUTSTANDING AT END DEBT OUTSTANDING SHARES OUTSTANDING OUTSTANDING DURING
PERIOD ENDED OF PERIOD (000) DURING PERIOD (000) DURING PERIOD (000) PERIOD
- -------------------------------- ------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
June 30, 1996................. $ 9,008 $15,626 $ 4,550 $3.43
June 30, 1995................. 19,872 9,130 6,389 1.43
June 30, 1994................. 8,300 18,840 10,234 1.84
June 30, 1993................. 24,386 34,892 13,517 2.58
June 30, 1992................. 20,109 9,939 13,458 .74
</TABLE>

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

<TABLE>
<S> <C>
(a) Commencement of investment operations.
(b) Annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) Commencement of offering of Class C shares.
(e) Figures are actual and not rounded to nearest thousand.
(f) Total return does not consider the effect 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 one full year are not annualized.
</TABLE>

<TABLE>
<C> <S>
* Effective February 28, 1995, BlackRock Financial Management, Inc. succeeded BlackRock
Financial Management, L.P. as subadviser of the Fund.
</TABLE>

5
<PAGE>
HOW THE FUND INVESTS

INVESTMENT OBJECTIVE AND POLICIES

THE INVESTMENT OBJECTIVE OF THE FUND IS TO PROVIDE LOW VOLATILITY OF NET
ASSET VALUE AND HIGH MONTHLY INCOME. THE FUND SEEKS TO ACHIEVE THIS OBJECTIVE BY
INVESTING UNDER NORMAL
CIRCUMSTANCES AT LEAST 65% OF ITS TOTAL ASSETS IN FIXED-INCOME U.S. GOVERNMENT
SECURITIES, INCLUDING U.S. TREASURY BILLS, NOTES, BONDS AND OTHER DEBT
SECURITIES ISSUED BY THE U.S. TREASURY, AND OBLIGATIONS ISSUED OR GUARANTEED BY
THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, INCLUDING, BUT NOT
LIMITED TO, GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA), FEDERAL NATIONAL
MORTGAGE ASSOCIATION (FNMA) AND FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)
SECURITIES. NEITHER THE VALUE NOR THE YIELD OF THE FUND'S SHARES OR OF THE U.S.
GOVERNMENT SECURITIES WHICH MAY BE INVESTED IN BY THE FUND IS GUARANTEED BY THE
U.S. GOVERNMENT. There can be no assurance that the Fund will be able to achieve
its investment objective. See "Investment Objective and Policies" in the
Statement of Additional Information.

WITH RESPECT TO THE REMAINING 35% OF ITS ASSETS, THE FUND MAY INVEST IN,
AMONG OTHER PRIVATELY ISSUED INSTRUMENTS, FIXED RATE AND ADJUSTABLE RATE
MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND CORPORATE DEBT
SECURITIES RATED AAA BY STANDARD & POOR'S RATINGS GROUP (S&P) OR AAA BY MOODY'S
INVESTORS SERVICE (MOODY'S) AND MONEY MARKET INSTRUMENTS OF A COMPARABLE
SHORT-TERM RATING. UP TO 20% OF THE FUND'S TOTAL ASSETS MAY BE INVESTED IN
SECURITIES WHICH ARE UNRATED BUT DEEMED TO BE OF COMPARABLE CREDIT QUALITY BY
THE FUND'S INVESTMENT ADVISER. UP TO 10% OF THE FUND'S TOTAL ASSETS MAY BE
INVESTED IN FOREIGN SECURITIES, INCLUDING MORTGAGE-BACKED SECURITIES AND
ASSET-BACKED SECURITIES ISSUED BY FOREIGN ENTITIES WHICH ARE OF COMPARABLE
CREDIT QUALITY. The Fund may also engage in various hedging strategies,
including utilizing derivatives, to increase investment return and/or protect
against interest rate changes and thus maintain the stability of its net asset
value. See "Hedging and Return Enhancement Strategies" below.

THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY WHICH MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940
(THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NON-FUNDAMENTAL MAY BE
CHANGED BY THE TRUSTEES.

The Fund's net asset value per share may increase or decrease for many
reasons. These include increases and decreases in the market prices of the
Fund's portfolio securities, the success or failure (and the associated costs)
of investment strategies employed by the investment adviser in seeking to
achieve the Fund's investment objective, and the payment (whether in cash or
shares) of dividends and distributions.

Market prices of portfolio securities change in response to changes in
market interest rates generally, with the prices of securities having a longer
maturity or duration being more volatile than those having a shorter maturity or
duration; changes in differentials in yields among various kinds of U.S.
Government securities; and changes in the creditworthiness or perceived
creditworthiness of the issuer. Market price volatility also arises from certain
terms of specific securities, such as the length of time to the next coupon
reset date, the payment characteristics and the dollar-weighted average life.
Certain types of securities (especially mortgage- and asset-backed instruments)
may have less predictable cashflows and may have longer or shorter effective
maturities, and thus

6
<PAGE>

greater price volatility, than anticipated at the time they were purchased. See
"Other Investments and Policies--Risk Factors Relating to Investing in
Mortgage-Backed and Asset-Backed Securities" below.

Investment strategies employed by the investment adviser result from its
continuous evaluation of the appropriate composition of the portfolio as a
whole. The investment adviser's efforts to change or modify the portfolio
composition are made in response to (i) cash inflows and outflows resulting from
purchases and redemptions, (ii) current market conditions and (iii) the
investment adviser's view of future market developments. The investment adviser
may employ certain strategies, such as options, futures and derivative
instruments, which may magnify or minimize the volatility of the Fund's net
asset value per share depending in large measure on the success of the
investment adviser in correlating the investment strategies with actual market
developments. Specific risks associated with these instruments are discussed
under "Hedging and Return Enhancement Strategies" below.

The Fund seeks to achieve low volatility of net asset value by investing in
a diversified portfolio of securities which the investment adviser believes
will, in the aggregate, be resistant to significant fluctuations in market
value. The Fund will seek to achieve a volatility of net asset value that will
be similar to that of a portfolio that invests exclusively in fixed-income
securities of comparable credit quality with maturities of approximately two
years. The Fund expects that under normal circumstances the dollar-weighted
average life (or period until the next reset date) of the Fund's portfolio
securities will be approximately five years. There can be no assurance, however,
that the Fund will achieve its investment objective or that the strategies used
by the investment adviser will not magnify rather than limit volatility or
decreases in value.

U.S. GOVERNMENT SECURITIES

UNDER NORMAL CIRCUMSTANCES, THE FUND WILL INVEST AT LEAST 65% OF ITS TOTAL
ASSETS IN FIXED-INCOME U.S. GOVERNMENT SECURITIES, INCLUDING U.S. TREASURY
SECURITIES, SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES OR
INSTRUMENTALITIES AND MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES.

U.S. TREASURY SECURITIES

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

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

THE FUND WILL INVEST IN SECURITIES ISSUED BY AGENCIES OF THE U.S. GOVERNMENT
OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT, INCLUDING, BUT NOT LIMITED TO,
GNMA, FNMA AND FHLMC SECURITIES. Obligations of GNMA, the Farmers Home
Administration and the Export-Import Bank are backed by the "full faith and
credit" of the United States. In the case of securities not backed by the "full
faith and credit" of the United States, the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment. Such
securities include obligations issued by FNMA and FHLMC, each of which may
borrow under certain conditions from the U.S. Treasury to meet its obligations,
although the U.S. Treasury is under no obligation to lend to FNMA

7
<PAGE>
or FHLMC. GNMA, FNMA and FHLMC investments may also include collateralized
mortgage obligations. See "Other Investments and Policies" below.

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

THE FUND WILL INVEST IN MORTGAGE-BACKED SECURITIES, INCLUDING THOSE
REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA,
FNMA AND FHLMC CERTIFICATES. The U.S. Government or the issuing agency
guarantees the payment of interest and principal of these securities. However,
the guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. See "Investment Objective and
Policies--U.S. Government Securities" in the Statement of Additional
Information. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal payments
from the mortgages underlying the certificate, net of certain fees. See "Other
Investments and Policies--Mortgage-Backed Securities" below.

In addition to GNMA, FNMA or FHLMC certificates, through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, the Fund may invest in mortgage pass-through
securities, where all interest payments go to one class of holders (Interest
Only Securities or IOs) and all principal payments go to a second class of
holders (Principal Only Securities or POs). These securities are commonly
referred to as mortgage-backed security strips or MBS strips. The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.

OTHER INVESTMENTS AND POLICIES

UNDER NORMAL CIRCUMSTANCES, THE FUND MAY INVEST UP TO 35% OF ITS TOTAL
ASSETS IN THE FOLLOWING PRIVATELY ISSUED INSTRUMENTS RATED AAA BY S&P OR AAA BY
MOODY'S OR HAVING A COMPARABLE SHORT-TERM RATING: (i) fixed rate and adjustable
rate mortgage-backed securities, including collateralized mortgage obligations,
multi-class pass-through securities and stripped mortgage-backed securities,
(ii) asset-backed securities, (iii) corporate debt securities (if unrated,
deemed to be of comparable credit quality by the Fund's investment adviser) and
(iv) money market instruments, including bank obligations, Eurodollar
certificates of deposit, obligations of savings institutions, fully insured
certificates of deposit and commercial paper (if unrated, issued by a company
having an outstanding debt issue rated AAA by S&P or Aaa by Moody's).

UP TO 20% OF THE FUND'S TOTAL ASSETS MAY BE INVESTED IN SECURITIES WHICH ARE
UNRATED BUT DEEMED BY THE FUND'S INVESTMENT ADVISER TO BE COMPARABLE IN CREDIT
QUALITY TO SECURITIES RATED AAA BY S&P OR AAA BY MOODY'S AND UP TO 10% OF ITS
TOTAL ASSETS MAY BE INVESTED IN FOREIGN SECURITIES OF COMPARABLE CREDIT QUALITY.
THE FUND MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL OBLIGATIONS AND IN
ZERO COUPON SECURITIES, INCLUDING ZERO COUPON U.S. TREASURY SECURITIES. If a
portfolio security held by the Fund is assigned a lower rating or ceases to be
rated or of comparable credit quality to securities rated AAA by S&P or Aaa by
Moody's, the investment adviser will reassess whether the Fund should continue
to hold the security.

8
<PAGE>
MORTGAGE-BACKED SECURITIES

Mortgage-Backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. The term Mortgage-Backed securities, as used herein,
includes adjustable rate mortgage securities and derivative mortgage products
such as collateralized mortgage obligations, stripped Mortgage-Backed securities
and other products described below.

There are currently three basic types of Mortgage-Backed securities: (i)
those issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, such as GNMA, FNMA and FHLMC, described under "U.S.
Government Securities" above; (ii) those issued by private issuers that
represent an interest in or are collateralized by Mortgage-Backed securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or Mortgage-Backed
securities without a government guarantee but usually having some form of
private credit enhancement.

ADJUSTABLE RATE MORTGAGE SECURITIES

Adjustable rate mortgage securities (ARMs) are pass-through mortgage
securities collateralized by mortgages with adjustable rather than fixed rates.
ARMs eligible for inclusion in a mortgage pool generally provide for a fixed
initial mortgage interest rate for either the first three, six, twelve,
thirteen, thirty-six or sixty scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes to a
designated benchmark index.

ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.

PRIVATE MORTGAGE PASS-THROUGH SECURITIES

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

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COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES

Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multi-class pass-through securities are equity interests in a trust composed of
Mortgage Assets. Payments of principal and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multi-class pass-through securities.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing. The issuer of a series of CMOs may elect to be treated as a
Real Estate Mortgage Investment Conduit (REMIC). All future references to CMOs
shall also be deemed to include REMICs.

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

The Fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.

In reliance on rules and on interpretations of the Securities and Exchange
Commission (SEC), the Fund's investments in certain qualifying CMOs and REMICs
are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Investment Objective and
Policies--Other Investments" in the Statement of Additional Information. CMOs
and REMICs issued by an agency or instrumentality of the U.S. Government are
considered U.S. Government securities for purposes of this Prospectus.

STRIPPED MORTGAGE-BACKED SECURITIES

Stripped Mortgage-Backed securities or MBS strips are derivative multi-class
mortgage securities. In addition to MBS strips issued by agencies or
instrumentalities of the U.S. Government, the Fund may purchase MBS strips
issued by private originators of, or investors in, mortgage loans,

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including depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing. See "Investment Objective and
Policies--U.S. Government Securities-- Mortgage-Related Securities Issued by
U.S. Government Agencies and Instrumentalities" above.

ASSET-BACKED SECURITIES

The securitization techniques used to develop Mortgage-Backed securities are
also applied to a broad range of other assets. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a pay-through structure similar to the CMO structure. The
Fund may invest in these and other types of Asset-Backed securities that may be
developed in the future.

New instruments and variations of existing Mortgage-Backed securities and
Asset-Backed securities continue to be developed. The Fund may invest in any
such instruments or variations as may be developed, to the extent consistent
with its investment objective and policies and applicable regulatory
requirements.

TYPES OF CREDIT ENHANCEMENT

Mortgage-Backed securities and Asset-Backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
those securities may contain elements of credit support, which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in a security. The Fund will not pay any additional fees for credit
support, although the existence of credit support may increase the price of a
security.

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES

The yield characteristics of Mortgage-Backed and Asset-Backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if the Fund
purchases such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Moreover, slower than expected prepayments may

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<PAGE>

effectively change a security which was considered short- or intermediate-term
at the time of purchase into a long-term security. Long-term securities
generally lead to increased volatility of net asset value because they tend to
fluctuate more widely in response to changes in interest rates than short- or
intermediate-term securities.The Fund may invest a portion of its assets in
derivative Mortgage-Backed securities such as Stripped Mortgage-Backed
securities which are highly sensitive to changes in prepayment and interest
rates. The investment adviser will seek to manage these risks (and potential
benefits) by diversifying its investments in such securities and through hedging
techniques.

Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Asset-Backed
securities, although less likely to experience the same prepayment rates as
Mortgage-Backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-Backed securities and Asset-Backed securities may decrease
in value as a result of increases in interest rates and may benefit less than
other fixed income securities from declining interest rates because of the risk
of prepayment.

Asset-Backed securities involve certain risks that are not posed by
Mortgage-Backed securities, resulting mainly from the fact that Asset-Backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.

CORPORATE DEBT SECURITIES

The Fund may purchase corporate debt securities rated AAA by S&P or Aaa by
Moody's or, if unrated, deemed to be of comparable credit quality by the Fund's
investment adviser. These debt securities may have adjustable or fixed rates of
interest and in certain instances may be secured by assets of the issuer.
Adjustable rate corporate debt securities may have features similar to those of
adjustable rate Mortgage-Backed securities, but corporate debt securities,
unlike Mortgage-Backed securities, are not subject to prepayment risk other than
through contractual call provisions which generally impose a penalty for
prepayment. Fixed rate debt securities may also be subject to call provisions.

FOREIGN SECURITIES

The Fund may invest up to 10% of its total assets in foreign securities,
including Mortgage-Backed securities and Asset-Backed securities issued by
foreign entities.

Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers. Such risks
include fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. See "Investment Objective and Policies--Other
Investments--Foreign Securities" in the Statement of Additional Information.

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MUNICIPAL OBLIGATIONS

The Fund may invest up to 5% of its total assets in Municipal Obligations
(consisting of Municipal Bonds, Municipal Notes and Municipal Commercial Paper)
rated in the highest rating category by Moody's or S&P. The Municipal
Obligations in which the Fund may invest include "zero coupon" Municipal
Obligations. Any Municipal Obligation which depends directly or indirectly on
the credit of the U.S. Government shall be considered to have the highest rating
by Moody's and S&P. See "Investment Objective and Policies--Other
Investments--Municipal Obligations" in the Statement of Additional Information.

ZERO COUPON SECURITIES

The Fund may invest up to 5% of its total assets in "zero coupon"
securities, including U.S. Treasury bills, notes and bonds which have been
stripped of their unmatured interest coupons and receipts or which are
certificates representing interests in such stripped debt obligations and
coupons. Such securities are purchased at a discount from their face amount,
giving the purchaser the right to receive their full value at maturity. A zero
coupon security pays no interest to its holder during its life. See "Investment
Objective and Policies--Other Investments--Zero Coupon Treasury Securities" in
the Statement of Additional Information.

ILLIQUID SECURITIES

The Fund may hold up to 15% of its net assets in illiquid securities
including repurchase agreements having maturities of more than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities issued pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act) and privately placed commercial paper that have a
readily available market are not considered illiquid for purposes of this
limitation. Investing in Rule 144A securities could, however, have the effect of
increasing the level of Fund illiquidity to the extent that qualified
institutional buyers become, for a limited time, uninterested in purchasing
these securities. The Fund intends to comply with any applicable state blue sky
laws restricting the Fund's investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. The Fund will also treat POs and IOs as illiquid securities
except for POs and IOs issued by U.S. Government agencies and instrumentalities,
whose liquidity is monitored by the investment adviser subject to the
supervision of the Trustees.

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

When the Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that the Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid. See "Investment Objective and Policies--Other
Investments-- Illiquid Securities" in the Statement of Additional Information.

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REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
security. The Fund's repurchase agreements will at all times be fully
collateralized in an amount at least equal to the resale price. The instruments
held as collateral are valued daily, and if the value of the instruments
declines, the Fund will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Fund may incur a loss. In the event of a default or bankruptcy of a seller, the
Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of such collateral upon a default in the obligations to
repurchase are less than the repurchase price, the Fund will suffer a loss. See
"Investment Objective and Policies--Other Investment Strategies--Repurchase
Agreements" in the Statement of Additional Information.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS

From time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis or may purchase or sell
securities on a forward commitment basis. When such transactions are negotiated,
the price is fixed at the time of the commitment, but delivery and payment can
take place a month or more after the date of the commitment. While the Fund will
only purchase securities on a when-issued, delayed delivery or forward
commitment basis with the intention of acquiring the securities, the Fund may
sell the securities before the settlement date, if it is deemed advisable. At
the time the Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, the Fund will record the transaction and thereafter
reflect the value, each day, of such security in determining the net asset value
of the Fund. The securities so purchased are subject to market fluctuations and
no interest accrues to the purchaser during the period between purchase and
settlement. At the time of delivery of the securities, the value may be more or
less than the purchase price. An increase in the percentage of the Fund's assets
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis may increase the volatility of the Fund's net asset
value. At the time the Fund enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash, U.S.
Government securities or other liquid, unencumbered assets, marked-to-market
daily, having a value equal to or greater than the Fund's purchase commitments
will be established and maintained with the custodian. Subject to this
requirement, the Fund may purchase securities on such basis without limit. See
"Investment Objective and Policies--Other Investment Strategies--When-Issued and
Delayed Delivery Securities" in the Statement of Additional Information.

HEDGING AND RETURN ENHANCEMENT STRATEGIES

The Fund may engage in various investment techniques, including utilizing
derivatives, reverse repurchase agreements, dollar rolls, purchasing and selling
call and put options, entering into interest rate futures contracts and related
options, engaging in short-selling, purchasing Eurodollar instruments, interest
rate transactions and lending portfolio securities in an effort to increase
investment return and/or to hedge against changes in interest rates and thus
maintain the stability of its net asset value.

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SHORT SALES
The Fund may make short sales of securities. A short sale is a transaction
in which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. The Fund expects to make short sales
both as a form of hedging to offset potential declines in long positions in
similar securities and in order to maintain portfolio flexibility.

When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.

Until the Fund replaces a borrowed security, the Fund will maintain daily a
segregated account, containing cash or U.S. Government securities, at such a
level that (i) the amount deposited in the account plus any cash or U.S.
Government securities deposited with the broker as collateral will equal the
current value of the security sold short and (ii) the amount deposited in the
segregated account plus the amount deposited with the broker as collateral will
not be less than the market value of the security at the time it was sold short.
Depending on arrangements made with the broker-dealer from which it borrowed the
security regarding payment over of any payments received by the Fund on such
security, the Fund may not receive any payments (including interest) on its
collateral deposited with such broker-dealer.

If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a capital
gain. Although the Fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited.

The Fund will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
net assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.

LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund (subject to
certain notice provisions described in the Statement of Additional Information),
and are at all times secured by cash, U.S. Government securities or other high
grade debt securities, which are maintained in a segregated account pursuant to
applicable regulations and that are at least equal to the market value,
determined daily, of the loaned securities.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Fund may use reverse repurchase agreements and dollar rolls as part of
its investment strategy. Reverse repurchase agreements involve sales by the Fund
of portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.

The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date from the same party. During the roll period, the Fund forgoes principal and
interest paid on the securities. The Fund is compensated by the difference
between

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the current sales price and the forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.

The Fund will establish a segregated account with its custodian in which it
will maintain cash, U.S. Government securities or other liquid, unencumbered
assets, marked-to-market daily, equal in value to its obligations in respect to
reverse repurchase agreements and dollar rolls. Reverse repurchase agreements
and dollar rolls involve the risk that the market value of the securities
retained by the Fund may decline below the price of the securities the Fund has
sold but is obligated to repurchase under the agreement. In the event the buyer
of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.

Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage and are considered borrowings by the Fund for purposes of the
percentage limitations applicable to borrowings. Under normal market conditions
the Fund expects to engage in reverse repurchase agreements and dollar rolls
with respect to approximately 15% of the Fund's total assets.

OPTIONS TRANSACTIONS
The Fund may purchase put and call options on U.S. Government securities and
Mortgage-Backed securities. The Fund may purchase a put option in an effort to
protect the value of a security which it owns against a substantial decline in
market value (protective puts), if the Fund's investment adviser believes that a
defensive posture is warranted for a portion of the portfolio.

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

The Fund may purchase call options on securities it intends to acquire in
order to hedge against an anticipated market appreciation in the price of the
underlying securities at limited risk and with a limited cash outlay. If the
market price does rise as anticipated, the Fund will benefit from that rise but
only to the extent that the rise exceeds the premiums paid. If the anticipated
rise does not occur or if it does not exceed the premium, the Fund will bear the
expense of the option premiums and transaction costs without gaining an
offsetting benefit.

The Fund's ability to purchase put and call options may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code) for qualification as a regulated investment company. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.

All options purchased by the Fund will be traded on a U.S. securities
exchange or will be purchased or sold by a primary government securities dealer
recognized by the Federal Reserve Bank of New York (OTC options). While
exchange-traded options are in effect guaranteed by The Options Clearing
Corporation, the Fund relies on the dealer from whom it purchases an OTC option
to perform if the option is exercised. The Fund's investment adviser monitors
the creditworthiness of dealers with whom the Fund enters into OTC option
transactions under the general supervision of the Fund's Trustees. See
"Investment Objective and Policies--Other Investment Strategies-- Option and
Futures Transactions" in the Statement of Additional Information.

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TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS THEREON
The Fund may purchase and sell interest rate futures contracts on U.S.
Government securities and Mortgage-Backed securities (futures contracts) that
are traded on U.S. commodity exchanges. A futures contract on such securities,
other than GNMAs which are cash settled, is an agreement to purchase or sell an
agreed amount of such securities at a set price for delivery on an agreed future
date. The Fund may purchase a futures contract as a hedge against an anticipated
decline in interest rates, and resulting increase in market price, in securities
the Fund intends to acquire. The Fund may sell a futures contract as a hedge
against an anticipated increase in interest rates, and resulting decline in
market price, in securities the Fund owns.

The Fund may also purchase call and put options on futures contracts on U.S.
Government securities and Mortgage-Backed securities that are traded on U.S.
commodity exchanges. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the option
exercise period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a long
position if the option is a put). Upon the exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated cash balance in the
writer's futures margin account which represents the amount by which the market
price of the futures contract, at exercise, exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.

The Fund's ability to enter into transactions in futures contracts and
options thereon may be limited by the Internal Revenue Code's requirements for
qualification as a regulated investment company. The Fund will not purchase an
option if, as a result of such purchase, more than 20% of its total assets would
be invested in premiums for options and options on futures. In addition, the
Fund may not purchase or sell futures contracts or options thereon for
non-hedging purposes if immediately thereafter the sum of the amount of initial
margin deposits on the Fund's futures positions and premiums paid for options
thereon would exceed 5% of the liquidation value of the Fund's total assets,
after taking into account unrealized profits and unrealized losses on any such
contracts the Fund has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount may
be excluded in computing such 5% limitation. However, there is no overall
limitation on the percentage of the Fund's assets which may be subject to a
hedge position.

The Fund will purchase and sell futures contracts primarily to hedge its
actual or anticipated holdings of U.S. Government and Mortgage-Backed
securities. There is generally an inverse relationship between interest rates
and bond prices. Generally, when interest rates increase, bond prices will
decline; when interest rates decline, bond prices will increase. For example, if
the Fund holds cash reserves or short-term debt securities at a time that
interest rates are expected to decline, the Fund might purchase futures
contracts as a hedge against anticipated increases in the price of the U.S.
Government securities that the Fund intends to acquire (an anticipatory hedge).

CHARACTERISTICS AND PURPOSE OF OPTIONS ON FUTURES CONTRACTS ON U.S.
GOVERNMENT SECURITIES AND MORTGAGE-BACKED SECURITIES. The Fund will purchase put
options on futures contracts primarily to hedge its portfolio of U.S. Government
and Mortgage-Backed securities against the risk of rising interest rates, and
the consequent decline in the prices of U.S. Government and Mortgage-Backed
securities it owns. The Fund will purchase call options on futures contracts to
hedge the

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Fund's portfolio against a possible market advance at a time when the Fund is
not fully invested in U.S. Government and Mortgage-Backed securities (other than
Treasury Bills).

RISK CONSIDERATIONS. Participation in the options or futures markets
involves investment risks and transaction costs to which the Fund would not be
subject absent the use of these strategies. If the adviser's predictions of
movements in the direction of the securities and interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, futures contracts and options on futures contracts include (1)
dependence on the 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 being hedged; (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities; (4) the absence of a liquid secondary market for any
particular instrument at any time; (5) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences; and (6) the possible
inability of the Fund 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 the security at a disadvantageous time, due to the requirement that the
Fund maintain "cover" or segregate securities in connection with hedging
transactions. See "Investment Objective and Policies" and "Taxes, Dividends and
Distributions" in the Statement of Additional Information.

There is no assurance that a liquid secondary market will exist for futures
contracts and options thereon in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. In addition,
limitations imposed by an exchange or board of trade on which futures contracts
are traded may compel or prevent the Fund from closing out a contract which may
result in reduced gain or increased loss to the Fund. The absence of a liquid
market in futures contracts might cause the Fund to make or take delivery of the
underlying securities at a time when it may be disadvantageous to do so.

EURODOLLAR INSTRUMENTS
The Fund may also from time to time purchase Eurodollar instruments traded
on the Chicago Mercantile Exchange. Eurodollar instruments are essentially U.S.
dollar denominated futures contracts or options thereon which are linked to the
London Interbank Offered Rate (LIBOR). Eurodollar futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and sellers to obtain
a fixed rate for borrowings. The Fund intends to use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which many
interest rate swaps are linked. See "Interest Rate Transactions."

INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest, e.g., an exchange of floating rate payments for fixed rate
payments. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.

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

BORROWING

The Fund may borrow from banks and enter into reverse repurchase agreements
or dollar rolls up to 33 1/3% of the value of its total assets (computed at the
time the loan is made) to take advantage of investment opportunities and for
temporary, extraordinary or emergency purposes. See "Reverse Repurchase
Agreements and Dollar Rolls" above. The Fund may pledge up to 33 1/3% of its
total assets to secure these borrowings. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings. If the Fund borrows to invest in securities, any investment gains
made on the securities in excess of interest paid on the borrowing will cause
the net asset value of the Fund's 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 Fund, the net asset value of the Fund's shares will
decrease faster than would otherwise be the case. This is the speculative
characteristic known as "leverage." Under normal market conditions, the Fund
expects to engage in borrowing with respect to approximately 15% of the Fund's
total assets.

PORTFOLIO TURNOVER

The Fund has no fixed policy with respect to portfolio turnover. The Fund
does not expect to trade in securities for short-term gain. The portfolio
turnover rates for the fiscal years ended June 30, 1996 and 1995 were 173% and
254%, respectively, due to market volatility. The investment adviser expects
that, under normal circumstances, the Fund's annual portfolio turnover rate will
not exceed 200%. The portfolio turnover rate is calculated by dividing the
lesser of sales or purchases of portfolio securities by the average monthly
value of the Fund's portfolio securities, excluding securities having a maturity
at the date of purchase of one year or less. While the Fund will pay commissions
in connection with its options and futures transactions, the other securities in
which the Fund invests are generally traded on a "net" basis with dealers acting
as principals for their own account without a stated commission. Nevertheless,
high portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs which will be borne directly by the
Fund. See "Portfolio Transactions" in the Statement of Additional Information.

INVESTMENT RESTRICTIONS

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

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<PAGE>
HOW THE FUND IS MANAGED

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

For the fiscal year ended through June 30, 1996, total expenses as a
percentage of average net assets of the Class A and Class C shares were 1.47%
and 2.07%, respectively. See "Financial Highlights."

MANAGER

PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. It was incorporated in May 1987 under the laws of the State of Delaware.
See "Manager" in the Statement of Additional Information.

For the fiscal year ended June 30, 1996, the Fund paid management fees to
PMF of .50 of 1% of the Fund's average net assets.

As of July 31, 1996, PMF served as the manager of 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 26 closed-end investment companies with aggregate assets of
approximately $52 billion.

UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS AFFAIRS. See
"Manager" in the Statement of Additional Information. PMF is a subsidiary of
Prudential Securities Incorporated and a wholly-owned subsidiary of The
Prudential Insurance Company of America (Prudential), a major diversified
insurance and financial services company.

SUBADVISER

UNDER A SUBADVISORY AGREEMENT AMONG THE FUND, PMF AND BLACKROCK FINANCIAL
MANAGEMENT, INC. (BFM OR THE SUBADVISER), BFM FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND'S PORTFOLIO AND IS
COMPENSATED BY PMF FOR ITS SERVICES AT THE RATE OF .25 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS. PMF continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and supervises
BFM's performance of such services.

For the fiscal year ended June 30, 1996, the Subadviser received advisory
fees of .25 of 1% of the Fund's average daily net assets from PMF.

The Subadviser is a Delaware corporation and a wholly-owned subsidiary of
PNC Asset Management Group, Inc., which is a wholly-owned subsidiary of PNC
Bank, N.A. (PNC), a commercial bank. PNC is a wholly-owned indirect subsidiary
of PNC Bank Corp., a bank holding company. The Subadviser serves as investment
adviser to fixed-income investors in the U.S. and overseas

20
<PAGE>

through funds and private accounts with combined total assets of over $41
billion, of which approximately $16 billion represent investment company assets.

Scott Amero, an employee of the Subadviser, is responsible for the
day-to-day management of the Fund's portfolio. Mr. Amero has managed the Fund's
portfolio since its inception in September 1991 and has been employed by BFM as
a portfolio manager since 1990. Prior to joining BlackRock in 1990, Mr. Amero
was a vice-president in Fixed Income Research at The First Boston Corporation.
BFM, however, applies a team approach to portfolio management and several
BlackRock professionals, including Robert Kapito and Keith Anderson, are
responsible for the longer term strategies and major transactions for the Fund's
portfolio.

DISTRIBUTOR

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

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

Under the Class C Plan, 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, as is the case
under the Class A Plan. If the Distributor's expenses under the Class C Plan
exceed its distribution and service fees, the Fund will not be obligated to pay
any additional expenses under the Class C Plan. If the Distributor's expenses
under the Class C Plan are less than such distribution and service fees, it will
retain its full fees and realize a profit.

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

21
<PAGE>

Plan to .15 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending June 30, 1997.

UNDER THE CLASS C PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS C SHARES AT AN ANNUAL RATE
OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS C SHARES. The Class C
Plan provides for the payment to Prudential Securities of (i) an asset-based
sales charge of up to .75 of 1% of the average daily net assets of the Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending June 30, 1997. Prudential Securities also receives contingent
deferred sales charges from certain redeeming shareholders. See "Shareholder
Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."

For the fiscal year ended June 30, 1996, the Fund paid distribution expenses
of .15% and .75% of the average daily net assets of the Class A and Class C
shares, respectively. The Fund records all payments made under the Plans as
expenses in the calculation of net investment income.

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

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

In addition to distribution and service fees paid by the Fund under the
Class A 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 who distribute shares of the Fund. Such payments may be
calculated by reference to the net asset value of the shares sold by such
persons or otherwise.

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

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

22
<PAGE>
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.

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

In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.

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

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

PORTFOLIO TRANSACTIONS

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

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

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

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

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<PAGE>
HOW THE FUND VALUES ITS SHARES

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

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

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

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

HOW THE FUND CALCULATES PERFORMANCE

FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "YIELD" AND "TOTAL RETURN"
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) IN
ADVERTISEMENTS AND SALES LITERATURE. YIELD AND TOTAL RETURN ARE CALCULATED
SEPARATELY FOR CLASS A AND CLASS C SHARES. These figures are based on historical
earnings and are not intended to indicate future performance. The "yield" refers
to the income generated by an investment in the Fund over a one-month or 30-day
period. This income is then "annualized" that is, the amount of income generated
by the investment during that 30-day period is assumed to be generated each
30-day period for twelve periods and is shown as a percentage of the investment.
The income earned on the investment is also assumed to be reinvested at the end
of the 30-day period. The "total return" shows how much an investment in the
Fund would have increased (decreased) over a specified period of time, (i.e.,
one, five or ten years or since inception of the Fund) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. The "aggregate" total
return reflects actual performance over a stated period of time. "Average
annual" total return is a hypothetical rate of return that, if achieved
annually, would have produced the same aggregate total return if performance had
been constant over the entire period. "Average annual" total return smooths out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges. Neither "average annual" total return nor
"aggregate" total return takes into account any federal or state income taxes
which may be payable upon

24
<PAGE>

redemption. The Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc., Morningstar Publications,
Inc., other industry publications, business periodicals and market indices. See
"Performance Information" in the Statement of Additional Information. Further
performance information will be contained in the Fund's annual and semi-annual
reports to shareholders which may be obtained without cost. See "Shareholder
Guide-- Shareholder Services--Reports to Shareholders."

TAXES, DIVIDENDS AND DISTRIBUTIONS

TAXATION OF THE FUND

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

The Fund may incur foreign income taxes in the event that it does invest in
foreign securities. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.

Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked to
market" for federal income tax purposes; that is, treated as having been sold at
market value. Sixty percent of any gain or loss recognized on these "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. See
"Taxes, Dividends and Distributions" in the Statement of Additional Information.

TAXATION OF SHAREHOLDERS

Any dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term capital
gains to the shareholders, whether or not reinvested and regardless of the
length of time a shareholder has owned his or her shares. The maximum long-term
capital gains rate for individuals is currently 28%. The maximum long-term
capital gains rate for corporate shareholders currently is the same as the
maximum tax rate for ordinary income.

The Fund has obtained an opinion of counsel to the effect that the exchange
of Class C shares for Class A shares does not constitute a taxable event for
federal income tax purposes. However, such opinion is not binding on the
Internal Revenue Service.

Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.

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<PAGE>
WITHHOLDING TAXES

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

DIVIDENDS AND DISTRIBUTIONS

THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends paid by the Fund with respect to each class of shares, to the
extent any dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
will bear its own distribution charges, generally resulting in lower dividends
for Class C shares. Distributions of net capital gains, if any, will be paid in
the same amount for Class A and Class C shares. See "How the Fund Values its
Shares." For federal income tax purposes, the Fund had a capital loss
carryforward at June 30, 1996 of approximately $3,822,000 of which $588,000
expires in 2001, $2,044,000 expires in 2002, $742,000 expires in 2003, and
$448,000 expires in 2004. Accordingly, no capital gains distributions are
expected to be paid to shareholders until net gains have been realized in excess
of such amount.

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

WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE,
THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF
YOUR INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS WHEN MAKING YOUR PURCHASES.

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<PAGE>
GENERAL INFORMATION

DESCRIPTION OF SHARES

THE FUND, ORGANIZED AS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF
MASSACHUSETTS, IS A TRUST FUND OF THE TYPE COMMONLY KNOWN AS A "MASSACHUSETTS
BUSINESS TRUST." THE FUND'S ACTIVITIES ARE SUPERVISED BY ITS TRUSTEES. THE FUND
IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES OF BENEFICIAL INTEREST,
$.01 PAR VALUE PER SHARE, DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS
B AND CLASS C. ON NOVEMBER 28, 1995, ALL OUTSTANDING CLASS B SHARES WERE
CONVERTED TO CLASS A SHARES. THE FUND CURRENTLY OFFERS ONLY CLASS A AND CLASS C
SHARES. Each class of shares represents an interest in the same assets of the
Fund and are identical in all respects except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan and each class has a different exchange privilege. See "How
the Fund is Managed--Distributor." The Trustees are empowered by the Declaration
of Trust to issue additional series of shares and classes within those series.

The Trustees may increase or decrease the number of authorized shares.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of beneficial
interest of each class is equal as to earnings, assets and voting privileges;
except as noted above, each class bears the expenses related to the distribution
of its shares. There are no conversion, preemptive or other subscription rights
in connection with the shares. In the event of liquidation, each share of the
Fund is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of Class C shares are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.

THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS.
SHAREHOLDERS HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A
VOTE OF 10% OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE
REMOVAL OF ONE OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.

Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligation of the
Fund beyond the amount of their investment in the Fund, which is not the case
with a corporation. The Declaration of Trust of the Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written obligation, contract, instrument
or undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not individually bound thereunder.

ADDITIONAL INFORMATION

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

27
<PAGE>
SHAREHOLDER GUIDE

HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC,
OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. In addition, Class A
shares may be purchased through a dealer which has entered into a selected
dealer agreement with the Fund's Distributor. The minimum initial investment for
Class A shares is $2,500 and $5,000 for Class C shares. The minimum subsequent
investment is $100 for both classes. All minimum investment requirements are
waived for certain retirement and employee savings plans or custodial accounts
for the benefit of minors. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Services."

THE PURCHASE PRICE IS THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT OF
AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE
WHICH, AT YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS
A SHARES) OR (II) ON A DEFERRED BASIS (CLASS C SHARES). SEE "ALTERNATIVE
PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."

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

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

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

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

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

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

In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies The BlackRock Government
Income Trust, Class A or Class C shares, your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum initial amount which may be invested by
wire is $2,500 for Class A shares and $5,000 for Class C shares and the minimum
subsequent amount which may be invested by wire is $1,000 for both classes.

28
<PAGE>

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

<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
--------------------------- -------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales .30 of 1% (Currently being Initial sales charge waived or
charge of 3% of the public charged at a rate of .15 reduced for certain purchases
offering price of 1%)

CLASS C Maximum CDSC of 1% of the 1% (Currently being
lesser of the amount charged at a rate of .75
invested or the redemption of 1%)
proceeds on redemptions
made within one year of
purchase
</TABLE>

Both classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class is
subject to different sales charges and distribution and/or service fees and (ii)
each class has exclusive voting rights on any matter submitted to shareholders
that relates solely to its distribution arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of the other class.

The two classes also have separate exchange privileges. See "How to Exchange
Your Shares" below. The income attributable to each class and the dividends
payable on the shares of each class will be reduced by the amount of the
distribution fee of each class. Class B and Class C shares bear the expenses of
a higher distribution fee which will generally cause them to have higher expense
ratios and to pay lower dividends than the Class A shares.

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

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

29
<PAGE>
The following illustrations are provided to assist you in determining which
method of purchase best suits your individual circumstances:

If you qualify for a reduced sales charge, you might elect to purchase Class
A shares because a similar sales charge reduction is not available for purchases
of Class C shares and because Class A shares are subject to a lower distribution
and service fee than are Class C shares. However, because the initial sales
charge for Class A shares is deducted at the time of purchase, you would not
have all of your funds invested initially.

If you do not qualify for a reduced initial sales charge and expect to
maintain your investment in the Fund for a long period of time you might also
elect to purchase Class A shares because over time the accumulated continuing
distribution and service fees of Class C shares will exceed the initial sales
charge plus distribution and service fees of Class A shares. Again, however, you
must weigh this consideration against the fact that not all of your funds will
be invested initially. Furthermore, the ongoing distribution and service fees
applicable to Class C shares will be offset to the extent any return is realized
on the additional funds. However, there can be no assurance that any return will
be realized on the additional funds.

On the other hand, you might determine that it is more advantageous to have
all of your funds invested initially, although they are subject to a
distribution and service fee and, for a one-year period, a contingent deferred
sales charge. For example, based on current fees and expenses, you would have to
hold your investment over six years for the Class C distribution and service fee
to exceed the initial sales charge plus distribution and service fees of Class A
shares. In this example, if you intend to maintain your investment in the Fund
for more than six years, you should consider purchasing Class A shares. This
example does not take into account the time value of money which further reduces
the impact of the distribution and service fee on the investment, fluctuations
in net asset value, the effect of the return on the investment over this period
of time or redemptions to which the contingent deferred sales charge is
applicable.

CLASS A SHARES

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

<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------------------------- --------------- --------------- --------------------
<S> <C> <C> <C>
$0 to $49,999 3.00% 3.09% 2.90%
$50,000 to $99,999 2.50 2.56 2.40
$100,000 to $249,999 2.00 2.04 1.90
$250,000 to $499,999 1.50 1.52 1.45
$500,000 to $999,999 1.00 1.01 0.95
$1,000,000 to $2,499,999 0.50 0.50 0.45
Over $2,500,000 0.25 0.20 0.20
</TABLE>

Selling dealers may be deemed to be underwriters, as that term is defined
under federal securities laws.

REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other

30
<PAGE>
Prudential Mutual Funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) may be aggregated to determine the
applicable reduction. See "Purchase and Redemption of Fund Shares--Reduced
Initial Sales Charges--Class A Shares" in the Statement of Additional
Information.

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

PruArray and SmartPath Plans. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, including pension,
profit-sharing, stock-bonus or other employee benefit plans under Section 401 of
the Code and deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Code that participate in Prudential's PruArray and SmartPath
Programs (benefit plan recordkeeping services) (hereafter referred to as a
PruArray or SmartPath Plan); provided that the plan has at least $1 million in
existing assets or 250 eligible employees or participants. The term "existing
assets" for this purpose includes stock issued by a PruArray or SmartPath Plan
sponsor and shares of non-money market Prudential Mutual Funds and shares of
certain unaffiliated non-money market mutual funds that participate in the
PruArray or SmartPath Program (Participating Funds). "Existing assets" also
include shares of money market funds acquired by exchange from a Participating
Fund.

Special Rules Applicable to Retirement Plans. After a Benefit Plan, PruArray
Plan or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.

Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Tranfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (d) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (e) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of Benefit Plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end fund
sponsored by the financial adviser's previous employer (other than a money

31
<PAGE>

market or other no-load fund which imposes a distribution or service fee of .25
of 1% or less) and (iii) the financial adviser served as the client's broker on
the previous purchase.

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

CLASS C SHARES

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

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

IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.

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

PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU

32
<PAGE>
INDICATE OTHERWISE. Such payment may be postponed or the right of redemption
suspended at times (a) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (d) during any other period when the SEC, by order, so permits;
provided that applicable rules and regulations of the SEC shall govern as to
whether the conditions prescribed in (b), (c) or (d) exist.

PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.

REDEMPTION IN KIND. If the 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 SEC.
Securities will be readily marketable and will be valued in the same manner as
in a regular redemption. See "How the Fund Values its Shares." If your shares
are redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder.

INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any 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 contingent deferred sales charge or CDSC paid in
connection with such redemption will be credited (in shares) to your account.
(If less than a full repurchase is made, the credit will be on a pro rata
basis.) You must notify the Fund's Transfer Agent, either directly or through
Prudential Securities, at the time the repurchase privilege is exercised to
adjust your account for the CDSC you previously paid. Thereafter, any
redemptions will be subject to the CDSC applicable at the time of the
redemption. See "Contingent Deferred Sales Charges" below. Exercise of the
repurchase privilege will generally not affect the federal tax treatment of any
gain realized upon redemption. However, if the redemption was made within a 30
day period of the repurchase and if the redemption resulted in a loss, some or
all of the loss, depending on the amount reinvested, may not be allowed for
federal income tax purposes.

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class C shares made within one year of purchase will be
subject to a contingent deferred sales charge or CDSC of 1%. The CDSC will be
deducted from the redemption proceeds and reduce the amount paid to you. 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

33
<PAGE>
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor."

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

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of shares made during the preceding one-year period
and then of amounts representing the cost of shares held beyond the applicable
one-year CDSC period.

For example, assume you purchased 100 Class C shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class C shares through
dividend reinvestment. Six months after 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 C shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the value of the reinvested
dividend shares and the amount which represents appreciation ($260). Therefore,
$240 of the $500 redemption proceeds ($500 minus $260) would be charged at a
rate of 1%.

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.

HOW TO EXCHANGE YOUR SHARES

AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A AND
CLASS C SHARES OF THE FUND MAY BE EXCHANGED FOR CLASS A AND CLASS C SHARES,
RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. CLASS C
SHAREHOLDERS MAY ALSO EXCHANGE THEIR SHARES FOR SHARES OF PRUDENTIAL SPECIAL
MONEY MARKET FUND, INC. ON THE BASIS OF THE RELATIVE NAV. NO SALES CHARGE WILL
BE IMPOSED AT THE TIME OF THE EXCHANGE. ANY APPLICABLE CDSC PAYABLE UPON THE
REDEMPTION OF CLASS C SHARES EXCHANGED WILL BE THAT IMPOSED BY THE FUND IN WHICH
SHARES WERE INITIALLY PURCHASED AND WILL BE CALCULATED FROM THE FIRST DAY OF THE
MONTH AFTER THE INITIAL PURCHASE, EXCLUDING THE TIME SHARES WERE HELD IN A MONEY
MARKET FUND. CLASS C SHARES MAY NOT BE EXCHANGED INTO MONEY MARKET FUNDS OTHER
THAN PRUDENTIAL SPECIAL MONEY MARKET FUND, INC. EXCHANGES (OTHER THAN PURSUANT
TO THE SPECIAL EXCHANGE PRIVILEGE DISCUSSED BELOW) WILL BE TREATED AS A
REDEMPTION AND PURCHASE FOR FEDERAL INCOME TAX PURPOSES. SEE "SHAREHOLDER
INVESTMENT ACCOUNT--EXCHANGE PRIVILEGE" IN THE STATEMENT OF ADDITIONAL
INFORMATION.

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

34
<PAGE>

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

IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES OR THROUGH A DEALER WHICH
HAS ENTERED INTO A SELECTED DEALER AGREEMENT WITH THE DISTRIBUTOR, YOU MUST
EXCHANGE YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.

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

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

IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE
OF SHARES OF THE FUND MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE
EXCHANGES BY MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC. AT THE
ADDRESS NOTED ABOVE.

SPECIAL EXCHANGE PRIVILEGE. The following special exchange privilege applies
only to Class C shareholders who qualify to purchase Class A shares at NAV. See
"Alternative Purchase Plan--Class A Shares--Reduction and Waiver of Initial
Sales Charges" above. Under this exchange privilege, amounts representing any
Class C shares (which are not subject to a CDSC) held in such a shareholder's
account will be automatically exchanged for Class A shares on a quarterly basis,
unless the shareholder elects otherwise. Eligibility for this exchange privilege
will be calculated on the business day prior to the date of the exchange.
Amounts representing Class C shares which are not subject to a CDSC include the
following: (1)amounts representing 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 C shares and (3)amounts representing Class C shares held
beyond the applicable CDSC period. Class C shareholders must notify the Transfer
Agent either directly or through Prudential Securities or Prusec that they are
eligible for this special exchange privilege.

The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of size and/or frequency engaged in
by one or more accounts acting in concert or otherwise, that have or may have an
adverse effect on the ability of the Subadviser to manage the portfolio. The
determination that such exchanges or activity may have an adverse effect and the
determination to reject any exchange order shall be in the discretion of the
Manager and the Subadviser.

The Exchange Privilege is not a right and may be suspended, terminated or
modified at any time.

35
<PAGE>
SHAREHOLDER SERVICES

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

. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge unless you indicate otherwise on your initial application form. You may
direct the Transfer Agent in writing not less than 5 full business days prior to
the record date to have subsequent dividends and/or distributions sent in cash
rather than reinvested.

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

. TAX DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.

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

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

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

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

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

TAXABLE BOND FUNDS EQUITY FUNDS

Prudential Diversified Bond Fund, Inc.
Prudential Allocation Fund
Prudential Government Income Fund, Inc.
Balanced Portfolio
Prudential Government Securities Trust
Strategy Portfolio
Short-Intermediate Term Series
Prudential Distressed Securities
Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Equity Income Fund
Prudential Structured Maturity Fund, Inc.
Prudential Jennison Fund, Inc.
Income Portfolio
Prudential Multi-Sector Fund,
Inc.
The BlackRock Government Income Trust

Prudential Small Companies Fund,
Inc.
Prudential Utility Fund, Inc.
TAX-EXEMPT BOND FUNDS

Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth
Equity Fund
Prudential California Municipal Fund
California Series
MONEY MARKET FUNDS

California Income Series
Prudential Municipal Bond Fund
. Taxable Money Market Funds
High Yield Series
Prudential Government Securities
Trust
Insured Series
Money Market Series
Intermediate Series
U.S. Treasury Money Market
Series
Prudential Municipal Series Fund
Prudential Special Money Market
Fund, Inc.
Florida Series
Money Market Series
Hawaii Income Series
Prudential MoneyMart Assets, Inc.
Maryland Series
. Tax-Free Money Market Funds
Massachusetts Series
Prudential Tax-Free Money Fund,
Inc.
Michigan Series
Prudential California Municipal
Fund
New Jersey Series
California Money Market
Series
New York Series
Prudential Municipal Series Fund
North Carolina Series
Connecticut Money Market
Series
Ohio Series
Massachusetts Money Market
Series
Pennsylvania Series
New Jersey Money Market
Series
Prudential National Municipals Fund, Inc.

New York Money Market Series
. Command Funds
GLOBAL FUNDS

Command Money Fund
Prudential Europe Growth Fund, Inc.
Command Government Fund
Prudential Global Genesis Fund, Inc.
Command Tax-Free Fund
Prudential Global Limited Maturity Fund, Inc.
. Institutional Money Market
Funds
Prudential Intermediate Global Income Fund, Inc.
Prudential Institutional
Liquidity Portfolio, Inc.
Prudential Natural Resources Fund, Inc.
. Institutional Money Market
Series

Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
Prudential World Fund, Inc.
Global Series
The Global Government Plus Fund, Inc.

The Global Total Return Fund, Inc.

A-1

<PAGE>

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

THE BLACKROCK
GOVERNMENT
TABLE OF CONTENTS INCOME TRUST

FUND HIGHLIGHTS......................... 2
Risk Factors and Special
Characteristics....................... 2
FUND EXPENSES........................... 4
FINANCIAL HIGHLIGHTS.................... 5
HOW THE FUND INVESTS.................... 6 PROSPECTUS
Investment Objective and Policies..... 6 AUGUST 29, 1996
Other Investments and Policies........ 8
Hedging and Return Enhancement
Strategies.............................. 14
Investment Restrictions............... 19
HOW THE FUND IS MANAGED................. 20
Manager............................... 20
Subadviser............................ 20
Distributor........................... 21
Portfolio Transactions................ 23
Custodian and Transfer and Dividend
Disbursing Agent........................ 23
HOW THE FUND VALUES ITS SHARES.......... 24
HOW THE FUND CALCULATES PERFORMANCE..... 24
TAXES, DIVIDENDS AND DISTRIBUTIONS...... 25
GENERAL INFORMATION..................... 27
Description of Shares................. 27
Additional Information................ 27
SHAREHOLDER GUIDE....................... 28
How to Buy Shares of the Fund......... 28
Alternative Purchase Plan............. 29
How to Sell Your Shares............... 32
How to Exchange Your Shares........... 34
Shareholder Services.................. 36
THE PRUDENTIAL MUTUAL FUND FAMILY....... A-1

- -------------------------------------------
MF 152A 444 5604

CUSIP Nos.: Class A: 09247Y208 [ART]
Class C: 09247Y109

<PAGE>

THE BLACKROCK GOVERNMENT INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 29, 1996

The BlackRock Government Income Trust (the Fund) is an open-end,
diversified, management investment company whose investment objective is to
provide low volatility of net asset value and high monthly income. The Fund
seeks to achieve its objective by investing at least 65% of its total assets in
fixed-income U.S. Government securities, including U.S. Treasury Bills, Notes,
Bonds and other debt securities issued by the U.S. Treasury, and obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
The Fund may also invest in high quality debt securities rated AAA by Standard &
Poor's Ratings Group or Aaa by Moody's Investors Service, including fixed rate
and adjustable rate mortgage-backed securities, asset-backed securities,
corporate debt securities and money market instruments of a comparable
short-term rating. The Fund may engage in short selling and use leverage,
including reverse repurchase agreements and dollar rolls, which entail
additional risks not usually associated with a government fund. An investment in
this Fund is neither insured nor guaranteed by the U.S. Government and there can
be no assurance that the Fund's investment objective will be achieved. See
"Investment Objective and Policies."

The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated August 29, 1996, a copy of
which may be obtained from the Fund upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ---------------
<S> <C> <C>
Investment Objective and Policies.................................... B-2 6
Investment Restrictions.............................................. B-14 18
Trustees and Officers................................................ B-16 19
Manager.............................................................. B-19 19
Subadviser........................................................... B-20 19
Distributor.......................................................... B-21 20
Portfolio Transactions............................................... B-24 23
Purchase and Redemption of Fund Shares............................... B-25 28
Shareholder Investment Account....................................... B-28 37
Net Asset Value...................................................... B-32 24
Taxes, Dividends and Distributions................................... B-32 25
Performance Information.............................................. B-34 24
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants.......................................................... B-36 23
Financial Statements................................................. B-37 --
Independent Auditors' Report......................................... B-48 --
Appendix--General Investment Information............................. A-1 --
Appendix--Information Relating to The Prudential..................... A-2 --
</TABLE>

<PAGE>
INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide low volatility of net
asset value and high monthly income. There can be no assurance that the Fund's
investment objective will be achieved.

U.S. GOVERNMENT SECURITIES

The Fund will invest at least 65% of its total assets in fixed-income
securities issued by the U.S. Government, its agencies or instrumentalities.
Such securities include:

(1) U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are direct obligations
of the U.S. Government and, as such, are backed by the "full faith and
credit" of the United States.

(2) Securities issued by agencies and instrumentalities of the U.S.
Government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing such obligations
are the Federal Housing Administration, the Government National Mortgage
Association (GNMA), the Department of Housing and Urban Development, the
Export-Import Bank, the Farmers Home Administration, the General Services
Administration, the Maritime Administration and the Small Business
Administration. The maturities of such obligations range from three months
to 30 years.

(3) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but whose issuing
agency or instrumentality may borrow from the U.S. Treasury under certain
conditions, to meet its obligations. Among the agencies and
instrumentalities issuing such obligations are the Tennessee Valley
Authority, the Federal National Mortgage Association (FNMA), the Federal
Home Loan Mortgage Corporation (FHLMC), the U.S. Postal Service and the
Federal Home Loan Bank.

(4) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but which are
backed by the credit of the issuing agency or instrumentality. Among the
agencies and instrumentalities issuing such obligations is the Federal Farm
Credit System.

Neither the value nor the yield of the Fund's shares or of the U.S.
Government securities which may be invested in by the Fund are guaranteed by the
U.S. Government. Such values and yield will fluctuate with changes in prevailing
interest rates and other factors. Generally, as prevailing interest rates rise,
the value of any U.S. Government securities held by the Fund will fall. Such
securities with longer maturities generally tend to produce higher yields and
are subject to greater market fluctuation as a result of changes in interest
rates than debt securities with shorter maturities. The Fund is not limited as
to the maturities of the U.S. Government securities in which it may invest. See
"How the Fund Invests--Investment Objective and Policies" in the Prospectus.

MORTGAGE-BACKED SECURITIES

As discussed in the Prospectus, the mortgage-backed securities purchased by
the Fund evidence an interest in a specific pool of mortgages. Such securities
may be issued by GNMA, FNMA and FHLMC.

GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the Housing Act), authorized GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans insured by

B-2
<PAGE>
the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 (FHA Loans), or guaranteed by the Veterans' Administration
under the Servicemen's Readjustment Act of 1944, as amended (VA Loans), or by
pools of other eligible mortgage loans. The Housing Act provides that the full
faith and credit of the U.S. Government is pledged to the payment of all amounts
that may be required to be paid under the guarantee. In order to meet its
obligations under such guarantee, GNMA is authorized to borrow from the U.S.
Treasury with no limitations as to amount.

The GNMA Certificates will represent a pro rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-
to four-family housing units. Legislative changes may be proposed from time to
time in relation to the Department of Housing and Urban Development which, if
adopted, could alter the viability of investing in GNMAs. As of the date of this
Statement of Additional Information, no such legislation has been enacted. The
Fund's investment adviser may re-evaluate the Fund's investment objective and
policies if any such legislative proposals were adopted.

FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
Government agency to provide supplemental liquidity to the mortgage market and
was transformed into a shareholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to purchase
home mortgage loans from many capital market investors that may not ordinarily
invest in mortgage loans directly, thereby expanding the total amount of funds
available for housing.

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

Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; and (iii) adjustable rate mortgage loans.

FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the FHLMC Act). FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently consists of the purchase of

B-3
<PAGE>
first lien, conventional, residential mortgage loans and participation interests
in such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC Certificates.

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

FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one-to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.

OTHER INVESTMENTS
ZERO COUPON TREASURY SECURITIES

The Fund may purchase "zero coupon" Treasury securities. These are U.S.
Treasury bills, notes and bonds which have been stripped of their unmatured
interest coupons and receipts or which are certificates representing interests
in such stripped debt obligations and coupons. Such securities are purchased at
a discount from their face amount giving the purchaser the right to receive
their full value at maturity. A zero coupon security pays no interest to its
holder during its life. Its value to an investor consists of the difference
between its face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its face value
(sometimes referred to as a "deep discount" price).

The interest rate on such securities is automatically compounded and paid
out at maturity. While such compounding at a constant rate eliminates the risk
of receiving lower yields upon reinvestment of interest if prevailing interest
rates decline, the owner of a zero coupon security will be unable to participate
in higher yields upon reinvestment of interest received if prevailing interest
rates rise. For this reason, zero coupon securities are subject to substantially
greater market price fluctuations during periods of changing prevailing interest
rates than are comparable debt securities which make current distributions of
interest. Current federal tax law generally requires that a holder (such as the
Fund) of a zero coupon security accrue a portion of the discount at which the
security was purchased as income each year even though the Fund receives no
interest payments in cash on the security during the year.

Currently the only U.S. Treasury security issued without coupons is the
Treasury bill. However, a number of banks and brokerage firms have separated
(stripped) the principal portions from the coupon portions of the U.S. Treasury
bonds and notes and sold them separately in the form of receipts or certificates
representing undivided interests in these instruments. These instruments are
generally held by a bank in a custodial or trust account.

B-4
<PAGE>
MUNICIPAL OBLIGATIONS

The municipal obligations in which the Fund may invest include municipal
bonds, municipal notes and municipal commercial paper rated in the highest
rating category by Moody's Investors Service (Moody's) or Standard & Poor's
Ratings Group (S&P) and "zero coupon" municipal obligations. Any municipal
obligation which depends directly or indirectly on the credit of the U.S.
Government shall be considered to have the highest rating by Moody's and S&P.

Municipal bonds and municipal notes are debt obligations of a state, its
cities, municipalities and municipal agencies which generally have maturities,
at the time of their issuance, of either one year or more (bonds) or from six
months to three years (notes). Municipal commercial paper consists of short-term
obligations of municipalities which may be issued at a discount and is sometimes
referred to as short-term discount notes.

The two principal classifications of municipal bonds, notes and commercial
paper are "general obligation" and "revenue" bonds, notes or commercial paper.
General obligation bonds, notes or commercial paper are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest. Issuers of general obligation bonds, notes or commercial paper include
a state, its counties, cities, towns and other governmental units. Revenue
bonds, notes or commercial paper are payable from the revenues derived from a
particular facility or class of facilities or, in some cases, from specific
revenue sources. Revenue bonds, notes or commercial paper are issued for a wide
variety of purposes, including the financing of electric, gas, water and sewer
systems and other public utilities; industrial development and pollution control
facilities; single and multifamily housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.

Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively called
"lease obligations") of municipalities. State and local governments issue lease
obligations to acquire equipment and facilities.

Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation" clauses
that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing "non-appropriation" clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.

FOREIGN SECURITIES

The Fund may invest up to 10% of its total assets in foreign securities,
including mortgage-backed securities and asset-backed securities issued by
foreign entities, although under current market conditions the Fund does not
expect to invest in foreign securities.

B-5
<PAGE>
Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers. Such risks
include fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. With respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.

There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign securities
markets (other than Japan), while growing in volume, have, for the most part,
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable U.S. companies. Transaction costs on foreign securities markets are
generally higher than in the United States and settlement procedures are often
not as regularized as in the United States. There is generally less government
supervision and regulation of exchanges, brokers and issuers than there is in
the United States. The Fund may have greater difficulty taking appropriate legal
action with respect to foreign investments in foreign courts than with respect
to domestic issuers in U.S. courts.

Dividend and interest income from foreign securities will generally be
subject to withholding taxes by the country in which the issuer is located and
the Fund will not be able to pass through to its shareholders foreign tax
credits or deductions with respect to these taxes.

COLLATERALIZED MORTGAGE OBLIGATIONS

Certain issuers of mortgage-backed obligations (CMOs), including certain
CMOs that have elected to be treated as Real Estate Mortgage Investment Conduits
(REMICs), are not considered investment companies pursuant to a rule recently
adopted by the Securities and Exchange Commission (SEC), and the Fund may invest
in the securities of such issuers without the limitations imposed by the
Investment Company Act of 1940 (the Investment Company Act) on investments by
the Fund in other investment companies. In addition, in reliance on an earlier
SEC interpretation, the Fund's investments in certain other qualifying CMOs,
which cannot or do not rely on the rule, are also not subject to the limitation
of the Investment Company Act on acquiring interests in other investment
companies. In order to be able to rely on the SEC's interpretation, these CMOs
must be unmanaged, fixed asset issuers, that (a) invest primarily in
mortgage-backed securities, (b) do not issue redeemable securities, (c) operate
under general exemptive orders exempting them from all provisions of the
Investment Company Act and (d) are not registered or regulated under the
Investment Company Act as investment companies. To the extent that the Fund
selects CMOs or REMICs that cannot rely on the Rule or do not meet the above
requirements, the Fund may not invest more than 10% of its assets in all such
entities and may not acquire more than 3% of the voting securities of any single
such entity.

ILLIQUID SECURITIES

The Fund may hold up to 15% of its net assets in repurchase agreements which
have a maturity of longer than seven days or in other illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market (either within or outside of the United States) or legal or
contractual restrictions on resale. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual

B-6
<PAGE>
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them, resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.

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

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

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

B-7
<PAGE>
OTHER INVESTMENT STRATEGIES
OPTION AND FUTURES TRANSACTIONS

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

PURCHASING CALL AND PUT OPTIONS. The Fund may purchase listed and OTC call
and put options in amounts equalling up to 10% of its total assets. The Fund may
purchase put options on securities which it holds (or has the right to acquire)
in its portfolio only to protect itself against a decline in the value of the
security. If the value of the underlying security were to fall below the
exercise price of the put purchased in an amount greater than the premium paid
for the option, the Fund would incur no additional loss. In addition, the Fund
may sell a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such a sale would result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put option which is sold.
Any such gain or loss could be offset in whole or in part by a change in the
market value of the underlying security. If a put option purchased by the Fund
expired without being sold or exercised, the premium would be lost.

RISKS OF OPTIONS TRANSACTIONS. In the event of the bankruptcy of a broker
through which the Fund engages in options transactions, the Fund 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. Similarly, in the event of the bankruptcy of the writer of an
OTC option purchased by the Fund, the Fund could experience a loss of all or
part of the value of the option. Transactions are entered into by the Fund only
with brokers or financial institutions deemed creditworthy by the investment
adviser.

The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.

INTEREST RATE FUTURES CONTRACTS. As a purchaser of an interest rate futures
contract (futures contract), the Fund incurs an obligation to take delivery of a
specified amount of the obligation underlying the futures contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Fund incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.

The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the investment adviser anticipates that interest
rates may rise and, concomitantly, the price of U.S. Government or other debt
securities falls, the Fund may sell a futures contract. If declining interest
rates are anticipated, the Fund may purchase a futures contract to protect
against a potential increase in the price of U.S. Government or other debt
securities the Fund intends to purchase. Subsequently, appropriate U.S.
Government or other debt securities may be purchased by the Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by

B-8
<PAGE>
offsetting sales of contracts. In addition, futures contracts will be bought or
sold in order to close out a short or long position in a corresponding futures
contract.

Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of security and the same delivery date. If the sale price exceeds
the offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting sale
price, the purchaser would realize a loss. There is no assurance that the Fund
will be able to enter into a closing transaction.

When the Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction, an "initial margin" of cash or U.S. Government
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the Exchanges.

Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a broker's client but is, rather, a good faith deposit on the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked to market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or U.S. Government
securities, called "variation margin," in the name of the broker, which are
reflective of price fluctuations in the futures contract. Currently, interest
rate futures contracts can be purchased on debt securities such as U.S. Treasury
Bills and Bonds, Eurodollar instruments, U.S. Treasury Notes with maturities
between 6 1/2 and 10 years, GNMA Certificates and Bank Certificates of Deposit.

OPTIONS ON FUTURES CONTRACTS. The Fund may purchase call and put options on
futures contracts which are traded on an Exchange and enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid), and the writer the obligation, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the term of
the option. Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by the
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
the time of exercise exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.

The Fund will purchase options on futures contracts for identical purposes
to those set forth above for the purchase of a futures contract (purchase of a
call option or sale of a put option) and the sale of a futures contract
(purchase of a put option or sale of a call option), or to close out a long or
short position in futures contracts. If, for example, the investment adviser
wished to protect against an increase in interest rates and the resulting
negative impact on the value of a portion of its U.S. Government securities
portfolio, it might purchase a put option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the investment adviser seeks to hedge.

B-9
<PAGE>
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may
sell a futures contract to protect against the decline in the value of U.S.
Government securities and other debt securities held by the Fund. However, it is
possible that the futures market may advance and the value of securities held in
the Fund's portfolio may decline. If this were to occur, the Fund would lose
money on the futures contracts and also experience a decline in value in its
portfolio securities. However, while this could occur for a very brief period or
to a very small degree, over time the market prices of the securities of a
diversified portfolio will tend to move in the same direction as the prices of
futures contracts.

If the Fund purchases a futures contract to hedge against the increase in
value of U.S. Government securities it intends to buy, and the value of such
securities decreases, then the Fund 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.

In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such is defined by the Commodity Futures
Trading Commission, either: (1) a substantial majority (i.e., approximately 75%)
of all anticipatory hedge transactions (transactions in which the Fund 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 Fund; (b) cash held by the Fund; (c) cash proceeds due to the Fund
on investments within thirty days; (d) the margin deposited on the contracts;
and (e) any unrealized appreciation in the value of the contracts.

If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account maintained at its Custodian,
cash, U.S. Government securities or other liquid, unencumbered assets,
marked-to-market daily, 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 Fund
to purchase the same contract at a price no higher than the price at which the
short position was established.

In addition, if the Fund holds a long position in a futures contract, it
will hold cash, U.S. Government securities or other liquid, unencumbered assets,
marked-to-market daily, equal to the purchase price of the contract (less the
amount of initial or variation margin on deposit) in a segregated account
maintained for the Fund by its Custodian. Alternatively, the Fund 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
Fund.

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 Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Fund has insufficient cash, it may be
disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the instruments underlying interest rate futures contracts it holds
at a time when it is disadvantageous to do so. The inability to close out
options and futures positions could also have an adverse impact on the Fund's
ability to effectively hedge its portfolio.

In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund 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

B-10
<PAGE>
deposits with the broker. Transactions are entered into by the Fund only with
brokers or financial institutions deemed creditworthy by the investment adviser.

While the futures contracts and options transactions to be engaged in by the
Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
One such risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities is 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 Fund's
portfolio securities. Another such risk is that prices of interest rate futures
contracts may not move in tandem with the changes in prevailing interest rates
against which the Fund 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 Fund 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 investors in futures contracts elect to make or take
delivery of underlying securities rather than engage in closing 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
requirements in the futures markets are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures market
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 U.S. Government securities 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.

There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. In addition,
limitations imposed by an exchange or board of trade on which futures contracts
are traded may compel or prevent the Fund from closing out a contract which may
result in reduced gain or increased loss to the Fund. The absence of a liquid
market in futures contracts might cause the Fund to make or take delivery of the
underlying securities at a time when it may be disadvantageous to do so.

Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
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
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contracts or underlying U.S. Government securities.

REPURCHASE AGREEMENTS

When cash may be available for only a few days, it may be invested by the
Fund in repurchase agreements until such time as it may otherwise be invested or
used for payments of obligations of the Fund. These agreements, which may be
viewed as a type of secured lending by the Fund, typically involve the
acquisition by the Fund of debt securities from a selling financial institution

B-11
<PAGE>

such as a bank or broker-dealer. The agreement provides that the Fund will sell
back to the institution, and that the institution will repurchase, the
underlying security (collateral) at a specified price and at a fixed time in the
future, usually not more than seven days from the date of purchase. The
collateral will be maintained in a segregated account and will be
marked-to-market daily to determine that the value of the collateral, as
specified in the agreement, does not decrease below the purchase price plus
accrued interest. If such decrease occurs, additional collateral will be
requested and, when received, added to the account to maintain full
collateralization. The Fund will accrue interest from the institution until the
time when the repurchase is to occur. Although such date is deemed by the Fund
to be the maturity date of a repurchase agreement, the maturities of securities
subject to repurchase agreements are not subject to any limits.

While repurchase agreements involve certain risks not associated with direct
investment in debt securities, the Fund follows procedures designed to minimize
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
financial condition will be continually monitored by the investment adviser
subject to procedures established by the Trustees. In addition, as described
above, the value of the collateral underlying the repurchase agreement will be
at least equal to the resale price. In the event of a default or bankruptcy by
a selling financial institution, the Fund will seek to liquidate such
collateral. However, the exercising of the Fund's right to liquidate such
collateral could involve certain costs or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Fund could suffer a loss. It is the current
policy of the Fund not to invest in repurchase agreements that do not mature
within seven days if any such investment, together with any other illiquid
assets held by the Fund, amounts to more than 15% of its net assets.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

From time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis--i.e., delivery and
payment can take place a month or more after the date of the transactions. The
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. While the Fund will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the Fund may sell the securities
before the settlement date, if it is deemed advisable. At the time the Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction and thereafter reflect the value,
each day, of such security in determining the net asset value of the Fund. At
the time of delivery of the securities, the value may be more or less than the
purchase price. The Fund will also establish a segregated account with the
Fund's custodian bank in which it will continuously maintain cash, U.S.
Government securities or other liquid, unencumbered assets, marked-to-market
daily, having a value equal to or greater than the Fund's purchase commitments.
The Fund may purchase securities on such basis without limit. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of the Fund's
net asset value. The investment adviser does not believe that the Fund's net
asset value or income will be adversely affected by the Fund's purchase of
securities on such basis.

SECURITIES LENDING

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund, and are at all
times secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations that are equal to at least the market
value, determined daily, of the loaned securities. The advantage of such loans
is that the Fund continues

B-12
<PAGE>
to receive the income on the loaned securities while at the same time earning
interest on the cash amounts deposited as 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 Fund on two business days' notice. If the borrower fails to deliver the
loaned securities within two days after receipt of notice, the Fund could 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 even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms deemed
by the Fund's investment adviser to be creditworthy and when the income which
can be earned from such loans justifies the attendant risks. Upon termination of
the loan, the borrower is required to return the securities to the Fund. Any
gain or loss in the market price during the loan period would inure to the Fund.
The creditworthiness of firms to which the Fund lends its portfolio securities
will be monitored on an ongoing basis by the investment adviser pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Trustees of the
Fund.

When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund will pay reasonable finders', administrative
and custodial fees in connection with a loan of its securities.

INTEREST RATE TRANSACTIONS

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

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

The Fund may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of

B-13
<PAGE>
loss with respect to interest rates swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the other
party to an interest rate swap defaults, the Fund's risk of loss consists of the
net amount of interest payments that the Fund is contractually entitled to
receive. Since interest rate swaps are individually negotiated, the Fund expects
to achieve an acceptable degree of correlation between its rights to receive
interest on its portfolio securities and its rights and obligations to receive
and pay interest pursuant to interest rate swaps.

INVESTMENT RESTRICTIONS

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

The Fund may not:

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

2. Make short sales of securities, or maintain a short position if, when
added together, more than 25% of the value of the Fund's net assets would be (i)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to this limitation.

3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks or through reverse repurchase agreements or
dollar rolls 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 and may pledge up to 33 1/3% of the value
of its total assets to secure such borrowings. For purposes of this restriction,
the purchase or sale of securities on a "when-issued" or delayed delivery basis,
the purchase and sale of futures contracts, the entry into reverse repurchase
agreements and dollar roll transactions and collateral arrangements with respect
thereto are not deemed to be a pledge of assets and neither such arrangements
nor the purchase or sale of futures contracts or the purchase and sale of
related options, nor obligations of the Fund to Trustees pursuant to deferred
compensation arrangements are deemed to be the issuance of a senior security.

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

5. Purchase securities, other than mortgage-backed securities, asset-backed
securities or obligations of the U.S. Government, its agencies or
instrumentalities, of any issuer having a record, together with predecessors, of
less than three years of continuous operations if, immediately after such
purchase, more than 5% of the Fund's total assets would be invested in such
securities.

6. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell mortgaged-backed securities, securities collateralized by
mortgages, securities which are

B-14
<PAGE>
secured by real estate, securities of companies which invest or deal in real
estate and publicly traded securities of real estate investment trusts. The Fund
may not purchase interests in real estate limited partnerships which are not
readily marketable.

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

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

9. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 10% of its total assets (determined at the
time of investment) would be invested in such securities, or except as part of a
merger, consolidation or other acquisition.

10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.

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

12. Purchase more than 10% of all outstanding voting securities of any one
issuer.

13. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon.

Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy.

However, in the event that the Fund's asset coverage for borrowings falls
below 300%, the Fund will take prompt action to reduce its borrowings as
required by applicable laws.

In order to comply with certain "blue sky" restrictions, the Fund will not,
as a matter of operating policy, (i) invest in securities of any issuer if, to
the knowledge of the Fund, any officer or Trustee of the Fund or the Fund's
Manager or Subadviser owns more than 1/2 of 1% of the outstanding securities of
such issuer, and such officers and Trustees who own more than 1/2 of 1% own in
the aggregate more than 5% of the outstanding securities of such issuer and
(ii) invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and in equity securities of issuers which are not readily
marketable.

The Trustees have proposed that Investment Restriction number 5 be
eliminated. This proposal will be submitted to shareholders at a special meeting
to be held on or about October 30, 1996. The Trustees have determined that if
the proposal is approved, a non-fundamental policy (a policy that may be changed
without shareholder approval) will be adopted which will state that in order to
comply with certain "blue sky" restrictions, the Fund will not as a matter of
operating policy: Purchase any security if as a result the Fund would then have
more than 5% of its total assets (determined at the time of the investment)
invested in securities of companies (including predecessors) having a record of
less than three years continuous operations, except that the Fund may invest in
the securities of any U.S. Government agency or instrumentality, and in any
security guaranteed by such an agency or instrumentality.

B-15
<PAGE>
TRUSTEES AND OFFICERS

Edward D. Beach (71) Trustee President and Director of BMC Fund, Inc., a
c/o Prudential Mutual closed-end investment company; formerly, Vice
Fund Management, Inc. Chairman of Broyhill Furniture Industries,
One Seaport Plaza Inc.; Certified Public Accountant; Secretary
New York, NY and Treasurer of Broyhill Family Foundation,
Inc.; Member of the Board of Trustees of Mars
Hill College; President, Treasurer and
Director of First Financial Fund, Inc. and The
High Yield Plus Fund, Inc.

Delayne D. Gold (58) Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY

Stanley E. Shirk (80) Trustee Certified Public Accountant and a former Senior
c/o Prudential Mutual Fund Partner of the accounting firm of KPMG Peat
Management, Inc. Marwick L.L.P.; former Management and
One Seaport Plaza Accounting Consultant for the Association of
New York, NY Bank Holding Companies, Washington, D.C. and
the Bank Administration Institute, Chicago,
IL; Director of The High Yield Plus Fund, Inc.

Stephen Stoneburn (53) Trustee President, Angus Integrated Media, Inc. (since
c/o Prudential Mutual Fund June 1995); formerly, Senior Vice President
Management, Inc. and Managing Director, Cowles Business Media
One Seaport Plaza (January 1993-June 1995); prior thereto,
New York, NY Senior Vice President (January 1991-December
1992) and Publishing Vice President (May
1989-December 1990) of Gralla Publications, a
division of United Newspapers, U.K.; formerly,
Senior Vice President of Fairchild
Publications, Inc.

Nancy H. Teeters (66) Trustee Economist; formerly, Vice President and Chief
c/o Prudential Mutual Fund Economist (March 1986-June 1990) of
Management, Inc. International Business Machines Corporation;
One Seaport Plaza Member of the Board of Governors of the Horace
New York, NY H. Rackham School of Graduate Studies of the
University of Michigan; Director, Inland Steel
Corporation (since July 1991) and First
Financial Fund, Inc.

Richard A. Redeker (53) President President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993), PMF; Executive Vice
New York, NY President, Director and Member of Operating
Committee (since October 1993), Prudential
Securities; Director (since October 1993) of
Prudential Securities Group, Inc. (PSG);
Executive Vice President, The Prudential
Investment Corporation (since July 1994);
Director (since January 1994) of Prudential
Mutual Fund Distributors, Inc. (PMFD) and
Prudential Mutual Fund Services, Inc. (PMFS);
formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc.
(September 1978-September 1993); President and
Director of The High Yield Plus Fund, Inc.
</TABLE>

B-16
<PAGE>

<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- ---------------------------- -------------- ------------------------------------------------
<S> <C> <C>
Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990),
One Seaport Plaza Director (since January 1989), Executive Vice
New York, NY President, Treasurer and Chief Financial
Officer (since June 1987) of PMF; Comptroller
of the Money Management Group of The
Prudential Insurance Company of America
(Prudential); Senior Vice President (since
March 1987) of Prudential Securities;
Executive Vice President, Treasurer and
Comptroller (since March 1991) of PMFD;
Director (since June 1987) of PMFS; Vice
President and Director of The Asia Pacific
Fund, Inc. (since May 1989).

Eugene S. Stark (38) Treasurer and First Vice President (since January 1990) of
One Seaport Plaza Principal PMF.
New York, NY Financial and
Accounting
Officer

Stephen M. Ungerman (43) Assistant First Vice President (since February 1993) of
One Seaport Plaza Treasurer PMF; Tax Director of the Money Management
New York, NY Group and the Private Asset Group of
Prudential (since March 1996); prior thereto,
Senior Tax Manager of Price Waterhouse LLP
(1981-January 1993).

S. Jane Rose (50) Secretary Senior Vice President (since January 1991) and
One Seaport Plaza Senior Counsel (since June 1987) of PMF;
New York, NY Senior Vice President and Senior Counsel of
Prudential Securities (since July 1992);
formerly, Vice President and Associate General
Counsel of Prudential Securities.

Ellyn C. Vogin (35) Assistant Vice President and Associate General Counsel of
One Seaport Plaza Secretary Prudential Securities and PMF (since March
New York, NY 1995); prior thereto, associated with the law
firm of Fulbright & Jaworski L.L.P.
</TABLE>

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

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

The Trustees have nominated a new slate of Trustees for the Fund which will
be submitted to shareholders at a special meeting to be held on or about October
30, 1996.

The Fund pays each of its Trustees who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $6,000, in
addition to certain out-of-pocket expenses.

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 and Shirk are
scheduled to retire on December 31, 1999 and 1997, respectively.

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 Trustees' fees which accrue interest at a rate equivalent to
the prevailing rate applicable to 90-day U.S. Treasury Bills at

B-17
<PAGE>
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 following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended June 30, 1996 to the Trustees who are not affiliated
with the Manager and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Board of any other investment companies
managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for the
calendar year ended December 31, 1995.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO TRUSTEES
- ---------------------- ------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Edward D. Beach, $6,000 None N/A $ 183,500(22)*(43)**
Trustee
Delayne Dedrick Gold, $6,000 None N/A $ 183,250(24)*(45)**
Trustee
Stanley E. Shirk, $6,000 None N/A $ 79,000(10)*(19)**
Trustee
Stephen Stoneburn, $6,000 None N/A $ 44,875(7)*(7)**
Trustee
Nancy H. Teeters, $6,000 None N/A $ 107,500(13)*(31)**
Trustee
</TABLE>

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

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

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

As of August 9, 1996, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the shares of beneficial interest of the
Fund.

As of August 9, 1996, the only beneficial owners, directly or indirectly, of
more than 5% of either class of shares of the Fund were: Prudential Bank and
Trust Co., D/F the Rollover IRA of Jacqueline L. Stayton, 10 West 5th Street,
Burlington, New Jersey who owned approximately 1,413 Class C shares (or
approximately 10% of the outstanding Class C shares); M. Christine Metrinko,
John S. Metrinko Ten Ent, 2510 SW 2nd Avenue, Okeechobee, Florida who owned
approximately 1,308 Class C shares (or approximately 10% of the outstanding
Class C shares); Nilda Barrerra, 11490 SW 57th Street, Miami, Florida who owned
approximately 1,599 Class C shares (or approximately 12% of the outstanding
Class C shares); Sidney H. Willuweit, Lila Willuweit JT TEN, 14812 Berry Valley
Road, Yelm, Washington who owned approximately 777 Class C shares (or
approximately 6% of the outstanding Class C shares); and Prudential Bank and
Trust Co., C/F The Rollover IRA of Lee I. Woodside, 140 St. NW, Marysville,
Washington who owned approximately 7,575 Class C shares (or approximately 55%
of the outstanding Class C shares).

As of August 9, 1996, Prudential Securities was record holder of 2,938,110
Class A shares (or approximately 76% of the outstanding Class A shares), 914
Class C shares (or approximately 7% of the outstanding Class C shares). In the
event of any meetings of shareholders, Prudential Securities will forward, or
cause the forwarding of, proxy material to the beneficial owner for which it is
the record holder.

B-18
<PAGE>
MANAGER

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

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

Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and lending of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
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 PMFS, the Fund's Transfer and Dividend
Disbursing Agent. The management services of PMF for the Fund are not exclusive
under the terms of the Management Agreement and PMF is free to, and does, render
management services to others.

For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. In the event the expenses of the Fund
(including the fees of the Manager but excluding interest, taxes, brokerage
commissions, distribution fees, litigation and indemnification expenses and
other extraordinary expenses) 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 shares of the Fund are then qualified
for offer and sale, the Manager will reduce its fee by the amount of such
excess, or, if such reduction exceeds the compensation payable to the Manager,
the Manager will pay to the Fund the amount of such reduction which exceeds the
amount of such compensation. Any such reductions or payments will be made
monthly and are subject to readjustment during the year. No such reductions were
required during the fiscal year ended June 30, 1996. Currently, the most
restrictive of such annual limitations is believed to be 2 1/2% of the Fund's
average daily net assets up to $30 million, 2% of the next $70 million and 1
1/2% of such assets in excess of $100 million.

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

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

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

B-19
<PAGE>
(c) the costs and expenses payable to BlackRock Financial Management, Inc.
(BFM) pursuant to the subadvisory agreement among the Fund, PMF and BFM (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 Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
business 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) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Securities and
Exchange Commission, registering the Fund as a broker or dealer and qualifying
its shares under state securities laws, including the preparation and printing
of the Fund's registration statements and prospectuses for such purposes, (k)
allocable communications expenses with respect to investor services and all
expenses of shareholders' and 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 PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Trustees of the Fund, including a majority of the
Trustees who are not parties to the contract or interested persons of any such
party as defined in the Investment Company Act, on April 10, 1996 and by the
shareholders of the Fund on February 23, 1995. For the fiscal years ended June
30, 1996, 1995 and 1994, PMF earned management fees of $217,733, $296,623 and
$488,157, respectively, of which it paid $108,867, $148,312 and $244,079,
respectively, to the Subadviser.

SUBADVISER

PMF and the Fund have entered into a Subadvisory Agreement with BlackRock
Financial Management, Inc. (BFM or the Subadviser), a Delaware corporation and a
wholly-owned subsidiary of PNC Asset Management Group, Inc. and a wholly-owned
indirect subsidiary of PNC Bank, N.A., a bank holding company organized under
the laws of the Commonwealth of Pennsylvania. BFM specializes in fixed-income,
mortgage-backed and asset-backed investing. Its proprietary analytic models
utilize resources and data generally not available to individual investors. See
"How the Fund is Managed--Subadviser" in the Prospectus.

The Subadvisory Agreement provides that BFM furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
BFM is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises BFM's performance of such

B-20
<PAGE>
services. Pursuant to the Subadvisory Agreement, PMF compensates BFM for its
services thereunder at the rate of .25 of 1% of the Fund's average daily net
assets.

The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such parties, as defined in the Investment Company Act, on April
10, 1996 and by the shareholders of the Fund on February 23, 1995.

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

DISTRIBUTOR

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

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

Prior to August 31, 1992, the Fund offered only one class of shares (the
Class A shares). On January 8, 1992, the Trustees, including a majority of the
Trustees who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Class A Plan or in any
agreement related to the Class A Plan (the Rule 12b-1 Trustees), at a meeting
called for the purpose of voting on each such Plan approved an amended and
restated plan of distribution of the Class A shares of the Fund (the Class A
Plan). On April 14, 1993, the Trustees, including a majority of the Rule 12b-1
Trustees, at a meeting called for the purpose of voting on the Class A Plan,
approved modifications of the Fund's Class A Plan and Distribution Agreement to
conform them with recent amendments to the NASD maximum sales charge rule
described below. As modified, the Class A Plan provides that (i) up to .25 of 1%
of the average daily net assets of the Class A shares may be used to pay for
personal service and the maintenance of shareholder accounts (service fee) and
(ii) total distribution fees (including the service fee of .25 of 1%) may not
exceed .30 of 1%. The Class A Plan was approved by the shareholders of the Fund
on February 27, 1992. On October 7, 1994, the Trustees, including a majority of
the Rule 12b-1 Trustees, at a meeting called for the purpose of voting thereon,
adopted a plan of distribution for the Class C shares (the Class C Plan). The
Class C Plan was approved by the sole shareholder of the Class C shares on
November 1, 1994. The Class C Plan provides that the Distributor may be paid a
distribution and service fee of up to 1% of the average daily net assets of the
Class C shares as compensation for its distribution activities in connection
with such shares. Unlike the Class A Plan, the Class C Plan is a compensation,
rather than a reimbursement, type plan. See "How the Fund is
Managed--Distributor" in the Prospectus. Each Plan was last approved by the
Trustees, including a majority of the Rule 12b-1 Trustees, on April 10, 1996.

B-21
<PAGE>

CLASS A PLAN. For the fiscal year ended June 30, 1995, PMFD and Prudential
Securities incurred distribution expenses in the amount of $63,897, all of which
was recovered through the distribution fee paid by the Fund to PMFD and
Prudential Securities under the Class A Plan. This amount was expended on
commission credits to Prudential Securities and Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, for payments of commissions and account
servicing fees to financial advisers.

In addition, for the fiscal year ended June 30, 1996, PMFD and Prudential
Securities received approximately $7,700 in initial sales charges with respect
to the sale of Class A shares.

CLASS C PLAN. For the fiscal year ended June 30, 1996, Prudential Securities
received $250 under the Class C Plan and spent approximately $1,170 in
distributing Class C shares. It is estimated that the latter amount was spent on
(i) payments of commissions and account servicing fees to financial advisers
(61.5% or $720) and (ii) printing and mailing of prospectuses (38.5% or $450).
Prudential Securities receives the proceeds of contingent deferred sales charges
paid by investors upon certain redemptions of Class C shares. See "Shareholder
Guide--How to Sell Your Shares--Contingent Deferred Sales Charges" in the
Prospectus. For the fiscal year ended June 30, 1996, the Distributor received
approximately $45 in contingent deferred sales charges with respect to Class C
shares.

The Class A 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 Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Trustees or by the vote of the holders of a majority
of the outstanding shares of the Fund on not more than 30 days' written notice
to any other party to the Plans. The Plans may be amended to increase materially
the amounts to be spent for the services described therein without approval by
the shareholders of the applicable class, and all material amendments are
required to be approved by the 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 after it is
terminated or not continued.

Pursuant to each Plan, the 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 Prudential Securities. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Trustees shall be committed to the Rule 12b-1 Trustees.

Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended. On November 3, 1995,
the Trustees approved the transfer of the Distribution Agreement for shares of
the Fund with PMFD to Prudential Securities, and on April 10, 1996, the
Trustees, including a majority of the Rule 12b-1 Trustees, approved a restated
distribution agreement between the Fund and Prudential Securities relating to
all of the Fund's classes of shares.

On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing

B-22
<PAGE>
properties and aircraft leasing ventures. The SEC Order (i) included findings
that PSI's conduct violated the federal securities laws and that an order issued
by the SEC in 1986 requiring PSI to adopt, implement and maintain certain
supervisory procedures had not been complied with; (ii) directed PSI to cease
and desist from violating the federal securities laws and imposed a $10 million
civil penalty; and (iii) required PSI to adopt certain remedial measures
including the establishment of a Compliance Committee of its Board of Directors.
Pursuant to the terms of the SEC settlement, PSI established a settlement fund
in the amount of $330,000,000 and procedures, overseen by a court approved
Claims Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.

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

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

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

B-23
<PAGE>
PORTFOLIO TRANSACTIONS

The Manager is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures contracts, for the Fund,
the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section, the
term "Manager" includes the Subadviser. The Fund does not normally incur any
brokerage commission expense on such transactions. The instruments purchased by
the Fund 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. Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities (or an affiliate thereof), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the Securities and
Exchange Commission. This limitation, in the opinion of the Fund, will not
significantly affect the Fund's ability to pursue its present investment
objective. However, in the future, in other circumstances, the Fund may be at a
disadvantage because of this limitation in comparison to other funds with
similar objectives but not subject to such limitations. The Fund will not deal
with Prudential Securities or its affiliates on a principal basis.

In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable under the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Manager may consider research and investment
services provided by brokers or dealers who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data and
research reports on particular companies and industries. Such services are used
by the Manager in connection with all of its investment activities, and some of
such services obtained in connection with the execution of transactions for the
Fund may be used in managing other investment accounts. Conversely, brokers,
dealers or futures commission merchants furnishing such services may be selected
for the execution of transactions for such other accounts, whose aggregate
assets are far larger than the Fund's, and the services furnished by such
brokers may be used by the Manager in providing investment management for the
Fund. While such services are useful and important in supplementing its own
research and facilities, the Manager believes that the value of such services is
not determinable and does not significantly reduce expenses. The Fund does not
reduce the advisory fee it pays to the Manager by any amount that may be
attributed to the value of such services. The Fund will not pay for research in
principal transactions.

Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased or sold during a comparable period
of time. This standard would allow Prudential Securities (or any affiliate) to
receive no more than the remuneration which would be expected to be received by
an

B-24
<PAGE>
unaffiliated broker or futures commission merchant in a commensurate
arm's-length transaction. Furthermore, the Trustees of the Fund, including a
majority of the noninterested Trustees, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to Prudential Securities (or any affiliate) are consistent with the
foregoing standard. In accordance with Section 11(a) under the Securities
Exchange Act of 1934, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to the Fund at least annually a statement setting forth
the total amount of all compensation retained by Prudential Securities from
transactions effected for the Fund during the applicable period. Brokerage and
futures transactions with Prudential Securities (or any affiliate) are also
subject to such fiduciary standards as may be imposed on Prudential Securities
(or any affiliate) by applicable law.

For the fiscal year ended June 30, 1996, the Fund did not pay any brokerage
commissions. For the fiscal years ended June 30, 1995 and 1994, the Fund paid
brokerage commissions of $4,215 and $9,750, respectively, none of which was paid
to Prudential Securities.

PURCHASE AND REDEMPTION OF FUND SHARES

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

Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees, (ii) each class
has exclusive voting rights with respect to any matter submitted to shareholders
that relates solely to its distribution arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of the other class and (iii) each class has a
different exchange privilege. See "Distributor" and "Shareholder Investment
Account--Exchange Privilege."

SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 3% and Class
C* shares are sold at net asset value. Using the Fund's net asset value at June
30, 1996, the maximum offering price of the Fund's shares is set forth below.

<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share...................... $9.28
-----
Maximum sales charge (3% of offering price)................................. .29
-----
Offering price to public.................................................... $9.57
-----
-----
CLASS C
Net asset value, offering price and redemption price per Class C share*..... $9.28
-----
</TABLE>

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

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

B-25
<PAGE>
REDUCED INITIAL SALES CHARGES--CLASS A SHARES

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

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

(a) an individual;

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

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

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

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

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

In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more 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 Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.

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

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

B-26
<PAGE>

LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and groups plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).

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 Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.

A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totalling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investment 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 Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.

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, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to any
individual participants in any retirement or group plans.

B-27
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of shares of the Fund, 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/OR DISTRIBUTIONS

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

EXCHANGE PRIVILEGE

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

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

CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds and 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 acquire 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-28
<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 C. Shareholders of the Fund may exchange their Class C shares for
Class C shares 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 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 date of the initial purchase, rather than
the date of the exchange.

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
without regard to 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.

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

Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.

DOLLAR COST AVERAGING

Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares

B-29
<PAGE>
when the price is high. The overall cost is lower than it would be if a constant
number of shares were bought at set intervals.

Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class 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 Savings Accumulation Plan."
</TABLE>

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

1 Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.

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 of less than their
original cost.

AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)

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

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

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available for 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 C shares
may be subject to a CDSC. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.

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

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

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

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

TAX-DEFERRED RETIREMENT PLANS

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

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

INDIVIDUAL RETIREMENT ACCOUNTS

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

TAX-DEFERRED COMPOUNDING(1)

CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- -------------- -------- --------

10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692

(1) The chart is for illustrative purposes
only and does not represent the
performance of the Fund or any specific
investment. It shows taxable versus
tax-deferred compounding for the
periods and on the terms indicated.
Earnings in the IRA account will be
subject to tax when withdrawn from the
account.

B-31
<PAGE>
NET ASSET VALUE

The Fund computes its net asset value at 4:15 P.M., New York time, on each
day the New York Stock Exchange is open for trading except days on which no
orders to purchase, sell or redeem Fund shares have been received or on days on
which changes in the value of the Fund's portfolio investments do not affect net
asset value. In the event the New York Stock Exchange closes early on any
business day, the net asset value of the Fund's shares shall be determined at a
time between such closing and 4:15 P.M., New York time.

Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Trustees, the value of each portfolio
security for which quotations are available will be based on the valuation
provided by an independent broker/dealer or pricing service. Pricing services
consider such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations.

Securities for which market quotations are not readily available are valued
at fair value as determined in good faith under procedures established by the
Trustees. Short-term debt securities which mature in more than 60 days are
valued at current market quotations. Short-term debt securities which mature in
60 days or less are valued at amortized cost if their term to maturity from the
date of purchase was 60 days or less, or by amortizing their value on the 61st
day prior to maturity, if their term to maturity from the date of purchase
exceeded 60 days, unless the Trustees determine that such valuation does not
represent fair value.

TAXES, DIVIDENDS AND DISTRIBUTIONS

The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the Internal Revenue Code). This relieves the Fund (but not
its shareholders) from paying federal income tax on income realized during the
taxable year which is distributed to shareholders, and permits net capital gains
of the Fund (i.e., the excess of net long-term capital gains over net short-term
capital losses) to be treated as long-term capital gains of the shareholders,
regardless of how long shareholders have held their shares in the Fund.

Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the Fund's annual gross income (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, options thereon, futures
contracts, options thereon, forward contracts and foreign currencies; (b) the
Fund derive less than 30% of its gross income from gains (without reduction for
losses) from the sale or other disposition of securities, options thereon,
futures contracts, options thereon and forward contracts held for less than
three months; (c) the Fund diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the value of the Fund's assets
is represented by cash, U.S. Government obligations and other securities limited
in respect of any one issuer to an amount not greater than 5% of the Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than U.S. Government obligations) and (d) the Fund distribute
to its shareholders at least 90% of its net investment income and net short-term
gains (i.e., the excess of net short-term capital gains over net long-term
capital losses) in each year.

Gains or losses on sales of securities by the Fund generally will be treated
as long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
makes a short-sale against-the-box. Other gains or losses on the sale of
securities will be short-term capital gains or losses.

B-32
<PAGE>
Gains and losses on the sale, lapse or other termination of options on
securities will generally be treated as gains and losses from the sale of
securities (assuming they do not qualify as "Section 1256 contracts"). Certain
of the Fund's transactions may be subject to wash sale and short sale provisions
of the Internal Revenue Code. In addition, debt securities acquired by the Fund
may be subject to original issue discount and market discount rules.

For federal income tax purposes, the Fund had a capital loss carryforward at
June 30, 1996 of approximately $3,822,000, of which $588,000 expires in 2001,
$2,044,000 expires in 2002, $724,000 expires in 2003 and $488,000 expires in
2004. Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such amount.

"Regulated futures contracts" and certain listed options which are not
"equity options" constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of the Fund's
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 gains or loss. In addition, positions
which are part of a "straddle" are to be subject to rules which apply certain
wash sale and short sale provisions of the Internal Revenue Code. The Fund may
be required to defer the recognition of losses on positions it holds to the
extent of any unrecognized gain on offsetting positions held by the Fund. The
Fund's ability to enter into futures contracts, options thereon and options on
securities may be affected by the 30% limitation on gains derived from
securities held less than three months, discussed above.

Distributions of net investment income and net short-term capital gains will
be taxable to the shareholder at ordinary income rates regardless of whether the
shareholder receives such distributions in additional shares or cash.
Distributions of net capital gains, if any, are taxable as long-term capital
gains regardless of how long the investor has held his or her Fund shares.
However, if a shareholder holds shares in the Fund for not more than six months,
then any loss recognized on the sale of such shares will be treated as long-term
capital loss to the extent of any distribution on the shares which was treated
as long-term capital gain. Shareholders will be notified annually by the Fund as
to the federal tax status of distributions made by the Fund.

The Fund is subject to a nondeductible 4% excise tax if it does not
distribute 98% of its ordinary income on a calendar year basis and 98% of its
capital gains on an October 31 year-end basis. The Fund intends to distribute
its income and capital gains in the manner necessary to avoid imposition of the
4% excise tax. Dividends and distributions generally are taxable to shareholders
in the year in which they are received or accrued; however, dividends declared
in October, November and December payable to shareholders of record on a
specified date in October, November and December and paid in the following
January will be treated as having been paid by the Fund and received by
shareholders in such prior year. Under this rule, a shareholder may be taxed in
one year on dividends or distributions actually received in January of the
following year.

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.

Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries is not known.

B-33
<PAGE>
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.

The Fund declares dividends daily based on actual net investment income
determined in accordance with generally accepted accounting principles. A
portion of such dividend may also include projected net investment income. Such
dividends will be payable monthly in additional shares of the Fund unless
otherwise requested by the shareholder. The Fund's net capital gains, if any,
will be distributed at least annually. In determining the amount of capital
gains to be distributed, any capital loss carry forwards from prior years will
be offset against capital gains. Dividends and distributions will be paid in
additional Fund shares based on net asset value on the payment date or such
other date as the Trustees may determine, unless the shareholder elects in
writing not less than five full business days prior to the payment date to
receive such distributions in cash. In the event that a shareholder's shares are
redeemed on a date other than the monthly dividend payment date, the proceeds of
such redemption will equal the net asset value of the shares redeemed plus the
amount of all dividends declared through the date of redemption.

Distributions of taxable net investment income and net realized 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 net asset value of a share of the Fund on the distribution date.

Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of the
Fund, the investor should carefully consider the impact of dividends or capital
gains distributions which are expected to be or have been announced.
Distributions may be subject to additional state and local taxes. See "Taxes,
Dividends and Distributions" in the Prospectus.

The per share dividends on Class C shares will be lower than the per share
dividends on Class A shares as a result of the higher distribution fee
applicable with respect to the Class C shares.

PERFORMANCE INFORMATION

The Fund may from time to time advertise its yield as calculated over a
30-day period. Yield is calculated separately for Class A and Class C shares.
This yield will be computed by dividing the Fund's net investment income per
share earned during this 30-day period by the maximum offering price per share
on the last day of this period. The yield for the 30-day period ended June 30,
1996 for the Class A shares was % and for the Class C shares was %.
Yield is calculated according to the following formula:

a - b
------
YIELD = 2 [( cd + 1)6-1]

<TABLE>
<C> <C> <S>
Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of reimbursements).

c = the average daily number of shares outstanding during the period that were
entitled to receive dividends.

d = the maximum offering price per share on the last day of the period.
</TABLE>

B-34
<PAGE>

Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period. Yields for the Fund will vary based on a number of factors
including changes in net asset value, market conditions, the level of interest
rates and the level of Fund income and expenses.

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

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

P(1+T)4 = ERV

<TABLE>
<C> <C> <S>
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.
</TABLE>

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

The average annual total returns for Class A shares for the period September
9, 1991 (commencement of offering of the Class A shares) through June 30, 1996
and for the one year period ended June 30, 1996 were % and %,
respectively. The average annual total returns for Class C shares for the period
November 1, 1994 (commencement of offering of the Class C shares) through June
30, 1996 and for the one year period ended June 30, 1996 were % and %,
respectively.

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

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

ERV - P
-------
P

<TABLE>
<C> <C> <S>
Where: P = a hypothetical initial payment of $1,000.

ERV = ending redeemable value at the end of the 1, 5 or 10 year periods (or
fractional portion thereof) of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods.
</TABLE>

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

The aggregate total returns for Class A shares for the period September 9,
1991 (commencement of offering of the Class A shares) through June 30, 1995 and
for the one year period ended June 30, 1996 were % and %, respectively.
The aggregate total returns for Class C shares for the period November 1, 1994
(commencement of offering of Class C shares) through

B-35
<PAGE>

June 30, 1996 and for the one year period ended June 30, 1996 were % and
%, respectively.

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

(CHART)

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

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

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING
AGENT AND INDEPENDENT ACCOUNTANTS

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 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.

Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account, a new account
set-up fee for each manually established account and a monthly inactive zero
balance account fee per shareholder account. For the fiscal year ended June 30,
1996, such fees amounted to approximately $57,000. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications and other costs.

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

B-36

<PAGE>
Portfolio of Investments as of THE BLACKROCK GOVERNMENT INCOME
June 30, 1996 TRUST
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--122.9%
------------------------------------------------------------
Asset-Backed Securities--16.9%
$ 450 Banc One Auto Grantor Trust, Series
1996-B, Class A, 6.55%, 2/15/03 $ 451,969
Chase Manhattan Grantor Trust,
Auto Loan Pass-Through
Certificates,
768 Series 1995-B, Class A, 5.90%,
11/15/01 764,212
636 Series 1996-A, Class A, 5.20%,
2/15/02 626,192
500 Chevy Chase Auto Receivables Trust,
Series 1996-1, Class A, 6.60%,
12/15/02 500,156
1,345 Daimler-Benz Auto Grantor Trust,
Series 1995-A, Class A, 5.85%,
5/15/02 1,340,091
1,440 MLCC Mortgage Investors, Inc.,
Series 1996-A, Class A, 5.8675%,
2/15/21 1,441,797
1,159 NationsBank Auto Grantor Trust,
Series 1995-A, Class A, 5.85%,
6/15/02 1,154,225
-----------
Total Asset-Backed Securities
(cost $6,294,622) 6,278,642
- ------------------------------------------------------------
Mortgage Pass-Throughs--68.6%
Federal Home Loan Mortgage
Corporation,
3,574(b) 9.00%, 9/01/05 - 11/01/05, 15 Year 3,695,563
752 7.375%, 3/01/06, Multi-family 754,441
850(b) 6.771%, 2/01/18, 1 year CMT, ARM 859,416
1,387 7.686%, 9/01/23, 1 year CMT, ARM 1,414,063
1,864 7.681%, 10/01/24, 1 year CMT, ARM 1,896,069
Federal National Mortgage
Association,
1,796(c) 8.00%, 3/01/08 1,831,831
2,763 8.50%, 6/01/08 - 1/01/16 2,859,063
1,143 7.906%, 12/01/20, 3 year CMT, ARM 1,165,548
1,144 7.241%, 9/01/25, 1 year CMT, ARM 1,178,029
Government National Mortgage
Association,
2,723(d) 7.25%, 1/15/05 - 4/15/06 2,744,814
2,964 6.50%, 2/20/21 - 2/20/23, 1 year
CMT, ARM 2,969,769
Government National Mortgage
Association, (cont'd.)
$ 500 6.50%, 12/15/2099, 1 year CMT, ARM $ 500,781
2,285(b) 7.00%, 8/20/23 - 1/20/25, 1 year
CMT, ARM 2,311,227
1,261 8.50%, 4/20/25, 1 year CMT, ARM 1,283,176
-----------
Total Mortgage Pass-Throughs
(cost $25,650,609) 25,463,790
- ------------------------------------------------------------
Multiple Class Mortgage Pass-Throughs--7.0%
351 Collateralized Mortgage Obligation
Trust, Series 59, Class G, 9.00%,
7/01/17 350,324
582 Federal Home Loan Mortgage
Corporation, Multiclass Mortgage
Participation Certificates,
(REMIC), Series 124, Class A,
8.50%, 3/15/97 581,869
Federal National Mortgage
Association,
Series I, Class 2, 11.50%,
1,272 4/01/09 1,416,042
REMIC Pass-Through Certificates,
127 Series 1990-60, Class J, 9.00%,
6/25/17 127,092
119 Series 1991-49, Class D, 8.00%,
5/25/05 118,586
372 Residential Funding Mtg. Sec. I,
I/O, Series 1992-S2, Class A17,
7.933%, 1/25/22 327
4 Small Business Administration,
6.50%, 8/25/16, ARM 4,554
-----------
Total Multiple Class Mortgage
Pass-Throughs (cost $6,109,449) 2,598,794
- ------------------------------------------------------------
U.S Government Securities--30.4%
U.S. Treasury Notes,
4,540(b) 6.125%, 3/31/98 4,543,547
1,205 5.875%, 4/30/98 1,200,482
3,100 6.00%, 5/31/98 3,093,703
2,450(b) 6.375%, 5/15/99 2,455,742
-----------
Total U.S Government Securities
(cost $11,282,238) 11,293,474

- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.

B-37

<PAGE>

THE BLACKROCK GOVERNMENT INCOME TRUST

Portfolio of Investments as of
June 30, 1996
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE><CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
Total long-term investments
(cost $49,336,918) $45,634,700
SHORT-TERM INVESTMENTS--2.0%
- ------------------------------------------------------------
Discount Note--1.9%
$ 700 Federal Home Loan Mortgage
Association,
5.52%, 7/01/96
(cost $700,000) 700,000
- ------------------------------------------------------------
Call Options Purchased--0.1%
Contracts(a)
- ---------
9 U.S. Treasury Note Futures, Sep.
'96,
expiring 8/24/96 @ 105.00
(cost $11,793) 25,734
-----------
Total Short-Term Investments
(cost $711,793) 725,734
- ------------------------------------------------------------
Total Investments--124.9%
(cost $50,048,711; Note 4) 46,360,434
Liabilities in excess of other
assets (Note 5)--(24.9%) (9,245,586)
-----------
Net Assets--100% $37,114,848
-----------
-----------

- ---------------
ARM--Adjustable Rate Mortgage
CMT--Constant Maturity Treasury
I/O--Interest Only
REMIC--Real Estate Mortgage Investment Conduit
</TABLE>
(a) One contract equals $100,000 face value.
(b) Portion of principal amount pledged as collateral for
reverse repurchase agreements.
(c) Entire principal amount pledged as collateral for
reverse repurchase agreements.
(d) Portion of principal amount pledged as collateral for
futures transactions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-38

<PAGE>
Statement of Assets and Liabilities THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets June 30, 1996
-------------
<S> <C>
Investments, at value (cost $50,048,711).................................................................... $46,360,434
Cash........................................................................................................ 1,104
Receivable for investments sold............................................................................. 1,111,601
Interest receivable......................................................................................... 552,456
Receivable for Fund shares sold............................................................................. 6,589
Deferred organization expenses and other assets............................................................. 4,253
-------------
Total assets............................................................................................. 48,036,437
-------------
Liabilities
Reverse repurchase agreements............................................................................... 9,007,500
Payable for investments purchased........................................................................... 1,506,151
Payable for Fund shares reacquired.......................................................................... 140,484
Dividends payable........................................................................................... 54,787
Due to broker-variation margin.............................................................................. 16,670
Management fee payable...................................................................................... 15,448
Interest payable............................................................................................ 8,742
Distribution fee payable.................................................................................... 4,667
Accrued expenses and other liabilities...................................................................... 167,140
-------------
Total liabilities........................................................................................ 10,921,589
-------------
Net Assets.................................................................................................. $37,114,848
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 39,987
Paid-in capital in excess of par......................................................................... 44,750,277
-------------
44,790,264
Distributions in excess of net investment income......................................................... (142,253)
Accumulated net realized loss on investments............................................................. (3,792,695)
Net unrealized depreciation on investments............................................................... (3,740,468)
-------------
Net assets, June 30, 1996................................................................................... $37,114,848
-------------
-------------
Class A:
Net asset value and redemption price per share
($37,048,986 / 3,991,578 shares of beneficial interest issued and outstanding)........................ $9.28
Maximum sales charge (3.0% of offering price)............................................................ .29
Maximum offering price to public......................................................................... $9.57
Class C:
Net asset value, offering price and redemption price per share
($65,862 / 7,096 shares of beneficial interest issued and outstanding)................................ $9.28
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-39

<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income June 30, 1996
<S> <C>
Income
Interest................................... $ 4,079,196
-------------
Expenses
Management fee............................. 217,733
Distribution fee--Class A.................. 63,897
Distribution fee--Class B.................. 1,830
Distribution fee--Class C.................. 250
Custodian's fees and expenses.............. 85,000
Transfer agent's fees and expenses......... 68,000
Reports to shareholders.................... 53,000
Registration fees.......................... 44,000
Audit fee and expenses..................... 33,000
Trustees' fees............................. 30,000
Amortization of deferred organization
expense................................. 27,000
Legal fees and expenses.................... 20,000
Miscellaneous.............................. 10,173
-------------
Total operating expenses............... 653,883
Interest expense........................... 976,127
-------------
Total expenses......................... 1,630,010
-------------
Net investment income......................... 2,449,186
-------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... (1,301)
Financial futures contracts................ 108,120
Short sale transactions.................... 89,415
-------------
196,234
-------------
Net change in unrealized depreciation on:
Investments................................ (421,421)
Financial futures contracts................ (52,093)
-------------
(473,514)
-------------
Net loss on investments....................... (277,280)
-------------
Net Increase in Net Assets
Resulting from Operations..................... $ 2,171,906
-------------
-------------
</TABLE>

THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Cash Flows
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Increase (Decrease) in Cash June 30, 1996
<S> <C>
Cash flows provided by operating activities:
Interest received.......................... $ 4,515,368
Operating expenses paid.................... (706,460)
Interest expense paid...................... (987,763)
Sale of short-term portfolio investments,
net..................................... 1,580,630
Purchase of long-term portfolio
investments............................. (105,894,564)
Sale of long-term portfolio investments.... 126,302,714
Variation margin on futures................ 46,890
Other...................................... 3,681
-------------
Net cash provided by operating
activities.............................. 24,860,496
-------------
Cash flows used for financing activities:
Proceeds from shares sold.................. 804,097
Payments on shares redeemed................ (13,787,030)
Cash dividends paid(a)..................... (1,079,632)
Net payments for reduction in reverse
repurchase agreements................... (10,864,500)
-------------
Net cash used for financing activities..... (24,927,065)
-------------
Net decrease in cash.......................... (66,569)
Cash at beginning of year..................... 67,673
-------------
Cash at end of year........................... $ 1,104
-------------
-------------
Reconciliation of Net Increase in Net Assets
to Net Cash Provided by Operating Activities
Net increase in net assets resulting from
operations................................. $ 2,171,906
-------------
Decrease in investments....................... 21,495,041
Net realized gain............................. (196,234)
Increase in unrealized depreciation........... 473,514
Decrease in receivable for investments sold... 5,296,003
Decrease in interest receivable............... 375,953
Decrease in other assets...................... 30,681
Decrease in payable for investments
purchased.................................. (4,713,018)
Decrease in interest payable.................. (11,636)
Decrease in accrued expenses and other
liabilities................................... (52,577)
Decrease in due to broker-variation margin.... (9,137)
-------------
Total adjustments.......................... 22,688,590
-------------
Net cash provided by operating activities..... $ 24,860,496
-------------
-------------
</TABLE>
- ---------------
(a) Non-cash financing activity not included herein consists of reinvestment of
dividends and distributions of $1,488,750.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-40

<PAGE>
Statement of Changes in Net Assets THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
Increase (Decrease) in Net Assets 1996 1995
------------ ------------
<S> <C> <C>
Operations:
Net investment income.................................................................... $ 2,449,186 $ 3,243,779
Net realized gain (loss) on investment transactions...................................... 196,234 (1,253,706)
Net change in unrealized depreciation on investments..................................... (473,514) 1,682,349
------------ ------------
Net increase in net assets resulting from operations..................................... 2,171,906 3,672,422
------------ ------------
Net equalization debits..................................................................... (5,142) (13,333)
------------ ------------
Dividends and distributions (Note 1):
Dividends from net investment income:
Class A............................................................................... (2,374,095) (3,086,267)
Class B............................................................................... (51,187) (147,139)
Class C............................................................................... (1,632) (42)
------------ ------------
(2,426,914) (3,233,448)
------------ ------------
Tax return of capital distributions:
Class A............................................................................... (116,602) (15,142)
Class B............................................................................... (2,514) (722)
Class C............................................................................... (80) --
------------ ------------
(119,196) (15,864)
------------ ------------
Fund share transactions (net of share conversions) (Note 6):
Net proceeds from shares subscribed...................................................... 795,510 1,294,788
Net asset value of shares issued in reinvestment of dividends and distributions.......... 1,488,750 1,891,073
Cost of shares reacquired................................................................ (13,712,371) (28,430,251)
------------ ------------
Net decrease in net assets from Fund share transactions.................................. (11,428,111) (25,244,390)
------------ ------------
Total decrease.............................................................................. (11,807,457) (24,834,613)
Net Assets
Beginning of year........................................................................... 48,922,305 73,756,918
------------ ------------
End of year................................................................................. $ 37,114,848 $ 48,922,305
------------ ------------
------------ ------------
</TABLE>

- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-41

<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
The BlackRock Government Income Trust (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 June 13, 1991 and had no operations until the issuance of
10,000 shares of beneficial interest for $100,000 on July 18, 1991 to Prudential
Mutual Fund Management, Inc. (``PMF''). Investment operations commenced on
September 9, 1991. The Fund's primary objectives are to provide low volatility
of net asset value and high monthly income, primarily through investment in U.S.
Government securities and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The ability of issuers of debt
securities, other than those issued or guaranteed by the U.S. Government, to
meet their obligations may be affected by economic developments in a specific
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.

Securities Valuation: The Fund values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Board of Trustees. In determining the value of
a particular security, pricing services may use certain information with respect
to transactions in such securities, quotations from dealers, market transactions
in comparable securities, various relationships observed in the market between
securities, and calculated yield measures based on valuation technology commonly
employed in the market for such securities. Exchange-traded options are valued
at their last sales price as of the close of options trading on the applicable
exchanges. In the absence of a last sale, options are valued at the average of
the quoted bid and asked prices as of the close of business. Futures contracts
are valued at the last sale price as of the close of the commodities exchange on
which they trade unless the Fund's Board of Trustees determine that such price
does not reflect its fair value, in which case it will be valued at its fair
value as determined by the Fund's Board of 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.

Securities for which such current market quotations are not readily available
are valued at fair value as determined in good faith under procedures
established by and under the general supervision and responsibility of the
Fund's Board of Trustees. No such securities were held by the Fund at June 30,
1996.

In connection with transactions in repurchase agreements, the Fund's custodian
takes possession of the underlying collateral securities, the value of which at
least equals the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. If the seller defaults and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.

Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the 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 or foreign currency exchange rates with respect to
securities or currencies 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
- --------------------------------------------------------------------------------

B-42

<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
the extent of the premium received or paid. If an option is exercised, the
premium received or paid is an adjustment to the proceeds from the sale or the
cost of the purchase in determining whether the Fund has realized a gain or
loss. The difference between the premium and the amount received or paid on
effecting a closing purchase or sale transaction is also treated as a realized
gain or loss. Gain or loss on purchased options is included in net realized gain
(loss) on investment transactions. Gain or loss on written options is presented
separately as net realized gain (loss) on written option transactions.

Cash Flow Information: The Fund invests in securities and distributes dividends
from net investment income and from net realized gains which are paid in cash or
are reinvested at the discretion of shareholders. These activities are reported
in the Statement of Changes in Net Assets and additional information on cash
receipts and cash payments is presented in the Statement of Cash Flows.

Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and amortizing discounts or premiums on
debt obligations.

Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses on sales of
portfolio securities are calculated on the identified cost basis. Interest
income is recorded on the accrual basis and the Fund accretes discount or
amortizes premium on securities purchased using the interest method. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.

Net investment income (other than distribution fees), and 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 beginning of the
day.

Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.

Taxes: It is the Fund's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute sufficient amounts of its taxable income to shareholders. Therefore,
no federal income tax provision is required.
Dividends and Distributions: The Fund declares daily and pays dividends monthly
first from net investment income then from realized short-term capital gains, if
any, and other sources, if necessary. Net long-term capital gains, if any, are
distributed at least annually. 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.

Deferred Organization Expenses: A total of $135,000 was incurred in connection
with the organization of the Fund. These costs have been deferred and are being
amortized ratably over a period of sixty months ending September, 1996.
- ------------------------------------------------------------
Note 2. Agreements

The Fund has a management agreement with PMF. Pursuant to this agreement, PMF
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with BlackRock Financial Management, Inc. (``BFM''). BFM furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the costs of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.

The management fee paid PMF is computed daily and payable monthly at an annual
rate of .50 of 1% of the Fund's average daily net assets. PMF pays BFM, as
compensation for its services pursuant to the subadvisory agreement, a fee at
the annual rate of .25 of 1% of the Fund's average daily net assets.

The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A shares of the Fund
and is serving under the same terms and conditions as under the arrangement with
PMFD. PSI acted as distributor of the Class B shares through November 27, 1995
and continues to act as distributor of the Class C shares of the Fund. The
distribution fees are accrued daily and payable monthly.

Pursuant to the Class A Plan, the Fund reimbursed PMFD and PSI for its
distribution-related expenses with respect to Class A shares at an annual rate
of up to .30 of 1% of the average daily net assets of the Class A shares. Such
expenses under the Class A Plan were .15 of 1% of the
- --------------------------------------------------------------------------------

B-43
<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
average daily net assets of the Class A shares for the year ended June 30, 1996.
PSI pays various broker-dealers, including Pruco Securities Corporation
(``Prusec''), an affiliated broker-dealer, for account servicing fees and other
expenses incurred by such broker-dealers.

Pursuant to the Class B Plan, the Fund reimbursed PSI for its distribution-
related expenses with respect to Class B shares at an annual rate of up to 1%
of the average daily net assets of Class B shares. Effective November 1, 1994,
such expenses under the Class B Plan were reduced to .20 of 1% of the average
daily net assets of the Class B shares. On November 28, 1995, all outstanding
Class B shares converted to Class A shares.

Pursuant to the Class C Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class C shares at an annual rate
of up to 1% of the average daily net assets of Class C shares. Such expenses
under the Class C Plan were .75 of 1% of the average daily net assets of Class C
shares for the year ended June 30, 1996.

PSI has advised the Fund that it has received approximately $7,700 in front-end
sales charges resulting from sales of Class A shares during the year ended June
30, 1996. From these fees, PSI paid such sales charges to dealers which in turn
paid commissions to salespersons and incurred other distribution costs.

With respect to the Class B and C Plans, PSI advised the Fund that for the year
ended June 30, 1996, it received approximately $45 in contingent deferred sales
charges imposed upon certain redemptions by investors.
PMFD is a wholly-owned subsidiary of PMF; PSI and PMF are indirect wholly-owned
subsidiaries of The Prudential Insurance Company of America (``Prudential'').
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates

Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended June 30, 1996,
the Fund incurred fees of approximately $57,000 for the services of PMFS. As of
June 30, 1996, approximately $5,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities

Purchases and sales of investment securities, other than short-term investments
for the year ended June 30, 1996 aggregated $101,181,546 and $102,992,358,
respectively.

The federal income tax basis of the Fund's investments at June 30, 1996 was
substantially the same as the basis for financial statement reporting purposes
and, accordingly, net unrealized depreciation for federal income tax purposes
was $3,688,277 (gross unrealized appreciation--$211,384; gross unrealized
depreciation--$3,899,661).

During the year ended June 30, 1996 the Fund entered into financial futures
contracts. Details of open futures contracts at June 30, 1996 are as follows:
<TABLE><CAPTION>
Value at Value at Unrealized
Number of Expiration Trade June 30, Appreciation
Contracts Type Date Date 1996 (Depreciation)
- --------- ------------------ ----------- ----------- ----------- --------------
<C> <S> <C> <C> <C> <C>
Long position:
51 2 yr. T-Note Sep. 1996 $10,441,695 $10,504,406 $ 62,711
Short positions:
48 5 yr. T-Note Sep. 1996 5,006,772 5,076,000 (69,228)
14 10 yr. T-Note Sep. 1996 1,469,934 1,505,000 (35,066)
3 30 yr. T-Bond Sep. 1996 317,986 328,594 (10,608)
-------
$(52,191)
-------
-------
</TABLE>
For federal income tax purposes, the Fund had a capital loss carryforward at
June 30, 1996 of approximately $3,822,000 of which $588,000 expires in 2001,
$2,044,000 expires in 2002, $742,000 expires in 2003, and $448,000 expires in
2004. Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such amount.
- ------------------------------------------------------------
Note 5. Borrowings

The Fund enters into reverse repurchase agreements with qualified, third party
broker-dealers as determined by and under the direction of the Board of
Trustees. Reverse repurchase agreements are a technique involving leverage and
are considered a borrowing of the Fund thereby causing the Fund's total assets
to exceed its net assets. In a reverse repurchase agreement, the Fund sells
securities and agrees to repurchase them at a mutually agreed date and price.
During this time, the Fund continues to receive the principal and interest
payments from that security. At the end of the term, the Fund receives the same
securities that were sold for the same initial dollar amount plus interest on
the cash proceeds of the initial sale. Interest on the value of reverse
repurchase agreements issued and outstanding is based upon competitive market
rates at the time of issuance. At the time the Fund enters into a reverse
repurchase agreement, it establishes and maintains a segregated account with the
lender containing liquid high grade securities having a value not less than the
repurchase price, including accrued interest, of the reverse repurchase
agreement.
- --------------------------------------------------------------------------------

B-44

<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
The Fund had outstanding reverse repurchase agreements at June 30, 1996 as
follows:
<TABLE>
<CAPTION>
Date Amount
Entered Maturity Interest Due at
Into Date Par Rate Maturity
- --------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C>
06/24/96 07/24/96 $ 5,929,000 5.43% $5,955,829
06/24/96 07/01/96 402,000 5.25% 404,410
06/25/96 07/02/96 1,414,000 5.40% 1,415,485
06/26/96 07/10/96 1,262,500 5.30% 1,265,102
-----------
$ 9,007,500
-----------
-----------
</TABLE>

The average daily balance of reverse repurchase agreements outstanding during
the year ended June 30, 1996 was approximately $15,626,200 at a weighted average
interest rate of approximately 5.75%.
- ------------------------------------------------------------
Note 6. Capital

The Fund currently offers only Class A and Class C shares. Class A shares are
sold with a front-end sales charge of up to 3%. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares,
which were discontinued from being offered on November 1, 1994, automatically
converted to Class A shares upon being held longer than one year from the date
of purchase. On November 28, 1995, the remaining Class B shares converted to
Class A shares.

The Fund has authorized an unlimited number of shares of beneficial interest at
$.01 par value per share divided into three classes, of which two classes,
designated Class A and Class C shares, are currently being offered. Of the
3,998,674 shares issued and outstanding at June 30, 1996, PMF owned 10,000 Class
A shares.

Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended June 30, 1996:
Shares sold.......................... 75,957 $ 711,331
Shares issued in reinvestment
of dividends and distributions..... 155,658 1,455,287
Shares reacquired.................... (1,435,603) (13,420,680)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (1,203,988) (11,254,062)
Shares issued upon conversion from
Class B............................ 237,999 2,230,509
---------- ------------
Net decrease in shares outstanding... (965,989) $ (9,023,553)
---------- ------------
---------- ------------
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended June 30, 1995:
Shares sold.......................... 119,099 $ 1,102,305
Shares issued in reinvestment
of dividends and distributions..... 193,271 1,796,033
Shares reacquired.................... (2,881,336) (26,749,291)
---------- ------------
Net decrease in shares
outstanding........................ (2,568,966) $(23,850,953)
---------- ------------
---------- ------------
<CAPTION>
Class B
- -------------------------------------
<S> <C> <C>
Period ended November 28, 1995:(a)
Shares sold.......................... 139 $ 1,297
Shares issued in reinvestment
of dividends and distributions..... 3,471 32,417
Shares reacquired.................... (28,748) (266,771)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (25,138) (233,057)
Shares reacquired upon conversion
into Class A....................... (238,015) (2,230,509)
---------- ------------
Net decrease in shares
outstanding........................ (263,153) $ (2,463,566)
---------- ------------
---------- ------------
Year ended June 30, 1995:
Shares sold.......................... 20,175 $ 185,396
Shares issued in reinvestment
of dividends and distributions..... 10,322 95,011
Shares reacquired.................... (181,077) (1,680,960)
---------- ------------
Net decrease in shares
outstanding........................ (150,580) $ (1,400,553)
---------- ------------
---------- ------------
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
Year ended June 30, 1996:
Shares sold.......................... 8,898 $ 82,882
Shares issued in reinvestment
of dividends and distributions..... 103 1,046
Shares reacquired.................... (2,665) (24,920)
---------- ------------
Net increase in shares
outstanding........................ 6,336 $ 59,008
---------- ------------
---------- ------------
November 1, 1994(b) through
June 30, 1995:
Shares sold.......................... 757 $ 7,087
Shares issued in reinvestment
of dividends and distributions..... 3 29
---------- ------------
Net increase in shares
outstanding........................ 760 $ 7,116
---------- ------------
---------- ------------
</TABLE>

- ---------------
(a) On November 28, 1995, all outstanding Class B shares were converted to Class
A shares.
(b) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------

B-45

<PAGE>
Financial Highlights THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------
September 9,
1991(a)
Year ended June 30, through
-------------------------------------------- June 30,
1996 1995(c) 1994(c) 1993 1992
------- ------- ------- -------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.37 $ 9.29 $ 9.67 $ 10.07 $ 10.00
------- ------- ------- -------- ------------
Income from investment operations
Net investment income......................... .51 .51 .45 .64 .57
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... (.06) .09 (.35) (.41) .10
------- ------- ------- -------- ------------
Total from investment operations........... .45 .60 .10 .23 .67
------- ------- ------- -------- ------------
Less distributions
Dividends from net investment income.......... (.51) (.52) (.40) (.63) (.57)
Tax return of capital distributions........... (.03) -- (.08) -- --
Distributions in excess of net realized
capital gains.............................. -- -- -- -- (.03)
------- ------- ------- -------- ------------
Total distributions........................ (.54) (.52) (.48) (.63) (.60)
------- ------- ------- -------- ------------
Net asset value, end of period................ $ 9.28 $ 9.37 $ 9.29 $ 9.67 $ 10.07
------- ------- ------- -------- ------------
------- ------- ------- -------- ------------
TOTAL RETURN(d)............................... 4.98% 6.55% 1.02% 2.40% 6.69%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $37,049 $46,450 $69,912 $113,623 $143,856
Average net assets (000)...................... $42,598 $56,395 $91,849 $131,371 $134,585
Ratios to average net assets:
Total expenses............................. 3.74% 2.19% 1.89% 1.94% 1.34%(b)
Operating expenses, including distribution
fee..................................... 1.47% 1.31% 1.17% 1.05% 1.03%(b)
Operating expenses, excluding distribution
fee..................................... 1.32% 1.16% 1.05% .95% .93%(b)
Net investment income...................... 5.51% 5.49% 4.94% 6.71% 6.95%(b)
For Class A, B and C shares:
Portfolio turnover rate.................... 173% 254% 209% 228% 137%
</TABLE>

<TABLE>
<CAPTION>
BORROWINGS:
Amount of debt Average amount of
outstanding at end debt outstanding
Period Ended of period (000) during period (000)
- --------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
June 30, 1996........................................................ $ 9,008 $15,626
June 30, 1995........................................................ 19,872 9,130
June 30, 1994........................................................ 8,300 18,840
June 30, 1993........................................................ 24,386 34,892
June 30, 1992........................................................ 20,109 9,939

<CAPTION>
BORROWINGS:
Average amount of
debt per share
Average number of outstanding
shares outstanding during
Period Ended during period (000) period
- --------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
June 30, 1996........................................................ 4,550 $3.43
June 30, 1995........................................................ 6,389 1.43
June 30, 1994........................................................ 10,234 1.84
June 30, 1993........................................................ 13,517 2.58
June 30, 1992........................................................ 13,458 .74
</TABLE>

- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) 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 return for periods of less than one full year are not
annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-46

<PAGE>
Financial Highlights THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------ -----------
July 1, September 1,
1995 1992(a) Year ended
through Year ended June 30, through ended
November 27, ------------------- June 30, June 30,
1995(f) 1995(c) 1994(c) 1993 1996
------------- ------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.37 $ 9.29 $ 9.68 $ 9.97 $ 9.37
------ ------- ------- ------ -----------
Income from investment operations
Net investment income......................... .22 .48 .37 .47 .45
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... .02 .09 (.37 ) (.32) (.06)
------ ------- ------- ------ -----------
Total from investment operations........... .24 .57 -- .15 .39
------ ------- ------- ------ -----------
Less distributions
Dividends from net investment income.......... (.22) (.49 ) (.32 ) (.44) (.46)
Tax return of capital distributions........... (.01) -- (.07 ) -- (.02)
Distributions in excess of net realized
capital gains.............................. -- -- -- -- --
------ ------- ------- ------ -----------
Total distributions........................ (.23) (.49 ) (.39 ) (.44) (.48)
------ ------- ------- ------ -----------
Net asset value, end of period................ $ 9.38 $ 9.37 $ 9.29 $ 9.68 $ 9.28
------ ------- ------- ------ -----------
------ ------- ------- ------ -----------
TOTAL RETURN(e)............................... 2.63% 6.16 % (.01 )% 1.39% 4.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 0 $2,466 $3,845 $5,954 $ 66
Average net assets (000)...................... $ 1,820 $2,928 $5,778 $2,740 $ 33
Ratios to average net assets:
Total expenses............................. 3.87%(b) 2.56 % 2.76 % 2.89%(b) 4.10%
Operating expenses, including distribution
fee..................................... 1.52%(b) 1.68 % 2.05 % 1.95%(b) 2.07%
Operating expenses, excluding distribution
fee..................................... 1.32%(b) 1.16 % 1.05 % .95%(b) 1.32%
Net investment income...................... 5.46%(b) 5.12 % 4.06 % 5.11%(b) 4.91%
<CAPTION>

November 1,
1994(a)
through
June 30,
1995(c)
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.26
-----

Income from investment operations
Net investment income......................... .23
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... .21
-----

Total from investment operations........... .44
-----

Less distributions
Dividends from net investment income.......... (.33)
Tax return of capital distributions........... --
Distributions in excess of net realized
capital gains.............................. --
-----

Total distributions........................ (.33)
-----

Net asset value, end of period................ $ 9.37
-----
-----

TOTAL RETURN(e)............................... 4.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $7,121(d)
Average net assets (000)...................... $1,335(d)
Ratios to average net assets:
Total expenses............................. 2.24%(b)
Operating expenses, including distribution
fee..................................... 1.91%(b)
Operating expenses, excluding distribution
fee..................................... 1.16%(b)
Net investment income...................... 4.89%(b)
</TABLE>

- ---------------
(a) Commencement of offering of shares.
(b) Annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) Amounts are actual and not rounded to nearest thousand.
(e) 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 return for periods of less than one full year are not
annualized.
(f) Last day of investment operations of Class B shares. On November 28, 1995,
all outstanding Class B shares were converted to Class A shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.

B-47

<PAGE>
Independent Auditor's Report THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
The Shareholders and
Board of Trustees of
The BlackRock Government Income Trust:

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The BlackRock Government Income Trust as of
June 30, 1996, the related statements of operations and of cash flows for the
year then ended and of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the four years in the
period then ended and for the period September 9, 1991 (commencement of
investment operations) to June 30, 1992. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1996, by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The BlackRock
Government Income Trust as of June 30, 1996, the results of its operations, its
cash flows, the changes in its net assets and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP
New York, New York
August 15, 1996

B-48

<PAGE>

APPENDIX--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

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

DIVERSIFICATION

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

DURATION

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

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

MARKET TIMING

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

POWER OF COMPOUNDING

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

A-1
<PAGE>

APPENDIX--INFORMATION RELATING TO THE PRUDENTIAL

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

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC1 are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employes more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.

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

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

Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.2

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

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

2 As of December 31, 1994.

A-2
<PAGE>

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

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

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

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

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

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.

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

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

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

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

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

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

A-3
<PAGE>

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

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

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

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

Trading Data.4 On an average day, Prudential Mutual Funds' U.S. and foreign
equity trading desks traded $77 million in securities representing over 3.8
million shares with nearly 200 different firms. Prudential Mutual Funds' bond
trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.5 Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.6

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

INFORMATION ABOUT PRUDENTIAL SECURITIES

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

Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a

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

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

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6As of December 31, 1994.

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7As of December 31, 1994.

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

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

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

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

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8In 1995, Institutional Investor magazine surveyed more than 700 institutional
money managers, chief investment officers and research directors, asking them to
evaluate analysts in approximately 80 industry sectors. Scores were produced by
taking the number of votes awarded to an individual analyst and weighting them
based on the size of the voting institution. In total, the magazine sent its
survey to more than 2,000 institutions, including a group of European and Asian
institutions. This survey is conducted annually.

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