PRUDENTIAL DIVERSIFIED BOND FUND INC, 497, 1996-09-12

PRUDENTIAL DIVERSIFIED BOND FUND INC
497, 1996-09-12

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<PAGE>

Prudential Diversified Bond Fund, Inc.
(Class Z Shares)

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

PROSPECTUS DATED SEPTEMBER 12, 1996

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Prudential Diversified Bond Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is high current
income consistent with an appropriate balance between risk and reward as
determined by the investment adviser. The Fund seeks to achieve this objective
by allocating its assets among sectors of the fixed-income securities markets,
primarily U.S. Government securities, mortgage-backed securities, corporate
debt securities and foreign securities (mainly government), based upon the
investment adviser's evaluation of current market and economic conditions. The
Fund has the flexibility to allocate its investments across different sectors
of the fixed-income securities markets in order to seek to reduce some of the
risks from negative market movements and interest rate changes in any one
sector. The Fund is not obligated to invest in all of these sectors at a given
time and, at times, may invest all of its assets in only one sector, subject
to the limitations described herein. Under normal circumstances, the Fund will
maintain at least 65% of its total assets in investment grade debt securities
(as defined herein). The Fund may also purchase preferred stock and engage in
various derivative securities transactions, including the purchase and sale of
put and call options on securities and financial indices and futures
transactions on securities, financial indices and currencies and the purchase
and sale of foreign currency exchange contracts, to hedge its portfolio and to
attempt to enhance returns. The Fund may engage in short-selling and use
leverage, including reverse repurchase agreements, dollar rolls and bank
borrowings, which entail additional risks to the Fund. There can be no
assurance that the Fund's investment objective will be achieved. See "How the
Fund Invests--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.

THE FUND MAY INVEST UP TO 35% OF ITS NET ASSETS IN LOWER-RATED AND UNRATED
BONDS, COMMONLY KNOWN AS "JUNK" BONDS. INVESTMENTS OF THIS TYPE ARE SUBJECT TO
A GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST, INCLUDING DEFAULT RISK, THAN
HIGHER RATED BONDS. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED
WITH AN INVESTMENT IN THIS FUND. See "How the Fund Invests--Investment
Objective and Policies--Risk Factors Relating to Investing in Debt Securities
Rated Below Investment Grade (Junk Bonds)."

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Class Z shares are offered exclusively for sale to a limited group of
investors. Only Class Z shares are offered through this Prospectus. The Fund
also offers Class A, Class B and Class C shares through the attached
Prospectus dated April 26, 1996, as supplemented, (the Retail Class
Prospectus) which is a part hereof.
- -------------------------------------------------------------------------------

This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated April 26, 1996, as supplemented,
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.
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Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------

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

FUND EXPENSES

<TABLE>
<CAPTION>
CLASS Z SHARES
--------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)............................................... None
Maximum Sales Load or Deferred Sales Load Imposed on Reinvested
Dividends..................................................... None
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, whichever is lower)................... None
Redemption Fees................................................ None
Exchange Fee................................................... None
<CAPTION>
CLASS Z SHARES
ANNUAL FUND OPERATING EXPENSES* --------------
<S> <C>
(as a percentage of average net assets)
Management Fees (After Reduction)**............................ .10%
12b-1 Fees..................................................... None
Other Expenses................................................. .62%
---
Total Fund Operating Expenses** (After Reduction).............. .72%
===
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<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:........................ $ 7 $23 $40 $89
</TABLE>

The above example is based on expenses expected to have been incurred if
Class Z shares had been in existence throughout the fiscal year ended
December 31, 1995. The example should not be considered a representation
of past or future expenses. Actual expenses may be greater or less than
those shown.

The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in Class Z shares of the Fund
will bear, whether directly or indirectly. For more complete descriptions
of the various costs and expenses, see "How the Fund is Managed." "Other
Expenses" include operating expenses of the Fund, such as Directors' and
professional fees, registration fees, reports to shareholders, transfer
agency and custodian (domestic and foreign) fees and miscellaneous fees
(but excludes foreign withholding taxes).
--------
* Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended December
31, 1995.
** The Manager has agreed to subsidize expenses and waive management fees
so that Total Fund Operating Expenses do not exceed .75% of the
average net assets of the Class Z shares. The management fee without
such reductions would be .50 of 1% of the Fund's average daily net
assets. The operating expenses without such reductions would be 1.12%
for Class Z shares. See "How the Fund is Managed--Manager--Fee Waivers
and Subsidy."

2
<PAGE>

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

Class Z shares of the Fund are available for purchase by the following
categories of investors: (i) pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code, and non-qualified plans for which the Fund is an
available option (collectively, Benefit Plans), provided such Benefit Plans
(in combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution assets;
(ii) participants in any fee-based program sponsored by Prudential Securities
Incorporated (Prudential Securities) or its affiliates which includes mutual
funds as investment options and for which the Fund is an available option; and
(iii) investors who are, or have executed a letter of intent to become,
shareholders of any series of The Prudential Institutional Fund (Institutional
Fund) on or before one or more series of Institutional Fund reorganize or who
on that date have investments in certain products for which Institutional Fund
provides exchangeability. After a Benefit Plan qualifies to purchase Class Z
shares, all subsequent purchases will be for Class Z shares.

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

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

Class Z shareholders of the Fund may exchange their Class Z shares for Class
Z shares of other Prudential Mutual Funds on the basis of relative net asset
value. Shareholders who qualify to purchase Class Z shares (other than
participants in any fee-based program) will have their Class B and Class C
shares which are not subject to contingent deferred sales charges and their
Class A shares exchanged for Class Z shares on a quarterly basis. Participants
in any fee-based program for which the Fund is an available option will have
their Class A shares, if any, exchanged for Class Z shares when they elect to
have those assets become a part of the fee-based program. Upon leaving the
program (whether voluntarily or not), such Class Z shares (and, to the extent
provided for in the program, Class Z shares acquired through participation in
the program) will be exchanged for Class A shares at net asset value. See
"Shareholder Guide--How to Exchange Your Shares--Special Exchange Privilege."

THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND IS MANAGED--DISTRIBUTOR"
IN THE RETAIL CLASS PROSPECTUS:

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

THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND VALUES ITS SHARES" IN
THE RETAIL CLASS PROSPECTUS:

The NAV of Class Z shares will generally be higher than the NAV of Class A,
Class B or Class C shares because Class Z shares are not subject to any
distribution and/or service fee. It is expected, however, that the NAV of the
four classes will tend to converge immediately after the recording of
dividends, which will differ by approximately the amount of the distribution-
related expense accrual differential among the classes.

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

The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.

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

3
<PAGE>

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS........................................................... 2
Risk Factors and Special Characteristics................................. 2
FUND EXPENSES............................................................. 4
FINANCIAL HIGHLIGHTS...................................................... 5
HOW THE FUND INVESTS...................................................... 6
Investment Objective and Policies........................................ 6
Risk Factors and Special Considerations of Investing in Foreign
Securities.............................................................. 11
Risk Factors Relating to Investing in Debt Securities Rated Below
Investment Grade (Junk Bonds)........................................... 12
Hedging and Return Enhancement Strategies................................ 13
Other Investments and Policies........................................... 16
Investment Restrictions.................................................. 20
HOW THE FUND IS MANAGED................................................... 20
Manager.................................................................. 20
Distributor.............................................................. 21
Fee Waivers and Subsidy.................................................. 23
Portfolio Transactions................................................... 23
Custodian and Transfer and Dividend Disbursing Agent..................... 23
HOW THE FUND VALUES ITS SHARES............................................ 23
HOW THE FUND CALCULATES PERFORMANCE....................................... 24
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 24
GENERAL INFORMATION....................................................... 26
Description of Common Stock.............................................. 26
Additional Information................................................... 27
SHAREHOLDER GUIDE......................................................... 27
How to Buy Shares of the Fund............................................ 27
Alternative Purchase Plan................................................ 28
How to Sell Your Shares.................................................. 30
Conversion Feature--Class B Shares....................................... 33
How to Exchange Your Shares.............................................. 34
Shareholder Services..................................................... 35
APPENDIX.................................................................. A-1
Description of Security Ratings.......................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY........................................ B-1
</TABLE>
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MF166Z

CUSIP No.: Class Z: 74431J-40-9

PRUDENTIAL
DIVERSIFIED BOND
FUND, INC.

(CLASS Z SHARES)
----------------

PROSPECTUS
September 3, 1996

[LOGO OF PRUDENTIAL MUTUAL FUNDS]
<PAGE>

PRUDENTIAL DIVERSIFIED BOND FUND, INC.

Supplement dated September 12, 1996 to Prospectus dated April 26, 1996

THE FOLLOWING INFORMATION SUPPLEMENTS "FINANCIAL HIGHLIGHTS" IN THE PROSPECTUS:

FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS A, CLASS B AND CLASS C SHARES)

The following financial highlights for Class A, Class B and Class C shares
are unaudited. This information should be read in conjunction with the
financial statements and the notes thereto, which appear in the Statement
of Additional Information. The following financial highlights contain
selected data for a Class A, Class B and Class C share of common stock,
respectively, outstanding, total return, ratios to average net assets and
other supplemental data for the period indicated. The information has been
determined based on data contained in the financial statements. No Class Z
shares were outstanding during the period.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, 1996
----------------------------
CLASS A CLASS B CLASS C
------- -------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 13.79 $ 13.79 $13.79
------- -------- ------
INCOME FROM INVESTMENT OPTIONS
Net investment income(a)....................... .46 .42 .42
Net realized and unrealized gain on investment
transactions.................................. (.66) (.66) (.66)
------- -------- ------
Total from investment operations.............. (.20) (.24) (.24)
------- -------- ------
LESS DISTRIBUTIONS
Dividends from net investment income........... (.46) (.42) (.42)
------- -------- ------
Net asset value, end of period................. $ 13.13 $ 13.13 $13.13
======= ======== ======
TOTAL RETURN (C)............................... (1.60)% (1.80)% (1.80)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $21,239 $116,245 $3,523
Average net assets (000)....................... $17,317 $100,917 $3,134
Ratios to average net assets(a)/(b):
Expenses, including distribution fees......... .75 % 1.35 % 1.35 %
Expenses, excluding distribution fees......... .60 % .60 % .60 %
Net investment income......................... 6.98 % 6.38 % 6.38 %
Portfolio turnover rate........................ 149 % 149 % 149 %
</TABLE>
--------
(a) Net of expense subsidy and fee waiver.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for periods
of less than a full year are not annualized.
<PAGE>

THE FOLLOWING INFORMATION SUPPLEMENTS "GENERAL INFORMATION--DESCRIPTION OF
COMMON STOCK" IN THE PROSPECTUS:

THE FUND IS AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.001 PAR
VALUE PER SHARE, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS
C AND CLASS Z COMMON STOCK, EACH CONSISTING OF 500 MILLION AUTHORIZED SHARES.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv)
only Class B shares have a conversion feature and (v) Class Z shares are
offered exclusively for sale to a limited group of investors. For more
information about Class Z shares, contact your Prudential Securities financial
adviser or Prusec representative or telephone the Fund at (800) 225-1852.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about Class Z shares.
Since Class B and Class C shares generally bear higher distribution expenses
than Class A shares, the liquidation proceeds to shareholders of those classes
are likely to be lower than to Class A shareholders and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fee. In accordance with the Fund's Articles of Incorporation, the Board of
Directors may authorized the creation of additional series and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board of Directors may determine.

THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER GUIDE--HOW TO BUY SHARES OF
THE FUND" IN THE PROSPECTUS:

REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.

BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code (Benefit Plans), provided that the plan has existing
assets of at least $1 million invested in shares of Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the
exchange privilege) or 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 record keeping (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 Internal
Revenue Code and deferred compensation and annuity plans under Sections 457
and 403(b)(7) of the Code that participate in Prudential's PruArray or
SmartPath Programs (benefit plan record keeping 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.

2
<PAGE>

SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray 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 Transfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all
persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers
who have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 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 market fund 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 purchases.

You must notify the Fund's 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--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.

MF166C-2

3
<PAGE>

PRUDENTIAL DIVERSIFIED BOND FUND, INC.

Supplement dated September 12, 1996 to
Statement of Additional Information dated
April 26, 1996

THE FOLLOWING INFORMATION SUPPLEMENTS "DISTRIBUTOR" IN THE STATEMENT OF
ADDITIONAL INFORMATION:

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

THE FOLLOWING INFORMATION SUPPLEMENTS "PURCHASE AND REDEMPTION OF FUND SHARES"
IN THE STATEMENT OF ADDITIONAL INFORMATION:

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

Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares
which are not subject to any sales charge or distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv)
only Class B shares have a conversion feature and (v) Class Z shares are
offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."

SPECIMEN PRICE MAKE-UP SHEET

Under the current distribution arrangements between the Fund and the
Distributor. Class A shares are sold with a maximum sales charge of 4% and
Class B*, Class C* and Class Z** shares are sold at net asset value. Using the
Fund's net asset value at June 30, 1996, the maximum offering price of the
Fund's shares is as follows:

CLASS A
<TABLE>
<S> <C>
Net asset value and redemption price per Class A share.................. $13.13
Maximum sales charge (4% of offering price)............................. .55
------
Offering price to public................................................ $13.68
======
CLASS B
Net asset value, offering price and redemption price per Class B share*. $13.13
======
CLASS C
Net asset value, offering price and redemption price per Class C share*. $13.13
======
CLASS Z
Net asset value, offering price and redemption price per Class Z
share**................................................................ $13.13
======
</TABLE>
- --------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
** Class Z shares did not exist at June 30, 1996.
MF166C-3
<PAGE>

THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER INVESTMENT ACCOUNT--
EXCHANGE PRIVILEGE" IN THE STATEMENT OF ADDITIONAL INFORMATION:

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

THE FOLLOWING INFORMATION SUPPLEMENTS "PERFORMANCE INFORMATION" IN THE
STATEMENT OF ADDITIONAL INFORMATION:

YIELD. The yield for the 30-day period ended June 30, 1996 for the Fund's
Class A, Class B and Class C shares was 6.57%, 6.25% and 6.25%, respectively.
Class Z shares did not exist at June 30, 1996.

AVERAGE ANNUAL TOTAL RETURN. The average annual total return for the period
from January 10, 1995 (commencement of operations) to June 30, 1996 and for
the one year period ended June 30, 1996 for the Fund's Class A shares was 8.8%
and 1.7%, respectively; Class B shares was 8.6% and .4%, respectively; and
Class C shares was 11.2% and 4.4%, respectively. Class Z shares did not exist
at June 30, 1996.

AGGREGATE TOTAL RETURN. The aggregate total return for the period from
January 10, 1995 (commencement of operations) to June 30, 1996 and for the one
year period ended June 30, 1996 for the Fund's Class A shares was 17.9% and
6.0%, respectively; Class B shares was 17.0% and 5.4%, respectively; and Class
C shares was 17.0% and 5.4%, respectively. Class Z shares did not exist at
June 30, 1996.

THE FOLLOWING INFORMATION SUPPLEMENTS "DIRECTORS AND OFFICERS" IN THE
STATEMENT OF ADDITIONAL INFORMATION:

As of July 19, 1996, the directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.

As of July 19, 1996, the only beneficial owners, directly or indirectly of
more than 5% of any class of shares of the outstanding common stock of the
Fund were: Prudential Securities Inc., FA Nicanor G Pasion-Deceased, P.O. Box
180, Wall Street, New York, New York owned 648,580 Class A shares
(approximately 37% of the outstanding Class A shares) and Prudential
Securities Inc., FA Sandra M. DunWoody, 1209 S Heincke Rd, Miamisburg, Ohio
owned 181,928 Class C shares (approximately 64% of the outstanding Class C
shares).

As of July 19, 1996, Prudential Securities was the record holder for other
beneficial owners of 936,896 Class A shares (or approximately 53% of the
outstanding Class A shares), 4,556,659 Class B shares (or approximately 50% of
the outstanding Class B shares) and 190,875 Class C shares (or approximately
68% of the outstanding Class C shares) of the Fund. In the event of any
meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy materials to the beneficial owners for which it is the
record holder.

The following financial statements are unaudited and are based upon the
results of operations for the interim period ended June 30, 1996. Included
therein are all adjustments, if any, which are, in the opinion of management,
necessary to a fair statement of the results for the interim period presented.

2
<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED
June 30, 1996 (Unaudited) BOND FUND, INC.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
LONG-TERM INVESTMENTS--89.9%
- -------------------------------------------------------------------
Domestic Corporate Bonds--65.7%
Baa3 $ 2,000 Advanta National Bank,
Cert. of Deposit,
6.26%, 9/1/97
(Banking) $ 1,997,000
Ba3 2,000 Agco Corp.,
Sr. Sub. Notes,
8.50%, 3/15/06
(Agricultural Equipment) 1,960,000
Ba3 1,000 American Standard, Inc.,
Sr. Deb.,
11.375%, 5/15/04
(Consumer Goods & Services) 1,080,000
A3 2,500 Auburn Hills Trust,
Gtd. Cert.,
12.00%, 5/1/20
(Automotive) 3,611,000
B1 2,000 Bally's Grand, Inc.,
10.375%, 12/15/03
(Casinos) 2,195,000
NR 2,400 BankAmerica Corp.,
Sub. Notes, F.R.N.,
5.9844% (a), 5/17/99
(Banking) 2,419,680
Ba2 2,000 BJ Services Co.,
Sr. Notes,
7.00%, 2/1/06 1,846,720
(Oil & Gas Equipment &
Services)
B2 1,000 Cablevision Systems Corp.,
Sr. Sub. Notes,
9.25%, 11/1/05 930,000
(Cable & Pay Television
Systems)
B2 1,000 Centennial Cellular Corp.,
Sr. Notes,
10.125%, 5/15/05
(Telecommunications) 960,000
Baa3 2,500 Columbia Gas Systems, Inc.,
7.62%, 11/28/25
(Oil & Gas) 2,350,425
Baa3 $ 1,000 Delta Air Lines, Inc.,
Sr. Notes,
9.875%, 5/15/00
(Transportation) $ 1,092,590
Digital Equipment Corp.,
Ba1 1,000 7.125%, 10/15/02 970,100
Ba1 4,000 7.75%, 4/1/23
(Computers) 3,616,320
Ba3 1,500 El Paso Electric Co.,
9.40%, 5/1/11
(Utilities) 1,485,000
Enterprise Rent-A-Car U.S.A.
Finance Co.,
Baa3 1,000 7.875%, 3/15/98 1,024,660
Baa3 2,500 7.00%, 6/15/00
(Financial Services) 2,497,656
Federated Dept. Stores, Inc.,
Sr. Notes,
Ba1 2,000 10.00%, 2/15/01 2,105,000
Ba1 1,000 8.125%, 10/15/02 980,000
Ba1 3,000 8.50%, 6/15/03
(Retail) 2,970,000
A2 2,500 First Union Corp.,
8.00%, 11/15/02
(Banking) 2,612,525
A3 500 General Motors Acceptance
Corp.,
8.625%, 6/15/99
(Financial Services) 525,480
Baa1 3,000 Lumbermens Mutual Casualty
Co., Sub. Notes,
9.15%, 7/1/26
(Insurance) 3,103,125
B1 3,000 MFS Communications, Inc.,
Zero Coupon, 1/15/06
(Telecommunications) 1,815,000
A2 2,500 NationsBank Corp.,
Sr. Notes,
7.00%, 5/15/03
(Banking) 2,486,175

- -------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED
June 30, 1996 (Unaudited) BOND FUND, INC.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
- -------------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
A1 $ 1,000 Nationwide Life Insurance
Co.,
9.875%, 2/15/25
(Insurance) $ 1,088,000
News America Hldgs., Inc.,
Sr. Notes,
Baa3 1,000 9.125%, 10/15/99 1,064,310
Baa3 4,000 7.75%, 12/1/45
(Media) 3,579,040
Ba2 1,500 Noble Drilling Corp.,
Sr. Notes,
9.125%, 7/1/06 1,503,750
(Oil & Gas Equipment &
Services)
Baa3 3,000 NorAm Energy Corp.,
7.50%, 8/1/00
(Oil & Gas) 3,040,440
Occidental Petroleum Corp.,
Baa3 1,000 10.125%, 11/15/01 1,136,440
Baa3 1,000 11.125%, 8/1/10
(Oil & Gas) 1,282,980
Paramount Communications,
Inc., Sr. Notes,
Ba2 1,857 5.875%, 7/15/00 1,766,156
Ba2 500 7.50%, 1/15/02
(Media) 493,220
Ba2 1,250 Parker & Parsley Petroleum
Co.,
8.25%, 8/15/07
(Oil & Gas) 1,303,600
Ba2 1,000 RHG Finance Corp.,
Gtd. Notes,
8.875%, 10/1/05
(Financial Services) 1,032,500
Baa2 1,000 RJR Nabisco, Inc.,
6.70%, 6/15/02
(Consumer Goods & Services) 975,410
Ba2 1,000 Royal Caribbean Cruises Ltd.,
Sr. Sub. Notes,
11.375%, 5/15/02
(Entertainment) 1,075,000
Ba1 1,000 Ryerson Tull, Inc.,
8.50%, 7/15/01
(Metals Processing) 1,001,250
Salomon Inc.,
Sr. Notes,
Baa1 $ 2,000 5.98%, 2/2/98 $ 1,978,080
Baa1 3,800 7.00%, 5/15/99 3,801,938
Baa1 500 7.25%, 5/1/01
(Financial Services) 498,760
A2 1,000 Sears Roebuck Acceptance
Corp.,
6.34%, 10/12/00
(Financial Services) 981,710
Tenet Healthcare Corp.,
Sr. Notes,
Ba1 2,000 9.625%, 9/1/02 2,125,000
Ba1 3,500 8.625%, 12/1/03
(Health Care) 3,548,125
Baa3 1,000 Time Warner Entertainment,
Co., L.P., Sr. Deb.,
8.375%, 3/15/23
(Entertainment) 973,620
Time Warner, Inc.,
Ba1 2,500 7.75%, 6/15/05 2,440,550
Ba1 2,000 6.85%, 1/15/26
(Media) 1,915,740
Transco Energy Co.,
Baa2 500 9.125%, 5/1/98 519,595
Baa2 500 9.375%, 8/15/01
(Oil & Gas) 549,495
B2 295 UCAR Global Enterprises,
Inc.,
Sr. Sub. Notes,
12.00%, 1/15/05
(Steel) 334,825
Baa3 1,000 USX Corp.,
9.80%, 7/1/01
(Steel) 1,097,200
Ba2 3,000 Viacom Inc.,
Sr. Notes,
7.75%, 6/1/05
(Media) 2,925,060
Baa1 2,000 Weatherford Enterra, Inc., 1,970,000
7.25%, 5/15/06 -----------
(Oil & Gas Equipment &
Services)
Total Domestic Corporate
Bonds
(cost $93,162,942) 92,635,250

- -------------------------------------------------------------------
4 See Notes to Financial Statements.
<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED
June 30, 1996 (Unaudited) BOND FUND, INC.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
- -------------------------------------------------------------------
Foreign Government Securities--10.9%
A2 $ 2,000 Hydro-Quebec,
(Canada),
8.05%, 7/7/24 $ 2,120,080
A2 2,500 Quebec Province,
(Canada),
6.50%, 1/17/06 2,343,325
B1 600 Republic of Argentina,
9.25%, 2/23/01 575,250
Republic of Colombia,
Baa3 1,000 8.75%, 10/6/99 1,021,250
Baa3 2,000 8.00%, 6/14/01 1,981,660
Baa3 2,000 7.25%, 2/15/03 1,886,580
A1 3,600 Republic of Italy,
6.875%, 9/27/23 3,246,192
Ba1 2,000 Trinidad & Tobago,
(Trinidad),
11.50%, 11/20/97 2,100,000
Total Foreign Government -------------
Securities
(cost $15,681,787) 15,274,337
- -------------------------------------------------------------------
Foreign Corporate Bonds--10.9%
Aa1 1,000 African Development Bank,
6.875%, 10/15/15
(Banking-Supranational) 939,950
Ba1 1,000 Banco de Comercio Exterior de
Colombia,
8.625%, 6/2/00
(Financial Services) 1,017,500
A3 1,000 Kansallis-Osake-Pankki,
(Finland), Sub. Notes,
10.00%, 5/1/02
(Banking-Yankee) 1,128,070
NR 3,000 National Bank of Romania,
9.75%, 6/25/99
(Banking) 3,030,000
Ba3 $ 4,000 Polysindo Int'l. Finance Co.
BV,
(Indonesia),
11.375%, 6/15/06
(Financial Services-Yankee) $ 4,070,000
Aa3 2,000 Rodamco NV,
(Netherlands),
7.30%, 5/15/05
(Financial Services) 1,991,000
Ba3 2,000 Rogers Cablesystems, Inc.,
(Canada), Sr. Notes,
10.00%, 3/15/05 1,970,000
(Cable & Pay Television
Systems-Yankee)
A1 1,250 Santander Financial
Issuances,
(Spain),
Gtd. Sub. Notes,
7.25%, 5/30/06
(Financial Services) 1,230,862
Total Foreign Corporate Bonds -------------
(cost $15,409,893) 15,377,382
- -------------------------------------------------------------------
U. S. Government Securities--1.0%
Aaa 1,200 United States Treasury Bond,
6.875%, 8/15/25 1,187,808
Aaa 250 United States Treasury Note,
6.875%, 5/15/06 252,773
-------------
Total U. S. Government
Securities
(cost $1,412,086) 1,440,581
- -------------------------------------------------------------------
Preferred Stock--1.4%
Ba3 2,000 Time Warner, Inc., 1,960,000
(Media) -------------
(cost $2,000,000)
Total Long-Term Investments
(cost $127,666,708) 126,687,550
-------------

- -------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>

- ---------------
F.R.N.--Floating Rate Note
NR--Not Rated by Moody's or Standard & Poor's.
(a) Rate shown reflects current rate of variable rate instruments.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
The industry classification of portfolio holdings and other net assets shown as
a percentage of net assets as of June 30, 1996 was as follows:

Financial Services.................................... 14.6%
Media................................................. 11.4
Banking............................................... 11.1
Foreign Government Securities......................... 10.9
U.S. Government & Agency Securities................... 9.6
Oil & Gas............................................. 7.2
Retail................................................ 4.3
Health Care........................................... 4.0
Oil & Gas Equipment & Services........................ 3.8
Computers............................................. 3.3
Insurance............................................. 3.0
Automotive............................................ 2.6
Cable & Pay Television Systems........................ 2.1
Telecommunications.................................... 2.0
Casinos............................................... 1.6
Agricultural Equipment................................ 1.4
Consumer Goods & Services............................. 1.4
Entertainment......................................... 1.4
Steel................................................. 1.0
Utilities............................................. 1.0
Transportation........................................ .8
Metals Processing..................................... .7
Other assets in excess of liabilities................. .8
-----
100.0%
=====

- -------------------------------------------------------------------
6 See Notes to Financial Statements.
<PAGE>

Statement of Assets and Liabilities (Unaudited) PRUDENTIAL DIVERSIFIED BOND
FUND, INC.
- ------------------------------------------------------------------------------------------------------------------------------
Assets June 30, 1996
------------
<S> <C>
Investments, at value (cost $140,793,408)................................................................... $139,813,050
Cash........................................................................................................ 41,926
Receivable for investments sold............................................................................. 8,274,799
Interest receivable......................................................................................... 2,091,500
Receivable for Fund shares sold............................................................................. 1,304,895
Deferred expenses and other assets.......................................................................... 145,968
Dividends receivable........................................................................................ 44,565
------------
Total assets............................................................................................. 151,716,703
------------
Liabilities
Payable for investments purchased........................................................................... 9,501,946
Payable for Fund shares reacquired.......................................................................... 712,444
Dividends payable........................................................................................... 293,659
Accrued expenses and other liabilities...................................................................... 116,857
Distribution fee payable.................................................................................... 73,442
Management fee payable...................................................................................... 11,084
------------
Total liabilities........................................................................................ 10,709,432
------------
Net Assets.................................................................................................. $141,007,271
============
Net assets were comprised of:
Common stock, at par..................................................................................... $ 10,736
Paid-in capital in excess of par......................................................................... 142,695,555
------------
142,706,291
Accumulated net realized loss on investments............................................................. (718,662)
Net unrealized depreciation on investments............................................................... (980,358)
------------
Net assets, June 30, 1996................................................................................... $141,007,271
============
Class A:
Net asset value and redemption price per share
($21,238,725/1,617,125 shares of common stock issued and outstanding)................................. $13.13
Maximum sales charge (4.0% of offering price)............................................................ 0.55
------
Maximum offering price to public......................................................................... $13.68
======
Class B:
Net asset value, offering price and redemption price per share
($116,244,956/8,850,209 shares of common stock issued and outstanding)................................ $13.13
======
Class C:
Net asset value, offering price and redemption price per share
($3,523,590/268,267 shares of common stock issued and outstanding).................................... $13.13
======
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements. 7
</TABLE>

<PAGE>

PRUDENTIAL DIVERSIFIED BOND FUND, INC.
DIVERSIFIED BOND FUND, INC.
Statement of Operations (Unaudited)
- --------------------------------------------------------------
Six Months
Ended
June 30,
Net Investment Income 1996
-----------
Income
Interest..................................... $ 4,622,289
Dividends.................................... 44,565
-----------
Total income............................... 4,666,854
-----------
Expenses
Distribution fee--Class A.................... 12,917
Distribution fee--Class B.................... 376,372
Distribution fee--Class C.................... 11,688
Management fee............................... 301,762
Transfer agent's fees and expenses........... 98,000
Custodian's fees and expenses................ 63,000
Registration fees............................ 50,000
Reports to shareholders...................... 40,000
Amortization of deferred organization
expenses.................................. 21,735
Audit fee and expenses....................... 12,000
Directors' fees.............................. 11,000
Legal fees and expenses...................... 7,000
Miscellaneous................................ 1,495
-----------
Total expenses............................ 1,006,969
Less: Management fee waiver (Note 2)......... (241,410)
-----------
Net expenses.............................. 765,559
-----------
Net investment income........................... 3,901,294
-----------
Realized and Unrealized
Loss on Investments
Net realized loss on investment transactions.... (965,781)
Net change in unrealized depreciation on
investments.................................. (4,772,503)
-----------
Net loss on investments......................... (5,738,284)
-----------
Net Decrease in Net Assets
Resulting from Operations....................... $(1,836,990)
===========

PRUDENTIAL DIVERSIFIED BOND FUND, INC.
DIVERSIFIED BOND FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- --------------------------------------------------------------

January 10,
Six Months 1995(a)
Ended Through
Increase (Decrease) June 30, December 31,
in Net Assets 1996 1995
---------- ------------
Operations
Net investment income........... $ 3,901,294 $ 3,242,014
Net realized gain (loss) on
investment transactions...... (965,781) 1,773,712
Net unrealized appreciation
(depreciation) on
investments.................. (4,772,503) 3,792,145
------------ ------------
Net increase (decrease) in net
assets resulting from
operations................... (1,836,990) 8,807,871
------------ ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A...................... (601,652) (499,866)
Class B...................... (3,200,448) (2,663,152)
Class C...................... (99,194) (78,996)
------------ ------------
(3,901,294) (3,242,014)
------------ ------------
Distributions to shareholders
from net realized gains
Class A...................... -- (209,652)
Class B...................... -- (1,276,511)
Class C...................... -- (40,430)
------------ ------------
-- (1,526,593)
------------ ------------
Fund share transactions (net of
share conversions) (Note 7)
Net proceeds from shares sold... 58,500,069 108,185,016
Net asset value of shares issued
to shareholders in
reinvestment of dividends and
distributions................ 2,602,913 3,228,879
Cost of shares reacquired....... (16,760,529) (13,150,057)
------------ -----------
Net increase in net assets from
Fund share transactions...... 44,342,453 98,263,838
------------ -----------
Total increase..................... 38,604,169 102,303,102
Net Assets
Beginning of period................ 102,403,102 100,000
------------ -----------
End of period...................... $141,007,271 $102,403,102
============ =============

- ---------------
(a) Commencement of investment operations.
- ---------------------------------------------------------------
8 See Notes to Financial Statements.
<PAGE>

Notes to Financial Statements (Unaudited) PRUDENTIAL DIVERSIFIED BOND
FUND, INC.
- --------------------------------------------------------------------------------
Prudential Diversified Bond Fund, Inc. (the ``Fund''), which was incorporated
in Maryland on September 1, 1994, is registered under the Investment Company
Act of 1940 as a diversified, open-end management investment company. The Fund
had no significant operations other than the issuance of 2,667 shares each of
Class A and Class B common stock and 2,666 shares of Class C common stock for
$100,000 on October 5, 1994 to Prudential Mutual Fund Management, Inc.
("PMF"). Investment operations commenced on January 10, 1995.

The Fund's investment objective is to achieve high current income consistent
with an appropriate balance between risk and reward. The Fund will seek to
achieve this objective by allocating its assets among sectors of the fixed
income securities markets, U.S. Government securities, mortgage-backed
securities, corporate debt, and foreign securities based upon an evaluation of
current market and economic conditions.
- -------------------------------------------------------------------------------
Note 1. Accounting Policies

The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: Securities listed on a securities exchange (other than
options on securities and indices) are valued at the last sales price on the
day of valuation, or, if there was no sale on such day, at the average of
readily available closing bid and asked prices on such day as provided by a
pricing service. Corporate bonds (other than convertible debt securities) and
U.S. Government securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed to
be over-the-counter, are valued by an independent pricing service. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, are valued at the average of the most recently quoted bid and
asked prices provided by a principal market maker or dealer. Options on
securities and indices traded on an exchange are valued at the average of the
most recently quoted bid and asked prices provided by the respective exchange
and futures contracts and options thereon are valued at the last sales price as
of the close of business of the exchange. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.

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

Options: The Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value caused by changes in
prevailing interest rates 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 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.

Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund amortizes premiums and discounts paid on purchases of
portfolio securities as adjustments to interest income. 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.
- -------------------------------------------------------------------------------
9
<PAGE>

Notes to Financial Statements (Unaudited) PRUDENTIAL DIVERSIFIED BOND
FUND, INC.
- --------------------------------------------------------------------------------
Dividends and Distributions: The Fund declares daily and pays monthly dividends
from net investment income. The Fund will distribute at least annually any net
capital gains in excess of loss carryforwards. Dividends and distributions are
recorded on the ex-dividend date.

Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.

Federal Income Taxes: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.

Deferred Organization Expenses: Approximately $210,000 of expenses were
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 from the
date the Fund commenced investment operations.
- -------------------------------------------------------------------------------
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 The Prudential Investment Corporation (``PIC''); PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the cost of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.

The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Fund. For the six
months ended June 30, 1996, PMF waived 80% of its management fee. The amount of
fees waived for the six months ended June 30, 1996 amounted to $241,410 ($.02
per share for Class A, B and C shares; .40 of 1% of average daily net assets,
annualized). The Fund is not required to reimburse PMF for such waiver.
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 the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also distributor of the Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the "Class A, B and C Plans"), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.

Pursuant to the Class A, B and C Plans, the Fund compensates PSI and PMFD for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Class A, Class B and Class C Plans were .15%, .75% and
.75%, respectively, of the average daily net assets of Class A, Class B and
Class C shares for the six months ended June 30, 1996.

PSI has advised the Fund that it has received approximately $79,000 in
front-end sales charges resulting from sales of Class A shares during the six
months ended June 30, 1996. From these fees, PSI paid such sales charges to
Pruco Securities Corporation and affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.

PSI has advised the Fund that for the six months ended June 30, 1996, it
received approximately $125,000 and $1,600 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.

PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- -------------------------------------------------------------------------------
10
<PAGE>

Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the six months ended June 30
1996, the Fund incurred fees of approximately $97,000 for the services of PMFS.
As of June 30, 1996, approximately $21,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
Note 4. Expense Subsidy

PMF voluntarily agreed to subsidize operating expenses so that total Fund
operating expenses do not exceed .90%, 1.50% and 1.50% of the average daily net
assets of the Class A, Class B and Class C shares, respectively. No
reimbursement was required for the six months ended June 30, 1996.
- ------------------------------------------------------------
Note 5. Portfolio Securities

Purchases and sales of investment securities, other than short-term
investments, for the six months ended June 30, 1996 were $209,629,130 and
$172,723,814, respectively.

The federal income tax cost basis of the Fund's investments at June 30, 1996
was $140,799,523 and, accordingly, net unrealized depreciation for federal
income tax purposes was $986,473 (gross unrealized appreciation-$988,257; gross
unrealized depreciation-$1,974,730).
- --------------------------------------------------------------------------------
Note 6. Joint Repurchase Agreement Account

The Fund, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. As of June 30,
1996, the Fund had a 1.1% undivided interest in the repurchase agreements in
the joint account. The undivided interest for the Fund represents $12,128,000
in principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor were as follows:

Bear, Stearns & Co., Inc., 5.40%, in the principal amount of $369,000,000,
repurchase price $369,055,350, due 7/1/96. The value of the collateral
including accrued interest was $377,194,429.

Goldman, Sachs & Co., 5.47%, in the principal amount of $369,000,000,
repurchase price $369,056,068 7/1/96. The value of the collateral including
accrued interest was $376,380,556.

Smith Barney, Inc., 5.50%, in the principal amount of $369,000,000, repurchase
price $369,056,375, due 7/1/96. The value of the collateral including accrued
interest was $376,380,118.
- --------------------------------------------------------------------------------
Note 7. Capital

The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 4%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value.
There are 2 billion shares of common stock, $.001 par value per share, divided
into three classes, designated Class A, B and Class C, each of which consists
of 1 billion, 500 million and 500 million authorized shares, respectively. Of
the 10,735,601 shares of common stock issued and outstanding at June 30, 1996,
PMF owned 8,000.
- -------------------------------------------------------------------------------
11
<PAGE>

Class A Shares Amount
- ------- --------- -----------
Six months ended June 30, 1996:
Shares sold........................... 718,103 $ 9,596,855
Shares issued in reinvestment of
dividends........................... 32,331 430,621
Shares reacquired..................... (252,605) (3,361,031)
--------- -----------
Net increase in shares outstanding
before conversion................... 497,829 6,666,445
Shares issued upon conversion from
Class B............................. 84,075 1,100,474
--------- -----------
Net increase in shares outstanding.... 581,904 $ 7,766,919
========= ===========
January 10, 1995 (a) through
December 31, 1995:
Shares sold........................... 1,149,425 $15,161,009
Shares issued in reinvestment of
dividends and distributions......... 39,135 528,573
Shares reacquired..................... (242,566) (3,231,169)
--------- -----------
Net increase in shares outstanding
before conversion................... 945,994 12,458,413
Shares issued upon conversion from
Class B............................. 86,560 1,185,549
--------- -----------
Net increase in shares outstanding.... 1,032,554 $13,643,962
========= ===========
Class B
- -------
Six months ended June 30, 1996:
Shares sold........................... 3,550,255 $47,510,958
Shares issued in reinvestment of
dividends........................... 157,986 2,104,091
Shares reacquired..................... (971,412) (12,959,921)
--------- -----------
Net increase in shares outstanding
before conversion................... 2,736,829 36,655,128
Shares reacquired upon conversion
into Class A........................ (84,075) (1,100,474)
--------- -----------
Net increase in shares outstanding.... 2,652,754 $35,554,654
========= ===========
January 10, 1995 (a) through
December 31, 1995:
Shares sold........................... 6,807,170 $90,362,412
Shares issued in reinvestment of
dividends and distributions......... 193,355 2,618,478
Shares reacquired..................... (719,177) (9,697,206)
--------- -----------
Net increase in shares
outstanding before conversion....... 6,281,348 83,283,684
Shares reacquired upon conversion into
Class A............................. (86,560) (1,185,549)
--------- -----------
Net increase in shares outstanding.... 6,194,788 $82,098,135
========= ===========

Class C Shares Amount
- ------- --------- -----------
Six months ended June 30, 1996:
Shares sold........................... 103,776 $ 1,392,256
Shares issued in reinvestment of
dividends........................... 5,121 68,201
Shares reacquired..................... (33,172) (439,577)
--------- -----------
Net increase in shares outstanding.... 75,725 $ 1,020,880
========= ===========
January 10, 1995 (a) through
December 31, 1995:
Shares sold........................... 200,032 $ 2,661,595
Shares issued in reinvestment of
dividends and distributions......... 6,043 81,828
Shares reacquired..................... (16,199) (221,682)
--------- -----------
Net increase in shares outstanding.... 189,876 $ 2,521,741
========= ===========
- ---------------
(a) Commencement of investment operations.
- -------------------------------------------------------------------------------
12
<PAGE>

Financial Highlights (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- ------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
---------------------------- ---------------------------- ----------
January 10, January 10,
Six Months 1995(a) Six Months 1995(a) Six Months
Ended Through Ended Through Ended
June 30, December 31, June 30, December 31, June 30,
1996 1995 1996 1995 1996
---------- ------------- ---------- ------------- ----------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 13.79 $ 12.50 $ 13.79 $ 12.50 $ 13.79
---------- ------ ---------- ------ ----------

Income from investment operations
Net investment income(b)...................... .46 .90 .42 .82 .42
Net realized and unrealized gain on investment
transactions................................ (.66) 1.51 (.66) 1.51 (.66)
---------- ------ ---------- ------ ----------
Total from investment operations........... (.20) 2.41 (.24) 2.33 (.24)
---------- ------ ---------- ------ ----------

Less distributions
Dividends from net investment income.......... (.46) (.90) (.42) (.82) (.42)
Distributions from net realized gains......... -- (.22) -- (.22) --
---------- ------ ---------- ------ ----------

Total distributions........................ (.46) (1.12) (.42) (1.04) (.42)
---------- ------ ---------- ------ ---------

Net asset value, end of period................ $ 13.13 $ 13.79 $ 13.13 $ 13.79 $ 13.13
========== ====== =========- ======= =========
TOTAL RETURN(d)............................... (1.60)% 19.80% (1.80)% 19.11% (1.80)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $ 21,239 $14,276 $116,245 $85,472 $ 3,523
Average net assets (000)...................... $ 17,317 $ 7,428 $100,917 $43,574 $ 3,134
Ratios to average net assets(b)/(c):
Expenses, including distribution fees...... .75% .87% 1.35% 1.47% 1.35%
Expenses, excluding distribution fees...... .60% .72% .60% .72% .60%
Net investment income...................... 6.98% 6.92% 6.38% 6.32% 6.38%
Portfolio turnover rate....................... 149% 260% 149% 260% 149%
</TABLE>

January 10,
1995(a)
Through
December 31,
1995
-------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 12.50
-----
Income from investment operations
Net investment income(b)...................... .82
Net realized and unrealized gain on investment
transactions................................ 1.51
-----
Total from investment operations........... 2.33
-----
Less distributions
Dividends from net investment income.......... (.82)
Distributions from net realized gains......... (.22)
-----
Total distributions........................ (1.04)
-----
Net asset value, end of period................ $ 13.79
=====
TOTAL RETURN(d)............................... 19.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $ 2,655
Average net assets (000)...................... $ 1,307
Ratios to average net assets(b)/(c):
Expenses, including distribution fees...... 1.47%
Expenses, excluding distribution fees...... .72%
Net investment income...................... 6.32%
Portfolio turnover rate....................... 260%
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy and fee waiver.
(c) Annualized.
(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 returns for periods of less than a
full year are not annualized.

- -------------------------------------------------------------------------------
See Notes to Financial Statements. 13

MF166C-3