PRUDENTIAL DIVERSIFIED BOND FUND INC, 485BPOS, 1998-03-04

PRUDENTIAL DIVERSIFIED BOND FUND INC
485BPOS, 1998-03-04

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<PAGE>

As filed with the Securities and Exchange Commission on March 4, 1998

Registration No. 33-55441 811-7215
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]

PRE-EFFECTIVE AMENDMENT NO. [_]

POST-EFFECTIVE AMENDMENT NO. 5 [X]

AND/OR

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 [_]

AMENDMENT NO. 8 [X]

(Check appropriate box or boxes)

-----------

PRUDENTIAL DIVERSIFIED BOND FUND, INC.

(Exact name of registrant as specified in charter)

GATEWAY CENTER THREE 100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077

(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530

S. JANE ROSE, ESQ.
GATEWAY CENTER THREE

100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.

-----------

[X] immediately upon filing pursuant to paragraph (b)

[_] on (date) pursuant to paragraph (b)

[_] 60 days after filing pursuant to paragraph (a)(1)

[_] on (date) pursuant to paragraph (a)(1)

[_] 75 days after filing pursuant to paragraph (a)(2)

[_] on (date) pursuant to paragraph (a)(2) of Rule 485.

If appropriate, check the following box:

[_] This post-effective amendment designates a new
effective datefor previously filed post-effective
amendment.

Title of Securities
Bring Registered.........Share of Common Stock (Par Value $.001 per share)
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<PAGE>

CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C>
PART A
Item 1. Cover Page............................. Cover Page
Item 2. Synopsis............................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information........ Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Registrant...... Cover Page; Fund Highlights;
How the Fund Invests; General
Information
Item 5. Management of the Fund................. Financial Highlights; How the
Fund is Managed; General
Information; Shareholder Guide
Item 5A. Management's Discussion of Fund
Performance.................................... Not Applicable
Item 6. Capital Stock and Other Securities..... Taxes, Dividends and
Distributions; General
Information; Shareholder Guide
Item 7. Purchase of Securities Being Offered... Shareholder Guide; How the
Fund Values its Shares; Fund
Expenses; How the Fund is
Managed
Item 8. Redemption or Repurchase............... Shareholder Guide; How the
Fund Values its Shares
Item 9. Pending Legal Proceedings.............. Not Applicable
PART B
Item 10. Cover Page............................. Cover Page
Item 11. Table of Contents...................... Table of Contents
Item 12. General Information and History........ General Information
Item 13. Investment Objectives and Policies..... Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund................. Directors and Officers;
Manager; Distributor
Item 15. Control Persons and Principal Holders
of Securities.................................. Not Applicable
Item 16. Investment Advisory and Other Services. Manager; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other Portfolio Transactions and
Practices...................................... Brokerage
Item 18. Capital Stock and Other Securities..... Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and Redemption of
Securities Being Offered....................... Fund Shares; Shareholder
Investment Account; Net Asset
Value
Item 20. Tax Status............................. Taxes, Dividends and
Distributions
Item 21. Underwriters........................... Distributor
Item 22. Calculation of Performance Data........ Performance Information
Item 23. Financial Statements................... Financial Statements
PART C
</TABLE>

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.

1
<PAGE>

PRUDENTIAL DIVERSIFIED BOND FUND, INC.

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PROSPECTUS DATED MARCH 4, 1998

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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
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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)."

This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of the Prudential Insurance Company of America
(http://www.Prudential.com). Additional information about the Fund has been
filed with the Securities and Exchange Commission (the Commission) in a
Statement of Additional Information, dated March 4, 1998, 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. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding the Fund.

- -------------------------------------------------------------------------------
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 NOR HAS THE 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 this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.

WHAT IS PRUDENTIAL DIVERSIFIED BOND FUND, INC.?

Prudential Diversified Bond Fund, Inc. is a mutual fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing
the proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified
management investment company.

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is high current income consistent with an
appropriate balance between risk and reward as determined by the investment
adviser. It seeks to achieve this objective by allocating its assets primarily
among 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.
There can be no assurance that the Fund will achieve its objective. See "How
the Fund Invests--Investment Objective and Policies" at page 9.

WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?

The Fund will allocate its assets among one or more sectors of the fixed-
income securities markets and, under normal circumstances, will maintain at
least 65% of its total assets in investment grade debt securities (as defined
herein). See "How the Fund Invests--Investment Objective and Policies" at page
9. The Fund is permitted to invest up to 45% of its total assets in debt
securities issued by foreign companies and foreign governments, which involves
certain risks and considerations not typically associated with investments in
U.S. Government securities and debt securities of domestic companies. See "How
the Fund Invests--Risk Factors and Special Considerations of Investing in
Foreign Securities" at page 14. The Fund is permitted to invest up to 35% of
its net assets in non-investment grade bonds having a minimum rating of at
least CCC as determined by a nationally recognized securities rating
organization (NRSRO), such as Standard & Poor's Ratings Group or another NRSRO
or, if unrated, are, in the opinion of the investment adviser, of equivalent
quality. Lower rated securities are subject to a greater risk of loss of
principal and interest. See "How the Fund Invests--Risk Factors Relating to
Investing in Debt Securities Rated Below Investment Grade (Junk Bonds)" at page
15. The Fund may also engage in various derivative securities transactions
including hedging and return enhancement strategies and interest rate swap
transactions, and borrow for leveraging. See "How the Fund Invests--Hedging and
Return Enhancement Strategies--Risks of Hedging and Return Enhancement
Strategies" at page 18. The amount of income available for distribution to
shareholders will be affected by any foreign currency gains or losses generated
by the Fund upon the disposition of debt securities denominated in a foreign
currency and by certain hedging activities of the Fund. See "Taxes, Dividends
and Distributions" at page 27. As with an investment in any mutual fund, an
investment in this fund can decrease in value and you can lose money.

WHO MANAGES THE FUND?

Prudential Investments Fund Management LLC (PIFM 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 January 31, 1998, PIFM
served as manager or administrator to 64 investment companies, including 42
mutual funds, with aggregate assets of approximately $63 billion. The
Prudential Investment Corporation (PIC), which does business under the name of
Prudential Investments (PI, the Subadviser or the investment adviser),
furnishes investment advisory services in connection with the management of the
Fund under a Subadvisory Agreement with PIFM. See "How the Fund is Managed--
Manager" at page 23. The term "investment adviser," as used herein, refers to
the Manager and the Subadviser.

WHO DISTRIBUTES THE FUND'S SHARES?

Prudential Securities Incorporated (Prudential Securities or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares and is paid a

2
<PAGE>

distribution and service fee which is currently being charged at the annual
rate of .15 of 1% of the average daily net assets of the Class A shares, and at
the annual rate of .75 of 1% of the average daily net assets of each of the
Class B and Class C shares. The Distributor incurs the expenses of distributing
the Class Z shares under a distribution agreement with the Fund, none of which
is reimbursed by or paid for by the Fund. See "How the Fund Is Managed--
Distributor" at page 24.

WHAT IS THE MINIMUM INVESTMENT?

The minimum initial investment is $1000 for Class A and Class B shares per
class and $5,000 for Class C shares. There is no minimum initial investment
requirement for investors who qualify to purchase Class Z shares. The minimum
subsequent investment is $100 for Class A, Class B and Class C shares. Class Z
shares are not subject to any minimum investment requirements. There is no
minimum investment requirement for certain retirement and employee savings
plans or custodial accounts for the benefit of minors and for purchases made in
connection with the "Best Minds" program sponsored by the Distributor. 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 30 and "Shareholder Guide--Shareholder Services" at
page 41.

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 LLC (PMFS or the Transfer Agent), at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at NAV without any sales charge. See "How The Fund
Values its Shares" at page 26 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 30.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers four classes of shares:

. Class A Shares: Sold with a maximum initial sales charge of 4% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses)
approximately seven years after purchase.
. Class C Shares: Sold without an initial sales charge but, for one year
after purchase, are subject to a CDSC of 1% on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related expenses
than Class A shares but do not convert to another class.

. Class Z Shares: Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not subject
to any ongoing service or distribution-related expenses.

See "Shareholder Guide--Alternative Purchase Plan" at page 31.

HOW DO I SELL MY SHARES?

You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 35. Participants
in programs sponsored by Prudential Retirement Services should contact their
client representative for more information about selling their Class Z shares.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

The Fund expects to declare daily and pay monthly dividends of net investment
income and pay distributions of net capital gains, if any, 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. The amount of income available for distribution to
shareholders will be affected by any foreign currency gains or losses generated
by the Fund upon the disposition of debt securities denominated in a foreign
currency and by certain hedging activities of the Fund. See "Taxes, Dividends
and Distributions" at page 27.

3
<PAGE>

FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 4% None None None
Maximum Sales Load Im-
posed on Reinvested
Dividends............. None None None None
Deferred Sales Load (as None
a percentage of origi- None 5% during the first year, 1% on redemptions
nal purchase price or decreasing by 1% annually to made within one
redemption proceeds, 1% in the fifth and year of purchase
whichever is lower)... the sixth years and
0% in the seventh year*
Redemption Fees........ None None None None
Exchange Fees.......... None None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES**
(as a percentage of av-
erage net assets)
Management Fees**...... .21% .21% .21% .21%
12b-1 Fees++ (After Re-
duction) ............ .15% .75% .75% None
Other Expenses......... .46% .46% .46% .46%
--- ---- ---- ----
Total Fund Operating
Expenses (After Re-
duction)............. .82% 1.42% 1.42% .67%
=== ==== ==== ====
</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 re-
turn and (2) redemption at the end of each time
period:
Class A....................................... $48 $65 $84 $137
Class B....................................... $64 $75 $88 $146
Class C....................................... $24 $45 $78 $170
Class Z....................................... $ 7 $21 $37 $ 83
You would pay the following expenses on the
same investment, assuming no redemption:
Class A....................................... $48 $65 $84 $137
Class B....................................... $14 $45 $78 $146
Class C....................................... $14 $45 $78 $170
Class Z....................................... $ 7 $21 $37 $ 83
</TABLE>

The above example is based on restated data for the Fund's fiscal year ended
December 31, 1997. 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 an investor in understanding the various
types of costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" include operating
expenses of the Fund, such as Directors' and professional fees, registration
fees, reports to shareholders, transfer agency and custodian (domestic and
foreign) fees (but excludes foreign withholding taxes).
- ------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."

** The expense information in the table has been restated to reflect current
fees. Effective May 1, 1997, PIFM eliminated its management fee waiver (.05
of 1%). See "How the Fund is Managed--Manager--Fee Waivers."

+ 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
the Fund rather than on a per shareholder basis. Therefore, long-term
shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."

++ Although the Class A, Class B and Class C Distribution and Service Plans
provide that the Fund may pay up to an annual rate of .30 of 1% of the
average daily net assets of the Class A shares and 1% of the average daily
net assets of each of the Class B and Class C shares, the Distributor has
agreed to limit its distribution fees with respect to Class A shares of the
Fund to .15 of 1% of the average daily net asset value of the Class A shares
and, with respect to Class B and Class C shares of the Fund to .75 of 1% of
the average daily net asset value of the Class B and Class C shares
respectively, each for the fiscal year ending December 31, 1998. See "How
the Fund is Managed--Distributor." Total operating expenses without such
limitations would be .97% for Class A shares, and 1.67% for Class B and
Class C shares.

4
<PAGE>

FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)

(CLASS A SHARES)

The following financial highlights for the year ended December 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the year
ended December 31, 1996 and the period from January 10, 1995 through December
31, 1995, have been audited by Deloitte & Touche LLP, independent auditors,
whose reports thereon were unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear
in the Statement of Additional information. The financial highlights contain
selected data for a Class A share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information has been determined based on data contained in the
financial statements. Further performance information is contained in the
annual report which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
CLASS A
-----------------------------
JANUARY 10,
YEAR ENDED 1995(A)
DECEMBER 31, THROUGH
--------------- DECEMBER 31,
1997 1996 1995
------- ------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 13.57 $ 13.79 $ 12.50
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(b).................... .98 .93 .90
Net realized and unrealized gain on
investment transactions.................... .07 (.19) 1.51
------- ------- -------
Total from investment operations........... 1.05 .74 2.41
------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income........ (.98) (.93) (.90)
Distributions in excess of net investment
income..................................... (.02) -- --
Distributions from net realized gains....... (.21) (.03) (.22)
------- ------- -------
Total distributions....................... (1.21) (.96) (1.12)
------- ------- -------
Net asset value, end of period.............. $ 13.41 $ 13.57 $ 13.79
======= ======= =======
TOTAL RETURN (d)............................ 7.96% 5.80% 19.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............. $41,051 $30,657 $14,276
Average net assets (000).................... $34,994 $21,867 $ 7,428
Ratios to average net assets(b):
Expenses, including distribution fees...... .82% .79% .87%(c)
Expenses, excluding distribution fees...... .67% .64% .72%(c)
Net investment income...................... 7.14% 7.08% 6.92%(c)
Portfolio turnover rate..................... 334% 362% 260%
</TABLE>
- --------

(a) Commencement of investment operations of Class A shares.

(b) Net of expense subsidy and fee waiver.

(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.

5
<PAGE>

FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)

(CLASS B SHARES)

The following financial highlights for the year ended December 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the year
ended December 31, 1996 and the period from January 10, 1995 through December
31, 1995, have been audited by Deloitte & Touche LLP, independent auditors,
whose reports thereon were unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear
in the Statement of Additional information. The financial highlights contain
selected data for a Class B share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information has been determined based on data contained in the
financial statements. Further performance information is contained in the
annual report which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
CLASS B
--------------------------------
JANUARY 10,
YEAR ENDED 1995(a)
DECEMBER 31, THROUGH
------------------ DECEMBER 31,
1997 1996 1995
-------- -------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 13.58 $ 13.79 $ 12.50
-------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(b)..................... .89 .85 .82
Net realized and unrealized gain on
investment transactions..................... .06 (.18) 1.51
-------- -------- -------
Total from investment operations............ .95 .67 2.33
-------- -------- -------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.89) (.85) (.82)
Distributions in excess of net investment
income...................................... (.02) -- --
Distributions from net realized gains........ (.21) (.03) (.22)
-------- -------- -------
Total distributions........................ (1.12) (.88) (1.04)
-------- -------- -------
Net asset value, end of period............... $ 13.41 $ 13.58 $ 13.79
======== ======== =======
TOTAL RETURN (d)............................. 7.24% 5.19% 19.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $157,501 $136,054 $85,472
Average net assets (000)..................... $144,620 $114,560 $43,574
Ratios to average net assets(b):
Expenses, including distribution fees....... 1.42% 1.39% 1.47%(c)
Expenses, excluding distribution fees....... .67% .64% .72%(c)
Net investment income....................... 6.54% 6.48% 6.32%(c)
Portfolio turnover rate...................... 334% 362% 260%
</TABLE>
- --------

(a) Commencement of investment operations of Class B shares.

(b) Net of expense subsidy and fee waiver.

6
<PAGE>

FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)

(CLASS C SHARES)

The following financial highlights for the year ended December 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the year
ended December 31, 1996 and the period from January 10, 1995 through December
31, 1995, have been audited by Deloitte & Touche LLP, independent auditors,
whose reports thereon were unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear
in the Statement of Additional information. The financial highlights contain
selected data for a Class C share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information has been determined based on data contained in the
financial statements. Further performance information is contained in the
annual report which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."

<TABLE>
<CAPTION>
CLASS C
---------------------------
JANUARY 10,
YEAR ENDED 1995(a)
DECEMBER 31, THROUGH
------------- DECEMBER 31,
1997 1996 1995
------ ------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $13.58 $13.79 $12.50
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(b).......................... .89 .85 .82
Net realized and unrealized gain on investment
transactions..................................... .06 (.18) 1.51
------ ------ ------
Total from investment operations................. .95 .67 2.33
------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.89) (.85) (.82)
Distributions in excess of net investment income.. (.02) -- --
Distributions from net realized gains............. (.21) (.03) (.22)
------ ------ ------
Total distributions............................. (1.12) (.88) (1.04)
------ ------ ------
Net asset value, end of period.................... $13.41 $13.58 $13.79
====== ====== ======
TOTAL RETURN (d).................................. 7.24% 5.19% 19.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $6,005 $4,143 $2,655
Average net assets (000).......................... $4,747 $3,534 $1,307
Ratios to average net assets(b):
Expenses, including distribution fees............ 1.42% 1.39% 1.47%(c)
Expenses, excluding distribution fees............ .67% .64% .72%(c)
Net investment income............................ 6.54% 6.48% 6.32%(c)
Portfolio turnover rate........................... 334% 362% 260%
</TABLE>
- --------

(a) Commencement of investment operations of Class C shares.

(b) Net of expense subsidy and fee waiver.

7
<PAGE>

FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS INDICATED)

(CLASS Z SHARES)

The following financial highlights for the year ended December 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the
period from September 16, 1996 through December 31, 1996, have been audited by
Deloitte & Touche LLP, independent auditors, whose reports thereon were
unqualified. This information should be read in conjunction with the financial
statements and the notes thereto, which appear in the Statement of Additional
information. The financial highlights contain selected data for a Class Z share
of common stock outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. The information has been
determined based on data contained in the financial statements. Further
performance information is contained in the annual report which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."

<TABLE>
<CAPTION>
CLASS Z
-----------------------
YEAR SEPTEMBER 16,
ENDED 1996(a)
DECEMBER THROUGH
31, DECEMBER 31,
1997 1996
-------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $ 13.57 $13.20
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(b)................................ 1.00 .28
Net realized and unrealized gain on investment
transactions........................................... .06 .40
------- ------
Total from investment operations....................... 1.06 .68
------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.................... (1.00) (.28)
Distributions in excess of net investment income........ (.02) --
Distributions from net realized gains................... (.21) (.03)
------- ------
Total distributions................................... (1.23) (.31)
------- ------
Net asset value, end of period.......................... $ 13.40 $13.57
======= ======
TOTAL RETURN (d)........................................ 8.05% 5.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......................... $47,519 $ 608
Average net assets (000)................................ $36,750 $ 125
Ratios to average net assets(b):
Expenses............................................... .67% .64%(c)
Net investment income.................................. 7.29% 7.23%(c)
Portfolio turnover rate................................. 334% 362%
</TABLE>
- --------

(a) Commencement of investment operations of Class Z shares.

(b) Net of expense subsidy and fee waiver.

8
<PAGE>

HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES

THE FUND'S 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 INVESTMENT 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 MARKET CIRCUMSTANCES, THE FUND WILL
MAINTAIN AT LEAST 65% OF ITS TOTAL ASSETS IN INVESTMENT GRADE DEBT SECURITIES
(AS DEFINED BELOW) AND AT LEAST 65% OF ITS TOTAL ASSETS IN BONDS. FOR THE
PURPOSES OF THIS PROSPECTUS, BONDS ARE DEBT SECURITIES WITH A MATURITY AT DATE
OF ISSUE OF GREATER THAN ONE YEAR. THERE CAN BE NO ASSURANCE THAT THE FUND'S
OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and Policies" in the
Statement of Additional Information.

THE FUND HAS NO FIXED PERCENTAGE LIMITATIONS ON ALLOCATIONS AMONG SECTORS OF
THE FIXED-INCOME SECURITIES MARKETS EXCEPT THAT (I) NO MORE THAN 35% OF ITS
NET ASSETS MAY BE INVESTED IN NON-INVESTMENT GRADE BONDS, (II) NO MORE THAN
45% OF ITS TOTAL ASSETS MAY BE INVESTED IN FOREIGN DEBT SECURITIES INCLUDING
BOTH CORPORATE AND GOVERNMENT ISSUERS AND (III) AT LEAST 65% OF ITS TOTAL
ASSETS MUST BE INVESTED IN INVESTMENT GRADE DEBT SECURITIES UNDER NORMAL
MARKET CONDITIONS. ALTHOUGH THE INVESTMENT ADVISER ANTICIPATES THAT
INVESTMENTS WILL BE MADE PRINCIPALLY AMONG THE U.S. GOVERNMENT, MORTGAGE-
BACKED, CORPORATE AND FOREIGN DEBT SECURITIES SECTORS, THE FUND MAY ALSO
INVEST IN OTHER SECTORS OF THE FIXED-INCOME MARKETS, INCLUDING MUNICIPAL
SECURITIES, AND MAY PURCHASE PREFERRED STOCK. SEE "INVESTMENT OBJECTIVE AND
POLICIES" IN THE STATEMENT OF ADDITIONAL INFORMATION. IN ADDITION, THE FUND
WILL NOT INVEST 25% OR MORE OF ITS TOTAL ASSETS IN A SINGLE INDUSTRY (OTHER
THAN OBLIGATIONS OF THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES).

The investment adviser has a team of fixed-income professionals including
credit analysts and traders with experience in many sectors of the U.S. and
foreign fixed-income securities markets. The investment adviser uses both
quantitative and fundamental analyses to evaluate each bond issue considered
for the Fund. In selecting portfolio securities, the investment adviser will
consider economic conditions and interest rate fundamentals. Within each bond
sector, the investment adviser will evaluate individual issues based upon
their relative investment merit and will consider factors such as yield and
potential for price appreciation as well as credit quality, maturity and risk.
See "How the Fund is Managed--Manager."

WHEN MARKET OR ECONOMIC CONDITIONS DICTATE, IN THE VIEW OF THE INVESTMENT
ADVISER, THAT A TEMPORARY DEFENSIVE INVESTMENT STRATEGY IS APPROPRIATE, THE
FUND MAY INVEST WITHOUT LIMIT IN MONEY MARKET INSTRUMENTS, HOLD CASH AND
ENGAGE IN REPURCHASE AGREEMENT TRANSACTIONS. FOR LIQUIDITY PURPOSES, THE FUND
MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN MONEY MARKET INSTRUMENTS AND HOLD
CASH. MONEY MARKET INSTRUMENTS TYPICALLY HAVE A MATURITY OF ONE YEAR OR LESS
(AS MEASURED FROM THE DATE OF PURCHASE). SEE "OTHER INVESTMENTS AND POLICIES--
MONEY MARKET INSTRUMENTS" BELOW.

Under normal market conditions, the Fund will invest at least 65% of its
total assets in investment grade debt securities. The term investment grade
refers to bonds and other debt obligations, rated within the four highest
quality grades as determined by Moody's Investors Service (Moody's) (currently
Aaa, Aa, A and Baa for bonds and P-1 for commercial paper), or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A and BBB for bonds, SP-1 and
SP-2 for notes and A-1 for commercial paper), or by another nationally
recognized statistical rating organization (NRSRO) or, in unrated securities
which

9
<PAGE>

are of equivalent quality in the opinion of the investment adviser, for
example, U.S. Government securities and certain foreign government securities.
Securities rated Baa by Moody's or BBB by S&P, although considered to be
investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Securities rated Ba and below by Moody's or
BB and below by S&P are considered speculative. Changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments on such securities than is the case with
higher grade bonds. See the "Description of Security Ratings" in the Appendix
to this Prospectus. The Fund's holdings in money market instruments may be
used to meet the 65% test for investment grade securities. See "Other
Investments and Policies--Money Market Instruments" below.

THE FUND IS PERMITTED TO INVEST UP TO 35% OF ITS NET ASSETS IN LOWER QUALITY
BONDS PROVIDED THAT SUCH SECURITIES HAVE A MINIMUM RATING OF AT LEAST CCC AS
DETERMINED BY ONE NRSRO OR, IF UNRATED, ARE DEEMED BY THE INVESTMENT ADVISER
TO BE OF COMPARABLE QUALITY. Securities rated Caa by Moody's or CCC by S&P are
speculative and of poor standing and may be in default or there may be present
elements of danger with respect to principal or interest. Lower rated debt
securities, as well as debt securities with longer maturities, typically
provide a higher return and are subject to a greater risk of loss of principal
and price volatility than higher rated securities and securities with shorter
maturities. See "Risk Factors Relating to Investing in Debt Securities Rated
Below Investment Grade (Junk Bonds)" below. The dollar weighted average
maturity of the Fund's portfolio will range from one to thirty years.

Subsequent to its purchase by the Fund, a security may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination
of the issue from the portfolio, but the investment adviser will consider such
an event in determining whether the Fund should continue to hold the security
in its portfolio. The Fund does not intend to retain investment grade
securities that are downgraded to junk bond status if 35% or more of its net
assets would be invested in junk bonds.

Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the values of bonds held by the Fund will change,
causing an increase or decrease in the net asset value of the Fund. Longer-
term bonds are generally more sensitive to changes in interest rates than
shorter-term bonds. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall. The
investment adviser will actively manage the Fund's portfolio maturity
according to its interest rate outlook and will engage in various techniques
to monitor the Fund's exposure to interest rate risk including hedging
transactions and interest rate swaps. See "Hedging and Return Enhancement
Strategies" and "Other Investments and Policies--Interest Rate Swap
Transactions" below.

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

U.S. GOVERNMENT SECURITIES

The Fund invests in adjustable rate and fixed rate U.S. Government
securities. U.S. Government securities are instruments issued or guaranteed by
the U.S. Treasury or by an agency or instrumentality of the U.S. Government.
U.S. Government guarantees do not extend to the yield or value of the
securities or the Fund's shares. Not all U.S. Government securities are backed
by the full faith and credit of the United States. Some are supported only by
the credit of the issuing agency. U.S. Government securities include zero
coupon securities. See "Mortgage-Backed Securities" and "Corporate and Other
Debt Obligations" below and "Investment Objective and Policies--U.S.
Government Securities" in the Statement of Additional Information.

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. 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 Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage

10
<PAGE>

Corporation (FHLMC); (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.

The Fund may invest in mortgage-backed securities and other derivative
mortgage products, including those representing an undivided ownership
interest in a pool of mortgages, e.g., GNMA, FNMA and FHLMC certificates,
where the U.S. Government or its agencies or instrumentalities guarantees the
payment of interest and principal of these securities. These guarantees do not
extend to the yield or value of the securities or 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. The value of these securities is likely to vary inversely
with fluctuations in interest rates.

Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. 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. Mortgage-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.

During periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending
the projected average maturity of the mortgage-backed securities. This
maturity extension risk may 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 fluctuate more widely in response to changes in
interest rates than short- or intermediate-term securities.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES

A collateralized mortgage obligation (CMO) is a security issued by a
corporation or U.S. Government agency or instrumentality which is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation
to make interest and principal payments is secured by the underlying portfolio
of mortgages or mortgage-backed securities. Multiclass pass-through securities
are equity interests in a trust composed of mortgages or mortgage-backed
securities. Payments of principal of and interest on the underlying mortgage
assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass 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 and
Multiclass Pass-Through Securities.

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 underlying 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 of and interest on
the underlying 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.

11
<PAGE>

In reliance on rules and interpretations of the Commission, 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--Mortgage-Backed
Securities--Collateralized Mortgage Obligations" in the Statement of
Additional Information.

STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may also invest in mortgage-
backed security strips (MBS strips) (i) issued by the U.S. Government or its
agencies or instrumentalities or (ii) issued by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing
(derivative multiclass mortgage securities). MBS strips are usually structured
with two classes that receive different proportions of the interest and
principal distributions on a pool of mortgage assets. A common type of
stripped mortgage security will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yields to maturity on IOs and POs are
sensitive to the expected or anticipated 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. See
"Investment Objective and Policies--Mortgage-Backed Securities" in the
Statement of Additional Information. Derivative mortgage-backed securities
such as MBS strips are highly sensitive to changes in prepayment and interest
rates.

PRIVATE MORTGAGE PASS-THROUGH SECURITIES

Private mortgage pass-through securities are structured similarly to the
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.

CORPORATE AND OTHER DEBT OBLIGATIONS

The Fund may invest in corporate and other debt obligations of domestic and
foreign issuers including convertible securities. Issuers are not limited to
the corporate form of organization. See "Investment Objective and Policies--
Corporate and Other Debt Obligations" in the Statement of Additional
Information. Bonds and other debt securities are used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest and must repay the amount borrowed at maturity. Some debt securities,
such as zero coupon bonds, do not pay current interest but are purchased at a
discount from their face values. The discount approximates the total amount of
interest the security will accrue and compound over the period until maturity
or the particular interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. Zero coupon securities do
not require the periodic payment of interest. These investments benefit the
issuer by mitigating its need for cash to meet debt service, but also require
a higher rate of return to attract investors who are willing to defer receipt
of cash. These investments may experience greater volatility in market value
than securities that make regular payments of interest. The Fund accrues
income on these investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations, in which case the Fund will
forego the purchase of additional income producing assets with these funds.
Zero coupon securities include both corporate and U.S. and foreign government
securities.

Pay-in-kind securities have their interest payable upon maturity by delivery
of additional securities. Deferred payment securities are securities that
remain a zero coupon security until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Certain debt securities are subject to call provisions.

12
<PAGE>

Zero coupon, pay-in-kind and deferred payment securities may be subject to
greater fluctuation in value and lesser liquidity in the event of adverse
market conditions than comparable rated securities paying cash interest at
regular interest payment periods. See "Investment Objective and Policies--
Corporate and Other Debt Obligations--Zero Coupon, Pay-in-Kind or Deferred
Payment Securities" in the Statement of Additional Information.

The Fund is permitted to invest in adjustable rate or floating rate debt
securities, including corporate securities and securities issued by U.S.
Government agencies, whose interest rate is calculated by reference to a
specified index such as the constant maturity Treasury rate, the T-bill rate
or LIBOR (London Interbank Offered Rate) and is reset periodically. Adjustable
rate securities allow the Fund to participate in increases in interest rates
through these periodic adjustments. The value of adjustable or floating rate
securities will, like other debt securities, generally vary inversely with
changes in prevailing interest rates. The value of adjustable or floating rate
securities is unlikely to rise in periods of declining interest rates to the
same extent as fixed rate instruments of similar maturities. In periods of
rising interest rates, changes in the coupon will lag behind changes in the
market rate resulting in a lower net asset value until the coupon resets to
market rates.

ASSET-BACKED SECURITIES

The Fund may invest in asset-backed securities. Through the use of trusts
and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to the mortgage pass-through
structures 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. Unlike mortgage-backed securities, asset-backed
securities do not have the benefit of a security interest in the related
collateral. Credit card receivables, for example, are generally 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, the security interests in the
underlying automobiles are often not transferred when the pool is created,
with the resulting possibility that the collateral could be resold. In
general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments. In many instances, asset-
backed securities are over-collateralized to ensure the relative stability of
their credit-quality. The Fund is permitted to invest up to 25% of its total
assets in asset-backed securities.

CONVERTIBLE SECURITIES

The Fund may invest in preferred stocks or debt securities that either have
warrants attached or are otherwise convertible into common stock. A
convertible security is generally a corporate bond (or preferred stock) which
may be converted at a stated price within a specified period of time into a
certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in a corporation's capital
structure, but are usually subordinated to similar nonconvertible securities.
While providing a fixed income stream (generally higher in yield than the
income derivable from a common stock but lower than that afforded by a similar
nonconvertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation dependent upon a market price advance in the convertible
security's underlying common stock. The Fund may from time to time hold common
stock received upon the conversion of a convertible security. The Fund does
not intend to retain the common stock in its portfolio and will sell it as
soon as reasonably practicable. Convertible securities also include preferred
stock which technically is an equity security. The Fund has no fixed
percentage limitations on its investment in convertible securities except as
otherwise stated herein under "Investment Objective and Policies."

In general, the market value of a convertible security is at least the
higher of its investment value (i.e., its value as a fixed-income security) or
its conversion value (i.e., its value upon conversion into its underlying
common stock). As a fixed- income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines.

13
<PAGE>

MUNICIPAL SECURITIES

The Fund may from time to time invest in municipal bonds including general
obligation and revenue bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest, whereas revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
The Fund may also invest in municipal notes including tax, revenue and bond
anticipation notes which are issued to obtain funds for various public
purposes. See "Investment Objective and Policies--Municipal Securities" in the
Statement of Additional Information.

FOREIGN SECURITIES

The Fund is permitted to invest up to 45% of its total assets in foreign
debt securities, including securities of corporate issuers and foreign
government securities. See "Risk Factors and Special Considerations of
Investing in Foreign Securities" below. "Foreign government securities"
include debt securities issued or guaranteed, as to payment of principal and
interest, by governments, quasi-governmental entities, governmental agencies,
supranational entities and other governmental entities (collectively,
Governmental Entities) denominated in U.S. dollars or foreign currencies. A
supranational entity is an entity constituted by the national governments of
several countries to promote economic development. Examples of such
supranational entities include, among others, the World Bank (International
Bank for Reconstruction and Development), the European Investment Bank and the
Asian Development Bank. Debt securities of quasi-governmental entities are
issued by entities owned by a national, state, or equivalent government or are
obligations of a political unit that are not backed by the national
government's full faith and credit and general taxing powers. Examples of
quasi-governmental entities issuers include, among others, the provinces of
Canada. Foreign Government securities shall also include debt securities of
Government Entities denominated in European Currency Units (ECU). An ECU
represents specified amounts of the currencies of certain of the member states
of the European Economic Community. Foreign Government securities shall also
include mortgage-backed securities issued by foreign Government Entities
including quasi-governmental entities and Brady Bonds, which are long-term
bonds issued by Governmental Entities in developing countries as part of a
restructuring of their commercial bank loans. See "Investment Objective and
Policies--Foreign Government Securities" in the Statement of Additional
Information.

RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES

FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBILITY OF IMPOSITION OF
EXCHANGE CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly
available information about a foreign company than about a domestic company.
Foreign companies generally are not subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could affect investment. In many instances, foreign debt
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. These investments, however, may be less
liquid than the securities of U.S. corporations. In the event of default of
any such foreign debt obligations, it may be more difficult for the Fund to
obtain or enforce a judgment against the issuers of such securities.

INVESTING IN THE FIXED-INCOME MARKETS OF DEVELOPING COUNTRIES INVOLVES
EXPOSURE TO ECONOMIES THAT ARE GENERALLY LESS DIVERSE AND MATURE AND TO
POLITICAL SYSTEMS WHICH CAN BE EXPECTED TO HAVE LESS STABILITY THAN THOSE OF
DEVELOPED COUNTRIES. HISTORICAL EXPERIENCE INDICATES THAT THE MARKETS OF
DEVELOPING COUNTRIES HAVE BEEN MORE VOLATILE THAN THE

14
<PAGE>

MARKETS OF DEVELOPED COUNTRIES. THE RISKS ASSOCIATED WITH INVESTMENTS IN
FOREIGN DEBT SECURITIES MAY BE GREATER WITH RESPECT TO INVESTMENTS IN
DEVELOPING COUNTRIES.

ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign transaction costs are generally
higher than in the United States. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.

If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred.

The Fund may, but need not, enter into forward foreign currency exchange
contracts, options on foreign currencies and futures contracts on foreign
currencies and related options, for hedging purposes, including: locking-in
the U.S. dollar price of the purchase or sale of securities denominated in a
foreign currency; locking-in the U.S. dollar equivalent of interest or
dividends to be paid on such securities which are held by the Fund; and
protecting the U.S. dollar value of such securities which are held by the
Fund.

To mitigate against foreign market risk, the investment adviser intends to
invest the non-U.S. dollar denominated portion of the portfolio primarily in
government securities of developed nations and highly liquid corporate issues
and in options and futures thereon.

RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)

Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (i.e., high
yield or high risk) securities (commonly referred to as junk bonds) are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Fund. Investors should
carefully consider the relative risks of investing in high yield securities
and understand that such securities are not generally meant for short term
investing.

The investment adviser will perform its own investment analysis and will not
rely principally on the ratings assigned by the rating services, although such
ratings will be considered by the investment adviser. The investment adviser
will consider, among other things, the financial history and condition, the
prospects and the management of an issuer in selecting securities for the
Fund's portfolio.

Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession,
securities of highly leveraged issuers are more likely to default than
securities of higher rated issuers. In addition, the secondary market for high
yield securities, which is concentrated in relatively few market makers, may
not be as liquid as the secondary market for

15
<PAGE>

more highly rated securities and, from time to time, it may be more difficult
to value high yield securities than more highly rated securities. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell
the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Fund's NAV.

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

Ratings of fixed-income securities represent the rating agencies' opinions
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than a rating indicates.

From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high
yield bonds. These types of laws could adversely affect the Fund's NAV and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of
outstanding high yield securities.

During the year ended December 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Fund, expressed as a percentage of
the Fund's total investments, were as follows:

<TABLE>
<S> <C>
Percentage of Total
Ratings Investments
------- -------------------
AAA/Aaa 9.62%
AA/Aa 0.33%
A/A 14.26%
BBB/Baa 51.07%
BB/Ba 20.02%
B/B 4.49%
CCC/Ccc --
Unrated 0.21%
</TABLE>

HEDGING AND RETURN ENHANCEMENT STRATEGIES

THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVE SECURITIES TRANSACTIONS, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS
AND TO ATTEMPT TO ENHANCE RETURN. THE FUND, AND THUS ITS INVESTORS, MAY LOSE
MONEY THROUGH THE UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies
currently include the use of options, forward currency exchange contracts and
futures contracts and options thereon. The Fund's ability to use these
strategies may be limited by market conditions and regulatory limits and there
can be no assurance that any of these strategies will succeed. See "Investment
Objective and Policies" and "Taxes, Dividends and Distributions" in the
Statement of Additional Information. New financial products and risk
management techniques continue to be developed and the Fund may use these new
investments and techniques to the extent consistent with its investment
objective and policies.

16
<PAGE>

OPTIONS TRANSACTIONS

THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES, FINANCIAL INDICES AND CURRENCIES THAT ARE TRADED ON U.S. OR
FOREIGN SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ATTEMPT TO
ENHANCE RETURN OR TO HEDGE THE FUND'S PORTFOLIO. These options will be on debt
securities, financial indices and foreign currencies. The Fund may write
covered put and call options to attempt to generate additional income through
the receipt of premiums, purchase put options in an effort to protect the
value of securities (or currencies) that it owns against a decline in market
value and purchase call options in an effort to protect against an increase in
the price of securities (or currencies) it intends to purchase. The Fund may
also purchase put and call options to offset previously written put and call
options of the same series. See "Investment Objective and Policies--Options on
Securities" in the Statement of Additional Information.

A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY SUBJECT
TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The
writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities
or currency in excess of the exercise price of the option during the period
that the option is open.

A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option at
the exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.

THE FUND WILL WRITE ONLY COVERED OPTIONS. A written option is covered if, as
long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or currency or (ii) maintains cash or
liquid assets with a value sufficient at all times to cover its obligations in
a segregated account. See "Investment Objective and Policies--Segregated
Accounts" and "Investment Objective and Policies--Options on Securities" in
the Statement of Additional Information. The Fund is not subject to any
further limitations on the amount of call options it may write.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. A forward contract on foreign currency is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days agreed upon by the parties from the date of the
contract at a price set on the date of the contract. See "Investment Objective
and Policies--Risks Related to Forward Foreign Currency Exchange Contracts" in
the Statement of Additional Information.

THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although
there are no limits on the number of forward contracts which the Fund may
enter into, the Fund may not position hedge (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of forward currency)
of the securities being hedged. See "Investment Objective and Policies--Risks
Related to Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information.

FUTURES CONTRACTS AND OPTIONS THEREON

THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN

17
<PAGE>

IN ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(CFTC). THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH THE
UNSUCCESSFUL USE OF THESE STRATEGIES. These futures contracts and related
options will be on debt securities, financial indices and foreign currencies
or groups of foreign currencies such as the European Currency Unit (ECU). An
ECU is a basket of specified amounts of the currencies of certain member
states of the European Economic Community, a European economic cooperative
organization. A financial futures contract is an agreement to purchase or sell
an agreed amount of securities or currencies at a set price for delivery in
the future.

The Fund may purchase and sell futures contracts and related options,
without limitation, for bona fide hedging purposes in accordance with
regulations of the CFTC (i.e., to reduce certain risks of its investments).
The Fund may also purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options does not exceed 5% of the
liquidation value of the Fund's total assets. The value of all futures
contracts sold will not exceed the total market value of the Fund's portfolio.

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

THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements
in the price of a futures contract and the movements in the index or price of
the currencies being hedged is imperfect and there is a risk that the value of
the indices or currencies being hedged may increase or decrease at a greater
rate than the related futures contracts resulting in losses to the Fund.
Certain futures exchanges or boards of trade have established daily limits on
the amount that the price of futures contracts or related options may vary,
either up or down, from the previous day's settlement price. These daily
limits may restrict the Fund's ability to purchase or sell certain futures
contracts or related options on any particular day.

RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES

PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS
ITS INVESTORS, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE
STRATEGIES. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency 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, foreign currency and futures contracts and options on futures
contracts include (1) dependence on the investment adviser's ability to
predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices
of the securities or currencies being hedged; (3) the fact that skills needed
to use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; and (5) the possible inability of the 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 a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain cover or to segregate securities in connection with hedging
transactions.

The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if management believes that the
counterparty

18
<PAGE>

to the option is creditworthy. However, there can be no assurance that a
liquid secondary market will continue to exist or that the counterparty to the
option will perform as promised. Thus, it may not be possible to close an
options or futures transaction. The inability to close options and futures
positions also could have an adverse impact on the Fund's ability effectively
to hedge its portfolio. There is also the risk of loss by the Fund of margin
deposits or collateral in the event of bankruptcy of a broker with whom the
Fund has an open position in an option, a futures contract or related option.
The investment adviser will monitor the creditworthiness of counterparties to
OTC options transactions under the supervision of the Board of Directors.

OTHER INVESTMENTS AND POLICIES

MONEY MARKET INSTRUMENTS

The Fund may invest in high quality money market instruments, including,
among others, commercial paper of a U.S. or non-U.S. company, foreign
government securities, certificates of deposit, bankers' acceptances and time
deposits of domestic and foreign banks, and obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities. These obligations
will be U.S. dollar denominated or denominated in a foreign currency. Money
market instruments typically have a maturity of one year or less as measured
from the date of purchase.

REPURCHASE AGREEMENTS

The Fund will enter into repurchase agreements whereby the seller of the
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 repurchase agreement. The Fund's repurchase agreements will at all
times be fully collateralized in an amount at least equal to the resale price.
In the event of a default or bankruptcy by a seller, the Fund will promptly
seek to liquidate the collateral. To the extent that the proceeds from any
sale of such collateral upon a default in the obligation to repurchase are
less than the resale price, the Fund will suffer a loss. The Fund participates
in a joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the Commission. See "Investment Objective and
Policies--Repurchase Agreements" 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 which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and other securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act) and privately placed commercial paper and
municipal lease obligations for which there is a readily available market are
not considered illiquid for purposes of this limitation. See "Investment
Objective and Policies--Illiquid Securities" in the Statement of Additional
Information. The Fund's investment in Rule 144A securities could have the
effect of increasing the level of Fund illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
Rule 144A securities. The investment adviser will monitor the liquidity of
such restricted securities under the supervision of the Board of Directors.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.

When the Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that the Fund enters
into interest rate swaps on a net basis, the net amount of the excess, if any,
of the Fund's obligations over its entitlements with respect to each interest
rate swap will be treated as illiquid.

19
<PAGE>

The Fund will also treat non-U.S. Government IOs and POs as illiquid so long
as the staff of the Commission maintains its position that such securities are
illiquid.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place a month or more in the future in order to secure what is considered to
be an advantageous price and yield to the Fund at the time of entering into
the transaction. While the Fund will only purchase securities on a when-issued
or delayed delivery basis with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date, if it is deemed
advisable. If the Fund chooses to dispose of the right to acquire a when-
issued security prior to its acquisition, it could, as with the disposition of
any other portfolio security, incur a gain or loss due to market fluctuations.
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
NAV 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 segregate cash or other
liquid assets having a value equal to or greater than the Fund's purchase
commitments. Subject to this requirement, the Fund may purchase securities on
such basis without limit.

BORROWING

The Fund may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated at the time of the borrowing) from banks for
temporary, extraordinary or emergency purposes, for the clearance of
transactions or for investment purposes. 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 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time.

Borrowing for investment purposes is generally known as leveraging.
Leveraging exaggerates the effect on NAV of any increase or decrease in the
market value of the Fund's portfolio. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased and may exceed the income from the securities
purchased. In addition, the Fund may be required to maintain minimum average
balances in connection with such borrowing or pay a commitment fee to maintain
a line of credit, which would increase the cost of borrowing over the stated
interest rate.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS

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 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. A covered roll is a

20
<PAGE>

specific type of dollar roll for which there is an offsetting cash position or
a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction.

The Fund will establish a segregated account in which it will maintain cash
or other liquid assets equal in value to its obligations in respect of 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. See "Borrowing" above.

SECURITIES LENDING

The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregated account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or secured a letter of credit. Loans are
subject to termination at the option of the Fund or the borrower. The Fund may
pay reasonable administration and custodial fees in connection with a loan. As
a matter of fundamental policy, the Fund cannot lend more than 30% of the
value of its total assets.

SHORT SALES

The Fund may sell a security it does not own in anticipation of a decline in
the market value of that security (short sales). To complete the transaction,
the Fund will borrow the security to make delivery to the buyer. The Fund is
then obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the security
is replaced, the Fund is required to pay to the lender any dividends or
interest which accrue during the period of the loan. To borrow the security,
the Fund may be required to pay a premium which would increase the cost of the
security sold. The proceeds of the short sale will be retained by the broker
to the extent necessary to meet margin requirements until the short position
is closed out. Until the Fund replaces the borrowed security, it will (a)
maintain in a segregated account cash or liquid assets at such a level that
the amount deposited in the account plus the amount deposited with the broker
as collateral will equal the current value of the security sold short and will
not be less than the market value of the security at the time it was sold
short or (b) otherwise cover its short position.

The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. This result is the opposite of
what one would expect from a cash purchase of a long position in a security.
The amount of any gain will be decreased, and the amount of any loss will be
increased, by the amount of any premium, dividends or interest paid in
connection with the short sale. No more than 25% of the Fund's net assets will
be, when added together: (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.

21
<PAGE>

INTEREST RATE SWAP TRANSACTIONS

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

The risk of loss with respect to interest rate swaps is limited to the net
amount of interest payments that the Fund is contractually obligated to make
and will not exceed 10% of the Fund's net assets. The use of interest rate
swaps may involve investment techniques and risks different from those
associated with ordinary portfolio transactions. If the investment adviser is
incorrect in its forecast of market values, interest rates and other
applicable factors, the investment performance of the Fund would diminish
compared to what it would have been if the investment technique was never
used.

LOAN PARTICIPATIONS

The Fund may invest in fixed and floating rate loans (Loans) arranged
through private negotiations between a corporate borrower and one or more
financial institutions (Lenders). The Fund may invest in such Loans generally
in the form of participations in Loans (Participations). Participations
typically will result in the Fund having a contractual relationship only with
the Lender, not with the borrower. The Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of
the payments from the borrower. In connection with purchasing Participations,
the Fund generally will have no right to enforce compliance by the borrower
with the terms of the loan agreement relating to the Loan, nor any rights of
set-off against the borrower, and the Fund may not benefit directly from any
collateral supporting the Loan in which it has purchased the Participation. As
a result, the Fund will assume the credit risk of both the borrower and the
Lender that is selling the Participation. In the event of the insolvency of
the Lender selling a Participation, the Fund may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender
and the borrower.

PORTFOLIO TURNOVER

As a result of the Fund's investment policies, its portfolio turnover rate
may exceed 100%, although the rate is not expected to exceed 300%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions (or mark-ups) and other transaction costs, which will be borne
directly by the Fund. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information. In addition, high portfolio turnover may
result in increased short-term capital gains, which, when distributed to
shareholders, are treated as ordinary income. See "Taxes, Dividends and
Distributions."

SECURITIES OF OTHER INVESTMENT COMPANIES

The Fund may invest up to 10% of its total assets in shares of other
investment companies. To the extent the Fund invests in securities of other
investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees.

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.

22
<PAGE>

HOW THE FUND IS MANAGED

THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.

For the fiscal year ended December 31, 1997, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B, Class C and
Class Z shares were .82%, 1.42%, 1.42% and 0.67%, respectively.

MANAGER

PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, 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. PIFM is organized in New
York as a limited liability company. It is the successor to Prudential Mutual
Fund Management LLC, which transferred its assets to PIFM in September 1996.
See "Fee Waivers and Subsidy" below and "Manager" in the Statement of
Additional Information.

As of January 31, 1998, PIFM served as the manager to 42 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $63 billion.

UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.

UNDER THE SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE
SUBADVISER OR THE INVESTMENT ADVISER), A WHOLLY OWNED SUBSIDIARY OF THE
PRUDENTIAL INSURANCE COMPANY OF AMERICA (PRUDENTIAL). PI FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS
REIMBURSED BY PIFM FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING
SUCH SERVICES. PIFM continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises PI's
performance of such services.

The current portfolio manager of the Fund is Barbara L. Kenworthy, a
managing director and senior portfolio manager of Prudential Investments. Ms.
Kenworthy has responsibility for the day-to-day management of the Fund's
portfolio. Ms. Kenworthy was previously employed by The Dreyfus Corporation
(June 1985-June 1994) and served as president and portfolio manager for
several Dreyfus fixed-income funds. Barbara Kenworthy also serves as the co-
portfolio manager of Prudential Balanced Fund, Prudential Government Income
Fund, Inc., Prudential Government Securities Trust--Short-Intermediate Term
Series and Prudential Mortgage Income Fund, Inc. and has 20 years of
investment management experience in both U.S. and foreign securities and
investment grade and high yield bonds. Ms. Kenworthy actively manages each
Fund's portfolio according to the investment adviser's interest rate outlook.
Consistent with each fund's investment objective and policies, she will, at
times, invest in different sectors of the fixed-income markets seeking price
discrepancies and more favorable interest rates. The investment adviser
conducts extensive analysis of U.S. and overseas markets in an attempt to
identify trends in interest rates, supply and demand and economic growth. The
portfolio manager then selects the sectors, maturities and individual bonds
she believes provide the best value under those conditions. The portfolio
manager is assisted by two credit analysis teams, one that specializes in
investment grade bonds and one that specializes in high yield bonds.

PIFM and PIC are wholly-owned subsidiaries of Prudential, a major
diversified insurance and financial services company.

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<PAGE>

DISTRIBUTOR

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

UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING
THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. THE DISTRIBUTOR ALSO INCURS
THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS Z SHARES UNDER THE DISTRIBUTION
AGREEMENT, NONE OF WHICH IS REIMBURSED BY OR PAID FOR BY THE FUND. These
expenses include commissions and account servicing fees paid to, or on account
of, financial advisers of the Distributor 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 and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.

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

UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL
RATE OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
The Class A Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1% of the average daily net assets of the Class A shares. The Distributor
has agreed to limit its distribution-related fees payable under the Class A
Plan to .15 of 1% of the average daily net assets of the Class A shares for
the fiscal year ending December 31, 1998.

UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES AT
AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to
the Distributor of (i) an asset-based sales charge of .75 of 1% of the average
daily net assets of the Class B and Class C shares, respectively, and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class
B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders. The
Distributor has agreed to limit its distribution-related fees payable under
the Class B and Class C Plans to .75 of 1% of the average daily NAV of the
Class B and Class C shares, respectively, for the fiscal year ending December
31, 1998. The Distributor 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 December 31, 1997, the Fund paid distribution
expenses of .15%, .75% and .75% of the average net assets of the Class A,
Class B 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 Class A, Class B and Class
C shares of the Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C
shares of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.

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<PAGE>

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

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

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

FEE WAIVERS

The Distributor has agreed to limit its distribution fee for the Class A,
Class B and Class C shares as described under "Distributor." Fee waivers will
increase the Fund's total return. See "Performance Information" in the
Statement of Additional Information and "Fund Expenses" above.

PIFM may from time to time waive its management fee or a portion thereof and
subsidize certain operating expenses of the Fund. Fee waivers and expense
subsidies will increase the Fund's yield and total return. The Fund is not
required to reimburse PIFM for such management fee waivers and expense
subsidies. Effective May 1, 1997, PIFM discontinued its waiver of its
management fee of .05 of 1% of the Fund's daily net assets.

PORTFOLIO TRANSACTIONS

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

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

State Street Bank and Trust Company (State Street or the Custodian), 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 LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.

YEAR 2000

The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of

25
<PAGE>

interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund,
the Manager, the Distributor, the Transfer Agent and the Custodian have
advised the Fund that they have been actively working on necessary changes to
their computer systems to prepare for the year 2000 and expect that their
systems, and those of their outside service providers, will be adapted in time
for that event.

HOW THE FUND VALUES ITS SHARES

THE FUND'S 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. FOR VALUATION PURPOSES,
QUOTATIONS OF FOREIGN SECURITIES IN A FOREIGN CURRENCY ARE CONVERTED TO U.S.
DOLLAR EQUIVALENTS. THE BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.

Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. For valuation purposes,
quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents. 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.

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. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any distribution and/or service
fees.

HOW THE FUND CALCULATES PERFORMANCE

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

26
<PAGE>

advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc., Morningstar Publications,
Inc., and 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 will be available
without charge. See "Shareholder Guide--Shareholder Services--Reports
to Shareholders."

TAXES, DIVIDENDS AND DISTRIBUTIONS

TAXATION OF THE FUND

The Fund has qualified and intends to remain qualified as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code). Accordingly, the Fund will not be subject to federal
income taxes on its net investment income and net capital and currency gains,
if any, that it distributes to its shareholders.

In addition, 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 may 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.

Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition are
treated as ordinary gain or loss. These gains or losses increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. IF CURRENCY FLUCTUATION
LOSSES EXCEED OTHER INVESTMENT COMPANY TAXABLE INCOME DURING A TAXABLE YEAR,
DISTRIBUTIONS MADE BY THE FUND DURING THE YEAR WOULD BE CHARACTERIZED AS A
RETURN OF CAPITAL TO SHAREHOLDERS, REDUCING THE SHAREHOLDER'S BASIS IN HIS OR
HER FUND SHARES. SIGNIFICANT CURRENCY LOSSES COULD RESULT IN THE FUND'S
INABILITY TO PAY DIVIDENDS OF NET INVESTMENT INCOME.

TAXATION OF SHAREHOLDERS

All dividends out of net investment income, together with distributions of
net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information. Any net long-term
capital gains distributed to shareholders will be taxable as such to the
shareholder, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
corporate shareholders is currently the same as the maximum tax rate for
ordinary income. The maximum long-term capital gains rate for individual
shareholders is currently 28% with respect to securities held by the Fund for
more than 12 months, but not more than 18 months, and 20% with respect to
securities held by the Fund for more than 18 months, and the maximum tax rate
for ordinary income is 39.6%.

Net investment income attributable to the Fund's investments in municipal
securities will be tax-exempt to the Fund but when distributed to shareholders
as a dividend will become taxable as ordinary income to the shareholder.

The Fund may incur foreign income taxes in connection with some of its
foreign investments. See "Taxes, Dividends and Distributions" in the Statement
of Additional Information.

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<PAGE>

Any gain or loss realized upon a sale, exchange or redemption of shares by a
shareholder who is not a dealer in securities will be treated as capital gain.
Any such capital gain derived by an individual will be subject to tax at the
reduced rate described above depending upon the shareholder's holding period
of these shares sold. Any such loss will be long-term capital loss if the
shares have been held more than one year and otherwise as short-term capital
loss. Any loss, however, on the sale, exchange or redemption of shares that
are held for six months or less, will be treated as a long-term capital loss
to the extent of any capital gain distributions received by the shareholder.
Gain or loss on shares held more than 18 months will be considered in
determining a holder's adjusted net-capital gain subject to a maximum tax rate
of 20%.

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

Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign partnership (foreign shareholder) are subject to a
30% (or lower treaty rate) withholding tax upon the gross amount of the
dividends unless the dividends are effectively connected with a U.S. trade or
business conducted by the foreign shareholder. Capital gain dividends paid to
a foreign shareholder are generally not subject to withholding tax. A foreign
shareholder will, however, be required to pay U.S. income tax on any dividends
and capital gain distributions which are effectively connected with a U.S.
trade or business of the foreign shareholder.

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

WITHHOLDING TAXES

Under U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case
of certain foreign shareholders) with the required certifications regarding
the shareholder's status under the federal income tax law.

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

DIVIDENDS AND DISTRIBUTIONS

THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET
CAPITAL GAINS. 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 Class A, Class B and Class C shares will bear their own
distribution charges, generally resulting in lower dividends for Class B and
Class C shares in relation to Class A and Class Z shares and lower dividends
for Class A shares in relation to Class Z shares. Distribution of net capital
gains, if any, will be paid in the same amount per share for each class of
shares. See "How The Fund Values its Shares."

THE AMOUNT OF INCOME AVAILABLE FOR DISTRIBUTION TO SHAREHOLDERS WILL BE
AFFECTED BY ANY FOREIGN CURRENCY GAINS OR LOSSES GENERATED BY THE FUND UPON
THE DISPOSITION OF DEBT SECURITIES DENOMINATED IN A FOREIGN CURRENCY. See
"Taxation of the Fund" above. In the event the Fund's foreign currency losses
exceed other investment company taxable income during a taxable year, any
distributions made by the Fund during the year would be characterized as a
return of capital to investors, reducing the shareholder's basis in the
shares. Additionally, the Fund might not be able to pay further dividends to
shareholders under these circumstances.

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<PAGE>

DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV OF EACH CLASS ON THE PAYABLE DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS
THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attn: Account Maintenance Unit, 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 both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. If you
hold shares through the Distributor, you should contact your financial adviser
to elect to receive dividends and distributions in cash.

IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINED WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING
OF DIVIDENDS WHEN BUYING SHARES OF THE FUND.

For more information regarding taxes, dividends and distributions, see
"Taxes, Dividends and Distributions" in the Statement of Additional
Information.

GENERAL INFORMATION

DESCRIPTION OF COMMON STOCK

THE FUND WAS INCORPORATED IN MARYLAND ON SEPTEMBER 1, 1994. 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 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. In accordance with the Fund's Articles
of Incorporation, the Board of Directors may authorize 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 Board of Directors 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 each class
of common stock is equal as to earnings, assets and voting privileges, except
as noted above, and each class (with the exception of Class Z shares which are
not subject to any distribution and/or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of common stock
of the Fund is entitled to its portion of all of the Fund's assets after all
debts and expenses of the Fund have been paid. Since Class B and Class C
shares generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders whose shares are not
subject to any distribution and/or service fees. The Fund's shares do not have
cumulative voting rights for the election of Directors.

THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OR
MORE OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL
OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.

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<PAGE>

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 Commission
under the Securities Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.

SHAREHOLDER GUIDE

HOW TO BUY SHARES OF THE FUND

SHARES OF THE FUND MAY BE PURCHASED THROUGH THE DISTRIBUTOR, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), Attention: Investment Services,
P.O. Box 15020, New Brunswick, New Jersey 08906-5020. The purchase price is
the NAV next determined following receipt of an order by the Transfer Agent or
the Distributor plus a sales charge which, at your option, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred
basis (Class B or Class C shares). Class Z shares are offered to a limited
group of investors at NAV without any sales charge. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. Payments may be made
by cash, wire, check or through your brokerage account. See "Alternative
Purchase Plan" below. See also "How the Fund Values its Shares."

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

The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for
Class C shares may be waived from time to time. There is no minimum initial
investment requirement for Class Z shares. The minimum subsequent investment
is $100 for all classes, except for Class Z shares, for which there is no such
minimum. All minimum investment requirements are waived for certain retirement
and employee savings plans or custodial accounts for the benefit of minors.
For purchases through the Automatic Savings Accumulation Plan the minimum
initial and subsequent investment is $50. All minimum investment requirements
are waived for purchases made in connection with the "Best Minds" program
sponsored by the Distributor pursuant to which the total dollar amount of a
client's investment in the program will be allocated equally among shares of
the Fund and other Prudential Mutual Funds. For more information about this
program, you should contact your Prudential Securities financial adviser or
Prusec representative. See "Shareholder Services."

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

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

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

PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS 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:
Prudential Diversified Bond Fund, Inc., specifying on the wire the account
number assigned by PMFS and your name and identifying the class in which you
are eligible to invest (Class A, Class B, Class C or Class Z shares).

30
<PAGE>

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

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

ALTERNATIVE PURCHASE PLAN

THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z 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
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
------------ ------------------ -----------------
<S> <C> <C> <C>
CLASS Maximum initial sales charge .30 of 1% Initial sales charge waived
A of 4% of the public offering (currently being or reduced for certain
price charged at a rate purchases
of .15 of 1%)

CLASS Maximum CDSC of 5% of the 1% (currently Shares convert to Class A
B lesser of the amount being charged at a shares approximately seven
invested or the redemption rate of .75 of 1%) years after purchase
proceeds; declines to zero
after six years

CLASS Maximum CDSC of 1% of the 1% (currently Shares do not convert to
C lesser of the amount being charged at a another class
invested or the redemption rate of .75 of 1%)
proceeds on redemptions made
within one year of purchase.

CLASS None None Sold to a limited group of
Z investors
</TABLE>

Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class (with the exception of
Class Z shares, which are not subject to any distribution or service fees),
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangements and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interest of any other class and (iii) Class B shares
have a conversion feature. The four classes 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 (if any) 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 and Class Z shares.

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

IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).

31
<PAGE>

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

If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.

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

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

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed
the initial sales charge plus cumulative annual distribution-related fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in NAV value, the effect of the
return on the investment over this period of time or redemptions when the CDSC
is applicable.

ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See
"Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.

CLASS A SHARES

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

<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
--------------- --------------- -----------------
<S> <C> <C> <C>
Less than $50,000 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50 3.63 3.25
$100,000 to $249,999 2.75 2.83 2.50
$250,000 to $499,999 2.00 2.04 1.90
$500,000 to $999,999 1.50 1.52 1.40
$1,000,000 and above None None None
</TABLE>

The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that item is defined in
the Securities Act.

In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons who distribute shares a
finders' fee from its own resources based on a percentage of the NAV value of
shares sold by such persons.

32
<PAGE>

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.

YOU MUST NOTIFY THE TRANSFER AGENT EITHER DIRECTLY OR THROUGH YOUR DEALER
THAT YOU ARE ENTITLED TO THE WAIVER OF THE SALES CHARGE. THE REDUCTION OR
WAIVER WILL BE GRANTED SUBJECT TO CONFIRMATION OF YOUR ENTITLEMENT.

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 (collectively, Benefit Plans), provided that the Benefit
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 Prudential Securities or
its subsidiaries (Prudential Securities 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.

PRUDENTIAL RETIREMENT PROGRAMS. 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, for which Prudential serves as the
plan administrator or recordkeeper, provided that (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans
of a company for which Prudential serves as a plan administrator or
recordkeeper are aggregated in meeting the $1 million threshold. The term
"existing assets" as used herein includes stock issued by a plan sponsor,
shares of Prudential Mutual Funds and shares of certain unaffiliated mutual
funds that participate in the PruArray or SmartPath Program (Participating
Funds). "Existing assets" also include monies invested in The Guaranteed
Interest Account (GIA), a group annuity insurance product issued by
Prudential, and units of The Stable Value Fund (SVF), an unaffiliated bank
collective fund. Class A shares may also be purchased at NAV by plans that
have monies invested in GIA and SVF, provided (i) the purchase is made with
the proceeds of a redemption from ether GIA or SVF and (ii) Class A shares are
an investment option of the plan.

PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are
members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at NAV without regard
to the assets or number of participants in the individual employer's qualified
Plan(s) or non-qualified plans so long as the employers in the Association (i)
have retirement plan assets in the aggregate of at least $1 million or 250
participants in the aggregate and (ii) maintain their accounts with the
Transfer Agent.

PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at NAV by Individual Retirement Accounts (IRA) and Savings
Accumulation Plans of the company's employees. The Program is available only
to (i) employees who open an IRA or Savings Accumulation Plan account with the
Transfer Agent and (ii) spouses of employees who open an IRA account with the
Transfer Agent. The program is offered to companies that have at least 250
eligible employees.

33
<PAGE>

SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.

OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an employee related account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of
the Prudential Mutual Funds provided that purchases at NAV are permitted by
such person's employer, (d) 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, (e) 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, (f) 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, and (g) investors in IRAs, provided the purchase is made with the
proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential Investments serves as the recordkeeper or administrator.

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
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.

CLASS B AND CLASS C SHARES

The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, Prudential Securities or Prusec.
Although there is no sales charge imposed at the time of purchase, redemption
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." The Distributor will pay, from its
own resources, sales commissions of up to 4% of the purchase price of Class B
shares to dealers, financial advisers and other persons who sell Class B
shares at the time of sale. This facilitates the ability of the Fund to sell
the Class B shares without an initial sales charge being deducted at the time
of purchase. The Distributor anticipates that it will recoup its advancement
of sales commissions from the combination of the CDSC and the distribution
fee. See "How the Fund is Managed--Distributor." In connection with the sale
of Class C shares, the Distributor will pay, from its own resources, dealers,
financial advisers and other persons who distribute Class C shares a sales
commission of up to 1% of the purchase price at the time of the sale.

CLASS Z SHARES

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, The Prudential Savings Bank,
F.S.B.,

34
<PAGE>

or any affiliate which includes mutual funds as investment options and for
which the Fund is an available option; (iii) certain participants in the
MEDLEY Program (group variable annuity contracts) sponsored by Prudential for
whom Class Z shares of the Prudential Mutual Funds are an available option;
(iv) Benefit Plans for which Prudential Retirement Services serves as
recordkeeper and as of September 20, 1996, (a) were Class Z shareholders of
the Prudential Mutual Funds or (b) executed a letter of intent to purchase
Class Z shares of the Prudential Mutual Funds; (v) current and former
Directors/Trustees of the Prudential Mutual Funds (including the Fund); and
(vi) employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan.

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 who distribute shares a finders' fee from its own resources, based on
a percentage of the NAV of shares sold by such persons.

HOW TO SELL YOUR SHARES

YOU CAN REDEEM SHARES OF THE FUND 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, as described below. See
"Contingent Deferred Sales Charges" below.

IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR
PRUDENTIAL SECURITIES FINANCIAL ADVISER.

IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(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 LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.

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

PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. If you hold shares through
Prudential Securities, payment for shares presented for redemption will be
credited to your Prudential Securities account unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(d) during any other period when the Commission, by order, so permits;
provided that applicable rules and regulations of the Commission shall govern
as to whether the conditions prescribed in (b), (c) or (d) exist.

35
<PAGE>

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

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

INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has an NAV of less than $500 due to a redemption. The Fund will give
any such shareholder 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No CDSC will be imposed
on any involuntary redemption.

90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. If less than a full repurchase is made,
the credit will 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
Charge" below. Exercise of the repurchase privilege may affect federal tax
treatment of any gain realized upon redemption.

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased 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" and "Waiver of the Contingent Deferred Sales Charges--
Class B Shares" below.

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

36
<PAGE>

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

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

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

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

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

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

The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
in the case of an IRA or Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service, i.e.,
following voluntary or involuntary termination of employment or following
retirement. Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan unless such
redemptions otherwise qualify as a waiver as described above. In the case of
Direct Account and Prudential Securities or Subsidiary Prototype Benefit
Plans, the CDSC will be waived on redemptions which represent borrowings from
such plans. Shares purchased with amounts used to repay a loan from such plans
on which a CDSC was not previously deducted will thereafter be subject to a
CDSC without regard to the time such amounts were previously invested. In the
case of a 401(k) plan, the

37
<PAGE>

CDSC will also be waived upon the redemption of shares purchased with amounts
used to repay loans made from the account to the participant and from which a
CDSC was previously deducted. In addition, the CDSC will be waived on
redemptions of shares held by Directors of the Fund.

Systematic Withdrawal Plan. THE CDSC WILL BE WAIVED (OR REDUCED) ON CERTAIN
REDEMPTIONS FROM A SYSTEMATIC WITHDRAWAL PLAN. ON AN ANNUAL BASIS, UP TO 12%
OF THE TOTAL DOLLAR AMOUNT SUBJECT TO THE CDSC MAY BE REDEEMED WITHOUT CHARGE.
THE TRANSFER AGENT WILL CALCULATE THE TOTAL AMOUNT AVAILABLE FOR THIS WAIVER
ANNUALLY ON THE ANNIVERSARY DATE OF YOUR PURCHASE OR, FOR SHARES PURCHASED
PRIOR TO MARCH 1, 1997, ON MARCH 1 OF THE CURRENT YEAR. THE CDSC WILL BE
WAIVED (OR REDUCED) ON REDEMPTIONS UNTIL THIS THRESHOLD 12% IS REACHED.

You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC and provide the Transfer Agent with such supporting
documentation as it may deem appropriate. See "Purchase and Redemption of Fund
Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the
Statement of Additional Information. The waiver will be granted subject to
confirmation of your entitlement.

WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES

PruArray or SmartPath Plans. The CDSC will be waived on redemptions from
certain qualified and non-qualified retirement and deferred compensation plans
that participate in the Transfer Agent's PruArray and SmartPath Programs.

CONVERSION FEATURE--CLASS B SHARES

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

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

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

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

For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange,

38
<PAGE>

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

The conversion feature is subject to the continuing availability of opinions
of counsel or rulings of the Internal Revenue Service (i) that the dividends
and other distributions paid on Class A, Class B, Class C and Class Z shares
will not constitute preferential dividends under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.

HOW TO EXCHANGE YOUR SHARES

AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B,
CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE
RELATIVE NAV. No sales charge will be imposed at the time of exchange. Any
applicable CDSC payable upon the redemption of shares exchanged will be that
imposed by the fund in which shares are 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 B and Class
C shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund, Inc. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which
Class B shares were held in a money market fund will be excluded. See
"Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.

IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. (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, 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 "HOW TO SELL YOUR SHARES" ABOVE.

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

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

39
<PAGE>

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

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
NAV. Similarly, participants in Prudential Securities' 401(k) Plan for which
the Fund's Class Z shares are an available option and who wish to transfer
their Class Z shares out of the Prudential Securities 401(k) Plan following
separation from service (i.e. voluntary or involuntary termination of
employment or retirement) will have their Class Z shares exchanged for Class A
shares at NAV.

The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.

FREQUENT TRADING. THE FUND AND THE OTHER PRUDENTIAL MUTUAL FUNDS ARE NOT
INTENDED TO SERVE AS VEHICLES FOR FREQUENT TRADING IN RESPONSE TO SHORT-TERM
FLUCTUATIONS IN THE MARKET. DUE TO THE DISRUPTIVE EFFECT THAT MARKET TIMING
INVESTMENT STRATEGIES AND EXCESSIVE TRADING CAN HAVE ON EFFICIENT PORTFOLIO
MANAGEMENT, EACH PRUDENTIAL MUTUAL FUND AND THE FUND RESERVES THE RIGHT TO
REFUSE PURCHASE ORDERS AND EXCHANGES BY ANY PERSON, GROUP OR COMMONLY
CONTROLLED ACCOUNTS, IF, IN THE MANAGER'S SOLE JUDGMENT, SUCH PERSON, GROUP OR
ACCOUNTS WERE FOLLOWING A MARKET TIMING STRATEGY OR WERE OTHERWISE ENGAGING IN
EXCESSIVE TRADING (MARKET TIMERS).

To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.
The Fund may notify the Market Timer of rejection of an exchange or purchase
order subsequent to the day on which the order was placed.

SHAREHOLDER SERVICES

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

. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.

40
<PAGE>

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

. BEST MINDS PROGRAM. The Distributor sponsors the Best Minds program
pursuant to which the total dollar amount of a client's investment in the
program will be allocated equally among shares of the Fund and certain other
Prudential Mutual Funds. For more information about this program, you should
contact your Prudential Securities financial adviser or Prusec representative.

. 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 to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional
Information.

. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition,
monthly unaudited financial data are available upon request from the Fund.

. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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.

41
<PAGE>

APPENDIX

DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.

A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.

Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

SHORT-TERM DEBT RATINGS

Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year unless explicitly noted.

PRIME-1: Issuers rated Prime-1 or P-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.

A-1
<PAGE>

PRIME-2: Issuers rated Prime-2 or P-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.

PRIME 3: Issuers rated Prime-3 or P-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.

NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.

SHORT-TERM MUNICIPAL RATINGS

Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition
of the differences between short-term and long-term credit risk.

MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.

MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.

MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with
all security elements accounted for but lacking strength of the preceding
grades.

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

STANDARD & POOR'S RATINGS GROUP

BOND RATINGS

AAA: Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

A: Debt rated A has strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.

BB, B, CCC, CC: Debt rated BB, B, CCC, and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.

COMMERCIAL PAPER

Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt having an original maturity of no more
than 270 days.

A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is very strong.

A-2
<PAGE>

A-2: Capacity for timely payment on issues with the designation A-2 is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.

A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.

MUNICIPAL NOTES

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

A-3
<PAGE>

THE PRUDENTIAL MUTUAL FUND FAMILY

Prudential 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
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio

TAX-EXEMPT BOND
FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series

Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.

GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.

Prudential International Bond Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.

The Global Total Return Fund, Inc.

EQUITY FUNDS

Prudential Balanced Fund

Prudential Distressed Securities Fund, Inc.

Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund

Prudential Index Series Fund

Prudential Bond Market Index Fund

Prudential Europe Index Fund

Prudential Pacific Index Fund

Prudential Small-Cap Index Fund

Prudential Stock Index Fund

Prudential Jennison Series, Inc.

Prudential Jennison Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth and Income Fund

Prudential Small-Cap Quantum Fund, Inc.
Prudential Multi-Sector Fund, Inc.

Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
. Taxable Money Market Funds

Cash Accumulation Trust

National Money Market Fund

Liquid Assets Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.

. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series

. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund

. Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

B-1
<PAGE>

No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS........................................................... 2
FUND EXPENSES............................................................. 4
FINANCIAL HIGHLIGHTS...................................................... 5
HOW THE FUND INVESTS...................................................... 9
Investment Objective and Policies........................................ 9
Risk Factors and Special Considerations of Investing in Foreign
Securities.............................................................. 14
Risk Factors Relating to Investing in Debt Securities Rated Below
Investment Grade (Junk Bonds)........................................... 15
Hedging and Return Enhancement Strategies................................ 16
Other Investments and Policies........................................... 19
Investment Restrictions.................................................. 22
HOW THE FUND IS MANAGED................................................... 23
Manager.................................................................. 23
Distributor.............................................................. 24
Fee Waivers.............................................................. 25
Portfolio Transactions................................................... 25
Custodian and Transfer and Dividend Disbursing Agent..................... 25
Year 2000................................................................ 25
HOW THE FUND VALUES ITS SHARES............................................ 26
HOW THE FUND CALCULATES PERFORMANCE....................................... 26
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 27
GENERAL INFORMATION....................................................... 29
Description of Common Stock.............................................. 29
Additional Information................................................... 30
SHAREHOLDER GUIDE......................................................... 30
How to Buy Shares of the Fund............................................ 30
Alternative Purchase Plan................................................ 31
How to Sell Your Shares.................................................. 35
Conversion Feature--Class B Shares....................................... 38
How to Exchange Your Shares.............................................. 39
Shareholder Services..................................................... 41
APPENDIX.................................................................. A-1
Description of Security Ratings.......................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... B-1
</TABLE>
- --------------------------------------------------------------------------------
MF166A
- ---------------------------------------
Class A: 74431J-10-2
CUSIP Nos.: Class B: 74431J-20-1
Class C: 74431J-30-0
Class Z: 74431J-40-9
- ---------------------------------------

PRUDENTIAL
DIVERSIFIED
BOND
FUND, INC.

PROSPECTUS

March 4, 1998

www.prudential.com

[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>

PRUDENTIAL DIVERSIFIED BOND FUND, INC.

Statement of Additional Information

dated March 4, 1998

Prudential Diversified Bond Fund, Inc. (the Fund), is an open-end,
diversified management investment company whose 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
"Investment Objective and Policies."

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

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated March 4, 1998, 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 9
Investment Restrictions....................................... B-16 22
Directors and Officers........................................ B-18 23
Manager....................................................... B-21 23
Distributor................................................... B-22 24
Portfolio Transactions and Brokerage.......................... B-24 25
Purchase and Redemption of Fund Shares........................ B-25 30
Shareholder Investment Account................................ B-28 30
Net Asset Value............................................... B-31 26
Taxes, Dividends and Distributions............................ B-32 27
Performance Information....................................... B-34 26
Custodian, Transfer and Dividend Disbursing Agent and Indepen-
dent Accountants............................................. B-36 25
Financial Statements.......................................... B-37 --
Independent Auditors' Report.................................. B-49 --
Appendix I--Historical Performance Data....................... I-1 --
Appendix II--General Investment Information................... II-1 --
Appendix III--Information Relating to Portfolio Securities.... III-1 --
Appendix IV--Information Relating to The Prudential........... IV-1 --
</TABLE>

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MF166B
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The Fund's 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. There can be
no assurance that the Fund's investment objective will be achieved. See "How
the Fund Invests--Investment Objective and Policies" in the Prospectus.

U.S. GOVERNMENT SECURITIES

U.S. TREASURY SECURITIES. The Fund may 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 may invest in securities issued by agencies of the
U.S. Government or instrumentalities of the U.S. Government. These
obligations, including those which are guaranteed by Federal agencies or
instrumentalities, may or may not be backed by the full faith and credit of
the United States. Obligations of the Government National Mortgage Association
(GNMA), the Farmers Home Administration and the Small Business Administration
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 and may not be able to assert a claim
against the United States if the agency or instrumentality does not meet its
commitments. Securities in which the Fund may invest which are not backed by
the full faith and credit of the United States include obligations such as
those issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage Association (FNMA), the
Student Loan Marketing Association, Resolution Funding Corporation and the
Tennessee Valley Authority, each of which has the right to borrow from the
U.S. Treasury to meet its obligations, and obligations of the Farm Credit
System, the obligations of which may be satisfied only by the individual
credit of the issuing agency. FHLMC investments may include collateralized
mortgage obligations. See "Other Investments and Investment Techniques" below.

STRIPPED U.S. GOVERNMENT SECURITIES. The Fund may invest in component parts
of U.S. Government securities, namely either the corpus (principal) of such
obligations or one or more of the interest payments scheduled to be paid on
such obligations. These obligations may take the form of (i) obligations from
which the interest coupons have been stripped; (ii) the interest coupons that
are stripped; (iii) book-entries at a Federal Reserve member bank representing
ownership of obligation components; or (iv) receipts evidencing the component
parts (corpus or coupons) of U.S. Government obligations that have not
actually been stripped. Such receipts evidence ownership of component parts of
U.S. Government obligations (corpus or coupons) purchased by a third party
(typically an investment banking firm) and held on behalf of the third party
in physical or book-entry form by a major commercial bank or trust company
pursuant to a custody agreement with the third party. The Fund may also invest
in custodial receipts held by a third party that are not U.S. Government
securities.

The values of U.S. Government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. During periods
of falling U.S. interest rates, the values of U.S. Government securities
generally rise and, conversely, during periods of rising interest rates, the
values of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with longer-term
maturities.

Fixed-income U.S. Government securities are considered among the most
creditworthy of fixed-income investments. The yields available from U.S.
Government securities are generally lower than the yields available from
corporate debt securities. The values of U.S. Government securities will
change as interest rates fluctuate. To the extent U.S. Government securities
are not adjustable rate securities, these changes in value in response to
changes in interest rates generally will be more pronounced. During periods of
falling interest rates, the values of outstanding long-term fixed rate U.S.
Government securities generally rise. Conversely, during periods of rising
interest rates, the values of such securities generally decline. The magnitude
of these fluctuations will generally be greater for securities with longer
maturities. Although changes in the value of U.S. Government securities will
not affect investment income from those securities, they may affect the net
asset value of the Fund.

At a time when the Fund has written call options on a portion of its U.S.
Government securities, its ability to profit from declining interest rates
will be limited. Any appreciation in the value of the securities held in the
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by the Fund. The termination of
option positions under these

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conditions would generally result in the realization of capital losses, which
would reduce the Fund's capital gains distribution. Accordingly, the Fund
would generally seek to realize capital gains to offset realized losses by
selling portfolio securities. In such circumstances, however, it is likely
that the proceeds of such sales would be reinvested in lower yielding
securities. See "Risks of Options Transactions."

MORTGAGE-BACKED SECURITIES

MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities,
including those which represent undivided ownership interests in pools of
mortgages. The U.S. Government or the issuing agency or instrumentality
guarantees the payment of interest on and principal of these securities.
However, the guarantees do not extend to the yield or value of the securities
nor do the guarantees extend to the yield or value of the Fund's shares.
Mortgages backing the securities which may be purchased by the Fund include
conventional thirty-year fixed-rate mortgages, graduated payment mortgages,
fifteen-year mortgages, adjustable rate mortgages and balloon payment
mortgages. A balloon payment mortgage-backed security is an amortized mortgage
security with installments of principal and interest, the last installment of
which is predominantly principal. All of these mortgages can be used to create
pass-through securities. A pass-through security is formed when mortgages are
pooled together and undivided interests in the pool or pools are sold. The
cash flow from the mortgages is passed through to the holders of the
securities in the form of periodic payments of interest, principal and
prepayments (net of a service fee). Prepayments occur when the holder of an
undivided mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. The remaining expected average life of a pool of mortgage loans
underlying a mortgage-backed security is a prediction of when the mortgage
loans will be repaid and is based upon a variety of factors, such as the
demographic and geographic characteristics of the borrowers and the mortgaged
properties, the length of time that each of the mortgage loans has been
outstanding, the interest rates payable on the mortgage loans and the current
interest rate environment.

During periods of declining interest rates, prepayment of mortgages
underlying mortgage backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that
time. Therefore, the Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages are reinvested in securities which have lower yields
than the prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium generally will result in capital losses.

GNMA CERTIFICATES. Certificates of Government National Mortgage Association
(GNMA Certificates) are mortgage-backed securities, which evidence an
undivided interest in a pool or pools of mortgages. GNMA Certificates that the
Fund may purchase are the modified pass-through type, which entitle the holder
to receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the issuer and GNMA, regardless of whether
or not the mortgagor actually makes the payment. The GNMA Certificates will
represent a pro rata interest in one or more pools of the following types of
mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) fixed rate
mortgage loans as to which escrowed funds are used to reduce the borrower's
monthly payments during the early years of the mortgage loans (buydown
mortgage loans); (viii) mortgage loans that provide for adjustments in
payments based on periodic changes in interest rates or in other payment terms
of the mortgage loans; and (ix) mortgage-backed serial notes. All of these
mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-
to four-family housing units. Legislative changes may be proposed from time to
time in relation to the Department of Housing and Urban Development which, if
adopted, could alter the viability of investing in GNMAs. As of the date of
this Statement of Additional Information, as supplemented, no such legislation
has been effected. The Fund's investment adviser would re-evaluate the Fund's
investment objectives 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 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.

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

B-3
<PAGE>

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 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
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.

FHLMC SECURITIES. The FHLMC was created in 1970 through enactment of Title
III of the Emergency Home Finance Act of 1970 (FHLMC Act). Its purpose is to
promote development of a nationwide secondary market in conventional
residential mortgages.

The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owned on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.

GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year
in guaranteed minimum payments. The expected average life of these securities
is approximately ten years.

FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the FHLMC Act. The principal activity of FHLMC
consists of the purchase of 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 the 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 on 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.

The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if
such mortgage securities are purchased at a discount, an unscheduled
prepayment of principal will increase current and total returns and will
accelerate the recognition of income which when distributed to shareholders
will be taxable as ordinary income.

ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
(ARMs) are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. Generally, ARMs have a specified maturity
date and amortize principal over their life. In periods of declining interest
rates, there is a reasonable likelihood that ARMs will experience increased
rates of prepayment of principal. However, the major difference between ARMs
and fixed rate mortgage securities is that the interest rate and the rate of
amortization of principal of ARMs can and do change in accordance with
movements in a particular, pre-specified, published interest rate index.

B-4
<PAGE>

The amount of interest on an ARM is calculated by adding a specified amount,
the "margin," to the index, subject to limitations on the maximum and minimum
interest that can be charged to the mortgagor during the life of the mortgage
or to maximum and minimum changes to that interest rate during a given period.
Because the interest rate on ARMs generally moves in the same direction as
market interest rates, the market value of ARMs tends to be more stable than
that of long-term fixed rate securities.

There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the three-
month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds,
the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of Funds index (often
related to ARMs issued by FNMA), tend to lag changes in market rate levels and
tend to be somewhat less volatile.

COLLATERALIZED MORTGAGE OBLIGATIONS. In reliance on a Securities and
Exchange Commission (the Commission) interpretation, the Fund's investments in
certain qualifying collateralized mortgage obligations (CMOs), including CMOs
that have elected to be treated as Real Estate Mortgage Investment Conduits
(REMICs), are not subject to the limitation of the Investment Company Act of
1940, as amended (Investment Company Act), on acquiring interests in other
investment companies. In order to be able to rely on the SEC's interpretation,
the CMOs and REMICs 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 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.

The Fund will invest in both ARMs which are pass-through mortgage securities
collateralized by adjustable rate mortgages, and Fixed Rate Mortgage
Securities (FRMs), which are collateralized by fixed rate mortgages.

CORPORATE AND OTHER DEBT OBLIGATIONS

ZERO COUPON, PAY-IN-KIND OR DEFERRED PAYMENT SECURITIES

The Fund may also invest in zero coupon, pay-in-kind or deferred payment
securities. Zero coupon securities are securities that are sold at a discount
to par value and on which interest payments are not made during the life of
the security. Upon maturity, the holder is entitled to receive the par value
of the security. While interest payments are not made on such securities,
holders of such securities are deemed to have received annually "phantom
income." The Fund accrues income with respect to these securities prior to the
receipt of cash payments. Pay-in-kind securities are securities that have
interest payable by delivery of additional securities. Upon maturity, the
holder is entitled to receive the aggregate par value of the securities.
Deferred payment securities are securities that remain a zero coupon security
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals. Zero coupon, pay-
in-kind and deferred payment securities may be subject to greater fluctuation
in value and lesser liquidity in the event of adverse market conditions than
comparable rated securities paying cash interest at regular intervals.

MUNICIPAL SECURITIES

Municipal securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is generally eligible for exclusion from federal income tax
and, in certain instances, applicable state or local income and personal
property taxes. Such securities are traded primarily in the over-the-counter
market. Under normal market conditions, the Fund intends to invest no more
than 5% of its net assets in municipal securities.

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

B-5
<PAGE>

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

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

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

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

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

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

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

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

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

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

FOREIGN GOVERNMENT SECURITIES

BRADY BONDS. The Fund is permitted to invest in debt obligations commonly
known as "Brady Bonds" which are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection
with debt restructurings under a plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady (the Brady Plan). Brady Bonds have been issued
in connection with the restructuring of the bank loans, for example, of the
governments of Mexico, Venezuela and Argentina.

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<PAGE>

Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
are actively traded in the over-the-counter secondary market.

Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
value recovery payments in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady
Bonds are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the residual risk). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds which will continue to be
outstanding at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.

OPTIONS ON SECURITIES

The Fund may purchase and write (i.e., sell) put and call options to attempt
to enhance return or to hedge the Fund's portfolio. The Fund may purchase put
and call options and write covered put and call options on debt securities,
aggregates of debt securities or indices of prices thereof, other financial
indices and U.S. and foreign government debt securities. These may include
options traded on U.S. or foreign exchanges and options traded on U.S. or
foreign over-the-counter markets (OTC Options) including OTC options with
primary U.S. government securities dealers recognized by the Federal Reserve
Bank of New York.

The purchaser of a call option has the right, for a specified period of
time, to purchase the securities subject to the option at a specified price
(the "exercise price" or "strike price"). By writing a call option, the Fund
becomes obligated during the term of the option, upon exercise of the option,
to deliver the underlying securities or a specified amount of cash to the
purchaser against receipt of the exercise price. When the Fund writes a call
option, the Fund loses the potential for gain on the underlying securities in
excess of the exercise price of the option during the period that the option
is open.

The purchaser of a put option has the right, for a specified period of time,
to sell the securities subject to the option to the writer of the put at the
specified exercise price. By writing a put option, the Fund becomes obligated
during the term of the option, upon exercise of the option, to purchase the
securities underlying the option at the exercise price. The Fund might,
therefore, be obligated to purchase the underlying securities for more than
their current market price.

The writer of an option retains the amount of the premium, although this
amount may be offset or exceeded, in the case of a covered call option, by a
decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.

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
other carefully selected securities, the values of which the investment
adviser expects will have a high degree of positive correlation to the values
of such portfolio securities. If the investment adviser's judgment is correct,
changes in the value of the put options should generally offset changes in the
value of the portfolio securities being hedged. If the investment adviser's
judgment is not correct, the value of the securities underlying the put option
may decrease less than the value of the Fund's investments and therefore the
put option may not provide complete protection against a decline in the value
of the Fund's investments below the level sought to be protected by the put
option.

The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options
on other carefully selected

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debt securities the values of which the investment adviser expects will have a
high degree of positive correlation to the values of the debt securities that
the Fund intends to acquire. In such circumstances the Fund will be subject to
risks analogous to those summarized above in the event that the correlation
between the value of call options so purchased and the value of the securities
intended to be acquired by the Fund is not as close as anticipated and the
value of the securities underlying the call options increases less than the
value of the securities to be acquired by the Fund.

The Fund may write options on securities in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write
a call option against that security. If the call option is exercised, the
Fund's maximum gain will be the premium it received for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price of the option. If the option is
not exercised and the price of the underlying security declines, the amount of
the decline will be offset in part, or entirely, by the premium received.

The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline
moderately during the option period. Buy-and-write transactions using at-the-
money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. A buy-and-write transaction using an out-of-the-money call option may
be used when it is expected that the premium received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of
the underlying security alone. If the call option is exercised in such a
transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between
the Fund's purchase price of the security and the exercise price of the
option. If the option is not exercised and the price of the underlying
security declines, the amount of the decline will be offset in part, or
entirely, by the premium received.

Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with
respect to the same underlying security, having the same expiration date and
the same strike price.) The effect of the purchase is that the writer's
position will be cancelled by the exchange's affiliated clearing organization.
Likewise, an investor who is the holder of an exchange-traded option may
liquidate a position by effecting a "closing sale transaction" by selling an
option of the same series as the option previously purchase. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected.

Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and its contra-party with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do
so would result in the loss of the premium paid by the Fund as well as the
loss of the expected benefit of the transaction. The Board of Directors of the
Fund will approve a list of dealers with which the Fund may engage in OTC
options.

When the Fund writes an OTC option, it generally will be able to close out
the OTC option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Fund originally wrote the
OTC option. While the Fund will enter into OTC options only with dealers which
agree to, and which are expected to be capable of, entering into closing
transactions with the Fund, there can be no assurance that the Fund will be
able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in
a covered OTC call option the Fund has written, it will not be able to
liquidate securities used as cover until the option expires or is exercised or
different cover is substituted. In the event of insolvency of the contra-
party, the Fund may be unable to liquidate an OTC option.

OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to cover OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund
may repurchase any OTC options it writes for a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.

B-8
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The Fund may write only covered options. This means that so long as the Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price
of the covered option, or will establish and maintain with its Custodian for
the term of the option a segregated account consisting of cash or liquid
assets having a value equal to or greater than the fluctuating market value of
the optioned securities (the exercise price of the option). The Fund may also
write straddles (i.e., a combination of a call and a put written on the same
security at the same strike price). In such cases the same segregated
collateral is considered cover for both the put and the call, and the Fund
will also segregate or deposit cash or liquid assets equivalent to the amount,
if any, by which the put is in-the-money.

OPTIONS ON SECURITIES INDICES. The Fund also may purchase and write call and
put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Fund owns or intends to
purchase. Through the writing or purchase of index options, the Fund can
achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on
a security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the securities index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. Unlike security options, all settlements are in
cash and gain or loss depends upon price movements in the market generally (or
in a particular industry or segment of the market), rather than upon price
movements in individual securities. Price movements in securities that the
Fund owns or intends to purchase will probably not correlate perfectly with
movements in the level of an index and, therefore, the Fund bears the risk
that a loss on an index option would not be completely offset by movements in
the price of such securities.

When the Fund writes an option on a securities index, it will be required to
deposit, and mark-to-market, eligible securities equal in value to 100% of the
exercise price in the case of a put, or the contract value in the case of a
call. In addition, where the Fund writes a call option on a securities index
at a time when the contract value exceeds the exercise price, the Fund will
segregate and mark-to-market, until the option expires or is closed out, cash
or cash equivalents equal in value to such excess.

Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an
option purchased by the Fund may expire worthless, in which case the Fund
would lose the premium paid therefor.

OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not currently
traded on any Exchange. However, the Fund may purchase and write such options
should they commence trading on any Exchange and may purchase or write OTC
Options on GNMA Certificates.

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

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

RISKS OF OPTIONS TRANSACTIONS

An exchange-traded option position may be closed out only on an Exchange
which provides a secondary market for an option of the same series. Although
the Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an Exchange will exist for any particular option at any
particular time, and for some exchange-traded options, no secondary market on
an Exchange may exist. In such event, it might not be possible to effect
closing transactions in particular options, with the result that the Fund
would have to exercise its exchange-traded options in order to realize any
profit and may incur transaction costs in connection therewith. If the Fund as
a covered call

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<PAGE>

option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.

Reasons for the absence of a liquid secondary market on an Exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes
or series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
clearinghouse, such as the Options Clearing Corporation (the OCC) to handle
current trading volume; or (f) a decision by one or more Exchanges to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would generally continue to be exercisable in accordance with their
terms.

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.

RISKS OF OPTIONS ON FOREIGN CURRENCIES

Options on foreign currencies involve the currencies of two nations and
therefore, developments in either or both countries affect the values of
options on foreign currencies. Risks include those described in the Prospectus
under "How the Fund Invests--Risk Factors and Special Considerations of
Investing in Foreign Securities," including government actions affecting
currency valuation and the movements of currencies from one country to
another. The quantity of currency underlying option contracts represent odd
lots in a market dominated by transactions between banks; this can mean extra
transaction costs upon exercise. Option markets may be closed while round-the-
clock interbank currency markets are open, and this can create price and rate
discrepancies.

FUTURES CONTRACTS

As a purchaser of a 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 may purchase futures contracts on debt securities,
aggregates of debt securities, financial indices, foreign currencies or
composite foreign currencies (such as the European Currency Unit) and U.S.
Government securities including futures contracts or options linked to the
London Interbank Offered Rate (LIBOR). Eurodollar futures contracts are
currently traded on the Chicago Mercantile Exchange. They enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. The Fund would use Eurodollar futures contracts and
options thereon to hedge against changes in LIBOR, to which many interest rate
swaps are linked. See "Risks of Options Transactions" above.

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 the Fund's portfolio
securities may fall, 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 securities the Fund
intends to purchase. Subsequently, appropriate securities may be purchased by
the Fund in an orderly fashion; as securities are purchased, corresponding
futures positions would be terminated by offsetting sales of contracts.

The Fund will purchase or sell futures contracts also to attempt to enhance
return. 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 or cash, 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
(or currency) and the same delivery

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<PAGE>

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, in a segregated account performing the transaction, an initial margin
of cash or liquid assets 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 brokers' client but is, rather, a good faith deposit on a
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 for that purpose, of cash or liquid assets,
called variation margin, in the name of the broker, which are reflective of
price fluctuations in the futures contract.

OPTIONS ON FUTURES CONTRACTS

The Fund may purchase and sell 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 an offsetting
futures position by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin
account which represents the amount by which the market price of the futures
contract at exercise exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.

The Fund may only write covered put and call options on futures contracts.
The Fund will be considered covered with respect to a call option it writes on
a futures contract if the Fund owns the assets which are deliverable under the
futures contract or an option to purchase that futures contract having a
strike price equal to or less than the strike price of the covered option and
having an expiration date not earlier than the expiration date of the covered
option, or if it segregates and maintains for the term of the option cash or
liquid assets equal to the fluctuating value of the optioned future. The Fund
will be considered covered with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the covered option, or if
it segregates and maintains for the term of the option cash or liquid assets
at all times equal in value to the exercise price of the put (less any initial
margin deposited by the Fund with respect to such option). There is no
limitation on the amount of the Fund's assets which can be placed in the
segregated account.

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.

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 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.

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

Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
commodity pool operator, subject to compliance with certain conditions. The
Fund may enter into futures or related options contracts for return
enhancement purposes if the aggregate initial margin and option premiums do
not

B-11
<PAGE>

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,
provided, however, that in the case of an option that is in-the-money, the in-
the-money amount may be excluded in computing such 5%. The above restriction
does not apply to the purchase and sale of futures and related options
contracts for bona fide hedging purchases within the meaning of the
regulations of the Commodity Futures Trading Commission (CFTC).

In order to determine that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, 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 or liquid assets equal in value (when added to any initial or variation
margin on deposit) to the market value of the securities underlying the
futures contract. Such a position may also be covered by owning the securities
underlying the futures contract, or by holding a call option permitting the
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 or liquid assets equal to the purchase price of the contract
(less the amount of initial or variation margin on deposit) in a segregated
account 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 futures contracts it holds
at a time when it is disadvantageous to do so. The ability to close out
options and futures positions could also have an adverse impact on the Fund's
ability to hedge effectively 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 deposits with the
broker. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the investment adviser.

There are risks inherent in the use of futures contracts and options
transactions. 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
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 (or currencies) 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 (or currencies) and futures
market could result. Price distortions could also result if investors in
futures contracts elect to make or take delivery of underlying securities (or
currencies) 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 markets could cause
temporary price distortions. Due to the possibility of price distortions in
the futures market and because of the imperfect correlation between movements
in the prices of securities (or currencies) and movements in the prices of
futures contracts, a correct forecast of interest rate trends by the
investment adviser may still not result in a successful hedging transaction.
See "Risks of Hedging and Return Enhancement Strategies" in the Prospectus.

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<PAGE>

Compared to the purchase or sale of futures contracts, the purchase and sale
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 securities (or currencies).

RISKS RELATED TO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Fund may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for a fixed amount of dollars, for the purchase or sale of the amount
of foreign currency involved in the underlying transactions, the Fund may be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend or interest payment is declared, and the date on
which such payments are made or received.

Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of
some or all of the Fund's portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible since the future
value of securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date on which
the forward contract is entered into and the date it matures. The projection
of short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain. If
the Fund enters into a position hedging transaction, the transaction will be
covered by the position being hedged, or the Fund will place cash or other
liquid assets in a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of the given
forward contract (less the value of the covering positions, if any). If the
value of the securities placed in the segregated account declines, additional
cash or liquid assets will be placed in the account so that the value of the
account will, at all times, equal the amount of the Fund's net commitment with
respect to the forward contract.

The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.

It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of
the foreign currency and if the market value of the security is less than the
amount of foreign currency that the Fund is obligated to deliver, then it
would be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase).

If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices
decline during the period between the Fund's entering into a forward contract
for the sale of a foreign currency and the date it enters into an offsetting
contract for the purchase of the foreign currency, the Fund will realize a
gain to the extent that the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.

The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, the Fund
is not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be recognized that this method
of protecting the value of the Fund's portfolio securities against a decline
in the value of a currency does not eliminate fluctuations in the underlying
prices of the securities which are unrelated to exchange rates. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.

Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency

B-13
<PAGE>

conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.

DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS

When conditions dictate a defensive strategy, the Fund may temporarily
invest in money market instruments, including commercial paper of
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, obligations issued or guaranteed by
the U.S. Government, its agencies or its instrumentalities and repurchase
agreements (described more fully below). Such investments may be subject to
certain risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, the seizure or
nationalization of foreign deposits and foreign exchange controls or other
restrictions.

REPURCHASE AGREEMENTS

The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Board of
Directors. The Fund's investment adviser will monitor the creditworthiness of
such parties, under the general supervision of the Board of Directors. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than
the repurchase price, the Fund will suffer a loss.

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

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral that is
equal to at least the market value, determined daily, of the loaned
securities. The advantage of such loans is that the Fund continues to receive
payments in lieu of the interest and dividends of the loaned securities, while
at the same time earning interest either directly from the borrower or on the
collateral which will be invested in short-term obligations.

A loan may be terminated by the Fund at any time without cause. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and 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 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 determined to be creditworthy
pursuant to procedures approved by the Board of Directors of the Fund. On
termination of the loan, the borrower is required to return the securities to
the Fund, and any gain or loss in the market price during the loan would inure
to the Fund.

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

ILLIQUID SECURITIES

The Fund may not hold more than 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

B-14
<PAGE>

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

In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible 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 under 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 and foreign securities will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act, 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 Board of Directors. In reaching liquidity
decisions, the investment adviser will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser will also consider: (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) an analysis of factors similar to that performed by
nationally recognized statistical rating organizations (NRSROs) 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. 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 NRSROs, or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.

The staff of the Commission has taken the position, which the Fund will
follow, that purchased OTC options and the assets used as cover for written
OTC options are illiquid securities unless the Fund and the counterparty have
provided for the Fund, at its election, to unwind the OTC 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. See "How the Fund Invests--Illiquid Securities" in the Prospectus.

INTEREST RATE SWAP TRANSACTIONS

The Fund may enter into interest rate swaps, on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities. Under normal circumstances, the Fund will enter into interest
rate swaps on a net basis, i.e., the two payment streams netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and an amount of cash or liquid assets having an aggregate net
asset value at least equal to the accrued

B-15
<PAGE>

excess will be maintained in a segregated account by a custodian that
satisfies the requirements of the Investment Company Act. To the extent that
the Fund enters into interest rate swaps on other than a net basis, the amount
maintained in a segregated account will be the full amount of the Fund's
obligations, if any, with respect to such interest rate swaps, accrued on a
daily basis. Inasmuch as segregated accounts are established for these hedging
transactions the investment adviser and the Fund believe such obligations do
not constitute senior securities. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreement related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. The
Fund will enter into interest rate swaps only with parties meeting
creditworthiness standards approved by the Fund's Board of Directors. The
investment adviser will monitor the creditworthiness of such parties under the
supervision of the Board of Directors.

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

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

PORTFOLIO TURNOVER

As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, but the Fund's portfolio
turnover rate is not expected to exceed 300%. For the fiscal year ended
December 31, 1996 and 1997, the Fund's portfolio turnover rate was 362% and
334%, respectively. The Fund's portfolio turnover rate during the years ended
1996 and 1997 resulted from active trading to take advantage of new financial
products and increased investor interest in emerging markets. The portfolio
turnover rate is generally the percentage computed by dividing the lesser of
portfolio purchases or sales (excluding all securities, including options,
whose maturities or expiration date at acquisition were one year or less) by
the monthly average value of the portfolio. High portfolio turnover (over
100%) involves correspondingly greater brokerage commissions and other
transaction costs, which are borne directly by the Fund. In addition, high
portfolio turnover may also mean that a proportionately greater amount of
distributions to shareholders will be taxed as ordinary income rather than
long-term capital gains compared to investment companies with lower portfolio
turnover. See "Portfolio Transactions and Brokerage" and "Taxes, Dividends and
Distributions."

SEGREGATED ACCOUNTS

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

INVESTMENT RESTRICTIONS

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

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 maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.

B-16
<PAGE>

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 up to 33 1/3% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes, for the clearance of transactions or for investment purposes. The
Fund 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, forward foreign
currency exchange contracts and collateral arrangements relating thereto, and
collateral arrangements with respect to interest rate swap transactions,
reverse repurchase agreements, dollar roll transactions, options, futures
contracts and options thereon and obligations of the Fund to Directors
pursuant to deferred compensation arrangements are not deemed to be a pledge
of assets or the issuance of a senior security.

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

5. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell securities which are 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.

6. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon. (For
purposes of this restriction, futures contracts on securities, currencies and
on securities or financial indices and forward foreign currency exchange
contracts are not deemed to be commodities or commodity contracts.)

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. The Fund has not adopted a fundamental
investment policy with respect to investments in restricted securities.

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

9. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which the Fund will not hold more than 3% of the outstanding voting
securities of any one investment company, will not have invested more than 5%
of its total assets in any one investment company and will not have invested
more than 10% of its total assets (determined at the time of investment) in
such securities of one or more investment companies, 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 Fund's total assets.

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

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 NAVs will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt
action to reduce its borrowings, as required by applicable law.

B-17
<PAGE>

DIRECTORS AND OFFICERS

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE(/1/) FUND DURING PAST 5 YEARS
-------------------------- ------------- --------------------
<C> <C> <S>
Edward D. Beach (73) Director President and Director of BMC Fund,
Inc., a closed-end investment
company; formerly Vice Chairman of
Broyhill Furniture Industries,
Inc.; Certified Public Accountant;
Secretary and Treasurer of
Broyhill Family Foundation, Inc.;
Member of the Board of Trustees of
Mars Hill College; Director of The
High Yield Income Fund, Inc.
Eugene C. Dorsey (71) Director Retired President, Chief Executive
Officer and Trustee of the Gannett
Foundation (now Freedom Forum);
former Publisher of four Gannett
newspapers and Vice President of
Gannett Company; past Chairman of
Independent Sector (national
coalition of philanthropic
organizations); former Chairman of
the American Council for the Arts;
Director of the Advisory Board of
Chase Manhattan Bank of Rochester,
The High Yield Income Fund, Inc.
and First Financial Fund, Inc.
Delayne Dedrick Gold (59) Director Marketing and Management
Consultant; Director of The High
Yield Income Fund, Inc.
*Robert F. Gunia (51) Director and Vice President (since September
Vice President 1997) of Prudential Investments;
Executive Vice President and
Treasurer (since December 1996),
Prudential Investments Fund
Management LLC (PIFM); Senior Vice
President (since March 1987) of
Prudential Securities Incorporated
(Prudential Securities); formerly
Chief Administrative Officer (July
1990-September 1996), Director
(January 1989-September 1996),
Executive Vice President,
Treasurer and Chief Financial
Officer (June 1987-September 1996)
of Prudential Mutual Fund
Management, Inc.; Vice President
and Director of The Asia Pacific
Fund, Inc. (since May 1989) and
Director of The High Yield Income
Fund, Inc.
*Harry A. Jacobs, Jr. (76) Director Senior Director (since January
One Seaport Plaza 1986) of Prudential Securities;
New York, NY 10292 formerly Interim Chairman and
Chief Executive Officer of
Prudential Mutual Fund Management,
Inc. (June-September 1993);
formerly Chairman of the Board of
Prudential Securities (1982-1985)
and Chairman of the Board and
Chief Executive Officer of Bache
Group, Inc. (1977-1982); Director
of the Center for National Policy.
The First Australia Fund, Inc. and
The First Australia Prime Income
Fund, Inc.; Director of The High
Yield Income Fund, Inc.
*Mendel A. Melzer, CFA (37) Director Chief Investment Officer (since
751 Broad Street October 1996) of Prudential Mutual
Newark, NJ 07102-4077 Funds; formerly Chief Financial
Officer (November 1995-September
1996) of Prudential Investments,
Senior Vice President and Chief
Financial Officer (April 1993-
November 1995) of Prudential
Preferred Financial Services,
Managing Director (April 1991-
April 1993) of Prudential
Investment Advisors and Senior
Vice President (July 1989-April
1991) of Prudential Capital
Corporation; Chairman and Director
of Prudential Series Fund, Inc.;
Director of The High Yield Income
Fund, Inc.
Thomas T. Mooney (56) Director President of the Greater Rochester
Metro Chamber of Commerce; former
Rochester City Manager; Trustee of
Center for Governmental Research,
Inc.; Director of Blue Cross of
Rochester, The Business Council of
New York State, Monroe County
Water Authority, Rochester Jobs,
Inc., Executive Service Corps of
Rochester, Monroe County
Industrial Development
Corporation, Northeast Midwest
Institute and The High Yield
Income Fund, Inc.; President,
Director and Treasurer of First
Financial Fund, Inc. and The High
Yield Plus Fund, Inc.
</TABLE>

B-18
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE(/1/) FUND DURING PAST 5 YEARS
-------------------------- ------------- --------------------
<C> <C> <S>
Thomas H. O'Brien (73) Director President of O'Brien Associates
(Financial and Management
Consultants) (since April
1984); formerly President of
Jamaica Water Securities Corp.
(holding company) (February
1989-August 1990); Chairman of
the Board and Chief Executive
Officer (September 1987-
February 1989) of Jamaica
Water Supply Company and
Director (September 1987-April
1991); Director and President
of Winthrop Regional Health
Systems, Inc. and United
Presbyterian Homes; Director
of Ridgewood Savings Bank;
Trustee of Hofstra University;
Director of The High Yield
Income Fund, Inc.
*Richard A. Redeker (54) President and Employee of Prudential
751 Broad Street Director Investments; formerly
Newark, NJ 07102-4077 President, Chief Executive
Officer and Director (October
1993-September 1996) of
Prudential Mutual Fund
Management, Inc.; Executive
Vice President, Director and
Member of the Operating
Committee (October 1993-
September 1996) of Prudential
Securities; Director (since
October 1993-September 1996)
of Prudential Securities
Group, Inc.; Executive Vice
President, The Prudential
Investment Corporation
(January 1994-September 1996);
Director (January 1994-
September 1996) of Prudential
Mutual Fund Distributors, Inc.
and Prudential Mutual Fund
Services, Inc. and Senior
Executive Vice President and
Director of Kemper Financial
Services, Inc. (September
1978-September 1993);
President and Director of The
High Yield Income Fund, Inc.
Nancy H. Teeters (67) Director Economist; formerly Vice
President and Chief Economist
(March 1986-June 1990) of
International Business
Machines Corporation; Member
of the Board of Governors of
the Horace Rockham School of
Graduate Studies of the
University of Michigan;
Director of Inland Steel
Industries (since July 1991),
and The High Yield Income
Fund, Inc.
Louis A. Weil, III (56) Director Publisher and Chief Executive
Officer (since January 1996)
and Director (since September
1991) of Central Newspapers,
Inc.; Chairman of the Board
(since January 1996),
Publisher and Chief Executive
Officer (August 1991-December
1995) of Phoenix Newspapers,
Inc.; formerly Publisher of
Time Magazine (May 1989-March
1991); formerly President,
Publisher and Chief Executive
Officer of The Detroit News
(February 1986-August 1989);
and member of the Advisory
Board, Chase Manhattan Bank--
Westchester; Director of The
High Yield Income Fund, Inc.
S. Jane Rose (52) Secretary Senior Vice President (since
December 1996) of PIFM; Senior
Vice President and Senior
Counsel (since July 1992) of
Prudential Securities,
formerly Senior Vice President
(January 1991-September 1996)
and Senior Counsel (June 1987-
September 1996) of Prudential
Mutual Fund Management, Inc.
Grace Torres (38) Treasurer and First Vice President (since
Principal December 1996) of PIFM; First
Financial and Vice President (since March
Accounting 1994) of Prudential
Officer Securities; formerly First
Vice President (March 1994-
September 1996) of Prudential
Mutual Fund Management, Inc.
and Vice President (July 1989-
March 1994) of Bankers Trust
Corporation.
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996)
Treasurer of Prudential Investments and
the Private Asset Group of The
Prudential Insurance Company
of America (Prudential);
formerly First Vice President
of Prudential Mutual Fund
Management, Inc. (February
1993-September 1996) and
Senior Tax Manager (1981-
January 1993) of Price
Waterhouse LLP.
Deborah A. Docs (40) Assistant Secretary Vice President (since December
1996) of PIFM; formerly Vice
President and Associate
General Counsel (June 1991-
September 1996) of PIFM; Vice
President and Associate
General Counsel of Prudential
Securities.
</TABLE>

(/1/) Unless otherwise noted the address for each of the Directors and Officers
is: c/o Prudential Investments Fund Management LLC, Gateway Center Three,
100 Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.
- ---------

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

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

B-19
<PAGE>

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

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

The Fund pays each of its Directors who is not an affiliated person of PIFM,
The Prudential Investment Corporation (PIC) or the Subadviser annual
compensation of $4,500, in addition to certain out-of-pocket expenses. The
amount of annual compensation paid to each Director may change as a result of
the introduction of additional funds on whose Boards the Director may be asked
to serve.

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

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

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

The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1997 to current Directors of the Fund,
as well as to Directors of the Fund who served during the Fund's 1996 fiscal
year. The table also shows aggregate compensation paid to those Directors for
service on Boards of all funds managed by PIFM, including the Fund, for the
calendar year ended December 31, 1997.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM THE 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 DIRECTORS
----------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Edward D. Beach--Direc-
tor.................... $4,500 None N/A $135,000(38/63)*
Eugene C. Dorsey--Direc-
tor**.................. $4,500 None N/A $ 70,000(16/43)*
Delayne Dedrick Gold--
Director............... $4,500 None N/A $135,000(38/63)*
Robert F. Gunia--Direc-
tor and Vice Presi-
dent(/1/).............. -- -- -- --
Harry A. Jacobs, Jr.--
Director(/1/).......... -- -- -- --
Donald D. Lennox--Re-
tired Director......... $4,500 None N/A $ 90,000(26/50)*
Mendel A. Melzer--Direc-
tor(/1/)............... -- -- -- --
Thomas T. Mooney--Direc-
tor**.................. $4,500 None N/A $115,000(31/64)*
Thomas H. O'Brien--Di-
rector................. $4,500 None N/A $ 45,000(11/29)*
Richard A. Redeker--Di-
rector and Presi-
dent(/1/).............. -- None N/A --
Nancy H. Teeters--Direc-
tor.................... $4,500 None N/A $ 90,000(23/42)*
Louis A. Weil, III--Di-
rector................. $4,500 -- -- $ 90,000(26/50)*
</TABLE>
- ---------

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

(/1/)Directors who are "interested" do not receive compensation from the Fund
complex (including the Fund).

** Total compensation from all of the funds in the Fund complex for the
calendar year ended December 31, 1997, includes amounts deferred at the
election of Directors under the Fund's deferred compensation plans.
Including accrued interest, total compensation amounted to $87,401 and
$143,909 for Messrs. Dorsey and Mooney respectively.

As of February 6, 1998, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund. As of February 6,
1998, the only beneficial owner, directly or indirectly, of more than 5% of
any class of shares of the outstanding common stock of the Fund were: Pru
Defined Contribution Services, FBO PRU-DC Qualified Clients, ATT John Sturdy,
30 Scranton Officer Park, Moosic, PA 18507-1755, who held 297-769 Class Z
shares of the Fund (8.2%); Prudential Trust Company, FBO PRU-DC Trust
Accounts, ATT John Sturdy, 30 Scranton Officer Park, Moosic, PA 18507-1796,
who held 2,317,859 Class Z shares of the Fund (64%); and Marquette Trust Co
TTEE, Marquette Trust Company, ATTN Marlene Pavek, 13100 Wayzata Blvd,
Minnetonka, MN 55305-1842 who held 518,888 Class Z shares of the Fund (14%).

B-20
<PAGE>

As of February 6, 1998, Prudential Securities was the record holder for
other beneficial owners of 1,387,791 Class A shares (approximately 43% of such
shares outstanding), 5,447,157 Class B shares (approximately 45% of such
shares outstanding), 276,510 Class C shares (approximately 59% of such shares
outstanding) and 478,213 Class Z shares (approximately 13% of such shares
outstanding). In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy materials to
beneficial owners for which it is the record holder.

MANAGER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM 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 December 31, 1997, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $62 billion. According to the
Investment Company Institute, as of October 31, 1997, the Prudential Mutual
Funds were the 17th largest family of mutual funds in the United States.

PIFM is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). Prudential Mutual Fund
Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary of PIFM,
serves as the transfer agent for the Prudential Mutual Funds and, in addition,
provides customer service, record keeping and management and administration
services to qualified plans.

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

For its services, PIFM 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. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PIFM, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due to
PIFM will be reduced by the amount of such excess. Reductions in excess of the
total compensation payable to PIFM will be paid by PIFM to the Fund. No such
reductions were required during the fiscal year ended December 31, 1997.
Currently, the Fund believes that there are no such expense limitations.

In connection with its management of the corporate affairs of the Fund, PIFM
bears the following expenses:

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

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

(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI, the Subadviser or the investment
adviser), pursuant to the Subadvisory Agreement between PIFM and PI (the
Subadvisory Agreement).

Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer and Dividend Disbursing Agent, including the cost
of providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and

B-21
<PAGE>

corporate fees payable by the Fund to governmental agencies, (g) the fees of
any trade associations of which the Fund may be a member, (h) the cost of
stock certificates representing shares of the Fund, (i) the cost of fidelity
and liability insurance, (j) certain organization expenses of the Fund and the
fees and expenses involved in registering and maintaining registration of the
Fund and of its shares with the Commission, including the preparation and
printing of the Fund's registration statements and prospectuses for such
purposes, and paying fees and expenses of notice filings made in accordance
with state securities laws, (k) allocable communications expenses with respect
to investor services and all expenses of shareholders' and Directors' meetings
and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business and (m) distribution fees (except for Class Z shares).

The Management Agreement provides that PIFM 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 Board of
Directors of the Fund, including a majority of the Directors who are not
parties to the contract or interested persons of any such party, as defined in
the Investment Company Act, on May 22, 1997 and by shareholders of the Fund on
December 29, 1994.

For the period from January 10, 1995 (commencement of investment operations)
through December 31, 1995 and for the fiscal years ended December 31, 1996,
and December 31, 1997, respectively, PIFM received management fees of $50,876
(net of fee waivers), $139,998 (net of fee waivers) and $838,238, (net of fee
waivers) respectively, from the Fund.

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

The Subadvisory Agreement was last approved by the Board of Directors of the
Fund, including a majority of the Directors who are not parties to the
contract or interested persons of any such party, as defined in the Investment
Company Act, on May 22, 1997 and by shareholders of the Fund on December 29,
1994.

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

DISTRIBUTOR

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

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

On September 19, 1994, the Board of Directors, including a majority of the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plans or in any agreement
related to either Plan (Rule 12b-1 Directors), at a meeting called for the
purpose of voting on each Plan, approved the Plans and the Distribution
Agreement

B-22
<PAGE>

with respect to the Fund. The Plans were last approved by the Board of
Directors, including a majority of the Rule 12b-1 Directors, on May 22, 1997.
The Plans were each approved by the sole shareholder of the Class A, Class B
and Class C shares on December 29, 1994.

The Class A Plan provides that (i) .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 B and Class C Plans provide that (i) .25 of 1% of the average daily net
assets of the Class B and Class C shares, respectively, may be paid as a
service fee and (ii) .75 of 1% (not including the service fee) may be paid for
distribution-related expenses with respect to the Class B and Class C shares,
respectively (asset-based sales charge).

CLASS A PLAN. For the fiscal year ended December 31, 1997, the Distributor
received payments of $52,492 under the Class A Plan. The amount was primarily
expended for payment of account servicing fees to financial advisers and other
persons who sell Class A shares. The Distributor also received approximately
$141,000 in initial sales charges.

CLASS B PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $1,084,647 from the Fund under the Class B Plan and spent
approximately $1,699,200 in distributing the Fund's Class B shares. It is
estimated that of the latter amount approximately 9.8% ($167,100) was spent on
printing and mailing of prospectuses to other than current shareholders; 40.5%
($688,200) on compensation to Pruco Securities Corporation, an affiliated
broker-dealer, for commissions to its representatives and other expenses,
including an allocation of overhead and other branch office distribution-
related expenses, incurred by it for distribution of Fund shares; 49.7%
($843,900) on the aggregate of (i) payments of commission and account
servicing fees to financial advisers (20.6% or $350,200) and (ii) an
allocation of overhead and other branch office distribution-related expenses
(29.1% or $493,700). The term "overhead and other branch office distribution-
related expenses" represents (a) the expenses of operating the Distributor's
branch offices in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies, (b) the costs of client sales seminars, (c) expenses of mutual fund
sales coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.

The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. For the fiscal year ended December 31, 1997,
the Distributor received approximately $409,000 in contingent deferred sales
charges with respect to Class B shares.

CLASS C PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $35,602 from the Fund under the Class C Plan and spent approximately
$46,100 in distributing the Fund's Class C shares. It is estimated that of the
latter amount approximately 11.9% ($5,500) was spent on printing and mailing
of prospectuses to other than current shareholders; 16.9% ($7,800) on
compensation to Pruco Securities Corporation, an affiliated broker-dealer, for
commissions to its representatives and other expenses, including an allocation
of overhead and other branch office distribution-related expenses, incurred by
it for distribution of Fund shares; 71.2% ($32,800) on the aggregate of (i)
payments of commission and account servicing fees to financial advisers (54.3%
or $25,000) and (ii) an allocation of overhead and other branch office
distribution-related expenses (16.9% or $7,800). The term "overhead and other
branch office distribution-related expenses" represents (a) the expenses of
operating the Distributor's branch offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs
and the costs of stationery and supplies, (b) the costs of client sales
seminars, (c) expenses of mutual fund sales coordinators to promote the sale
of Fund shares and (d) other incidental expenses relating to branch promotion
of Fund sales.

The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class C shares upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares--Contengent Deferred
Sales Charges" in the Prospectus. For the fiscal year ended December 31, 1997,
the Distributor received approximately $2,000 in contingent deferred sales
charges with respect to Class C shares.

The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on
such continuance. The Plans may each be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Directors or by the vote
of the holders of a majority of the outstanding shares of the applicable class
on not more than 60 days', nor less than 30 days' written notice to any other
party to the Plans. The Plans may not be amended to increase materially the
amounts to be spent for the services described therein without approval by the
shareholders of the applicable class, and all material amendments are required
to be approved by the Board of Directors in the manner described above. Each
Plan will automatically terminate in the event of its assignment. The Fund
will not be obligated to pay expenses incurred under any Plan if it is
terminated or not continued.

B-23
<PAGE>

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

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

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. In the case of
Class B shares, interest charges 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 with respect to
Class B and Class C 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 total gross sales of any
class, all sales charges on shares of that class would be suspended.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in
this section includes the Subadviser. The Fund does not normally incur any
brokerage commission expense on its portfolio transactions although broker-
dealers may receive negotiated brokerage commissions on certain portfolio
transactions, including options and the purchase and sale of underlying
securities upon the exercise of options. On foreign securities exchanges,
commissions may be fixed. Orders may be directed to any broker or futures
commission merchant including, to the extent and in the manner permitted by
applicable law, the Distributor and its affiliates.

The securities 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 and U.S. Government agency securities may be
purchased directly from the issuer, in which case no commissions or discounts
are paid. The Fund will not deal with the Distributor or any affiliate in any
transaction in which the Distributor or any affiliate acts as principal. Thus,
it will not deal with the Distributor acting as market maker, and it will not
execute a negotiated trade with the Distributor if execution involves
Prudential Securities' acting as principal with respect to any part of the
Fund's order.

Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, or an affiliate, during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the Commission.
This limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.

In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies and industries. Such services are
used by the Manager in connection with all of its investment activities, and
some of such services obtained in connection with the execution of
transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund's, and the
services furnished by such brokers, dealers or futures commission merchants
may be used by the Manager in providing investment management for the Fund.
Commission rates are established pursuant to negotiations with the broker,
dealer or futures commission merchant based on the quality and quantity of
execution services provided by the broker in the light of generally prevailing
rates. The Manager's policy is to pay higher commissions to brokers, other
than Prudential Securities, for particular transactions than might be charged
if a different

B-24
<PAGE>

broker had been selected, on occasions when, in the Manager's opinion, this
policy furthers the objective of obtaining best price and execution. In
addition, the Manager is authorized to pay higher commissions on brokerage
transactions for the Fund to brokers other than Prudential Securities (or any
affiliate) in order to secure research and investment services described
above, subject to review by the Fund's Board of Directors from time to time as
to the extent and continuation of this practice. The allocation or orders
among brokers and the commission rates paid are reviewed periodically by the
Fund's Board of Directors. The Fund will not pay up for research in principal
transactions.

Subject to the above considerations, Prudential Securities (or any
affiliate) 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 on an exchange during a comparable period of time. This
standard would allow Prudential Securities (or any affiliate) to receive no
more than the remuneration which would be expected to be received by an
unaffiliated broker or futures commission merchant in a commensurate arm's-
length transaction. Furthermore, the Board of Directors of the Fund, including
a majority of the Directors who are not "interested" persons, has adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Prudential Securities (or any affiliate) are
consistent with the foregoing standard. In accordance with Section 11(a) under
the Securities Exchange Act of 1934, as amended, 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 are also subject to such fiduciary standards as may be
imposed by applicable law.

During the period from January 10, 1995 (commencement of investment
operations), through December 31, 1995, and the fiscal years ended December
31, 1996, and December 31, 1997, the Fund did not pay any brokerage
commissions to Prudential Securities.

PURCHASE AND REDEMPTION OF FUND SHARES

Shares of the Fund may be purchased at a price equal to the next determined
NAV 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 NAV without any sales charges. See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.

Each class of shares represents an interest in the same assets of the Fund
and has the same rights, 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."

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

B-25
<PAGE>

SPECIMEN PRICE MAKE-UP

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 NAV. Using the Fund's NAV at
December 31, 1997, the maximum offering price of the Fund's shares is as
follows:

<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share.................. $13.41
Maximum sales charge (4% of offering price)............................. .56
------
Offering price to public................................................ $13.97
======
CLASS B
Net asset value, offering price and redemption price per Class B share*. $13.41
======
CLASS C
Net asset value, offering price and redemption price per Class C share*. $13.41
======
CLASS Z
Net asset value, offering price and redemption price per Class Z share.. $13.40
======
</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.

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

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

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

(a) an individual;

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

(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a 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 qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).

The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in 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.

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 in the Statement of Additional Information
under "Combined Purchase and Cumulative Purchase Privilege," may aggregate the
value of their existing holdings of shares of the Fund and shares of other
Prudential Mutual Funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) to determine

B-26
<PAGE>

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 (NAV plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
accumulation are not available to individual participants in any retirement or
group plans.

LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Portfolio and shares of other
Prudential Mutual Funds (Investment Letter of Intent). Retirement and group
plans may also qualify to purchase Class A shares at NAV 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 totaling 5% of the dollar amount of the Letter of
Intent will be held by the Transfer Agent in the name of the purchaser, except
in the case of retirement and group plans where the employer or plan sponsor
will be responsible for paying any applicable sales charge. The effective date
of 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 investments made
during this 90-day period, valued at the purchaser's cost, can be applied to
the fulfillment of the Letter of Intent goal.

The 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
individual participants in any retirement or group plans.

B-27
<PAGE>

WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES

The contingent deferred sales charge (CDSC) is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--
Waiver of Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.

<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
Disability - An individual will be A copy of the Social Security Administration
considered disabled if he or she is award letter or a letter from a physician on
unable to engage in any substantial the physician's letterhead stating that the
gainful activity by reason of any shareholder (or, in the case of a trust, the
medically determinable physical or grantor) is permanently disabled. The letter
mental impairment which can be must also indicate the date of disability.
expected to result in death or to be
of long-continued and indefinite
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the
Custodial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is taking a
normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/trustee on company
letterhead indicating the amount of the excess
and whether or not taxes have been paid.
</TABLE>

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

SHAREHOLDER INVESTMENT ACCOUNT

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

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

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

B-28
<PAGE>

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

The following money market funds participate in the Class A Exchange
Privilege:

Prudential California Municipal Fund
(California Money Market Series)

Prudential Government Securities Trust

(Money Market Series) (Class A Shares)

(U.S. Treasury Money Market Series) (Class A Shares)

Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)

Prudential MoneyMart Assets, Inc. (Class A Shares)

Prudential Tax-Free Money Fund, Inc.

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

Class B and Class C shares of the Fund may also be exchanged for Class B and
Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption
from such money market fund or after re-exchange into the Fund, such shares
will be subject to the CDSC calculated 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
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares
of any fund participating in the Class B or Class C exchange privilege that
were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.

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

Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the 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 when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.

B-29
<PAGE>

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

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

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years.................................... $ 110 $ 165 $ 220 $ 275
20 Years.................................... 176 264 352 440
15 Years.................................... 296 444 592 740
10 Years.................................... 555 833 1,110 1,388
5 Years..................................... 1,371 2,057 2,742 3,428
</TABLE>

See "Automatic Savings Accumulation Plan (ASAP)."
- ---------
/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 or 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. Stock certificates are not issued to ASAP
participants.

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

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

In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account 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 NAV on
shares held under this plan. See "Shareholder Investment Account--Automatic
Reinvestment of Dividends and Distributions."

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

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

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

TAX-DEFERRED RETIREMENT PLANS. Various qualified retirement plans, including
a 401(k) plan, self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code of 1986, as
amended (the Internal

B-30
<PAGE>

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, and the
administration, custodial fees an other details are available from Prudential
Securities or the Transfer Agent.

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

TAX-DEFERRED RETIREMENT ACCOUNTS

INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn (or, in the case of a Roth IRA, the total
avoidance of federal income tax on such income). 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/

<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- ---
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- ---------

/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 a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meets the conditions required
under the Internal Revenue Code will not be subject to tax upon withdrawal
from the account.

MUTUAL FUND PROGRAMS

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

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

NET ASSET VALUE

Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments 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, the mean between the last 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 on
the basis of valuations provided by a pricing service which uses information
with respect to transactions in bonds, quotations from bond dealers, agency
ratings, market transactions in comparable securities and various
relationships between securities in determining value. 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 mean between the last reported bid and asked prices
provided by principal market makers or independent pricing agents. Options on
securities and indices traded on an exchange are valued at the mean

B-31
<PAGE>

between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last
sales prices as of the close of trading on the applicable the commodities
exchange or board of trade. Should an extraordinary event, which is likely to
affect the value of the security, occur after the close of an exchange on
which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established by and under the general supervision of the
Fund's Board of Directors.

Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker
does not provide a valuation or methodology or provides a valuation or
methodology that, in the judgment of the Manager or Subadviser (or Valuation
Committee or Board of Directors) does not represent fair value, are valued by
the Valuation Committee or Board of Directors in consultation with the Manager
or Subadviser. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Board of
Directors not to represent fair value. Short-term securities with remaining
maturities of 60 days or more, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
NAV at 4:15 P.M., New York time, on each day the New York Stock Exchange is
open for trading except on days on which no orders to purchase, sell or redeem
Fund shares have been received or days on which changes in the value of the
Fund's portfolio securities do not affect NAV. In the event the New York Stock
Exchange closes early on any business day, the NAV of the Fund's shares shall
be determined at a time between such closing and 4:15 P.M., New York time. The
New York Stock Exchange is closed on the following holidays, New Year's Day,
Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

NAV is calculated separately for each class. The NAV of Class B and Class C
shares will generally be lower than the NAV of Class A shares as a result of
the larger distribution-related fee to which Class B and Class C shares are
subject. The NAV of Class Z shares will generally be higher than the NAV of
Class A, Class B or Class C shares as a result of the fact that the Class Z
shares are not subject to any distribution or service fee. It is expected,
however, that the NAV per share of each class 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.

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.
This relieves the Fund (but not its shareholders) from paying federal income
tax on income which is distributed to shareholders and permits net capital
gains of the Fund (i.e., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses) to be
treated as 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 or options thereon
or foreign currencies, or other income (including but not limited to gains
from options, futures or forward contracts) derived with respect to its
business of investing in such securities or currencies; (b) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year (i) at
least 50% of the market value of the Fund's assets is represented by cash,
U.S. Government securities and other securities limited in respect of any one
issuer to an amount not greater than 5% of the market value of the 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 securities); and (c) the Fund
distribute to its shareholders at least 90% of its net taxable investment
income (including short-term capital gains) other than long-term capital gains
and 90% of its net tax exempt interest income in each year.

Any net capital gains distributed to shareholders will be taxable as capital
gains to the shareholders, whether or not reinvested and regardless of the
length of time a shareholder has owned his or her shares. The maximum capital
gains rate for individuals is 28% with respect to assets held by the Fund for
more than 12 months, but not more than 18 months, and 20% with respect to
assets held by the Fund for more than 18 months. The maximum capital gains
rate for corporate shareholders currently is the same as the maximum tax rate
for ordinary income. If the Fund acquires a put or writes a call thereon, the
Fund's holding period of the underlying security may be affected. If the Fund
acquires a put or writes a call thereon the Fund's holding period of the
underlying security may be affected. Other gains or losses on the sale of
securities will be short-term capital gains or losses. 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). If an option written by the Fund on
securities lapses or is terminated

B-32
<PAGE>

through a closing transaction, such as a repurchase by the Fund of the option
from its holder, the Fund will generally realize capital gain or loss. If
securities are sold by the Fund pursuant to the exercise of a call option
written by it, the Fund will include the premium received in the sale proceeds
of the securities delivered in determining the amount of gain or loss on the
sale. Certain of the Fund's transactions may be subject to wash sale, short
sale, straddle, conversion transaction and constructive 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.

Special rules apply to "regulated futures contracts," certain listed options
which are not "equity options", and certain forward foreign currency exchange
contracts. These investments will generally constitute Section 1256 contracts
and will be required to be "marked to market" for federal income tax purposes
at the end of the Fund's taxable year; that is, treated as having been sold at
market value. Except with respect to forward foreign currency exchange
contracts, 60% of any gain or loss recognized on such deemed sales and on
actual dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss.

Gain or loss on the sale, lapse or other termination of options on
securities and indices will be capital gain or loss the character of which
will depend upon the holding period of the option. In addition, positions
which are part of a straddle will be subject to certain wash sale and short
sale provisions of the Internal Revenue Code. In the case of a straddle, 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.

Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or
ordinary loss. Similarly, gains or losses on forward foreign currency exchange
contracts or dispositions of debt securities denominated in a foreign currency
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition also are
treated as ordinary gain or loss. These gains, referred to under the Internal
Revenue Code as "Section 988" gains or losses, increase or decrease the amount
of the Fund's investment company taxable income available to be distributed to
its shareholders as ordinary income, rather than increasing or decreasing the
amount of the Fund's net capital gain. If Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary dividend distributions, or distributions made before
the losses were realized would be recharacterized as a return of capital to
shareholders, rather than as an ordinary dividend, reducing each shareholder's
basis in his or her Fund shares.

The Fund may purchase debt securities that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as income
earned by the Fund and therefore is subject to the distribution requirements
of the Internal Revenue Code. Because the original issue discount income
earned by the Fund in a taxable year may not be represented by cash income,
the Fund may have to dispose of other securities and use the proceeds to make
distributions to satisfy the Internal Revenue Code's distribution
requirements. Debt securities acquired by the Fund also may be subject to the
market discount rules.

The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during
the 12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from
the prior year or the twelve-month period ending on October 31 of such prior
year, respectively. To the extent it does not meet these distribution
requirements, the Fund will be subject to a nondeductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the
Fund pays income tax is treated as distributed.

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 carryforwards 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 Board of Directors 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. If the Fund pays a dividend in
January which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend or distribution will be treated for tax purposes as being paid by the
Fund and received by its shareholders on December 31 of the year in which such
dividend was declared. 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. To the extent
that, in a given year, distributions to shareholders exceed recognized net
investment income and recognized short-term and long-term capital gains for
the year, shareholders will receive a return of capital in respect of such
year and, in an annual statement, will be notified of the amount of any return
of capital for such year.

B-33
<PAGE>

Any 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 distributions. Furthermore, such 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 capital gains distributions, which are
expected to be or have been announced.

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.

The per share dividends on Class B and Class C shares will generally be
lower than the per share dividends on Class A and Class Z shares as a result
of the higher distribution-related fee applicable to the Class B and Class C
shares. The per share capital gains distributions will be paid in the same
amounts for Class A, Class B, Class C and Class Z shares. See "Net Asset
Value."

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 will vary.

PERFORMANCE INFORMATION

YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. 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. Yield is calculated
according to the following formula:

a-b
YIELD = 2 [( +1)to the power of 6 - 1]
cd

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

The yield for the 30-day period ended December 31, 1997 for the Fund's Class
A, Class B, Class C and Class Z shares was 6.89%, 6.57%, 6.56% and 7.33%,
respectively.

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, Class B, Class C and Class Z shares. See "How the Fund Calculates
Performance" in the Prospectus.

B-34
<PAGE>

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

P(1+T) to the power of n = ERV

Where:P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).

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

The average annual total return (before management fee waiver or subsidy)
with respect to the Class A shares for the one year and since inception
(January 10, 1995) periods ended December 31, 1997 was 3.34% and 9.36%,
respectively. The average annual total return (before management fee waiver or
subsidy) with respect to the Class B shares for the one year and since
inception (January 10, 1995) periods ended December 31, 1997 was 1.92% and
9.36%, respectively. The average annual total return (before management fee
waiver or subsidy) with respect to the Class C shares for the one year and
since inception (January 10, 1995) periods ended December 31, 1997 was 5.92%
and 10.19%, respectively. The average annual total return (before management
fee waiver or subsidy) with respect to the Class Z shares for one year and
since inception (September 16, 1996) periods ended December 31, 1997 was 7.72%
and 10.31%, respectively.

The average annual total return (after management fee waiver or subsidy)
with respect to the Class A shares for the one year and since inception
(January 10, 1995) periods ended December 31, 1997 was 3.65% and 9.61%,
respectively. The average annual total return (after management fee waiver or
subsidy) with respect to the Class B shares for the one year and since
inception (January 10, 1995) periods ended December 31, 1997 was 2.24% and
9.61%, respectively. The average annual total return (after management fee
waiver or subsidy) with respect to the Class C shares for the one year and
since inception (January 10, 1995) periods ended December 31, 1997 was 6.24%
and 10.44%, respectively. The average annual total return (after management
fee waiver or subsidy) with respect to the Class Z shares for the one year and
since inception (September 16, 1996) periods ended December 31, 1997 was 8.05%
and 10.57%, respectively.

(Effective May 1, 1997, PIFM discontinued its waiver of its management fee
of .05 of 1% of the Fund's daily net assets.)

AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class 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 according to the following formula:

ERV - P
-------
P

Where:P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).

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

The aggregate total return (before management fee waiver or subsidy) with
respect to the Class A shares for the one year and since inception (January
10, 1995) periods ended December 31, 1997 was 7.64% and 35.93%, respectively.
The aggregate total return (before management fee waiver or subsidy) with
respect to the Class B shares for the one year and since inception (January
10, 1995) periods ended December 31, 1997 was 6.92% and 33.47%, respectively.
The aggregate total return (before management fee waiver or subsidy) with
respect to the Class C shares for the one year and since inception (January
10, 1995) periods ended December 31, 1997 was 6.92% and 33.47%, respectively.
The aggregate total return (before management fee waiver or subsidy) with
respect to the Class Z shares for the one year and since inception (September
16, 1996) periods ended December 31, 1997 was 7.72% and 13.49%, respectively.

The aggregate total return (after management fee waiver or subsidy) with
respect to the Class A shares for the one year and since inception (January
10, 1995) periods ended December 31, 1997 was 7.96% and 36.89%, respectively.
The aggregate total return (after management fee waiver or subsidy) with
respect to the Class B shares for the one year and since inception (January
10, 1995) periods ended December 31, 1997 was 7.24% and 34.41%, respectively.
The aggregate total return (after management fee waiver or subsidy) with
respect to the Class C shares for the one year and since inception (January
10, 1995) periods ended

B-35
<PAGE>

December 31, 1997 was 7.24% and 34.42%, respectively. The aggregate total
return (after management fee waiver or subsidy) with respect to the Class Z
shares for the one year and since inception (September 16, 1996) periods ended
December 31, 1997 was 8.05% and 13.65%, 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 and the rate of
inflation./1/

[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]

A Look at Performance Over the Long-Term
Average Annual Returns
1/1/26 - 12/31/97

Common Stocks 11.0%
Long-Term Gov't Bonds 5.2%
Inflation 3.1%

/1/Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation--1997
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). 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.

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. Subcustodians provide
custodial services for the Fund's foreign assets held outside the United
States. See "How the Fund is Managed--Custodian and Transfer and Dividend
Disbursing Agent" in the Prospectus.

Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $13.00
per shareholder account, a new account set-up fee of $2.00 for each manually
established account and a monthly inactive zero balance account fee of $.20
per shareholder account. For the fiscal year ended December 31, 1997, the Fund
incurred fees of approximately $38,100 for the services of PMFS. PMFS is also
reimbursed for its out-of-pocket expenses, including but not limited to
postage, stationery, printing, allocable communication expenses and other
costs.

Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
served as the Fund's independent accountants, for the fiscal year ended
December 31, 1996 and in that capacity audited the Fund's annual reports.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
currently serves as the Fund's independent public accountants and, in that
capacity, has audited the Fund's financial statements for the fiscal year
ending December 31, 1997.

B-36
<PAGE>

Portfolio of Investments PRUDENTIAL DIVERSIFIED BOND FUND, INC.
as of December 31, 1997

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

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

- --------------------------------------------------------------------
LONG-TERM INVESTMENTS--91.2%
- --------------------------------------------------------------------
Domestic Corporate Bonds--61.9%

Ba1 $ 200 Agco Corp.,
Sr. Sub. Notes,
8.50%, 3/15/06 $ 204,500
Baa1 500 Apache Corp.,
Deb.,
7.95%, 4/15/26 560,350
Aa3 2,600 Archer Daniels Midland Co.,
Deb.,
6.95%, 12/15/2097 2,633,904
Baa2 2,000 BJ Services Co.,
Sr. Notes,
7.00%, 2/1/06 2,050,100
Baa3 3,000 Capital One Bank,
Medium Term Notes,
7.08%, 10/30/01 3,069,660
Ba1 2,500 Cleveland Electric
Illuminating Co.,
Sec'd. Notes Ser. C,
7.88%, 11/1/17 2,639,250
Baa3 3,500 Commonwealth Edison Co.,
Notes,
7.625%, 1/15/07 3,693,830
A3 3,000 Compass Trust I,
Gtd. Bond
8.23%, 1/15/27 3,169,320
Ba2 500 Conseco Financing Trust II,
Bonds,
8.70%, 11/15/26 559,025
Ba2 5,500 Conseco Financing Trust III,
Bonds,
8.796%, 4/1/27 6,212,580
Baa2 2,000 CSX Corp.,
Deb.,
7.95%, 5/1/27 2,260,720
Delta Air Lines, Inc.,
Deb.,
Baa3 1,000 9.875%, 5/15/00 1,077,420
Baa3 4,100 9.75%, 5/15/21 5,286,540

Ba3 $ 1,500 El Paso Electric Co.,
First Mtge. Bonds,
9.40%, 5/1/11 $ 1,695,855
Baa2 5,500 Enterprise Rent-A-Car Co.,
Medium Term Notes,
7.00%, 6/15/00 5,609,780
Baa2 5,100 Federated Dept. Stores,
Inc.,
Sr. Notes,
8.50%, 6/15/03 5,568,639
B2 2,000 Impsat Corp.,
Sr. Notes,
12.125%, 7/15/03 2,030,000
Baa1 4,500 Lehman Brothers, Inc.,
Medium Term Notes,
6.40%, 8/30/00 4,500,000
Baa1 4,150 Lubermens Mutual Casualty
Co.,
Sr. Notes,
8.30%, 12/1/37 4,414,562
Mcleod, Inc.,
Sr. Disc. Notes,
B3 6,000 Zero Coupon (until 3/1/02)
10.50%, 3/1/07 4,365,000
B3 2,000 9.25%, 7/15/07 2,100,000
A1 1,000 Nationwide Life Insurance
Co.,
Bonds,
9.875%, 2/15/25 1,200,000
Aaa 3,000 New Jersey Economic
Development Authority
Revenue Bonds,
7.425%, 2/15/29 3,285,000
Ba3 2,000 Niagara Mohawk Power Corp.,
First Mtge. Bonds,
8.00%, 6/1/04 2,119,160
Baa1 4,000 Norfolk Southern Corp.,
Bonds,
7.80%, 5/15/27 4,496,160

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

37
<PAGE>

Portfolio of Investments PRUDENTIAL DIVERSIFIED BOND FUND, INC.
as of December 31, 1997

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

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

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

Domestic Corporate Bonds (cont'd.)
Occidental Petroleum Corp.,
Sr. Notes,
Baa2 $ 1,000 10.125%, 11/15/01 $ 1,128,240
Baa2 1,000 11.125%, 8/1/10 1,362,140
Ba2 500 Paramount Communications,
Inc.,
Sr. Notes,
7.50%, 1/15/02 512,260
Baa3 1,250 Parker & Parsley Petroleum
Co.,
Sr. Notes,
8.25%, 8/15/07 1,376,800
RJR Nabisco, Inc.,
Sr. Notes,
Baa3 4,000 8.25%, 7/1/04 4,190,760
Baa3 4,000 8.50%, 7/1/07 4,264,200
Ba3 2,000 Rogers Cablesystems, Inc.,
Sr. Sec'd. Notes,
10.00%, 3/15/05 2,200,000
Baa3 10,000 Royal Caribbean Cruises
Ltd.,
Sr. Notes,
7.50%, 10/15/27 10,183,400
Salomon, Inc.,
Medium Term Notes,
A2 2,000 6.50%, 3/1/00 2,006,200
A2 4,000 6.59%, 2/21/01 4,014,000
A2 500 7.25%, 5/1/01 513,160
A2 3,000 6.65%, 7/15/01 3,019,500
Baa3 3,000 Seagate Technology, Inc.,
Sr. Deb.,
7.45%, 3/1/37 3,081,060
Ba1 3,000 Seagull Energy Corp.,
Sr. Notes,
7.50%, 9/15/27 3,107,070
Tele-Communications, Inc.,
Deb.,
Ba1 3,000 6.875%, 2/15/06 3,011,040
Ba1 4,500 7.875%, 8/1/13 4,840,065
Ba1 1,500 10.125%, 4/15/22 1,996,155

Time Warner, Inc.,
Deb.,
Ba1 $ 2,000 7.75%, 6/15/05 $ 2,109,480
Ba1 2,000 6.85%, 1/15/26 2,046,860
Sr. Notes,
Ba1 3,400 9.125%, 1/15/13 4,048,618
Turner Broadcasting Systems
Inc.,
Sr. Notes,
Ba1 1,500 7.40%, 2/1/04 1,562,055
Ba1 2,000 8.375%, 7/1/13 2,244,040
B1 295 UCAR Global Enterprises,
Inc.,
Sr. Sub. Notes,
12.00%, 1/15/05 330,400
Baa1 1,000 Union Planters Corp.,
Gtd. Bonds,
8.20%, 12/15/26 1,058,040
United Airlines, Inc.,
Deb.,
Baa3 3,000 10.67%, 5/1/04 3,595,740
Baa3 2,000 11.21%, 5/1/14 2,804,620
B2 2,000 United States Can Corp.,
Sr. Sub. Notes, Series B,
10.125%, 10/15/06 2,115,000
Baa3 4,000 Vesta Capital,
Gtd. Notes,
8.525%, 1/15/27 4,410,400
Ba2 2,450 Viacom, Inc.,
Sr. Notes,
7.75%, 6/1/05 2,491,871
Ba1 1,500 Worldcom Inc.,
Sr. Notes,
7.75%, 4/1/07 1,610,835
------------
Total domestic corporate
bonds
(cost $148,395,614) 156,035,364
------------

- --------------------------------------------------------------------
Foreign Government Securities--13.8%

Baa3 1,000 Banco de Commercio Exterior
de Colombia,
8.625%, 6/2/00 1,022,500

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

38
<PAGE>

Portfolio of Investments PRUDENTIAL DIVERSIFIED BOND FUND, INC.
as of December 31, 1997

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

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

- --------------------------------------------------------------------
Foreign Government Securities (cont'd.)

Ba1 $ 5,000 Bangkok Bank Public Ltd.,
(Thailand) Sub. Notes,
8.375%, 1/15/27 $ 2,930,050
Ba1 500 Bangko Sentral Philipinas,
8.60%, 6/15/27 410,000
Baa3 1,000 Banque Centale De Tunisie,
(Tunisia) Notes,
7.50%, 9/19/07 950,000
Ba2 4,000 Moscow City,
Russia, 2000
9.50%, 5/31/00 3,750,000
A1 1,200 National Australia Bank
Ltd.,
(Australia) Bonds,
6.40%, 12/10/07 1,200,000
Republic of Colombia,
Baa3 1,000 8.75%, 10/6/99 1,029,820
NR 250 8.00%, 6/14/01 250,875
Baa3 5,500 7.625%, 2/15/07 5,149,375
Ba1 4,000 Republic of Panama,
7.875%, 2/13/02 3,840,000
Baa3 4,500 Republic of South Africa,
8.50%, 6/23/17 4,364,415
NR 3,000 Rio de Janeiro Municipality,
10.375%, 7/12/99 2,973,750
NR 1,100 Russian Federation,
10.00%, 6/26/07 1,019,150
NR 5,000 St. Petersburg Russia,
9.50%, 6/18/02 4,550,000
Ba2 1,150 United Mexican States,
11.50%, 5/15/26 1,362,750
------------
Total foreign government
securities
(cost $38,189,263) 34,802,685
------------
- --------------------------------------------------------------------
Foreign Corporate Bonds--11.7%

Baa2 3,000 Avon Energy Partners Hldg.,
(United Kingdom) Sr. Notes,
7.05%, 12/11/07 3,048,750

Ba1 $ 2,500 Greater Beijing First
Expwy.,
(China) Sr. Notes,
9.50%, 6/15/07 $ 2,000,000
Ba2 1,500 Grupo Televisa,
(Mexico) Sr. Disc. Notes,
11.875%, 5/15/06 1,680,000
Ba1 2,400 Gulf Canada Resources Ltd.,
(Canada) Sr. Notes,
8.25%, 3/15/17 2,670,024
Baa1 4,000 Hyder Plc.,
(United Kingdom) Bonds,
7.25%, 12/15/17 4,041,800
Ba1 2,000 Industrial Finance Corp.,
(Thailand) Notes,
7.875%, 8/4/02 1,900,000
A3 1,000 Kansallis-Osake-Pankki,
N.Y., (Finland), Sub.
Notes,
10.00%, 5/1/02 1,136,390
B2 500 P. T. Polysindo Eka Perkasa,
Sr. Notes, (Indonesia)
13.00%, 6/15/01 455,000
Ba3 4,000 Polysindo Int'l. Finance
Co.,
(Indonesia) Gtd. Notes,
9.375%, 7/30/07 2,880,000
Baa1 2,000 Skandinaviska Enskilda
Banken, (Sweden) Bonds,
7.50%, 3/29/49 2,037,500
NR 1,500 Svenska Handelsbanken,
(Sweden) Sub. Notes,
7.125%, 3/29/49 1,511,250
Ba2 5,000 Total Access Communication
Pub.,
(Thailand) Bonds,
8.375%, 11/4/06 2,400,000
Baa1 1,900 Upm Kymmene Corp., (Finland)
Notes,
7.45%, 11/26/27 1,949,875

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

39
<PAGE>

Portfolio of Investments PRUDENTIAL DIVERSIFIED BOND FUND, INC.
as of December 31, 1997

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

Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)

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

Foreign Corporate Bonds (cont'd.)
Baa3 $ 2,000 Videotron Holdings Plc,
Sr. Disc. Notes,
(United Kingdom)
Zero Coupon (until 1/1/00)
11.125%, 7/1/04 $ 1,904,960
------------
Total foreign corporate
bonds
(cost $33,687,853) 29,615,549
------------
- --------------------------------------------------------------------

U.S. Government Securities--3.8%
United States Treasury
Notes,
1,000(a) 6.00%, 7/31/02 1,010,470
5,525 5.875%, 9/30/02 5,555,222
800 6.25%, 2/15/03 818,128
2,050 6.125%, 8/15/07 2,106,703
------------
Total U.S. government
securities
(cost $9,375,293) 9,490,523
------------
Total long-term investments
(cost $229,648,023) 229,944,121
------------

- --------------------------------------------------------------------
SHORT-TERM INVESTMENTS--8.3%
- --------------------------------------------------------------------

Domestic Corporate Bond--0.4%
Ba3 $ 1,000 Kmart Corp.,
Medium Term Notes,
9.80%, 6/15/98
(cost $1,010,000) $ 1,010,000
- --------------------------------------------------------------------
Repurchase Agreement--7.9%
19,979 Joint Repurchase Agreement
Account,
6.63%, 1/2/98, (Note 6)
(cost $19,979,000) 19,979,000
------------
Total short-term investments
(cost $20,989,000) 20,989,000
------------
- --------------------------------------------------------------------
Total Investments--99.5%
(cost $250,637,023; Note 5) 250,933,121
Other assets in excess of
liabilities--0.5% 1,143,132
------------
Net Assets--100% $252,076,253
============
- ----------------------
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
(a) Pledged as initial margin on financial futures contracts.

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

40
<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED BOND
December 31, 1997 FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The industry classification of portfolio holdings and other
net assets shown as a percentage of net assets as of December
31, 1997 was as follows:

Financial Services.................................... 11.9%
Foreign Government Securities......................... 11.8
Banking............................................... 6.8
Media................................................. 6.6
Airlines.............................................. 5.2
Utilities............................................. 5.2
Telecommunications.................................... 5.0
Cable & Pay Television................................ 4.8
Leisure............................................... 4.0
U.S. Government Securities............................ 3.8
Oil & Gas............................................. 3.6
Consumer Goods & Services............................. 3.4
Industrials........................................... 3.3
Railroads............................................. 2.7
Retail................................................ 2.6
Transportation........................................ 2.2
Insurance............................................. 2.2
State Government...................................... 1.3
Computer Hardware..................................... 1.2
Energy................................................ 1.2
Foods................................................. 1.0
Toll Roads............................................ 0.8
Containers............................................ 0.8
Agricultural Equipment................................ 0.1
Steel................................................. 0.1
-----
91.6
Other assets in excess of liabilities (including Joint
Repurchase Agreement)............................... 8.4
-----
100.0%
=====

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

41
<PAGE>

Statement of Assets and Liabilities PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------

<S> <C>
Assets December 31, 1997
-----------------
Investments, at value (cost $250,637,023)............................................................... $ 250,933,121
Cash.................................................................................................... 8,757
Interest receivable..................................................................................... 4,583,966
Receivable for Fund shares sold......................................................................... 766,874
Deferred expenses and other assets...................................................................... 85,424
---------------
Total assets......................................................................................... 256,378,142
---------------
Liabilities
Payable for investments purchased....................................................................... 3,352,008
Payable for Fund shares reacquired...................................................................... 430,990
Accrued expenses and other liabilities.................................................................. 207,306
Due to broker - variation margin........................................................................ 136,750
Distribution fee payable................................................................................ 107,698
Dividends payable....................................................................................... 40,783
Management fee payable.................................................................................. 26,354
---------------
Total liabilities.................................................................................... 4,301,889
---------------
Net Assets.............................................................................................. $ 252,076,253
===============
Net assets were comprised of:
Common stock, at par................................................................................. $ 18,798
Paid-in capital in excess of par..................................................................... 251,653,643
---------------
251,672,441
Undistributed net investment income.................................................................. 3,614
Accumulated net realized gain on investments......................................................... 390,788
Net unrealized appreciation on investments, foreign currencies and futures........................... 9,410
---------------
Net assets, December 31, 1997........................................................................... $ 252,076,253
===============
</TABLE>
<TABLE>
<S> <C>
Class A:
Net asset value and redemption price per share
($41,050,791 / 3,061,394 shares of common stock issued and outstanding)........................... $13.41
Maximum sales charge (4.0% of offering price)........................................................ .56
------
Maximum offering price to public..................................................................... $13.97
======

Class B:
Net asset value, offering price and redemption price per share
($157,501,432 / 11,743,633 shares of common stock issued and outstanding)......................... $13.41
======

Class C:
Net asset value, offering price and redemption price per share
($6,005,066 / 447,789 shares of common stock issued and outstanding).............................. $13.41
======
Class Z:
Net asset value, offering price and redemption price per share
($47,518,964 / 3,545,665 shares of common stock issued and outstanding)........................... $13.40
======

- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Notes to Financial Statements.

42
<PAGE>

PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Operations
- ------------------------------------------------------------

Year Ended
Net Investment Income December 31, 1997
-----------------

Interest and discount earned............. $17,580,629
-----------
Expenses
Distribution fee--Class A................ 52,492
Distribution fee--Class B................ 1,084,647
Distribution fee--Class C................ 35,602
Management fee........................... 1,105,555
Transfer agent's fees and expenses....... 479,000
Custodian's fees and expenses............ 172,000
Reports to shareholders.................. 130,000
Registration fees........................ 113,000
Amortization of deferred organization
expenses.............................. 40,135
Legal fees and expenses.................. 35,000
Audit fee................................ 25,000
Directors' fees and expenses............. 20,000
Miscellaneous............................ 10,047
--------------
Total expenses........................ 3,302,478
Less: Management fee waiver (Note 2)..... (267,317)
Expense subsidy (Note 4).............. (391,381)
--------------
Net expenses.......................... 2,643,780
--------------
Net investment income....................... 14,936,849
--------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currencies
Net realized gain (loss) on:
Investment transactions.................. 6,043,804
Short sales.............................. 74,025
Financial futures transactions........... (2,110,728)
Foreign currency transactions............ 57,955
--------------
4,065,056
--------------
Net change in unrealized
appreciation/(depreciation) on:
Investments.............................. (2,822,669)
Short sales.............................. (55,878)
Financial futures........................ (286,688)
Foreign currencies....................... 4,498
--------------
(3,160,737)
--------------
Net gain on investments..................... 904,319
--------------
Net Increase in Net Assets
Resulting from Operations................... $15,841,168
===========

PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Changes in Net Assets

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

Increase (Decrease) Year Ended December 31,
in Net Assets --------------------------
1997 1996
---------- -----------

Operations
Net investment income........... $14,936,849 $ 9,199,027
Net realized gain on investment
and foreign currency
transactions................. 4,065,056 544,282
Net change in unrealized
appreciation (depreciation)
of investments and foreign
currencies................... (3,160,737) (621,998)
----------- -----------
Net increase in net assets
resulting from operations.... 15,841,168 9,121,311
----------- -----------
Dividends and distributions (Note 1)

Dividends from net investment
income
Class A...................... (2,499,000) (1,551,620)
Class B...................... (9,461,239) (7,416,277)
Class C...................... (309,631) (228,430)
Class Z...................... (2,666,979) (2,700)
----------- -----------
(14,936,849) (9,199,027)
----------- -----------
Distributions in excess of net
investment income
Class A...................... (62,548) --
Class B...................... (239,443) --
Class C...................... (9,136) --
Class Z...................... (72,124) --
----------- -----------
(383,251) --
----------- -----------
Distributions from net realized
gains
Class A...................... (613,027) (58,141)
Class B...................... (2,367,951) (257,928)
Class C...................... (87,655) (7,883)
Class Z...................... (685,629) (590)
----------- -----------
(3,754,262) (324,542)
----------- -----------
Fund share transactions (net of
share conversions) (Note 7)
Net proceeds from shares sold... 121,952,066 96,732,342
Net asset value of shares issued
to shareholders in
reinvestment of dividends and
distributions................ 15,297,448 6,941,778
Cost of shares reacquired....... (53,401,326) (34,213,705)
----------- -----------
Net increase in net assets from
Fund share transactions...... 83,848,188 69,460,415
----------- -----------
Total increase..................... 80,614,994 69,058,157
Net Assets
Beginning of year.................. 171,461,259 102,403,102
----------- -----------
End of year........................ $252,076,253 $171,461,259
=========== ===========

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

43
<PAGE>

Notes to Financial Statements 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 Investments Fund Management LLC ('PIFM').
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. The ability of issuers of debt
securities held by the Fund 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.

Security Valuation: Securities listed on a securities exchange 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 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. If the seller defaults and the value of the collateral
declines or if bankruptcy proceedings are commenced with respect to the seller
of the security, realization of the collateral by the Fund may be delayed or
limited.

Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:

(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange;

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

Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the year, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the year. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of portfolio securities sold during
the year.

Net realized gains and losses on foreign currency transactions represent net
foreign exchange gains and losses from sales and maturities of short-term
securities, disposition of foreign currency, gains or losses realized between
the trade and settlement dates of security transactions, and the difference
between amounts of dividends, interest and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets, except portfolio securities, and liabilities at year end exchange rates
are reflected as a component of unrealized appreciation or depreciation on
foreign currencies.

Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.

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

44
<PAGE>

Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.

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.

Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). 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. The proceeds received from the
short sale are maintained as collateral for its obligation to deliver the
security upon conclusion of the sale. The Fund may have to pay a fee to borrow
the particular security and may be obligated to pay over any payments received
on such borrowed securities. A gain, limited to the price at which the Fund sold
the security short, or a loss, unlimited in magnitude, will be recognized upon
the termination of a short sale if the market price at termination is less than
or greater than, respectively, the proceeds originally received.

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.

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.

Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with 'Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.' The
effect of applying this statement was to increase undistributed net investment
income by $386,865, and decrease accumulated net realized gain by $386,865,
primarily due to the sale of securities purchased with market discount. Net
investment income, net realized gains and net assets were not affected by this
change.

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

45
<PAGE>

Note 2. Agreements

The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the cost of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.

The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Fund. PIFM waived 80%
of its management fee until May 1, 1997. Effective May 1, 1997 PIFM eliminated
its voluntary management fee waiver. The management fees waived for the year
ended December 31, 1997 amounted to $267,317 ($.01 per share for Class A, B, C
and Z shares; .12 of 1% of average net assets, annualized). The Fund is not
required to reimburse PIFM for such waiver.

The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates 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.
No distribution or service fees are paid to PSI as distributor for Class Z
shares of the Fund.

Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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 Plans were .15 of 1% of the average daily net assets of
Class A shares and .75% of the average daily net assets of both the Class B and
Class C shares for the year ended December 31, 1997.

PSI has advised the Fund that it has received approximately $141,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1997. 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 year ended December 31, 1997, it received
approximately $409,000 and $2,000 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders, respectively.

PSI, PIFM and PIC are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.

The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement during the year
ended December 31, 1997. The Funds pay a commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro rata basis by the Funds. The agreement
expired on December 30, 1997 and has been extended through December 29, 1998
under the same terms.
- --------------------------------------------------------------------------------
Note 3. Other Transactions With Affiliates

Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended December 31, 1997,
the Fund incurred fees of approximately $393,400 for the services of PMFS. As of
December 31, 1997, approximately $38,100 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also include certain
out-of-pocket expenses paid to nonaffiliates.

- --------------------------------------------------------------------------------
Note 4. Expense Subsidy

PIFM voluntarily agreed to subsidize operating expenses so that total Fund
operating expenses do not exceed .90%, 1.50%, 1.50% and .75% of the average
daily net assets of the Class A, Class B, Class C and Class Z shares,
respectively. For the year ended December 31, 1997, such reimbursement amounted
to $391,381 ($0.02 per share for Class A, B, C and Z shares; .17% of average net
assets). The Fund is not required to reimburse PIFM for such subsidy.

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

46
<PAGE>

Note 5. Portfolio Securities

Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1997 were $761,889,353 and $708,751,587,
respectively.

The federal income tax cost basis of the Fund's investments at December 31, 1997
was $250,692,608 and, accordingly, net unrealized appreciation for federal
income tax purposes was $240,513 (gross unrealized appreciation--$8,268,633;
gross unrealized depreciation--$8,028,120).

During the year ended December 31, 1997, the Fund entered into financial futures
contracts. Details of open contracts at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration December 31, Trade Appreciation
Contracts Type Date 1997 Date (Depreciation)
- --------- ------------------ ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Short Positions:
326 30 yr. T-Bond Mar. 1998 $39,272,813 $38,836,344 $ (436,469)
203 10 yr. T-Note Mar. 1998 22,767,719 22,647,188 (120,531)

Long Positions:
100 Muni. Bond Mar. 1998 12,312,500 12,198,438 114,062
100 30 yr. T-Bond Mar. 1998 12,046,875 11,890,625 156,250
--------------
$ (286,688)
==============
</TABLE>
- --------------------------------------------------------------------------------
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 December 31, 1997, the
Fund had a 2% undivided interest in the joint account. The undivided interest
for the Fund represents $19,979,000 in principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:

Credit Suisse First Boston, Corp., 6.75%, in the principal amount of
$342,000,000, repurchase price $342,128,250, due 1/2/98. The value of the
collateral including accrued interest was $353,486,750.

Morgan Grenfell Deutsche Bank Securities Corp., 6.80%, in the principal amount
of $200,000,000, repurchase price $200,075,555, due 1/2/98. The value of the
collateral including accrued interest was $204,000,314.

Morgan Stanley, Dean Witter Discover & Co., Inc., 5.95%, in the principal amount
of $151,553,000, repurchase price $151,603,097, due 1/2/98. The value of the
collateral including accrued interest was $154,584,932.

SBC Warburg Dillon Reed, Inc., 6.55%, in the principal amount of $142,000,000,
repurchase price $142,051,672, due 1/2/98. The value of the collateral including
accrued interest was $144,862,841.

Salomon Smith Barney Inc, 6.75%, in the principal amount of $342,000,000,
repurchase price $342,128,250, due 1/2/98. The value of the collateral including
accrued interest was $350,295,372.

- --------------------------------------------------------------------------------
Note 7. Capital

The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 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. Class Z shares are not
subject to any sales or redemption charge and are offered exclusively for sale
to a limited group of investors.

There are 2 billion shares of common stock, $.001 par value per share, divided
into four classes, designated Class A, B, C and Class Z, each of which consists
of 1 billion, 500 million, 500 million and 500 million authorized shares,
respectively. Of the 18,798,481 shares of common stock issued and outstanding at
December 31, 1997, PIFM owned 8,000.

Transactions in shares of common stock were as follows:

Class A Shares Amount
- ------- ---------- -----------
Year ended December 31, 1997:
Shares sold........................... 1,426,052 $19,452,716
Shares issued in reinvestment of
dividends and distributions......... 187,300 2,545,364
Shares reacquired..................... (1,021,326) (13,910,845)
---------- -----------
Net increase in shares outstanding
before conversion................... 592,026 8,087,235
Shares issued upon conversion from
Class B............................. 210,803 2,878,755
---------- -----------
Net increase in shares outstanding.... 802,829 $10,965,990
========== ===========

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

47
<PAGE>

Class A Shares Amount
- ------- ---------- -----------
Year ended December 31, 1996:
Shares sold........................... 1,409,945 $18,784,906
Shares issued in reinvestment of
dividends and distributions......... 93,794 1,254,514
Shares reacquired..................... (477,222) (6,363,413)
---------- -----------
Net increase in shares outstanding
before conversion................... 1,026,517 13,676,007
Shares issued upon conversion from
Class B............................. 196,827 2,615,114
---------- -----------
Net increase in shares outstanding.... 1,223,344 $16,291,121
========== ===========

Class B
- -------
Year ended December 31, 1997:
Shares sold........................... 3,336,421 $45,561,167
Shares issued in reinvestment of
dividends and distributions......... 663,972 9,023,614
Shares reacquired..................... (2,067,600) (28,222,638)
---------- -----------
Net increase in shares outstanding
before conversion................... 1,932,793 26,362,143
Shares reacquired upon conversion
into Class A........................ (210,717) (2,878,755)
---------- -----------
Net increase in shares outstanding.... 1,722,076 $23,483,388
========== ===========

Year ended December 31, 1996:
Shares sold........................... 5,615,168 $75,013,374
Shares issued in reinvestment of
dividends and distributions......... 412,093 5,507,751
Shares reacquired..................... (2,006,332) (26,854,321)
---------- -----------
Net increase in shares
outstanding before conversion....... 4,020,929 53,666,804
Shares reacquired upon conversion into
Class A............................. (196,827) (2,615,114)
---------- -----------
Net increase in shares outstanding.... 3,824,102 $51,051,690
========== ===========

Class C Shares Amount
- ------- ---------- -----------
Year ended December 31, 1997:
Shares sold........................... 211,330 $ 2,892,963
Shares issued in reinvestment of
dividends and distributions......... 23,545 319,900
Shares reacquired..................... (92,251) (1,257,156)
---------- -----------
Net increase in shares outstanding.... 142,624 $ 1,955,707
========== ===========

Year ended December 31, 1996:
Shares sold........................... 169,498 $ 2,266,712
Shares issued in reinvestment of
dividends and distributions......... 13,201 176,406
Shares reacquired..................... (70,076) (934,259)
---------- -----------
Net increase in shares outstanding.... 112,623 $ 1,508,859
========== ===========

Class Z
- -------
Year ended December 31, 1997:
Shares sold........................... 3,983,551 $54,045,220
Shares issued in reinvestment of
dividends and distributions......... 250,799 3,408,570
Shares reacquired..................... (733,462) (10,010,687)
---------- -----------
Net increase in shares outstanding.... 3,500,888 $47,443,103
========== ===========

September 16, 1996(a) through
December 31, 1996
Shares sold........................... 49,040 $ 667,350
Shares issued in reinvestment of
dividends and distributions......... 229 3,107
Shares reacquired..................... (4,542) (61,712)
---------- -----------
Net increase in shares outstanding.... 44,727 $ 608,745
========== ===========

- ----------------------------
(a) Commencement of Offering of Class Z shares.

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

48
<PAGE>

Financial Highlights PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------- -----------------------------
January 10,
1995(a)
Year Ended December 31, Through Year Ended December 31,
----------------------------- December 31, -----------------------------
1997 1996 1995 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 13.57 $ 13.79 $ 12.50 $ 13.58 $ 13.79
------ ------ ------ ------------ ------------
Income from investment operations
Net investment income(b)...................... .98 .93 .90 .89 .85
Net realized and unrealized gain (loss) on
investment transactions.................... .07 (.19) 1.51 .06 (.18)
------ ------ ------ ------------ ------------
Total from investment operations........... 1.05 .74 2.41 .95 .67
------ ------ ------ ------------ ------------
Less distributions
Dividends from net investment income.......... (.98) (.93) (.90) (.89) (.85)
Distributions in excess of net investment
income..................................... (.02) -- -- (.02) --
Distributions from net realized gains......... (.21) (.03) (.22) (.21) (.03)
------ ------ ------ ------------ ------------
Total distributions........................ (1.21) (.96) (1.12) (1.12) (.88)
------ ------ ------ ------------ ------------
Net asset value, end of period................ $ 13.41 $ 13.57 $ 13.79 $ 13.41 $ 13.58
====== ====== ====== ============ ============
TOTAL RETURN(d)............................... 7.96% 5.80% 19.80% 7.24% 5.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $ 41,051 $ 30,657 $ 14,276 $157,501 $136,054
Average net assets (000)...................... $ 34,994 $ 21,867 $ 7,428 $144,620 $114,560
Ratios to average net assets(b):
Expenses, including distribution fees...... .82% .79% .87%(c) 1.42% 1.39%
Expenses, excluding distribution fees...... .67% .64% .72%(c) .67% .64%
Net investment income...................... 7.14% 7.08% 6.92%(c) 6.54% 6.48%
Portfolio turnover rate....................... 334% 362% 260% 334% 362%
</TABLE>

Class B
-------------------------------

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 (loss) on
investment transactions.................... 1.51
------
Total from investment operations........... 2.33
------
Less distributions
Dividends from net investment income.......... (.82)
Distributions in excess of net investment
income..................................... --
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)............... $ 85,472
Average net assets (000)...................... $ 43,574
Ratios to average net assets(b):
Expenses, including distribution fees...... 1.47%(c)
Expenses, excluding distribution fees...... .72%(c)
Net investment income...................... 6.32%(c)
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.

49
<PAGE>

Financial Highlights PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------- ------------------------------
January 10, September 16,
1995(a) 1996(e)
Year Ended December 31, Through Year Ended Through
----------------------------- December 31, December 31, December 31,
1997 1996 1995 1997 1996
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $13.58 $13.79 $12.50 $ 13.57 $ 13.20
----- ----- ----- ------ -----
Income from investment operations
Net investment income(b)...................... .89 .85 .82 1.00 .28
Net realized and unrealized gain (loss) on
investment transactions.................... .06 (.18) 1.51 .06 .40
----- ----- ----- ------ -----
Total from investment operations........... .95 .67 2.33 1.06 .68
----- ----- ----- ------ -----
Less distributions
Dividends from net investment income.......... (.89) (.85) (.82) (1.00) (.28)
Distributions in excess of net investment
income..................................... (.02) -- -- (.02) --
Distributions from net realized gains......... (.21) (.03) (.22) (.21) (.03)
----- ----- ----- ------ -----
Total distributions........................ (1.12) (.88) (1.04) (1.23) (.31)
----- ----- ----- ------ -----
Net asset value, end of period................ $13.41 $13.58 $13.79 $ 13.40 $ 13.57
===== ===== ===== ====== =====
TOTAL RETURN(d)............................... 7.24% 5.19% 19.11% 8.05% 5.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $6,005 $4,143 $2,655 $ 47,519 $ 608
Average net assets (000)...................... $4,747 $3,534 $1,307 $ 36,750 $ 125
Ratios to average net assets(b):
Expenses, including distribution fees...... 1.42% 1.39% 1.47%(c) .67% .64%(c)
Expenses, excluding distribution fees...... .67% .64% .72%(c) .67% .64%(c)
Net investment income...................... 6.54% 6.48% 6.32%(c) 7.29% 7.23%(c)
Portfolio turnover rate....................... 334% 362% 260% 334% 362%
</TABLE>
- ------------------------------
(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.
(e) Commencement of offering of Class Z shares.

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

50
<PAGE>

Report of Independent Accountants PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

To the Shareholders and Board of Directors of
Prudential Diversified Bond Fund, Inc.

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Diversified Bond Fund,
Inc. (the 'Fund') at December 31, 1997, and the results of its operations, the
changes in its net assets and the financial highlights for the year then ended,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmation from brokers were not received, provides
a reasonable basis for the opinion expressed above. The accompanying statement
of changes in net assets for the year ended December 31, 1996, and the financial
highlights for the periods other than the year ended December 31, 1997 were
audited by other independent accountants, whose opinion dated February 12, 1997
was unqualified.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1998
- --------------------------------------------------------------------------------

51
<PAGE>

Tax Information (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

As required by the Internal Revenue Code, we are to advise you within 60 days of
the Fund's fiscal year end (December 31, 1997) as to the federal tax status of
dividends and distributions paid by the Fund.

We are required by Massachusetts, Missouri and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders providing the Mutual Fund meets certain requirements
mandated by the respective state's taxing authorities. We are pleased to report
that 3.57% of the dividends paid by Prudential Diversified Bond Fund, Inc.
qualifies for such deduction.

During the fiscal year ended December 31, 1997, the Fund paid dividends from net
investment income and a short-term capital gains distribution which was taxable
as ordinary income. We wish to advise you that the corporate dividends received
deduction for the Fund is zero.

For the purpose of preparing your annual federal income tax return, however, you
should report the amounts as reflected on the appropriate Form 1099-DIV or
substitute 1099-DIV.

Change of Auditors PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
independent auditors. For the years ended December 31, 1995, and December 31,
1996, Deloitte & Touche LLP expressed an unqualified opinion on the Fund's
financial statements. There were no disagreements between Fund management and
Deloitte & Touche LLP prior to their termination. The Board of Directors
approved the termination of Deloitte & Touche LLP and the appointment of Price
Waterhouse LLP as the Fund's independent accountants.

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

52
<PAGE>

APPENDIX I
HISTORICAL PERFORMANCE DATA

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

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

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

[CHART APPEARS HERE]

Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Illinois. Used with permission. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any portfolio.

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

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

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

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

I-1
<PAGE>

Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 through 1997. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying
securities during the period mentioned. The data is provided to illustrate the
varying historical total returns and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.

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

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S GOVERNMENT
TREASURY
BONDS/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7% 9.6%
- -------------------------------------------------------------------------------------------------------------------------------
U.S GOVERNMENT
MORTGAGE
SECURITIES/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4% 9.5%
- -------------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT
GRADE
CORPORATE BONDS/3/ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3% 10.2%
- -------------------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD
CORPORATE BONDS/4/ 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4% 12.8%
- -------------------------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS/5/ 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%)
- -------------------------------------------------------------------------------------------------------------------------------
DIFFERENCE
BETWEEN
HIGHEST AND
LOWEST
RETURNS PERCENT 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

/1/LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Governmental National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

I-2
<PAGE>

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

LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)

[CHART APPEARS HERE]

Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1995. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.

I-3
<PAGE>

APPENDIX II
GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

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

DIVERSIFICATION

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

DURATION

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

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

MARKET TIMING

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

POWER OF COMPOUNDING

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

STANDARD DEVIATION

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

II-1
<PAGE>

APPENDIX III
INFORMATION RELATING TO PORTFOLIO SECURITIES

The following chart shows where the Fund fits in the Prudential Fund Family
in terms of the maturity of its portfolio securities.

[CHART]

The Fund may provide: (i) higher yield and total return than Prudential's
U.S. government funds, but with lower overall quality and (ii) higher overall
quality than the Prudential High Yield Fund, but with potentially lower yield
and total return.

Currently, the Fund is maintaining an intermediate-term duration of 5 to 6
years. This is subject to change.

III-1
<PAGE>

APPENDIX IV
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 "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1996 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 PI/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1996. Prudential (together with its subsidiaries) employs more than 81,000
persons worldwide, and maintains a sales force of approximately 11,500 agents
and 6,400 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 nearly 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 22 million
life insurance policies in force today with a face value of $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. The Prudential provides auto insurance for
approximately 1.6 million cars and insures approximately 1.2 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. As of December 31, 1996, Prudential had more than $322 billion in
assets under management. Prudential's Investments, a business group of
Prudential (of which Prudential Mutual Funds is a key part) manages over $190
billion in assets of institutions and individuals. In (Pensions &
Investments), May 12, 1996, Prudential was ranked third in terms of total
assets under management.

Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers
and agents across the United States./2/

Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
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

As of October 31, 1997 Prudential Investments Fund Management was the 17th
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with
more than 3.7 million shareholder accounts.

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

/1/ Prudential Investments 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 Series
Fund, Inc. and Mercater Asset Management, L.P., as Subadviser to
International Stock Series, a portfolio of Prudential World Fund, Inc.
There are multiple subadvisers for The Target Portfolio Trust.

/2/ As of December 31, 1996.

IV-1
<PAGE>

From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.

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
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.3 Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.

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

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

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

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

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

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

Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing
over 3.8 million shares with nearly 200 different firms. Prudential Mutual
Funds' bond trading desks traded $157 million in government and corporate
bonds on an average day. That represents more in daily trading than most bond
funds tracked by Lipper even have in assets./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/
- ---------
/3/As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
/4/Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
/5/Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
/6/As of December 31, 1994.

IV-2
<PAGE>

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

INFORMATION ABOUT PRUDENTIAL SECURITIES

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

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

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

In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial 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.

- ---------
/7/As of December 31, 1994.
/8/On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.

IV-3
<PAGE>

PART C

OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) FINANCIAL STATEMENTS:

(1) Financial statements included in the Prospectus constituting Part A
of this Registration Statement:

Financial Highlights

(2) Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:

Portfolio of Investments at December 31, 1997.

Statement of Assets and Liabilities at December 31, 1997 (audited).

Statement of Operations for the fiscal year ended December 31, 1997
(audited).

Statement of Changes in Net Assets for the fiscal years ended
December 31, 1997 and December 31, 1996.

Notes to Financial Statements.

Financial Highlights.

Report of Independent Accountants.

(b) EXHIBITS:

1.(a) Articles of Incorporation. Incorporated by reference to Exhibit 1
to the Registration Statement on Form N-1A (File No. 33-55441) filed
via EDGAR on September 12, 1994.

(b) Articles Supplementary. Incorporated by reference to Exhibit No.
1(b) to Post-Effective Amendment No. 3 to the Registration Statement
on Form N-1A (File No. 2-89725) filed via EDGAR on August 9, 1996.

2.By-Laws. Incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 33-55441) filed via EDGAR on
September 12, 1994.

3.Not Applicable.

4.Instruments defining rights of shareholders. Incorporated by
reference to Exhibit 4 to the Registration Statement on Form N-1A
(File No. 33-55441) filed via EDGAR on September 12, 1994.

5.(a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc. Incorporated by reference to Exhibit No. 5(a)
to Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 2-89725) filed via EDGAR on June 20, 1995.

(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No. 2-89725) filed via
EDGAR on June 20, 1995.

6.(a) Distribution Agreement between the Registrant and Prudential
Securities Incorporated. Incorporated by reference to Exhibit No.
6(a) to Post-Effective Amendment No. 3 to the Registration Statement
on Form N-1A (File No. 2-89725) filed via EDGAR on August 9, 1996.

(b) Form of Selected Dealer Agreement. Incorporated by reference to
Exhibit No. 6(d) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 2-89725) filed via
EDGAR on June 20, 1995.

7.Not Applicable.

8.Custodian Contract between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit No. 8 to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 2-89725) filed via EDGAR on June 20, 1995.

9.Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 2-89725) filed via EDGAR on June 20,
1995.

C-1
<PAGE>

10.Opinion of Shereff, Friedman, Hoffman & Goodman, LLP. Incorporated by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-55441) filed via EDGAR on October
18, 1994.

11.Consent of Independent Accountants.*

12.Not Applicable.

14.Not Applicable.

15.(a) Distribution and Service Plan for Class A Shares. Incorporated by
reference to Exhibit No. 15(a) to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No. 2-89725) filed via
EDGAR on June 20, 1995.

(b) Distribution and Service Plan for Class B Shares. Incorporated by
reference to Exhibit No. 15(b) to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No. 2-89725) filed via
EDGAR on June 20, 1995.

(c) Distribution and Service Plan for Class C Shares. Incorporated by
reference to Exhibit No. 15(c) to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No. 2-89725) filed via
EDGAR on June 20, 1995.

16.Schedule of Computation of Performance Quotations. Incorporated by
reference to Exhibit No. 16 to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 2-89725) filed via
EDGAR on June 20, 1995.

17. Financial Data Schedule for Class A, Class B, Class C and Class Z
shares filed as Exhibit 27 for electronic purposes.*

18. Rule 18f-3 Plan. Incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 3 to the Registration Statement on Form
N-1A (File No. 2-89725) filed via EDGAR on August 9, 1996.

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

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of February 6, 1998, there were 6,129, 21,185, 1,032 and 627 record
holders of Class A, Class B, Class C and Class Z shares of Common Stock,
respectively, $.001 par value per share, of the Registrant.

ITEM 27. INDEMNIFICATION.

As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of the Maryland General Corporation Law permits indemnification
of directors who acted in good faith and reasonably believed that the conduct
was in the best interests of the Registrant. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 10 of each Distribution Agreement (Exhibit 6
to the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission (Commission) such indemnification is against
public policy as expressed in the 1940 Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1940 Act and will be governed by the
final adjudication of such issue.

C-2
<PAGE>

The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.

Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management, Inc. (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.

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

Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either
the Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office.

Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange
Commission staff's position on Section 17(h) advances will be limited in the
following respect:

(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including cost
connected with preparation of a settlement);

(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the amount
to which it is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification;

(3) Such promise must be secured by a surety bond or other suitable
insurance; and

(4) Such surety bond or other insurance must be paid for by the recipient of
such advance.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

(a) Prudential Investments Fund Management LLC (PIFM).

See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.

The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Commission
the text of which is hereby incorporated by reference (File No. 801-31104).

The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark,
NJ 07102-4077.

C-3
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<C> <C> <S>
Frank W. Giordano Executive Vice Executive Vice President, Secretary
President, and General Counsel, PIFM; Senior
Secretary and Vice President, Prudential Securities
General Counsel Incorporated (Prudential Securities)
Robert F. Gunia Executive Vice Vice President, Prudential
President and Investments; Executive Vice President
Treasurer and Treasurer, PIFM, Senior Vice
President, Prudential Securities
Incorporated
Neil A. McGuinness Executive Vice Executive Vice President and Director
President of Marketing, PMF&A Executive Vice
President, PIFM
Brian Storms Officer-in-Charge, Officer-in-Charge, President, Chief
President, Chief Executive Officer and Chief Operating
Executive Officer Officer, PIFM
and
Chief Operating
Officer
Robert J. Sullivan Executive Vice Executive Vice President, PMF&A;
President Executive Vice President, PIFM
</TABLE>
(b) The Prudential Investment Corporation (PIC)

See "How the Fund is Managed--Subadviser" in the Prospectus constituting
Part A of this Registration Statement and "Subadviser" in the Statement of
Additional Information constituting Part B of this Registration Statement.

The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.

<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
---------------- ----------------- ---------------------
<C> <C> <S>
E. Michael Caulfield Chairman of the Chief Executive Officer of
Board, President Prudential Investments of The
and Chief Executive Prudential Insurance Company of
Officer America (Prudential)
and Director
Jonathan M. Greene Senior Vice President of Investment Management
President and of Prudential Investments of
Director Prudential
John R. Strangfeld Vice President and President of Private Asset
Director Management Group of Prudential;
Senior Vice President,
Prudential; Vice President and
Director, PIC
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS

(a) Prudential Securities Incorporated

Prudential Securities is distributor for Cash Accumulation Trust, Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
Government Securities Trust (Short-Intermediate Term Series, Money Market
Series and U.S. Treasury Money Market Series), Prudential MoneyMart Assets,
Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential Special
Money Market Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential
Jennison Series Fund, Inc., The Target Portfolio Trust, Prudential Balanced
Fund, Prudential California Municipal Fund, Prudential Distressed Securities
Fund, Inc., Prudential Index Series Fund, Prudential Diversified Bond Fund,
Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential High Yield Fund, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential International Bond Fund, Inc., Prudential Mortgage
Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal
Bond Fund, Prudential Municipal Series Fund, Prudential National Municipals
Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential Pacific Growth
Fund, Inc., Prudential Small Cap Quantum Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential Utility Fund, Inc., Prudential World Fund,
Inc., The Global Government Plus Fund Inc., The Global Total Return Fund,
Inc., Global Utility Fund, Inc. and Nicholas-Applegate Fund, Inc., (Nicholas-
Applegate Growth Equity Fund). Prudential Securities is also a depositor for
the following unit investment trusts:

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

C-4
<PAGE>

(b) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below:

<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(/1/) UNDERWRITER REGISTRANT
- --------- ------------- -------------
<S> <C> <C>
Alan D. Hogan........... Executive Vice President, Chief None
Administrative Officer
and Director
William Horan........... Chief Financial Officer None
George A. Murray........ Executive Vice President and Director None
Leland B. Paton......... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff....... Executive Vice President and Director None
Vincent T. Pica, II..... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons........ Chief Executive Officer, President and None
Director
Lee B. Spencer, Jr...... General Counsel, Executive Vice President and None
Director
Brian Storms............ Director None
Gateway Center Three
Newark, NJ 07102
</TABLE>
- ---------
(/1/)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171. The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey, 07102 the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and Prudential
Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey, 08837.
Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-
1(f) and Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and the remaining
accounts, books and other documents required by such other pertinent provisions
of Section 31(a) and the Rules promulgated thereunder will be kept by State
Street Bank and Trust Company and Prudential Mutual Fund Services LLC.

ITEM 31. MANAGEMENT SERVICES

Other than as set forth under the captions "How the Fund is Managed--Manager"
and "How the Fund is Managed--Distributor" in the Prospectus and the captions
"Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.

ITEM 32. UNDERTAKINGS

Registrant makes the following undertaking:

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

C-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Newark, and the State of New Jersey, on the 3rd day
of March, 1998.

PRUDENTIAL DIVERSIFIED BOND FUND, INC.

By: /s/ Richard A. Redeker
----------------------------------
RICHARD A. REDEKER, PRESIDENT

Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Edward D. Beach Director March 3, 1998
- -------------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Director March 3, 1998
- -------------------------------------
EUGENE C. DORSEY
/s/ Delayne Dedrick Gold Director March 3, 1998
- -------------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Vice President and Director March 3, 1998
- -------------------------------------
ROBERT F. GUNIA
/s/ Harry A. Jacobs, Jr. Director March 3, 1998
- -------------------------------------
HARRY A. JACOBS, JR.
/s/ Mendel A. Melzer Director March 3, 1998
- -------------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Director March 3, 1998
- -------------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Director March 3, 1998
- -------------------------------------
THOMAS H. O'BRIEN
/s/ Richard A. Redeker President and Director March 3, 1998
- -------------------------------------
RICHARD A. REDEKER
/s/ Nancy Hays Teeters Director March 3, 1998
- -------------------------------------
NANCY HAYS TEETERS
/s/ Louis A. Weil, III Director March 3, 1998
- -------------------------------------
LOUIS A. WEIL, III
/s/ Grace C. Torres Principal Financial and March 3, 1998
- -------------------------------------
GRACE C. TORRES Accounting Officer
</TABLE>

C-6
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.(a) Articles of Incorporation. Incorporated by reference to Exhibit
1 to the Registration Statement on Form N-1A (File No. 33-
55441) filed via EDGAR on September 12, 1994.
(b) Articles Supplementary. Incorporated by reference to Exhibit
No. 1(b) to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-1A (File No. 2-89725) filed via EDGAR on
August 9, 1996.
2. By-Laws. Incorporated by reference to Exhibit 2 to the
Registration Statement on Form N-1A (File No. 33-55441) filed
via EDGAR on September 12, 1994.
3. Not Applicable.
4. Instruments defining rights of shareholders. Incorporated by
reference to Exhibit 4 to the Registration Statement on Form N-
1A (File No. 33-55441) filed via EDGAR on September 12, 1994.
5.(a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to
Exhibit No. 5(a) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 2-89725) filed
via EDGAR on June 20, 1995.
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.
Incorporated by reference to Exhibit No. 5(b) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 2-89725) filed via EDGAR on June 20, 1995.
6.(a) Distribution Agreement between the Registrant and Prudential
Securities Incorporated. Incorporated by reference to Exhibit
No. 6(a) to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-1A (File No. 2-89725) filed via EDGAR on
August 9, 1996.
(b) Form of Selected Dealer Agreement. Incorporated by reference to
Exhibit No. 6(d) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 2-89725) filed
via EDGAR on June 20, 1995.
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 8
to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 2-89725) filed via EDGAR on June 20,
1995.
9. Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit No. 9 to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No. 2-89725)
filed via EDGAR on June 20, 1995.
10. Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
Incorporated by reference to Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No. 33-55441)
filed via EDGAR on October 18, 1994.
11. Consent of Independent Accountants.*
12. Not Applicable.
14. Not Applicable.
15.(a) Distribution and Service Plan for Class A Shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 2-
89725) filed via EDGAR on June 20, 1995.
(b) Distribution and Service Plan for Class B Shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 2-
89725) filed via EDGAR on June 20, 1995.
(c) Distribution and Service Plan for Class C Shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 2-
89725) filed via EDGAR on June 20, 1995.
16. Schedule of Computation of Performance Quotations. Incorporated
by reference to Exhibit No. 16 to Post-Effective Amendment No.
1 to the Registration Statement on Form N-1A (File No. 2-89725)
filed via EDGAR on June 20, 1995.
17. Financial Data Schedule for Class A, Class B, Class C and Class
Z shares filed as Exhibit 27 for electronic purposes.*
18. Rule 18f-3 Plan. Incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 3 to the Registration Statement on
Form N-1A (File No. 2-89725) filed via EDGAR on August 9, 1996.
</TABLE>

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

<PAGE>

Exhibit 11

CONSENT OF INDEPENDENT ACCOUNTANTS

We herby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 5 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 13, 1998, relating to the financial statements and financial highlights
of Prudential Diversified Bond Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the references to us under the headings "Financial
Highlights" in such Prospectus.

/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 25, 1998

<PAGE>

<ARTICLE> 6
<CIK> 0000929523
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC. (CLASS A)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 250,637,023
<INVESTMENTS-AT-VALUE> 250,933,121
<RECEIVABLES> 5,350,840
<ASSETS-OTHER> 94,181
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 256,378,142
<PAYABLE-FOR-SECURITIES> 3,352,008
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 949,881
<TOTAL-LIABILITIES> 4,301,889
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 251,672,441
<SHARES-COMMON-STOCK> 18,798,481
<SHARES-COMMON-PRIOR> 12,630,064
<ACCUMULATED-NII-CURRENT> 3,614
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 390,788
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,410
<NET-ASSETS> 252,076,253
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,580,629
<OTHER-INCOME> 0
<EXPENSES-NET> 2,643,780
<NET-INVESTMENT-INCOME> 14,936,849
<REALIZED-GAINS-CURRENT> 4,065,056
<APPREC-INCREASE-CURRENT> (3,160,737)
<NET-CHANGE-FROM-OPS> 15,841,168
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,936,849)
<DISTRIBUTIONS-OF-GAINS> (3,754,262)
<DISTRIBUTIONS-OTHER> (383,251)
<NUMBER-OF-SHARES-SOLD> 121,952,066
<NUMBER-OF-SHARES-REDEEMED> (53,401,326)
<SHARES-REINVESTED> 15,297,448
<NET-CHANGE-IN-ASSETS> 80,614,994
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 466,859
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,105,555
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,985,082
<AVERAGE-NET-ASSETS> 34,994,000
<PER-SHARE-NAV-BEGIN> 13.57
<PER-SHARE-NII> 0.98
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> (0.98)
<PER-SHARE-DISTRIBUTIONS> (0.19)
<RETURNS-OF-CAPITAL> (0.02)
<PER-SHARE-NAV-END> 13.41
<EXPENSE-RATIO> 0.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>

<ARTICLE> 6
<CIK> 0000929523
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC. (CLASS B)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 250,637,023
<INVESTMENTS-AT-VALUE> 250,933,121
<RECEIVABLES> 5,350,840
<ASSETS-OTHER> 94,181
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 256,378,142
<PAYABLE-FOR-SECURITIES> 3,352,008
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 949,881
<TOTAL-LIABILITIES> 4,301,889
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 251,672,441
<SHARES-COMMON-STOCK> 18,798,481
<SHARES-COMMON-PRIOR> 12,630,064
<ACCUMULATED-NII-CURRENT> 3,614
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 390,788
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,410
<NET-ASSETS> 252,076,253
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,580,629
<OTHER-INCOME> 0
<EXPENSES-NET> 2,643,780
<NET-INVESTMENT-INCOME> 14,936,849
<REALIZED-GAINS-CURRENT> 4,065,056
<APPREC-INCREASE-CURRENT> (3,160,737)
<NET-CHANGE-FROM-OPS> 15,841,168
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,936,849)
<DISTRIBUTIONS-OF-GAINS> (3,754,262)
<DISTRIBUTIONS-OTHER> (383,251)
<NUMBER-OF-SHARES-SOLD> 121,952,066
<NUMBER-OF-SHARES-REDEEMED> (53,401,326)
<SHARES-REINVESTED> 15,297,448
<NET-CHANGE-IN-ASSETS> 80,614,994
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 466,859
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,105,555
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,985,082
<AVERAGE-NET-ASSETS> 144,620,000
<PER-SHARE-NAV-BEGIN> 13.58
<PER-SHARE-NII> 0.89
<PER-SHARE-GAIN-APPREC> 0.04
<PER-SHARE-DIVIDEND> (0.89)
<PER-SHARE-DISTRIBUTIONS> (0.19)
<RETURNS-OF-CAPITAL> (0.02)
<PER-SHARE-NAV-END> 13.41
<EXPENSE-RATIO> 1.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00

</TABLE>

<PAGE>

<ARTICLE> 6
<CIK> 0000929523
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC. (CLASS C)

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 250,637,023
<INVESTMENTS-AT-VALUE> 250,933,121
<RECEIVABLES> 5,350,840
<ASSETS-OTHER> 94,181
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 256,378,142
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</TABLE>

<PAGE>

<ARTICLE> 6
<CIK> 0000929523
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC.
<SERIES>
<NUMBER> 004
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC. (CLASS Z)

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