PRUDENTIAL DIVERSIFIED BOND FUND INC, N-30D, 2000-03-09

PRUDENTIAL DIVERSIFIED BOND FUND INC
N-30D, 2000-03-09

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<PAGE>

(ICON)

Prudential Diversified
Bond Fund, Inc.

Annual Report

December 31, 1999

(LOGO)

<PAGE>

A Message from the Fund's President February 3, 2000
- -------------------------------------------------------------------------------
(PHOTO)

Dear Shareholder,
Prudential Diversified Bond Fund's Class A shares posted a negative return of
0.23% for 1999 that lagged the 0.66% positive return of its benchmark, the
Lipper General Bond Fund Average. The Fund trailed its Lipper Average primarily
because of its modest exposure to emerging market bonds. However, the Fund's
Class A shares beat the negative 0.82% return provided by the Lehman Brothers
U.S. Aggregate Bond Index for 1999.

The returns of the Fund, its Lipper Average, and the Index reflect the bearish
trend that dominated many major bond markets in 1999. For example, the U.S.
economy continued to expand at a rapid pace during the year, while the U.S.
stock market set successive records. Because brisk economic growth can ignite
higher inflation, the Federal Reserve raised its key short-term interest rate
three times to cool off the economy. The repeated short-term rate increases
led investors to demand higher yields on U.S. bonds, which caused bond prices
to fall.

A discussion of developments in the bond markets and an explanation of the
Fund's performance follow.

New Portfolio Management
As a result of the restructuring of our Fixed Income Group that I discussed in
my last report to shareholders, Steven Kellner has been named head of our
Corporate Sector team and Portfolio Manager of the Fund. Along with other
members of the Corporate Sector team, Steve works to identify trends in
relative value, credit quality, and liquidity in order to capitalize on
changing opportunities in the bond markets. Before joining the Corporate Sector
team in July, Steve managed investment-grade corporate bonds for the Prudential
Insurance General Account for 10 years.

Thank you for your continued confidence in Prudential mutual funds.

Sincerely,

John R. Strangfeld
President
Prudential Diversified Bond Fund, Inc.

<PAGE>

Performance Review
- -------------------------------------------------------------------------------
(PHOTO)

Portfolio manager Steven Kellner
(Corporate [Sector] Team Leader)

Investment Goals and Style
The Fund's investment objective is high current income consistent with the
appropriate balance between risk and reward as determined by the Fund's
investment adviser. This means we allocate assets primarily among debt
securities, including U.S. government securities, mortgage-related securities,
corporate debt securities, and foreign securities. We normally invest at least
65% of the Fund's total assets in investment-grade bonds. The Fund may also
invest up to 35% of its net assets in noninvestment-grade securities having a
rating of not lower than CCC--also known as high-yield or "junk" bonds. There
can be no assurance that the Fund will achieve its investment objective.

1999 was a tough year for many bond markets
Negative sentiment clouded many fixed-income markets throughout most of 1999.
Although some signs of slower U.S. economic growth emerged in the second half
of the year, the economy remained strong overall, spurring fears of rising
inflation. But other than soaring oil prices, there were few solid indications
that inflationary pressures were building. Investors remained concerned,
however, because a tight labor supply and robust consumer demand for goods and
services have historically been factors that can drive inflation higher.
Furthermore, U.S. stock prices continued their dramatic rally, and the U.S.
dollar no longer provided protection against higher import prices or checked
demand for U.S. exports because it had weakened against some currencies.

To keep the economy from overheating and igniting higher inflation, the Federal
Reserve raised the federal funds rate (what U.S. banks charge each other for
overnight loans) by a quarter of a percentage point in June, August, and
November. These moves pushed up the rate to 5.50%. The repeated changes in U.S.
monetary policy caused investors to require higher yields on bonds--and lower
prices. Thus, the Lehman Brothers U.S. Aggregate Bond Index returned a negative
0.82% for the year. This was only the second time since its inception in 1976
that the Index posted a negative return.

Fund hurt by low exposure to emerging market bonds
Although robust economic growth hurt U.S. fixed-income markets, a resurgence in
the global economy benefited emerging market bonds, which typically provide
higher yields than better-rated bonds because they are viewed as carrying
greater credit risk. Emerging market bonds began 1999 trading very cheaply
relative to higher-quality bonds, but they soon grew more expensive, on a
relative basis. Improving economic conditions and strengthening currencies in
many developing countries boosted investor confidence in their bonds. As a
result, emerging market bonds provided a double-digit return in 1999 that beat
all other bond markets, according to Lehman Brothers indexes.

We increased emerging market bonds to 7.3% of the Fund's total investments as
of December 31, 1999, from 2.0% a year earlier. Nevertheless, the Fund's still
modest position was the primary reason it underperformed its benchmark Lipper
Average in 1999. We typically limit exposure because returns on emerging
market bonds have historically been very volatile due to social, political,
and currency risks. Indeed, their stellar performance in 1999 contrasted
sharply

<PAGE>

with the previous year, when Lehman Brothers indexes showed that emerging
market bonds were the worst performing fixed-income market in 1998.

Fund duration was not cut sharply enough
When bond markets sell off, as many did in 1999, lowering a portfolio's
duration (a measure of change in the prices of its bonds for a given change in
interest rates) provides some degree of protection by making the portfolio
less sensitive to the rise in bond yields. The Fund's performance suffered
because we did not shorten its duration dramatically enough in the first half
of 1999.

In the second half of 1999, however, we cut the Fund's duration further by
selling longer-term U.S. Treasury securities, which fell to 3.0% of the Fund's
total investments as of December 31, 1999, from 7.5% as of June 30, 1999. Some
of the proceeds derived from selling Treasuries were used to purchase
high-grade and high-yield corporate bonds with shorter maturities. (Both
performed better than longer-term Treasuries in 1999, based on Lehman Brothers
indexes.) Although the Fund ended the year in negative territory, its
performance improved in the final six months of the year because its duration
fell to 5.2 years by December 31, 1999. This was down sharply from 6.5 years
12 months earlier.

Performance at a Glance

Cumulative Total Returns1 As of 12/31/99
<TABLE>
<CAPTION>
One Three Since
Year Years Inception2
<S> <C> <C> <C>
Class A -0.23% (-0.39) 13.25% (12.70) 43.55% (42.27)
Class B -0.72 (-0.88) 11.28 (10.74) 39.43 (38.19)
Class C -0.72 (-0.88) 11.27 (10.73) 39.40 (38.16)
Class Z 0.01 (-0.15) 13.78 (13.22) 19.87 (19.19)
Lipper General Bond Fund Avg.3 0.66 18.02 ***
</TABLE>

Average Annual Total Returns1 As of 12/31/99
<TABLE>
<CAPTION>
One Three Since
Year Years Inception2
<S> <C> <C> <C>
Class A -4.22% (-4.38) 2.83% (2.66) 6.66% (6.47)
Class B -5.72 (-5.88) 2.69 (2.52) 6.76 (6.57)
Class C -2.71 (-2.87) 3.28 (3.11) 6.69 (6.50)
Class Z 0.01 (-0.15) 4.40 (4.23) 5.67 (5.48)
</TABLE>

Distributions and Yields As of 12/31/99
<TABLE>
<CAPTION>
Total
Distributions 30-Day
Paid for 12 Mos. SEC Yield
<S> <C> <C>
Class A $0.85 7.16% (6.84)
Class B $0.79 6.95 (6.62)
Class C $0.79 6.88 (6.54)
Class Z $0.88 7.72 (7.38)
</TABLE>

Past performance is not indicative of future results. Principal and investment
return will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost.

1 Source: Prudential Investments Fund Management LLC and Lipper Inc. The
cumulative total returns do not take into account sales charges. The average
annual total returns do take into account applicable sales charges. The Fund
charges a maximum front-end sales charge of 4% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically
convert to Class A shares, on a quarterly basis, approximately seven years
after purchase. Class C shares are subject to a front-end sales charge of 1%
and a CDSC of 1% for 18 months. Class Z shares are not subject to a sales
charge or distribution and service (12b-1) fees. Without waiver of management
fees and/or expense subsidization, the Fund's cumulative and average
annual total returns and yields would have been lower, as indicated in
parentheses ( ).

2 Inception dates: Class A, B, and C, 1/10/95; Class Z, 9/16/96.

3 Lipper average returns are for all funds in each share class for the one-
and three-year periods in the General Bond Fund category. The Lipper average is
unmanaged. General Bond funds do not have any quality or maturity restrictions.
They intend to keep the bulk of their assets in corporate and government debt
issues.

***Lipper Since Inception returns are 50.58% for Class A, B, and C, and 22.55%
for Class Z, based on all funds in each share class.

<PAGE>

Review Cont'd.
- -------------------------------------------------------------------------------
Good security selection helped the Fund
Our careful selection of corporate bonds also benefited the Fund in the latter
half of the year. Among those that performed well, on a relative basis, were
bonds of Conseco, a leading financial services company offering insurance,
investments, and lending products. Moody's Investors Service upgraded the
ratings of Conseco's debt securities and preferred stock in December 1999.
Others included debt securities of Columbia Healthcare, operator of private
hospital, healthcare, and medical services in the United States and overseas,
and Scotia Pacific, involved in the lumber business in California.

We also took advantage of several excellent buying opportunities among newly
issued bonds of corporations such as Cox Communications and PSE&G Energy. Many
companies had rushed to issue bonds to avoid any complications that might have
occurred if computers malfunctioned when their internal dates switched from
1999 to 2000.

Some bonds held by the Fund did not perform well, particularly those of
companies in the waste disposal industry. For example, the Fund owns debt
securities of Waste Management Inc. that declined in value because the firm
reported that accounting concerns, among other problems, hurt its earnings.
The Fund also holds bonds of Allied Waste that sold off because of investor
concern about the industry.

Looking Ahead
We believe the U.S. economic expansion could lose steam during the year as the
Fed's tighter monetary policy works its way through the economy. Moderating
economic growth might help bonds in two ways--by stabilizing market interest
rates and causing the U.S. stock market rally to falter, which could prompt
some equity investors to turn to fixed-income securities.

Five Largest Issuers
Expressed as a percentage of net assets as of 12/31/99
U.S. Treasury Bond 2.4%
Equity Residential Properties 2.2
Niagra Mohawk Power Corp. 2.1
News America, Inc. 2.0
United Airlines, Inc. 2.0

Portfolio Composition
Expressed as a percentage of total investments as of 12/31/99
U.S. Corporate Bonds 80.6%
Foreign Gov't Securities 9.4
Foreign Corporate Bonds 3.5
Asset-Backed Securities 3.1
U.S. Gov't Securities 3.1
Cash & Equivalents 0.3

Additional Performance Tracking Tools

You can access comprehensive information about the performance of your
Prudential mutual fund 24 hours a day through our website and automated phone
service. At www.prudential.com/investing, you'll find the daily closing
values, changes from the previous day, and quarterly performance for all of
our retail mutual funds. Other available resources include daily, monthly, and
quarterly market commentary.

Daily fund values are also a toll-free call away from any touch-tone phone.
Call (800) 225-1852 and follow the voice prompts to obtain mutual fund closing
values and yields. You can even set up a personalized "watch list" to track
specific Prudential mutual funds.

<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED BOND
December 31, 1999 FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ---------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.2%
- ---------------------------------------------------------------------
Asset Backed Securities--3.1%
Aaa $ 5,000 Citibank Credit Card,
Master Trust I,
Series 1999-5, Class A,
6.10%, 5/15/08 $ 4,707,300
Aaa 4,700 MBNA Master Credit Card
Trust,
Series 1999 B, Class A,
5.90%, 8/15/11 4,260,465
------------
Total asset backed
securities
(cost $9,679,922) 8,967,765
------------
- ------------------------------------------------------------
Domestic Corporate Bonds--79.3%
Baa3 2,200 Abitibi-Consolidated Inc.,
Deb.,
8.50%, 8/1/29 2,120,778
Ba1 2,010 AES Corp., Sr. Note,
9.50%, 6/1/09 2,050,200
A1 200 All State Corp.,
Sr. Note,
7.20%, 12/1/09 194,438
Ba3 2,275 Allied Waste North
America,
Sr. Note,
10.00%, 8/1/09 2,024,750
Baa1 400 Amerada Hess Corp.,
Note,
7.875%, 10/1/29 390,120
Aa3 1,400 Archer-Daniels-Midland,
Deb.,
6.625%, 5/1/29 1,191,022
A2 1,500 AT&T Corp., Deb.,
10.125%, 4/15/22 1,869,270
A2 1,000 Bear, Stearns & Co. Inc.,
Global Note,
7.625%, 12/7/09 981,920
Baa2 2,000 BJ Services Co.,
Sr. Note,
7.00%, 2/1/06 1,892,680
Ba2 2,000 Calair Capital Corp.,
Sr. Note,
8.125%, 4/1/08 1,760,000
Calenergy Co., Inc.,
Sr. Notes,
Baa3 $ 2,000 6.96%, 9/15/03 $ 1,954,800
Baa3 2,000 7.23%, 9/15/05 1,948,860
Ba1 2,345 Calpine Corp.,
Sr. Note,
10.50%, 5/15/06 2,462,250
Baa2 3,000 Camden Property Trust,
Note,
7.23%, 10/30/00 2,988,900
Capital One Financial,
Medium Term Note,
Baa2 3,000 7.08%, 10/30/01 2,970,690
Note,
Baa3 1,600 7.25%, 5/1/06 1,512,000
B1 1,050 Century Communications
Corp., Sr. Note,
Zero Coupon, 3/15/03 748,125
Ba2 945 Chancellor Media Corp.,
Sr. Note,
8.00%, 11/1/08 945,000
Ba3 1,200 CMS Energy Corp.,
Sr. Note,
8.00%, 1/1/00 1,188,720
Baa2 600 Coca Cola Bottling Co.,
Deb.,
6.375%, 5/1/09 540,480
Ba1 3,200 Cogentrix Energy, Inc.,
Sr. Note,
8.75%, 10/15/08 3,104,000
Ba2 650 Columbia / HCA Healthcare
Corp., Note,
6.91%, 6/15/05 594,750
Comdisco, Inc.,
Medium Term Notes,
Baa1 2,000 6.32%, 11/27/00 1,986,400
Baa1 3,500 6.50%, 6/15/00 3,498,635
Baa3 3,500 Commonwealth Edison Co.,
Note,
7.625%, 1/15/07 3,478,160
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3

<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED BOND
December 31, 1999 FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ---------------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
Baa3 $ 4,000 Connecticut Light & Power
Co., Series C,
7.75%, 6/1/02 $ 4,049,040
Ba2 3,850 Conseco Financing Trust
III,
Bond,
8.796%, 4/1/27 3,494,606
Continental Airlines,
Inc.,
Pass-Through Trust,
Series 1997 1A,
Aa3 1,325 7.461%, 4/1/15 1,275,888
Sr. Note,
Ba2 2,515 8.00%, 12/15/05 2,300,370
A3 2,000 Cooper Tire And Rubber,
Note,
7.75%, 12/15/09 1,958,400
Cox Communications Inc.,
Notes,
Baa2 2,000 6.375%, 6/15/00 1,995,400
Baa2 600 7.875%, 8/15/09 608,220
Baa1 900 Cox Enterprises, Inc.,
Note,
6.625%, 6/14/02 886,977
CSC Holdings, Inc.,
Sr. Notes,
Ba2 475 7.875%, 12/15/07 466,298
Ba2 900 7.25%, 7/15/08 848,664
Delta Air Lines, Inc.,
Deb.,
Baa3 1,000 9.875%, 5/15/00 1,010,380
Baa3 600 7.90%, 12/15/09 584,226
A1 3,300 Dresdner Funding Trust I,
Note,
8.151%, 6/30/31 3,146,220
Baa1 800 Duke Realty L.P.,
Sr. Note,
7.30%, 6/30/03 791,120
A3 800 Edison Mission Energy,
Sr. Note,
7.73%, 6/15/09 796,776
El Paso Electric Co.,
Ba2 1,500 First Mtge. Bond,
9.40%, 5/1/11 1,603,140
Baa2 1,000 Sr. Note,
6.625%, 7/15/01 992,070
A2 $ 800 Electric Lightwave, Inc.,
Note,
6.05%, 5/15/04 $ 755,072
Ba2 1,140 Eott Energy Partners L.P.,
Sr. Note
11.00%, 10/1/09 1,185,600
ERP Operating L.P.,
Bond,
A3 1,200 6.63%, 1/16/00 1,124,568
Note,
A3 5,000 6.15%, 9/15/00 4,959,000
A3 375 7.10%, 6/23/04 366,424
B2 2,000 Falcon Holdings Group,
L.P.,
Deb., Series B,
8.375%, 4/15/10 2,020,000
Baa2 5,100 Federated Dept. Stores,
Inc.,
Sr. Note,
8.50%, 6/15/03 5,241,219
Baa2 5,000 First Industrial, L.P.,
Note,
6.50%, 3/15/01 4,891,300
Ford Motor Co.,
A1 3,000 Deb.,
6.375%, 2/1/29 2,518,680
A1 600 Note,
7.45%, 7/16/31 577,224
A1 200 Ford Motor Credit Co.,
7.375%, 10/28/09 198,000
Baa2 2,000 Fort James Corp., Note,
6.234%, 3/15/01 1,979,280
Baa2 3,500 Gables Reality L.P.,
Sr. Note,
6.55%, 10/1/00 3,476,060
Baa2 2,000 Gatx Capital Corp.,
Note,
7.75%, 12/1/06 1,982,140
A2 3,000 General Motors Acceptance
Corp., Note,
5.95%, 3/14/03 2,888,700
B2 800 Gentek Inc.,
Sr. Sub. Note,
11.00%, 8/1/09 832,000
Baa2 210 Georgia Pacific Corp.,
Deb.,
7.75%, 11/15/29 200,117
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements. 4

<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED BOND
December 31, 1999 FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ---------------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
Ba2 $ 2,490 Global Crossing Holdings
Limited, Sr. Note,
9.125%, 11/15/06 $ 2,461,987
Ba2 160 Harrahs Operating Inc.,
Sr. Sub. Note,
7.875%, 12/15/05 156,000
A3 800 Heller Financial, Inc.,
Note,
6.00%, 3/19/04 759,624
Aa3 300 HVB Funding Trust,
Silent Partnership
Certificate,
8.741%, 6/30/31 299,610
Aa3 200 HVB Funding Trust III,
Dated Silent
Participation
Certificate,
9.00%, 10/22/31 205,100
A1 4,000 International Lease
Finance Corp., Medium
Term Note, Series MTNJ,
5.90%, 3/12/03 3,848,400
B2 2,000 ITC Deltacom Inc.,
9.75%, 11/15/08 2,020,000
ITT Corp.,
Notes,
Ba1 1,200 6.25%, 11/15/00 1,176,636
Ba1 2,000 6.75%, 11/15/03 1,860,460
Baa2 4,000 K N Energy, Inc.,
Note,
6.30%, 3/1/01 3,958,400
A1 720 Keycorp Capital III,
7.75%, 7/15/29 669,600
Kroger Co.,
Sr. Notes,
Baa3 1,700 6.34%, 6/1/01 1,680,875
Baa3 1,000 7.25%, 6/1/09 960,000
Baa3 240 7.70%, 6/1/29 226,800
Ba1 5,000 LCI International Inc.,
Sr. Note,
7.25%, 6/15/07 4,807,350
Ba1 2,715 Lear Corp., Sr. Note,
7.96%, 5/15/05 2,633,550
Lehman Brothers Holdings,
Notes,
Baa1 $ 3,605 6.625%, 4/1/04 $ 3,489,784
A3 1,175 6.625%, 2/5/06 1,110,093
Baa1 250 6.375%, 3/15/01 247,888
Liberty Media Group,
Bond,
Baa3 400 7.875%, 7/15/09 398,440
Note,
Baa3 700 8.50%, 7/15/29 724,500
B3 1,250 Lin Holdings Corp.,
Sr. Disc. Note,
Zero Coupon, 3/1/08 843,750
Baa2 275 Litton Inds. Inc., Note,
8.00%, 10/15/09 273,845
Ba3 975 Lyondell Chemical Co.,
9.625%, 5/1/07 996,938
Baa2 2,000 Mallinckrodt, Inc.,
Bond,
6.30%, 3/15/01 1,955,000
B2 2,000 McLeod, USA Inc.,
Sr. Note,
8.125%, 2/15/09 1,860,000
B2 1,180 Metromedia Fiber Network
Inc., Sr. Note,
10.00%, 12/15/09 1,206,550
Baa3 500 Meyer Fred, Inc., Note,
7.15%, 3/1/03 493,650
Baa2 3,000 National Oilwell, Inc.,
Sr. Note,
6.875%, 7/1/05 2,847,600
A1 1,000 Nationwide Life Insurance
Co., Deb.,
9.875%, 2/15/25 1,018,930
Navistar International
Corp.,
Sr. Notes,
Baa3 1,000 7.00%, 2/1/03 957,500
Ba2 2,500 8.00%, 2/1/08 2,375,000
Baa3 6,000 News America, Inc.,
6.703%, 5/21/04 5,730,420
Nextel Communications
Inc., Sr. Note,
10.50%, 12/1/09 1,435,175
NR 1,390
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5

<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED BOND
December 31, 1999 FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ---------------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
Niagara Mohawk Power Corp.,
First Mtge. Bonds,
Baa2 $ 2,000 6.875%, 4/1/03 $ 1,985,980
Baa2 2,000 7.375%, 8/1/03 2,000,200
Baa2 2,000 8.00%, 6/1/04 2,039,020
Baa3 900 Northrop Grumman Corp.,
Deb.,
7.875%, 3/1/26 844,272
B3 3,250 NTL Communications Corp.,
Sr. Disc. Note,
Zero Coupon, 10/1/03 2,291,250
Baa3 3,000 Osprey Trust,
Sr. Note,
8.31%, 1/15/03 2,984,250
Ba1 2,100 Owens Illinois, Inc.,
Deb.,
7.50%, 5/15/10 1,846,362
Baa3 500 Paramount Communications,
Inc., Sr. Note,
7.50%, 1/15/02 501,085
Ba2 1,310 Park Place Entertainment
Corp., Sr. Sub. Note,
7.875%, 12/15/05 1,251,050
Ba1 540 Parker & Parsley Petroleum
Co., Sr. Note,
8.875%, 4/15/05 537,187
B2 725 Plains Resources, Inc.,
Sr. Sub. Note,
10.25%, 3/15/06 706,875
Ba1 1,340 PSEG Energy Holdings Inc.,
Note,
10.00%, 10/1/09 1,323,250
Ba1 2,400 Qwest Communications
Int'l, Inc., Sr. Note,
7.50%, 11/1/08 2,352,000
Baa1 1,300 Raytheon Co., Note,
6.50%, 7/15/05 1,231,048
Ba3 260 RBF Finance Co.,
Sr. Sec'd. Note,
11.375%, 3/15/09 279,500
A1 1,500 Rockwell International
Corp.,
Deb.,
5.20%, 1/15/98 957,930
A1 600 Royal & Sun Alliance
Insurance, Bond,
8.95%, 10/15/29 612,960
Aa3 $ 1,500 Salomon, Inc.,
Sr. Note,
6.59%, 2/21/01 $ 1,493,910
Baa2 3,700 Scotia Pacific Co. LLC,
Series B, Class A3,
7.71%, 1/20/14 2,775,000
Baa3 300 Seagram (Joseph) & Sons,
Inc.,
5.79%, 4/15/01 293,460,
Ba1 1,010 Seagull Energy Corp,
Sr. Note,
7.875%, 8/1/03 987,275
B3 1,500 SFX Entertainment, Inc.,
Sr. Sub. Note,
9.125%, 12/1/08 1,432,500
Baa2 1,200 Sonat Inc., Note,
7.625%, 7/15/11 1,177,140
Sovereign Bancorp Inc.,
Sr. Notes,
Ba3 765 10.25%, 5/15/04 771,043
Ba3 1,320 10.50%, 11/15/06 1,346,400
Baa1 2,000 Sprint Capital Corp.,
Note,
6.875%, 11/15/28 1,777,420
B2 205 Swift Energy Co.,
Sr. Sub. Note,
10.25%, 8/1/09 206,538
A2 1,000 Tele-Communications, Inc.,
Deb.,
6.34%, 2/1/12 990,340
Telecom de Puerto Rico
Inc.,
Sr. Notes,
Baa2 1,800 6.65%, 5/15/06 1,707,822
NR 1,500 6.80%, 6/15/09 1,367,895
Ba1 1,075 Tenet Healthcare Corp.,
Sr. Note,
7.875%, 1/15/03 1,042,750
B2 1,250 Tenneco Inc.,
Sr. Sub. Note,
11.625%, 10/15/09 1,268,750
B2 1,000 Time Warner Telecom LLC,
Sr. Note,
9.75%, 7/15/08 1,025,000
Baa3 1,000 Time Warner, Inc.,
Deb.,
8.11%, 8/15/06 1,029,170
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6

<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED BOND
December 31, 1999 FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ---------------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
Aa3 $ 250 Travelers Group, Inc.,
Sr. Note,
7.25%, 5/1/01 $ 250,793
NR 2,000 TVN Entertainment Corp.,
Sr. Note,
14.00%, 8/1/08 700,000
Baa3 400 Union Pacific Corporation,
Sr. Note,
7.375%, 9/15/09 391,444
Baa3 1,000 Union Pacific Resources
Group Inc., Deb.,
7.95%, 4/15/29 970,710
Ba1 1,530 Unisys Corp., Sr. Note,
12.00%, 4/15/03 1,629,450
United Airlines, Inc.,
Deb.,
Baa3 3,000 10.67%, 5/1/04 3,285,390
Baa3 2,000 11.21%, 5/1/14 2,426,220
B1 980 United Rentals Inc.,
Sr. Sub. Note,
9.25%, 1/15/09 940,800
B3 975 United States Air Inc.,
9.625%, 2/1/01 970,125
B2 2,000 United States Can Corp.,
Sr. Sub. Note, Series B,
10.125%, 10/15/06 2,045,000
B3 1,155 Verio Inc., Sr. Note,
10.625%, 11/15/09 1,183,875
2,090 VoiceStream Wireless
Corp.,
10.375%, 11/15/09 2,152,700
Ba1 2,000 Waste Management, Inc.,
Note,
6.125%, 7/15/01 1,903,500
B2 1,175 Williams Communications
Corp., Sr. Note,
10.70%, 10/1/07 1,233,750
Baa3 2,000 World Color Press, Inc.,
Sr. Sub. Note,
7.75%, 2/15/09 1,910,000
A3 2,700 Worldcom, Inc., Note,
6.95%, 8/15/28 2,451,492
B2 1,250 ZSC Specialty Chemicals
PLC, Sr. Note,
11.00%, 7/1/09 1,293,750
------------
Total domestic corporate bonds
(cost $240,363,143) 232,265,213
------------
Foreign Government Securities--9.3%
NR $ 1,000 Banco de Comercio Exterior
de Colombia, Note,
8.625%, 6/2/00 $ 990,000
B2 2,000 Bulgaria,
Series A, F.R.N.,
6.50%, 7/28/24 1,682,500
Aaa 2,570 Commonwealth of Australia,
4.50%, 3/15/02 1,798,902
NR 2,570 Govt. of France,
4.50%, 7/12/03 2,572,320
Ba1 700 Republic of Philippines,
Bond,
8.875%, 4/15/08 682,500
A2 525 Quebec Hydro (Canada)
7.50%, 4/1/16 513,508
Quebec Province, (Canada)
Debs.,
A2 2,050 7.50%, 7/15/23 1,998,852
A2 600 7.50%, 9/15/29 590,160
B2 3,000 Republic of Brazil,
Bond,
11.625%, 4/15/04 2,977,500
Republic of Colombia,
Notes, F.R.N.,
Ba2 2,500 11.442%, 8/13/05 2,400,000
Unsub.,
Ba2 700 9.75%, 4/23/09 649,250
Republic of Panama,
Deb., F.R.N.,
NR 1,700 4.25%, 7/17/14 1,334,500
Note,
Ba1 4,000 7.875%, 2/13/02 3,860,000
NR 2,100 Republic of Poland,
Series RSTA, F.R.N.,
4.00%, 10/27/24 1,386,000
NR 400 Saskatchewan Province,
(Canada)
9.125%, 2/15/21 460,896
United Mexican States,
Series A, F.R.N.,
Ba2 600 6.9325%, 12/31/19 563,250
Series B, F.R.N.,
Ba2 1,200 6.9425%, 12/31/19 1,126,500
Series C, F.R.N.,
Ba2 1,700 6.83625%, 12/31/19 1,595,875
------------
Total foreign government
securities
(cost $27,537,886) 27,182,513
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7

<PAGE>

U.S. Government Securities--3.0%
United States Treasury Bonds,
$ 2,500 6.375%, 8/15/27 $ 2,401,175
3,600 6.75%, 8/15/26 3,616,884
800(b) 8.125%, 8/15/21 917,496
1,910 United States Treasury Note,
6.50%, 5/15/05 1,910,592
------------
Total U. S. government securities
(cost $9,064,793) 8,846,147
------------
-------------------------------------------------------------
Warrants(a)
Units
2,000 TVN Entertainment Corp.,
expiring 8/1/08 0
-------------------------------------------------------------
Rights(a)
5,384 United Mexican States,
expiring 12/31/19 0
------------
Total long-term investments
(cost $296,977,618) 287,379,854
------------
SHORT-TERM INVESTMENTS--0.3%
-------------------------------------------------------------
Repurchase Agreement
Principal
Amount
(000)
$ 977 Joint Repurchase Agreement Account,
2.83%, 1/3/00
(cost $977,000; Note 6) 977,000
------------
-------------------------------------------------------------
Total Investments--98.5%
(cost $297,954,618; Note 5) 288,356,854
Other assets in excess of
liabilities--1.5% 4,482,279
------------
Net Assets--100% $292,839,133
------------
------------
</TABLE>
- ---------------
F.R.N.--Floating Rate Note
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) Non-income producing security.
(b) Pledged as intial margin on financial futures contracts.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8

<PAGE>

Portfolio of Investments as of PRUDENTIAL DIVERSIFIED BOND
December 31, 1999 FUND, INC.
- ------------------------------------------------------------
The industry classification of portfolio holdings and other
assets shown as a percentage of net assets as of December 31,
1999 was as follows:

<TABLE>
<CAPTION>
<S> <C>
Financial Services.................................... 14.8%
Utilities............................................. 12.7
Telecommunications.................................... 11.2
Foreign Government Securities......................... 9.3
Real Estate Investment Trust.......................... 6.4
Media................................................. 4.4
Airlines.............................................. 4.0
Automotive............................................ 3.5
Foreign Corporate Bonds............................... 3.5
Asset Backed Securities............................... 3.1
U.S. Government Securities............................ 3.0
Oil & Gas............................................. 3.0
Retail................................................ 2.5
Cable................................................. 2.3
Food & Beverage....................................... 1.8
Paper Related Products................................ 1.5
Hotels................................................ 1.5
Waste Management...................................... 1.3
Containers............................................ 1.3
Medical............................................... 1.3
Computer Services..................................... 1.0
Metal................................................. 0.9
Chemicals............................................. 0.8
Aerospace............................................. 0.7
Insurance............................................. 0.3
Entertainment......................................... 0.2
Transportation........................................ 0.1
Miscellaneous......................................... 1.8
Other assets in excess of liabilities (including Joint
Repurchase Agreement)............................... 1.8
-----
100.0%
-----
-----
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9

<PAGE>
Statement of Assets and Liabilities PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1999
<S> <C>
Investments, at value (cost $297,954,618)............................................................... $ 288,356,854
Foreign currency (cost $62)............................................................................. 62
Interest receivable..................................................................................... 5,486,715
Receivable for Fund shares sold......................................................................... 330,434
Due from manager........................................................................................ 160,562
Forward currency contracts - net amount receivable from counterparties.................................. 78,092
Deferred expenses and other assets...................................................................... 5,860
-----------------
Total assets......................................................................................... 294,418,579
-----------------
Liabilities
Bank overdraft.......................................................................................... 101,221
Payable for Fund shares reacquired...................................................................... 861,815
Accrued expenses........................................................................................ 342,709
Distribution fee payable................................................................................ 129,684
Due to broker-variation margin.......................................................................... 74,656
Forward currency contracts - net amount payable to counterparties....................................... 36,534
Dividends payable....................................................................................... 28,032
Foreign tax withholding................................................................................. 4,795
-----------------
Total liabilities.................................................................................... 1,579,446
-----------------
Net Assets.............................................................................................. $ 292,839,133
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 23,719
Paid-in capital in excess of par..................................................................... 317,793,853
-----------------
317,817,572
Undistributed net investment income.................................................................. 534,165
Accumulated net realized loss on investments......................................................... (15,479,507)
Net unrealized depreciation on investments, financial futures and foreign currencies................. (10,033,097)
-----------------
Net assets, December 31, 1999........................................................................... $ 292,839,133
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($62,660,347 3 5,075,014 shares of common stock issued and outstanding)........................... $12.35
Maximum sales charge (4.0% of offering price)........................................................ .51
-----------------
Maximum offering price to public..................................................................... $12.86
-----------------
-----------------
Class B:
Net asset value offering price and redemption price per share
($170,706,425 3 13,824,968 shares of common stock issued and outstanding)......................... $12.35
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($9,257,312 3 749,732 shares of common stock issued and outstanding).............................. $12.35
Sales charge (1% of offering price).................................................................. .12
-----------------
Offering price to public............................................................................. $12.47
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($50,215,049 3 4,069,241 shares of common stock issued and outstanding)........................... $12.34
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10

<PAGE>

PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1999
<S> <C>
Interest and discount earned.......... $ 22,709,246
-----------------
Expenses
Management fee........................ 1,531,371
Distribution fee--Class A............. 154,152
Distribution fee--Class B............. 1,373,907
Distribution fee--Class C............. 72,723
Transfer agent's fees and expenses.... 750,000
Custodian's fees and expenses......... 181,000
Reports to shareholders............... 120,000
Registration fees..................... 56,000
Legal fees and expenses............... 50,000
Amortization of deferred organization
expenses........................... 40,135
Audit fee and expenses................ 25,000
Directors' fees and expenses.......... 18,500
Miscellaneous......................... 4,172
-----------------
Total expenses.................. 4,376,960
Less: Expense subsidy (Note 4)........ (478,079)
-----------------
Net expenses.................... 3,898,881
-----------------
Net investment income.................... 18,810,365
-----------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currencies
Net realized gain (loss) on:
Investment transactions............... (9,371,854)
Financial futures transactions........ (593,813)
Foreign currency transactions......... 98,783
-----------------
(9,866,884)
-----------------
Net change in unrealized depreciation on:
Investments........................... (10,239,508)
Financial futures..................... (474,242)
Foreign currencies.................... 39,692
-----------------
(10,674,058)
-----------------
Net loss on investments.................. (20,540,942)
-----------------
Net Decrease in Net Assets
Resulting from Operations................ $ (1,730,577)
-----------------
-----------------
</TABLE>

PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income.......... $ 18,810,365 $ 16,855,176
Net realized loss on investment
and foreign currency
transactions................ (9,866,884) (4,757,242)
Net change in unrealized
appreciation (depreciation)
of investments and foreign
currencies.................. (10,674,058) 631,551
------------- ------------
Net increase (decrease) in net
assets resulting from
operations.................. (1,730,577) 12,729,485
------------- ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (3,952,554) (3,300,618)
Class B..................... (10,835,380) (9,936,206)
Class C..................... (573,175) (424,457)
Class Z..................... (3,449,256) (3,193,895)
------------- ------------
(18,810,365) (16,855,176)
------------- ------------
Distributions in excess of net
investment income
Class A..................... (153,112) (680)
Class B..................... (414,306) (2,156)
Class C..................... (23,401) (85)
Class Z..................... (121,185) (693)
------------- ------------
(712,004) (3,614)
------------- ------------
Fund share transactions (net of
share conversions) (Note 7)
Net proceeds from shares
sold........................ 91,189,671 129,677,477
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 15,963,051 13,554,825
Cost of shares reacquired...... (101,066,803) (83,173,090)
------------- ------------
Net increase in net assets from
Fund share transactions..... 6,085,919 60,059,212
------------- ------------
Total increase (decrease)......... (15,167,027) 55,929,907
Net Assets
Beginning of year................. 308,006,160 252,076,253
------------- ------------
End of year(a).................... $ 292,839,133 $308,006,160
------------- ------------
------------- ------------
- ---------------
(a) Includes undistributed net
investment income of.......... $ 534,165 $ 836,812
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11

<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.

Repurchase Agreement: 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 period, 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 period. 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 period.

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 period 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.
- --------------------------------------------------------------------------------
12

<PAGE>
Notes to Financial Statements PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
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.
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 $409,357, and increase accumulated net realized loss by $409,357
primarily due to the sale of securities purchased with market discount and net
foreign currency gains. Net investment income, net realized gains and net assets
were not affected by this change.

- ------------------------------------------------------------
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.

The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Class A, Class B,
Class C and Class Z shares of the Fund. The Fund compensates PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly. No distribution or service fees are paid to PIMS as distributor
for Class Z shares of the Fund.

Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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,
- --------------------------------------------------------------------------------
13

<PAGE>
Notes to Financial Statements PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
respectively. Such expenses under the Plans were .25 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, 1999.

PIMS has advised the Fund that it has received approximately $192,600 and
$30,100 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended December 31, 1999. From these fees,
PIMS paid such sales charges to Pruco Securities Corporation and affiliated
broker-dealers, which in turn paid commissions to salespersons and incurred
other distribution costs.

PIMS has advised the Fund that for the year ended December 31, 1999, it received
approximately $507,200 and $5,400 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders, respectively.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential Insurance
Company of America ('Prudential').

As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. The Funds pay a
commitment fee at an annual rate of .065 of 1% on the unused portion of the
credit facility, which is accrued and paid quarterly on a pro rata basis by the
Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had
a credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund did not
borrow any amounts pursuant to either agreement during the year ended December
31, 1999. The purpose of the agreements is to serve as an alternative source of
funding for capital share redemptions.

- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates

Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended December 31, 1999,
the Fund incurred fees of approximately $644,000 for the services of PMFS. As of
December 31, 1999, approximately $54,600 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 contractually agreed to subsidize operating expenses so that total Fund
operating expenses do not exceed 1.00%, 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, 1999, such reimbursement amounted
to $478,079 ($0.02 per share for Class A, B, C and Z shares; .16% of average net
assets). The Fund is not required to reimburse PIFM for such subsidy.
- ------------------------------------------------------------
Note 5. Portfolio Securities

Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1999 were $706,339,244 and $702,358,360,
respectively.

The federal income tax cost basis of the Fund's investments at December 31, 1999
was $298,464,236 and, accordingly, net unrealized depreciation for federal
income tax purposes was $10,107,382 (gross unrealized appreciation--$1,996,441;
gross unrealized depreciation--$12,103,823).

For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1999 of approximately $13,738,000 of which $5,204,000 expires in
2006 and $8,534,000 expires in 2007. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such carryforward.

The Fund will elect, for United States federal income tax purposes, to treat net
short-term capital losses of $1,706,696 incurred in the two months ended
December 31, 1999 as having been incurred in the following fiscal year.
During the year ended December 31, 1999, the Fund entered into financial futures
contracts. Details of open contracts at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration Trade December 31, Appreciation/
Contracts Type Date Date 1999 (Depreciation)
- --------- ----------------- ---------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Long Positions:
77 20 yr. Bond Mar. 2000 $7,271,688 $7,002,188 $ (269,500)
37 10 yr. Note Mar. 2000 3,632,070 3,546,797 (85,273)
52 10 yr. Note Mar. 2000 5,104,938 4,984,688 (120,250)
--------------
$ (475,023)
--------------
--------------
</TABLE>

At December 31, 1999, the Fund had outstanding forward currency contracts to
purchase and sell foreign currency as follows:

<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Current
Purchase Contracts Date Receivable Value Appreciation
- ------------------------ --------------- ----------- --------------
<S> <C> <C> <C>
Australian Dollars,
expiring 1/18/00 $ 1,556,145 $ 1,593,651 $ 37,506
New Zealand Dollars,
expiring 1/25/00 1,950,943 1,991,529 40,586
--------------- ----------- --------------
$ 3,507,088 $ 3,585,180 $ 78,092
--------------- ----------- --------------
--------------- ----------- --------------
</TABLE>
- --------------------------------------------------------------------------------
14

<PAGE>
Notes to Financial Statements PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Current Appreciation/
Sale Contracts Date Payable Value (Depreciation)
- ------------------------ --------------- ----------- --------------
<S> <C> <C> <C>
Australian Dollars,
expiring 1/18/00 $ 3,354,214 $ 3,404,000 $ (49,786)
Euros
expiring 1/18/00 1,369,600 1,345,263 24,337
expiring 1/18/00 1,315,364 1,295,614 19,750
New Zealand Dollars,
expiring 1/25/00 1,960,693 1,991,528 (30,835)
--------------- ----------- --------------
$ 7,999,871 $ 8,036,405 $ (36,534)
--------------- ----------- --------------
--------------- ----------- --------------
</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, 1999, the
Fund had a 0.1% undivided interest in the joint account. The undivided interest
for the Fund represents $977,000 in principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:

ABN AMRO Incorporated, 2.75%, in the principal amount of $90,000,000, repurchase
price $90,020,625, due 1/3/2000. The value of the collateral including accrued
interest was $91,800,968.

Bear, Stearns & Co. Inc., 2.75%, in the principal amount of $210,000,000,
repurchase price $210,048,125, due 1/3/2000. The value of the collateral
including accrued interest was $221,923,528.

Lehman Brothers, Inc., 2.50%, in the principal amount of $100,000,000,
repurchase price $100,020,833, due 1/3/2000. The value of the collateral
including accrued interest was $101,979,049.

Morgan (J.P.) Securities, Inc., 3.00%, in the principal amount of $120,000,000,
repurchase price $120,030,000, due 1/3/2000. The value of the collateral
including accrued interest was $122,400,783.

Morgan (J.P.) Securities, Inc., 4.50%, in the principal amount of $78,685,000,
repurchase price $78,714,507, due 1/3/2000. The value of the collateral
including accrued interest was $80,259,686.

Salomon Smith Barney, Inc., 2.00%, in the principal amount of $110,000,000,
repurchase price $110,018,333, due 1/3/2000. The value of the collateral
including accrued interest was $112,231,078.

- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. A special exchange privilege is
also available for shareholders who 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 authorized, $.001 par value per
share, divided into four classes, designated Class A, B, C and Class Z, each of
which consists of 500 million, 500 million, 500 million and 500 million
authorized shares, respectively.

Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- -----------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold.......................... 2,119,919 $27,017,033
Shares issued in reinvestment of
dividends.......................... 260,271 3,299,392
Shares reacquired.................... (2,068,769) (26,249,289)
---------- -----------
Net increase in shares outstanding
before conversion.................. 311,421 4,067,136
Shares issued upon conversion from
Class B............................ 289,783 3,651,848
---------- -----------
Net increase in shares outstanding... 601,204 $ 7,718,984
---------- -----------
---------- -----------
Year ended December 31, 1998:
Shares sold.......................... 2,495,893 $33,401,514
Shares issued in reinvestment of
dividends.......................... 194,963 2,602,189
Shares reacquired.................... (1,507,321) (20,108,457)
---------- -----------
Net increase in shares outstanding
before conversion.................. 1,183,535 15,895,246
Shares issued upon conversion from
Class B............................ 228,881 3,064,759
---------- -----------
Net increase in shares outstanding... 1,412,416 $18,960,005
---------- -----------
---------- -----------
</TABLE>
- --------------------------------------------------------------------------------
15

<PAGE>
Notes to Financial Statements PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------- ---------- -----------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold.......................... 3,456,631 $44,310,059
Shares issued in reinvestment of
dividends.......................... 689,639 8,755,340
Shares reacquired.................... (4,140,053) (52,609,385)
---------- -----------
Net increase in shares outstanding
before conversion.................. 6,217 456,014
Shares reacquired upon conversion
into Class A....................... (289,783) (3,651,848)
---------- -----------
Net decrease in shares outstanding... (283,566) $(3,195,834)
---------- -----------
---------- -----------
Year ended December 31, 1998:
Shares sold.......................... 4,920,054 $65,663,839
Shares issued in reinvestment of
dividends.......................... 562,773 7,514,653
Shares reacquired.................... (2,889,045) (38,488,622)
---------- -----------
Net increase in shares outstanding
before conversion.................. 2,593,782 34,689,970
Shares reacquired upon conversion
into Class A....................... (228,881) (3,064,759)
---------- -----------
Net increase in shares outstanding... 2,364,901 $31,625,111
---------- -----------
---------- -----------
</TABLE>

<TABLE>
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold.......................... 390,480 $ 5,023,340
Shares issued in reinvestment of
dividends.......................... 36,684 465,063
Shares reacquired.................... (378,966) (4,818,053)
---------- -----------
Net increase in shares outstanding... 48,198 $ 670,350
---------- -----------
---------- -----------
Year ended December 31, 1998:
Shares sold.......................... 412,554 $ 5,507,004
Shares issued in reinvestment of
dividends.......................... 25,359 338,435
Shares reacquired.................... (184,168) (2,450,323)
---------- -----------
Net increase in shares outstanding... 253,745 $ 3,395,116
---------- -----------
---------- -----------

<CAPTION>
Class Z
- -------------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold.......................... 1,158,621 $14,839,239
Shares issued in reinvestment of
dividends.......................... 271,352 3,443,256
Shares reacquired.................... (1,360,238) (17,390,076)
---------- -----------
Net increase in shares outstanding... 69,735 $ 892,419
---------- -----------
---------- -----------
Year ended December 31, 1998:
Shares sold.......................... 1,880,837 $25,105,120
Shares issued in reinvestment of
dividends.......................... 232,269 3,099,548
Shares reacquired.................... (1,659,265) (22,125,688)
---------- -----------
Net increase in shares outstanding... 453,841 $ 6,078,980
---------- -----------
---------- -----------
</TABLE>
- --------------------------------------------------------------------------------
16

<PAGE>
Financial Highlights PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------
January 10,
1995(a)
Year Ended December 31, Through
------------------------------------------------- December 31,
1999 1998 1997 1996 1995
------- ------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 13.23 $ 13.41 $ 13.57 $ 13.79 $ 12.50
------- ------- ------------ -------- ------------
Income from investment operations
Net investment income(b)...................... .83 .85 .98 .93 .90
Net realized and unrealized gain (loss) on
investment transactions.................... (.86) (.18) .07 (.19 ) 1.51
------- ------- ------------ -------- ------------
Total from investment operations........... (.03) .67 1.05 .74 2.41
------- ------- ------------ -------- ------------
Less distributions
Dividends from net investment income.......... (.82) (.85) (.98) (.93 ) (.90)
Distributions in excess of net investment
income..................................... (.03) --(e) (.02) -- --
Distributions from net realized gains......... -- -- (.21) (.03 ) (.22)
------- ------- ------------ -------- ------------
Total distributions........................ (.85) (.85) (1.21) (.96 ) (1.12)
------- ------- ------------ -------- ------------
Net asset value, end of period................ $ 12.35 $ 13.23 $ 13.41 $ 13.57 $ 13.79
------- ------- ------------ -------- ------------
------- ------- ------------ -------- ------------
TOTAL RETURN(d)............................... (.23)% 5.14% 7.96% 5.80 % 19.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $62,660 $59,186 $ 41,051 $30,657 $ 14,276
Average net assets (000)...................... $61,661 $51,915 $ 34,994 $21,867 $ 7,428
Ratios to average net assets(b):
Expenses, including distribution fees...... 1.00% .90% .82% .79 % .87%(c)
Expenses, excluding distribution fees...... .75% .75% .67% .64 % .72%(c)
Net investment income...................... 6.41% 6.36% 7.14% 7.08 % 6.92%(c)
For Class A, B, C and Z shares:
Portfolio turnover rate.................... 236% 304% 334% 362 % 260%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy and/or 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) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 17

<PAGE>
Financial Highlights PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------
January 10,
1995(a)
Year Ended December 31, Through
--------------------------------------------------- December 31,
1999 1998 1997 1996 1995
-------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 13.23 $ 13.41 $ 13.58 $ 13.79 $ 12.50
-------- -------- ------------ -------- ------------
Income from investment operations
Net investment income(b)...................... .77 .77 .89 .85 .82
Net realized and unrealized gain (loss) on
investment transactions.................... (.86) (.18) .06 (.18 ) 1.51
-------- -------- ------------ -------- ------------
Total from investment operations........... (.09) .59 .95 .67 2.33
-------- -------- ------------ -------- ------------
Less distributions
Dividends from net investment income.......... (.76) (.77) (.89) (.85 ) (.82)
Distributions in excess of net investment
income..................................... (.03) --(e) (.02) -- --
Distributions from net realized gains......... -- -- (.21) (.03 ) (.22)
-------- -------- ------------ -------- ------------
Total distributions........................ (.79) (.77) (1.21) (.88 ) (1.04)
-------- -------- ------------ -------- ------------
Net asset value, end of period................ $ 12.35 $ 13.23 $ 13.41 $ 13.58 $ 13.79
-------- -------- ------------ -------- ------------
-------- -------- ------------ -------- ------------
TOTAL RETURN(d)............................... (.72)% 4.51% 7.24% 5.19 % 19.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $170,706 $186,659 $157,501 $136,054 $ 85,472
Average net assets (000)...................... $183,188 $172,326 $144,620 $114,560 $ 43,574
Ratios to average net assets(b):
Expenses, including distribution fees...... 1.50% 1.50% 1.42% 1.39 % 1.47%(c)
Expenses, excluding distribution fees...... .75% .75% .67% .64 % .72%(c)
Net investment income...................... 5.91% 5.76% 6.54% 6.48 % 6.32%(c)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy and/or 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) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 18

<PAGE>
Financial Highlights PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------------------
January 10,
1995(a)
Through
Year Ended December 31, December
--------------------------------------------------- 31,
1999 1998 1997 1996 1995
------ ------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $13.23 $13.41 $13.58 $13.79 $ 12.50
------ ------ ------------ ------------ -----------
Income from investment operations
Net investment income(b)...................... .77 .77 .89 .85 .82
Net realized and unrealized gain (loss) on
investment transactions.................... (.86) (.18) .06 (.18) 1.51
------ ------ ------------ ------------ -----------
Total from investment operations........... (.09) .59 .95 .67 2.33
------ ------ ------------ ------------ -----------
Less distributions
Dividends from net investment income.......... (.76) (.77) (.89) (.85) (.82)
Distributions in excess of net investment
income..................................... (.03) --(e) (.02) -- --
Distributions from net realized gains......... -- -- (.21) (.03) (.22)
------ ------ ------------ ------------ -----------
Total distributions........................ (.79) (.77) (1.12) (.88) (1.04)
------ ------ ------------ ------------ -----------
Net asset value, end of period................ $12.35 $13.23 $13.41 $13.58 $ 13.79
------ ------ ------------ ------------ -----------
------ ------ ------------ ------------ -----------
TOTAL RETURN(d)............................... (.72)% 4.51% 7.24% 5.19% 19.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $9,257 $9,282 $6,005 $4,143 $ 2,655
Average net assets (000)...................... $9,696 $7,390 $4,747 $3,534 $ 1,307
Ratios to average net assets(b):
Expenses, including distribution fees...... 1.50% 1.50% 1.42% 1.39% 1.47%(c)
Expenses, excluding distribution fees...... .75% .75% .67% .64% .72%(c)
Net investment income...................... 5.91% 5.76% 6.54% 6.48% 6.32%(c)
</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) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 19

<PAGE>
Financial Highlights PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
-----------------------------------------------------------
September 16,
1996(a)
Year Ended December 31, Through
----------------------------------------- December 31,
1999 1998 1997 1996
------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 13.22 $ 13.40 $ 13.57 $ 13.20
------- ------------ ------------ -------------
Income from investment operations
Net investment income(b)...................... .86 .87 1.00 .28
Net realized and unrealized gain (loss) on
investment transactions.................... (.86) (.18) .06 .40
------- ------------ ------------ -------------
Total from investment operations........... -- .69 1.06 .68
------- ------------ ------------ -------------
Less distributions
Dividends from net investment income.......... (.85) (.87) (1.00) (.28)
Distributions in excess of net investment
income..................................... (.03) --(e) (.02) --
Distributions from net realized gains......... -- -- (.21) (.03)
------- ------------ ------------ -------------
Total distributions........................ (.88) (.87) (1.23) (.31)
------- ------------ ------------ -------------
Net asset value, end of period................ $ 12.34 $ 13.22 $ 13.40 $ 13.57
------- ------------ ------------ -------------
------- ------------ ------------ -------------
TOTAL RETURN(d)............................... .01% 5.30% 8.05% 5.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $50,215 $ 52,879 $ 47,519 $ 608
Average net assets (000)...................... $51,729 $ 48,988 $ 36,750 $ 125
Ratios to average net assets(b):
Expenses, including distribution fees...... .75% .75% .67% .64%(c)
Expenses, excluding distribution fees...... .75% .75% .67% .64%(c)
Net investment income...................... 6.67% 6.51% 7.29% 7.23%(c)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy and fee waiver.
(c) Annualized.
(d) 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) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 20

<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, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the three years in
the period then ended, in conformity with accounting principles generally
accepted in the United States. These financial statements and financial
highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying financial highlights for
each of the two periods in the period ended December 31, 1996 were audited by
other independent accountants, whose opinion dated February 12, 1997 was
unqualified.

PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 18, 2000
- --------------------------------------------------------------------------------
21

<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, 1999) 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 5.08% of the dividends paid by the Fund qualifies for such deduction.
During the fiscal year ended December 31, 1999, the Fund paid dividends from net
investment income 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.
- --------------------------------------------------------------------------------
22
<PAGE>

Comparing a $10,000 Investment
- -----------------------------------------------------
Prudential Diversified Bond Fund, Inc. vs. the Lehman
Brothers Aggregate Bond Index

Class A
(GRAPH)

Average Annual Total Returns

With Sales Charge As of 12/31/99
Since Inception 6.66% (6.47)
Three Years 2.83 (2.66)
One Year -4.22 (-4.38)
- ----------------------------------------
Without Sales Charge As of 12/31/99
Since Inception 7.54% (7.35)
Three Years 4.24 (4.07)
One Year -0.23 (-0.39)

Class B
(GRAPH)

Average Annual Total Returns

With Sales Charge As of 12/31/99
Since Inception 6.76% (6.57)
Three Years 2.69 (2.52)
One Year -5.72 (-5.88)
- ----------------------------------------
Without Sales Charge As of 12/31/99
Since Inception 6.91% (6.72)
Three Years 3.63 (3.46)
One Year -0.72 (-0.88)

Past performance is not indicative of future results. Principal and investment
return will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost. The information beneath the graphs
is designed to give you an idea of how much the Fund's returns can fluctuate
from year to year by measuring the best and worst calendar years in terms of
total annual return since inception of each share class.

These graphs compare a $10,000 investment in Prudential Diversified Bond Fund,
Inc. (Class A, B, C, and Z shares) with a similar investment in the Lehman
Brothers Aggregate Bond Index (the Index) by portraying the initial account
values of Class A, B, C, and Z shares at the commencement of operations, and
at the end of the fiscal year (December 31), as measured on a quarterly basis,
beginning in 1995 for Class A, B, and C shares, and in 1996 for Class Z shares.
For purposes of the graphs, and unless otherwise indicated, it has been assumed
that (a) the maximum applicable front-end sales charge was deducted from the
initial $10,000 investment in Class A and Class C shares; (b) the maximum
applicable contingent deferred sales charges were deducted from the value of
the investment in Class B and Class C shares, assuming full redemption on
December 31, 1999; (c) all recurring fees (including management fees) were
deducted; and (d) all dividends and distributions were reinvested. Class
B shares will automatically convert to Class A shares, on a quarterly basis,

<PAGE>

Class C
(GRAPH)

Average Annual Total Returns

With Sales Charge As of 12/31/99
Since Inception 6.69% (6.50)
Three Years 3.28 (3.11)
One Year -2.71 (-2.87)
- ----------------------------------------
Without Sales Charge As of 12/31/99
Since Inception 6.91% (6.72)
Three Years 3.63 (3.46)
One Year -0.72 (-0.88)

Class Z
(GRAPH}

Average Annual Total Returns

As of 12/31/99
Since Inception 5.67% (5.48)
Three Years 4.40 (4.23)
One Year 0.01 (-0.15)

approximately seven years after purchase. This conversion feature is not
reflected in the graphs. Class Z shares are not subject to a sales charge or
distribution and service (12b-1) fees. Without waiver of management fees
and/or expense subsidization, the Fund's average annual total returns would
have been lower, as indicated in parenthesis ( ).

The Index is an unmanaged index of investment-grade securities issued by the
U.S. government and its agencies, and by corporations with between one and ten
years remaining to maturity. The Index gives a broad look at how short- and
intermediate-term bonds have performed. The Index returns include the
reinvestment of all dividends, but do not include the effect of any sales
charges or operating expenses of a mutual fund. The securities in the Index may
differ substantially from the securities in the Fund. The Index is not the
only one that may be used to characterize performance of bond funds, and other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.

These graphs are furnished to you in accordance with SEC regulations.

<PAGE>

Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--or other financial materials-- and
stumbled across a word that you don't understand?

Many shareholders have run into the same problem. We'd like to help. So we'll
use this space from time to time to explain some of the words you might have
read, but not understood. And if you have a favorite word that no one can
explain to your satisfaction, please write to us.

Basis Point: 1/100th of 1%. For example, one-half of one percent is 50 basis
points.

Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate
mortgage pools into different maturity classes, called tranches. These
instruments are sensitive to changes in interest rates and homeowner
refinancing activity. They are subject to prepayment and maturity extension
risk.

Derivatives: Securities that derive their value from other securities. The rate
of return of these financial instruments rises and falls--sometimes very
suddenly--in response to changes in some specific interest rate, currency,
stock, or other variable.

Discount Rate: The interest rate charged by the Federal Reserve on loans to
member banks.

Federal Funds Rate: The interest rate charged by one bank to another on
overnight loans.

Futures Contract: An agreement to purchase or sell a specific amount of a
commodity or financial instrument at a set price at a specified date in the
future.

Leverage: The use of borrowed assets to enhance return. The expectation is that
the interest rate charged on borrowed funds will be lower than the return on
the investment. While leverage can increase profits, it can also magnify
losses.

Liquidity: The ease with which a financial instrument (or product) can be
bought or sold (converted into cash) in the financial markets.

Price/Earnings Ratio: The price of a share of stock divided by the earnings
per share for a 12-month period.

Option: An agreement to purchase or sell something, such as shares of stock,
by a certain time for a specified price. An option need not be exercised.

Spread: The difference between two values; often used to describe the
difference between "bid" and "asked" prices of a security, or between the
yields of two similar maturity bonds.

Yankee Bond: A bond sold by a foreign company or government in the U.S. market
and denominated in U.S. dollars.

<PAGE>

Getting the Most from Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this--they don't read annual and
semiannual reports. It's quite understandable. These annual and semiannual
reports are prepared to comply with federal regulations, and are often written
in language that is difficult to understand. So, when most people run into
those particularly daunting sections of these reports, they don't read them.

We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our report to make it
easier to understand and more pleasant to read. We hope you'll find it
profitable to spend a few minutes familiarizing yourself with your investment.
Here's what you'll find in the report:

Performance at a Glance
Since an investment's performance is often a shareholder's primary concern, we
present performance information in two different formats. You'll find it first
on the "Performance at a Glance" page where we compare the Fund and the
comparable average calculated by Lipper, Inc., a nationally recognized mutual
fund rating agency. We report both the cumulative total returns and the average
annual total returns. The cumulative total return is the total amount of income
and appreciation the Fund has achieved in various time periods. The average
annual total return is an annualized representation of the Fund's performance.
It gives you an idea of how much the Fund has earned in an average year for a
given time period. Under the performance box, you'll see legends that explain
the performance information, whether fees and sales charges have been included
in returns, and the inception dates for the Fund's share classes.

See the performance comparison charts at the back of the report for more
performance information. Please keep in mind that past performance is not
indicative of future results.

Portfolio Manager's Report
The portfolio manager, who invests your money for you, reports on successful--
and not-so-successful--strategies in this section of your report. Look for
recent purchases and sales here, as well as information about the sectors the
portfolio manager favors, and any changes that are on the drawing board.

Portfolio of Investments
This is where the report begins to appear technical, but it's really just a
listing of each security held at the end of the reporting period, along with
valuations and other information. Please note that sometimes we discuss a
security in the Portfolio Manager's Report that doesn't appear in this listing
because it was sold before the close of the reporting period.

Statement of Assets and Liabilities
The balance sheet shows the assets (the value of the Fund's holdings),
liabilities (how much the Fund owes), and net assets (the Fund's equity, or
holdings after the Fund pays its debts) as of the end of the reporting period.
It also shows how we calculate the net asset value per share for each class of
shares. The net asset value is reduced by payment of your dividend, capital
gain, or other distribution, but remember that the money or new shares are
being paid or issued to you. The net asset value fluctuates daily, along with
the value of every security in the portfolio.

Statement of Operations
This is the income statement, which details income (mostly interest and
dividends earned) and expenses (including what you pay us to manage your
money). You'll also see capital gains here--both realized and unrealized.

Statement of Changes in Net Assets
This schedule shows how income and expenses translate into changes in net
assets. The Fund is required to pay out the bulk of its income to shareholders
every year, and this statement shows you how we do it--through dividends and
distributions--and how that affects the net assets. This statement also shows
how money from investors flowed into and out of the Fund.

Notes to Financial Statements
This is the kind of technical material that can intimidate readers, but it does
contain useful information. The Notes provide a brief history and explanation
of your Fund's objectives. In addition, they outline how Prudential Mutual
Funds prices securities. The Notes also explain who manages and distributes
the Fund's shares and, more importantly, how much they are paid for doing so.
Finally, the Notes explain how many shares are outstanding and the number
issued and redeemed over the period.

Financial Highlights
This information contains many elements from prior pages, but on a per-share
basis. It is designed to help you understand how the Fund performed, and to
compare this year's performance and expenses to those of prior years.

Independent Auditor's Report
Once a year, an outside auditor looks over our books and certifies that the
information is fairly presented and complies with generally accepted accounting
principles.

Tax Information
This is information which we report annually about how much of your total
return is taxable. Should you have any questions, you may want to consult a
tax adviser.

Performance Comparison
These charts are included in the annual report and are required by the
Securities Exchange Commission. Performance is presented here as a hypothetical
$10,000 investment in the Fund since its inception or for 10 years (whichever
is shorter). To help you put that return in context, we are required to include
the performance of an unmanaged, broad-based securities index as well. The
index does not reflect the cost of buying the securities it contains or the
cost of managing a mutual fund. Of course, the index holdings do not mirror
those of the Fund--the index is a broad-based reference point commonly used by
investors to measure how well they are doing. A definition of the selected
index is also provided. Investors cannot invest directly in an index.

<PAGE>

The Prudential Mutual Fund Family
- -------------------------------------------------------------------------------

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

STOCK FUNDS
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund

Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund

Asset Allocation/Balanced Funds
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund

GLOBAL FUNDS
Global Stock Funds
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Index Series Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Global Utility Fund, Inc.
Target Funds
International Equity Fund

Global Bond Funds
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.

BOND FUNDS
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Target Funds
Total Return Bond Fund

Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series

Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.

MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.

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

COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund

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

<PAGE>

Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077

(800) 225-1852

visit our website at www.prudential.com

Directors
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
John R. Strangfeld
Nancy H. Teeters
Louis A. Weil, III

Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Deborah A. Docs, Secretary
Stephen M. Ungerman, Assistant Treasurer

Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077

Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777

Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077

Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171

Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906

Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036

Legal Counsel
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, NY 10174

Fund Symbols NASDAQ CUSIP
Class A PDBAX 74431J102
Class B PRDBX 74431J201
Class C -- 74431J300
Class Z PDBZX 74431J409

The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.

This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.

MF166E

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