Prudential Municipal Bond Fund
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PROSPECTUS DATED JULY 1, 1998
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Prudential Municipal Bond Fund (the Fund) is an open-end, diversified,
management investment company, or mutual fund, consisting of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series (collectively, the Series). The investment objectives of the Series are
as follows: (i) the objective of the High Income Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes, (ii) the objective of the Insured Series is to provide the maximum amount
of income that is eligible for exclusion from federal income taxes consistent
with the preservation of capital and (iii) the objective of the Intermediate
Series is to provide a high level of income that is eligible for exclusion from
federal income taxes consistent with the preservation of capital. Although each
Series will seek income that is eligible for exclusion from federal income
taxes, a portion of the dividends and distributions paid by each Series (and, in
particular, the High Income Series) may be treated as a preference item for
purposes of the alternative minimum tax. Each Series seeks to achieve its
objective through the separate investment policies described in this Prospectus.
There can be no assurance that the Series' investment objectives will be
achieved. See "How the Fund Invests--Investment Objectives and Policies."

Subject to the limitations described herein, each Series may utilize
derivatives, including buying and selling futures contracts for the purpose of
hedging its portfolio securities. See "How the Fund Invests--Investment
Objectives and Policies."

THE HIGH INCOME SERIES MAY INVEST IN LOWER RATED BONDS, COMMONLY KNOWN AS JUNK
BONDS. INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER RISK OF LOSS OF
PRINCIPAL AND INTEREST, INCLUDING DEFAULT RISK, THAN HIGHER RATED BONDS.
PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS SERIES. See "How the Fund Invests--Investment Objectives and Policies--The
High Income Series--Risk Factors Relating to Investing in High Yield
Securities."

The Insured Series invests at least 70% of its assets in insured obligations
under normal conditions. The insurance relates to the timely payment of
principal and interest on portfolio investments and not to the shares of the
Series.

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

This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of the Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated July 1, 1998, which information is incorporated herein by reference (is
legally considered a part of this Prospectus) and is available without charge
upon request to the Fund at the address or telephone number noted above. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference and other
information regarding the Fund.

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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.

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

FUND HIGHLIGHTS

The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL BOND FUND?
Prudential Municipal Bond Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified,
management investment company. The Fund is comprised of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series.

WHAT ARE THE SERIES' INVESTMENT OBJECTIVES?
The investment objective of the High Income Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes. The investment objective of the Insured Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes consistent with the preservation of capital. The investment objective
of the Intermediate Series is to provide a high level of income that is
eligible for exclusion from federal income taxes consistent with the
preservation of capital. Each Series seeks to achieve its objective through
the separate investment policies described in this Prospectus. There can be
no assurance that the Series' objectives will be achieved. See "How the Fund
Invests--Investment Objectives and Policies" at page 18.

WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
The High Income Series invests in high yield securities, commonly known as
junk bonds, which may be considered speculative and are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations, as well as price volatility. The Insured Series invests
primarily in insured municipal obligations. Although the insurance policies
protect against the failure to make timely payment of principal and interest
on the insured municipal obligations, the price of the municipal obligations
and the stability of the Series' net asset value per share (NAV) are not
insured. The Intermediate Series invests primarily in municipal obligations
with maturities between 3 and 15 years and will have a dollar-weighted
average portfolio maturity of more than 3 and less than 10 years. Generally,
the yield earned on longer-term municipal obligations is greater than that
earned on similar obligations with shorter maturities. However, obligations
with longer maturities are subject to greater market risk due to larger
fluctuations in value given specific changes in the level of interest rates
relative to the value of shorter-term obligations. See "How the Fund
Invests--Investment Objectives and Policies" at page 18. Each Series may
purchase and sell derivatives, including certain financial futures contracts
and options thereon, for hedging purposes. These activities may be
considered speculative and may result in higher risks and costs to the Fund.
See "How the Fund Invests--Hedging Strategies--Risks of Hedging Strategies"
at page 25. As with an investment in any mutual fund, an investment in this
Fund can decrease in value and you can lose money.

WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the average daily net assets of each Series up to $1 billion
and .45 of 1% of the average daily net assets of each Series in excess of $1
billion. As of May 31, 1998, PIFM served as manager or administrator to 67
investment companies, including 45 mutual funds, with aggregate assets of
approximately $65 billion. The Prudential Investment Corporation (PIC),
doing business as Prudential Investments (the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 29.

WHO DISTRIBUTES THE FUND'S SHARES?
On and after July 1, 1998, Prudential Investment Management Services LLC
(the Distributor), will act as the Distributor of the Fund's Class A, Class
B, Class C and Class Z shares. Before July 1, 1998, Prudential Securities
Incorporated (Prudential Securities) served as Distributor of Fund shares.
Prudential Securities and Prudential Investment Management Services LLC are
each referred to as the Distributor. The Distributor is paid an annual
distribution and service fee which is currently being charged at the rate of
.10 of 1% of the average daily net assets of the Class A shares of each
Series, is paid an annual distribution and service fee which is currently
being charged at the rate of .50 of 1% of the average daily net assets of
the Class B shares of each Series and is paid an annual distribution and
service fee which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares of each Series. The
Distributor incurs the expense of distributing the Fund's Class Z shares
under a distribution agreement with the Fund, none of which is reimbursed or
paid for by the Fund. See "How the Fund is Managed--Distributor" at page 29.

WHAT IS THE MINIMUM INVESTMENT?

The minimum initial investment is $1,000 for Class A and Class B shares
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for Class A, Class B and Class C shares. Class Z shares are not
subject to any minimum investment requirements. There is no minimum
investment requirement for certain employee savings plans. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial
and subsequent investment is $50. See "Shareholder Guide--How to Buy Shares
of the Fund" at page 37 and "Shareholder Guide--Shareholder Services" at
page 46.

HOW DO I PURCHASE SHARES?

You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers), including Prudential
Securities or Pruco Securities Incorporated (Prusec), or directly from the
Fund through its transfer agent, Prudential Mutual Fund Services LLC (PMFS
or the Transfer Agent). In each case, sales are made at the NAV next
determined after receipt of your purchase order by the Transfer Agent, a
Dealer or the Distributor, plus a sales charge which may be imposed either
(i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group
of investors at NAV without any sales charge. Dealers may charge their
customers a separate fee for handling purchase transactions. See "How the
Fund Values its Shares" at page 32 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 37.

WHAT ARE MY PURCHASE ALTERNATIVES?

The Fund offers four classes of shares through this Prospectus:

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

- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.

- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Class C shares are subject to higher
ongoing distribution-related expenses than Class A
shares but, unlike Class B shares, do not convert
to another class.

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

See "Shareholder Guide--Alternative Purchase Plan" at page 38.

HOW DO I SELL MY SHARES?

You may redeem your shares at any time at the NAV next determined after
your Dealer, the Distributor or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. Dealers may charge their customers a separate fee for
handling sale transactions. See "Shareholder Guide--How to Sell Your Shares"
at page 41. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information
about selling their Class Z shares.

HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?

The Fund expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of a Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 33.

FUND EXPENSES
(FOR EACH SERIES)

CLASS A SHARES CLASS B SHARES (b) CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------------- ----------------- ----------------

SHAREHOLDER TRANSACTION EXPENSES (a)
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)...................... 3% None None None
Maximum Sales Load Imposed on
Reinvested Dividends................. None None None None
Maximum Deferred Sales Load (as a
percentage of original purchase price
or redemption proceeds, whichever is
lower)............................... None 5% during the first year, decreasing 1% on redemptions None
by 1% annually to 1% in the fifth and made within one
sixth years and 0% the seventh year year
of purchase
Redemption Fees....................... None None None None
Exchange Fee.......................... None None None None

CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------------- ----------------- ----------------

ANNUAL FUND OPERATING EXPENSES (c)
(as a percentage of average net assets)
Management Fees:
High Income Series (Before
Waiver)........................ .50% .50% .50% .50%
Insured Series.................. .50 .50 .50 .50
Intermediate Series............. .50 .50 .50 .50
12b-1 Fees (After Reduction):
High Income Series.............. .10%(d) .50% .75%(d) None
Insured Series.................. .10(d) .50 .75(d) None
Intermediate Series............. .10(d) .50 .75(d) None
Other Expenses:
High Income Series.............. .07% .07% .07% .07%
Insured Series.................. .11 .11 .11 .11
Intermediate Series............. .73 .73 .73 .73
Total Fund Operating Expenses
(Before Waiver and After
Reduction):
High Income Series.............. .67% 1.07% 1.32% .57%
Insured Series.................. .71 1.11 1.36 .61
Intermediate Series............. 1.33 1.73 1.98 1.23

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

(b) Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."

(c) Based on expenses incurred during the fiscal year ended April 30, 1998,
without taking into account the management fee waiver. At the current level
of management fee waiver (10%) for the High Income Series, Management Fees
for the High Income Series would be .45% for all classes and Total Fund
Operating Expenses for Class A, B, C and Class Z shares would be .62%,
1.02%, 1.27% and .52%, respectively for the High Income Series. The expense
information in the table with respect to the Insured and Intermediate
Series has been restated to reflect current fees. Effective August 31,
1997, PIFM eliminated its management fee waiver (10%) with respect to the
Insured and Intermediate Series. See "How the Fund is Managed--Fee Waivers
and Subsidy."

(d) Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and up to 1% of
the average daily net assets of the Class A and Class C shares,
respectively, the Distributor may voluntarily waive all or a portion of the
distribution fees as it may determine from time to time. Any such waivers
may be terminated at any time without prior notice to shareholders. The fee
table reflects the 12b-1 fees that are estimated to be incurred by the Fund
during its current fiscal year. Total Fund Operating Expenses of the Class
A and Class C shares without such waivers would be .87% and 1.57%,
respectively, of the High Income Series, .91% and 1.61%, respectively, of
the Insured Series and 1.53% and 2.23%, respectively, of the Intermediate
Series. See "How the Fund is Managed--Distributor."

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- -------------- --------

EXAMPLE (EACH SERIES)
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:
High Income Series
Class A............................. $36 $49 $ 64 $105
Class B............................. $60 $62 $ 66 $108
Class C............................. $23 $40 $ 70 $153
Class Z............................. $ 5 $17 $ 29 $ 70
Insured Series
Class A............................. $37 $51 $ 67 $113
Class B............................. $61 $65 $ 70 $116
Class C............................. $24 $42 $ 73 $161
Class Z............................. $ 6 $19 $ 33 $ 79
Intermediate Series
Class A............................. $43 $70 $100 $183
Class B............................. $67 $84 $103 $186
Class C............................. $30 $62 $106 $229
Class Z............................. $12 $38 $ 66 $151
You would pay the following expenses on
the same investment, assuming no
redemption:
High Income Series
Class A............................. $36 $49 $ 64 $105
Class B............................. $10 $32 $ 56 $108
Class C............................. $13 $40 $ 70 $153
Class Z............................. $ 5 $17 $ 29 $ 70
Insured Series
Class A............................. $37 $51 $ 67 $113
Class B............................. $11 $35 $ 60 $116
Class C............................. $14 $42 $ 73 $161
Class Z............................. $ 6 $19 $ 33 $ 79
Intermediate Series
Class A............................. $43 $70 $100 $183
Class B............................. $17 $54 $ 93 $186
Class C............................. $20 $62 $106 $229
Class Z............................. $12 $38 $ 66 $151

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The above examples are based on data for the Fund's fiscal year ended
April 30, 1998. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.

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

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES - CLASS A SHARES)

The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."

HIGH INCOME SERIES
------------------------------------------------------------------------------------------------------------
CLASS A
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JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
------------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- ------- ------- ------- ------- ------------

PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.33 $10.58
-------- -------- -------- -------- ------- ------- ------- ------- ------

INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .67(d) .70(d) .72(d) .72(d) .72 .77 .77(d) .79(d) .23(d)
Net realized and
unrealized gain
(loss) on
investment
transactions...... .47 .14 (.02) (.02) (.39) .46 .23 .12 (.25)
-------- -------- -------- -------- ------- ------- ------- ------- ------
Total from
investment
operations........ 1.14 .84 .70 .70 .33 1.23 1.00 .91 (.02)
-------- -------- -------- -------- ------- ------- ------- ------- ------

LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.67) (.70) (.72) (.72) (.72) (.77) (.77) (.79) (.23)
Distributions from
capital gains..... -- -- -- -- (.01) -- -- -- --
-------- -------- -------- -------- ------- ------- ------- ------- ------
Total
distributions..... (.67) (.70) (.72) (.72) (.73) (.77) (.77) (.79) (.23)
-------- -------- -------- -------- ------- ------- ------- ------- ------
Net asset value, end
of period......... $ 11.31 $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $10.33
-------- -------- -------- -------- ------- ------- ------- ------- ------
-------- -------- -------- -------- ------- ------- ------- ------- ------

TOTAL RETURN (b):... 10.80% 8.03% 6.55% 6.90% 2.88% 11.90% 9.82% 9.14% (1.49)%

RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $421,503 $334,062 $223,073 $115,501 $54,491 $43,529 $24,725 $15,089 $3,905
Average net assets
(000)............. $381,735 $294,940 $162,329 $ 65,207 $52,982 $31,658 $19,702 $11,594 $1,914
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 0.62%(d) 0.64%(d) 0.64%(d) 0.69%(d) 0.69% 0.74% 0.65%(d) 0.60%(d) 0.60%(c)(d)
Expenses,
excluding
distribution
fees............. 0.52%(d) 0.54%(d) 0.54%(d) 0.59%(d) 0.59% 0.64% 0.55%(d) 0.50%(d) 0.50%(c)(d)
Net investment
income........... 6.03%(d) 6.44%(d) 6.58%(d) 6.83%(d) 6.42% 7.04% 7.25%(d) 7.62%(d) 8.17%(c)(d)
Portfolio turnover
rate.............. 13% 26% 35% 39% 36% 27% 34% 29% 44%

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(a) Commencement of offering of Class A shares.

(b) 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.

(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES - CLASS B SHARES)

The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."

HIGH INCOME SERIES
----------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------
YEARS ENDED APRIL 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.84 $ 10.69 $ 10.72 $ 10.74 $ 11.14
---------- ---------- ---------- ---------- ----------

INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .63(b) .66(b) .68(b) .68(b) .68
Net realized and unrealized gain (loss) on
investment transactions......................... .47 .15 (.03) (.02) (.39)
---------- ---------- ---------- ---------- ----------
Total from investment operations.................. 1.10 .81 .65 .66 .29
---------- ---------- ---------- ---------- ----------

LESS DISTRIBUTIONS
Dividends from net investment income.............. (.63) (.66) (.68) (.68) (.68)
Distributions from capital gains.................. -- -- -- -- (.01)
---------- ---------- ---------- ---------- ----------
Total distributions............................... (.63) (.66) (.68) (.68) (.69)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.................... $ 11.31 $ 10.84 $ 10.69 $ 10.72 $ 10.74
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------

TOTAL RETURN (a):................................. 10.36% 7.71% 6.12% 6.37% 2.46%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 669,223 $ 665,525 $ 799,048 $ 934,725 $1,099,640
Average net assets (000).......................... $ 669,132 $ 725,305 $ 900,115 $1,024,132 $1,132,653
Ratios to average net assets:
Expenses, including distribution fees........... 1.02%(b) 1.04%(b) 1.04%(b) 1.09%(b) 1.09%
Expenses, excluding distribution fees........... 0.52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.58%
Net investment income........................... 5.63%(b) 6.05%(b) 6.19%(b) 6.37%(b) 6.02%
Portfolio turnover rate........................... 13% 26% 35% 39% 36%

1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.68 $ 10.45 $ 10.34 $ 10.56 $ 10.13
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .73 .73(b) .75(b) .79(b) .86(b)
Net realized and unrealized gain (loss) on
investment transactions......................... .46 .23 .11 (.17) .45
---------- ---------- ---------- ---------- ----------
Total from investment operations.................. 1.19 .96 .86 .62 1.31
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.73) (.73) (.75) (.79) (.86)
Distributions from capital gains.................. -- -- -- (.05) (.02)
---------- ---------- ---------- ---------- ----------
Total distributions............................... (.73) (.73) (.75) (.84) (.88)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.................... $ 11.14 $ 10.68 $ 10.45 $ 10.34 $ 10.56
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN (a):................................. 11.47% 9.40% 8.59% 6.04% 13.40%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $1,028,480 $ 803,838 $ 701,483 $ 622,970 $ 549,426
Average net assets (000).......................... $ 893,203 $ 759,779 $ 667,751 $ 549,485 $ 185,367
Ratios to average net assets:
Expenses, including distribution fees........... 1.14% 1.05%(b) 1.00%(b) 0.83%(b) 0.27%(b)

Expenses, excluding distribution fees........... .64% 0.55%(b) 0.50%(b) 0.33%(b) 0.12%(b)

Net investment income........................... 6.66% 6.85%(b) 7.22%(b) 7.24%(b) 7.26%(b)

Portfolio turnover rate........................... 27% 34% 29% 44% 17%

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(a) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions.

(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES - CLASS C SHARES)

The following financial highlights for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the year ended April 30,
1996 and for the period from August 1, 1994 through April 30, 1995. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."

HIGH INCOME SERIES
--------------------------------------
CLASS C
--------------------------------------
AUGUST 1,
1994(a)
YEAR ENDED APRIL 30, THROUGH
------------------------- APRIL 30,
1998 1997 1996 1995
------- ------- ------- -----------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.84 $ 10.69 $ 10.72 $10.79
------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)......................... .61 .63 .65 .49
Net realized and unrealized gain (loss) on
investment transactions......................... .47 .15 (.03) (.07)
------- ------- ------- -----------
Total from investment operations.................. 1.08 .78 .62 .42
------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.61) (.63) (.65) (.49)
------- ------- ------- -----------
Net asset value, end of period.................... $ 11.31 $ 10.84 $ 10.69 $10.72
------- ------- ------- -----------
------- ------- ------- -----------
TOTAL RETURN (b):................................. 10.09% 7.44% 5.86% 3.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $20,554 $ 9,563 $ 6,471 $3,208
Average net assets (000).......................... $14,932 $ 8,060 $ 5,608 $1,385
Ratios to average net assets:
Expenses, including distribution fees (d)....... 1.27% 1.29% 1.29% 1.34%(c)
Expenses, excluding distribution fees (d)....... 0.52% 0.54% 0.54% 0.59%(c)
Net investment income (d)....................... 5.39% 5.80% 5.93% 6.34%(c)
Portfolio turnover rate........................... 13% 26% 35% 39%

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

(a) Commencement of offering of Class C shares.

(b) 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.

(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(HIGH INCOME SERIES - CLASS Z SHARES)

The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and for the period from September 16, 1996 through April
30, 1997 have been audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The financial highlights contain
selected data for a Class Z share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the period
indicated. This information has been determined based on data contained in the
financial statements. Further performance information is contained in the annual
report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."

HIGH INCOME SERIES
---------------------------
CLASS Z
---------------------------
SEPTEMBER 16,
YEAR ENDED 1996(a)
APRIL 30, THROUGH
1998 APRIL 30, 1997
---------- --------------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.83 $10.79
---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)......................... .68 .45
Net realized and unrealized gain (loss) on
investment transactions......................... .47 .04
---------- ------
Total from investment operations.................. 1.15 .49
---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.68) (.45)
---------- ------
Net asset value, end of period.................... $ 11.30 $10.83
---------- ------
---------- ------
TOTAL RETURN(b):.................................. 10.91% 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 9,919 $2,719
Average net assets (000).......................... $ 6,064 $ 704
Ratios to average net assets:
Expenses (d).................................... 0.52% 0.54%(c)
Net investment income (d)....................... 6.14% 6.55%(c)
Portfolio turnover rate........................... 13% 26%

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

(a) Commencement of offering of Class Z shares.

(b) 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 the period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.

(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS A SHARES)

INSURED SERIES
----------------------------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
----------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- ------- ------- ------- ------- ------ ------------

PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98 $ 10.76 $10.25 $ 10.51
-------- -------- -------- ------- ------- ------- ------- ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .53(d) .55(d) .58(d) .58(d) .58 .61 .66(d) .67(d) .18(d)
Net realized and
unrealized gain
(loss) on
investment
transactions...... .40 .08 .11 .12 (.43) .73 .24 .54 (.26)
-------- -------- -------- ------- ------- ------- ------- ------ ------
Total from
investment
operations........ .93 .63 .69 .70 .15 1.34 .90 1.21 (.08)
-------- -------- -------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.53) (.55) (.58) (.58) (.58) (.61) (.66) (.67) (.18)
Distributions in
excess of net
investment
income............ --(e) (.01) -- -- -- -- -- -- --
Distributions from
capital gains..... (.25) (.11) -- -- (.30) (.27) (.02) (.03) --
-------- -------- -------- ------- ------- ------- ------- ------ ------
Total
distributions..... (.78) (.67) (.58) (.58) (.88) (.88) (.68) (.70) (.18)
-------- -------- -------- ------- ------- ------- ------- ------ ------
Net asset value, end
of period......... $ 11.05 $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98 $10.76 $ 10.25
-------- -------- -------- ------- ------- ------- ------- ------ ------
-------- -------- -------- ------- ------- ------- ------- ------ ------
TOTAL RETURN (b):... 8.67% 5.74% 6.47% 6.73% 1.04% 12.68% 8.59% 11.86% (3.37)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $224,409 $208,411 $139,548 $75,800 $30,669 $30,098 $19,177 $7,630 $ 2,700
Average net assets
(000)............. $222,115 $187,371 $102,456 $39,471 $32,309 $24,589 $12,731 $5,164 $ 1,280
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 0.69%(d) 0.68%(d) 0.68%(d) 0.74%(d) 0.71% 0.72% 0.62%(d) 0.61%(d) 0.62%(c)(d)
Expenses,
excluding
distribution
fees............. 0.59%(d) 0.58%(d) 0.58%(d) 0.64%(d) 0.61% 0.62% 0.52%(d) 0.51%(d) 0.52%(c)(d)
Net investment
income........... 4.75%(d) 4.95%(d) 5.20%(d) 5.45%(d) 5.09% 5.46% 6.06%(d) 6.38%(d) 6.64%(c)(d)
Portfolio turnover
rate.............. 85% 110% 68% 64% 105% 85% 56% 51% 82%

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

(a) Commencement of offering of Class A shares.

(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.

(e) Less than $.005 per share.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS B SHARES)

The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."

INSURED SERIES
------------------------------------------------------------
CLASS B
------------------------------------------------------------
YEARS ENDED APRIL 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.91 $ 10.95 $ 10.84 $ 10.71 $ 11.44
-------- -------- -------- -------- --------

INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .49(b) .50(b) .54(b) .54(b) .54
Net realized and unrealized gain (loss) on
investment transactions......................... .40 .08 .11 .13 (.43)
-------- -------- -------- -------- --------
Total from investment operations.................. .89 .58 .65 .67 .11
-------- -------- -------- -------- --------

LESS DISTRIBUTIONS
Dividends from net investment income.............. (.49) (.50) (.54) (.54) (.54)
Distributions in excess of net investment
income.......................................... --(c) (.01) -- -- --
Distributions from capital gains.................. (.25) (.11) -- -- (.30)
-------- -------- -------- -------- --------
Total distributions............................... (.74) (.62) (.54) (.54) (.84)
-------- -------- -------- -------- --------
Net asset value, end of period.................... $ 11.06 $ 10.91 $ 10.95 $ 10.84 $ 10.71
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------

TOTAL RETURN (a):................................. 8.23% 5.32% 6.04% 6.40% 0.63%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $236,370 $298,005 $443,391 $567,648 $740,447
Average net assets (000).......................... $270,553 $365,891 $524,452 $660,237 $807,794
Ratios to average net assets:
Expenses, including distribution fees........... 1.09%(b) 1.08%(b) 1.08%(b) 1.14%(b) 1.11%
Expenses, excluding distribution fees........... 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61%
Net investment income........................... 4.35%(b) 4.54%(b) 4.80%(b) 4.99%(b) 4.69%
Portfolio turnover rate........................... 85% 110% 68% 64% 105%

1993 1992 1991 1990 1989
-------- -------- -------- -------- --------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.99 $ 10.76 $ 10.25 $ 10.54 $ 10.18
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .56 .62(b) .63(b) .67(b) .76(b)
Net realized and unrealized gain (loss) on
investment transactions......................... .72 .25 .54 (.22) .42
-------- -------- -------- -------- --------
Total from investment operations.................. 1.28 .87 1.17 .45 1.18
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.56) (.62) (.63) (.67) (.76)
Distributions in excess of net investment
income.......................................... -- -- -- -- --
Distributions from capital gains.................. (.27) (.02) (.03) (.07) (.06)
-------- -------- -------- -------- --------
Total distributions............................... (.83) (.64) (.66) (.74) (.82)
-------- -------- -------- -------- --------
Net asset value, end of period.................... $ 11.44 $ 10.99 $ 10.76 $ 10.25 $ 10.54
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (a):................................. 12.14% 8.24% 11.43% 4.36% 11.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $770,060 $638,451 $578,412 $497,139 $447,101
Average net assets (000).......................... $705,846 $609,516 $537,275 $446,904 $160,158
Ratios to average net assets:
Expenses, including distribution fees........... 1.12% 1.02%(b) 1.01%(b) 0.85%(b) 0.22%(b)
Expenses, excluding distribution fees........... 0.62% 0.52%(b) 0.51%(b) 0.35%(b) 0.13%(b)
Net investment income........................... 5.06% 5.66%(b) 5.98%(b) 6.07%(b) 6.52%(b)
Portfolio turnover rate........................... 85% 56% 51% 82% 87%

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

(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS C SHARES)

The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the year ended April 30,
1996 and the period August 1, 1994 through April 30, 1995. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."

INSURED SERIES
----------------------------------------
CLASS C
---------------------------------------------------------------------
YEAR ENDED APRIL 30, AUGUST 1, 1994(a)
---------------------------------------- THROUGH APRIL 30,
1998 1997 1996 1995
---------- ---------- ---------- ------------------------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.91 $ 10.95 $ 10.84 $ 10.79
---------- ---------- ---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... .46(d) .48(d) .51(d) .39(d)
Net realized and unrealized gain (loss)
on investment transactions............ .40 .08 .11 .05
---------- ---------- ---------- ------
Total from investment operations........ .86 .56 .62 .44
---------- ---------- ---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.46) (.48) (.51) (.39)
Distributions in excess of net
investment income..................... --(e) (.01) -- --
Distributions from capital gains........ (.25) (.11) -- --
---------- ---------- ---------- ------
Total distributions..................... (.71) (.60) (.51) (.39)
---------- ---------- ---------- ------
Net asset value, end of period.......... $ 11.06 $ 10.91 $ 10.95 $ 10.84
---------- ---------- ---------- ------
---------- ---------- ---------- ------
TOTAL RETURN (b):....................... 7.96% 5.06% 5.78% 4.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 1,509 $ 888 $ 1,137 $ 525
Average net assets (000)................ $ 1,142 $ 973 $ 827 $ 224
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees................................. 1.34%(d) 1.33%(d) 1.33%(d) 1.39%(c)(d)
Expenses, excluding distribution
fees................................. 0.59%(d) 0.58%(d) 0.58%(d) 0.64%(c)(d)
Net investment income................. 4.11%(d) 4.29%(d) 4.56%(d) 4.92%(c)(d)
Portfolio turnover rate................. 85% 110% 68% 64%

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

(a) Commencement of offering of Class C shares.

(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.

(e) Less than $.005 per share.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INSURED SERIES - CLASS Z SHARES)

INSURED SERIES
---------------------------------
CLASS Z
---------------------------------
SEPTEMBER 16,
YEAR ENDED 1996(a)
APRIL 30, THROUGH
1998 APRIL 30, 1997
------------- -----------------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 10.91 $ 11.05
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................ .54(d) .36(d)
Net realized and unrealized gain (loss) on investment
transactions................................................... .39 (.02)
------ ------
Total from investment operations................................. .93 .34
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income............................. (.54) (.36)
Distributions in excess of net investment income................. --(e) (.01)
Distributions from capital gains................................. (.25) (.11)
------ ------
Total distributions.............................................. (.79) (.48)
------ ------
Net asset value, end of period................................... $ 11.05 $ 10.91
------ ------
------ ------
TOTAL RETURN (b):................................................ 8.68% 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................. $418 $15
Average net assets (000)......................................... $173 $10
Ratios to average net assets:
Expenses....................................................... 0.60%(d) 0.58%(c)(d)
Net investment income.......................................... 4.92%(d) 4.18%(c)(d)
Portfolio turnover rate.......................................... 85% 110%

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

(a) Commencement of offering of Class Z shares.

(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.

(e) Less than $.005 per share.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS A SHARES)

The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."

INTERMEDIATE SERIES
----------------------------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
----------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- ------- ------- ------------

PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............... $ 10.59 $ 10.65 $ 10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98 $10.21
------- ------- ------- ------- ------- ------- ------- ------- ------

INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... .43(d) .46(d) .47(d) .51(d) .53 .54(d) .57(d) .59(d) .18(d)
Net realized and
unrealized gain
(loss) on investment
transactions......... .28 (.05) .20 (.03) (.19) .60 .26 .50 (.23)
------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations........... .71 .41 .67 .48 .34 1.14 .83 1.09 (.05)
------- ------- ------- ------- ------- ------- ------- ------- ------

LESS DISTRIBUTIONS
Dividends from net
investment income.... (.43) (.46) (.47) (.51) (.53) (.54) (.57) (.59) (.18)
Distributions in excess
of net investment
income............... -- (.01) -- (.01) -- -- -- -- --
Distributions from
capital gains........ (.06) -- -- (.18) (.22) (.11) (.15) -- --
------- ------- ------- ------- ------- ------- ------- ------- ------
Total distributions.... (.49) (.47) (.47) (.70) (.75) (.65) (.72) (.59) (.18)
------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period............... $10.81 $10.59 $10.65 $10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98
------- ------- ------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------- ------- ------

TOTAL RETURN (b):...... 6.76% 3.86% 6.48% 4.52% 2.83% 11.13% 8.14% 11.20% (2.49)%

RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)......... $13,126 $13,740 $12,552 $10,507 $5,810 $3,594 $1,424 $397 $164
Average net assets
(000)................ $13,591 $13,487 $12,604 $7,742 $4,981 $1,883 $ 599 $305 $80
Ratios to average net
assets:
Expenses, including
distribution fees... 1.31%(d) 1.15%(d) 1.16%(d) 1.05%(d) 1.00% 1.06%(d) 1.06%(d) 0.92%(d) 0.63%(c)(d)
Expenses, excluding
distribution fees... 1.21%(d) 1.05%(d) 1.06%(d) 0.95%(d) 0.90% 0.96%(d) 0.96%(d) 0.82%(d) 0.53%(c)(d)
Net investment
income.............. 3.99%(d) 4.30%(d) 4.36%(d) 4.75%(d) 4.63% 5.09%(d) 5.41%(d) 5.92%(d) 6.26%(c)(d)
Portfolio turnover
rate................. 54% 46% 35% 30% 55% 22% 78% 128% 91%

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

(a) Commencement of offering of Class A shares.

(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS B SHARES)

INTERMEDIATE SERIES
-------------------------------------------------------
CLASS B
-------------------------------------------------------
YEARS ENDED APRIL 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.59 $ 10.65 $ 10.45 $ 10.68 $ 11.09
------- ------- ------- ------- -------

INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .39(b) .42(b) .43(b) .45(b) .48
Net realized and unrealized gain (loss) on
investment transactions......................... .28 (.05) .20 (.04) (.19)
------- ------- ------- ------- -------
Total from investment operations.................. .67 .37 .63 .41 .29
------- ------- ------- ------- -------

LESS DISTRIBUTIONS
Dividends from net investment income.............. (.39) (.42) (.43) (.45) (.48)
Distributions in excess of net investment
income.......................................... -- (.01) -- (.01) --
Distributions from capital gains.................. (.06) -- -- (.18) (.22)
------- ------- ------- ------- -------
Total distributions............................... (.45) (.43) (.43) (.64) (.70)
------- ------- ------- ------- -------
Net asset value, end of period.................... $ 10.81 $ 10.59 $ 10.65 $ 10.45 $ 10.68
------- ------- ------- ------- -------
------- ------- ------- ------- -------

TOTAL RETURN (a):................................. 6.33% 3.44% 6.05% 3.99% 2.43%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $24,017 $29,980 $40,550 $51,039 $65,215
Average net assets (000).......................... $27,175 $35,221 $46,127 $60,174 $59,811
Ratios to average net assets:
Expenses, including distribution fees........... 1.71%(b) 1.55%(b) 1.56%(b) 1.45%(b) 1.40%
Expenses, excluding distribution fees........... 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90%
Net investment income........................... 3.59%(b) 3.89%(b) 3.96%(b) 4.35%(b) 4.23%
Portfolio turnover rate........................... 54% 46% 35% 30% 55%

1993 1992 1991 1990 1989
------- ------- ------- ------- -------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.60 $ 10.48 $ 9.98 $ 10.17 $ 10.14
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .50(b) .53(b) .56(b) .62(b) .70(b)
Net realized and unrealized gain (loss) on
investment transactions......................... .60 .27 .50 (.16) .09
------- ------- ------- ------- -------
Total from investment operations.................. 1.10 .80 1.06 .46 .79
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.50) (.53) (.56) (.62) (.70)
Distributions in excess of net investment
income.......................................... -- -- -- -- --
Distributions from capital gains.................. (.11) (.15) -- (.03) (.06)
------- ------- ------- ------- -------
Total distributions............................... (.61) (.68) (.56) (.65) (.76)
------- ------- ------- ------- -------
Net asset value, end of period.................... $ 11.09 $ 10.60 $ 10.48 $ 9.98 $ 10.17
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (a):................................. 10.62% 7.68% 10.82% 4.61% 8.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $57,049 $45,401 $45,401 $47,838 $45,362
Average net assets (000).......................... $50,154 $44,439 $46,521 $46,246 $30,515
Ratios to average net assets:
Expenses, including distribution fees........... 1.46%(b) 1.46%(b) 1.32%(b) 0.83%(b) 0.15%(b)
Expenses, excluding distribution fees........... 0.96%(b) 0.96%(b) 0.82%(b) 0.33%(b) 0.05%(b
Net investment income........................... 4.69%(b) 5.01%(b) 5.52%(b) 6.03%(b) 6.59%(b)
Portfolio turnover rate........................... 22% 78% 128% 91% 135%

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

(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS C SHARES)

The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998 have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the year
ended April 30, 1996 and the period August 1, 1994 through April 30, 1995. Each
of the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on
such financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."

INTERMEDIATE SERIES
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED APRIL 30, AUGUST 1, 1994(a)
---------------------------------------- THROUGH APRIL 30,
1998 1997 1996 1995
---------- ---------- ---------- --------------------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.59 $ 10.65 $ 10.45 $ 10.54
---------- ---------- ---------- ------

INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .36(d) .39(d) .40(d) .35(d)
Net realized and unrealized gain (loss) on
investment transactions......................... .28 (.05) .20 (.08)
---------- ---------- ---------- ------
Total from investment operations................ .64 .34 .60 .27
---------- ---------- ---------- ------

LESS DISTRIBUTIONS
Dividends from net investment income.............. (.36) (.39) (.40) (.35)
Distributions in excess of net investment
income.......................................... -- (.01) -- (.01)
Distributions from capital gains.................. (.06) -- -- --
---------- ---------- ---------- ------
Total distributions............................... (.42) (.40) (.40) (.36)
---------- ---------- ---------- ------
Net asset value, end of period.................... $ 10.81 $ 10.59 $ 10.65 $ 10.45
---------- ---------- ---------- ------
---------- ---------- ---------- ------

TOTAL RETURN (b):................................. 6.07% 3.17% 5.79% 2.14%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 449 $ 257 $ 225 $ 167
Average net assets (000).......................... $ 381 $ 149 $ 197 $ 28
Ratios to average net assets:
Expenses, including distribution fees........... 1.96%(d) 1.80%(d) 1.81%(d) 1.81%(c)(d)
Expenses, excluding distribution fees........... 1.21%(d) 1.05%(d) 1.06%(d) 1.06%(c)(d)
Net investment income........................... 3.33%(d) 3.65%(d) 3.71%(d) 4.34%(c)(d)
Portfolio turnover rate........................... 54% 46% 35% 30%

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

(a) Commencement of offering of Class C shares.

(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INTERMEDIATE SERIES - CLASS Z SHARES)

The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and for the period September 1996 through April 30, 1997
have been audited by Price Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read in conjunction with the
financial statements and the notes thereto, which appear in the Statement of
Additional Information. The financial highlights contain selected data for a
Class Z share of common stock outstanding, total return, ratios to average net
assets and other supplemental data for the period indicated. This information
has been determined based on data contained in the financial statements. Further
performance information is contained in the annual report, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."

INTERMEDIATE SERIES
----------------------------------------
CLASS Z
----------------------------------------
SEPTEMBER 16,
1996(a)
YEAR ENDED THROUGH
APRIL 30, 1998 APRIL 30, 1997
-------------- --------------------

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................................... $ 10.59 $ 10.63
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income...................................................... .44(d) .31(d)
Net realized and unrealized gain (loss) on investment transactions......... .28 (.03)
------ ------
Total from investment operations........................................... .72 .28
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income....................................... (.44) (.31)
Distributions in excess of net investment income........................... -- (.01)
Distributions from capital gains (.06) --
------ ------
Total distributions........................................................ (.50) (.32)
------ ------
Net asset value, end of period............................................. $ 10.81 $ 10.59
------ ------
------ ------
TOTAL RETURN(b):........................................................... 6.86% 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................................ $ 1,194 $ 246
Average net assets (000)................................................... $ 447 $ 63
Ratios to average net assets:
Expenses................................................................. 1.21%(d) 1.05%(c)(d)
Net investment income.................................................... 4.09%(d) 4.65%(c)(d)
Portfolio turnover rate.................................................... 54% 46%

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

(a) Commencement of offering of Class Z shares.

(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.

HOW THE FUND INVESTS

INVESTMENT OBJECTIVES AND POLICIES

THE FUND IS COMPRISED OF THREE SEPARATE DIVERSIFIED PORTFOLIOS--THE HIGH
INCOME SERIES, THE INSURED SERIES AND THE INTERMEDIATE SERIES--EACH OF WHICH IS
MANAGED INDEPENDENTLY. THE INVESTMENT OBJECTIVES OF THE SERIES ARE AS FOLLOWS:
(i) THE OBJECTIVE OF THE HIGH INCOME SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF
INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES, (ii) THE
OBJECTIVE OF THE INSURED SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF INCOME THAT
IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND (iii) THE OBJECTIVE OF THE INTERMEDIATE SERIES IS TO
PROVIDE A HIGH LEVEL OF INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL
INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL. THERE CAN BE NO
ASSURANCE THAT SUCH OBJECTIVES WILL BE ACHIEVED. See "Investment Objectives and
Policies" in the Statement of Additional Information. Although each Series will
seek income that is eligible for exclusion from federal income taxes, a portion
of the dividends and distributions paid by each Series (and, in particular, the
High Income Series) may be treated as a preference item for purposes of the
alternative minimum tax. See "Taxes, Dividends and Distributions."

As with an investment in any mutual fund, an investment in any Series of this
Fund can decrease in value and you can lose money.

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

EACH SERIES PURSUES ITS INVESTMENT OBJECTIVE THROUGH THE SEPARATE INVESTMENT
POLICIES DESCRIBED BELOW. These policies differ with respect to the maturity and
quality of portfolio securities in which a Series may invest and can affect the
yield for each Series and the degree of market risk and credit risk to which
each Series is subject.

EACH SERIES WILL SEEK TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING IN A
PORTFOLIO OF OBLIGATIONS ISSUED BY OR ON BEHALF OF STATES, TERRITORIES AND
POSSESSIONS OF THE UNITED STATES AND THE DISTRICT OF COLUMBIA AND THEIR
POLITICAL SUBDIVISIONS, AGENCIES AND INSTRUMENTALITIES, THE INTEREST ON WHICH IS
GENERALLY ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXATION (MUNICIPAL
OBLIGATIONS OR MUNICIPAL SECURITIES). THE PORTFOLIO SECURITIES HELD BY EACH OF
THE SERIES WILL VARY WITH RESPECT TO YIELD, MARKET PRICE VOLATILITY AND QUALITY.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations generally vary inversely with interest rates. In
addition, lower rated municipal obligations typically provide a higher yield
than higher rated municipal obligations of similar maturity. However, lower
rated municipal obligations are also subject to a greater degree of risk with
respect to the ability of the issuer to meet the principal and interest payments
on the obligations (credit risk) and may also be subject to greater price
volatility due to the market perceptions of the creditworthiness of the issuer.
Insurance policies may be obtained to insure against credit risk, but not
against market risk. From time to time, a Series may own the majority of a
municipal obligation. Such majority-owned holdings may present additional market
and credit risks.

Municipal securities include bonds and notes issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities, the interest on which is generally
eligible for exclusion from federal income tax. Municipal bonds are typically
issued to obtain funds for various public purposes, including the construction
of

a wide range of public facilities such as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets, water and sewer works and gas
and electric utilities. Municipal notes generally are used to finance short-term
capital needs and typically have maturities of one year or less.

DURING NORMAL MARKET CONDITIONS, THE ASSETS OF EACH SERIES WILL BE INVESTED SO
THAT IT WILL HAVE AT LEAST 80% OF ITS NET ASSETS INVESTED IN MUNICIPAL
OBLIGATIONS. However, when the Fund's investment adviser believes that market
conditions warrant a temporary defensive investment posture or when necessary to
meet large redemptions, a Series may hold more than 20% of its net assets in
cash, cash equivalents or investment grade taxable obligations, including
obligations that are generally exempt from state, but not federal, taxation.
Each Series may invest in municipal cash equivalents, such as floating rate
demand notes, municipal commercial paper and general obligation and revenue
notes, or in taxable cash equivalents, such as certificates of deposit, bankers'
acceptances and time deposits or other short-term taxable investments, such as
repurchase agreements. Each Series will treat an investment in a municipal bond
refunded with escrowed U.S. Government securities as U.S. Government securities
for purposes of the Investment Company Act's diversification requirements
provided certain conditions are met.

THE HIGH INCOME SERIES

THE HIGH INCOME SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WHICH
ARE RATED B OR BETTER BY MOODY'S INVESTORS SERVICE (MOODY'S) OR STANDARD &
POOR'S RATINGS GROUP (S&P) OR A SIMILAR NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION (NRSRO) AND WHICH GENERALLY HAVE MATURITIES IN EXCESS OF TEN YEARS
AT THE TIME OF PURCHASE, ALTHOUGH THE SERIES ALSO WILL INVEST IN MUNICIPAL
OBLIGATIONS HAVING MATURITIES RANGING FROM ONE YEAR TO TEN YEARS, PROVIDED THAT
THE WEIGHTED AVERAGE MATURITY OF THE SERIES' INVESTMENT PORTFOLIO REMAINS WITHIN
THE FIFTEEN TO THIRTY YEAR RANGE. Securities rated Baa by Moody's or BBB by S&P,
although considered to be investment grade, lack outstanding investment
characteristics and in fact have speculative characteristics as well. Securities
rated Ba or BB or lower by Moody's or S&P, respectively, are generally
considered to be predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal and are commonly referred to as junk bonds.
While such securities may have some quality and protective characteristics,
those are outweighed by large uncertainties or major risk exposures to adverse
conditions. See "Risk Factors Relating to Investing in High Yield Securities"
below and "Description of Security Ratings" in the Appendix. Subsequent to its
purchase by the Series, a municipal obligation may be assigned a lower rating or
cease to be rated. Such an event would not require the elimination of the issue
from the portfolio, but the investment adviser will consider such an event in
determining whether the Series should continue to hold the security in its
portfolio.

THE SERIES MAY ALSO INVEST IN MUNICIPAL SECURITIES WHICH ARE NOT RATED IF,
BASED UPON A CREDIT ANALYSIS BY THE FUND'S INVESTMENT ADVISER, THE INVESTMENT
ADVISER BELIEVES THAT SUCH SECURITIES ARE OF COMPARABLE QUALITY TO RATED
MUNICIPAL SECURITIES IN WHICH THE SERIES MAY INVEST. The High Income Series
normally can be expected to offer the highest yields of the three Series, but it
will also be subject to the greatest market and credit risk.

THE SERIES ALSO MAY INVEST IN SHORT-TERM MUNICIPAL OBLIGATIONS (I.E., CASH
EQUIVALENTS) THAT ARE, AT THE TIME OF PURCHASE, RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY EITHER MOODY'S (CURRENTLY MIG 1, MIG 2, MIG 3
AND MIG 4 FOR NOTES AND P-1, P-2 AND P-3 FOR COMMERCIAL PAPER) OR S&P (CURRENTLY
A-1, A-2 AND A-3 FOR COMMERCIAL PAPER AND SP-1 AND SP-2 FOR NOTES). See "Other
Investments and Policies--General" below.

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

The Series is permitted to invest in defaulted securities and in low quality
debt securities having a rating of D or better as determined by S&P or Moody's
or having a comparable rating determined by another NRSRO, or in unrated
securities which, in the opinion of the investment adviser, are of equivalent
quality. See "Risk Factors Relating to Investing in High Yield Securities"

below and the "Description of Security Ratings" in the Appendix. Such
lower-quality debt securities are considered to have speculative
characteristics, and involve greater risk of default or price changes due to
changes in the obligor's creditworthiness, or they may already be in default.
The market prices of these securities may fluctuate more than higher-quality
securities and may decline significantly in periods of general or regional
economic difficulty.

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

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. FIXED-INCOME
SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET PRINCIPAL
AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE SUBJECT
TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY AND THE
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER (MARKET RISK). Lower
rated (I.E., high yield) securities or non-rated securities of comparable
quality are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates. The investment adviser considers both
credit risk and market risk in making investment decisions for the Series.
Investors should carefully consider the relative risks of investing in high
yield securities and understand that such securities are not generally meant for
short-term trading.

The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
Furthermore, changes in economic conditions and other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than in the case of higher grade bonds. In addition, the secondary market for
high yield securities, which is concentrated in relatively few market makers,
may not be as liquid as the secondary market for more highly rated securities.
Under adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the Series'
NAV. If the investment adviser becomes involved in activities such as
reorganizations of obligors of troubled investments held by the Series, this may
prevent the Series from disposing of the securities, due to its possession of
material, non-public information concerning the obligor.

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

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

From time to time proposals have been introduced to limit the use, or tax and
other advantages, of municipal securities which, if enacted, could adversely
affect the Series' NAV and investment practices. Such proposals could also
adversely affect the secondary market for high yield municipal securities, the
financial condition of issuers of these securities and the value of outstanding
high yield municipal securities. Reevaluation of the Series' investment
objective and structure might be necessary in the future due to market
conditions which may result from future changes in state or federal law.

LOWER RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the portfolio and increasing the
exposure of the Series to the risks of high yield securities.

During the year ended April 30, 1998, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total investments, were as follows:

PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
------------ -------------------

AAA/Aaa 26.7%
AA/Aa 4.9%
A/A 0.8%
BBB/Baa 10.6%
BB/Ba 4.5%
B/B 1.9%
CCC/Caa 0.0%
Unrated
AAA/Aaa 2.7%
AA/Aa 0.0%
A/A 0.3%
BBB/Baa 3.0%
BB/Ba 14.1%
B/B 27.8%
CCC/Caa 0.5%
D 2.2%

THE INSURED SERIES

THE INSURED SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WHICH ARE
(i) INSURED BY AN ENTITY WHOSE CLAIMS-PAYING ABILITY AT THE TIME OF PURCHASE IS
RATED Aaa BY MOODY'S OR AAA BY S&P, OR A SIMILAR NRSRO, SO THAT THE OBLIGATION
IS RATED AAA OR Aaa OR MEETS THE ELIGIBILITY CRITERIA IMPOSED BY SUCH INSURERS,
(ii) RATED Aaa OR AAA BY MOODY'S OR S&P, RESPECTIVELY, OR A SIMILAR NRSRO (OR,
IN THE CASE OF NOTES OR VARIABLE RATE SECURITIES, A-1, P-1, MIG 1 OR SP-1),
BASED ON THE CREDIT OF THE ISSUER OR (iii) BACKED BY THE FULL FAITH AND CREDIT
OF THE U.S. GOVERNMENT. The Series may also invest up to 5% of its total assets
in municipal obligations which are rated A/A or Aa/AA by Moody's or S&P,
respectively, or a similar NRSRO. See "Description of Security Ratings" in the
Appendix. The Series may also invest in municipal securities which are not rated
if, based upon a credit analysis by the Fund's investment adviser, the
investment adviser believes that such securities are of comparable quality to
other municipal securities that the Series may purchase.

UNDER NORMAL CONDITIONS, AT LEAST 70% OF THE SERIES' TOTAL ASSETS WILL CONSIST
OF INSURED OBLIGATIONS. AS OF APRIL 30, 1998, APPROXIMATELY 90% OF THE SERIES'
TOTAL ASSETS WERE OBLIGATIONS INSURED BY A MUNICIPAL BOND INSURER. This
insurance may be provided either (i) under a new issue insurance policy obtained
by the issuer or underwriter of a bond or note or

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

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

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

The ratings of insured municipal obligations depend, in substantial part, on
the creditworthiness of the insurer; thus their value will fluctuate largely on
the basis of factors relating to the insurer's ability to satisfy its
obligations, as well as on market factors generally. It is anticipated that,
under current market conditions, a great majority of the municipal obligations
held by the Insured Series will be insured by the following entities, among
others: MBIA Insurance Corporation, AMBAC Indemnity Corporation, Financial
Guaranty Insurance Company and Financial Security Assurance Inc. S&P rates
securities insured by all of these companies AAA. Moody's rates securities
insured by all of these companies Aaa. The Insured Series may, from time to
time, purchase municipal securities insured by other entities or acquire
insurance coverage for individual uninsured municipal securities directly from
another insurer provided any such entity has a claims-paying ability rated AAA
or Aaa by S&P or Moody's, respectively. See "Investment Objectives and
Policies--The Insured Series" in the Statement of Additional Information for
additional information concerning the insurers.

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

THE INTERMEDIATE SERIES

THE INTERMEDIATE SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WITH
MATURITIES BETWEEN 3 AND 15 YEARS AND WILL HAVE A DOLLAR-WEIGHTED AVERAGE
PORTFOLIO MATURITY OF MORE THAN 3 AND LESS THAN 10 YEARS. ALL OF THE MUNICIPAL
OBLIGATIONS HELD BY THE INTERMEDIATE SERIES WILL BE RATED AT LEAST Baa BY
MOODY'S OR BBB BY S&P OR A SIMILAR NRSRO AT THE TIME OF PURCHASE OR BE NON-RATED
OBLIGATIONS OF COMPARABLE QUALITY IN THE OPINION OF THE FUND'S INVESTMENT
ADVISER. Subsequent to its purchase by the Series, a municipal obligation may be
assigned a lower rating or cease to be rated. Such an event would not require
the elimination of the issue from the portfolio, but the investment adviser will
consider such an event in determining whether the Series should continue to hold
the security in its portfolio. Under normal circumstances, at least 60% of the
municipal obligations purchased by the Series will be rated A or better by
Moody's or S&P or a similar NRSRO. See "Description of Security Ratings" in the
Appendix.

For purposes of determining the dollar-weighted average portfolio maturity of
the Series' portfolio, the maturity of a municipal security will be its ultimate
maturity, unless it is probable that the issuer of the security will take
advantage of maturity-shortening

devices such as a call, refunding or redemption provision, in which case the
maturity date will be the date on which it is probable that the security will be
called, refunded or redeemed. If the municipal security includes the right to
demand payment, the maturity of the security for purposes of determining the
Series' dollar-weighted average portfolio maturity will be the period remaining
until the principal amount of the security can be recovered by exercising the
right to demand payment.

GENERALLY, THE YIELD EARNED ON LONGER-TERM MUNICIPAL OBLIGATIONS IS GREATER
THAN THAT EARNED ON SIMILAR OBLIGATIONS WITH SHORTER MATURITIES. HOWEVER,
OBLIGATIONS WITH LONGER MATURITIES ARE SUBJECT TO GREATER MARKET RISK. Given a
specific change in the level of interest rates, the value of longer-term
obligations will fluctuate relatively more than the value of shorter-term
obligations. For example, 30-year municipal obligations typically yield 60-90
basis points (.60%-.90%) more than 10-year obligations and have 60-70% more
price volatility (market risk) than 10-year obligations.

THE INTERMEDIATE SERIES INTENDS TO INVEST IN LONGER-TERM, HIGHER YIELDING
OBLIGATIONS AND REDUCE THE GREATER MARKET RISK OF SUCH OBLIGATIONS THROUGH THE
USE OF FINANCIAL FUTURES CONTRACTS. SPECIFICALLY, THE SERIES WILL INVEST IN
MUNICIPAL OBLIGATIONS WITH MATURITIES OF BETWEEN 5 AND 30 YEARS AND
SIMULTANEOUSLY HEDGE THE PRICE VOLATILITY OF SUCH OBLIGATIONS THROUGH THE SALE
OF FUTURES CONTRACTS. RATHER THAN HEDGING THE MUNICIPAL OBLIGATION ENTIRELY, THE
SERIES WILL SELL FUTURES CONTRACTS IN SUFFICIENT AMOUNTS SO THAT THE
DOLLAR-WEIGHTED AVERAGE MATURITY OF THE COMBINED MUNICIPAL OBLIGATION/FUTURES
POSITION WILL BE MORE THAN 3 AND LESS THAN 10 YEARS. IN THIS MANNER, THE
INVESTMENT ADVISER WILL CREATE A SYNTHETIC OBLIGATION THROUGH THE CONSTRUCTION
OF A PARTIALLY HEDGED LONGER-TERM OBLIGATION POSITION.

The Fund's investment adviser intends to create such synthetic obligation
positions when, in its opinion, the Series will realize one or more of the
following benefits compared to buying municipal obligations with shorter
maturities: (a) greater market liquidity; (b) lower transaction costs; (c)
greater expected capital appreciation or enhanced preservation of capital; or
(d) higher yields.

In the municipal securities market, most new issues are structured with many
serial maturities that are relatively small in principal amount and one or
several longer-term maturities that are relatively large in principal amount.
Therefore, long-term municipal obligations typically have greater liquidity and
the associated transaction costs are relatively less than obligations with
maturities of 3 to 15 years.

It is expected that synthetic obligation positions will often provide greater
returns than actual intermediate maturity municipal obligations. This can occur
when interest rate futures contracts are relatively overpriced in relation to
the current prices of municipal obligations, so that the sale of the futures
contracts, as part of a synthetic position, would be advantageous to the Series.
Synthetic positions can also be more attractive to the Series when the
investment adviser expects yields on longer-term municipal obligations to
decrease more (or increase less) than yields on medium-term municipal
obligations. If such expectations are correct, the net capital appreciation of
the synthetic obligation position should exceed (or the price decline be less
than) that of an actual intermediate-term municipal obligation.

THERE IS NO ASSURANCE THAT THE SYNTHETIC OBLIGATION POSITION WILL TRADE LIKE
AN INTERMEDIATE-TERM MUNICIPAL OBLIGATION. ANY USE OF FUTURES CONTRACTS INVOLVES
THE RISK OF IMPERFECT CORRELATION IN MOVEMENTS IN THE PRICE OF THE FUTURES
CONTRACTS AND MOVEMENTS IN THE PRICE OF THE SECURITY BEING HEDGED. FURTHERMORE,
THE SERIES' ABILITY TO CREATE SYNTHETIC OBLIGATIONS IS SUBJECT TO VARIOUS OTHER
LIMITATIONS. See "Hedging Strategies--Futures Contracts and Options Thereon"
below.

THE SERIES ALSO MAY USE FUTURES CONTRACTS TO HEDGE AGAINST OVERALL MARKET RISK
OF THE ENTIRE PORTFOLIO, as described under "Hedging Strategies--Futures
Contracts and Options Thereon" below.

BORROWING

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

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

HEDGING STRATEGIES

FUTURES CONTRACTS AND OPTIONS THEREON

EACH SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF ATTEMPTING TO HEDGE ITS INVESTMENT IN MUNICIPAL OBLIGATIONS AGAINST
FLUCTUATIONS IN VALUE CAUSED BY CHANGES IN PREVAILING MARKET INTEREST RATES AND
ATTEMPTING TO HEDGE AGAINST INCREASES IN THE COST OF SECURITIES THE SERIES
INTENDS TO PURCHASE. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH
UNSUCCESSFUL USE OF THESE STRATEGIES. In that regard, the Intermediate Series
may sell futures contracts to create synthetic positions by partially hedging
longer-term obligation positions. See "Investment Objectives and Policies--The
Intermediate Series" above. The successful use of futures contracts and options
thereon by a Series involves additional transaction costs, is subject to various
risks and depends upon the investment adviser's ability to predict the direction
of the market and interest rates.

A FUTURES CONTRACT OBLIGATES THE SELLER OF A CONTRACT TO DELIVER TO THE
PURCHASER OF A CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made. A
Series will engage in transactions in only those futures contracts and options
thereon that are traded on a commodities exchange or a board of trade.

EACH SERIES INTENDS TO ENGAGE IN FUTURES CONTRACTS AND OPTIONS THEREON AS A
HEDGE AGAINST CHANGES, RESULTING FROM MARKET CONDITIONS, IN THE VALUE OF
SECURITIES WHICH ARE HELD IN THE SERIES' PORTFOLIO OR WHICH THE SERIES INTENDS
TO PURCHASE, IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE COMMODITY
FUTURES TRADING COMMISSION (THE CFTC). The Series also intend to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series. A Series may purchase and sell
futures contracts and options thereon for bona fide hedging transactions, except
that a Series may purchase and sell futures contracts and options thereon for
any other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the liquidation value of the Fund's total assets.
In addition, a Series may not purchase or sell futures contracts or purchase
options thereon if, immediately thereafter, the sum of initial and net
cumulative variation margin on outstanding futures contracts, together with
premiums paid on options

thereon, would exceed 20% of the total assets of the Series. There are no
limitations on the percentage of a portfolio which may be hedged and no
limitations on the use of a Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of a Series' assets.

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

THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
a Series, the Series will continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Series had insufficient cash, it might have to sell portfolio securities
to meet daily variation margin requirements at a time when it might be
disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of a Series to hedge effectively. There is
also a risk of loss by a Series of margin deposits in the event of bankruptcy of
a broker with whom the Series has an open position in a futures contract.

THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY A SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.

RISKS OF HEDGING STRATEGIES

PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH A SERIES WOULD NOT BE SUBJECT ABSENT THE USE OF THESE
STRATEGIES. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH UNSUCCESSFUL
USE OF THESE STRATEGIES. If the investment adviser's prediction of movements in
the direction of the securities and interest rate markets is inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of futures contracts
and options thereon include (1) dependence on the investment adviser's ability
to predict correctly movements in the direction of interest rates and securities
prices or the movement in indicies; (2) imperfect correlation between the price
of futures contracts and options thereon and movements in the prices of the
securities being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (5) the possible inability of the Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain cover or to segregate securities
in connection with hedging transactions. See "Investment Objectives and
Policies" in the Statement of Additional Information.

OTHER INVESTMENTS AND POLICIES

GENERAL

EACH SERIES MAY INVEST MORE THAN 5% OF ITS ASSETS IN FLOATING RATE AND
VARIABLE RATE SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN. Floating
and variable rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
Bonds or Bills or the prime rate at a major commercial bank. These securities
also allow the holder to demand payment of the obligation on short notice at par
plus accrued interest, which amount may be more or less than the amount the
Series paid for them. Variable rate securities provide for a specified periodic
adjustment in the interest rate. The interest rate on floating rate securities
changes whenever there is a change in the designated base interest rate.

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

Each Series may purchase a rating from an NRSRO for non-rated securities. The
purchase of a rating is expected to enhance the value of the security for which
the rating is purchased. The cost of purchasing a rating is an expense of the
Series.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

Each Series may purchase municipal obligations on a when-issued or delayed
delivery basis and may from time to time sell obligations on a delayed delivery
basis, in each case without limit. When municipal obligations are offered on a
when-issued or delayed delivery basis, the price and coupon rate are fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. During the period between
purchase and settlement, no interest accrues to the purchaser. In the case of
purchases by a Series, the price that the Series is required to pay on the
settlement date may be in excess of the market value of the municipal
obligations on that date. While securities may be sold prior to the settlement
date, each Series intends to purchase these securities with the purpose of
actually acquiring them unless a sale would be desirable for investment reasons.
At the time a Series makes the commitment to purchase a municipal obligation on
a when-issued basis, it will record the transaction and reflect the value of the
obligation, each day, in determining its NAV. This value may fluctuate from day
to day in the same manner as values of municipal obligations otherwise held by
the Series. If the seller defaults in the sale, the Series could fail to realize
the appreciation, if any, that had occurred. Each Series will establish a
segregated account in which it will maintain cash or other liquid assets having
a value equal to or greater than the Series' purchase commitments.

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

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

MUNICIPAL LEASE OBLIGATIONS

Each Series may invest in municipal lease obligations. A municipal lease
obligation is a municipal security the interest on and principal of which is
payable out of lease payments made by the party leasing the facilities financed
by the issue. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities

(E.G., schools, dormitories, office buildings or prisons) or the acquisition of
equipment. The facilities are typically used by the state or municipality
pursuant to a lease with a financing authority. Certain municipal lease
obligations may trade infrequently. Accordingly, the investment adviser will
monitor the liquidity of municipal lease obligations under the supervision of
the Trustees. See "Illiquid Securities" below.

LIQUIDITY PUTS

Each Series may purchase and exercise puts on municipal bonds and notes
without limit. Puts give the Series the right to sell the securities at a
specified exercise price on a specified date. Puts may be acquired to reduce the
volatility of the market value of the securities subject to the puts, but the
acquisition of the puts may involve an additional cost to the Series. See
"Investment Objectives and Policies" in the Statement of Additional Information.

REPURCHASE AGREEMENTS

Each Series may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Series at a
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the repurchase agreement. The Series' repurchase agreements will at
all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily and, if the value of
the instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. Each Series participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the Commission.

SECURITIES OF OTHER INVESTMENT COMPANIES

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

ILLIQUID SECURITIES

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

Municipal lease obligations will not be considered illiquid for purposes of
the each Series' 15% limitation on illiquid securities provided the investment
adviser determines that there is a readily available market for such securities.
In reaching liquidity decisions, the investment adviser will consider, INTER
ALIA, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security and
the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser also considers: (1) the
willingness of the municipality to continue, annually or

biannually, to appropriate funds for payment of the lease; (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease; (3) in the case of unrated municipal lease
obligations, an analysis of factors similar to that performed by nationally
recognized statistical rating organizations in evaluating the credit quality of
a municipal lease obligation, including (i) whether the lease can be cancelled;
(ii) if applicable, what assurance there is that the assets represented by the
lease can be sold; (iii) the strength of the lessee's general credit (E.G., its
debt, administrative, economic and financial characteristics); (iv) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (E.G., the potential for an event of
nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the investment adviser.

SECURITIES LENDING

The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at least
100%, determined daily, of the market value of the securities loaned which are
segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed upon
amount of interest income from the borrower. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. The Fund will
not lend more than 33% of the value of its total assets. See "Investment
Objectives and Policies--Municipal Securities--Lending of Securities" in the
Statement of Additional Information. The Fund may pay reasonable administration
and custodial fees in connection with a loan.

PORTFOLIO TURNOVER

The Series do not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of a Series'
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. High portfolio turnover (over 100%) of a Series
may involve correspondingly greater brokerage commissions (or markups) and other
transaction costs, which will be borne directly by that Series. In addition,
high portfolio turnover may result in increased short-term capital gains, which,
when distributed to shareholders, are treated as ordinary income.

INVESTMENT RESTRICTIONS

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

HOW THE FUND IS MANAGED

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

For the fiscal year ended April 30, 1998, the total expenses as a percentage
of average net assets were .62%, 1.02%, 1.27% and .52% of the Class A, Class B,
Class C and Class Z shares, respectively, of the High Income Series, .69%,
1.09%, 1.34% and .60% of the Class A, Class B, Class C and Class Z shares,
respectively, of the Insured Series, and 1.31%, 1.71%, 1.96% and 1.21% of the
Class A, Class B, Class C and Class Z shares, respectively, of the Intermediate
Series. See "Financial Highlights."

MANAGER

PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF EACH SERIES UP TO $1 BILLION AND .45 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF EACH SERIES IN EXCESS OF $1 BILLION. PIFM is
organized in New York as a limited liability company. It is the successor to
Prudential Mutual Fund Management, Inc., which transferred its assets to PIFM in
September 1996. For the fiscal year ended April 30, 1998, PIFM received a
management fee of .45%, .48% and .48% of average daily net assets on behalf of
the High Income Series, Insured Series and Intermediate Series, respectively.
See "Manager" in the Statement of Additional Information.

PIFM may from time to time waive its management fee and subsidize operating
expenses of a Series. PIFM has agreed to waive 10% of its management fee
(approximately .05 of 1% of average net assets, as annualized), with respect to
the High Income Series. See "Fund Expenses." The Fund is not required to
reimburse PIFM for such fee waiver. Fee waivers and expense subsidies will
increase a Series' yield and total return. See "How the Fund Calculates
Performance."

As of May 31, 1998, PIFM served as the manager to 45 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $65 billion.

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

UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), THE SUBADVISER FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM
FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PIC's
address is Prudential Plaza, Newark, New Jersey 07102-3777. Under the Management
Agreement, PIFM continues to have responsibility for all investment advisory
services pursuant to the Management Agreement and supervises the Subadviser's
performance of such services.

The current portfolio manager of the High Income Series is Peter J. Allegrini,
a Managing Director of Prudential Investments, a business group of PIC. Mr.
Allegrini has managed the Series' portfolio since July 1994. From 1982 to 1986,
he was employed by Fidelity Investments as a senior bond analyst and, from 1986
to 1994, he was a portfolio manager, most recently of Fidelity Advisor High
Income Municipal Fund, and has been employed by PIC since 1994. Mr. Allegrini
has responsibility for the day-to-day management of the Series' portfolio. The
current portfolio manager of the Insured Series is Christian Smith. Mr. Smith
has responsibility for the day-to-day management of the Series' portfolio. He
has managed the Series' portfolio since October 1997 and has been employed by
PIC in various capacities since 1988. The current portfolio managers of the
Intermediate Series are Peter Allegrini and Mr. Diamond, who share
responsibility for the day-to-day management of the Series' portfolio. They have
managed the portfolio since October 1997. Mr. Diamond has been employed by PIC
in various capacities since 1993.

PIFM and PIC are indirect wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.

DISTRIBUTOR

PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE SHARES OF EACH SERIES OF THE FUND. IT IS A
WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities, One Seaport Plaza,
New York, New York 10292, previously served as distributor of Fund shares. It is
an indirect, wholly-owned subsidiary of Prudential.

UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
CLASS A, CLASS B AND CLASS C SHARES. THE DISTRIBUTOR INCURS THE EXPENSES OF
DISTRIBUTING THE FUND'S CLASS Z SHARES UNDER THE DISTRIBUTION AGREEMENT, NONE OF
WHICH IS REIMBURSED BY OR PAID FOR BY THE FUND. These expenses include
commissions and account servicing fees paid to, or on account of, Dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
the Distributor associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses. Certain Dealers are paid
higher fees than others with respect to Class A shares pursuant to separate
agreements with the Distributor.

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

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

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

UNDER THE CLASS B AND CLASS C PLANS, EACH SERIES MAY PAY THE DISTRIBUTOR FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to the Distributor of (i) an asset-based sales charge
of up to .50 of 1% of the average daily net assets of the Class B shares, and
(ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to the Distributor of (i)
an asset-based sales charge of up to .75 of 1% of the average daily net assets
of the Class C shares, and (ii) a service fee of up to .25 of 1% of the average
daily net assets of the Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholders accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."

For the fiscal year ended April 30, 1998, each Series paid distribution
expenses of .10%, .50% and .75% of the average daily net assets of the Class A,
Class B and Class C shares, respectively. The Series record all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.

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

Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not interested persons of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1

Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to a Series at any time by vote of a majority of the Rule 12b-1 Trustees
or of a majority of the outstanding shares of the applicable class of the
Series. The Series will not be obligated to pay distribution and service fees
incurred under any Plan if it is terminated or not continued.

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

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

FEE WAIVERS AND SUBSIDY

PIFM may from time to time voluntarily waive all or a portion of its
management fee and subsidize all or a portion of the operating expenses of the
Fund. Effective August 31, 1997, PIFM discontinued its waiver of 10% of its
management fee related to the Insured Series and Intermediate Series. The
Distributor has voluntarily waived a portion of its distribution fees for the
Class A and Class C shares as described under "Fund Expenses." Fee waivers and
expense subsidies will increase the Fund's total return. Any such waivers may be
terminated at any time without prior notice to shareholders. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."

PORTFOLIO TRANSACTIONS

Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund, provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT

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

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

YEAR 2000

The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000 and expect that their systems, and those of
outside service providers, will be adapted in time for that event.

HOW THE FUND VALUES ITS SHARES

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

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

Each Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.

Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declare dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.

HOW THE FUND CALCULATES PERFORMANCE

FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
TOTAL RETURN (INCLUDING AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN)
OF A SERIES IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD
AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. THESE FIGURES ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
The yield refers to the income generated by an investment in a Series over a
30-day period. This income is then annualized; that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The tax equivalent yield is calculated
similarly to the yield, except that the yield is increased using a stated income
tax rate to demonstrate the taxable yield necessary to produce an after-tax
yield equivalent to a Series. The total return shows how much an investment in a
Series would have increased (decreased) over a specified period of time (I.E.,
one, five or ten years or since inception of the Series) assuming that all
distributions and dividends by the Series were reinvested on the reinvestment
dates during the period and less all recurring fees. The aggregate total return
reflects actual performance over a stated period of time. Average annual total
return is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. Average annual total return smooths out variations in
performance and takes into account any applicable initial or contingent deferred
sales charges. Neither average annual total return nor aggregate total return
takes into account any federal or state income taxes which may be payable upon
redemption. The Fund also may include comparative performance information in
advertising or marketing the shares of each Series. Such performance information
may include data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., other industry publications, business periodicals and market
indices. See "Performance Information" in the Statement of Additional
Information. Further performance information is contained in the Series' annual
and semi-annual reports to shareholders, which may be obtained without charge.
See "Shareholder Guide-- Shareholder Services--Reports to Shareholders."

TAXES, DIVIDENDS AND DISTRIBUTIONS

TAXATION OF THE FUND

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

To the extent a Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent a Series sells securities or engages in
hedging transactions in futures contracts and options thereon, it may earn both
capital gain or loss. Capital gain or loss may also arise upon the sale of
municipal securities, as well as taxable obligations. Under the Internal Revenue
Code, special rules apply to the treatment of certain options and futures
contracts (Section 1256 contracts). At the end of each year, such investments
held by the Series will be required to be marked to market for federal income
tax purposes; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on these deemed sales and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.

Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any market discount. Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue.

TAXATION OF SHAREHOLDERS

In general, the character of tax-exempt interest distributed by each Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of each Series' net assets will be
invested in such obligations. See "How the Fund Invests--Other Investments and
Policies."

Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any capital gains (I.E., the excess of net capital gains from the sale of assets
held for more than 12 months over net short-term capital losses) distributed to
shareholders will be taxable as capital gains to the shareholders, whether or
not reinvested and regardless of the length of time a shareholder has owned his
or her shares. The maximum capital gains rate for individuals is 28% with
respect to assets held for more than 12 months, but not more than 18 months, and
20% with respect to assets held for more than 18 months. The maximum capital
gains rate for corporate shareholders currently is the same as the maximum tax
rate for ordinary income.

Any gain or loss realized upon the sale or redemption of a Series' shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital gain if the shares were held for not more than 12 months,
gain taxable at the maximum rate of 28% if such shares were held for more than
12, but not more than 18 months, and gain taxable at the maximum rate of 20% if
such shares were held for more than 18 months. In the case of a corporation, any
such capital gain will be treated as long-term capital gain, taxable at the same
rates as ordinary

income, if such shares were held for more than 12 months. Any such capital loss
will be treated as long-term capital loss if the shares have been held for more
than one year and otherwise as short-term capital loss. Any loss realized by a
shareholder upon the sale of shares of a Series held by the shareholder for six
months or less will be disallowed to the extent of any exempt interest dividends
received with respect to such shares and treated as long-term capital loss to
the extent of capital gains distributions received by the shareholder.

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

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

CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by a Series which has invested in
such municipal obligations will be attributed to the Series' shareholders,
although some portion of such items could be allocated to the Series itself.
Depending upon each shareholder's individual circumstances, the attribution of
items of tax preference incurred by a Series could result in liability for the
shareholder for the alternative minimum tax. Similarly, a Series could be liable
for the alternative minimum tax for items of tax preference attributed to it.

With the exception of the High Income Series, the Fund intends to minimize the
investment of each Series in municipal obligations of the type that will produce
items of tax preference. With respect to the High Income Series, however, it is
anticipated that a substantial portion of the Series' assets will be invested in
such obligations.

Distributions relating to interest on all municipal obligations will be
included in a corporate shareholder's current earnings for purposes of the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.

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

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

WITHHOLDING TAXES

Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholders' status under the federal
income tax law. Withholding generally is also required on taxable dividends and
capital gains distributions made by a Series.

Dividends of net investment income and distributions of net short-term capital
gains paid to a shareholder (including a shareholder acting as a nominee or
fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends

paid to a foreign shareholder are generally not subject to withholding tax. A
foreign shareholder will, however, be required to pay U.S. income tax on any
dividends and capital gain distributions which are effectively connected with a
U.S. trade or business of the foreign shareholder.

DIVIDENDS AND DISTRIBUTIONS

THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET INVESTMENT
INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends paid by each Series with respect to each class of shares, to
the extent dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
(other than Class Z) will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A shares
and lower dividends for Class A shares in relation to Class Z shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."

DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF A SERIES
BASED ON THE NAV OF EACH CLASS ON THE PAYMENT DATE, OR SUCH OTHER DATE AS THE
TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.

Any taxable dividends or distributions of net capital gains paid shortly after
a purchase by an investor will have the effect of reducing the NAV of the
investor's shares by the per share amount of the dividends or distributions.
Such dividends or distributions, although in effect a return of invested
principal, are subject to federal income taxes. Accordingly, prior to purchasing
shares of a Series, an investor should carefully consider the impact of taxable
dividends and capital gains distributions which are expected to be or have been
announced.

GENERAL INFORMATION

DESCRIPTION OF SHARES

THE FUND IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY COMPRISED OF THREE
SERIES WHICH WAS ORGANIZED UNDER THE LAWS OF MASSACHUSETTS ON NOVEMBER 3, 1986
AS AN UNINCORPORATED BUSINESS TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY
CALLED A MASSACHUSETTS BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN
UNLIMITED NUMBER OF SHARES, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS
B, CLASS C AND CLASS Z. Each class of shares represents an interest in the same
assets of the Fund and is identical in all respects except that (i) each class
is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charges or
distribution and/or service fees), which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively to a limited group of investors. See "How the Fund is
Managed--Distributor." In accordance with the Fund's Declaration of Trust, the
Trustees may authorize the creation of additional series and classes of shares
within such series, with such preferences, privileges, limitations and voting
and dividend rights as the Trustees may determine.

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

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

The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.

ADDITIONAL INFORMATION

This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the Commission under
the Securities Act of 1933. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.

SHAREHOLDER GUIDE

HOW TO BUY SHARES OF THE FUND

YOU MAY PURCHASE SHARES OF EACH SERIES OF THE FUND THROUGH THE DISTRIBUTOR,
THROUGH DEALERS, INCLUDING PRUDENTIAL SECURITIES OR PRUSEC, OR DIRECTLY FROM THE
FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR
THE TRANSFER AGENT) ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW
BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs sponsored by
Prudential Retirement Services should contact their client representative for
more information about Class Z shares. The purchase price is the NAV next
determined following receipt of an order in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors
accounts) by the Distributor, your Dealer or the Transfer Agent, plus a sales
charge which, at your option, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class
Z shares are offered to a limited group of investors at NAV without any sales
charge. Payments may be made by wire, check or through your brokerage account.
See "Alternative Purchase Plan" below. See also "How the Fund Values its
Shares."

In order to receive that day's NAV, your order must be received before the
Fund's NAV is computed (currently 4:15 P.M., New York time). If you purchase
shares through your Dealer, the Dealer must receive your order before the Fund's
NAV is computed that day and must transmit the order to the Distributor that
same day for you to receive that day's NAV.

An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.

The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares except that the minimum initial investment for Class C
shares may be waived from time to time. There is no minimum investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no minimum. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Services" below.

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

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

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

Dealers may charge their customers a separate fee for processing purchases and
redemptions. In addition, transactions in Fund shares may be subject to postage
and handling charges imposed by your Dealer. Any such charges are retained by
the Dealer and are not remitted to the Fund.

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

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

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

ALTERNATIVE PURCHASE PLAN

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

ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------

CLASS A Maximum initial sales charge of 3% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)

CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years

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

CLASS Z None None Sold to a limited group of investors

The four classes of shares represent an interest in the same portfolio of
investments of each Series and have the same rights, except that (i) each class
is subject to different sales charges and distribution and/or service fees (with
the exception of Class Z shares, which are not subject to any distribution or
service fees), which may affect performance, (ii) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, and (iii) only Class B shares have a conversion feature. The
four classes also have separate exchange privileges. See "How to Exchange Your
Shares" below. The income attributable to each class and the dividends payable
on the shares of each class will be reduced by the amount of the distribution
fee (if any) of each class. Class B and Class C shares bear the expenses of a
higher distribution fee which will generally cause them to have higher expense
ratios and to pay lower dividends than the Class A and Class Z shares.

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

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

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

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

If you intend to hold your investment for more than 5 years and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.

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

If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years in the case of Class C shares for the higher cumulative annual
distribution-related fee on those shares to exceed the initial sales charge plus
cumulative annual distribution-related fee on Class A shares. This does not take
into account the time value of money, which further reduces the impact of the
higher Class C distribution-related fee on the investment, fluctuations in NAV,
the effect of the return on the investment over this period of time or
redemptions when the CDSC is applicable.

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

CLASS A SHARES

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

SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------ ---------------- ---------------- -----------------

Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None

The Distributor may reallow the entire initial sales charge to Dealers.
Dealers may be deemed to be underwriters, as that term is defined under the
federal securities laws. The Distributor reserves the right, without prior
notice to any Dealer, to suspend or eliminate Dealer concessions or commissions.

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

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

OTHER WAIVERS. Class A shares may be purchased at NAV, through the
Distributor, Dealers or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an employee related account at Prudential
Securities or the Transfer Agent, (c) employees of subadvisers of the Prudential
Mutual Funds provided that the purchases at NAV are permitted by such person's
employer, (d) Prudential employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service with
Prudential or one of its subsidiaries, (e) registered representatives and
employees of Dealers who have entered into a selected dealer agreement with the
Distributor provided that purchases at NAV are permitted by such person's
employer and (f) investors who have a business relationship with a financial
adviser who joined Prudential Securities from another investment firm, provided
that (i) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities or within one year in
the case of benefit plans, (ii) the purchase is made with proceeds of a
redemption of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (iii) the financial
adviser served as the client's broker on the previous purchase.

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

CLASS B AND CLASS C SHARES

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

CLASS Z SHARES

Class Z shares of the Fund are currently available for purchase by the
following categories of investors:

(i) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option; (ii) current and former Directors/Trustees of the Prudential
Mutual Funds (including the Fund); and (iii) employees of Prudential and/or
Prudential Securities who participate in a Prudential-sponsored employee saving
plan.

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

HOW TO SELL YOUR SHARES

YOU CAN REDEEM YOUR SHARES OF EACH SERIES OF THE FUND AT ANY TIME FOR CASH AT
THE NAV NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM
(IN ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION
WITH INVESTORS' ACCOUNTS) BY THE TRANSFER AGENT, DISTRIBUTOR, OR YOUR DEALER.
SEE "HOW THE FUND VALUES ITS SHARES." In certain cases, however, redemption
proceeds will be reduced by the amount of any applicable CDSC as described
below. See "Contingent Deferred Sales Charges" below. If you are redeeming your
shares through a Dealer, your Dealer must receive your sell order before the
Fund computes its NAV for that day (I.E., 4:15 P.M., New York time) in order to
receive that day's NAV. Your Dealer will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of the Fund.

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

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

PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not

reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the Commission, by order, so permits, provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.

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

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

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

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

CONTINGENT DEFERRED SALES CHARGES

Redemptions of Class B shares will be subject to a CDSC declining from 5% to
zero over a six-year period. Class C shares redeemed within one year of purchase
will be subject to a 1% CDSC. The CDSC will be deducted from the redemption
proceeds and reduce the amount paid to you. The CDSC will be imposed on any
redemption by you which reduces the current value of your Class B or Class C
shares of a Series of the Fund to an amount which is lower than the amount of
all payments by you for shares of the Series during the preceding six years, in
the case of Class B shares, and one year, in the case of Class C shares. A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of Contingent Deferred Sales Charges--Class B
Shares" below.

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

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

CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------- ------------------------

First.......................... 5.0%
Second......................... 4.0%
Third.......................... 3.0%
Fourth......................... 2.0%
Fifth.......................... 1.0%
Sixth.......................... 1.0%
Seventh........................ None

In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years (five years for
Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.

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

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

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

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

A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.

SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer

Agent will calculate the total amount available for this waiver annually on the
anniversary date of your purchase, or for shares purchased prior to March 1,
1997, on March 1 of the current year. The CDSC will be waived (or reduced) on
redemptions until this threshold 12% amount is reached.

CONVERSION FEATURE--CLASS B SHARES

Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative NAV without the imposition of any additional sales charge. The first
conversion of Class B shares occurred in February 1995, when the conversion
feature was first implemented.

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

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

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

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

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

HOW TO EXCHANGE YOUR SHARES

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

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

IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.

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

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

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

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

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

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

FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund, including the Fund, reserves the right
to refuse purchase orders and exchanges by any person, group or commonly
controlled accounts, if, in the Manager's sole judgment, such person, group or
accounts were following a market timing strategy or were otherwise engaging in
excessive trading (Market Timers).

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

SHAREHOLDER SERVICES

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

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

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

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

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

-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at
(732) 417-7555 (collect).

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

DESCRIPTION OF SECURITY RATINGS

MOODY'S INVESTORS SERVICE
BOND RATINGS

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

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

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

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

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

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

Bonds rated within the Aa, A, Baa, Ba and B categories that Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.

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

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

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

SHORT-TERM DEBT RATINGS

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.

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

A-1

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

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

SHORT-TERM RATINGS

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

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

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

MIG 3: Loans bearing the designation MIG 3 are of favorable quality. All
security elements are accounted for but there is lacking the undeniable strength
of the preceding grades.

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

STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS

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

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

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

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

BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.

D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.

COMMERCIAL PAPER RATINGS

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

A-2

A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

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

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

MUNICIPAL NOTES

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

A-3

THE PRUDENTIAL MUTUAL FUND FAMILY

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

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

TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.

GLOBAL FUNDS
--------------------
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.
The Global Total Return Fund, Inc.

EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Prudential 20/20 Focus Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund

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

B-1

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

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

TABLE OF CONTENTS

PAGE
----

FUND HIGHLIGHTS............................................................. 2
What are the Series' Risk Factors and Special Characteristics?............ 2
FUND EXPENSES............................................................... 4
FINANCIAL HIGHLIGHTS........................................................ 6
HOW THE FUND INVESTS........................................................ 18
Investment Objectives and Policies........................................ 18
Hedging Strategies........................................................ 24
Other Investments and Policies............................................ 26
Investment Restrictions................................................... 28
HOW THE FUND IS MANAGED..................................................... 28
Manager................................................................... 29
Distributor............................................................... 29
Fee Waivers and Subsidy................................................... 31
Portfolio Transactions.................................................... 31
Custodian and Transfer and Dividend Disbursing Agent...................... 31
Year 2000................................................................. 31
HOW THE FUND VALUES ITS SHARES.............................................. 32
HOW THE FUND CALCULATES PERFORMANCE......................................... 32
TAXES, DIVIDENDS AND DISTRIBUTIONS.......................................... 33
GENERAL INFORMATION......................................................... 35
Description of Shares..................................................... 35
Additional Information.................................................... 36
SHAREHOLDER GUIDE........................................................... 37
How to Buy Shares of the Fund............................................. 37
Alternative Purchase Plan................................................. 38
How to Sell Your Shares................................................... 41
Conversion Feature--Class B Shares........................................ 44
How to Exchange Your Shares............................................... 45
Shareholder Services...................................................... 46
DESCRIPTION OF SECURITY RATINGS............................................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY........................................... B-1

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

MF133A

CUSIP Nos.:
Class A: 74435L103; Class B: 74435L202
High Income Series Class C: 74435L707 Class Z: 74435L871
Class A: 74435L301; Class B: 74435L400
Insured Series Class C: 74435L806 Class Z: 74435L863
Class A: 74435L509; Class B: 74435L608
Intermediate Series Class C: 74435L889 Class Z: 74435L855

PRUDENTIAL
MUNICIPAL
BOND FUND
- -----------

HIGH INCOME SERIES
INSURED SERIES
INTERMEDIATE SERIES

PROSPECTUS
July 1, 1998
www.prudential.com

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

[LOGO]

Supplement dated July 1, 1998

THE FOLLOWING INFORMATION SUPPLEMENTS YOUR PROSPECTUS:

Effective July 1, 1998, Prudential Investment Management Services LLC,
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, was
appointed the exclusive Distributor of Fund shares. Shares continue to be
offered through Prudential Securities Incorporated, Pruco Securities
Corporation and other brokers and dealers. Prudential Investment Management
Services is a wholly owned subsidiary of The Prudential Insurance Company of
America and an affiliate of Prudential Securities Incorporated and Pruco
Securities Corporation. All other arrangements with respect to the
distribution of Fund shares described in the Prospectus remain unchanged.

Supplement dated September 1, 1998

The following information should be added to the cover page of the
Prospectus.

AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.

The following information should be added under the heading "Shareholder
Guide--Shareholder Services".

SHAREHOLDER GUIDE

SHAREHOLDER SERVICES

THE PRUTECTOR PROGRAM-OPTIONAL GROUP TERM LIFE INSURANCE. Prudential makes
available optional group term life insurance coverage to purchasers of shares of
certain Prudential Mutual Funds which are held in an eligible brokerage account.
This insurance protects the value of your mutual fund investment for your
beneficiaries against market downturns. The insurance benefit is based on the
difference at the time of the insured's death between the "protected value" and
the then current market value of the shares. This coverage is not available in
all states and is subject to various restrictions and limitations. For more
complete information about this program, including charges and expenses, please
contact your Prudential representative.