(ICON)
Prudential Government Income Fund, Inc.
SEMI
ANNUAL
REPORT
Aug. 31, 1996
(LOGO)
<PAGE>
Prudential Government Income Fund, Inc.
Performance At A Glance.
The last six months were difficult for bond investors.
Stronger than expected
economic growth pushed interest rates higher and bond prices
lower from
March through August. As a result, the Prudential Government
Income Fund
produced a negative return for the six months ended August
31, slightly
below the average U.S. government bond fund tracked by
Lipper Analytical
Services. However, for the last 12 months, returns were
positive.
<TABLE>
Cumulative Total Returns1 As of
8/31/96
<CAPTION>
Six One Five Ten
Since
Months Year Years Years
Inception2
<S> <C> <C> <C> <C>
<C>
Class A -1.2% 2.7% 38.2% N/A
61.0%
Class B -1.5 1.9 33.0 85.8%
129.0
Class C -1.5 2.0 N/A N/A
13.0
Class Z N/A N/A N/A N/A
2.4
Lipper General U.S.
Government Fund Avg.3 -1.0 2.6 36.6 92.9
144.5
</TABLE>
<TABLE>
Average Annual Total Returns1 As
of 9/30/96
<CAPTION>
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A -0.6% 5.7% N/A 7.0%
Class B -2.3 5.6 6.7% 7.6
Class C 1.7 N/A N/A 6.6
Class Z N/A N/A N/A **
</TABLE>
<TABLE>
<CAPTION>
Total Dividends 30-Day
Paid for Six Mos. SEC Yield
<S> <C> <C> <C>
Dividends Class A $0.30 6.27%
& Yields Class B $0.27 5.85
As of Class C $0.27 5.93
8/31/96 Class Z $0.31 6.70
</TABLE>
Past performance is not indicative of future results.
Principal
and investment return will fluctuate so that an investor's
shares,
when redeemed, may be worth more or less than their original
cost.
1Source: Prudential Mutual Fund Management and Lipper
Analytical
Services. The cumulative total returns do not take into
account
sales charges. The average annual returns do take into
account
applicable sales charges. The Fund charges a maximum front-
end
sales load of 4% for Class A shares and a declining
contingent
deferred sales charge (CDSC) 5%, 4%, 3%, 2%, 1% and 1% for
six years, for Class B shares. Class C shares have a 1% CDSC
for one year. Class B shares automatically convert to Class
A
shares on a quarterly basis, after approximately seven
years.
Class Z shares have been in existence for less than one
year.
**The cumulative total return of Class Z shares as of
9/30/96
was -0.2%. An average annual total return for a full year is
not
yet available. The annualized return for a period of less
than one
year is not meaningful.
2Inception dates: 1/22/90 Class A; 4/22/85 Class B; 8/1/94
Class C;
3/4/96 Class Z.
3The Lipper category includes 175 funds for six months, 170
funds for
one year, 71 funds for 5 years, 38 funds for 10 years, and
20 funds
since inception of the Class B shares on 4/22/85.
How Investments Compared.
(As of 8/31/96)
(GRAPH)
Source: Lipper Analytical Services. Financial markets
change, so a
mutual fund's past performance should never be used to
predict future
results. The risks to each of the investments listed above
are
different -- we provide 12-month total returns for several
Lipper
mutual fund categories to show you that reaching for higher
yields
means tolerating more risk. The greater the risk, the larger
the potential
reward or loss. In addition, we've included historical 20-
year average
annual returns. These returns assume the reinvestment of
dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have received
higher historical total returns from stocks than from most
other
investments. Smaller capitalization stocks offer greater
potential
for long-term growth but may be more volatile than larger
capitalization
stocks.
General Bond Funds provide more income than stock funds,
which can help
smooth out their total returns year by year. But their
prices still
fluctuate (sometimes significantly) and their returns have
been
historically lower than those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments,
state agencies and/or municipalities. This investment
provides income
that is usually exempt from federal and state income
taxes.
Money Market Funds attempt to preserve a constant share
value; they
don't fluctuate much in price but, historically, their
returns have
been generally among the lowest of the major investment
categories.
<PAGE>
Barbara L. Kenworthy, Fund Manager
(PICTURE)
Portfolio
Manager's Report
The Prudential Government Income Fund is designed for
investors who
want high current return, primarily from bonds issued or
guaranteed
by the U.S. government or its agencies. At least 65% of the
Fund's
total assets are invested in U.S. government securities.
There can
be no assurance that the Fund's objective will be achieved.
Overview.
Barbara Kenworthy actively trades between the different
government bond sectors and maturities, seeking superior
yields and capital appreciation potential wherever those
opportunities may exist.
Strategy Session.
What Happened?
1995 was an exceptional year for government bond investors
as the
economy grew at the slowest rate in four years. As interest
rates
fell sharply, bond prices rose. 1996 has not been as kind.
Economic
growth accelerated in the second quarter at the fastest rate
in two
years -- 4.7%, setting off new fears of rising inflation,
and
unemployment hit a seven-year low in August, prompting
fears of
wage inflation. The yield of the 10-year U.S. Treasury rose
by
nearly a full percentage point over the last six months, to
6.94%
on August 30.
Of course, when yields rise, bond prices fall, because
investors
quickly lose interest in older bonds issued at lower
interest
rates. Bond funds typically defend your assets in these
situations
by moving into shorter maturity instruments. They also try
to add
yield. That's why we elected to sell longer maturity U.S.
Treasurys
and buy mortgages and government agency debt, particularly
that of
the Federal Home Loan Mortgage Corporation.
During the six months ended August 31, our assets in
government agency
debt nearly doubled, to 24% from 14%, while our holdings in
U.S.
Treasurys fell to 33% from 42%. Our assets in mortgages
increased
slightly to 40%.
This Fund is generally managed as an intermediate-maturity
fund.
When interest rates are falling, we tend to hold a
combination of
shorter and longer term bonds (because the prices of longer
term
bonds rise more rapidly when interest rates fall). When
interest
rates rise, we will generally hold more intermediate term
bonds.
We chose this alternative, because when interest rates are
volatile,
principal is safer in what investment professionals call the
"belly"
of the interest rate curve -- the middle, or 5- to 15-year
maturity range.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 8/31/96.
(PIE CHART)
<PAGE>
What Went Well.
We Liked Callables.
As interest rates rose, the longer term bonds suffered the
most. We
were glad we held on to our high-yielding, callable
U.S.Treasurys,
like our 12.5% Treasurys due in 2014 and our 13.25%
Treasurys due
in 2014. These bonds are somewhat unusual. They were issued
in those
periods of spectacularly high interest rates (the late
1970s and
early 1980s), so the Treasury retained the option of
redeeming them
(or calling them) five years before maturity. So the prices
of these
bonds behave like 13-year bonds, rather than 18-year
bonds. In today's interest rate climate, we like holding
Treasurys
that are callable, because they carry higher yields
depending on
when they were issued.
Acquiring Agencies.
Government agency bonds were the second-best performing
group of the
U. S. taxable bond market over the six months ended August
31, so we
are glad we dramatically increased our holdings, to 24% from
14% of
total net assets. These securities are ever so slightly
below Treasurys
in credit quality, but they do carry higher yields. When
interest rates
are rising, these bonds are attractive because their higher
coupons make
them more desirable, so they tend to hold their value
better. For example,
we purchased Federal Home Loan Mortgage Corporation
securities (Freddie
Mac) carrying 5.99% coupons and due in 2001 (yet callable in
1998) and
6.96% coupons due in 2005 but callable in 1998.
And Not So Well.
Too Long, Too Long.
Although we shortened duration in late 1995, we still kept a
duration which was too long. Our Fund's duration generally
varies
from 5.5 to 6 years, and we held it closer to its upper
limit in
late winter and early spring because we thought the economy
would
grow slowly in 1996. That decision hurt our performance.
The weakness in economic growth in 1996 turned out to be
temporary. When it was clear that growth was substantially
stronger than many suspected, we dropped our duration to 5.1
years in June. We wish we had done so earlier.
More Mortgages.
Holding more mortgage backed securities would also have
helped. We
did increase our holdings in government agency debt
substantially,
and had we moved more heavily into mortgages, our
performance would
have improved. We tend to hold about 33% to 40% in mortgages
to
maintain a high yield, and we did increase their percentage
of
total net assets to 40%. While this group was our largest
single
holding we wished we held even more, because it was the best
performing
group in the U.S. taxable bond market.
Five Largest Issuers.
12.4% U.S. Treasury Bond
12.375%, 5/15/04
8.7% U.S. Treasury Bond
12.50%, 8/15/14
4.9% U.S. Treasury Bond
12.75%, 11/15/10
4.8% Federal Home Loan
Mortgage Corporation
4.1% Government National
Mortgage Association
Expressed as a percentage of total net assets as of 8/31/96.
Looking Ahead.
We expect the Federal Reserve at some point will have to
raise interest
rates to defend against rising inflation as a result of
rapid economic
growth this year. But we don't expect that rates will rise a
lot.
We believe we can add value by monitoring the bond markets
closely to
determine which sectors and maturities are more valuable
than others
at any given time. We will continue to look for maturities
that offer
the best opportunity, and expect to focus on mortgages and
agencies,
because their higher yields will best defend assets against
rising
interest rates.
1
<PAGE>
President's Letter
October 7, 1996
(PICTURE)
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted
extraordinary returns.
Investors celebrated this performance by putting record
amounts of new
money into mutual funds in the first few months of 1996.
According to
figures released by the Investment Company Institute, a
mutual fund
industry trade group, new investments in mutual funds
reached an all-time
monthly high of $33 billion in January of 1996. An
additional $66 billion
was invested in the following three months, although this
rapid inflow
subsided somewhat in late spring.
While we are pleased that mutual funds are attracting new
investors,
we're concerned that some of them may be "buying last year's
returns."
Few expect 1995's virtual non-stop returns from the stock
and bond
markets. In fact, 1996's markets have been volatile so far
(stock and
bond prices go down just as they go up). There's no better
time than
now to be talking with your Financial Advisor or Registered
Representative. She or he can help you determine reasonable
expectations about both the potential performance and risks
associated with your investments.
Changes at Prudential.
There have been some important changes recently at
Prudential that
were made with you in mind. Prudential Mutual Funds has
moved under
the umbrella of Prudential's newly created "Prudential
Investments."
This group manages and administers nearly $190 billion in
client assets
and provides mutual funds, annuities, defined benefit and
defined
contribution plans to our individual and institutional
investors.
We plan to improve the range and quality of investment
products and
services that we can provide you by better leveraging
Prudential's
strengths. There will, however, be no change in the service
you
receive from your Financial Advisor, Registered
Representative or
our Customer Service unit.
We're excited about our future and hope that you are, too.
Thank you
for your continued support and confidence in Prudential
Mutual Funds.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments as
of August 31, 1996 (Unaudited) PRUDENTIAL GOVERNMENT
INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
-------------------------------------------------------
- -----
LONG-TERM INVESTMENTS--98.7%
-------------------------------------------------------
- -----
U.S. Government Agency Mortgage Pass-Throughs--39.4%
Federal Home Loan Mortgage Corp.,
$38,396 7.50%, 2/01/22 - 4/01/25 $
37,628,296
67,843 8.00%, 1/01/22 - 9/01/24
67,892,429
5,901 8.50%, 6/01/07 - 4/01/20
6,081,977
2,730 11.50%, 10/01/19
3,059,734
Federal National Mortgage Assoc.,
23,783 6.50%, 10/01/23 - 6/01/24
21,991,011
50,829 7.00%, 2/01/24 - 5/01/24
48,384,418
34,342 7.50%, 4/01/07 - 5/01/10
34,327,418
46,763 8.00%, 5/01/25 - 4/01/26
46,774,775
45,498 8.50%, 6/01/17 - 3/01/25
46,426,236
11,712 9.00%, 8/01/24 - 4/01/25
12,176,739
Government National Mortgage
Assoc.,
28,786 6.50%, 12/15/23 - 5/15/24
26,826,612
56,741 7.00%, 12/15/22 - 11/15/24
54,183,671
59,443 7.50%, 5/15/02 - 3/15/26
58,209,508
40,072 8.00%, 7/15/16 - 3/15/24
40,573,429
23,265 9.00%, 4/15/01 - 12/15/09
24,211,894
22,842 9.50%, 10/15/09 - 12/15/17
24,619,902
Government National Mortgage Assoc. II,
4,319 9.50%, 5/20/18 - 8/20/21
4,579,184
----------
- ----
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $553,244,425)
557,947,233
- ------------------------------------------------------------
U.S. Government Obligations--32.7%
United States Treasury Bonds,
3,000(b) 7.625%, 2/15/25
3,143,430
133,000(b) 12.375%, 5/15/04
175,871,220
85,500(b) 12.50%, 8/15/14
123,454,305
50,000(b) 12.75%, 11/15/10
69,047,000
25,000(b) 13.25%, 5/15/14
37,519,500
United States Treasury Notes,
$20,000 7.00%, 7/15/06 $
20,078,200
5,000 8.875%, 5/15/00
5,362,500
United States Treasury Strip,
70,200 Zero Coupon, 2/15/09
28,963,116
----------
- ----
Total U.S. Government Obligations
(cost $487,063,220)
463,439,271
- ------------------------------------------------------------
U.S. Government Agency Securities--22.2%
Federal Home Loan Bank,
1,000 6.78%, 7/24/02
973,440
Federal Home Loan Mortgage Corp.,
28,425 5.99%, 3/06/01
27,328,079
26,435 6.235%, 6/29/00
25,835,983
39,000 6.71%, 6/11/02
38,104,170
38,995 6.96%, 10/26/05
37,374,368
24,810 6.99%, 5/24/02
24,457,202
Federal National Mortgage Assoc.,
25,000 6.70%, 8/10/01
24,589,750
Financing Corp. Strip,
5,000 Zero Coupon, 3/07/04
2,931,850
Israel AID,
37,600 Zero Coupon, 5/15/15
9,369,920
37,600 Zero Coupon, 5/15/16
8,685,600
Small Business Administration
Participation Certificate,
25,130 6.45%, 12/01/15
22,896,630
35,000 7.25%, 8/01/16
34,300,000
Tennessee Valley Authority,
38,800 Series 1995-B, 6.235%, 7/15/45
37,850,176
20,000 Series 1996-A, 5.98%, 4/01/36
20,017,600
----------
- ----
Total U.S. Government Agency
Securities (cost $317,802,336)
314,714,768
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
3 -----
<PAGE>
Portfolio of Investments as
of August 31, 1996 (Unaudited) PRUDENTIAL
GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
-------------------------------------------------------
- -----
U.S. Government Agency-Stripped Security--1.7%
Federal National Mortgage Assoc.,
$50,000 Zero Coupon, 7/24/06
(cost $25,644,500) $
24,625,000
- ------------------------------------------------------------
Asset-Backed Securities--1.2%
Bank of America Master Credit Card Trust,
12,000 Series 96-A Class A,
5.59875%, 8/15/03
12,000,000
Structured Asset Securities Corp.,
5,000 Series 95-C1 Class C,
7.375%, 9/25/24
4,714,063
----------
- ----
Total Asset-Backed Securities
(cost $16,568,150)
16,714,063
- ------------------------------------------------------------
Supranational Bond--0.8%
International Bank For
Reconstruction
& Development,
10,000 8.625%, 10/15/16
(cost $12,400,900)
11,089,900
- ------------------------------------------------------------
Collateralized Mortgage Obligation--0.4%
Resolution Trust Corp.,
5,487 7.75%, 9/25/29
(cost $5,226,229)
5,313,675
- ------------------------------------------------------------
Adjustable Rate Mortgage Pass-Throughs--0.3%
Ryland Mortgage Securities Corp.,
4,074 Mortgage Participation Securities,
Series 1993-3 Class A-3,
7.44817%, 9/25/24
(cost $4,155,020)
4,067,195
- ------------------------------------------------------------
Total long-term investments
(cost $1,422,104,780)
1,397,911,105
----------
- ----
SHORT-TERM INVESTMENTS--0.6%
- ------------------------------------------------------------
Repurchase Agreement--0.6%
$8,213 Joint Repurchase Agreement
Account,
5.258%, 9/03/96
(cost $8,213,000) $
8,213,000
- ------------------------------------------------------------
Total Investments Before Outstanding Options Written--99.3%
(cost $1,430,317,780; Note 4)
1,406,124,105
OUTSTANDING CALL OPTIONS WRITTEN
Contracts(a)
United States Treasury Bond,
250 Expiring November '96 @ $148
(premiums received $603,281)
(234,375)
- ------------------------------------------------------------
Total Investments, Net of Outstanding Options Written--99.3%
(cost $1,429,714,499)
1,405,889,730
Other assets in excess of
liabilities--0.7%
10,037,755
----------
- ----
Net Assets--100%
$1,415,927,485
----------
- ----
----------
- ----
- ---------------
AID--Agency for International Development
(a) One contract equals $10,000 of par value.
(b) Principal amount segregated as collateral for options
written. Approximate
aggregate value of segregated securities is
$259,000,000.
- ------------------------------------------------------------
- --------------------
- ----- 4 See Notes to
Financial Statements.
</TABLE>
<PAGE>
Statement of Assets and
Liabilities (Unaudited) PRUDENTIAL GOVERNMENT INCOME
FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<S>
<C>
Assets
August 31, 1996
Investments, at value (cost
$1,430,317,780).............................................
.................. $1,406,124,105
Cash........................................................
..............................................
15,476
Interest
receivable..................................................
..................................... 17,454,690
Receivable for Fund shares
sold........................................................
................... 397,822
Deferred expenses and other
assets......................................................
.................. 44,902
- ---------------
Total
assets......................................................
..................................... 1,424,036,995
- ---------------
Liabilities
Payable for Fund shares
reacquired..................................................
...................... 2,719,951
Accrued expenses and other
liabilities.................................................
................... 2,492,540
Dividends
payable.....................................................
.................................... 1,547,279
Management fee
payable.....................................................
............................... 613,899
Distribution fee
payable.....................................................
............................. 501,466
Outstanding call option written, at value (premiums received
$603,281)....................................
234,375
- ---------------
Total
liabilities.................................................
..................................... 8,109,510
- ---------------
Net
Assets......................................................
..........................................
$1,415,927,485
- ---------------
- ---------------
Net assets were comprised of:
Common stock, at
par.........................................................
.......................... $ 1,641,011
Paid-in capital in excess of
par.........................................................
.............. 1,570,462,496
- ---------------
1,572,103,507
Accumulated net realized losses on
investments.................................................
........ (132,351,255 )
Net unrealized depreciation on
investments.................................................
............ (23,824,767 )
- ---------------
Net assets at August 31,
1996........................................................
..................... $1,415,927,485
- ---------------
- ---------------
Class A:
Net asset value and redemption price per share
($857,511,349 / 99,414,439 shares of common stock
issued and outstanding)...........................
$8.63
Maximum sales charge (4.0% of offering
price)......................................................
.... .36
- ---------------
Maximum offering price to
public......................................................
................. $8.99
- ---------------
- ---------------
Class B:
Net asset value, offering price and redemption price per
share
($542,231,787 / 62,809,614 shares of common stock
issued and outstanding)...........................
$8.63
- ---------------
- ---------------
Class C:
Net asset value, offering price and redemption price per
share
($2,514,887 / 291,313 shares of common stock issued
and outstanding)................................
$8.63
- ---------------
- ---------------
Class Z:
Net asset value, offering price and redemption price per
share
($13,669,462 / 1,585,696 shares of common stock issued
and outstanding).............................
$8.62
- ---------------
- ---------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
5 -----
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Six Months
Ended
Net Investment Income August 31,
1996
Income
Interest.................................. $
58,058,531
-------------
- --
Expenses
Management fee............................
3,755,101
Distribution fee--Class A.................
674,196
Distribution fee--Class B.................
2,424,081
Distribution fee--Class C.................
8,519
Transfer agent's fees and expenses........
1,185,000
Reports to shareholders...................
324,000
Custodian's fees and expenses.............
252,000
Registration fees.........................
71,000
Audit fee and expenses....................
35,000
Directors' fees...........................
24,000
Legal fees and expenses...................
20,000
Insurance expense.........................
16,000
Miscellaneous.............................
3,044
-------------
- --
Total expenses.........................
8,791,941
-------------
- --
Net investment income.......................
49,266,590
-------------
- --
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss):
Investment transactions...................
(11,957,577)
Financial futures contracts...............
251,987
Written option transactions...............
(799,531)
-------------
- --
(12,505,121)
-------------
- --
Net change in unrealized
appreciation/depreciation on:
Investments...............................
(58,074,095)
Written options...........................
368,906
-------------
- --
(57,705,189)
-------------
- --
Net loss on investments.....................
(70,210,310)
-------------
- --
Net Decrease in Net Assets
Resulting from Operations................... $
(20,943,720)
-------------
- --
-------------
- --
</TABLE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year
Ended
Increase (Decrease) August 31,
February 29,
in Net Assets 1996
1996
<S> <C> <C>
Operations
Net investment income........ $ 49,266,590 $
99,348,829
Net realized gain (loss) on
investment transactions... (12,505,121)
53,485,429
Net change in unrealized
appreciation/depreciation
on investments............ (57,705,189)
34,676,738
--------------- --------
- ---------
Net increase (decrease) in
net assets resulting from
operations................ (20,943,720)
187,510,996
--------------- --------
- ---------
Dividends to shareholders from
net investment income
(Note 1)
Class A................... (30,670,468)
(60,495,599)
Class B................... (18,061,885)
(38,807,245)
Class C................... (70,992)
(45,985)
Class Z................... (463,245)
- --
--------------- --------
- ---------
(49,266,590)
(99,348,829)
--------------- --------
- ---------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
subscribed................ 124,934,746
226,050,700
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 28,904,321
57,501,726
Cost of shares reacquired.... (256,483,789)
(360,013,003)
--------------- --------
- ---------
Decrease in net assets from
Fund share transactions... (102,644,722)
(76,460,577)
--------------- --------
- ---------
Total increase (decrease)...... (172,855,032)
11,701,590
Net Assets
Beginning of period............ 1,588,782,517
1,577,080,927
--------------- --------
- ---------
End of period.................. $ 1,415,927,485 $
1,588,782,517
--------------- --------
- ---------
--------------- --------
- ---------
</TABLE>
- ------------------------------------------------------------
- --------------------
- ----- 6 See Notes to
Financial Statements.
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL
GOVERNMENT INCOME FUND
- ------------------------------------------------------------
- --------------------
Prudential Government Income Fund, (the ``Fund'') is
registered under the
Investment Company Act of 1940 as a diversified, open-end
management investment
company. Investment operations commenced on April 22, 1985.
The Fund's
investment objective is to seek a high current return. The
Fund will seek to
achieve this objective by investing primarily in U.S.
Government and agency
securities and writing and purchasing put and call options
and net gains from
closing purchase and sale transactions.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: The Fund values portfolio securities on
the basis of current
market quotations provided by dealers or by a pricing
service approved by the
Board of Directors, which uses information such as
quotations from dealers,
market transactions in comparable securities, various
relationships between
securities and calculations on yield to maturity in
determining values. Options
and financial futures contracts listed on exchanges are
valued at their closing
price on the applicable exchange. When market quotations are
not readily
available, a security is valued at fair value as determined
in good faith by or
under the direction of the Board of Directors.
Short-term securities which mature in more than 60 days are
valued at current
market quotations. Short-term securities which mature in 60
days or less are
valued at amortized cost.
In connection with repurchase agreement transactions, the
Fund's custodian, or
designated subcustodians as the case may be under triparty
repurchase
agreements, takes possession of the underlying collateral
securities, the value
of which exceeds the principal amount of the repurchase
transaction, including
accrued interest. To the extent that any repurchase
transaction exceeds one
business day, the value of the collateral is marked-to-
market on a daily basis
to ensure the adequacy of the collateral. If the seller
defaults and the value
of the collateral declines or if bankruptcy proceedings are
commenced with
respect to the seller of the security, realization of the
collateral by the Fund
may be delayed or limited.
Options: The Fund may either purchase or write options in
order to hedge against
adverse market movements or fluctuations in value caused by
changes in
prevailing interest rates with respect to securities which
the Fund currently
owns or intends to purchase. The Fund's principal reason for
writing options is
to realize, through receipt of premiums, a greater current
return than would be
realized on the underlying security alone. When the Fund
purchases an option, it
pays a premium and an amount equal to that premium is
recorded as an investment.
When the Fund writes an option, it receives a premium and an
amount equal to
that premium is recorded as a liability. The investment or
liability is adjusted
daily to reflect the current market value of the option. If
an option expires
unexercised, the Fund realizes a gain or loss to the extent
of the premium
received or paid. If an option is exercised, the premium
received or paid is an
adjustment to the proceeds from the sale or the cost of the
purchase in
determining whether the Fund has realized a gain or loss.
The difference between
the premium and the amount received or paid on effecting a
closing purchase or
sale transaction is also treated as a realized gain or loss.
Gain or loss on
purchased options is included in net realized gain (loss) on
investment
transactions. Gain or loss on written options is presented
separately as net
realized gain (loss) on written option transactions.
The Fund, as a writer of an option, may have no control over
whether the
underlying securities may be sold (called) or purchased
(put). As a result, the
Fund bears the market risk of an unfavorable change in the
price of the security
underlying the written option. The Fund, as purchaser of an
option, bears the
risk of the potential inability of the counterparties to
meet the terms of their
contracts.
Dollar Rolls: The Fund enters into mortgage dollar rolls in
which the Fund sells
mortgage securities for delivery in the current month,
realizing a gain or loss
and simultaneously contracts to repurchase somewhat similar
(same type, coupon
and maturity) securities on a specified future date. During
the roll period, the
Fund forgoes principal and interest paid on the securities.
The Fund is
compensated by the interest earned on the cash proceeds of
the initial sale and
by the lower repurchase price at the future date. The
difference between the
sales proceeds and the lower repurchase price is recorded as
interest income.
The Fund maintains a segregated account, the dollar value of
which is at least
equal to its obligations, in respect of dollar rolls. There
were no dollar rolls
outstanding as of August 31, 1996.
Securities Lending: The Fund may lend its U.S. Government
securities to
broker-dealers or government securities dealers. The loans
are secured by
collateral at least equal at all times to the market value
of the securities
loaned. The Fund may bear the risk of delay in recovery of,
or even loss of
rights in, the securities loaned should the borrower of the
securities fail
financially. The Fund receives compensation for lending its
securities in the
form of fees or it retains a portion of interest on the
investment of any
- ------------------------------------------------------------
- --------------------
7 -----
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL
GOVERNMENT INCOME FUND
- ------------------------------------------------------------
- --------------------
cash received as collateral. The Fund also continues to
receive interest on the
securities loaned and any gain or loss in the market price
of the securities
loaned that may occur during the term of the loan will be
for the account of the
Fund. There were no loans outstanding as of August 31, 1996.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains or losses on
sales of securities are
calculated on the identified cost basis. Interest income is
recorded on the
accrual basis. Net investment income (other than
distribution fees) and
unrealized and realized gains or losses are allocated daily
to each class of
shares based upon the relative proportion of net assets of
each class at the
beginning of the day. Expenses are recorded on the accrual
basis which may
require the use of certain estimates by management.
Dividends and Distributions: The Fund declares daily and
pays monthly dividends
from net investment income. The Fund will distribute at
least annually any net
capital gains in excess of loss carryforwards. Dividends and
distributions are
recorded on the ex-dividend date.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles.
Federal Income Taxes: It is the Fund's policy to continue to
meet the
requirements of the Internal Revenue Code applicable to
regulated investment
companies and to distribute all of its taxable net income to
its shareholders.
Therefore, no federal income tax provision is required.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual
Fund Management, LLC.
(``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment
advisory services and supervises the subadviser's
performance of such services.
PMF has entered into a subadvisory agreement with The
Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory
services in connection
with the management of the Fund. PMF pays for the cost of
the subadviser's
services, the compensation of officers of the Fund,
occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and
expenses.
The management fee paid PMF is computed daily and payable
monthly, at an annual
rate of .50 of 1% of the Fund's average daily net assets up
to $3 billion and
.35 of 1% of the average daily net assets of the Fund in
excess of $3 billion.
The Fund had a distribution agreement with Prudential Mutual
Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class
A shares of the
Fund through January 1, 1996. Effective January 2, 1996,
Prudential Securities
Incorporated (``PSI''), became the distributor of the Class
A shares of the Fund
and is serving the Fund under the same terms and conditions
as under the
arrangement with PMFD. PSI is also the distributor of the
Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI for
distributing and
servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of
expenses actually
incurred by them. The distribution fees are accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund compensates PSI for
its
distribution-related expenses with respect to Class A
shares, at an annual rate
of up to .30 of 1% of the average daily net assets of the
Class A shares. Such
expenses under the Class A Plan were .15 of 1% of the
average daily net assets
of the Class A shares for the period ended August 31, 1996.
Pursuant to the Class B Plan, the Fund compensates PSI for
its
distribution-related expenses with respect to Class B shares
at an annual rate
of up to 1% of the average daily net assets up to $3
billion, .80 of 1% of the
next $1 billion of such net assets and .50 of 1% over $4
billion of the average
daily net assets of the Class B shares. Such expenses under
the Class B Plan
were charged at an effective rate of .825 of 1% of the
average daily net assets
of Class B shares.
Pursuant to the Class C Plan, the Fund compensates PSI for
its
distribution-related expenses with respect to Class C shares
at an annual rate
of up to .825 of 1% of the average daily net assets up to $3
billion, .80 of 1%
of the next $1 billion of such net assets and .50 of 1% over
$4 billion of the
average daily net assets of the Class C shares. Such
expenses under Class C Plan
were charged at an effective rate of .75 of 1% of average
daily net assets.
PMFD and PSI advised the Fund that they have received
approximately $108,000 in
front-end sales charges resulting from sales of Class A
shares during the period
ended August 31, 1996. From these fees, PMFD paid such sales
charges to dealers
which in turn paid commissions to salespersons.
- ------------------------------------------------------------
- --------------------
- ----- 8
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL
GOVERNMENT INCOME FUND
- ------------------------------------------------------------
- --------------------
PSI has advised the Fund that for the period ended August
31, 1996 it received
approximately $621,000 in contingent deferred sales charges
imposed upon
redemptions by certain Class B and Class C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC
are indirect,
wholly-owned subsidiaries of The Prudential Insurance
Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-
owned subsidiary of
PMF, serves as the Fund's transfer agent. During the period
ended August 31,
1996, the Fund incurred fees of approximately $929,000 for
the services of PMFS.
As of August 31, 1996, approximately $147,000 of such fees
were due to PMFS.
Transfer agent fees and expenses in the Statement of
Operations also include
certain out of pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than
short-term investments,
for the period ended August 31, 1996, were $799,866,254 and
$827,849,028,
respectively.
The federal income tax cost basis of the Fund's investments,
at August 31, 1996
was the same as for book purposes and, accordingly, net
unrealized appreciation
for federal income tax purposes was $23,824,767 (gross
unrealized
appreciation-$34,788,677; gross unrealized depreciation-
$10,963,910).
The Fund had a capital loss carryforward as of February 29,
1996 of
approximately $119,847,000 of which $11,970,000 expires in
1998, $41,965,000
expires in 1999 and $65,912,000 expires in 2003.
Accordingly, no capital gains
distribution is expected to be paid to shareholders until
net gains have been
realized in excess of such amounts.
Transactions in written options during the period ended
August 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of
Premiums
Contracts
Received
<S> <C> <C>
--------- --------
- --
Options written...................... 1,000
$1,550,312
Options terminated in closing
purchase transactions.............. (750)
(947,031)
Options expired...................... -- --
--------- --------
- --
Options outstanding at August 31,
1996............................... 250 $
603,281
--------- --------
- --
--------- --------
- --
</TABLE>
Note 5. Capital
The Fund offers Class A, Class B, Class C and Class Z
shares. Class A shares are
sold with a front-end sales charge of up to 4.0%. Class B
shares are sold with a
contingent deferred sales charge which declines from 5% to
zero depending on the
period of time the shares are held. Class C shares are sold
with a contingent
deferred sales charge of 1% during the first year. Class B
shares automatically
convert to Class A shares on a quarterly basis approximately
seven years after
purchase. Effective March 4, 1996 the Fund commenced
offering Class Z shares.
Class Z shares are not subject to any sales charge and are
offered exclusively
for sale to participants of the PSI 401(k) Plan, a defined
contribution plan
sponsored by PSI.
There are 2 billion shares of common stock, $.01 par value
per share, divided
into four classes, designated Class A, B, C and Class Z
common stock, each of
which consists of 500,000,000 authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ----------- ---------
- ----
<S> <C> <C>
Six months ended August 31, 1996:
Shares sold........................ 10,695,696 $
94,681,115
Shares issued in reinvestment of
dividends........................ 2,011,078
17,642,425
Shares reacquired.................. (20,491,833)
(180,732,527)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion................ (7,785,059)
(68,408,987)
Shares sold upon conversion from
Class B.......................... 4,170,454
36,524,539
Shares reaquired upon conversion
into Class Z..................... (1,559,278)
(14,231,482)
----------- ---------
- ----
Net decrease in shares
outstanding...................... (5,173,883) $
(46,115,930)
----------- ---------
- ----
----------- ---------
- ----
Year ended February 29, 1996:
Shares sold........................ 11,604,764 $
103,313,788
Shares issued in reinvestment of
dividends........................ 3,905,262
35,174,408
Shares reacquired.................. (23,885,431)
(215,512,733)
----------- ---------
- ----
Net decrease in shares
outstanding before conversion.... (8,375,405)
(77,024,537)
Shares sold upon conversion from
Class B.......................... 11,556,901
103,626,580
----------- ---------
- ----
Net increase in shares
outstanding...................... 3,181,496 $
26,602,043
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
9 -----
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL
GOVERNMENT INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ----------------------------------- ----------- ---------
- ----
Six months ended August 31, 1996:
<S> <C> <C>
Shares sold........................ 2,664,121 $
23,412,641
Shares issued in reinvestment of
dividends........................ 1,226,065
10,767,717
Shares reacquired.................. (7,896,308)
(69,350,460)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion................ (4,006,122)
(35,170,102)
Shares reacquired upon conversion
into Class A..................... (4,170,454)
(36,524,539)
----------- ---------
- ----
Net decrease in shares
outstanding...................... (8,176,576) $
(71,694,641)
----------- ---------
- ----
----------- ---------
- ----
Year ended February 29, 1996:
Shares sold........................ 14,021,663 $
120,993,355
Shares issued in reinvestment of
dividends........................ 2,476,368
22,291,045
Shares reacquired.................. (16,054,530)
(144,301,708)
----------- ---------
- ----
Net increase in shares
outstanding before conversion.... 443,501
(1,017,308)
Shares reacquired upon conversion
into Class A..................... (11,547,682)
(103,626,580)
----------- ---------
- ----
Net decrease in shares
outstanding...................... (11,104,181)
$(104,643,888)
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
Six months ended August 31, 1996:
Shares sold........................ 117,934 $
1,042,567
Shares issued in reinvestment of
dividends........................ 6,348
55,698
Shares reacquired.................. (31,885)
(280,285)
----------- ---------
- ----
Net increase in shares
outstanding...................... 92,397 $
817,980
----------- ---------
- ----
----------- ---------
- ----
August 1, 1994* through
February 28, 1996:
Shares sold........................ 217,329 $
1,948,923
Shares issued in reinvestment of
dividends........................ 4,489
40,453
Shares reacquired.................. (22,902)
(208,444)
----------- ---------
- ----
Net increase in shares
outstanding...................... 198,916 $
1,780,932
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
<TABLE>
<CAPTION>
Class Z Shares Amount
- ----------------------------------- ----------- ---------
- ----
<S> <C> <C>
March 4, 1996** through
August 31, 1996:
Shares sold........................ 669,281 $
5,798,423
Shares issued in reinvestment of
dividends........................ 50,051
438,481
Shares reacquired.................. (692,914)
(6,120,517)
----------- ---------
- ----
Net increase in shares outstanding
before conversion from Class A... 26,418
116,387
Shares issued upon conversion from
Class A.......................... 1,559,278
14,231,482
----------- ---------
- ----
Net increase in shares
outstanding...................... 1,585,696 $
14,347,869
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ---------------
** Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 6. Acquisition of The Prudential Institutional Income
Fund
On September 20, 1996, the Fund acquired all the net assets
of The Prudential
Institutional Fund, Income Fund (``Income Fund'') pursuant
to a plan of
reorganization approved by Income Fund shareholders on
September 6, 1996. The
acquisition was accomplished by a tax-free exchange of
6,698,193 Class Z shares
of the Fund for 5,948,930 shares of Income Fund valued at
$58,006,352 in the
aggregate on September 20, 1996. The aggregate net assets of
the Fund and Income
Fund immediately before the acquisition were $1,410,024,195
and $58,006,352
(including $172,817 of net unrealized depreciation),
respectively.
- ------------------------------------------------------------
- --------------------
- ----- 10
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL
GOVERNMENT INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A
----------
- ------------------------------------------------------------
- ----
Six
Months
Ended
Year Ended February 29/28,
August
31, ---------------------------------------------------
- ------
1996
1996 1995 1994 1993 1992
----------
- -- -------- -------- ------- ------- ---
- ----
<S> <C>
<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.04
$ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02
----------
- -- -------- -------- ------- ------- ---
- ----
Income from investment operations
Net investment income......................... 0.30
0.60 0.59 0.61 0.66 0.68
Net realized and unrealized gain (loss) on
investment transactions....................
(0.41) 0.45 (0.54) (0.25) 0.35
0.37
----------
- -- -------- -------- ------- ------- ---
- ----
Total from investment operations............
(0.11) 1.05 0.05 0.36 1.01
1.05
----------
- -- -------- -------- ------- ------- ---
- ----
Less distributions
Dividends from net investment income..........
(0.30) (0.60) (0.59) (0.61) (0.66)
(0.68)
Distributions in excess of accumulated
gains...................................... --
- -- -- (0.02) -- --
Distributions from paid-in capital in excess
of par..................................... --
- -- -- -- (0.12) (0.22)
----------
- -- -------- -------- ------- ------- ---
- ----
Total distributions.........................
(0.30) (0.60) (0.59) (0.63) (0.78)
(0.90)
----------
- -- -------- -------- ------- ------- ---
- ----
Net asset value, end of period................ $ 8.63
$ 9.04 $ 8.59 $ 9.13 $ 9.40 $ 9.17
----------
- -- -------- -------- ------- ------- ---
- ----
----------
- -- -------- -------- ------- ------- ---
- ----
TOTAL RETURN(a):..............................
(1.23)% 12.41% .83% 3.90% 11.55%
12.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $857,511
$945,038 $871,145 $51,673 $61,297 $33,181
Average net assets (000)...................... $891,599
$909,169 $ 95,560 $55,921 $46,812 $29,534
Ratios to average net assets:
Expenses, including distribution fees.......
0.91%(b) 0.91% 0.98% 0.84% 0.84%
0.86%
Expenses, excluding distribution fees.......
0.76%(b) 0.76% 0.83% 0.69% 0.69%
0.71%
Net investment income.......................
6.82%(b) 6.65% 7.45% 6.48% 7.17%
7.51%
For Class A, B, C and Z shares:
Portfolio turnover rate.....................
54% 123% 206% 80% 36%
187%
</TABLE>
- ---------------
(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. Total returns for periods of less than a
full year are not
annualized.
(b) Annualized.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
11 -----
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL
GOVERNMENT INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B
----------
- -----------------------------------------------------------
Six Months
Ended
Year Ended February 29/28,
August 31,
- -----------------------------------------------------
1996
1996 1995 1994 1993
<S> <C>
<C> <C> <C> <C>
----------
- - -------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.04
$ 8.60 $ 9.13 $ 9.40 $ 9.17
----------
- - -------- ---------- ---------- ----------
Income from investment operations
Net investment income......................... 0.27
0.54 0.53 0.53 0.58
Net realized and unrealized gain (loss) on
investment transactions....................
(0.41) 0.44 (0.53) (0.25)
0.35
----------
- - -------- ---------- ---------- ----------
Total from investment operations............
(0.14) 0.98 -- 0.28
0.93
----------
- - -------- ---------- ---------- ----------
Less distributions
Dividends from net investment income..........
(0.27) (0.54) (0.53) (0.53)
(0.58)
Distributions in excess of accumulated
gains...................................... --
- -- -- (0.02) --
Distributions from paid-in capital in excess
of par..................................... --
- -- -- -- (0.12)
----------
- - -------- ---------- ---------- ----------
Total distributions.........................
(0.27) (0.54) (0.53) (0.55)
(0.70)
----------
- - -------- ---------- ---------- ----------
Net asset value, end of period................ $ 8.63
$ 9.04 $ 8.60 $ 9.13 $ 9.40
----------
- - -------- ---------- ---------- ----------
----------
- - -------- ---------- ---------- ----------
TOTAL RETURN(a):..............................
(1.56)% 11.54% .24% 3.03%
10.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 542,232
$641,946 $ 705,732 $2,202,555 $2,680,259
Average net assets (000)...................... $ 582,865
$647,515 $1,735,413 $2,487,990 $2,670,924
Ratios to average net assets:
Expenses, including distribution fees.......
1.58%(b) 1.58% 1.66% 1.68%
1.69%
Expenses, excluding distribution fees.......
0.76%(b) 0.76% 0.80% 0.69%
0.69%
Net investment income.......................
6.15%(b) 5.99% 6.17% 5.64%
6.32%
<CAPTION>
1992
<S> <C>
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.02
----------
Income from investment operations
Net investment income......................... 0.60
Net realized and unrealized gain (loss) on
investment transactions.................... 0.37
----------
Total from investment operations............ 0.97
----------
Less distributions
Dividends from net investment income.......... (0.60)
Distributions in excess of accumulated
gains...................................... --
Distributions from paid-in capital in excess
of par..................................... (0.22)
----------
Total distributions......................... (0.82)
----------
Net asset value, end of period................ $ 9.17
----------
----------
TOTAL RETURN(a):.............................. 11.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $2,724,428
Average net assets (000)...................... $2,903,704
Ratios to average net assets:
Expenses, including distribution fees....... 1.71%
Expenses, excluding distribution fees....... 0.71%
Net investment income....................... 6.66%
</TABLE>
- ---------------
(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. Total returns for periods of less than a
full year are not
annualized.
(b) Annualized.
- ------------------------------------------------------------
- --------------------
- ----- 12 See Notes to
Financial Statements.
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL
GOVERNMENT INCOME FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class C Class Z
----------
- ----------------------------------- ----------
August 1, March 4,
Six Months
1994(c) 1996(d)
Ended
Year Ended Through Through
August 31,
February 29, February 28, August 31,
1996
1996 1995 1996
<S> <C>
<C> <C> <C>
----------
- - ------------ ------------ ----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.04
$ 8.60 $ 8.69 $ 9.13
----------
- - ------------ ------------ ----------
Income from investment operations
Net investment income......................... 0.27
0.54 0.31 0.31
Net realized and unrealized gain (loss) on
investment transactions....................
(0.41) 0.44 (0.09) (0.51)
----------
- - ------------ ------------ ----------
Total from investment operations............
(0.14) 0.98 0.22 (0.20)
----------
- - ------------ ------------ ----------
Less distributions
Dividends from net investment income..........
(0.27) (0.54) (0.31) (0.31)
----------
- - ------------ ------------ ----------
Net asset value, end of period................ $ 8.63
$ 9.04 $ 8.60 $ 8.62
----------
- - ------------ ------------ ----------
----------
- - ------------ ------------ ----------
TOTAL RETURN(a):..............................
(1.52)% 11.63% 2.75% (2.37)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 2,515
$1,799 $ 204 $ 13,669
Average net assets (000)...................... $ 2,253
$ 765 $ 111 $ 13,368
Ratios to average net assets:
Expenses, including distribution fees.......
1.51%(b) 1.51% 1.63%(b) 0.76%(b)
Expenses, excluding distribution fees.......
0.76%(b) 0.76% 0.88%(b) 0.76%(b)
Net investment income.......................
6.15%(b) 5.99% 6.69%(b) 6.99%(b)
</TABLE>
- ---------------
(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. Total returns for periods of less than a
full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements.
13 -----
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund.
Some mutual fund shareholders won't ever read this -- they
don't read annual
and semi-annual reports. It's quite understandable. These
annual and
semi-annual reports are prepared to comply with Federal
regulations. They
are often written in language that is difficult to
understand. So when most
people run into those particularly daunting sections of
these reports, they
don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our
report to make it
easier to understand and more pleasant to read, in hopes
you'll find it
profitable to spend a few minutes familiarizing yourself
with your investment.
Here's what you'll find in the report:
At A Glance
Since an investment's performance is often a shareholder's
primary concern, we
present performance information in two different formats.
You'll find it first
on the "At A Glance" page where we compare the Fund and the
comparable average
calculated by Lipper Analytical Services, a nationally
recognized mutual fund
rating agency. We report both the cumulative total returns
and the average
annual total returns. The cumulative total return is the
total amount of income
and appreciation the Fund has achieved in various time
periods. The average
annual total return is an annualized representation of the
Fund's
performance -- it generally smoothes out returns and gives
you an idea how
much the Fund has earned in an average year, for a given
time period. Under the
performance box, you'll see legends that explain the
performance information,
whether fees and sales charges have been included in
returns, and the inception
dates for the Fund's share classes.
See the performance comparison charts at the back of the
report for more
performance information. And keep in mind that past
performance is not
indicative of future results.
Portfolio
Manager's Report
The portfolio manager who invests your money for you reports
on successful --
and not-so-successful -- strategies in this section of your
report. Look for
recent purchases and sales here, as well as information
about the sectors the
portfolio manager favors and any changes that are on the
drawing board.
Portfolio Of
Investments
This is where the report begins to look technical, but it's
really just a
listing of each security held at the end of the reporting
period, along with
valuations and other information. Please note that sometimes
we discuss a
security in the Portfolio Manager's Report that doesn't
appear in this listing
because it was sold before the close of the reporting
period.
<PAGE>
Statement Of Assets
And Liabilities
The balance sheet shows the assets (the value of the Fund's
holdings),
liabilities (how much the Fund owes) and net assets (the
Fund's equity, or
holdings after the Fund pays its debts) as of the end of the
reporting period.
It also shows how we calculate the net asset value per share
for each class of
shares. The net asset value is reduced by payment of your
dividend, capital
gain, or other distribution, but remember that the money or
new shares are
being paid or issued to you. The net asset value fluctuates
daily along with
the value of every security in the portfolio.
Statement Of
Operations
This is the income statement, which details income (mostly
interest and
dividends earned) and expenses (including what you pay us to
manage your
money). You'll also see capital gains here -- both realized
and unrealized.
Statement Of Changes
In Net Assets
This schedule shows how income and expenses translate into
changes in net
assets. The Fund is required to pay out the bulk of its
income to shareholders
every year, and this statement shows you how we do it --
through dividends and
distributions -- and how that affects the net assets. This
statement also shows
how money from investors flowed into and out of the Fund.
Notes To Financial
Statements
This is the kind of technical material that can intimidate
readers, but it does
contain useful information. The Notes provide a brief
history and explanation
of your Fund's objectives. In addition, they also outline
how Prudential Mutual
Funds prices securities. The Notes also explain who manages
and distributes the
Fund's shares, and more importantly, how much they are paid
for doing so.
Finally, the Notes explain how many shares are outstanding
and the number
issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages,
but on a per share
basis. It is designed to help you understand how the Fund
performed and to
compare this year's performance and expenses to those of
prior years.
Independent
Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the
information is fairly presented and complies with generally
accepted accounting
principles.
Tax Information
This is information which we report annually about how much
of your total
return is taxable. Should you have any questions, you may
want to consult a
tax advisor.
Performance
Comparison
These charts are included in the annual report and are
required by the
Securities Exchange Commission. Performance is presented
here as a hypothetical
$10,000 investment in the Fund since its inception or for 10
years (whichever
is shorter). To help you put that return in context, we are
required to include
the performance of an unmanaged, broad based securities
index, as well. The
index does not reflect the cost of buying the securities it
contains or the
cost of managing a mutual fund. Of course, the index
holdings do not mirror
those of the fund -- the index is a broadly based reference
point commonly used
by investors to measure how well they are doing. A
definition of the selected
index is also provided. Investors generally cannot invest
directly in an index.
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund.
Change Your Mind.
You can exchange your shares in most Prudential Mutual Funds
for
shares in most other Prudential Mutual Funds, without
charges. This
may be most helpful if your investment needs change.
Reinvest Dividends Free Of Charge.
Reinvest your dividends and/or capital gains distributions
automatically -- without charge.
Invest For Retirement.
There is no minimum investment for an IRA. Plus, you defer
taxes on
your investment earnings by investing in an IRA.
If you'd like, you can contribute up to $2,000 a year in an
IRA. If
you are married, you and your spouse (if not working outside
the home)
can contribute up to $2,250 a year. (Withdrawals are taxed
as ordinary
income and may be subject to a 10% penalty prior to age 59
1/2.)
Change Your Job.
You can take your pension with you. Use a rollover IRA to
manage
your company-sponsored retirement plan while retaining the
special
tax-deferred advantages.
Invest In Your Children.
There's no fee to open a custodial account for a child's
education
or other needs.
Take Income.
Would you like to receive monthly or quarterly checks in any
amount from
your fund account? Just let us know. We'll take care of it.
Of course,
there are minimum amounts. And shares redeemed may be
subject to tax,
and Class B and C shares may be subject to contingent
deferred sales
charges. We'll gladly answer your questions.
Keep Informed.
We want to keep you up-to-date. Of course, you receive
account
activity statements every quarter. But you also receive
annual
and semi-annual fund reports, as well as other important
updates
on events that affect your investments, including tax
information.
This material is only authorized for distribution when
preceded
or accompanied by a current prospectus. Read the prospectus
carefully before you invest or send money.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http:\\www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Thomas A. Owens, Jr.
Richard A. Redeker
Stanley E. Shirk
Officers
Richard A. Redeker, President
David W. Drasnin, Vice President
Robert F. Gunia, Vice President
Eugene S. Stark, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Ellyn C. Vogin, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC.
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Freidman, Hoffman & Goodman, LLP
919 Third Avenue
New York, NY 10022
The views expressed in this report and information about the
Fund's
portfolio holdings are for the period covered by this report
and
are subject to change thereafter.
The accompanying financial statements as of August 31, 1996
were not
audited and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to
prospective investors unless preceded or accompanied by a
current prospectus.
<PAGE>
(LOGO)
BULK RATE
U.S.
POSTAGE
PAID
Permit 6807
New
York, NY
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
744339102
744339201 MF128E2
744339300 Cat#6421462
744339409
