PRUDENTIAL GOVERNMENT INCOME FUND INC, 497, 1996-08-12

PRUDENTIAL GOVERNMENT INCOME FUND INC
497, 1996-08-12

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THE PRUDENTIAL INSTITUTIONAL FUND
INCOME FUND
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777

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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
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To Our Shareholders:

Notice is hereby given that a Special Meeting of Shareholders (Meeting) of
Income Fund (Income Fund), a portfolio of The Prudential Institutional Fund,
will be held at 9:00 a.m., eastern time, on September 6, 1996, at Prudential
Plaza, 751 Broad Street, Newark, New Jersey 07102-3777, for the following
purposes:

1. To approve an Agreement and Plan of Reorganization and
Liquidation whereby all of the assets of Income Fund will be transferred
to Prudential Government Income Fund, Inc. (Government Income Fund) in
exchange solely for Class Z shares of Government Income Fund and
Government Income Fund's assumption of all of the liabilities, if any,
of Income Fund; and

2. To consider and act upon any other business as may properly come
before the Meeting or any adjournment thereof.

Only holders of shares of beneficial interest in Income Fund of record at
the close of business on July 12, 1996, are entitled to notice of and to vote at
this Meeting or any adjournment thereof.

S. JANE ROSE
SECRETARY

Dated: July 31, 1996

WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED STAMPED SELF-ADDRESSED ENVELOPE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
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PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PROSPECTUS
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(800) 225-1852
AND
THE PRUDENTIAL INSTITUTIONAL FUND--INCOME FUND
PROXY STATEMENT
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 225-1852
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The Prudential Institutional Fund (PIF) is an open-end, diversified
management investment company consisting of seven portfolios, one of which is
Income Fund (Income Fund). Prudential Government Income Fund, Inc. (Government
Income Fund) is an open-end, diversified management investment company. Both PIF
and Government Income Fund are managed by indirect, wholly owned subsidiaries of
The Prudential Insurance Company of America. PIF is managed by Prudential
Institutional Fund Management, Inc. Government Income Fund is managed by
Prudential Mutual Fund Management, Inc. Income Fund seeks a high level of income
over the longer term while providing reasonable safety of capital. The
investment objective of Government Income Fund is to seek a high current return.

This Prospectus and Proxy Statement is being furnished to shareholders of
Income Fund in connection with the solicitation of proxies by PIF's Board of
Trustees for use at a special meeting of Income Fund shareholders to be held on
September 6, 1996, at 9:00 a.m., eastern time, and at any adjournment thereof
(Meeting). The primary purpose of the Meeting is to vote on a proposed Agreement
and Plan of Reorganization and Liquidation (Plan), whereby Government Income
Fund will acquire all of the assets of Income Fund and assume all of the
liabilities, if any, of Income Fund. If the Plan is approved by Income Fund's
shareholders, and if an order of exemption from certain provisions of the
Investment Company Act of 1940 is received from the Securities and Exchange
Commission (SEC), all such shareholders will be issued Class Z shares of
Government Income Fund in exchange for the shares of Income Fund held by them,
and Income Fund will be terminated. Shareholders of Government Income Fund are
not being asked to vote on the Plan.

This Prospectus and Proxy Statement sets forth concisely information about
Government Income Fund that prospective investors should know before investing.
Additional information contained in a Statement of Additional Information (SAI)
dated July 31, 1996, relating to the Plan and including financial statements,
has been filed with the SEC, is incorporated herein by reference and is
available without charge upon request to the address or phone number shown above
for Government Income Fund. This Prospectus and Proxy Statement is accompanied
by the Prospectus of Government Income Fund--Class Z Shares, dated April 30,
1996, including a July 1, 1996 Supplement thereto. The Government Income Fund
SAI dated April 30, 1996, also has been filed with the SEC and is incorporated
by reference herein. A Prospectus for PIF dated February 1, 1996, including a
May 30, 1996 Supplement thereto, and an SAI for PIF dated February 1, 1996 also
have been filed with the SEC and are incorporated by reference herein. The
Government Income Fund SAI is available without charge upon request to
Government Income Fund at the address or toll-free phone number shown above. The
PIF Prospectus and SAI are available without charge upon request to PIF at the
address or toll-free phone number shown above.

Investors are advised to read and retain this Prospectus and Proxy Statement
for future reference.
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The date of this Prospectus and Proxy Statement is July 31, 1996.
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PRUDENTIAL GOVERNMENT INCOME FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025

THE PRUDENTIAL INSTITUTIONAL FUND--INCOME FUND
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777

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PROSPECTUS AND PROXY STATEMENT DATED JULY 31, 1996
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SYNOPSIS

The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization and Liquidation (Plan) and is qualified by reference to the more
complete information contained herein as well as in each of The Prudential
Institutional Fund (PIF)--Income Fund (Income Fund) Prospectus and the enclosed
Prudential Government Income Fund, Inc. (Government Income Fund) Prospectus.
(Income Fund and Government Income Fund sometimes are referred to herein
individually as a Fund and collectively as the Funds.) Shareholders should read
this entire Prospectus and Proxy Statement carefully.

GENERAL

This Prospectus and Proxy Statement is furnished by the Board of Trustees of
PIF in connection with the solicitation of proxies for use at a Special Meeting
of Shareholders of Income Fund (Meeting) to be held at 9:00 a.m., eastern time,
on September 6, 1996 at Prudential Plaza, 751 Broad Street, Newark, New Jersey
07102-3777, PIF's principal executive office. The purpose of the Meeting is to
approve or disapprove the Plan, pursuant to which all of the assets of Income
Fund will be acquired by, and all of the liabilities of Income Fund, if any,
will be assumed by, Government Income Fund, and to transact such other business
as may properly come before the Meeting or any adjournment thereof. The Plan is
attached to this Prospectus and Proxy Statement as Appendix A. The transactions
contemplated by the Plan are described herein and in summary provide that
Government Income Fund will acquire all of Income Fund's assets in exchange
solely for Class Z shares of Government Income Fund and Government Income Fund's
assumption of all of the liabilities, if any, of Income Fund. The Class Z shares
of Government Income Fund thereafter will be distributed to the former
shareholders of Income Fund, and Income Fund will be terminated.

Approval of the Plan requires the affirmative vote of a majority of the
shares of Income Fund voted at the Meeting, provided a quorum is present.
Approval of the Plan by the shareholders of Government Income Fund is not
required, and the Plan is not being submitted for their approval.

THE PROPOSED REORGANIZATION AND LIQUIDATION

The Board of Trustees of PIF, on behalf of Income Fund, and the Board of
Directors of Government Income Fund (each, a Board) have approved the Plan,
which provides for the transfer of all of the assets of Income Fund to
Government Income Fund in exchange solely for Class Z shares of Government
Income Fund and the assumption by Government Income Fund of all of the
liabilities, if any, of Income Fund. If the

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Plan is approved by Income Fund shareholders, and if an order of exemption
(Exemptive Order) from certain provisions of the Investment Company Act of 1940
(Investment Company Act) is received from the Securities and Exchange Commission
(SEC), Class Z shares of Government Income Fund will be distributed to
shareholders of Income Fund, and Income Fund will be terminated. (All of the
foregoing transactions are sometimes referred to herein as the Reorganization.)
It is expected that the Reorganization will become effective on or about
September 20, 1996 (Closing Date). IF THE REORGANIZATION IS CONSUMMATED, EACH
INCOME FUND SHAREHOLDER WILL RECEIVE THE NUMBER OF FULL AND FRACTIONAL CLASS Z
SHARES OF GOVERNMENT INCOME FUND (ROUNDED TO THE THIRD DECIMAL PLACE) HAVING A
VALUE EQUAL TO THE VALUE OF SUCH SHAREHOLDER'S SHARES OF INCOME FUND AS OF THE
CLOSING DATE.

For the reasons set forth below under "--Reasons for the Proposed
Reorganization" and "The Proposed Transaction--Reasons for the Reorganization,"
the Board of PIF, including those Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act), of PIF or Government Income
Fund (Independent Trustees), has determined that the Reorganization is in the
best interests of Income Fund and that the interests of the existing
shareholders of Income Fund will not be diluted as a result of the
Reorganization. The Board of Government Income Fund, including those Directors
who are not interested persons of PIF or Government Income Fund (Independent
Directors), similarly has determined that the Reorganization is in the best
interests of Government Income Fund and that the interests of existing
shareholders of Government Income Fund will not be diluted as a result of the
Reorganization. ACCORDINGLY, PIF'S BOARD RECOMMENDS APPROVAL OF THE PLAN.

REASONS FOR THE PROPOSED REORGANIZATION

The Board of PIF has concluded, based on information presented by Income
Fund's manager, Prudential Institutional Fund Management, Inc. (PIFM), that the
Reorganization is in the best interests of Income Fund and its shareholders. The
following are among the reasons for the Reorganization:

- THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (PRUDENTIAL) HAS CONSOLIDATED
ITS ASSET MANAGEMENT BUSINESS INTO ONE UNIT, THE MONEY MANAGEMENT GROUP. The
Money Management Group was formed in November 1995 as part of a major corporate
restructuring initiated by Arthur Ryan, Chairman and Chief Executive Officer of
Prudential. All of Prudential's money management businesses are part of this
group, which will develop products and manage assets for all of Prudential's
fee-based, marketable securities businesses, including mutual funds, annuities,
defined contribution and benefit plans, guaranteed products and retirement
administration.

One goal of The Money Management Group is to present one group of mutual
funds to the marketplace, I.E., a "brand" identity. Another goal is to achieve
cost savings. In light of these goals, The Money Management Group undertook a
broad review of the Prudential mutual fund family to see if any changes were
advisable. The consolidation of certain mutual funds that were substantially
similar appeared consistent with attaining the above stated goals, as well as
beneficial to the funds and shareholders involved.

- THE PROPOSED REORGANIZATION IS SUITABLE FOR EACH FUND BECAUSE A NUMBER OF
SIMILARITIES EXIST BETWEEN THEM. Each Fund is an open-end, diversified
management investment company (or a portfolio thereof). Each invests primarily
in debt securities. The Prudential Investment Corporation (PIC) serves as
subadviser to both Funds. In addition, Prudential Mutual Fund Services, Inc.
(PMFS) serves as transfer agent and dividend disbursing agent to both Funds; and
State Street Bank and Trust Company serves as custodian to both Funds.

PIF was created in 1992 to attract institutional investors inclined to
invest in mutual funds without sales charges, 12b-1 fees or service fees, and
Income Fund commenced operations as a portfolio thereof on

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March 1, 1993. Government Income Fund began offering Class Z shares, which are
sold without sales charges, 12b-1 fees or service fees, on March 1, 1996.
Although prospective purchasers of Class Z shares currently are limited to
participants in the PSI 401(k) Plan, an employee benefit plan sponsored by
Prudential Securities Incorporated (PSI), a wholly owned subsidiary of
Prudential, the Government Income Fund Board has authorized an expanded group of
prospective purchasers of Class Z shares, which includes those who are
shareholders of Income Fund. Certain institutional investors will be able to
invest directly in Class Z shares of Government Income Fund and realize the
economies of scale available from the pooling of assets of two similar
portfolios.

- AFTER IMPLEMENTATION OF THE PLAN, THE FORMER SHAREHOLDERS OF INCOME FUND
AND THE SHAREHOLDERS OF GOVERNMENT INCOME FUND SHOULD BENEFIT FROM REDUCED
EXPENSES RESULTING FROM A COMBINATION OF THE ASSETS OF THE TWO FUNDS. The
Reorganization would give Government Income Fund the opportunity to increase its
assets by acquiring securities consistent with its investment objective and
policies in exchange for the issuance of its Class Z shares. The PIF Board
believes that the Reorganization may achieve certain economies of scale that
Income Fund cannot realize alone. The Government Income Fund Board believes that
Government Income Fund would realize the benefits of a larger asset base in
exchange for its shares, thereby making it more attractive to retirement plans
and other investors. In addition, the combination of Income Fund and Government
Income Fund would eliminate certain duplicative expenses, such as
Directors'/Trustees' fees and those incurred in connection with separate audits
and the preparation of separate financial statements for each Fund.

Although each Fund currently incurs different expenses, Prudential Mutual
Fund Management, Inc. (PMF) believes that if the proposed Reorganization is
consummated, the ratio of total operating expenses to average daily net assets
of Government Income Fund Class Z shares will be lower than the ratio currently
incurred by Income Fund without considering the effect of a subsidy of Income
Fund's operating expenses by PIFM. PIFM has agreed, until September 30, 1996, to
bear any expenses that would cause the ratio of expenses to average daily net
assets of Income Fund to exceed .70%. This subsidy may be terminated by PIFM at
any time without notice and there can be no assurance that such subsidy will
continue after September 30, 1996. In addition, PMF has no intention to continue
this expense limitation after the Closing Date.

The ratios for Income Fund for the fiscal years ended September 30, 1994 and
1995 were .94% and .98%, respectively (without subsidy), and were each .70%
(with subsidy). The expense ratios for Income Fund's shares without subsidy are
greater than the anticipated annual expense ratio for Government Income Fund
Class Z shares, which is estimated at .76% based upon expenses estimated to have
been accrued if Class Z shares had been in existence throughout the fiscal year
ended February 29, 1996. See "Fees and Expenses--Expense Ratios, Fee Waivers and
Subsidy" below.

STRUCTURE OF INCOME FUND AND GOVERNMENT INCOME FUND

PIF is authorized to issue an unlimited number of shares of beneficial
interest. Each Income Fund share issued has a PRO RATA interest in the assets of
Income Fund and has no interest in the assets of any other series of PIF. Income
Fund bears its own liabilities and its proportional share of the general
liabilities of PIF and is not responsible for the liabilities of any other
series of PIF. PIF's Board is empowered by PIF's Declaration of Trust and
By-Laws to establish additional series and classes of shares.

Government Income Fund is authorized to offer 2 billion shares of common
stock, divided into four classes designated Class A, Class B, Class C and Class
Z, each of which consists of 500 million authorized shares. Each class of shares
represents an interest in the same assets of Government Income Fund and is

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identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting rights
on any matter submitted to shareholders that relates solely to its distribution
arrangements 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 currently are
offered exclusively for sale to participants in the PSI 401(k) Plan. Since Class
B and Class C shares generally bear higher distribution expenses than Class A
shares and Class Z shares bear no distribution and service fees, the liquidation
proceeds payable to shareholders of those classes are likely to be lower than to
Class A shareholders and to Class Z shareholders. In accordance with Government
Income Fund's Articles of Incorporation and PIF's Declaration of Trust, each
Board may authorize the creation of additional series and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Board may determine.

The Boards of PIF and Government Income Fund may increase or decrease the
number of authorized shares without shareholder approval. Shares of each Fund,
when issued, are fully paid, nonassessable, fully transferable and redeemable at
the option of the holder. Shares also are redeemable at the option of each Fund
under certain circumstances. Except for the conversion feature applicable to
Class B shares of Government Income Fund (which convert to Class A shares after
approximately seven years), there are no conversion, preemptive or other
subscription rights. In the event of liquidation of either Fund, each share
thereof is entitled to its portion of that Fund's assets after all of its debts
and expenses have been paid. Neither Fund's shares have cumulative voting rights
for the election of Trustees/Directors.

INVESTMENT OBJECTIVES AND POLICIES

Income Fund's investment objective is to seek to achieve a high level of
income over the longer term while providing reasonable safety of capital.
Government Income Fund's investment objective is to seek high current return.
Each Fund attempts to achieve its investment objective by investing in debt
securities. Income Fund may invest a significant portion of its assets in U.S.
Government securities. Government Income Fund will invest primarily in U.S.
Government securities.

Government Income Fund will invest at least 65% of its total assets in U.S.
Government securities, including U.S. Treasury bills, notes, bonds and other
debt securities issued by the U.S. Treasury, and obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, including certain
mortgage-backed securities and pass-through securities. U.S. Government
securities that are purchased pursuant to repurchase agreements or on a
when-issued or delayed delivery basis will be treated as U.S. Government
securities for purposes of this calculation. Government Income Fund also may
engage in various derivative transactions such as the purchase and sale of put
and call options. In an effort to hedge against changes in interest rates and
thus preserve its capital, Government Income Fund may engage in transactions
involving futures contracts on U.S. Government securities, options on such
futures and interest rate futures. See "Principal Risk Factors--Hedging and
Return Enhancement" below.

In addition, up to 35% of the total assets of Government Income Fund may be
committed to investments other than U.S. Government securities. The Government
Income Fund may invest in debt obligations (including corporate debt securities)
rated at least A by Standard & Poor's Ratings Services (S&P), a division of the
McGraw Hill Companies, or Moody's Investors Service, Inc. (Moody's) or, if
unrated, deemed to be of comparable credit quality by Government Income Fund's
investment adviser. Government Income Fund may invest up to 20% of its total
assets in high quality money market instruments and up to

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20% of its total assets in asset-backed securities. Government Income Fund may
purchase put and call options on U.S. Government securities if, as a result of
such purchase, no more than 20% of its total assets would be invested in
premiums for such options and on options on futures contracts on U.S. Government
securities. Government Income Fund may not purchase or sell futures contracts or
related options for other than bona fide hedging purposes if immediately
thereafter the sum of the amount of the initial margin deposits on its existing
futures and options on futures and for premiums paid for such related options
would exceed 5% of the liquidation value of its total assets, after taking into
account unrealized profits and unrealized losses on any such contracts into
which the Fund has entered.

The other investment policies of Government Income Fund are similar to the
investment policies of Income Fund, including both Funds' ability to enter into
dollar rolls and repurchase agreements, to invest in mortgage-backed securities,
to hold up to 15% of its net assets in illiquid securities (which, for Income
Fund, excludes interest rate swaps), and to borrow up to 20% of the value of
each Fund's respective total assets (calculated when the loan is made) for
temporary, extraordinary or emergency purposes or for the clearance of
transactions. Each Fund may pledge up to 20% of the value of its total assets to
secure such borrowings.

Income Fund invests, under normal circumstances, at least 65% of the value
of its total assets in fixed income securities. Such securities include: (1)
corporate debt obligations; (2) mortgage-backed securities; (3) custodial
receipts and asset-backed securities; (4) U.S. Government obligations (such as
U.S. Treasury bills, notes and bonds), and securities issued by its agencies or
its instrumentalities; and (5) U.S. dollar-denominated investment grade fixed
income securities of foreign issuers. Income Fund will invest primarily in fixed
income securities rated A or better by Moody's or S&P (or the equivalent rating
of another nationally recognized statistical rating organization (NRSRO)) or, if
not rated, determined by Income Fund's subadviser to be of comparable quality to
securities so rated. However, Income Fund also may invest up to 20% of its
portfolio in securities rated Baa/BBB or above by Moody's or S&P (or the
equivalent rating of another NRSRO) or, if not rated, determined by its
subadviser to be of comparable quality to securities so rated. Income Fund has
no maturity restrictions. However, Income Fund's subadviser anticipates that the
securities in which Income Fund will invest will primarily be intermediate- to
long-term debt securities having an average maturity of between 5 and 20 years.

In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental yield enhancement purposes, Income
Fund also may: (1) purchase and sell put and call options on securities and
interest rate indices; (2) purchase and sell futures contracts on securities,
securities indices and interest rate indices; and (3) enter into interest rate
swap transactions, caps, collars and floors. To facilitate Income Fund's
investment program, Income Fund also may purchase and sell non-U.S. dollar-
denominated investment grade fixed income securities of foreign issuers. In
order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for additional income, Income Fund also may: (1) enter into
repurchase agreements, when-issued, delayed-delivery and forward commitment
transactions; and (2) lend its portfolio securities.

CERTAIN DIFFERENCES BETWEEN INCOME FUND AND GOVERNMENT INCOME FUND
While both Funds are similar in several respects, a number of differences
between them exist as well.

First, although the Funds' investment policies are similar, Government
Income Fund's investment objective is to seek high current return, while Income
Fund's investment objective is to seek a high level of income over the longer
term while providing reasonable safety of capital.

Second, while the Funds both invest primarily in debt securities, the amount
of each respective Fund's total assets that may be invested in certain debt
securities and the types of debt securities in which each Fund

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may invest are different. Government Income Fund will invest at least 65% of its
total assets in U.S. Government securities and may invest up to 35% of its total
assets in other securities, including debt obligations, as discussed above.
Income Fund, under normal conditions, will invest at least 65% of the value of
its total assets in fixed income securities, including (1) corporate debt
obligations, (2) mortgage-backed securities, (3) custodial receipts and
asset-backed securities, (4) U.S. Government obligations (such as U.S. Treasury
bills, notes and bonds), and securities issued by its agencies or
instrumentalities, and (5) U.S. dollar-denominated investment grade fixed income
securities of foreign issuers. Historically, however, Income Fund generally has
invested a significant portion of its assets, and in any event more than 50% of
its assets, in U.S. Government securities.

Third, although neither Fund has limitations with respect to the maturity of
portfolio securities in which it may invest, they may maintain a disparate
portfolio duration. At June 30, 1996, Government Income Fund's average portfolio
duration was 5.1 years, whereas at that same date Income Fund's average
portfolio duration was 4.9 years. Duration is a measure of the expected life of
a fixed-income security on a present value basis. A shorter duration typically
will offer less exposure to interest rate risk than a longer duration.
Accordingly, although Government Income Fund generally invests in higher quality
securities than Income Fund, at any given time, it may expose an investor to
greater risk, in the form of interest rate risk, to the extent it maintains a
longer average portfolio duration.

Fourth, Government Income Fund may invest up to 35% of its total assets in
debt obligations rated at least A by S&P or Moody's, as discussed above. Income
Fund may invest up to 65% of its total assets in corporate debt obligations
rated A or better by Moody's or S&P (or the equivalent rating of another NRSRO).
Included in this 65%, Income Fund may invest up to 20% of its portfolio in
securities rated Baa/ BBB (or the equivalent rating of another NRSRO) or, if not
rated, determined by its subadviser to be of comparable quality to securities so
rated.

Fifth, Government Income Fund may invest less than 10% of its total assets
in obligations of foreign banks and foreign branches of U.S. banks, while Income
Fund may invest up to 35% of its total assets in fixed income securities and
equity securities of foreign issuers (denominated in either U.S. or foreign
currency). Investments in foreign securities involve certain considerations and
risks that typically are not associated with investing in U.S. Government
securities and securities of domestic companies. See "Principal Risk
Factors--Foreign Investments" below.

Sixth, Government Income Fund may invest up to 20% of its total assets in
high quality money market instruments, including commercial paper of domestic
corporations and certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, while Income Fund may invest in high
quality money market instruments without limitation but only for temporary
defensive purposes.

Seventh, the Funds' managers are different. PIFM, whose principal business
address is 30 Scranton Office Park, Moosic, Pennsylvania 18507-1789, is the
manager of Income Fund. PIFM was incorporated in May 1992 under the laws of the
Commonwealth of Pennsylvania and is an indirect, wholly owned subsidiary of
Prudential. PMF, whose principal business address is One Seaport Plaza, New
York, New York 10292-1025, is the manager of Government Income Fund. PMF was
incorporated in May 1987 under the laws of the State of Delaware and also is an
indirect, wholly owned subsidiary of Prudential. As of June 30, 1996, PMF served
as the manager or administrator to 60 investment companies, with aggregate
assets of approximately $52 billion. If the Reorganization is consummated,
Income Fund's assets will be transferred to Government Income Fund and will be
managed by PMF. The effective management fee rate charged by PMF to the
Government Income Fund, however, is the same as the management fee rate charged
by PIFM to Income Fund: .50% of that Fund's average daily net assets.

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Finally, although PIC is the subadviser of both Funds, the portfolio manager
of each Fund is different. The current portfolio manager of Government Income
Fund is Barbara L. Kenworthy, a managing director and senior portfolio manager
of Prudential Mutual Fund Investment Management, a unit of PIC. Ms. Kenworthy
has responsibility for the day-to-day management of Government Income Fund's
portfolio and has managed Government Income Fund's portfolio since July 1994.
Ms. Kenworthy previously was employed by The Dreyfus Corporation (from June 1985
to June 1994) and served as president and portfolio manager for several Dreyfus
fixed-income funds.

Ms. Kenworthy also serves as the portfolio manager of Prudential Diversified
Bond Fund, Inc. and Prudential Mortgage Income Fund, Inc. and has 20 years of
investment management experience in both U.S. and foreign securities and
investment grade and high yield quality bonds. Ms. Kenworthy actively manages
each of these funds' portfolios according to the investment adviser's interest
rate outlook. Consistent with each fund's investment objective and policies, she
will, at times, invest in different sectors of the fixed-income markets seeking
price discrepancies and more favorable interest rates. The investment adviser
conducts extensive analysis of U.S. and overseas markets in an attempt to
identify trends in interest rates, supply and demand and economic growth. The
portfolio manager then selects the sectors, maturities and individual bonds she
believes provide the best value under those conditions.

Kay T. Willcox, Managing Director and Senior Portfolio Manager of Prudential
Global Advisors, a unit of PIC, has had responsibility for the day-to-day
portfolio management of Income Fund since November 1993. Ms. Willcox has been a
portfolio manager at PIC since 1987.

FEES AND EXPENSES

MANAGEMENT FEES. PIFM, the manager of Income Fund, is compensated pursuant
to a management agreement with PIF, at an annual rate of .50 of 1% of Income
Fund's average daily net assets. PMF, the manager of Government Income Fund, is
compensated pursuant to a management agreement with Government Income Fund, at
an annual rate of .50 of 1% of Government Income Fund's average daily net assets
up to $3 billion and .35 of 1% of Government Income Fund's average daily net
assets in excess of $3 billion. For the fiscal year ended September 30, 1995,
Income Fund paid PIFM management fees at an annual rate of .50 of 1% of its
average daily net assets. For the fiscal year ended February 29, 1996,
Government Income Fund paid PMF management fees at an annual rate of .50 of 1%
of its average daily net assets.

Under a subadvisory agreement between PIFM and PIC, PIC provides investment
subadvisory services for the management of Income Fund. Under a subadvisory
agreement between PMF and PIC, PIC provides investment subadvisory services for
the management of Government Income Fund. Each subadvisory agreement provides
that PIFM or PMF, as applicable, will reimburse PIC for its reasonable costs and
expenses in providing investment subadvisory services. PIFM and PMF continue to
have responsibility for all investment advisory services pursuant to their
respective management agreements and supervise PIC's performance of its
services.

DISTRIBUTION FEES. Prudential Retirement Services, Inc. (PRSI), 751 Broad
Street, Newark, New Jersey 07102, an affiliate of PIFM and a corporation
organized under the laws of the State of New Jersey, serves as the distributor
of Income Fund's shares. No distribution or service fees are paid to PRSI by
Income Fund.

PSI, One Seaport Plaza, New York, New York 10292, serves as the distributor
of Class Z shares of Government Income Fund. PSI is a corporation organized
under the laws of the State of Delaware. No distribution or service fees are
paid to PSI by Government Income Fund's Class Z shares.

8
<PAGE>
ADMINISTRATION FEES. PIF has entered into an administration, transfer
agency and service agreement (Administration Agreement) with PMF, which provides
that PMF will furnish to Income Fund such services as Income Fund may require in
connection with administration of its business affairs. Under the Administration
Agreement, PIF pays PMF a monthly fee at an annual rate of .17% of the average
daily net assets of PIF up to $250 million and .15% of PIF's average daily net
assets in excess of $250 million. PMF also provides Income Fund with transfer
agent and dividend disbursing services for no additional fee through its wholly
owned subsidiary, PMFS, Raritan Plaza One, Edison, New Jersey 08837.

Government Income Fund incurs no separate fee for administrative services,
but does use PMFS to furnish transfer agent and dividend disbursing services.
Government Income Fund, pursuant to a transfer agency and service agreement,
pays PMFS an annual fee per shareholder account of $13.00, a new account set-up
fee for each manually established account of $2.00 and a monthly inactive zero
balance account fee per shareholder account of $0.20. PMFS also is reimbursed
for its out-of-pocket expenses, including postage, stationery, printing,
allocable communications expenses and other costs. (During the fiscal year ended
February 29, 1996, these fees and expenses represented an annual rate of
approximately .14% of Government Income Fund's average daily net assets.)
Existing shareholders of Income Fund will not be subject to the $2.00 manual
establishment fee with respect to any account established in connection with the
Reorganization.

OTHER EXPENSES. Each Fund also pays certain other expenses in connection
with its operation, including accounting, custodian, reports to shareholders,
legal, audit and share registration expenses. Although the basis for calculating
these fees and expenses is the same for Income Fund and Government Income Fund,
the per share effect on shareholder returns is affected by their relative size.
Combining the Funds will eliminate duplication of certain expenses. For example,
only one annual audit of the combined Funds will be required rather than
separate audits of each Fund as currently required.

EXPENSE RATIOS, FEE WAIVERS AND SUBSIDY. PIFM and PMF each may from time to
time waive all or a portion of its management fee and subsidize all or a portion
of the operating expenses of Income Fund and Government Income Fund,
respectively. Fee waivers and expense subsidies may increase a Fund's yield and
total return. Any fee waiver or subsidy may be terminated at any time without
notice, after which a Fund's expenses may increase and its yield and total
return may be reduced. It is not anticipated that Government Income Fund's
expenses will be subject to any fee waiver or subsidy in the near future.

For the fiscal year ended September 30, 1995, total expenses stated as a
percentage of average net assets of Income Fund were .98% before reduction of
expenses by PIFM and .70% after reduction of expenses. PIFM has agreed, until
September 30, 1996, to bear any expenses that would cause the ratio of expenses
payable by Income Fund to exceed .70%. Expenses paid or assumed by PIFM are
subject to recoupment by PIFM in later years, provided that (a) no recoupment
will be made, in any year, if it would result in Income Fund's expense ratio
exceeding .70%, (b) no recoupment will be made after December 31, 1996, and (c)
no recoupment will be made after the Closing Date, if the Reorganization is
consummated.

Government Income Fund commenced offering Class Z shares on March 1, 1996.
Estimated total operating expenses for Government Income Fund's Class Z shares
are .76% and are based on expenses estimated to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended February 29, 1996.

9
<PAGE>
Each Fund's shareholder transaction expenses are shown below. Note that
Income Fund and Government Income Fund Class Z shareholder transaction expenses
are the same. THERE WILL NOT BE ANY SHAREHOLDER TRANSACTION FEE PAYABLE IN
CONNECTION WITH THE REORGANIZATION.

<TABLE>
<CAPTION>
GOVERNMENT
INCOME FUND
INCOME FUND CLASS Z SHARES
--------------- -----------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)....... None None
Maximum Sales Load or Deferred Sales Load Imposed on Reinvested Dividends......... None None
Deferred Sales Load (as a percentage of original purchase price or redemption
proceeds, whichever is lower).................................................... None None
Redemption Fees................................................................... None None
Exchange Fee...................................................................... None None
</TABLE>

Set forth below is a comparison of each Fund's operating expenses that, in
the case of Income Fund, are for the fiscal year ended September 30, 1995, and
in the case of Government Income Fund Class Z shares, are estimated for the
fiscal year ended February 29, 1996. The ratios also are shown on a pro forma
(estimated) combined basis, giving effect to the Reorganization. Income Fund's
other expenses were .48%, of which PIFM subsidized .28%, thereby reducing the
total operating expenses to .70% for the fiscal year ended September 30, 1995.

<TABLE>
<CAPTION>
GOVERNMENT
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET INCOME FUND
ASSETS) INCOME FUND CLASS Z* PRO FORMA COMBINED
- --------------------------------------------------------------- --------------- --------------- -----------------------
<S> <C> <C> <C>
Management Fees................................................ .50% .50% .50%
12b-1 Fees..................................................... None None None
Other Expenses (After Reduction)............................... .20 .26 .26
----- ----- -----
Total Fund Operating Expenses (After Reduction)................ .70%** .76% .76%
----- ----- -----
----- ----- -----
</TABLE>

- ------------------
* Government Income Fund commenced offering Class Z shares on March 1, 1996.
The ratios for Class Z shares are based upon expenses expected to have been
incurred if Class Z shares had been in existence throughout the fiscal year
ended February 29, 1996.

** In the interest of limiting the expenses of Income Fund, PIFM has agreed,
until September 30, 1996, to bear any expenses that would cause the ratio of
expenses payable by Income Fund to exceed .70%. If the Reorganization is
consummated, PMF will not continue this expense limitation after the Closing
Date. Expenses paid or assumed by PIFM are subject to recoupment by PIFM in
later years, provided that (a) no recoupment will be made, in any year, if
it would result in Income Fund's expense ratio exceeding .70%, (b) no
recoupment will be made after December 31, 1996 and (c) no recoupment will
be made after the Closing Date, if the Reorganization is consummated. In the
absence of this agreement, Income Fund's Other Expenses and Total Fund
Operating Expenses would have been .48% and .98%, respectively, for the
fiscal year ended September 30 ,1995.

Set forth below is an example that shows the expenses that an investor in
the combined Fund would pay on a $1,000 investment, based upon the pro forma
ratios set forth above.

<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period............. $ 8 $ 24 $ 42 $ 94
</TABLE>

THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose
of this table is to assist an investor in understanding the various types of
costs and expenses that an investor in the combined Fund will bear, whether
directly or indirectly.

10
<PAGE>
PURCHASES AND REDEMPTIONS

Income Fund shares are offered exclusively to retirement programs and
arrangements (Programs) through their plan sponsors, to individual retirement
accounts (IRAs) and to certain institutional investors. Sponsors of a Program or
their agents are referred to as "Program Sponsor(s)," individual employees
participating in a Program are referred to as "Participant(s)," and individual
investors who separate from a Program are referred to as "Continuing
Participant(s)." Endowments, foundations, insurance companies and other
institutional investors are referred to as "Other Institutional Investors." The
term "shareholders" with respect to Income Fund refers to each or all of these
categories as well as to IRAs, as appropriate.

Shares of Income Fund may be purchased through a Program Sponsor's
recordkeeper or directly from PMFS. There is no minimum initial investment
requirement, and there are no sales charges associated with the purchase or
redemption of Income Fund shares. The purchase price for Income Fund shares is
the net asset value per share next determined following acceptance of a purchase
order by the Program Sponsor's recordkeeper or PMFS.

Class Z shares of Government Income Fund currently are offered exclusively
to Participants in PSI's 401(k) Plan. On or before the Closing Date, Class Z
shares will be made available through PSI, Pruco Securities Corporation
(Prusec), an affiliated broker/dealer, or directly from PMFS, at the net asset
value per share next determined after receipt of a purchase order by PMFS or
PSI. Class Z shares will be available for purchase by (i) pension, profit
sharing or other employee benefit plans qualified under section 401 of the
Internal Revenue Code of 1986, as amended (Internal Revenue Code), deferred
compensation and annuity plans under sections 457 and 403(b)(7) of the Internal
Revenue Code, and non-qualified plans for which Government Income Fund is an
available option (Benefit Plans), provided such plans (in combination with other
plans sponsored by the same employer or group of related employers) have at
least $50 million in defined contribution assets; (ii) participants (other than
Benefit Plans and IRAs) in any fee-based program sponsored by PSI that includes
mutual funds as investment options and for which Government Income Fund is an
available option; and (iii) investors who are, or have executed a letter of
intent to become, shareholders of any series of PIF on or before the Closing
Date or who on that date have investments in certain products for which PIF
provides exchangeability. After a Benefit Plan qualifies to purchase Class Z
shares, all subsequent purchases will be for Class Z shares. There are no sales
charges associated with the purchase or redemption of Government Income Fund
Class Z shares.

Shares of each Fund may be redeemed at any time at the net asset value next
determined after the Program Sponsor's recordkeeper in the case of Income Fund,
or PSI or PMFS in the case of Government Income Fund, receives the redemption
request in proper form. No sales charges will be imposed in connection with the
Reorganization.

EXCHANGE PRIVILEGES

Shareholders of Income Fund have an exchange privilege with other available
funds (depending upon the provisions of the Program) by request through the
Program's recordkeeper at the net asset value next determined after receipt by
PMFS or the Program Sponsor's recordkeeper of an exchange request in good order.
Exchanges of Income Fund shares currently are permitted at no charge, subject to
any minimum investment requirements or any general limitations of the fund into
which an exchange is sought. Currently, there are no such requirements or
limitations.

Class Z shareholders of Government Income Fund have an exchange privilege
with Class Z shares of certain other mutual funds for which PMF serves as
manager or administrator (Prudential Mutual Funds), including one or more
specified money market funds, subject to the minimum investment requirements of

11
<PAGE>
such funds. Class Z shares of Government Income Fund may be exchanged for Class
Z shares of another Prudential Mutual Fund on the basis of relative net asset
value. No sales charge will be imposed at the time of the exchange.

An exchange of shares of either Fund for shares of another Prudential Mutual
Fund is treated as a redemption of Fund shares and purchase of the other fund's
shares for tax purposes. Each Fund's exchange privilege may be modified or
terminated at any time on sixty days' notice.

DIVIDENDS AND OTHER DISTRIBUTIONS

Each Fund declares daily and pays monthly dividends from its net investment
income, if any, and makes distributions at least annually of any net capital
gains. Government Income Fund, as of February 29, 1996, had a capital loss
carryforward for federal income tax purposes of approximately $119,847,000.
Accordingly, no capital gain distribution is expected to be paid to shareholders
until net gains have been received in excess of such carryforward. Shareholders
of both Funds receive dividends and other distributions in additional shares of
the Fund. A Government Income Fund shareholder, unlike the Income Fund
shareholders, will be able to elect in writing not less than five days prior to
the payment date of such dividend or other distribution to receive dividends and
other distributions in cash by providing PMF with written notice of that
election.

FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED REORGANIZATION

PIF and Government Income Fund have received an opinion of Kirkpatrick &
Lockhart LLP to the effect that the proposed Reorganization will constitute a
tax-free reorganization within the meaning of section 368(a)(1)(C) of the
Internal Revenue Code. Accordingly, no gain or loss will be recognized to either
Fund on the transfer to Government Income Fund of all of Income Fund's assets
and the assumption of all of its liabilities, if any, or to shareholders of
Income Fund on their receipt of Class Z shares of Government Income Fund. The
tax basis for such shares to be received by an Income Fund shareholder will be
the same as the shareholder's tax basis for the shares of Income Fund to be
constructively surrendered in exchange therefor. In addition, the holding period
of the Government Income Fund shares to be received by a shareholder pursuant to
the Reorganization will include the period during which the shares of Income
Fund to be constructively surrendered in exchange therefor were held, provided
the latter shares were held as capital assets by the shareholder on the date of
the Reorganization. See "The Proposed Transaction-- Federal Income Tax
Considerations" below.

PRINCIPAL RISK FACTORS

As the investment policies of both Funds are similar, the risks associated
with such investments in either Fund also are similar. Below is a summary of
such risks. For a more complete discussion of the risks attendant to an
investment in Government Income Fund, please see pages 8 through 16 of the
Government Income Fund Prospectus, which accompanies this Prospectus and Proxy
Statement and is incorporated herein by reference.

U.S. GOVERNMENT SECURITIES

Income Fund may and Government Income Fund is required to, invest a
significant portion of its assets in U.S. Government securities. U.S. Government
securities, including those that are guaranteed by federal agencies or
instrumentalities, may or may not be guaranteed by the "full faith and credit"
of the United States. In the case of securities not backed by the full faith and
credit of the United States, a Fund must look principally to the agency issuing
or guaranteeing the obligation for ultimate repayment and may not be able to
assert a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Although each Fund invests in
obligations issued or guaranteed by U.S. Government agencies

12
<PAGE>
or instrumentalities, these guarantees apply only to the payment of principal
and interest on these securities and do not extend to the securities' yield or
value, which are likely to vary with fluctuations in interest rates, nor do the
guarantees extend to the yield or value of the applicable Fund's shares.

HEDGING AND RETURN ENHANCEMENT

Government Income Fund may utilize up to 35% of its total assets to engage
in various hedging and income enhancement strategies, including derivative
transactions such as the purchase and sale of put and call options on U.S.
Government securities, transactions involving futures contracts on U.S.
Government securities and options on such futures contracts and in interest rate
swap transactions. For hedging or incidental yield enhancement purposes, Income
Fund may (1) purchase and sell put and call options on securities and interest
rate indices; (2) purchase and sell futures contracts on securities and
securities indices; and (3) enter into interest rate swap transactions, caps,
collars and floors, in order to invest uncommitted cash balances, to maintain
liquidity to meet redemptions, or for hedging or incidental yield enhancement
purposes.

Participation in the options or futures markets involves investment risks
and transaction costs to which neither Income Fund nor Government Income Fund
would be subject absent the use of these strategies. If an adviser's prediction
of movements in the direction of the securities or interest rates is inaccurate,
the adverse consequences to a Fund may leave the Fund in a worse position than
if such strategies were not used. Risks inherent in the use of options and
futures contracts and options on futures contracts include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction of
interest rates, securities prices and currency markets; (2) imperfect
correlation, or even no correlation, between the price of options, futures
contracts and options thereon and movements in the prices of the assets 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; (5) the
possible need to defer closing out certain hedged positions to avoid adverse tax
consequences; (6) the fact that, while hedging strategies can reduce the risk of
loss, they also can reduce the opportunity for gain, or even result in losses,
by offsetting favorably price movements in hedged investments; and (7) the
possible inability of a 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 a
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.

FOREIGN INVESTMENTS

Government Income Fund may invest in foreign banks and foreign branches of
U.S. banks only if, after giving effect to such investments, all such
investments would constitute less than 10% of the Fund's total assets. Income
Fund may invest up to 35% of its assets in fixed income securities and equity
securities of foreign issuers (denominated in either U.S. or foreign currency).
Because Income Fund may invest a higher percentage of its assets in foreign
securities and may invest more broadly in foreign securities, the risks inherent
in investing in foreign securities are greater with respect to Income Fund.

Investing in securities of foreign companies in foreign countries involves
certain considerations and risks that typically are not associated with
investing in U.S. Government securities and those of domestic companies. These
risks include political or economic instability in the country of issue, the
difficulty of predicting international trade patterns, the possible imposition
of exchange controls and the risk of currency fluctuations. Foreign companies
generally are not subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies. In
addition, there may be less publicly available information about foreign
companies and governments compared to reports and ratings published about U.S.
companies.

13
<PAGE>
Foreign securities may be subject to greater fluctuations in price than
securities issued by domestic companies or issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. In addition, interest and
dividends paid by foreign companies may be subject to withholding and other
foreign taxes that may decrease the net return on such investments as compared
to dividends and interest paid by the U.S. Government or by domestic companies.
There generally is less government regulation of securities exchanges, brokers
and listed companies abroad than in the United States, and, with respect to
certain foreign countries, there is a possibility of expropriation, confiscatory
taxation, or diplomatic developments that could affect investment in those
countries. Securities of some foreign companies are less liquid and more
volatile than securities of comparable U.S. companies, and brokerage commissions
and other transaction costs on foreign securities exchanges generally are higher
than in the United States. Finally, in the event of a default of any such
foreign fixed income obligations, it may be more difficult for a Fund to obtain
or to enforce a judgment against the issuers of such securities. If the security
is foreign currency denominated, it may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and costs may be
incurred in connection with conversions between currencies.

REALIGNMENT OF INVESTMENT PORTFOLIO

The portfolio manager of Government Income Fund anticipates selling certain
securities in the investment portfolio of the combined Fund following the
consummation of the transaction. The portfolio manager expects that Government
Income Fund will sell certain securities acquired in the Reorganization that are
inconsistent with its investment objectives and policies, such as securities
rated below A by S&P or Moody's. The portfolio manager also may sell securities
to consolidate portfolio holdings, as appropriate. At this time it is not
possible to designate the securities that may be sold. Sale of these securities
may affect the aggregate amount of taxable gains and losses recognized by
Government Income Fund. If the net effect of such sales is a gain, it would have
to be distributed, although this is unlikely due to Government Income Fund's
large capital loss carryforward. See "Synopsis -- Dividends and Other
Distributions" above. Any distributed gain resulting from the Reorganization may
subject Income Fund shareholders to tax liabilities on the distributed gain to
which they would not have been subject had the Reorganization not occurred.

ANNUAL MEETING OF GOVERNMENT INCOME FUND SHAREHOLDERS

It is anticipated that an annual meeting of Government Income Fund
shareholders will be held in October 1996. It is intended that at such meeting
Government Income Fund shareholders will consider: (i) electing Government
Income Fund's Board (information on the nominated slate of Directors for
Government Income Fund is attached hereto as Appendix D), (ii) ratifying the
Board's selection of Deloitte & Touche LLP as Government Income Fund's
independent public accountants, (iii) deleting Government Income Fund's
fundamental policy limiting the Government Income Fund's investment in
securities of companies (including predecessors) less than three years then
three years old to 5% of total assets, and (iv) increasing from 5% to 10% the
percentage of total assets Government Income Fund may invest in the securities
of other investment companies.

Approval of these proposals by the shareholders of Government Income Fund is
not a condition to completion of the Reorganization. Only Government Income Fund
shareholders of record on August 9, 1996, will be entitled to vote on the above
proposals. There can be no assurance that any or all of these proposals will be
approved by the shareholders of Government Income Fund.

14
<PAGE>
THE PROPOSED TRANSACTION

AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION

The terms and conditions under which the Reorganization may be consummated
are set forth in the Plan. Significant provisions of the Plan are summarized
below; however, this summary is qualified in its entirety by reference to the
Plan, a copy of which is attached as Appendix A to this Prospectus and Proxy
Statement.

The Plan contemplates (i) Government Income Fund acquiring all of the assets
of Income Fund in exchange solely for Class Z shares of Government Income Fund
and the assumption by Government Income Fund of all of Income Fund's
liabilities, if any, as of the Closing Date, (ii) the constructive distribution
on the Closing Date of such Class Z shares to the shareholders of Income Fund
and (iii) the termination of Income Fund.

The assets of Income Fund to be acquired by Government Income Fund shall
include, without limitation, all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by Income Fund and any deferred or prepaid expenses shown as assets on the
books of Income Fund on the Closing Date. Government Income Fund will assume
from Income Fund all debts, liabilities, obligations and duties of Income Fund
of whatever kind or nature; provided, however, that Income Fund will utilize its
best efforts, to the extent practicable, to discharge all of its known debts,
liabilities, obligations and duties prior to the Closing Date. Government Income
Fund will deliver to Income Fund Class Z shares of Government Income Fund, which
Income Fund will then distribute to its shareholders.

The value of Income Fund's assets to be acquired and the amount of its
liabilities to be assumed by Government Income Fund and the net asset value of a
Class Z share of Government Income Fund will be determined as of 4:15 p.m., New
York time, on the Closing Date in accordance with the valuation procedures
specified in the respective Fund's then-current Prospectus and Statement of
Additional Information. Securities and other assets and liabilities for which
market quotations are not readily available will be valued at fair value as
determined in good faith under procedures established by PIF's and Government
Income Fund's respective Boards.

As soon as practicable after the Closing Date, Income Fund will distribute
PRO RATA to its shareholders of record, determined as of the close of business
on the Closing Date, the Class Z shares of Government Income Fund received by
Income Fund in exchange for such shareholders' shares of Income Fund. Such
distribution will be accomplished by opening accounts on the books of Government
Income Fund in the names of Income Fund shareholders and by transferring thereto
Class Z shares of Government Income Fund previously credited to the account of
Income Fund on those books. Each shareholder account shall be credited with the
respective PRO RATA number of Government Income Fund Class Z shares due to the
shareholder in whose name the account is established. Fractional shares of
Government Income Fund will be rounded to the third decimal place.

Accordingly, every shareholder of Income Fund will own Class Z shares of
Government Income Fund immediately after the Reorganization that, except for
rounding, will have a total value equal to the value of that shareholder's
shares of Income Fund immediately prior to the Reorganization. Moreover, because
Class Z shares of Government Income Fund will be issued at net asset value in
exchange for net assets of Income Fund that, except for rounding, will have a
value equal to the aggregate value of those shares, the net asset value per
Class Z share of Government Income Fund will be unchanged. Thus, the
Reorganization will not result in a dilution of the value of any shareholder
account. However, as a result of the Reorganization,

15
<PAGE>
the percentage of ownership interest of each former Income Fund shareholder in
the combined Fund will be less than such shareholder's current percentage of
ownership in Income Fund because, while the shareholder will have the same
dollar amount invested initially in Government Income Fund that it had invested
in Income Fund, its investment will represent a smaller percentage of the
combined net assets of the two Funds.

Any transfer taxes payable upon issuance of shares of Government Income Fund
in a name other than that of the registered holder of the shares on the books of
Income Fund as of the time of transfer shall be paid by the person to whom such
shares are to be issued as a condition of such transfer. Any reporting
responsibility of Income Fund will continue to be its responsibility up to and
including the Closing Date and such later date on which it is terminated.

The consummation of the Reorganization is subject to a number of conditions
set forth in the Plan, some of which may be waived by either Board. Consummation
of the Reorganization also is conditioned upon the SEC's issuance of the
Exemptive Order. The Plan may be terminated and the Reorganization abandoned at
any time prior to the Closing Date, before or after approval by the shareholders
of Income Fund. In addition, the Plan may be amended in any mutually agreeable
manner, except that subsequent to the Meeting no amendment may be made that
would detrimentally affect the value of the Government Income Fund shares to be
distributed.

REASONS FOR THE REORGANIZATION
The Board of PIF, including a majority of its Independent Trustees, has
determined that the interests of Income Fund shareholders will not be diluted as
a result of the proposed Reorganization and that the proposed Reorganization is
in the best interests of Income Fund. In addition, the Board of Government
Income Fund, including a majority of its Independent Directors, has determined
that the interests of Government Income Fund shareholders will not be diluted as
a result of the proposed Reorganization and that the proposed Reorganization is
in the best interests of Government Income Fund.

The reasons for the proposed Reorganization are summarized above under
"Synopsis--Reasons for the Proposed Reorganization." Each Board based its
decision to approve the Plan on an inquiry into a number of factors, including
the following:

(1) the compatibility of the investment objectives, policies and
restrictions of the Funds;

(2) the relative past and current growth in assets and investment
performance and future prospects of each Fund;

(3) the anticipated effect of the Reorganization on the expense ratios
of each Fund;

(4) the costs of the Reorganization, which will be paid for by each Fund
in proportion to its respective net asset level;

(5) the tax-free nature of the Reorganization to each Fund and its
shareholders; and

(6) the potential benefits to the shareholders of each Fund.

If the Plan is not approved by Income Fund shareholders, the PIF Board may
consider other appropriate action, such as the liquidation of Income Fund or a
merger or other business combination with an investment company other than
Government Income Fund.

16
<PAGE>
DESCRIPTION OF SECURITIES TO BE ISSUED

Class Z shares of Government Income Fund will be issued to Income Fund
shareholders on the Closing Date. Government Income Fund is authorized to issue
500 million shares of Class Z common stock, $.01 par value per share. Each Class
Z share represents an equal and proportionate interest in the same assets of
Government Income Fund. For further discussion of Government Income Fund Class Z
shares, see "Synopsis--Structure of Income Fund and Government Income Fund"
above.

FEDERAL INCOME TAX CONSIDERATIONS

PIF and Government Income Fund have received an opinion from Kirkpatrick &
Lockhart LLP, PIF's counsel, substantially to the effect that (1) the
Reorganization will constitute a reorganization within the meaning of section
368(a)(1)(C) of the Internal Revenue Code, and each Fund will be a "party to a
reorganization" within the meaning of section 368(b) of the Internal Revenue
Code; (2) an Income Fund shareholder will recognize no gain or loss on the
constructive exchange of all its Income Fund shares solely for Class Z shares of
Government Income Fund in complete liquidation of Income Fund (Internal Revenue
Code section 354(a)(1)); (3) no gain or loss will be recognized to Income Fund
on the transfer of its assets to Government Income Fund in exchange solely for
Class Z shares of Government Income Fund and the assumption by Government Income
Fund of Income Fund's liabilities, if any, and the subsequent distribution of
those shares to Income Fund's shareholders in complete liquidation thereof
(Internal Revenue Code sections 361(a) and 357(a)); (4) no gain or loss will be
recognized to Government Income Fund on the acquisition of such assets in
exchange solely for Government Income Fund Class Z shares and its assumption of
Income Fund's liabilities, if any (Internal Revenue Code section 1032(a)); (5)
Government Income Fund's basis for the assets to be received pursuant to the
Reorganization will be the same as the basis thereof in Income Fund's hands
immediately before the Reorganization, and Government Income Fund's holding
period for those assets will include Income Fund's holding period therefor
(Internal Revenue Code sections 362(b) and 1223(2)); (6) an Income Fund
shareholder's basis for the Class Z shares of Government Income Fund to be
received by it pursuant to the Reorganization will be the same as its basis for
the shares of Income Fund to be constructively surrendered in exchange therefor
(Internal Revenue Code section 358(a)(1)); and (7) the holding period of the
Class Z shares of Government Income Fund to be received by a shareholder of
Income Fund pursuant to the Reorganization will include the period during which
the shares of Income Fund to be constructively surrendered in exchange therefor
were held, provided the latter shares were held as capital assets by the
shareholder on the date of the exchange (Internal Revenue Code section 1223(1)).

Shareholders of Income Fund should consult their tax advisers regarding the
effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.

CERTAIN COMPARATIVE INFORMATION ABOUT GOVERNMENT INCOME FUND AND PIF

ORGANIZATION. Government Income Fund is a Maryland corporation, and the
rights of its shareholders are governed by its Articles of Incorporation, its
By-Laws and applicable Maryland law. PIF is a Delaware business trust, and the
rights of its shareholders are governed by its Declaration of Trust, its By-Laws
and applicable Delaware law.

17
<PAGE>
CAPITALIZATION. Government Income Fund is authorized to issue two billion
shares of common stock, par value $.01 per share, divided into four classes,
each of which consists of 500 million authorized shares. PIF's Declaration of
Trust authorizes the Board to issue an unlimited number of full and fractional
shares of beneficial interest, par value $.001 per share. Income Fund offers one
class of shares.

In addition, the Boards of PIF and Government Income Fund may authorize an
increase in the number of authorized shares and may reclassify unissued shares
to authorize additional classes of shares having terms and rights determined by
the respective Board without shareholder approval.

SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Fund is required
to hold annual meetings of its shareholders. Each Fund is required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of a Director/Trustee when requested in writing to do so by the holders of at
least 10% of the Fund's outstanding shares entitled to vote. In addition, each
Fund is required to call a meeting of shareholders for the purpose of electing
Directors/Trustees if, at any time, less than a majority of the
Directors/Trustees holding office was elected by shareholders.

Shareholders of PIF are entitled to vote on all matters submitted to a vote
of its shareholders under its Declaration of Trust, which includes the power to
vote (i) for the election or removal of Trustees as provided in the Declaration
of Trust, and (ii) with respect to such additional matters relating to PIF as
may be required by applicable law, the Declaration of Trust, its By-Laws or any
registration of PIF with the SEC (or any successor agency) or any state, or as
the Board may consider necessary or desirable. Each whole share is entitled to
one vote as to any matter on which it is entitled to vote and each fractional
share is entitled to a proportionate fractional vote.

Shareholders of Government Income Fund are entitled to one vote for each
share on all matters submitted to a vote of its shareholders under Maryland law.
Approval of certain matters, such as an amendment to the Articles of
Incorporation, a merger, consolidation or transfer of all or substantially all
assets, dissolution and removal of a Director, requires the affirmative vote of
a majority of the votes entitled to be cast. Other matters require the approval
of the affirmative vote of a majority of the votes cast at a meeting at which a
quorum is present.

Government Income Fund's By-Laws provide that a majority of the outstanding
shares shall constitute a quorum for the transaction of business at a
shareholders' meeting. PIF's Declaration of Trust states that, except when a
larger quorum is required by applicable law, by PIF's By-Laws or by the
Declaration of Trust, forty percent (40%) of the shares entitled to vote at a
shareholder meeting shall constitute a quorum for the transaction of business at
a shareholders' meeting.

SHAREHOLDER LIABILITY. Under Maryland law, shareholders of Government
Income Fund have no personal liability as such for Government Income Fund's acts
or obligations. Under Delaware law, Income Fund's shareholders similarly have no
personal liability as such for Income Fund's acts or obligations.

LIABILITY AND INDEMNIFICATION OF DIRECTORS/TRUSTEES. Under Government
Income Fund's Articles of Incorporation and Maryland law, a Director or officer
of the Fund is not liable to Government Income Fund or its shareholders for
monetary damages for breach of fiduciary duty as a Director or officer except to
the extent such exemption from liability or limitation thereof is not permitted
by law, including the Investment Company Act. Generally, under PIF's Declaration
of Trust and Delaware law, no Trustee or officer of PIF shall be liable to
Income Fund or its shareholders for any action or failure to act except for his
or her own bad faith, willful misfeasance, gross negligence or reckless
disregard of his or her duties and is not liable for errors of judgment or
mistakes.

18
<PAGE>
Under the Investment Company Act, a Director/Trustee may not be protected
against liability to a Fund and its security holders to which he or she would
otherwise be subject as a result of his or her willful misfeasance, bad faith or
gross negligence in the performance of his or her duties, or by reason of
reckless disregard of his or her obligations and duties. The staff of the SEC
interprets the Investment Company Act to require additional limits on
indemnification of Directors/Trustees and officers.

The foregoing is only a summary of certain differences between PIF, its
Declaration of Trust, its By-Laws and Delaware law, and Government Income Fund,
its Articles of Incorporation, its By-Laws and Maryland law.

PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of Income Fund and Government
Income Fund (Class Z) as of March 31, 1996 and the pro forma combined
capitalization of both Funds as if the Reorganization had occurred on that date.

<TABLE>
<CAPTION>
GOVERNMENT
INCOME FUND
INCOME FUND CLASS Z* PRO FORMA COMBINED
------------- ------------- ---------------------
<S> <C> <C> <C>
Net Assets (000)............................................... $ 57,326 $ 14,215 $ 71,541
Net Asset Value per share...................................... $ 9.92 $ 8.90 $ 8.90
Shares Outstanding (000)....................................... 5,780 1,597 8,038
</TABLE>

- ------------------
*Class Z shares commenced being offered on March 1, 1996.

The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of Income Fund for the
fiscal year ended September 30, 1995, and has been restated for Government
Income Fund -- Class Z shares to reflect data for the period March 1, 1996
through March 31, 1996. The ratios also are shown on a pro forma combined basis,
assuming the Reorganization occurs on or about September 20, 1996.

<TABLE>
<CAPTION>
GOVERNMENT
INCOME FUND INCOME FUND--CLASS Z(A) PRO FORMA COMBINED
----------------- --------------------------- -----------------------
<S> <C> <C> <C>
Ratio of expenses to average net assets (b)......... 0.70% 0.76% 0.76%
Ratio of net investment income to average net
assets............................................. 6.17% 5.99% 5.99%
</TABLE>

- ------------------
(a) Government Income Fund commenced offering Class Z shares on March 1, 1996.
(b) Through a period scheduled to end on September 30, 1996, PIFM voluntarily
reimburses Income Fund for any expenses in excess of .70% of average net
assets. Absent such reimbursement, the ratio of expenses to average net
assets would be .98%. If the Reorganization is consummated, PMF will not
continue this expense limitation after the Closing Date.

INFORMATION ABOUT GOVERNMENT INCOME FUND

FINANCIAL INFORMATION

For condensed financial information for Government Income Fund, see
"Financial Highlights" in the Government Income Fund Prospectus, which
accompanies this Prospectus and Proxy Statement.

GENERAL

For a discussion of the organization, classification and sub-classification
of Government Income Fund, see "General Information" and "Fund Highlights" in
the Government Income Fund Prospectus.

19
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES

For a discussion of Government Income Fund's investment objective and
policies and of risk factors associated with an investment in Government Income
Fund, see "How the Fund Invests" in the Government Income Fund Prospectus.

BOARD OF DIRECTORS

For a discussion of the responsibilities of Government Income Fund's Board,
see "How the Fund is Managed" in the Government Income Fund Prospectus. See
Appendix D for information on the nominated slate of Directors to be presented
to Government Income Fund's shareholders at an annual meeting anticipated to be
held in October 1996.

MANAGER AND PORTFOLIO MANAGER

For a discussion of Government Income Fund's manager, subadviser and
portfolio manager, see "How the Fund is Managed--Manager" in the Government
Income Fund Prospectus.

PORTFOLIO TRANSACTIONS

For a discusson of Government Income Fund's policy with respect to
brokerage, see "How the Fund is Managed--Portfolio Transactions" in the
Government Income Fund Prospectus.

PERFORMANCE

For a discussion of Government Income Fund's performance during the fiscal
year ended February 29, 1996, see Appendix B hereto.

GOVERNMENT INCOME FUND SHARES

For a discussion of Government Income Fund Class Z shares, including voting
rights and exchange rights, and how the shares may be purchased and redeemed,
see "General Information," "Shareholder Guide" and "How the Fund is Managed" in
the Government Income Fund Prospectus.

NET ASSET VALUE

For a discussion of how the offering price of Government Income Fund Class Z
shares is determined, see "How the Fund Values its Shares" in the Government
Income Fund Prospectus.

TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS

For a discussion of Government Income Fund's policy with respect to
dividends and other distributions and the tax consequences of an investment in
Class Z shares, see "Taxes, Dividends and Distributions" in the Government
Income Fund Prospectus.

20
<PAGE>
INFORMATION ABOUT INCOME FUND

FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)

Unless indicated otherwise, the following financial highlights have been
audited by Deloitte & Touche LLP, independent accountants, whose report thereon
was unqualified. This information is derived from and should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The following financial highlights contain
selected data for a share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated.

<TABLE>
<CAPTION>
SIX MONTHS MARCH 1,
ENDED YEAR ENDED 1993(A)
MARCH 31, SEPTEMBER 30, THROUGH
1996 ------------------ SEPTEMBER 30,
(UNAUDITED) 1995 1994 1993
----------- ------- ------- -------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C>
Net asset value, beginning of period................... $ 9.98 $ 9.38 $ 10.33 $ 10.00

INCOME FROM INVESTMENT OPERATIONS:
Net investment income(b)............................... .29 .59 .52 .27
Net realized and unrealized gain (loss) on investment
and foreign currency transactions..................... (.06) .60 (.91) .33
----------- ------- ------- -------------
Total from investment operations..................... .23 1.19 (.39) .60
----------- ------- ------- -------------
LESS DISTRIBUTIONS:
Dividends from net investment income................... (.29) (.59) (.52) (.27)
Distributions from net realized gains.................. -- -- (.04) --
----------- ------- ------- -------------
Total distributions.................................. (.29) (.59) (.56) (.27)
----------- ------- ------- -------------
Net asset value, end of period......................... $ 9.92 $ 9.98 $ 9.38 $ 10.33
----------- ------- ------- -------------
----------- ------- ------- -------------
TOTAL RETURN(D):....................................... 2.35% 13.11% (3.91)% 6.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $57,326 $52,297 $41,401 $35,015
Average net assets (000)............................... $55,718 $46,386 $37,802 $25,626
Ratios to average net assets:(b)
Expenses............................................. .70%(c) .70% .70% .70%(c)
Net investment income................................ 5.90%(c) 6.17% 5.24% 4.62%(c)
Portfolio turnover rate................................ 53% 145% 83% 93%
Average commission rate paid per share................. N/A N/A N/A N/A
</TABLE>

- ----------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and include reinvestment
of dividends and distributions. Total return for periods of less than a full
year are not annualized. Total return includes the effect of expense
subsidies.

21
<PAGE>
GENERAL

For a discussion of the organization, classification and sub-classification
of Income Fund, see "Introduction to the Funds" and "More Facts About the
Company" in the PIF Prospectus.

INVESTMENT OBJECTIVE AND POLICIES

For a discussion of Income Fund's investment objective and policies and of
risk factors associated with an investment in Income Fund, see "The Funds" and
"Other Investment Practices, Risk Considerations, and Policies of the Funds" in
the PIF Prospectus.

BOARD OF TRUSTEES

For a discussion of the responsibilities of PlF's Board, see "Management of
the Company" and "More Facts About the Company" in the PIF Prospectus.

MANAGER AND PORTFOLIO MANAGER

For a discussion of PIF's manager and subadvisers and Income Fund's
portfolio manager, see "Management of the Company" in the PIF Prospectus.

PORTFOLIO TRANSACTIONS

For a discussion of Income Fund's policy with respect to brokerage, see
"Other Considerations-- Portfolio Transactions" in the PIF Prospectus.

PERFORMANCE

For a discussion of Income Fund's performance during the fiscal year ended
September 30, 1995, see Appendix C hereto.

INCOME FUND SHARES

For a discussion of Income Fund shares, including voting and exchange rights
and how the shares may be purchased and redeemed, see "Investors Guide to
Services" and "More Facts About the Company" in the PIF Prospectus.

NET ASSET VALUE

For a discussion of how the offering price of Income Fund shares is
determined, see "Other Considerations--Net Asset Value" in the PIF Prospectus.

TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS

For a discussion of Income Fund's policy with respect to dividends and other
distributions and the tax consequences of an investment in its shares, see
"Other Considerations" in the PIF Prospectus.

MISCELLANEOUS

ADDITIONAL INFORMATION

PIF and Government Income Fund are subject to the informational requirements
of the Securities Exchange Act of 1934 and in accordance therewith file reports
and other information with the SEC. Reports and other information filed by PIF
and Government Income Fund can be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices in New York (7 World
Trade Center, Suite 1300, New York, New York 10048) and Chicago (Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511).

22
<PAGE>
Copies of such material also can be obtained at prescribed rates from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.

LEGAL MATTERS

Certain legal matters in connection with the issuance of Government Income
Fund Class Z shares as part of the Reorganization will be passed upon by
Shereff, Friedman, Hoffman & Goodman, LLP, counsel to Government Income Fund.

EXPERTS

The audited financial statements of Income Fund and Government Income Fund,
incorporated by reference herein or in the Statement of Additional Information,
have been audited by Deloitte & Touche LLP, independent accountants, to the
extent indicated in its reports thereon which are included in PIF's and
Government Income Fund's Annual Reports to Shareholders for the fiscal years
ended September 30, 1995 and February 29, 1996, respectively. The financial
statements audited by Deloitte & Touche LLP have been incorporated by reference
herein or in the Statement of Additional Information in reliance on its reports
given as experts in auditing and accounting.

VOTING INFORMATION

Forty percent of the shares of Income Fund outstanding on July 12, 1996,
represented in person or by proxy, must be present for the transaction of
business at the Meeting. In the event that a quorum is not present at the
Meeting, or if a quorum is present but sufficient votes to approve the proposal
are not received, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of Proxies. Any such
adjournment will require the affirmative vote of a majority of those shares
present at the Meeting or represented by proxy. When voting on a proposed
adjournment, the persons named as proxies will vote all shares that they are
entitled to vote for the proposed adjournment, unless directed to disapprove the
proposal, in which case such shares will be voted against the proposed
adjournment. Any questions as to an adjournment of the Meeting will be voted on
by the persons named in the enclosed Proxy in the same manner that the Proxies
are instructed to be voted. In the event that the Meeting is adjourned, the same
procedures will apply at a later Meeting date.

If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified on a proxy,
the shares represented thereby will be voted for the proposal. A Proxy may be
revoked at any time prior to the time it is voted by written notice to the
Secretary of PIF or by attendance at the Meeting. If a Proxy that is properly
executed and returned is accompanied by instructions to withhold authority to
vote (an abstention) or represents a broker "non-vote" (that is, a Proxy from a
broker or nominee indicating that such person has not received instructions from
the beneficial owner or other person entitled to vote shares on a particular
matter with respect to which the broker or nominee does not have discretionary
power), the shares represented thereby, with respect to matters to be determined
by a majority of the votes cast on such matters, will be considered present at
the Meeting for purposes of determining the existence of a quorum for the
transaction of business but, not being cast, will have no effect on the outcome
of such matters.

The close of business on July 12, 1996, has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, Income Fund had 5,852,503 shares outstanding and entitled
to vote. Each outstanding full share of Income Fund will be entitled to one

23
<PAGE>
vote at the Meeting, and each outstanding fractional share of Income Fund will
be entitled to a proportionate fractional part of one vote. As of July 12, 1996,
the Trustees and officers of PIF, as a group, owned less than 1% of the
outstanding shares of Income Fund and the Directors and officers of Government
Income Fund, as a group, owned less than 1% of the outstanding shares of that
Fund. As of July 12, 1996, the following shareholders owned beneficially or of
record 5% or more of Government Income Fund's outstanding Class A, Class B,
Class C or Class Z shares: S.B. Urban TTEE, F.H. Peterson Machine Corp., FBO
Wilbur J. Boss, P.O. Box 617, Stoughton, MA 02072-0617 owned 21,109 Class C
shares (approximately 8% of the outstanding Class C shares); and Anthony
Tarantino and Frances Tarantino JTTEN, 656 Guy Lombardo Ave., Freeport, NY
11520-6203 owned 14,672 Class C shares (approximately 5% of the outstanding
Class C shares). As of July 12, 1996, the following shareholders owned
beneficially or of record 5% or more of Income Fund's outstanding shares: The
Prudential Insurance Company of America, 30 Scranton Office Park, Moosic, PA
18507-1789 owned 3,020,269 shares (approximately 52% of the outstanding shares);
and Rite Aid Employee Investment Opportunity Plan, Rite Aid Corporation, 30
Hunter Lane, Camp Hill, PA 17011 owned 742,021 shares (approximately 13% of the
outstanding shares). Prudential intends to vote any shares for which it has
direct voting authority FOR the proposed Reorganization.

The expenses of the Reorganization and the solicitation of proxies will be
borne by Income Fund and Government Income Fund in proportion to their
respective assets and will include reimbursement of brokerage firms and others
for expenses in forwarding proxy solicitation material to the shareholders of
Income Fund. The solicitation of proxies will be largely by mail but may include
telephonic, telegraphic or oral communication by regular employees of PIFM and
its affiliates, including PMF. This cost, including specified expenses, also
will be borne by Income Fund and Government Income Fund in proportion to their
respective assets.

OTHER MATTERS

No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of Income
Fund arise, including any question as to an adjournment of the Meeting, the
persons named in the enclosed Proxy will vote thereon according to their best
judgment in the interests of Income Fund, taking into account all relevant
circumstances.

SHAREHOLDERS' PROPOSALS

Any Income Fund shareholder proposal intended to be presented at any
subsequent meeting of the shareholders of Income Fund must be received by PIF a
reasonable time before the Board's solicitation relating to such meeting is made
in order to be included in Income Fund's Proxy Statement and form of Proxy
relating to that meeting. In the event that the Plan is approved at this
Meeting, it is not expected that there will be any future shareholder meetings
of Income Fund.

It is the present intent of the Boards of PIF and Government Income Fund not
to hold annual meetings of shareholders unless the election of
Directors/Trustees is required under the Investment Company Act nor to hold
special meetings of shareholders unless required by the Investment Company Act
or state law.

S. JANE ROSE
SECRETARY

Dated: July 31, 1996

24
<PAGE>
APPENDIX A

AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION

Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the 26th day of July, 1996, by and between The Prudential Institutional Fund
(Institutional Fund) and Prudential Government Income Fund, Inc. (Acquiror Fund)
(collectively, the Investment Companies and each individually, an Investment
Company). Institutional Fund is a Delaware business trust and maintains its
principal place of business at 751 Broad Street, Newark, New Jersey 07102.
Acquiror Fund is a Maryland corporation and maintains its principal place of
business at One Seaport Plaza, New York, New York 10292. Shares of Institutional
Fund are divided into seven portfolios, including Income Fund (Acquiree Fund).
(Acquiror Fund and Acquiree Fund are sometimes referred to herein collectively
as the Funds and each individually as a Fund.) Acquiror Fund's shares are
divided into four classes of shares, Class A, Class B, Class C and Class Z
shares; only Class Z shares are involved in the transactions described herein.

This Agreement is intended to be, and is adopted as, a plan of a
reorganization pursuant to section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). The reorganization will comprise the
transfer of all of the assets of Acquiree Fund in exchange solely for Class Z
shares of Acquiror Fund and Acquiror Fund's assumption of all of Acquiree Fund's
liabilities, if any, and the constructive distribution, after the Closing Date
hereinafter referred to, of such shares of Acquiror Fund to the shareholders of
Acquiree Fund in liquidation of Acquiree Fund as provided herein, all upon the
terms and conditions as hereinafter set forth. (The foregoing transactions are
referred to herein as the Reorganization.)

In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:

1. TRANSFER OF ASSETS OF ACQUIREE FUND IN EXCHANGE FOR CLASS Z SHARES OF
ACQUIROR FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND LIQUIDATION OF ACQUIREE
FUND.

1.1 Subject to the terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, Acquiree Fund
agrees to sell, assign, transfer and deliver its assets, as set forth in
paragraph 1.2, to Acquiror Fund, and Acquiror Fund agrees (a) to issue and
deliver to Acquiree Fund in exchange therefor the number of Class Z shares
in Acquiror Fund determined by dividing the net asset value of Acquiree Fund
(computed in the manner and as of the time and date set forth in paragraph
2.1) by the net asset value of a Class Z share of Acquiror Fund (computed in
the manner and as of the time and date set forth in paragraph 2.2); and (b)
to assume all of Acquiree Fund's liabilities, if any, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided
for in paragraph 3 (Closing).

1.2 The assets of Acquiree Fund to be acquired by Acquiror Fund shall
include without limitation all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property
of any kind owned by Acquiree Fund and any deferred and prepaid expenses
shown as assets on the books of Acquiree Fund on the closing date provided
in paragraph 3.1 (Closing Date).

1.3 Acquiror Fund will assume from Acquiree Fund all debts,
liabilities, obligations and duties of Acquiree Fund of whatever kind or
nature, whether absolute, accrued, contingent or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable as
of the Closing Date, and whether or not specifically referred to in this
Agreement; provided, however, that Acquiree Fund agrees to utilize its best
efforts to discharge all of its known debts, liabilities, obligations and
duties prior to the Closing Date.

A-1
<PAGE>
1.4 On or immediately prior to the Closing Date, Acquiree Fund will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in any
event not less than ninety-eight percent) of its investment company taxable
income (computed without regard to any deduction for dividends paid), net
tax-exempt interest income, if any, and realized net capital gains, if any,
for all taxable years through its liquidation.

1.5 On a date (Liquidation Date), as soon after the Closing Date as is
conveniently practicable, Acquiree Fund will distribute PRO RATA to its
shareholders of record, determined as of the close of business on the
Closing Date, the shares of Acquiror Fund received by Acquiree Fund pursuant
to paragraph 1.1 in exchange for their interest in Acquiree Fund. Such
distribution will be accomplished by opening accounts on the books of
Acquiror Fund in the names of Acquiree Fund shareholders and transferring
thereto the shares credited to the account of Acquiree Fund on the books of
Acquiror Fund. Each such shareholder account shall be credited with the
respective PRO RATA number of Acquiror Fund shares due the shareholder in
whose name the account is established. Fractional shares of Acquiror Fund
shall be rounded to the third decimal place. Acquiror Fund shall not issue
certificates representing its shares in connection with such distribution.

1.6 Ownership of Acquiror Fund shares will be shown on the books of
Acquiror Fund's transfer agent. Shares of Acquiror Fund will be issued in
the manner described in its then-current prospectus and statement of
additional information.

1.7 Any transfer taxes payable upon issuance of shares of Acquiror
Fund in a name other than the registered holder of the shares on the books
of Acquiree Fund as of the time of transfer thereof shall be paid by the
person to whom such shares are to be issued as a condition to the
registration of such transfer.

1.8 Any reporting responsibility with the Securities and Exchange
Commission (SEC) or any state securities commission of Acquiree Fund is and
shall remain the responsibility of Acquiree Fund up to and including the
Liquidation Date.

1.9 All books and records of Acquiree Fund, including all books and
records required to be maintained under the Investment Company Act of 1940
(Investment Company Act) and the rules and regulations thereunder, shall be
available to Acquiror Fund from and after the Closing Date and shall be
turned over to Acquiror Fund on or prior to the Liquidation Date.

1.10 As soon as reasonably practicable after distribution of the
Acquiror Fund shares pursuant to paragraph 1.5, Acquiree Fund shall be
terminated as a series of Institutional Fund and any further actions shall
be taken in connection therewith as required by applicable law.

2. VALUATION

2.1 The value of Acquiree Fund's assets and liabilities to be acquired
and assumed, respectively, by Acquiror Fund shall be the net asset value of
Acquiree Fund computed as of 4:15 p.m., New York time, on the Closing Date
(such time and date being hereinafter called the Valuation Time), using the
valuation procedures set forth in Acquiree Fund's then-current prospectus
and statement of additional information.

2.2 The net asset value of a Class Z share of Acquiror Fund shall be
the net asset value per such share computed as of the Valuation Time, using
the valuation procedures set forth in Acquiror Fund's then-current
prospectus and statement of additional information.

A-2
<PAGE>
2.3 All computations of net asset value shall be made by or under the
direction of Prudential Mutual Fund Management, Inc. (PMF) in accordance
with its regular practice as manager or administrator, as the case may be,
of each Investment Company.

3. CLOSING AND CLOSING DATE

3.1 Except as provided in paragraph 3.3, the date of the closing shall
be September 20, 1996, or such later date as the parties may agree to
(Closing Date). All acts taking place at the Closing shall be deemed to take
place simultaneously as of the close of business on the Closing Date unless
otherwise provided. The Closing shall be at the office of Acquiror Fund or
at such other place as the parties may agree.

3.2 State Street Bank and Trust Company (State Street), as custodian
for Acquiree Fund, shall deliver to Acquiror Fund at the Closing a
certificate of an authorized officer of State Street stating that (a)
Acquiree Fund's portfolio securities, cash and any other assets have been
transferred in proper form to Acquiror Fund on the Closing Date and (b) all
necessary taxes, if any, have been paid, or provision for payment has been
made, in conjunction with the transfer of portfolio securities.

3.3 In the event that immediately prior to the Valuation Time (a) the
New York Stock Exchange (NYSE) or other primary exchange is closed to
trading (other than prior to, or following the close of, trading on such
exchange on a regular business day) or trading thereon is restricted or (b)
trading or the reporting of trading on the NYSE or other primary exchange or
elsewhere is disrupted so that accurate appraisal of the value of the net
assets of Acquiree Fund and of the net asset value per Class Z share of
Acquiror Fund is impracticable, the Closing Date shall be postponed until
the first business day after the date when such trading shall have been
fully resumed and such reporting shall have been restored.

3.4 Institutional Fund shall deliver to Acquiror Fund on or prior to
the Liquidation Date the names and addresses of Acquiree Fund's shareholders
and the number of outstanding shares owned by each such shareholder, all as
of the close of business on the Closing Date, certified by the Secretary or
Assistant Secretary of Institutional Fund. Acquiror Fund shall issue and
deliver to Institutional Fund at the Closing a confirmation or other
evidence satisfactory to Institutional Fund that shares of Acquiror Fund
have been or will be credited to Acquiree Fund's account on the books of
Acquiror Fund. At the Closing each party shall deliver to the other such
bills of sale, checks, assignments, share certificates, receipts and other
documents as such other party or its counsel may reasonably request to
effect the transactions contemplated by this Agreement.

3.5 Each Investment Company shall deliver to the other at the Closing
a certificate executed in its name by its President or a Vice President in
form and substance satisfactory to the recipient and dated the Closing Date,
to the effect that the representations and warranties it made in this
Agreement are true and correct at the Closing Date except as they may be
affected by the transactions contemplated by this Agreement.

4. REPRESENTATIONS AND WARRANTIES

4.1 Institutional Fund represents and warrants as follows:

4.1.1 Institutional Fund is a business trust duly organized and
validly existing under the laws of the State of Delaware, and Acquiree
Fund has been established in accordance with the terms of Institutional
Fund's Agreement and Declaration of Trust (Declaration of Trust);

4.1.2 Institutional Fund is an open-end management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;

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4.1.3 Institutional Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of its Declaration of Trust or By-Laws or of any material
agreement, indenture, instrument, contract, lease or other undertaking to
which Acquiree Fund is a party or by which Acquiree Fund is bound;

4.1.4 All material contracts or other commitments of Acquiree
Fund, or any of its properties or assets, except this Agreement and
investment contracts (including options, futures and forward contracts)
will be terminated, or provision for discharge of any liabilities of
Acquiree Fund thereunder will be made on or prior to the Closing Date
without either Fund's incurring any liability or penalty with respect
thereto;

4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Acquiree Fund or any of
its properties or assets, except as previously disclosed in writing to
Acquiror Fund. Institutional Fund knows of no facts that might form the
basis for the institution of such litigation, proceedings or
investigation, and Acquiree Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;

4.1.6 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of Acquiree Fund at September 30, 1995 and for
the year then ended (copies of which have been furnished to Acquiror
Fund) have been audited by Deloitte & Touche LLP, independent
accountants, in accordance with generally accepted auditing standards.
Such financial statements are prepared in accordance with generally
accepted accounting principles and present fairly, in all material
respects, the financial condition, results of operations, changes in net
assets and financial highlights of Acquiree Fund as of and for the period
ended on such date, and there are no material known liabilities of
Acquiree Fund (contingent or otherwise) not disclosed therein;

4.1.7 Since September 30, 1995, there has not been any material
adverse change in Acquiree Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Acquiree Fund of indebtedness
maturing more than one year from the date such indebtedness was incurred,
except as otherwise disclosed to and accepted by Acquiror Fund. For the
purposes of this paragraph 4.1.7, a decline in net asset value or a
decrease in the number of shares outstanding shall not constitute a
material adverse change;

4.1.8 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Acquiree Fund required by law to have
been filed on or before such dates shall have been timely filed, and all
federal and other taxes shown as due on said returns and reports shall
have been paid insofar as due, or provision shall have been made for the
payment thereof, and, to the best of Institutional Fund's knowledge, all
federal or other taxes required to be shown on any such return or report
have been shown on such return or report, no such return is currently
under audit and no assessment has been asserted with respect to such
returns;

4.1.9 Acquiree Fund is a "fund" as defined in section 851(h)(2) of
the Internal Revenue Code; for each past taxable year since it commenced
operations, Acquiree Fund (a) has met the requirements of Subchapter M of
the Internal Revenue Code for qualification and treatment as a regulated
investment company and will meet those requirements for the current
taxable year and (b) has made such distributions as are necessary to
avoid the imposition of federal excise tax or has

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paid or provided for the payment of any excise tax imposed; and Acquiree
Fund has no earnings and profits accumulated in any taxable year in which
the provisions of Subchapter M of the Internal Revenue Code did not apply
to it. Acquiree Fund's assets shall be invested at all times through the
Closing Date in a manner that ensures compliance with the foregoing;

4.1.10 All issued and outstanding shares of Acquiree Fund are, and
at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of Acquiree Fund will, at the time of the Closing, be held in the
names of the persons and in the amounts set forth in the list of
shareholders submitted to Acquiror Fund in accordance with the provisions
of paragraph 3.4. Acquiree Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares,
nor is there outstanding any security convertible into any of its shares;

4.1.11 At the Closing Date, Acquiree Fund will have good and
marketable title to its assets to be transferred to Acquiror Fund
pursuant to paragraph 1.1 and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment for
such assets, Acquiror Fund will acquire good and marketable title
thereto;

4.1.12 The execution, delivery and performance of this Agreement
have been duly authorized by the Board of Trustees of Institutional Fund
and by all necessary corporate action, other than shareholder approval,
on the part of Acquiree Fund, and this Agreement constitutes a valid and
binding obligation of Institutional Fund, enforceable in accordance with
its terms, except as the same may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws relating
to or affecting creditors' rights and by general principles of equity. At
the Closing Date, the performance of this Agreement shall have been duly
authorized by all necessary action by Acquiree Fund's shareholders;

4.1.13 The information furnished and to be furnished by
Institutional Fund for use in applications for orders, registration
statements, proxy materials and other documents that may be necessary in
connection with the transactions contemplated hereby is and shall be
accurate and complete in all material respects and is in compliance and
shall comply in all material respects with applicable federal securities
and other laws and regulations; and

4.1.14 On the effective date of the registration statement filed
with the SEC by Acquiror Fund on Form N-14 relating to the shares of
Acquiror Fund issuable hereunder, and any supplement or amendment thereto
(Registration Statement), at the time of the meeting of the shareholders
of Acquiree Fund and on the Closing Date, the Proxy Statement of
Institutional Fund and the Prospectus of Acquiror Fund to be included in
the Registration Statement (collectively, Proxy Statement)

(a) will comply in all material respects with the provisions of
the Securities Act of 1933 (1933 Act), the Securities Exchange Act of
1934 (1934 Act) and the Investment Company Act and the rules and
regulations thereunder and

(b) will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein in light of
the circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.14 shall not apply
to statements in or omissions from the Proxy Statement made in reliance
upon and in conformity with information furnished by Acquiror Fund for
use therein.

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4.2 Acquiror Fund represents and warrants as follows:

4.2.1 Acquiror Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;

4.2.2 Acquiror Fund is an open-end management investment company
duly registered under the Investment Company Act, and such registration
is in full force and effect;

4.2.3 Acquiror Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of its Articles of Incorporation or By-Laws or of any material
agreement, indenture, instrument, contract, lease or other undertaking to
which Acquiror Fund is a party or by which Acquiror Fund is bound;

4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Acquiror Fund or any of
its properties or assets, except as previously disclosed in writing to
Institutional Fund. Acquiror Fund knows of no facts that might form the
basis for the institution of such litigation, proceedings or
investigation, and Acquiror Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;

4.2.5 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of Acquiror Fund at February 29, 1996 and for
the fiscal year then ended (copies of which have been furnished to
Institutional Fund) have been audited by Deloitte & Touche LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with
generally accepted accounting principles and present fairly, in all
material respects, the financial condition, results of operations,
changes in net assets and financial highlights of Acquiror Fund as of and
for the period ended on such date, and there are no material known
liabilities of Acquiror Fund (contingent or otherwise) not disclosed
therein;

4.2.6 Since February 29, 1996, there has not been any material
adverse change in Acquiror Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Acquiror Fund of indebtedness
maturing more than one year from the date such indebtedness was incurred,
except as otherwise disclosed to and accepted by Institutional Fund. For
the purposes of this paragraph 4.2.6, a decline in net asset value or a
decrease in the number of shares outstanding shall not constitute a
material adverse change;

4.2.7 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Acquiror Fund required by law to have
been filed on or before such dates shall have been timely filed, and all
federal and other taxes shown as due on said returns and reports shall
have been paid insofar as due, or provision shall have been made for the
payment thereof, and, to the best of Acquiror Fund's knowledge, all
federal or other taxes required to be shown on any such return or report
are shown on such return or report, no such return is currently under
audit and no assessment has been asserted with respect to such returns;

4.2.8 For each past taxable year since it commenced operations,
Acquiror Fund (a) has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and will meet those requirements for the current
taxable year and (b) has made such distributions as are necessary to
avoid the imposition of federal excise tax or has paid or provided for
the payment of any excise tax imposed; and Acquiror Fund

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has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M of the Internal Revenue Code did not apply to
it. Acquiror Fund's assets shall be invested at all times through the
Closing Date in a manner that ensures compliance with the foregoing;

4.2.9 All issued and outstanding shares of Acquiror Fund are, and
at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. Except as contemplated by
this Agreement, Acquiror Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares,
nor is there outstanding any security convertible into any of its shares
except for the Class B shares that have the conversion feature described
in Acquiror Fund's current prospectus;

4.2.10 The execution, delivery and performance of this Agreement
have been duly authorized by the Board of Directors of Acquiror Fund and
by all necessary corporate action on the part of Acquiror Fund, and this
Agreement constitutes a valid and binding obligation of Acquiror Fund,
enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws relating to or affecting creditors' rights
and by general principles of equity;

4.2.11 The shares of Acquiror Fund to be issued and delivered to
Acquiree Fund pursuant to this Agreement will, at the Closing Date, have
been duly authorized and, when issued and delivered as provided in this
Agreement, will be duly and validly issued and outstanding shares of
Acquiror Fund, fully paid and non-assessable;

4.2.12 The information furnished and to be furnished by Acquiror
Fund for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection with
the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is in compliance and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and

4.2.13 On the effective date of the Registration Statement, at the
time of the meeting of the shareholders of Acquiree Fund and on the
Closing Date, the Proxy Statement (a) will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the
Investment Company Act and the rules and regulations thereunder and (b)
will not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.2.13 shall not apply
to statements in or omissions from the Proxy Statement made in reliance
upon and in conformity with information furnished by Institutional Fund
for use therein.

5. COVENANTS

5.1 Each Investment Company covenants to operate its respective Fund's
business in the ordinary course between the date hereof and the Closing
Date, it being understood that the ordinary course of business will include
declaring and paying customary dividends and other distributions and such
changes in operations as are contemplated by the normal operations of the
Funds, except as may otherwise be required by paragraph 1.4 hereof; provided
that Acquiree Fund shall not dispose of more than an insignificant portion
of its historic business assets during such period without Acquiror Fund's
prior consent.

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5.2 Institutional Fund covenants to call a meeting of Acquiree Fund's
shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated hereby
(including the determinations of its Trustees as set forth in Rule 17a-8(a)
under the Investment Company Act).

5.3 Institutional Fund covenants that Acquiror Fund shares to be
received by Acquiree Fund in accordance herewith are not being acquired for
the purpose of making any distribution thereof other than in accordance with
the terms of this Agreement.

5.4 Institutional Fund covenants that it will assist Acquiror Fund in
obtaining such information as Acquiror Fund reasonably requests concerning
the beneficial ownership of Acquiree Fund's shares.

5.5 Subject to the provisions of this Agreement, each Investment
Company will take, or cause to be taken, all action, and will do, or cause
to be done, all things, reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this
Agreement.

5.6 Institutional Fund covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each such act.

5.7 Institutional Fund covenants that it will, from time to time, as
and when requested by Acquiror Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action, as Acquiror Fund may deem
necessary or desirable in order to vest in and confirm to Acquiror Fund
title to and possession of all the assets of Acquiree Fund to be sold,
assigned, transferred and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.

5.8 Acquiror Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Directors as set forth in
Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the
Closing Date.

5.9 Acquiror Fund covenants that it will, from time to time, as and
when requested by Institutional Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will
take and cause to be taken such further action, as Institutional Fund may
deem necessary or desirable in order to (a) vest in and confirm to
Institutional Fund (on behalf of Acquiree Fund) title to and possession of
all the shares of Acquiror Fund to be transferred to Acquiree Fund pursuant
to this Agreement and (b) assume all of Acquiree Fund's liabilities in
accordance with this Agreement.

6. CONDITIONS PRECEDENT TO OBLIGATIONS OF INSTITUTIONAL FUND

The obligations of Institutional Fund to consummate the transactions
provided for herein shall be subject to the performance by Acquiror Fund of all
the obligations to be performed by it hereunder on or before the Closing Date
and the following further conditions:

6.1 All representations and warranties of Acquiror Fund contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.

6.2 Acquiror Fund shall have delivered to Institutional Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Acquiror Fund, in form and substance satisfactory to
Institutional Fund and dated as of the Closing Date, to the effect that the
representations

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and warranties of Acquiror Fund in this Agreement are true and correct at
and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as
Institutional Fund shall reasonably request.

6.3 Institutional Fund shall have received on the Closing Date a
favorable opinion from Shereff, Friedman, Hoffman & Goodman, LLP, counsel to
Acquiror Fund, dated as of the Closing Date, to the effect that:

6.3.1 Acquiror Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland, with power under its
Articles of Incorporation to own all of its properties and assets and, to
the knowledge of such counsel, to carry on its business as presently
conducted;

6.3.2 This Agreement has been duly authorized, executed and
delivered by Acquiror Fund and, assuming due authorization, execution and
delivery of this Agreement by Institutional Fund, is a valid and binding
obligation of Acquiror Fund enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles (regardless
of whether enforcement is sought in a proceeding at law or in equity),
and further subject to the qualifications set forth in the next
succeeding sentence. Such counsel may state that they express no opinion
as to the validity or enforceability of any provision regarding choice of
New York law to govern this Agreement;

6.3.3 The shares of Acquiror Fund to be distributed to Acquiree
Fund shareholders under this Agreement, assuming their due authorization
and delivery as contemplated by this Agreement, will be validly issued
and outstanding and fully paid and non-assessable, and no shareholder of
Acquiror Fund has any pre-emptive right to subscribe therefor or purchase
such shares;

6.3.4 The execution and delivery of this Agreement did not, and
the performance by Acquiror Fund of its obligations hereunder will not,
(a) violate Acquiror Fund's Articles of Incorporation or By-Laws or (b)
result in a default or a breach of (i) the Management Agreement dated
July 1, 1988 between Acquiror Fund and PMF, (ii) the Custodian Agreement
dated July 31, 1990 between Acquiror Fund and State Street, (iii) the
Distribution Agreement dated April 10, 1996 between Acquiror Fund and
Prudential Securities Incorporated, and (iv) the Transfer Agency and
Service Agreement dated January 1, 1988 between Acquiror Fund and
Prudential Mutual Fund Services, Inc.; provided, however, that such
counsel may state that they express no opinion with respect to federal or
state securities laws, other antifraud laws and fraudulent transfer laws;
provided further that insofar as performance by Acquiror Fund of its
obligations under this Agreement is concerned, such counsel may state
that they express no opinion as to bankruptcy, insolvency,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;

6.3.5 To the knowledge of such counsel (without any independent
inquiry or investigation), no consent, approval, authorization, filing or
order of any court or governmental authority is required for the
consummation by Acquiror Fund of the transactions contemplated herein,
except such as have been obtained under the 1933 Act, the 1934 Act and
the Investment Company Act and such as may be required under state Blue
Sky or securities laws;

6.3.6 Acquiror Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has
been issued or proceeding instituted to suspend such registration; and

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6.3.7 To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no material litigation or administration
proceeding or investigation of or before any court or governmental body
is presently pending or threatened against Acquiror Fund or any of its
properties or assets, and (b) Acquiror Fund is not a party to or subject
to the provision of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business,
except as otherwise disclosed.

In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Acquiror Fund and certificates of
public officials. As to matters of Maryland law, such counsel may rely upon
opinions of Maryland counsel reasonably satisfactory to Institutional Fund, in
which case the opinion shall state that both such counsel and Institutional Fund
are justified in so relying. In rendering such opinion, such counsel also may
(a) make assumptions regarding the authenticity, genuineness and/or conformity
of documents and copies thereof without independent verification thereof, (b)
limit such opinion to applicable federal and state law and (c) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly related to this
Agreement and the Reorganization.

7. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIROR FUND

The obligations of Acquiror Fund to complete the transactions provided for
herein shall be subject to the performance by Institutional Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:

7.1 All representations and warranties of Institutional Fund contained
in this Agreement shall be true and correct in all material respects as of
the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force
and effect as if made on and as of the Closing Date.

7.2 Institutional Fund shall have delivered to Acquiror Fund on the
Closing Date a statement of Acquiree Fund's assets and liabilities, which
statement shall be prepared in accordance with generally accepted accounting
principles consistently applied, together with a list of Acquiree Fund's
portfolio securities showing the adjusted tax bases of such securities by
lot, as of the Closing Date, certified by the Treasurer of Institutional
Fund.

7.3 Institutional Fund shall have delivered to Acquiror Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Institutional Fund, in form and substance satisfactory to
Acquiror Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Institutional Fund made in this Agreement
are true and correct at and as of the Closing Date except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as Acquiror Fund shall reasonably request.

7.4 On or immediately prior to the Closing Date, Acquiree Fund shall
have declared and paid to its shareholders of record one or more dividends
and/or other distributions so that it will have distributed substantially
all (and in any event not less than ninety-eight percent) of its investment
company taxable income (computed without regard to any deduction for
dividends paid), net tax-exempt interest income, if any, and realized net
capital gain, if any, for all taxable years through its liquidation.

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7.5 Acquiror Fund shall have received on the Closing Date a favorable
opinion from Kirkpatrick & Lockhart LLP, counsel to Institutional Fund,
dated as of the Closing Date, to the effect that:

7.5.1 Institutional Fund is a business trust duly organized and
validly existing under the laws of the State of Delaware, with power
under its Declaration of Trust to own all of its properties and assets
and, to the knowledge of such counsel, to carry on its business as
presently conducted, and Acquiree Fund has been duly established in
accordance with the terms of Institutional Fund's Declaration of Trust;

7.5.2 This Agreement has been duly authorized, executed and
delivered by Institutional Fund and, assuming due authorization,
execution and delivery of this Agreement by Acquiror Fund, is a valid and
binding obligation of Institutional Fund enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles (regardless of whether enforcement is sought in a proceeding
at law or in equity), and further subject to the qualifications set forth
in the next succeeding sentence. Such counsel may state that they express
no opinion as to the validity or enforceability of any provision
regarding choice of New York law to govern this Agreement;

7.5.3 The execution and delivery of this Agreement did not, and
the performance by Institutional Fund of its obligations hereunder will
not, (a) violate Institutional Fund's Declaration of Trust or By-Laws or
(b) result in a default or a breach of (i) the Management Agreement dated
October 30, 1992 between Institutional Fund and Prudential Institutional
Fund Management, Inc., (ii) the Custodian Agreement dated October 30,
1992 between Institutional Fund and State Street, (iii) the Distribution
Agreement with respect to Acquiree Fund dated May 1, 1993 between
Institutional Fund and Prudential Retirement Services, Inc., and (iv) the
Administration, Transfer Agency and Service Agreement dated October 30,
1992 between Institutional Fund and PMF; provided, however, that such
counsel may state that they express no opinion with respect to federal or
state securities laws, other antifraud laws and fraudulent transfer laws;
provided further that insofar as performance by Institutional Fund of its
obligations under this Agreement is concerned, such counsel may state
that they express no opinion as to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;

7.5.4 All regulatory consents, authorizations and approvals
required to be obtained by Institutional Fund under the federal laws of
the United States, the laws of the State of New York and Chapter 38 of
the Delaware Code for the consummation of the transactions contemplated
by this Agreement have been obtained;

7.5.5 Such counsel knows of no litigation or any governmental
proceeding instituted or threatened against Acquiree Fund that would be
required to be disclosed in the Registration Statement and is not so
disclosed;

7.5.6 Institutional Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has
been issued or proceeding instituted to suspend such registration; and

7.5.7 To the knowledge of such counsel (without any independent
inquiry or investigation), (a) no material litigation or administration
proceeding or investigation of or before any court or governmental body
is presently pending or threatened against Institutional Fund (with
respect to Acquiree Fund) or any of its properties or assets
distributable or allocable to Acquiree Fund,

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and (b) Institutional Fund is not a party to or subject to the provision
of any order, decree or judgment of any court or governmental body that
materially and adversely affects its business, except as otherwise
disclosed.

In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Institutional Fund and certificates of
public officials. As to matters of Delaware law, such counsel may rely upon
opinions of Delaware counsel reasonably satisfactory to Acquiror Fund, in which
case the opinion shall state that both such counsel and Acquiror Fund are
justified in so relying. In rendering such opinion, such counsel also may (a)
make assumptions regarding the authenticity, genuineness and/or conformity of
documents and copies thereof without independent verification thereof, (b) limit
such opinion to applicable federal and state law and (c) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with such
firm who have devoted substantive attention to matters directly related to this
Agreement and the Reorganization.

8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE INVESTMENT COMPANIES

The obligations of each Investment Company hereunder are subject to the
further conditions that on or before the Closing Date:

8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of (a) the Trustees of Institutional
Fund and the Directors of Acquiror Fund as to the determinations set forth
in Rule 17a-8(a) under the Investment Company Act, (b) the Directors of
Acquiror Fund as to the assumption by Acquiror Fund of the liabilities of
Acquiree Fund and (c) the holders of the outstanding shares of Acquiree Fund
in accordance with the provisions of Institutional Fund's Declaration of
Trust, and certified copies of the resolutions evidencing such approvals
shall have been delivered to Acquiror Fund.

8.2 Any proposed change to Acquiror Fund's operations that may be
approved by the Directors of Acquiror Fund subsequent to the date of this
Agreement but in connection with and as a condition to implementing the
transactions contemplated by this Agreement, for which the approval of
Acquiror Fund's shareholders is required pursuant to the Investment Company
Act or otherwise, shall have been approved by the requisite vote of the
holders of the outstanding shares of Acquiror Fund in accordance with the
Investment Company Act and the provisions of Acquiror Fund's Articles of
Incorporation, and certified copies of the resolution evidencing such
approval shall have been delivered to Institutional Fund.

8.3 On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein.

8.4 All consents of other parties and all consents, orders and permits
of federal, state and local regulatory authorities (including those of the
SEC and of state Blue Sky or securities authorities, including "no-action"
positions of such authorities) deemed necessary by either Investment Company
to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain
any such consent, order or permit would not involve a risk of a material
adverse effect on the assets or properties of either Fund, provided that
either party hereto may for itself waive any part of this condition.

8.5 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued, and to the best knowledge of the

A-12
<PAGE>
parties hereto, no investigation or proceeding under the 1933 Act for that
purpose shall have been instituted or be pending, threatened or
contemplated. In addition, the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the
Investment Company Act nor instituted any proceedings seeking to enjoin
consummation of the transactions contemplated hereby under section 25(c) of
the Investment Company Act.

8.6 The Investment Companies shall have received on or before the
Closing Date an opinion of Kirkpatrick & Lockhart LLP, satisfactory to each
Investment Company, substantially to the effect that for federal income tax
purposes:

8.6.1 The acquisition by Acquiror Fund of the assets of Acquiree
Fund in exchange solely for voting shares of Acquiror Fund and the
assumption by Acquiror Fund of Acquiree Fund's liabilities, if any,
followed by the distribution of those Acquiror Fund shares by Acquiree
Fund PRO RATA to its shareholders, pursuant to its liquidation and
constructively in exchange for their Acquiree Fund shares, will
constitute a reorganization within the meaning of section 368(a)(1)(C) of
the Internal Revenue Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Internal
Revenue Code;

8.6.2 Acquiree Fund's shareholders will recognize no gain or loss
upon the constructive exchange of all of their shares of Acquiree Fund
solely for shares of Acquiror Fund in complete liquidation of Acquiree
Fund;

8.6.3 No gain or loss will be recognized to Acquiree Fund upon the
transfer of its assets to Acquiror Fund in exchange solely for shares of
Acquiror Fund and the assumption by Acquiror Fund of Acquiree Fund's
liabilities, if any, and the subsequent distribution of those shares to
Acquiree Fund shareholders in complete liquidation of Acquiree Fund;

8.6.4 No gain or loss will be recognized to Acquiror Fund upon the
acquisition of Acquiree Fund's assets in exchange solely for shares of
Acquiror Fund and the assumption of Acquiree Fund's liabilities, if any;

8.6.5 Acquiror Fund's basis for those assets will be the same as
the basis thereof in Acquiree Fund's hands immediately before the
transfer, and Acquiror Fund's holding period for those assets will
include Acquiree Fund's holding period therefor;

8.6.6 An Acquiree Fund shareholder's basis for the shares of
Acquiror Fund to be received by it pursuant to the Reorganization will be
the same as its basis for the shares of Acquiree Fund to be
constructively surrendered in exchange therefor; and

8.6.7 The holding period of Acquiror Fund shares to be received by
an Acquiree Fund shareholder pursuant to the Reorganization will include
the period during which the Acquiree Fund shares to be constructively
surrendered in exchange therefor were held, provided such Acquiree Fund
shares were held as capital assets by that shareholder on the date of the
exchange.

In rendering such opinion, such counsel may rely as to factual matters,
exclusively and without independent verification, on the representations made in
this Agreement (or in separate letters addressed to such counsel) and the
certificates delivered pursuant to paragraph 3.5.

9. FINDER'S FEES AND EXPENSES

9.1 Each Investment Company represents and warrants to the other that
there are no finder's fees payable in connection with the transactions
provided for herein.

A-13
<PAGE>
9.2 The expenses incurred in connection with entering into and
carrying out the provisions of this Agreement shall be allocated to the
Funds PRO RATA in a fair and equitable manner in proportion to their
respective assets.

10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES

10.1 This Agreement constitutes the entire agreement between the
Investment Companies.

10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.

11. TERMINATION

Either Investment Company may at its option terminate this Agreement at or
prior to the Closing Date because of:

11.1 A material breach by the other of any representation, warranty or
covenant contained herein to be performed at or prior to the Closing Date;
or

11.2 A condition herein expressed to be precedent to the obligations of
either party not having been met and it reasonably appearing that it will
not or cannot be met; or

11.3 A mutual written agreement of the Investment Companies.

In the event of any such termination, there shall be no liability for
damages on the part of either Investment Company (other than the liability of
the Funds to pay their allocated expenses pursuant to paragraph 9.2) or any
Director, Trustee or officer of either Investment Company.

12. AMENDMENT

This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the Acquiree Fund's shareholders'
meeting called by Institutional Fund pursuant to paragraph 5.2, no such
amendment may have the effect of changing the provisions for determining the
number of shares of Acquiror Fund to be distributed to Acquiree Fund
shareholders under this Agreement to the detriment of such shareholders without
their further approval.

13. NOTICES

Any notice, report, demand or other communication to either party required
or permitted by any provision of this Agreement shall be in writing and shall be
given by hand delivery, or prepaid certified mail or overnight service,
addressed to such party c/o Prudential Mutual Fund Management, Inc., One Seaport
Plaza, New York, New York 10292, Attention: S. Jane Rose.

14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT

14.1 The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

14.2 This Agreement may be executed in any number of counterparts, each
of which will be deemed an original.

14.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.

A-14
<PAGE>
14.4 This Agreement shall bind and inure to the benefit of the parties
and their respective successors and assigns, and no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by either
party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation other than the parties and their
respective successors and assigns any rights or remedies under or by reason
of this Agreement.

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its President or Vice President.

THE PRUDENTIAL INSTITUTIONAL FUND,
on behalf of its series, Income Fund
By: /s/ MARK R. FETTING
------------------------------------
Mark R. Fetting
President

PRUDENTIAL GOVERNMENT INCOME FUND,
INC.

By: /s/ RICHARD A. REDEKER
------------------------------------
Richard A. Redeker
President

A-15

<PAGE>

APPENDIX B
PERFORMANCE INFORMATION

Performance At A Glance.
It was a good year for the bond market. Slow economic growth contained
inflation, pushing interest rates down and bond prices up. We're pleased to
report that for the 12 months ended February 29, 1996, the Prudential
Government Income Fund performed much better than the average U.S. government
bond fund tracked by Lipper Analytical Services. That's because your Fund held
a longer average maturity than its peers.

Cumulative Total Returns1 As of 2/29/96

<S> <C> <C> <C> <C>
One Five Ten Since
Year Years Years Inception2
Class A 12.4% 47.4% N/A 63.0%
Class B 11.5 41.8 99.6% 132.6
Class C 11.6 N/A N/A 14.7
Lipper Gen. U.S. Gov't Fund Avg.3 10.8 44.3 107.9 147.7
</TABLE>

Average Annual Total Returns1 As of 3/31/96

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
One Five Ten Since
Year Years Years Inception2
Class A 6.2% 6.9% N/A 7.3%
Class B 4.9 6.8 6.8% 7.9
Class C 9.0 N/A N/A 8.0
</TABLE>

Dividends
& Yields Total Dividends 30-Day
As of Paid for Six Mos. SEC Yield
2/29/96
<S> <C> <C>
Class A $0.60 5.16%
Class B $0.54 4.70
Class C $0.54 4.77
</TABLE>

Past performance is not a guarantee 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, Inc. and Lipper Analytical
Services, Inc. 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) of 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 after purchase.

2Inception dates: 1/22/90 Class A; 4/22/85, Class B; 8/1/94 Class C.

3The Lipper category includes 175 funds for one year, 71 funds for five years,
33 funds for 10 years, and 21 funds since inception of the Class B shares on
4/22/85.

How Investments Compared.
(As of 2/29/96)
(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 added
historical 20-year average annual returns. The 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.

*19 years for General Muni Debt Fund

<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 will achieve its objective.

Strategy Session.

A Very Good Year
For Bond Investors.

1995 was an exceptional year for investors in government bonds. Economic growth
was the slowest since 1991. Inflation was the lowest in a decade -- a paltry
2.5%, as measured by the Consumer Price Index. Additionally, the Federal
Reserve twice lowered short-term interest rates. Bond investors couldn't have
asked for much more. As a result, interest rates fell for much of the year.

Portfolio Breakdown*
Prudential Government Income Fund, Inc.
as of 2/29/96
(GRAPH)

Treasury 42%
Mortgages 39%
U.S. Gov't Agency 16%
Cash 3%

*As a percentage of net assets

We are pleased to report that we performed better than the average government
bond fund. We believe we did so because of two strategies we followed to take
advantage of falling interest rates: we reduced our mortgage holdings and
extended our duration (a measure of the fund's sensitivity to interest rate
changes).

As interest rates began falling early in the year, we sold mortgage backed
securities because their prices suffer on fears that homeowners might be
tempted to pay off their mortgages early. In addition, we extended our duration
significantly in the summer by buying longer-term bonds, which rise in price
much faster than shorter-term bonds as interest rates fall.

By the end of 1995, we feared that bond prices were too high. Yields had
already fallen substantially and we doubted they would fall much further soon,
especially since Congress and the president had failed to reach an agreement to
balance the budget. So we sold some of our longer maturities at a profit and
lowered our duration. When bond prices suddenly fell in February, as investors
feared that a renewed spurt of economic growth could prevent the Federal
Reserve from lowering short-term interest rates any further, we were glad we
had reduced our duration earlier -- it helped protect some of last year's price
gains.

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.
And we believe our performance shows that we did the right thing at the right
time for much of this year.

Overview.

Barbara Kenworthy actively trades between the different government bond
sectors and maturities, seeking attractive yields and capital appreciation
potential wherever those opportunities may exist.

B-2
<PAGE>

What Went Well.

We Thought 8% & 9%
Mortgages Were High.

We typically hold close to half of our Fund in mortgage backed securities. They
provide higher income than comparable maturity U.S. Treasurys, and that helps
pay the Fund's monthly dividend to you.

But when interest rates fall, homeowners refinance their mortgages, so the
prices of these mortgage securities can fall quite rapidly. Since rates were
declining over the past 12 months, we protected the Fund by reducing our
premium mortgages -- those carrying 8% and 9% coupons -- which were most likely
to be refinanced first.

Indeed, mortgage backed securities appreciated more slowly than the bond market
in general over the last 12 months. In fact, some types of mortgages produced
only half of the total return of long-term U.S. Treasurys.

In Maturities, We
Preferred To Be Long.

For most of 1995, we were interested in U.S. Treasury bonds with longer
maturities, because they appreciate more when interest rates fall. Long-term
U.S. Treasury bonds returned nearly twice as much as shorter-term notes over
the last 12 months, as measured by Lehman Brothers.

Nearly 50% of our total net assets were in maturities of 21 to 30 years, during
the year, which helped our performance. But late in 1995, when it appeared that
interest rates had fallen as far as they could for the time being, we reduced
our holdings in this maturity range. We sold 30-year bonds and bought 10-year
notes. Our largest holding during much of the year was a U.S. Treasury bond
maturing in 19 years, which is callable in 14 years, carrying a 12.5% coupon.

And Not So Well.

In the End, We Could
Have Shortened More.

Duration is a measure of a fund's sensitivity to interest rate changes. Your
Fund's duration generally varies from 5.5 to 6 years, and we kept it at its
upper limit for much of the year to gain as much as possible as rates fell. We
did reduce duration late in 1995, when it looked like the market was
overextended. We wish we had done so by a larger margin. Our duration was 5.9
years as of February 29, 1996, and that hurt our performance in the final month
of the reporting period.

Five Largest Holdings.

9.7% U.S. Treasury Bondx
6.9% GNMA Pass Through
6.0% U.S. Treasury Note
4.9% FHLMC 30-Year Bond
4.6% U.S. Treasury Bond

Expressed as a percentage of total net assets as of 2/29/96.

Looking Ahead.

The mood of the country has shifted. While fiscal responsibility was one of
the rallying cries of the Republican revolution in Washington last year, the
issue was missing in action from the Republican presidential primary debates
this year.

In 1995 government bonds were helped by talk of fiscal restraint in Washington.
This year, that "outside help" will have to come primarily from slow economic
growth, which we expect will continue.

Nevertheless, we see a volatile market ahead. Bond prices tumbled in February
and early March. At this writing, we think prices may fall more before they
head higher. Still, we expect bonds can produce price gains in 1996, as yields
generally edge lower in a slow-growth, subdued-inflation economy.

B-3

<PAGE>

APPENDIX C

PERFORMANCE INFORMATION

THE PRUDENTIAL INCOME FUND
(LOGO) INSTITUTIONAL
FUND

OBJECTIVE: Seeks to achieve a high level of income over the longer term while
providing reasonable safety of principal.

INVESTMENT APPROACH: This Fund is primarily an investment grade, intermediate
maturity, fixed income portfolio. It is managed with the objective of
outperforming the Lehman Aggregate Index, a benchmark which is commonly used by
institutional pension funds as a proxy for the U.S. investment grade debt
market. Historically, the returns of the index itself compare favorably with
that of the average general fixed income mutual fund. The Fund attempts to
outperform the index through issue and sector selection. Forecasting interest
rates plays only a subsidiary role in the management of the portfolio.

ADVISER: The Income Fund is managed by Prudential Global Advisers (PGA), a
business unit of Prudential Investment Corporation. PGA specializes in domestic
and global fixed income management. PGA manages approximately $22 billion in
fixed income accounts.

ADVISER'S COMMENTS: Fixed income market participants have enjoyed a sustained
rally throughout the first nine months of 1995. The rally was triggered early in
the year by economic releases depicting a slowing economy and benign inflation.
Expectations that the Fed would shift from a tightening to an easing stance were
also reflected in market price action. Interest rates on 30-year Treasury bonds
declined by 137 basis points to 6.50% by the end of the third quarter. In
addition, the spread between two-year and 30-year Treasuries steepened by 47
basis points over the period.

During the last twelve months, the Lehman Aggregate returned 14.06%, with the
bulk of the returns occurring in the first six months of 1995 (11.44%).
Corporates were the star performer with a 16.99% return, followed by governments
at 13.57% and mortgages at 13.53%.

Since our last report to you six months ago, corporate exposure in the Income
Fund increased by 12% and we are now overweighted in the sector, relative to the
Lehman Aggregate, by about 11%. We believe that strong investor appetite for
yield combined with continued strong corporate earnings and cash flow and
limited new supply should provide ongoing favorable performance in the sector.
We have also lengthened the overall maturity of our corporate holdings in order
to more fully participate in anticipated strong corporate relative performance
in the future.

The Income Fund's mortgage exposure was reduced by almost 10% to a relatively
neutral 31% over the period. We also lowered the Fund's average mortgage
pass-through coupon. Once again, rallying markets triggered prepayment fears and
caused prices to lag in this sector of the market. Fund performance was enhanced
by our move to avoid the most prepayment sensitive areas of the mortgage market.

<TABLE>
PERFORMANCE RESULTS:
<CAPTION>
Lehman
Aggregate
Average Annual Returns Fund Index
<S> <C> <C>
------------------------- ------------- ------------
One Year ended 9/30/95 +13.11% +14.06%
From Inception (3/1/93) +5.68% +6.03%
</TABLE>

Results from inception are average annual returns. Fund performance figures are
historical and reflect reinvestment of dividends and distributions. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results. The Manager is currently limiting the
expenses of the Fund. Without this reduction of expenses, the total return would
have been lower.
C-1

<PAGE>
THE PRUDENTIAL INCOME FUND
(LOGO) INSTITUTIONAL Comparison of Change in Value
FUND of A $10,000 Investment

(CHART)

-------------- Income Fund - - - - Lehman Aggregate Index

Past performance is no guarantee of future results and an investor's
shares may be worth more or less than their original cost.

This graph is furnished to you in accordance with SEC regulations. It
compares a $10,000 investment in The Prudential Institutional Fund:
Income Fund (the ``Fund'') with a similar investment in the Lehman
Brothers Aggregate Index (LBAI) by portraying the initial account values
at the commencement of operations and subsequent account values at the
end of each fiscal year (September 30) beginning in 1993. For purposes
of the graph and, unless otherwise indicated in the accompanying table,
it has been assumed that all recurring fees (including management fees)
were deducted and all dividends and distributions were reinvested.

The LBAI is a combination of the Lehman Brothers Government/Corporate,
Mortgage-Backed and Asset-Backed Indices and contains approximately
6,000 issues. The LBAI is an unmanaged index and includes the
reinvestment of all income, but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Fund. The securities which comprise the LBAI may differ substantially
from the securities in the Fund's portfolio. The LBAI is not the only
index that may be used to characterize performance of income funds and
other indices may portray different comparative performance.

C-2

<PAGE>
APPENDIX D

PRUDENTIAL GOVERNMENT INCOME FUND, INC.
NOMINATED SLATE OF DIRECTORS
(AS OF JULY 31, 1996)

The following is information about the nominated slate of Directors to be
presented to Government Income Fund shareholders at an annual meeting
anticipated to be held in October 1996. For information on Prudential Government
Income Fund, Inc.'s current Directors, see the Prudential Government Income
Fund, Inc. Statement of Additional Information, which may be obtained by calling
(800) 225-1852.

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE DURING PAST FIVE YEARS
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
Edward D. Beach (71) President and Director of BMC Fund, Inc., a closed-end investment company; prior
c/o Prudential Mutual Fund thereto Vice Chairman of Broyhill Furniture Industries, Inc.; Certified Public
Management, Inc. Accountant; Secretary and Treasurer of Broyhill Family Foundation, Inc.; Member
One Seaport Plaza of the Board of Trustees of Mars Hill College; President, Treasurer and
New York, NY Director of First Financial Fund, Inc. and The High Yield Plus Fund, Inc.

Eugene C. Dorsey (69) Retired President, Chief Executive Officer and Trustee of the Gannett Foundation
c/o Prudential Mutual Fund (now Freedom Forum); former Publisher of four Gannett newspapers and Vice
Management, Inc. President of Gannett Company; past chairman, Independent Sector, Washington,
One Seaport Plaza D.C. (largest national coalition of philanthropic organizations); former
New York, NY chairman of the American Council for the Arts; Director of the advisory board
of Chase Manhattan Bank of Rochester.

Delayne Dedrick Gold (58) Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY 10292

*Robert F. Gunia (49) Director (since January 1989) and Executive Vice President, Treasurer and Chief
One Seaport Plaza Financial Officer (since June 1987) of Prudential Mutual Fund Management, Inc.
New York, NY (PMF); Senior Vice President (since March 1987) of Prudential Securities
Incorporated (PSI); Executive Vice President, Treasurer, Comptroller and
Director (since March 1991) of Prudential Mutual Fund Distributors Inc. (PMFD);
Director (since June 1987) of Prudential Mutual Fund Services, Inc. (PFMS);
Vice President and Director (since May 1989) of The Asia Pacific Fund, Inc.

*Harry A. Jacobs, Jr. (75) Senior Director (since January 1986) of Prudential Securities Incorporated;
One Seaport Plaza formerly Interim Chairman and Chief Executive Officer of PMF (June- September
New York, NY 1993); Chairman of the Board of PSI (1982-1985) and Chairman of the Board and
Chief Executive Officer of Bache Group Inc. (1977-1982); Director of The First
Australia Fund, Inc. and The First Australia Prime Income Fund, Inc.; Trustee
of the Trudeau Institute.
</TABLE>

D-1
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE DURING PAST FIVE YEARS
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
Donald D. Lennox (77) Chairman (since February 1990) and Director (since April 1989) of International
c/o Prudential Mutual Fund Imaging Materials, Inc.; Retired Chairman, Chief Executive Officer and Director
Management, Inc. of Schlegel Corporation (industrial manufacturing) (March 1987-February 1989);
One Seaport Plaza Director of Gleason Corporation, Personal Sound Technologies, Inc. and the High
New York, NY Yield Income Fund, Inc.

*Mendel A. Melzer (35) Chief Financial Officer (since November 1995), Money Management Group, The
One Seaport Plaza Prudential Insurance Company of America; formerly Senior Vice President and
New York, NY Chief Financial Officer (April 1993-November 1995), Prudential Preferred
Financial Services; formerly Managing Director (April 1991-April 1993),
Prudential Investment Advisors.

Thomas T. Mooney (54) President of the Greater Rochester Metro Chamber of Commerce; former Rochester
c/o Prudential Mutual Fund City Manager; Trustee of Center for Governmental Research, Inc.; Director of
Management, Inc. Blue Cross of Rochester, Monroe County Water Authority, Rochester Jobs, Inc.,
One Seaport Plaza Executive Service Corps of Rochester, Monroe County Industrial Development
New York, NY Corporation, Northeast Midwest Institute, The Business Council of New York
State, First Financial Fund, Inc. and The High Yield Plus Fund, Inc.

Thomas H. O'Brien (71) President, O'Brien Associates; formerly President of Jamaica Water Securities
c/o Prudential Mutual Fund Corp. (February 1989-August 1990); Chairman and Chief Executive Officer
Management, Inc. (September 1987-February 1989) and Director (September 1987-April 1991) of
One Seaport Plaza Jamaica Water Supply Company; formerly Director of TransCanada Pipelines U.S.A.
New York, NY Ltd. (1984-June 1989); Director of Ridgewood Savings Bank; Trustee of Hofstra
University.

*Richard A. Redeker (53) President, Chief Executive Officer and Director (since October 1993), Prudential
One Seaport Plaza Mutual Fund Management, Inc.; Director and Member of the Operating Committee
New York, NY (since October 1993), PSI; Director (since October 1993) of Prudential
Securities Group, Inc.; Executive Vice President (since July 1994), The
Prudential Investment Corporation; Director (since January 1994) of PMFD and
PMFS; formerly Senior Executive Vice President and Director (September
1978-September 1993) of Kemper Financial Services, Inc.; and Director of The
High Yield Income Fund, Inc.

Nancy H. Teeters (66) Economist; formerly Vice President and Chief Economist (March 1986-June 1990) of
c/o Prudential Mutual Fund International Business Machines Corporation; Director of Inland Steel
Management, Inc. Corporation (since July 1991), and First Financial Fund, Inc.
One Seaport Plaza
New York, NY
</TABLE>

D-2
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE DURING PAST FIVE YEARS
- -------------------------------- --------------------------------------------------------------------------------
<S> <C>
Louis A. Weil, III (55) President and Chief Executive Officer (since January 1996) and Director (since
c/o Prudential Mutual Fund September 1991) of Central Newspapers, Inc.; Chairman of the Board (since
Management, Inc. January 1996), Publisher and Chief Executive Officer (August 1991-December
One Seaport Plaza 1995) of Phoenix Newspapers, Inc.; formerly Publisher of Time Magazine (May
New York, NY 10292 1989-March 1991); formerly President, Publisher & CEO of The Detroit News
(February 1986-August 1989); formerly member of the Advisory Board, Chase
Manhattan Bank-Westchester.
</TABLE>

- --------------
* "Interested" director, as defined in the Investment Company Act of 1940, by
reason of his affiliation with The Prudential Insurance Company of America,
Prudential Securities Incorporated or Prudential Mutual Fund Management,
Inc.

The above Nominees are also trustees, directors and officers of some or all
of the other investment companies distributed by Prudential Securities
Incorporated.

D-3
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
SYNOPSIS................................................................................................... 2
General................................................................................................ 2
The Proposed Reorganization and Liquidation............................................................ 2
Reasons for the Proposed Reorganization................................................................ 3
Structure of Income Fund and Government Income Fund.................................................... 4
Investment Objectives and Policies..................................................................... 5
Certain Differences Between Income Fund and Government Income Fund..................................... 6
Fees and Expenses...................................................................................... 8
Management Fees.................................................................................... 8
Distribution Fees.................................................................................. 8
Administration Fees................................................................................ 9
Other Expenses..................................................................................... 9
Expense Ratios, Fee Waivers and Subsidy............................................................ 9
Purchases and Redemptions.............................................................................. 11
Exchange Privileges.................................................................................... 11
Dividends and Other Distributions...................................................................... 12
Federal Income Tax Consequences of the Proposed Reorganization......................................... 12
PRINCIPAL RISK FACTORS..................................................................................... 12
U.S. Government Securities............................................................................. 12
Hedging and Return Enhancement......................................................................... 13
Foreign Investments.................................................................................... 13
Realignment of Investment Portfolio.................................................................... 14
ANNUAL MEETING OF GOVERNMENT INCOME FUND SHAREHOLDERS...................................................... 14
THE PROPOSED TRANSACTION................................................................................... 15
Agreement and Plan of Reorganization and Liquidation................................................... 15
Reasons for the Reorganization......................................................................... 16
Description of Securities to be Issued................................................................. 17
Federal Income Tax Considerations...................................................................... 17
Certain Comparative Information About Government Income Fund and PIF................................... 17
Organization....................................................................................... 17
Capitalization..................................................................................... 18
Shareholder Meetings and Voting Rights............................................................. 18
Shareholder Liability.............................................................................. 18
Liability and Indemnification of Directors/Trustees................................................ 18
Pro Forma Capitalization and Ratios.................................................................... 19
INFORMATION ABOUT GOVERNMENT INCOME FUND................................................................... 19
INFORMATION ABOUT INCOME FUND.............................................................................. 21
MISCELLANEOUS.............................................................................................. 22
Additional Information................................................................................. 22
Legal Matters.......................................................................................... 23
Experts................................................................................................ 23
VOTING INFORMATION......................................................................................... 23
OTHER MATTERS.............................................................................................. 24
SHAREHOLDERS' PROPOSALS.................................................................................... 24
APPENDIX A--Agreement and Plan of Reorganization and Liquidation........................................... A-1
APPENDIX B--Performance Information--Government Income Fund................................................ B-1
APPENDIX C--Performance Information--Income Fund........................................................... C-1
APPENDIX D--Nominated Slate of Directors--Government Income Fund........................................... D-1
TABLE OF CONTENTS
ENCLOSURE
Prospectus of Prudential Government Income Fund, Inc.--Class Z Shares dated April 30, 1996, including a
July 1, 1996 Supplement thereto.
</TABLE>
<PAGE>

[LETTERHEAD]

August 5, 1996

Dear Plan Participant:

As announced in early June, one of the first significant actions following
the formation of the Prudential Money Management Group was the approval by the
Board of Trustees of The Prudential Institutional Fund (PIF) to combine the
seven institutional series of funds with the broader Prudential Mutual Fund
(PMF) family. Pending approval of the Board's action, as shown in the chart
below, the four largest PIF funds will continue with the same investment
objectives and portfolio managers. The three smaller funds will be combined with
similar, but not identical, PMF funds.

CURRENT FUND NEW FUND INVESTMENT PORTFOLIO MANAGERS
OBJECTIVE

<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)

Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)

Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)

Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)

Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z

Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z

Money Market Fund Prudential MoneyMart Assets Similar Joseph Tully
Class Z

</TABLE>

As a shareholder, you are being asked to consider the action taken by the
Board. ENCLOSED IS A COMBINED PROXY/PROSPECTUS STATEMENT DISCUSSING THE RELEVANT
FUND CONSOLIDATION IN DETAIL AND THE REASONS WHY THE BOARD BELIEVES THE
CONSOLIDATION IS IN THE BEST INTEREST OF THE SHAREHOLDERS. ALSO ENCLOSED IS THE
BALLOT CARD FOR USE IN VOTING YOUR SHARES. PLEASE INDICATE YOUR VOTE AND RETURN
IT IN THE ENVELOPE PROVIDED.

As noted on the front of the proxy, a Special Meeting of Shareholders will
be held on September 6, 1996 to approve the consolidation changes. If approved,
the changes for your particular funds will appear on your quarterly statement
following the Shareholder Meeting. No further action will be required on your
part. If you have questions regarding the consolidation, please contact any
member of your Prudential service team at 1-800-458-6333. Your Prudential team
remains committed to providing quality retirement services to help you achieve
financial security.

Sincerely,

/s/Mark R. Fetting
------------------
Mark R. Fetting

Enclosures

<PAGE>

[LETTERHEAD]

August 5, 1996

Dear Pru-DC Client: