(ICON)
Prudential
Government
Income
Fund, Inc.
ANNUAL
REPORT
Feb. 28, 1998
(LOGO)
<PAGE>
Prudential Government Income Fund, Inc.
Performance At A Glance.
Exceptionally subdued inflation in the U.S. and
concern about
economic upheaval in Asia fueled a strong rally in
U.S.
Treasuries and federal government agency
securities over
the past year. The Prudential Government Income
Fund was
well-positioned to take advantage of these gains
during
the 12-month period ended February 28, 1998. As a
result, your Fund's Class A and Z shares provided
double-digit
returns that beat the average U.S. government bond
fund
tracked by Lipper Analytical Services, while Class
B and
C shares finished with competitive returns.
<TABLE>
Cumulative Total Returns1 As of
2/28/98
<CAPTION>
One Five Ten
Since
Year Years
Years Inception2
<S> <C> <C> <C>
<C>
Class A 10.26% 34.51% N/A
86.14%
Class B 9.40 29.95
97.48% 162.38
Class C 9.48 N/A N/A
29.59
Class Z 10.30 N/A N/A
13.77
Lipper General U.S.
Government Bond Avg.3 9.76 32.48
107.63 ***
</TABLE>
<TABLE>
Average Annual Total Returns1
As of 3/31/98
<CAPTION>
One Five Ten
Since
Year Years
Years Inception2
<S> <C> <C> <C>
<C>
Class A 7.41% 5.23% N/A
7.38%
Class B 6.26 5.20
7.24% 7.76
Class C 10.34 N/A N/A
7.39
Class Z 12.05 N/A N/A
6.47
</TABLE>
<TABLE>
Distributions & Yields
As of 2/28/98
<CAPTION>
Total Distributions
30-Day
Paid for 12 Mos.
SEC Yield
<S> <C>
<C>
Class A $0.58
5.76%
Class B $0.52
5.32
Class C $0.53
5.40
Class Z $0.59
6.15
</TABLE>
Past performance is not indicative of future
results. Principal and
investment return will fluctuate so that an
investor's shares,
when redeemed, may be worth more or less than
their original cost.
1 Source: Prudential Investments Fund Management
and Lipper Analytical
Services. The cumulative total returns do not take
into account
sales charges. The average annual returns do take
into account
applicable sales charges. The Fund charges a
maximum front-end
sales load of 4% for Class A shares and a six-
year,
declining contingent deferred sales charge (CDSC)
of 5%, 4%,
3%, 2%, 1% and 1% for Class B shares. Class C
shares have a
1% CDSC for one year. Class B shares automatically
convert to
Class A shares on a quarterly basis, after
approximately seven
years. Class Z shares do not carry a sales charge
or a distribution
fee.
2 Inception dates: Class A, 1/22/90; Class B,
4/22/85; Class C, 8/1/94;
Class Z, 3/4/96.
3 These are returns for all funds in each share
class for the Lipper
General U.S. Government Bond Average for one-,
five- and 10-year
categories.
*** The Lipper Since Inception category return for
Class A shares
is 84.09%; for Class B shares is 177.61%; for
Class C shares is
29.95% and for Class Z shares is 13.94% for all
funds in each share class.
How Investments Compared.
(As of 2/28/98)
(GRAPH)
Source: Lipper Analytical Services. Financial
markets change,
so a mutual fund's past performance should never
be used to
predict future results. The risks to each of the
investments
listed above are different -- we provide 12-month
total returns
for several Lipper mutual fund categories to show
you that
reaching for higher yields means tolerating more
risk. The
greater the risk, the larger the potential reward
or loss.
In addition, we've included historical 20-year
average annual
returns. These returns assume the reinvestment of
dividends.
U.S. Growth Funds will fluctuate a great deal.
Investors have
received higher historical total returns from
stocks than
from most other investments. Smaller
capitalization stocks
offer greater potential for long-term growth but
may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock
funds,
which can help smooth out their total returns year
by year.
But their prices still fluctuate (sometimes
significantly)
and their returns have been historically lower
than those of stock funds.
General Municipal Debt Funds invest in bonds
issued by
state governments, state agencies and/or
municipalities.
This investment provides income that is usually
exempt from
federal and state income taxes.
U.S. Taxable Money Funds attempt to preserve a
constant share
value; they don't fluctuate much in price but,
historically,
their returns have been generally among the lowest
of the
major investment categories.
<PAGE>
Barbara L. Kenworthy, Fund Manager
(PICTURE)
Portfolio
Manager's Report
The Prudential Government Income Fund is designed
for investors
who want high current return, primarily from bonds
issued or
guaranteed by the U.S. government or its agencies.
At least
65% of the Fund's total assets are invested in
U.S. government
securities. There can be no assurance that the
Fund will
achieve its investment objective.
What A Rally!
Investors fleeing the economic crisis in Asia
sought the
relative safety of U.S. Treasuries and federal
government agency securities. Yields fell and
prices
rose as the bond market rally intensified in
January
1998. The 30-year Treasury bond yield fell to
5.66%,
its lowest level since the government began
regular
sales of the securities in 1977.
Strategy Session.
Is Inflation Conquered?
Monetary policy remained unchanged for most of
the reporting
period as a strong U.S. dollar coupled with heavy
domestic and
global competition kept a lid on prices. In fact,
inflation as
measured by the consumer price index inched up
1.7% in 1997,
its smallest gain in 11 years. This trend helped
boost prices
of U.S. Treasuries because investors worried less
that rising
inflation would erode returns.
A shrinking federal budget deficit that could lead
to the first
budget surplus in nearly 30 years, and troubled
Asian markets
also benefited Treasuries. Robust U.S. economic
growth generated
increased tax revenues, which meant the federal
government had
to borrow less money to pay off the budget
deficit. In 1997,
the amount of Treasuries issued plunged a hefty
$600.3 billion
or 27.4%. The prospect of fewer new Treasuries, in
the face of
continued strong investor demand, pushed up bond
prices.
A Silver Lining.
Economic storm clouds gathered over Asia and burst
in late
October with news of financial and currency
problems in
countries such as Indonesia and Thailand.
Investors sold
global stocks, emerging market bonds, and to a
lesser extent,
U.S. corporate debt, and sought refuge in
Treasuries and federal
government agency securities. This panic buying
ignited a rally
that drove down the 30-year Treasury bond yield to
its lowest
level since 1977. Not surprisingly, long-term
Treasuries returned
17.4% over the past 12 months. So this double-
digit gain was the
silver lining in the clouds hovering over Asia.
Portfolio Composition.
Expressed as a percentage of
total investments as of 2/28/98.
(PIE CHART)
<PAGE>
What Went Well.
Home, Sweet, Home.
Widespread difficulties in Asia were rooted in a
history of
imprudent lending practices by local banks and
other financial
institutions. As Asian problems deepened in the
new year, more
cash poured into U.S. government securities, which
are considered
among the world's safest investments. For example,
prices of
Treasuries surged in January in reaction to a
sharp drop in
Hong Kong's benchmark stock index that followed
news of the
collapse of Peregrine Investment Holdings Ltd.,
the territory's
largest investment bank.
Like other investors, we too bought more
Treasuries and federal
government agency securities. The bonds comprised
about 36% of
your Fund's total investments shortly after the
Asian crisis
erupted at the end of October. By the close of the
reporting period, however, they accounted for
about 48% of
total investments (excluding mortgage backed
securities).
Adding to our holdings helped to extend the Fund's
duration
(a measure of sensitivity to interest rate
changes) to 5.7
years at the close of the reporting period from
5.3 years
at the end of October. The longer duration helped
the Fund
appreciate more rapidly as U.S. interest rates
fell.
And Not So Well.
We Wanted More.
Considering the prominent role that "flight-to-
quality"
buying played in the bond market rally, we should
have
purchased even more long-term Treasuries and
federal
government agency securities. This would have
lengthened
the duration even further and enabled the Fund to
appreciate
more rapidly as interest rates fell.
Looking Ahead.
U.S. economic momentum will likely slow and
inflation remain
subdued as struggling Asian countries purchase
fewer exports
from the U.S. and flood our markets with cheaper
imports. We
believe the U.S. economic expansion could cool
enough to
require a federal funds rate cut this summer to
warm things
up again. Because the expectation of lower short-
term
interest rates has largely been priced into the
bond market,
the yield on the 30-year U.S. Treasury bond will
probably
hover between 5.50% and 6.25% in the coming
months. Prices
of Treasuries should continue to garner support as
fewer
securities are issued to pay off the dwindling
federal
budget deficit. Indeed government officials
recently
announced the Treasury hopes to retire a record
$75 to
$80 billion in debt from April through June.
Five Largest Holdings.
9.2% New Jersey Economic
Dev. Auth.
7.425%, 2/15/29
5.6% U.S. Treasury Bond
12.50%, 8/15/14
4.7% Israel AID,
Zero Coupon,
2/15/09-2/15/26
4.6% GNMA
7.00%, 2/15/09-1/15/28
4.1% FNMA
6.56%, 8/27/04
Expressed as a percentage of net assets
as of 2/28/98.
1
<PAGE>
President's Letter
April 3, 1998
(PICTURE)
Investing Smart.
Dear Shareholder:
This is the season when many investors receive
income tax refunds
or have a CD or two maturing. What will you do
with these assets?
Investing smart can be a challenge especially
given today's new
investment choices.
The Federal Taxpayer Relief Act of 1997 is
changing
the way Americans invest and accumulate wealth,
save for
college or build a nest egg for retirement. While
the law
offers opportunity, it is also complex. You may
need help
to put things in perspective.
Now may be an excellent time for you and your
Prudential
Financial Professional to update your investment
strategy
and retirement plan. A wise investor does so
periodically.
You could find the tax law opening doors that may
benefit
you now or over the long term, such as --
- -- Revised Capital Gains Tax Rates & Exclusions.
Long-term
rates are down. Is your portfolio positioned to
benefit? Also,
new rules allow you to keep more of the profit
from the sale of
your home (perhaps up to $500,000 more).
- -- New Roth IRAs. The Roth IRA features tax-free
distributions
and does not require mandatory withdrawals, which
should be of
particular interest to retirees seeking to shelter
assets in a
tax-free account.
- -- New Education IRAs. Similar to a traditional
IRA, but
specifically designed for higher education. The
new law also
creates credits and deductions to help defray
college costs.
- -- Expanded IRAs. Rules governing traditional
IRAs have
been extensively revised. Deductibility and
contribution limits
have been broadened as has the list for penalty-
free early
withdrawals, including first-time home buyers.
As you can see, what you don't know may cost you!
That's why
I recommend you call your Prudential Financial
Professional
and get a free investment plan checkup. Let us
give you the
information and tools to invest smart.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
2
<PAGE>
Portfolio of Investments as of
PRUDENTIAL GOVERNMENT INCOME
February 28, 1998
FUND, INC.
- --------------------------------------------------
- --------------------------
- --------------------------------------------------
- --------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value
(Note 1)
<C> <S>
<C>
- --------------------------------------------------
- ----------
LONG-TERM INVESTMENTS--95.3%
- --------------------------------------------------
- ----------
U.S. Government Agency Mortgage Pass-Throughs--
26.1%
Federal Home Loan Mortgage Corp.,
$1,005 7.50%, 2/01/22 - 4/01/25
$ 1,033,630
6,828 8.00%, 1/01/22 - 5/01/23
7,114,140
4,390 8.50%, 6/01/07 - 4/01/20
4,641,347
2,001 11.50%, 10/01/19
2,287,437
Federal National Mortgage Assoc.,
22,510 6.50%, 5/01/11 - 6/01/24
22,403,627
47,731 7.00%, 7/01/03 - 9/01/26
48,418,547
31,638 7.125%, 2/01/07
33,111,104
43,100(a) 7.50%, 4/01/07 - 1/01/2099
44,500,297
33,873 8.50%, 6/01/17 - 3/01/25
35,618,750
8,284 9.00%, 8/01/24 - 4/01/25
8,811,168
1,681 9.50%, 10/01/19 - 3/01/25
1,800,031
Government National Mortgage
Assoc.,
56,499 7.00%, 2/15/09 - 1/15/28
57,272,946
19,479 7.50%, 5/15/02 - 11/15/24
20,038,802
1,100 8.00%, 7/15/16 - 3/15/24
1,147,652
17,262 9.00%, 4/15/01 - 7/15/21
18,165,122
16,211 9.50%, 10/15/09 - 12/15/17
17,674,119
Government National Mortgage Assoc.
II,
2,740 9.50%, 5/20/18 - 8/20/21
2,954,496
- --------------
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $310,558,520)
326,993,215
- --------------------------------------------------
- ----------
U.S. Government Obligations--21.4%
United States Treasury Bonds,
21,000(d) 6.125%, 11/15/27
21,587,370
10,000 6.625%, 2/15/27
10,882,800
3,000(c) 7.625%, 2/15/25
3,651,090
25,000 8.125%, 8/15/19
31,363,250
1,860 12.00%, 8/15/13
2,744,374
45,000(c) 12.50%, 8/15/14
69,581,250
20,000(c) 12.75%, 11/15/10
28,550,000
United States Treasury Notes,
$32,000(b) 5.50%, 2/29/00
$ 31,975,040
11,000(d) 5.50%, 1/31/03
10,953,580
18,000(d) 6.125%, 8/15/07
18,565,380
10,000 6.25%, 10/31/01
10,207,800
20,000(c) 12.375%, 5/15/04
26,937,400
United States Treasury Strips,
800 Zero Coupon, 8/15/08
437,272
700 Zero Coupon, 8/15/11
315,490
500 Zero Coupon, 11/15/11
221,945
- --------------
Total U.S. Government Obligations
(cost $265,905,749)
267,974,041
- --------------------------------------------------
- ----------
U.S. Government Agency Securities--20.3%
Federal Home Loan Bank,
1,000 6.78%, 7/24/02
1,000,940
Federal National Mortgage Assoc.,
42,350 5.70%, 1/22/03
41,820,625
20,000 6.30%, 9/25/02
20,115,600
51,125 6.56%, 8/27/04
51,851,934
Small Business Administration,
19,346 Series 1995-20B, 8.15%, 2/01/15
20,973,087
22,952 Series 1995-20L, 6.45%, 12/01/15
23,108,382
32,940 Series 1996-20H, 7.25%, 8/01/16
34,484,746
19,171 Series 1996-20K, 6.95%, 11/01/16
19,798,009
10,125 Series 1997-20A, 7.15%, 1/01/17
10,611,786
Tennessee Valley Authority,
600 Series 1993-D, 7.25%, 7/15/43
625,440
30,000(c) Series 1995-B, 6.235%, 7/15/45
30,513,000
- --------------
Total U.S. Government Agency
Securities
(cost $251,045,078)
254,903,549
- --------------------------------------------------
- ----------
Collateralized Mortgage Obligations--5.7%
Federal National Mortgage Assoc.,
37,000 6.425%, 2/17/30
37,138,750
GMAC Commercial Mortgage
Securities, Inc., Series
1997-C1,
20,000 Class A3, 6.869%, 8/15/07
20,706,250
Resolution Trust Corp.,
Series 1994-1, Class B2,
5,125 7.75%, 9/25/29
5,291,838
</TABLE>
- --------------------------------------------------
- ------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as of
PRUDENTIAL GOVERNMENT INCOME
February 28, 1998
FUND, INC.
- --------------------------------------------------
- --------------------------
- --------------------------------------------------
- --------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value
(Note 1)
<C> <S>
<C>
- --------------------------------------------------
- ----------
Ryland Mortgage Participation
Securities,
Series 1993-3, Class A-3,
$2,643 7.54%, 9/25/24, (ARM)
$ 2,668,906
Structured Asset Securities Corp.,
Series 1995-C1, Class C,
5,000 7.375%, 9/25/24
5,039,453
- --------------
Total Collateralized Mortgage
Obligations
(cost $69,839,190)
70,845,197
- --------------------------------------------------
- ----------
U.S. Government Agency - Stripped Securities--6.2%
Federal National Mortgage Assoc.,
9,045 Zero Coupon, 10/08/06
5,438,306
6,045 Zero Coupon, 10/08/07
3,396,504
4,745 Zero Coupon, 4/08/08
2,586,025
9,045 Zero Coupon, 4/08/10
4,317,541
Financing Corp.,
5,000 Zero Coupon, 3/07/04
3,516,450
Israel AID,
46,100 Zero Coupon, 2/15/09
23,997,816
25,584 Zero Coupon, 8/15/09
12,898,429
37,600 Zero Coupon, 5/15/15
13,854,848
46,100 Zero Coupon, 2/15/26
8,229,772
- --------------
Total U.S. Government Agency -
Stripped Securities
(cost $67,162,168)
78,235,691
- --------------------------------------------------
- ----------
Supranational Bond--1.0%
International Bank For
Reconstruction & Development,
8.625%, 10/15/16
10,000(c) (cost $12,400,900)
12,458,100
- --------------------------------------------------
- ----------
Asset Backed Securities--0.8%
Aesop Funding II LLC,
Series 1997-1, Class A2,
6.40%, 10/20/03
(cost $9,998,438)
10,109,677
10,000
Corporate Bonds--13.8%
Associates Corp. of North America,
$15,000 5.96%, 5/15/37
$ 15,225,000
Ford Motor Credit Corp.,
25,000(c) 7.32%, 5/23/02
25,250,000
Merck and Co.,
17,000 5.76%, 5/03/37
17,340,000
New Jersey Economic Development
Authority,
105,000(c) Series A, 7.425%, 2/15/29
115,024,245
- --------------
Total corporate bonds
(cost $167,478,100)
172,839,245
Total long-term investments
(cost $1,154,388,143)
1,194,358,715
SHORT-TERM INVESTMENT--4.8%
- --------------------------------------------------
- ----------
Repurchase Agreement
Joint Repurchase Agreement
Account,
5.63%, 3/02/98
60,446 (cost $60,446,000; Note 5)
60,446,000
- --------------------------------------------------
- ----------
Total Investments--100.1%
(cost $1,214,834,143; Note 4)
1,254,804,715
Liabilities in excess of other
assets--(0.1%)
(1,636,959)
- --------------
Net Assets--100%
$1,253,167,756
- --------------
- --------------
</TABLE>
- ---------------
AID--Agency for International Development
ARM--Adjusted Rate Mortgage
(a) Partial principal amount of $5,500,000
represents a to-be-announced ('TBA')
mortgage dollar roll, see Note 1 and Note 4.
(b) Represents a when-issued security.
(c) Partial principal amount pledged as collateral
for mortgage dollar roll,
financial futures contracts and when-issued
security.
(d) Portion of securities on loan, see Note 4.
- --------------------------------------------------
- ------------------------------
See Notes to Financial Statements. 4
<PAGE>
Statement of Assets and Liabilities
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
<TABLE>
<CAPTION>
Assets
February 28, 1998
<S>
<C>
Investments, at value (cost
$1,214,834,143)...................................
........................... $ 1,254,804,715
Receivable for investments
sold..............................................
............................ 69,727,147
Interest
receivable........................................
..............................................
9,232,873
Receivable for Fund shares
sold..............................................
............................ 1,306,597
Prepaid expenses and other
assets............................................
............................ 29,109
- -----------------
Total
assets............................................
..............................................
1,335,100,441
- -----------------
Liabilities
Bank
overdraft.........................................
..................................................
38,809,104
Payable for investments
purchased.........................................
...............................
32,025,711
Payable for dollar
roll..............................................
....................................
5,679,896
Payable for Fund shares
reacquired........................................
...............................
2,024,294
Accrued
expenses..........................................
...............................................
1,886,660
Dividends
payable...........................................
.............................................
656,503
Management fee
payable...........................................
........................................
483,797
Distribution fee
payable...........................................
......................................
317,201
Due to broker - variation
margin............................................
.............................
49,519
- -----------------
Total
liabilities.......................................
..............................................
81,932,685
- -----------------
Net
Assets............................................
..................................................
. $ 1,253,167,756
- -----------------
- -----------------
Net assets were comprised of:
Common stock, at
par...............................................
................................... $
1,385,232
Paid-in capital in excess of
par...............................................
....................... 1,342,841,205
- -----------------
1,344,226,437
Accumulated net realized losses on
investments.......................................
................. (131,040,581)
Net unrealized appreciation on
investments.......................................
..................... 39,981,900
- -----------------
Net assets at February 28,
1998..............................................
............................ $ 1,253,167,756
- -----------------
- -----------------
Class A:
Net asset value and redemption price per share
($819,536,440 / 90,606,290 shares of common
stock issued and
outstanding)..........................
$9.05
Maximum sales charge (4.0% of offering
price)............................................
............. .38
- -----------------
Maximum offering price to
public............................................
.......................... $9.43
- -----------------
- -----------------
Class B:
Net asset value, offering price and redemption
price per share
($346,059,079 / 38,226,563 shares of common
stock issued and
outstanding)..........................
$9.05
- -----------------
- -----------------
Class C:
Net asset value, offering price and redemption
price per share
($2,839,723 / 313,687 shares of common stock
issued and
outstanding)...............................
$9.05
- -----------------
- -----------------
Class Z:
Net asset value, offering price and redemption
price per share
($84,732,514 / 9,376,690 shares of common
stock issued and
outstanding)............................
$9.04
- -----------------
- -----------------
</TABLE>
- --------------------------------------------------
- ------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Statement of Operations
- --------------------------------------------------
- ----------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income
February 28, 1998
<S> <C>
Income
Interest................................. $
96,024,178
----
- -------------
Expenses
Management fee...........................
6,507,621
Distribution fee--Class A................
1,263,646
Distribution fee--Class B................
3,177,448
Distribution fee--Class C................
18,923
Transfer agent's fees and expenses.......
2,008,000
Reports to shareholders..................
305,000
Custodian's fees and expenses............
175,000
Legal fees and expenses..................
88,000
Audit fee and expenses...................
44,000
Directors' fees..........................
44,000
Registration fees........................
40,000
Insurance expense........................
23,000
Miscellaneous............................
11,610
----
- -------------
Total expenses........................
13,706,248
----
- -------------
Net investment income......................
82,317,930
----
- -------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions..................
12,654,531
Financial futures contracts..............
(5,079,275)
----
- -------------
7,575,256
----
- -------------
Net change in unrealized appreciation on:
Investments..............................
32,404,595
Financial futures contracts..............
11,328
----
- -------------
32,415,923
----
- -------------
Net gain on investments....................
39,991,179
----
- -------------
Net Increase in Net Assets
Resulting from Operations.................. $
122,309,109
----
- -------------
----
- -------------
</TABLE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Statement of Changes in Net Assets
- --------------------------------------------------
- ----------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended
February 28
in Net Assets 1998
1997
<S> <C>
<C>
Operations
Net investment income...... $ 82,317,930
$ 96,065,519
Net realized gain (loss) on
investment
transactions............ 7,575,256
(20,189,194)
Net change in unrealized
appreciation/depreciation
on investments.......... 32,415,923
(26,314,444)
-----------------
- -----------------
Net increase in net assets
resulting from
operations.............. 122,309,109
49,561,881
-----------------
- -----------------
Dividends from net investment
income
(Note 1)
Class A................. (54,904,893)
(60,005,745)
Class B................. (22,493,247)
(33,204,797)
Class C................. (149,286)
(151,010)
Class Z................. (4,770,504)
(2,703,967)
-----------------
- -----------------
(82,317,930)
(96,065,519)
-----------------
- -----------------
Fund share transactions (net
of share conversions) (Note
6)
Net proceeds from shares
subscribed.............. 236,235,904
326,332,216
Net asset value of shares
issued in reinvestment
of dividends............ 51,329,375
57,955,409
Cost of shares
reacquired.............. (472,675,912)
(528,279,294)
-----------------
- -----------------
Net decrease in net assets
from Fund share
transactions............ (185,110,633)
(143,991,669)
-----------------
- -----------------
Total decrease............... (145,119,454)
(190,495,307)
Net Assets
Beginning of year............ 1,398,287,210
1,588,782,517
-----------------
- -----------------
End of year.................. $ 1,253,167,756
$ 1,398,287,210
-----------------
- -----------------
-----------------
- -----------------
</TABLE>
- --------------------------------------------------
- ------------------------------
See Notes to Financial Statements. 6
<PAGE>
Notes to Financial Statements
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
Prudential Government Income Fund, (the 'Fund') is
registered under the
Investment Company Act of 1940 as a diversified,
open-end management investment
company. Investment operations commenced on April
22, 1985. The Fund's
investment objective is to seek a high current
return. The Fund will seek to
achieve this objective by investing primarily in
U.S. Government 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, and by engaging in
various derivative
transactions such as the purchase and sale of put
and call options.
- --------------------------------------------------
- ----------
Note 1. Accounting Policies
The following is a summary of significant
accounting policies followed by the
Fund in the preparation of its financial
statements.
Security Valuation: The Fund values portfolio
securities (including commitments
to purchase such securities on a 'when-issued'
basis) on the basis of current
market quotations provided by dealers or by a
pricing service approved by the
Board of Directors, which uses information such as
quotations from dealers,
market transactions in comparable securities,
various relationships between
securities and calculations on yield to maturity
in determining values. Options
and financial futures contracts listed on
exchanges are valued at their closing
price on the applicable exchange. When market
quotations are not readily
available, a security is valued at fair value as
determined in good faith by or
under the direction of the Board of Directors.
Short-term securities which mature in more than 60
days are valued at current
market quotations. Short-term securities which
mature in 60 days or less are
valued at amortized cost.
In connection with repurchase agreements with U.S.
financial institutions, it is
the Fund's policy that its custodian, or
designated subcustodians as the case
may be under triparty repurchase agreements, takes
possession of the underlying
collateral securities, the value of which exceeds
the principal amount of the
repurchase agreement transaction, including
accrued interest. To the extent that
any repurchase agreement transaction exceeds one
business day, the value of the
collateral is marked-to-market on a daily basis to
ensure the adequacy of the
collateral. If the seller defaults and the value
of the collateral declines or
if bankruptcy proceedings are commenced with
respect to the seller of the
security, realization of the collateral by the
Fund may be delayed or limited.
Financial Futures Contracts: A financial futures
contract is an agreement to
purchase (long) or sell (short) an agreed amount
of securities at a set price
for delivery on a future date. Upon entering into
a financial futures contract,
the Fund is required to pledge to the broker an
amount of cash and/or other
assets equal to a certain percentage of the
contract amount. This amount is
known as the 'initial margin.' Subsequent
payments, known as 'variation margin,'
are made or received by the Fund each day,
depending on the daily fluctuation in
the value of the underlying security. Such
variation margin is recorded for
financial statement purposes on a daily basis as
unrealized gain or loss. When
the contract expires or is closed, the gain or
loss is realized and is presented
in the statement of operations as net realized
gain (loss) on financial futures
contracts.
The Fund invests in financial futures contracts in
order to hedge its existing
portfolio securities, or securities the Fund
intends to purchase, against
fluctuations in value caused by changes in
prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not
achieve the anticipated
benefits of the financial futures contracts and
may realize a loss. The use of
futures transactions involves the risk of
imperfect correlation in movements in
the price of futures contracts, interest rates and
the underlying hedged assets.
Dollar Rolls: The Fund enters into mortgage dollar
rolls in which the Fund sells
mortgage securities for delivery in the current
month, realizing a gain or loss
and simultaneously contracts to repurchase
somewhat similar (same type, coupon
and maturity) securities on a specified future
date. During the roll period, the
Fund forgoes principal and interest paid on the
securities. The Fund is
compensated by the interest earned on the cash
proceeds of the initial sale and
by the lower repurchase price at the future date.
The difference between the
sales proceeds and the lower repurchase price is
recorded as interest income.
The Fund maintains a segregated account, the
dollar value of which is at least
equal to its obligations, in respect of dollar
rolls.
Securities Lending: The Fund may lend its U.S.
Government securities to
broker-dealers or government securities dealers.
The loans are secured by
collateral at least equal at all times to the
market value of the securities
loaned. The Fund may bear the risk of delay in
recovery of, or even loss of
rights in, the securities loaned should the
borrower of the securities fail
financially. The Fund receives compensation for
lending its securities in the
form of fees or it retains a portion of interest
on the investment of any cash
received as collateral. The Fund also continues to
receive interest on the
securities loaned and any gain or loss in the
market price of the securities
loaned that may occur during the term of the loan
will be for the account of the
Fund.
Securities Transactions and Net Investment Income:
Securities transactions are
recorded on the trade date. Realized gains or
losses on sales of securities are
calculated on the identified cost basis. Interest
income is recorded
- --------------------------------------------------
- ------------------------------
7
<PAGE>
Notes to Financial Statements
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
on the accrual basis. The Fund accretes original
issue discount on portfolio
securities as adjustments to interest income. Net
investment income (other than
distribution fees) and unrealized and realized
gains or losses are allocated
daily to each class of shares based upon the
relative proportion of net assets
of each class at the beginning of the day.
Expenses are recorded on the accrual
basis which may require the use of certain
estimates by management.
Reclassification of Capital Accounts: The Fund
accounts and reports for
distributions to shareholders in accordance with
Statement of Position 93-2:
Determination, Disclosure and Financial Statement
Presentation of Income,
Capital Gain and Return of Capital Distributions
by Investment Companies. The
effect of applying this statement was to decrease
paid-in capital in excess of
par by $1,419,491 and decrease accumulated net
realized losses on investments by
$1,419,491. The current year effect of applying
the Statement of Position was
due to capital loss carryforward expired unused.
Net investment income, net
realized gains and net assets were not affected by
this change.
Dividends and Distributions: The Fund declares
daily and pays monthly dividends
from net investment income. The Fund will
distribute at least annually any net
capital gains in excess of loss carryforwards, if
any. Dividends and
distributions are recorded on the ex-dividend
date.
Income distributions and capital gain
distributions are determined in accordance
with income tax regulations which may differ from
generally accepted accounting
principles.
Federal Income Taxes: It is the Fund's policy to
continue to meet the
requirements of the Internal Revenue Code
applicable to regulated investment
companies and to distribute all of its taxable net
income to its shareholders.
Therefore, no federal income tax provision is
required.
- --------------------------------------------------
- ----------
Note 2. Agreements
The Fund has a management agreement with
Prudential Investments Fund Management,
LLC ('PIFM'). Pursuant to this agreement, PIFM has
responsibility for all
investment advisory services and supervises the
subadviser's performance of such
services. PIFM has entered into a subadvisory
agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes
investment advisory services in
connection with the management of the Fund. PIFM
pays for the cost of the
subadviser's services, the compensation of
officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the
Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and
payable monthly, at an annual
rate of .50 of 1% of the Fund's average daily net
assets up to $3 billion and
.35 of 1% of the average daily net assets of the
Fund in excess of $3 billion.
The Fund has a distribution agreement with
Prudential Securities Incorporated
('PSI'), which acts as the distributor of the
Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates
PSI for distributing and
servicing the Fund's Class A, Class B and Class C
shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'),
regardless of expenses actually
incurred by them. The distribution fees for Class
A, B and C shares are accrued
daily and payable monthly. No distribution or
service fees are paid to PSI as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A Plan, the Fund compensates
PSI for its
distribution-related expenses with respect to
Class A shares, at an annual rate
of up to .30 of 1% of the average daily net assets
of the Class A shares. Such
expenses under the Class A Plan were .15 of 1% of
the average daily net assets
of the Class A shares for the year ended February
28, 1998.
Pursuant to the Class B Plan, the Fund compensates
PSI for its
distribution-related expenses with respect to
Class B shares at an annual rate
of up to 1% of the average daily net assets up to
$3 billion, .80 of 1% of the
next $1 billion of such net assets and .50 of 1%
over $4 billion of the average
daily net assets of the Class B shares. Such
expenses under the Class B Plan
were charged at an effective rate of .825 of 1% of
the average daily net assets
of the Class B shares for the year ended February
28, 1998.
Pursuant to the Class C Plan, the Fund compensates
PSI for its
distribution-related expenses with respect to
Class C shares at an annual rate
of up to .825 of 1% of the average daily net
assets up to $3 billion, .80 of 1%
of the next $1 billion of such net assets and .50
of 1% over $4 billion of the
average daily net assets of the Class C shares.
Such expenses under the Class C
Plan were charged at an effective rate of .75 of
1% of the average daily net
assets of the Class C shares for the year ended
February 28, 1998.
PSI advised the Fund that it received
approximately $294,300 in front-end sales
charges resulting from sales of Class A shares
during the year ended February
28, 1998. From these fees, PSI paid such sales
charges to Pruco Securities
Corporation, an affiliated broker-dealer, which in
turn paid commissions to
salespersons and incurred other distribution
costs.
PSI has advised the Fund that for the year ended
February 28, 1998 it received
approximately $781,400 and $400 in contingent
deferred sales
- --------------------------------------------------
- ------------------------------
8
<PAGE>
Notes to Financial Statements
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
charges imposed upon redemptions by certain Class
B and Class C shareholders,
respectively.
PSI, PIFM and PIC are indirect, wholly owned
subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered
investment companies (the
'Funds'), has a credit agreement (the 'Agreement')
with an unaffiliated lender.
The maximum commitment under the Agreement is
$200,000,000. Interest on any such
borrowings outstanding will be at market rates.
The purpose of the Agreement is
to serve as an alternative source of funding for
capital share redemptions. The
Fund did not borrow any amounts pursuant to the
Agreement during the year ended
February 28, 1998. The Funds pay a commitment fee
at an annual rate of .055 of
1% on the unused portion of the credit facility.
The commitment fee is accrued
and paid quarterly on a pro rata basis by the
Funds. The Agreement expired on
December 30, 1997 and has been extended through
December 29, 1998 under the same
terms.
- --------------------------------------------------
- ----------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a
wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During year
ended February 28, 1998, the
Fund incurred fees of approximately $1,832,500 for
the services of PMFS. As of
February 28, 1998, approximately $151,900 of such
fees were due to PMFS.
Transfer agent fees and expenses in the Statement
of Operations also include
certain out of pocket expenses paid to
nonaffiliates.
- --------------------------------------------------
- ----------
Note 4. Portfolio Securities
Purchases and sales of investment securities,
other than short-term investments,
for the year ended February 28, 1998, were
$1,109,606,649 and $1,263,542,179,
respectively.
During the year ended February 28, 1998, the Fund
entered into financial future
contracts. Details of open contracts at February
28, 1998 are as follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration
Trade February 28, Appreciation
Contracts Type Date
Date 1998 (Depreciation)
- --------- ----------- ----------- ------
- ------ ------------ --------------
<C> <S> <C> <C>
<C> <C>
Short
positions:
30 yr. June
131 T-Note 1998
$15,893,984 $15,781,406 $ 112,578
10 yr. June
10 T-Note 1998
1,123,125 1,123,125 --
10 yr. March
90 T-Bond 1998
10,040,625 10,141,875 (101,250)
- --------------
$ 11,328
- --------------
- --------------
</TABLE>
The federal income tax basis of the Fund's
investments at February 28, 1998 was
$1,214,912,655 and, accordingly, net unrealized
appreciation for federal income
tax purposes was $39,892,060 (gross unrealized
appreciation-$41,154,658; gross
unrealized depreciation-$1,262,598).
The Fund had a capital loss carryforward as of
February 28, 1998 of
approximately $131,130,000 of which $41,964,000
expires in 1999, $1,736,000
expires in 2001, $2,920,000 expires in 2002,
$66,560,000 expires in 2003 and
$17,950,000 expires in 2005. Such carryforward is
after utilization of
approximately $4,981,000 to offset net taxable
gains realized and recognized
during the fiscal year ended February 28, 1998.
Accordingly, no capital gains
distribution is expected to be paid to
shareholders until net gains have been
realized in excess of such amounts. During the
fiscal year ended February 28,
1998, approximately $7,409,000 of the capital loss
carryforward expired unused.
The average balance of dollar rolls outstanding
during the year ended February
28, 1998 was approximately $6,459,000. The amount
of dollar rolls outstanding at
February 28, 1998 was $5,645,313, which was 0.4%
of total assets.
As of February 28, 1998, the Fund had securities
on loan with an aggregate
market value of $39,798,660. As of this date, the
collateral held for securities
on loan was comprised of U.S. government
securities with an aggregate market
value of $41,001,991.
- --------------------------------------------------
- ----------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered
investment companies, transfers
uninvested cash balances into a single joint
account, the daily aggregate
balance of which is invested in one or more
repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As
of February 28, 1998, the
Fund had a 4.60% undivided interest in the
repurchase agreements in the joint
account. This undivided interest represented
$60,446,000 in principal amount. As
of such date, the repurchase agreements in the
joint account and the value of
the collateral therefore were as follows:
Bear, Stearns & Co., 5.65%, in the principal
amount of $360,000,000, repurchase
price $360,169,500, due 3/2/98. The value of the
collateral including accrued
interest was $369,861,965.
Credit Suisse First Boston Corp., 5.58%, in the
principal amount of $78,125,000,
repurchase price $78,161,328, due 3/2/98. The
value of the collateral including
accrued interest was $80,423,029.
- --------------------------------------------------
- ------------------------------
9
<PAGE>
Notes to Financial Statements
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
Credit Suisse First Boston Corp., 5.65%, in the
principal amount of
$300,000,000, repurchase price $300,141,250, due
3/2/98. The value of the
collateral including accrued interest was
$310,827,022.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 5.55%
in the principal amount of
$156,252,000, repurchase price $156,324,266, due
3/2/98. The value of the
collateral including accrued interest was
$159,381,768.
Morgan Stanley, Dean Witter, Discover & Co.,
5.65%, in the principal amount of
$60,000,000, repurchase price $60,028,250, due
3/2/98. The value of the
collateral including accrued interest was
$61,200,403.
Salomon Smith Barney Inc., 5.65%, in the principal
amount of $360,000,000,
repurchase price $360,169,500, due 3/2/98. The
value of the collateral including
accrued interest was $367,376,399.
- --------------------------------------------------
- ----------
Note 6. Capital
The Fund offers Class A, Class B, Class C and
Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4%.
Class B shares are sold with a
contingent deferred sales charge which declines
from 5% to zero depending on the
period of time the shares are held. Class C shares
are sold with a contingent
deferred sales charge of 1% during the first year.
Class B shares automatically
convert to Class A shares on a quarterly basis
approximately seven years after
purchase. Class Z shares are not subject to any
sales charge and are offered
exclusively for sale to a limited group of
investors.
There are 2 billion shares of common stock, $.01
par value per share, divided
into four classes, designated Class A, B, C and
Class Z common stock, each of
which consists of 500,000,000 authorized shares.
Transactions in shares of common stock were as
follows:
<TABLE>
<CAPTION>
Class A Shares
Amount
- ----------------------------------- -----------
- -------------
<S> <C>
<C>
Year ended February 28, 1998:
Shares sold........................ 15,454,541
$ 136,602,902
Shares issued in reinvestment of
dividends........................ 3,691,357
32,742,038
Shares reacquired.................. (33,350,895)
(294,958,733)
-----------
- -------------
Net decrease in shares outstanding
before conversion................ (14,204,997)
(125,613,793)
Shares issued upon conversion from
Class B.......................... 6,652,848
58,526,575
-----------
- -------------
Net decrease in shares
outstanding...................... (7,552,149)
$ (67,087,218)
-----------
- -------------
-----------
- -------------
<CAPTION>
Class A Shares
Amount
- ----------------------------------- -----------
- -------------
<S> <C>
<C>
Year ended February 28, 1997:
Shares sold........................ 23,880,421
$ 211,010,343
Shares issued in reinvestment of
dividends........................ 3,985,757
35,069,511
Shares reacquired.................. (41,836,738)
(368,907,729)
-----------
- -------------
Net decrease in shares outstanding
before conversion................ (13,970,560)
(122,827,875)
Shares issued upon conversion from
Class B.......................... 9,099,955
79,924,887
Shares reacquired upon conversion
into Class Z..................... (1,559,278)
(14,231,482)
-----------
- -------------
Net decrease in shares
outstanding...................... (6,429,883)
$ (57,134,470)
-----------
- -------------
-----------
- -------------
<CAPTION>
Class B
- -----------------------------------
<S> <C>
<C>
Year ended February 28, 1998:
Shares sold........................ 3,258,103
$ 29,057,734
Shares issued in reinvestment of
dividends........................ 1,549,463
13,738,189
Shares reacquired.................. (12,601,925)
(111,722,746)
-----------
- -------------
Net decrease in shares outstanding
before conversion................ (7,794,359)
(68,926,823)
Shares reacquired upon conversion
into Class A..................... (6,647,245)
(58,526,575)
-----------
- -------------
Net decrease in shares
outstanding...................... (14,441,604)
$(127,453,398)
-----------
- -------------
-----------
- -------------
Year ended February 28, 1997:
Shares sold........................ 4,648,727
$ 40,926,466
Shares issued in reinvestment of
dividends........................ 2,285,644
20,127,506
Shares reacquired.................. (16,152,439)
(142,246,190)
-----------
- -------------
Net decrease in shares outstanding
before conversion................ (9,218,068)
(81,192,218)
Shares reacquired upon conversion
into Class A..................... (9,099,955)
(79,924,887)
-----------
- -------------
Net decrease in shares
outstanding...................... (18,318,023)
$(161,117,105)
-----------
- -------------
-----------
- -------------
<CAPTION>
Class C
- -----------------------------------
<S> <C>
<C>
Year ended February 28, 1998:
Shares sold........................ 178,009
$ 1,593,648
Shares issued in reinvestment of
dividends........................ 13,542
120,330
Shares reacquired.................. (170,795)
(1,515,242)
-----------
- -------------
Net increase in shares
outstanding...................... 20,756
$ 198,736
-----------
- -------------
-----------
- -------------
Year ended February 28, 1997:
Shares sold........................ 165,423
$ 1,461,600
Shares issued in reinvestment of
dividends........................ 13,603
119,788
Shares reacquired.................. (85,011)
(747,770)
-----------
- -------------
Net increase in shares
outstanding...................... 94,015
$ 833,618
-----------
- -------------
-----------
- -------------
</TABLE>
- --------------------------------------------------
- ------------------------------
10
<PAGE>
Notes to Financial Statements
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
<TABLE>
<CAPTION>
Class Z Shares
Amount
- ----------------------------------- -----------
- -------------
Year ended February 28, 1998:
<S> <C>
<C>
Shares sold........................ 7,680,888
$ 68,981,620
Shares issued in reinvestment of
dividends........................ 533,884
4,728,818
Shares reacquired.................. (7,221,547)
(64,479,191)
-----------
- -------------
Net increase in shares
outstanding...................... 993,225
$ 9,231,247
-----------
- -------------
-----------
- -------------
March 4, 1996* through
February 28, 1997:
Shares sold**...................... 8,380,612
$ 72,933,807
Shares issued in reinvestment of
dividends........................ 299,172
2,638,604
Shares reacquired.................. (1,855,597)
(16,377,605)
-----------
- -------------
Net increase in shares outstanding
before conversion from Class A... 6,824,187
59,194,806
Shares issued upon conversion from
Class A.......................... 1,559,278
14,231,482
-----------
- -------------
Net increase in shares
outstanding...................... 8,383,465
$ 73,426,288
-----------
- -------------
-----------
- -------------
</TABLE>
- ---------------
* Commencement of offering of Class Z shares.
** Includes 6,698,193 shares issued for the
acquisition of The Prudential
Institutional Fund, Income Fund.
- --------------------------------------------------
- ------------------------------
11
<PAGE>
Financial Highlights
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
<TABLE>
<CAPTION>
Class A
- --------------------------------------------------
- ---------
Year Ended February 29/28,
- --------------------------------------------------
- ---------
1998 1997 1996 1995
1994
- -------- -------- -------- --------
- -------
<S>
<C> <C> <C> <C>
<C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.................. $ 8.76 $ 9.04
$ 8.59 $ 9.13 $ 9.40
- -------- -------- -------- --------
- -------
Income from investment operations
Net investment
income............................... 0.58
0.60 0.60 0.59 0.61
Net realized and unrealized gain (loss) on
investment
transactions.......................... 0.29
(0.28) 0.45 (0.54) (0.25)
- -------- -------- -------- --------
- -------
Total from investment
operations................. 0.87
0.32 1.05 0.05 0.36
- -------- -------- -------- --------
- -------
Less distributions
Dividends from net investment
income................ (0.58) (0.60)
(0.60) (0.59) (0.61)
Distributions in excess of accumulated
gains........ -- -- -
- - -- (0.02)
- -------- -------- -------- --------
- -------
Total
distributions..............................
(0.58) (0.60) (0.60) (0.59)
(0.63)
- -------- -------- -------- --------
- -------
Net asset value, end of
year........................ $ 9.05 $
8.76 $ 9.04 $ 8.59 $ 9.13
- -------- -------- -------- --------
- -------
- -------- -------- -------- --------
- -------
TOTAL
RETURN(a):....................................
10.26% 3.70% 12.41% .83%
3.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)....................... $819,536
$860,319 $945,038 $871,145 $51,673
Average net assets
(000)............................ $842,431
$884,862 $909,169 $ 95,560 $55,921
Ratios to average net assets:
Expenses, including distribution
fees............ 0.86% 0.90%
0.91% 0.98% 0.84%
Expenses, excluding distribution
fees............ 0.71% 0.75%
0.76% 0.83% 0.69%
Net investment
income............................ 6.52%
6.78% 6.65% 7.45% 6.48%
For Class A, B, C and Z shares:
Portfolio turnover
rate.......................... 88%
107% 123% 206% 80%
</TABLE>
- ---------------
(a) Total return does not consider the effects of
sales loads. Total return is
calculated assuming a purchase of shares on
the first day and a sale on the
last day of each year reported and includes
reinvestment of dividends and
distributions.
- --------------------------------------------------
- ------------------------------
See Notes to Financial Statements. 12
<PAGE>
Financial Highlights
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
<TABLE>
<CAPTION>
Class B
- --------------------------------------------------
- --------------
Year Ended February 29/28,
- --------------------------------------------------
- --------------
1998 1997 1996 1995
1994
- -------- -------- -------- ----------
- ----------
<S>
<C> <C> <C> <C>
<C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year.................. $ 8.77 $ 9.04
$ 8.60 $ 9.13 $ 9.40
- -------- -------- -------- ----------
- ----------
Income from investment operations
Net investment
income............................... 0.52
0.54 0.54 0.53 0.53
Net realized and unrealized gain (loss) on
investment
transactions.......................... 0.28
(0.27) 0.44 (0.53) (0.25)
- -------- -------- -------- ----------
- ----------
Total from investment
operations................. 0.80
0.27 0.98 -- 0.28
- -------- -------- -------- ----------
- ----------
Less distributions
Dividends from net investment
income................ (0.52) (0.54)
(0.54) (0.53) (0.53)
Distributions in excess of accumulated
gains........ -- -- -
- - -- (0.02)
- -------- -------- -------- ----------
- ----------
Total
distributions..............................
(0.52) (0.54) (0.54) (0.53)
(0.55)
- -------- -------- -------- ----------
- ----------
Net asset value, end of
year........................ $ 9.05 $
8.77 $ 9.04 $ 8.60 $ 9.13
- -------- -------- -------- ----------
- ----------
- -------- -------- -------- ----------
- ----------
TOTAL
RETURN(a):....................................
9.40% 3.12% 11.54% .24%
3.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)....................... $346,059
$461,988 $641,946 $ 705,732
$2,202,555
Average net assets
(000)............................ $385,145
$543,796 $647,515 $1,735,413
$2,487,990
Ratios to average net assets:
Expenses, including distribution
fees............ 1.53% 1.57%
1.58% 1.66% 1.68%
Expenses, excluding distribution
fees............ 0.71% 0.75%
0.76% 0.80% 0.69%
Net investment
income............................ 5.85%
6.11% 5.99% 6.17% 5.64%
</TABLE>
- ---------------
(a) Total return does not consider the effects of
sales loads. Total return is
calculated assuming a purchase of shares on
the first day and a sale on the
last day of each year reported and includes
reinvestment of dividends and
distributions.
- --------------------------------------------------
- ------------------------------
See Notes to Financial Statements. 13
<PAGE>
Financial Highlights
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
<TABLE>
<CAPTION>
Class C Class Z
- --------------------------------------------------
- - -----------
August 1, Year Ended
Year Ended 1994(c)
Ended
February 29/28, Through
February
- ---------------------------------- February
28, 28,
1998 1997 1996 1995
1998
- ------ ------------ ------ -----------
- - -----------
<S>
<C> <C> <C> <C>
<C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period................ $ 8.77 $ 9.04
$ 8.60 $ 8.69 $ 8.76
- ------ ----- ------ -----
- -----------
Income from investment operations
Net investment
income............................... 0.53
0.54 0.54 0.31 0.59
Net realized and unrealized gain (loss) on
investment
transactions.......................... 0.28
(0.27) 0.44 (0.09) 0.28
- ------ ----- ------ -----
- -----------
Total from investment
operations................. 0.81
0.27 0.98 0.22 0.87
- ------ ----- ------ -----
- -----------
Less distributions
Dividends from net investment
income................ (0.53) (0.54)
(0.54) (0.31) (0.59)
- ------ ----- ------ -----
- -----------
Net asset value, end of
period...................... $ 9.05 $
8.77 $ 9.04 $ 8.60 $ 9.04
- ------ ----- ------ -----
- -----------
- ------ ----- ------ -----
- -----------
TOTAL
RETURN(a):....................................
9.48% 3.20% 11.63% 2.75%
10.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)..................... $2,840 $2,569
$1,799 $ 204 $84,733
Average net assets
(000)............................ $2,523
$2,440 $ 765 $ 111
$71,425
Ratios to average net assets:
Expenses, including distribution
fees............ 1.46% 1.50%
1.51% 1.63%(b) 0.71%
Expenses, excluding distribution
fees............ 0.71% 0.75%
0.76% 0.88%(b) 0.71%
Net investment
income............................ 5.92%
6.19% 5.99% 6.69%(b) 6.67%
<CAPTION>
March 4,
1996(d)
Through
February 28,
1997
- ------------
<S>
<C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period................ $ 9.13
- ------
Income from investment operations
Net investment
income............................... 0.61
Net realized and unrealized gain (loss) on
investment
transactions..........................
(0.37)
- ------
Total from investment
operations................. 0.24
- ------
Less distributions
Dividends from net investment
income................ (0.61)
- ------
Net asset value, end of
period...................... $ 8.76
- ------
- ------
TOTAL
RETURN(a):....................................
3.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)..................... $ 73,411
Average net assets
(000)............................ $ 39,551
Ratios to average net assets:
Expenses, including distribution
fees............ 0.75%(b)
Expenses, excluding distribution
fees............ 0.75%(b)
Net investment
income............................ 6.76%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of
sales loads. Total return is
calculated assuming a purchase of shares on
the first day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions. Total returns for periods of
less than a full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------
- ------------------------------
See Notes to Financial Statements. 14
<PAGE>
Report of Independent Accountants
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
To the Shareholders and Board of Directors of
Prudential Government Income Fund, Inc.
In our opinion, the accompanying statement of
assets and liabilities, including
the portfolio of investments, and the related
statements of operations and of
changes in net assets and the financial highlights
present fairly, in all
material respects, the financial position of
Prudential Government Income Fund,
Inc. (the 'Fund') at February 28, 1998, and the
results of its operations, the
changes in its net assets and the financial
highlights for the year then ended,
in conformity with generally accepted accounting
principles. These financial
statements and financial highlights (hereafter
referred to as 'financial
statements') are the responsibility of the Fund's
management; our responsibility
is to express an opinion on these financial
statements based on our audit. We
conducted our audit of these financial statements
in accordance with generally
accepted auditing standards which require that we
plan and perform the audit to
obtain reasonable assurance about whether the
financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements, assessing
the accounting principles used and significant
estimates made by management, and
evaluating the overall financial statement
presentation. We believe that our
audit, which included confirmation of securities
at February 28, 1998 by
correspondence with the custodian and brokers and
the application of alternative
auditing procedures where confirmations from
brokers were not received, provides
a reasonable basis for the opinion expressed
above. The accompanying statement
of changes in net assets for the year ended
February 28, 1997, and the financial
highlights for the periods other than the year
ended February 28, 1998 were
audited by other independent accountants, whose
opinion dated April 11, 1997 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
April 9, 1998
Change of Auditors
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- ------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was
terminated as the Fund's
auditors. For the years ended February 28, 1994
through February 28, 1997,
Deloitte & Touche LLP expressed an unqualified
opinion on the Fund's financial
statements. There were no disagreements between
Fund management and Deloitte &
Touche LLP prior to their termination. The Board
of Directors approved the
termination of Deloitte & Touche LLP and the
appointment of Price Waterhouse LLP
as the Fund's independent accountants.
- --------------------------------------------------
- ------------------------------
15
<PAGE>
Important Notice for Certain
Shareholders PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------
- -----------------------------
We are required by Massachusetts, Missouri and
Oregon to inform you that
dividends which have been derived from interest on
federal obligations are not
taxable to shareholders providing the mutual fund
meets certain requirements
mandated by the respective state's taxing
authorities. We are pleased to report
that 28% of the dividends paid by Prudential
Government Income Fund qualify for
such deduction.
For more detailed information regarding your state
and local taxes, you should
contact your tax adviser or the state/local taxing
authorities.
- --------------------------------------------------
- ------------------------------
16
<PAGE>
Comparing A $10,000 Investment.
- ------------------------------------------
Prudential Government Income Fund, Inc. vs.
the Lehman Brothers Government Bond Index.
/ / Prudential Government Income Fund, Inc.
- --- Lehman Bros. Gov't Bond Index
Past performance is not indicative of future
results. Investment
return and principal value will fluctuate so an
investor's shares,
when redeemed, may be worth more or less than
their original cost.
The box on top of the graphs is designed to give
you an idea how
much the Fund's returns can fluctuate from year to
year by
measuring the best and worst calendar years in
total annual
return since inception of each share class.
These graphs are furnished to you in accordance
with SEC regulations.
They compare a $10,000 investment in the
Prudential Government
Income Fund, Inc. with a similar investment in the
Lehman
Brothers Government Bond Index (the "Index") by
portraying
the initial account values at the commencement of
operations
of Class A, Class C and Class Z shares and for 10
years for
the Class B shares, and subsequent account values
at the end
of this reporting period (February 28, 1998), as
measured on
a quarterly basis, beginning in 1988 for Class B
shares,
1990 for Class A shares, 1994 for Class C shares
and in
1996 for Class Z shares. For purposes of the
graphs, and
unless otherwise indicated, in the accompanying
tables it
has been assumed (a) that the maximum applicable
front-end
sales charge was deducted from the initial $10,000
investment
in Class A shares; (b) the maximum applicable
contingent deferred
sales charge was deducted from the value of the
investment in
Class B and Class C shares, assuming full
redemption on
February 28, 1998; all recurring fees (including
management
fees) were deducted; and (d) all dividends and
distributions
were reinvested. Class Z shares do not carry a
sales charge
or a distribution fee. Class B shares will
automatically
convert to Class A shares, on a quarterly basis,
beginning
approximately seven years after purchase. This
conversion is
not reflected in the graphs.
The Lehman Brothers Government Bond Index is a
weighted index
comprised of securities issued or backed by the
U.S. government,
its agencies and instrumentalities with a
remaining maturity of
one to 30 years. The Index is unmanaged and
includes the
reinvestment of all dividends, but does not
reflect the payment of
transactions costs and advisory fees associated
with an investment
in the Fund. The securities that comprise the
Index may differ
substantially from the securities in the Fund's
portfolio. The
Index is not the only one that may be used to
characterize performance of U.S. government bond
funds and
other indexes may portray different comparative
performance.
Class A (GRAPH)
Average Annual Total
Returns - Class A
- ---------------------
With Sales Load
7.43% Since Inception
5.25% for 5 Years
5.74% for 1 Year
Without Sales Load
7.97% Since Inception
6.11% for 5 Years
10.26% for 1 Year
Class B (GRAPH)
Average Annual Total
Returns - Class B
- ----------------------
With Sales Load
7.79% Since Inception
7.04% for 10 Years
5.22% for 5 Years
4.40% for 1 Year
Without Sales Load
7.79% Since Inception
7.04% for 10 Years
5.38% for 5 Years
9.40% for 1 Year
Class C (GRAPH)
Average Annual Total
Returns - Class C
- ----------------------
With Sales Load
7.51% Since Inception
8.48% for 1 Year
Without Sales Load
7.51% Since Inception
9.48% for 1 Year
Class Z (GRAPH)
Average Annual Total
Returns - Class Z
- --------------------------
6.68% Since Inception
10.30% for 1 Year
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Harry A. Jacobs, Jr.
Mendel A. Melzer, CFA
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Louis A. Weil, III
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, NY 10022
The views expressed in this report and information
about
the Fund's portfolio holdings are for the period
covered
by this report and are subject to change
thereafter.
This report is not authorized for distribution to
prospective
investors unless preceded or accompanied by a
current prospectus.
744339102 MF128E
744339201 Cat. #642157Z
744339300
744339409
