PRUDENTIAL GOVERNMENT INCOME FUND INC, N-30D, 1999-11-09

PRUDENTIAL GOVERNMENT INCOME FUND INC
N-30D, 1999-11-09

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<PAGE>
(ICON)

Prudential
Government
Income
Fund, Inc.

SEMI
ANNUAL
REPORT
Aug. 31, 1999

(LOGO)

<PAGE>
A Message from the Fund's President October 5, 1999
(PHOTO)

Dear Shareholder,
Prudential Government Income Fund's Class A shares posted a negative return of
1.82% during our six-month reporting period that ended August 31, 1999. Its
benchmark Lipper Average also generated a negative return as inflation fears
caused a broad sell-off in the U.S. bond markets. The following report takes
a closer look at recent bond market events and explains how your Prudential
Government Income Fund was positioned.

Sticking with your asset allocation strategy
The recent turbulence in the bond markets illustrates the importance of a
well-diversified asset allocation strategy. A portfolio comprised of equity
funds, international and domestic bond funds, and money market funds could
help you weather inevitable market volatility and achieve more consistent
returns over time, provided the strategy remains in place. Therefore investors
should avoid making rash decisions. Generally speaking, long-term investment
success comes from maintaining an established strategy during both market
highs and market lows.

One integrated and expanded team
I would also like to take this opportunity to tell you about some changes
we've made to our Fixed Income Group. Earlier in the year, we combined our
fixed-income areas into one integrated group that will manage money for
Prudential's investors and policyholders. This group now manages approximately
$135 billion in assets, making it one of the three largest fixed-income money
managers in the country. Our expanded depth, breadth, and scale now also allow
us to tap the best talent and share investment ideas, proprietary research,
and analytical tools.

To utilize these resources effectively, we recently organized the group into
teams, each specializing in a different sector of the fixed-income market.
The U.S. Liquidity Sector team, headed by Michael Lillard, is now responsible
for the day-to-day management of your Prudential Government Income Fund. Many
of the investment professionals who supported the management of the Fund in
the past, including Barbara Kenworthy who previously managed the Fund, are
part of this new team.

Thank you for your continued confidence in Prudential mutual funds.

Sincerely,

John R. Strangfeld
President
Prudential Government Income Fund

<PAGE>
Performance Review

(PHOTO) (PHOTO)
Michael Lillard, team leader of the U.S. Liquidity Sector team, and Barbara
L. Kenworthy, a team member

Investment Goals and Style
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.

Inflation fears pummeled U.S. bond markets
Investors grew increasingly worried that a strong U.S. economy, a pickup in
global economic activity, and soaring oil prices could boost inflationary
pressures. Inflation hurts debt securities by eating into the value of their
fixed interest payments. To compensate for this risk, investors pushed bond
yields higher, which caused their prices to fall. U.S. Treasuries, federal
government agency securities, investment-grade U.S. corporate bonds, and
mortgage-backed securities all posted negative returns for the six-month
period, based on Lehman Brothers Indexes. Amid this bearish trend, the Fund
posted returns that were more negative than the return on its benchmark
Lipper Average.

The sell-off in U.S. bond markets deepened in the spring of 1999 as more
investors realized that the Federal Reserve would increase short-term interest
rates to raise the cost of borrowing. This change in monetary policy will
eventually help slow U.S. economic growth. On June 30, 1999, the U.S. central
bank increased the Federal funds rate (the rate U.S. banks charge each other
for overnight loans) by a quarter of a percentage point to 5.00%. That move
was followed by a second of the same magnitude on August 24, 1999, that left
the Federal funds rate at 5.25%. This time the Fed also hiked the discount
rate (the rate it charges member banks that borrow money from its discount
window) to 4.75% from 4.50%.

Under these challenging market conditions, the Fund trailed its Lipper Average
primarily because we did not shorten its duration aggressively early in the
six-month period. Duration is a measure of the Fund's sensitivity to
fluctuations in interest rates. Cutting the duration sharply would have
provided greater protection to the Fund as interest rates rose and bond prices
fell. Furthermore, federal agency debt securities accounted for a considerable
28% of the Fund's total investments as of February 28, 1999. These bonds were
the weakest performers among U.S. government securities until late in the
period, when we reduced them to 25% of the Fund's total investments as of
August 31, 1999.

Supply/demand balance drove the Fund's asset allocation
We used some of our proceeds from selling federal agency debt securities to
purchase mortgage-backed securities, which climbed from 26% of the Fund's
total investments at the start of the period to 30% by the close of our fiscal
half year. In making this shift, we considered that changes in

<PAGE>
the balance of supply and demand would likely support the prices of some types
of bonds while pressuring the prices of others.

As mortgage rates climbed along with bond yields, the pace of home sales in
the United States began to slow due to higher borrowing costs. This drop in
home sales has led to a decline in the amount of newly issued mortgage-backed
securities. A combination of decreasing supply and strong demand from
investors could help underpin the prices of mortgage-backed securities in the
final months of 1999. As a result, mortgage-backed securities may continue to
perform better than their benchmark U.S. Treasury issues.

Shrinking supply of Treasuries viewed favorably
We maintained a considerable exposure to Treasuries, which accounted for at
least 30% of the Fund's total investments throughout our six-month reporting
period. We purchased 10-year Treasuries that provided very attractive yields
at the auction of government securities in August 1999. In the future, there
will probably be fewer Treasuries issued. The federal government is running a
budget surplus, therefore it needs to borrow less money by auctioning
Treasuries. The 30-year Treasury bond will no longer be issued in November,
but will continue to be

Performance at a Glance

<TABLE>
<CAPTION>
Cumulative Total Returns1 As of 8/31/99
Six One Five Ten Since
Months Year Years Years Inception2
<S> <C> <C> <C> <C> <C>
Class A -1.82% -1.42% 37.00% N/A 92.83%
Class B -2.21 -2.13 32.55 84.53% 169.98
Class C -2.17 -2.05 33.03 N/A 33.00
Class Z -1.71 -1.22 N/A N/A 18.07
Lipper General
U.S. Gov't Bond Fd. Avg.3 -1.69 -1.53 34.64 96.92 ***
</TABLE>

<TABLE>
<CAPTION>
Average Annual Total Returns1 As of 9/30/99
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A -6.91% 6.24% N/A 6.68%
Class B -8.60 6.31 6.39% 7.17
Class C -5.49 6.33 N/A 5.70
Class Z -2.82 N/A N/A 5.06
</TABLE>

<TABLE>
<CAPTION>
Distributions & Yields As of 8/31/99
Total
Distributions 30-Day
Paid for Six Mos. SEC Yield
<S> <C> <C>
Class A $0.27 5.52%
Class B $0.25 5.18
Class C $0.25 5.20
Class Z $0.29 6.01
</TABLE>

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

1 Source: Prudential Investments Fund Management LLC and Lipper, Inc. The
cumulative total returns do not take into account sales charges. The average
annual total returns do take into account applicable sales charges. The Fund
charges a maximum front-end sales charge of 4% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically
convert to Class A shares, on a quarterly basis, approximately seven years
after purchase. Class C shares are subject to a front-end sales charge of 1%
and a CDSC of 1% for 18 months. Class C shares bought before November 2, 1998,
have a 1% CDSC if sold within one year. Class Z shares are not subject to
sales charges or distribution and service (12b-1) fees.

2 Inception dates: Class A, 1/22/90; Class B, 4/22/85; Class C, 8/1/94; and
Class Z, 3/4/96.

3 Lipper average returns are for all funds in each share class for the six-
month, one-, five-, and ten-year periods in the General U.S. Government Bond
Fund category.

***Lipper Since Inception returns are 92.28% for Class A, 188.36% for Class
B, 34.59% for Class C, and 17.84% for Class Z, based on all funds in each
share class.
- -------------------------------------------------------------------------------
1

<PAGE>
Review Cont'd.

auctioned in February and August. There may also be a reduction in the
frequency of auctions of one-year bills and two-year notes, and the U.S.
Treasury may buy back some of its older debt securities. Such a move could
help the older, or "off-the-run" Treasuries to perform better than more
recently issued, or "on-the-run" Treasuries. In other words, the difference
between the yields of older Treasuries and those issued more recently could
narrow considerably. Since many of the Treasuries held by the Fund are older
issues, a buyback could help the Fund's performance.

Our purchases of 10-year Treasuries and mortgage-backed securities slightly
lengthened the Fund's duration from 5.5 years as of February 28, 1999 to 5.8
years at the end of August 1999. The duration extended primarily because
investors have been able to hold on to their mortgage-backed securities for
a longer time, since fewer of the underlying mortgages are being refinanced
in this higher-interest-rate environment. We usually would have shortened the
Fund's duration, which would have made it less vulnerable to the rise in
interest rates. However, we believed that interest rates had climbed too far
in advance of the Treasury auction in August.

Looking Ahead
Fed poised to act again, if necessary
After its most recent meeting in early October 1999, the Fed released a
statement indicating it might consider hiking short-term rates in the near
future and would be "especially alert" to economic trends that could boost
inflationary pressures. Therefore market participants will pay close attention
to data on employment and consumer spending for goods and services, which is
the main engine of the U.S. economy. If this data indicates that the U.S.
economy is continuing to expand at a rapid pace, we believe there is a chance
the Fed will hike rates in November 1999, reversing the last of three rate
cuts from the autumn of 1998.

Five Largest Issuers
Expressed as a percentage of net assets
as of 8/31/99

U.S. Treasury 32.3%
Obligations
Federal National 30.5
Mortgage Association
Small Business 8.6
Administration
Government National 6.7
Mortgage Association
New Jersey Economic 4.1
Development Authority

Portfolio Composition
Expressed as a percentage of net assets
as of 8/31/99

Treasuries 32.3%
Mortgages 30.2
Gov't Agency 24.6
Corporates 6.3
Other 3.4
Asset-Backed 1.3
Cash Equivalents 1.9

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

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

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2

<PAGE>
Portfolio of Investments as of August 31, 1999 PRUDENTIAL GOVERNMENT INCOME
(Unaudited) FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--98.1%
- ------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Throughs--30.2%
Federal Home Loan Mortgage Corp.,
$ 392(c) 7.50%, 6/01/24 $ 388
4,238 8.00%, 1/01/22 - 5/01/23 4,314,475
2,041 8.50%, 6/01/07 - 4/01/20 2,121,589
4,639 9.00%, 1/01/20 4,842,450
1,109 11.50%, 10/01/19 1,224,208
Federal National Mortgage Assoc.,
82,745(a) 6.50%, 10/01/14 - 10/01/29 78,643,918
109,507 7.00%, 7/01/03 - 10/01/29 106,577,493
31,212 7.125%, 2/01/07 30,568,693
50,054 7.50%, 12/01/06 - 10/01/29 50,160,501
11(b) 8.00%, 10/01/24 10,935
2,666 8.50%, 6/01/17 - 3/01/25 2,752,829
3,482 9.00%, 8/01/24 - 4/01/25 3,636,114
785 9.50%, 10/01/19 - 3/01/25 830,673
Government National Mortgage
Assoc.,
45,469 7.00%, 2/15/09 - 2/15/29 44,353,850
24,603(b) 7.50%, 5/15/02 - 11/15/24 24,586,551
656 8.00%, 7/15/16 - 3/15/24 666,570
8,779 9.50%, 10/15/09 - 12/15/17 9,358,373
Government National Mortgage
Assoc. II,
1,494 9.50%, 5/20/18 - 8/20/21 1,575,931
--------------
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $364,737,939) 366,225,541
- ------------------------------------------------------------
U.S. Government Obligations--32.3%
United States Treasury Bonds,
20,000(b) 8.125%, 8/15/19 23,615,600
30,400 8.125%, 8/15/21 36,204,576
20,000 8.75%, 5/15/17 24,712,400
42,800 10.00%, 5/15/10 50,189,848
United States Treasury Bonds,
$ 44,000(b) 11.75%, 2/15/10 $ 54,827,960
3,000(b) 12.00%, 8/15/13 4,128,750
68,400(b) 12.75%, 11/15/10 90,533,556
United States Treasury Notes,
20,980 3.375%, 1/15/07 20,062,316
6,000(b) 5.50%, 1/31/03 5,924,040
15,000 6.00%, 8/15/09 15,023,400
3,280(b) 6.50%, 5/31/01 3,318,934
5,000 7.875%, 11/15/04 5,396,100
23,000(b) 12.375%, 5/15/04 28,764,260
United States Treasury Strips,
81,500 Zero Coupon, 11/15/15 28,681,480
--------------
Total U.S. Government Obligations
(cost $417,387,788) 391,383,220
- ------------------------------------------------------------
U.S. Government Agency Securities--22.5%
Federal Home Loan Bank,
25,000(b) 5.75%, 10/15/07 24,328,125
Federal National Mortgage Assoc.,
16,000 5.125%, 2/13/04 15,104,960
13,500 5.875%, 4/23/04 13,000,095
10,000(b) 6.00%, 5/15/08 9,429,700
40,000 6.06%, 5/21/03, M.T.N. 39,124,800
20,000 6.30%, 9/25/02 19,771,800
Financing Corp.,
13,505 9.40%, 2/08/18 16,904,479
Small Business Administration,
16,146 Ser. 1995-20B, 8.15%, 2/01/15 16,610,139
20,315 Ser. 1995-20L, 6.45%, 12/01/15 19,274,264
29,755 Ser. 1996-20H, 7.25%, 8/01/16 29,342,186
17,625 Ser. 1996-20K, 6.95%, 11/01/16 17,118,619
8,999 Ser. 1997-20A, 7.15%, 1/01/17 8,808,121
14,106 Ser. 1998-20I, 6.00%, 9/01/18 13,040,698
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3

<PAGE>
Portfolio of Investments as of August 31, 1999 PRUDENTIAL GOVERNMENT INCOME
(Unaudited) FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
U.S. Government Agency Securities (cont'd.)
Tennessee Valley Authority,
$ 600 Ser. 1993-D, 7.25%, 7/15/43 $ 577,524
30,000(b) Ser. 1995-B, 6.235%, 7/15/45 29,992,800
--------------
Total U.S. Government Agency
Securities
(cost $283,777,324) 272,428,310
- ------------------------------------------------------------
Corporate Bonds--6.3%
Merck and Co.,
22,000(b) 5.76%, 5/03/37 22,110,000
New Jersey Economic Development
Authority,
55,000(b) Ser. A, 7.425%, 2/15/29 54,209,375
--------------
Total Corporate Bonds
(cost $79,214,850) 76,319,375
- ------------------------------------------------------------
Collateralized Mortgage Obligations--0.9%
Resolution Trust Corp.,
Ser. 1994-1, Class B2,
7.75%, 9/25/29 4,737,227
4,737
Ryland Mortgage Participation
Securities,
Ser. 1993-3, Class A3,
6.944%, 9/25/24 (ARM) 1,231,717
1,297
Structured Asset Securities Corp.,
Ser. 1995-C1, Class C,
7.375%, 9/25/24 4,262,161
4,281
--------------
Total Collateralized Mortgage
Obligations
(cost $9,745,481) 10,231,105
- ------------------------------------------------------------
U.S. Government Agency - Stripped Securities--2.1%
Federal National Mortgage Assoc.,
30,000 Zero Coupon, 6/01/17 8,732,700
Financing Corp.,
5,000 Zero Coupon, 3/07/04 3,737,800
Israel AID,
$ 25,584 Zero Coupon, 8/15/09 $ 13,243,717
--------------
Total U.S. Government Agency -
Stripped Securities
(cost $27,175,152) 25,714,217
- ------------------------------------------------------------
Supranational Bonds--2.5%
Asian Development Bank,
20,000 5.82%, 6/16/28 18,567,800
International Bank for
Reconstruction & Development,
10,000(b) 8.625%, 10/15/16 11,530,900
--------------
Total Supranational Bond
(cost $32,448,300) 30,098,700
- ------------------------------------------------------------
Asset Backed Securities--1.3%
Aesop Funding II LLC,
Ser. 1997-1, Class A2,
6.40%, 10/20/03 9,943,204
10,000
The Money Store Home Improvement
Trust,
Ser. 1997-1, Class M2,
8.07%, 5/15/23 6,116,693
6,125
--------------
Total Asset Backed Securities
(cost $16,121,849) 16,059,897
--------------
Total Long-Term Investments
(cost $1,230,608,683) 1,188,460,365
SHORT-TERM INVESTMENTS--15.8%
- ------------------------------------------------------------
Corporate Bonds--5.7%
Old Line Funding Corp.,
919 5.30%, 9/15/99 917,106
Preferred Receivables Funding
Corp.,
1,000 5.27%, 9/13/99 998,243
15,120 5.28%, 9/15/99 15,088,954
Thunder Bay Funding, Inc.,
2,010 5.30%, 9/14/99 2,006,153
2,971 5.30%, 9/15/99 2,964,877
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4

<PAGE>
PRUDENTIAL GOVERNMENT INCOME
FUND, INC.
Portfolio of Investments as of August 31, 1999
(Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Corporate Bonds (cont'd.)
Variable Funding Capital Corp.,
$ 46,400 5.28%, 9/15/99 $ 46,304,725
--------------
Total Corporate Bonds
(cost $68,280,058) 68,280,058
- ------------------------------------------------------------
Repurchase Agreement--10.1%
Joint Repurchase Agreement
Account,
5.45%, 9/01/99
122,451 (cost $122,451,000; Note 5) 122,451,000
--------------
Total Short-Term Investments
(cost $190,731,058) 190,731,058
--------------
- ------------------------------------------------------------
Total Investments--113.9%
(cost $1,421,339,741; Note 4) 1,379,191,423
Liabilities in excess of other
assets--(13.9%) (168,136,604)
--------------
Net Assets--100% $1,211,054,819
--------------
--------------
</TABLE>
- ---------------
AID--Agency for International Development
ARM--Adjusted Rate Mortgage
M.T.N.--Medium-Term Note
(a) Partial principal amount of $363,490,000 represents a to-be-
announced ('TBA') mortgage dollar roll, see Notes 1 and 4.
(b) Partial principal amount pledged as collateral for mortgage dollar roll.
(c) Represents actual principal amount (not rounded to nearest thousand).
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5

<PAGE>
Statement of Assets and Liabilities (Unaudited) PRUDENTIAL GOVERNMENT INCOME
FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets August 31, 1999
<S> <C>
Investments excluding repurchase agreement, at value (cost $1,298,888,741)................................ $1,256,740,423
Repurchase agreement, at value (cost $122,451,000)........................................................ 122,451,000
Receivable for investments sold........................................................................... 178,487,441
Interest receivable....................................................................................... 13,023,441
Receivable for Fund shares sold........................................................................... 2,479,143
Prepaid expenses and other assets......................................................................... 36,975
---------------
Total assets........................................................................................... 1,573,218,423
---------------
Liabilities
Payable for investments purchased......................................................................... 354,585,176
Payable for Fund shares reacquired........................................................................ 4,121,944
Accrued expenses and other liabilities.................................................................... 1,271,681
Dividends payable......................................................................................... 1,243,942
Management fee payable.................................................................................... 519,404
Distribution fee payable.................................................................................. 373,675
Due to broker - variation margin.......................................................................... 47,782
---------------
Total liabilities...................................................................................... 362,163,604
---------------
Net Assets................................................................................................ $1,211,054,819
---------------
---------------
Net assets were comprised of:
Common stock, at par................................................................................... $ 1,417,118
Paid-in capital in excess of par....................................................................... 1,374,915,236
---------------
1,376,332,354
Accumulated net realized loss on investments........................................................... (123,034,186)
Net unrealized depreciation on investments............................................................. (42,243,349)
---------------
Net assets, August 31, 1999............................................................................... $1,211,054,819
---------------
---------------
Class A:
Net asset value and redemption price per share
($837,391,178 / 97,994,782 shares of common stock issued and outstanding)........................... $8.55
Maximum sales charge (4% of offering price)............................................................ .36
---------------
Maximum offering price to public....................................................................... $8.91
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($265,289,590 / 31,022,661 shares of common stock issued and outstanding)........................... $8.55
---------------
---------------
Class C:
Net asset value and redemption price per share
($8,886,080 / 1,039,118 shares of common stock issued and outstanding).............................. $8.55
Sales charge (1% of offering price).................................................................... .09
---------------
Offering price to public............................................................................... $8.64
---------------
---------------
Class Z:
Net asset value, offering price and redemption price per share
($99,487,971 / 11,655,220 shares of common stock issued and outstanding)............................ $8.54
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6

<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income August 31, 1999
<S> <C>
Income
Interest.................................. $ 46,130,770
---------------
Expenses
Management fee............................ 3,237,195
Distribution fee--Class A................. 1,103,914
Distribution fee--Class B................. 1,250,826
Distribution fee--Class C................. 34,214
Transfer agent's fees and expenses........ 1,031,000
Reports to shareholders................... 40,000
Custodian's fees and expenses............. 36,000
Audit fee................................. 22,000
Directors' fees........................... 20,000
Registration fees......................... 15,000
Legal fees and expenses................... 13,000
Insurance expense......................... 8,000
Miscellaneous............................. 994
---------------
Total expenses......................... 6,812,143
---------------
Net investment income....................... 39,318,627
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on:
Investment transactions................... (16,689,438)
Financial futures contracts............... (388,382)
---------------
(17,077,820)
---------------
Net change in unrealized appreciation (depreciation) on:
Investment transactions................... (45,969,184)
Financial futures contracts............... (95,031)
---------------
(46,064,215)
---------------
Net loss on investments..................... (63,142,035)
---------------
Net Decrease in Net Assets
Resulting from Operations................... $ (23,823,408)
---------------
---------------
</TABLE>

PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) August 31, February 28,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income........ $ 39,318,627 $ 73,602,481
Net realized gain (loss) on
investment transactions... (17,077,820) 23,727,086
Net change in unrealized
appreciation
(depreciation) on
investments............... (46,064,215) (36,161,034)
----------------- --------------
Net increase (decrease) in
net assets resulting from
operations................ (23,823,408) 61,168,533
----------------- --------------
Dividends to shareholders from
net investment income (Note 1)
Class A................... (27,352,973) (50,553,420)
Class B................... (8,498,884) (17,378,979)
Class C................... (260,256) (268,163)
Class Z................... (3,206,514) (5,401,919)
----------------- --------------
(39,318,627) (73,602,481)
----------------- --------------
Fund share transactions (net of share
conversions) (Note 6):
Net proceeds from shares
subscribed................ 133,827,448 393,970,010
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 25,581,836 47,502,780
Cost of shares reacquired.... (229,540,692) (337,878,336)
----------------- --------------
Net increase (decrease) in
net assets from Fund share
transactions.............. (70,131,408) 103,594,454
----------------- --------------
Total increase (decrease)...... (133,273,443) 91,160,506
Net Assets
Beginning of period............ 1,344,328,262 1,253,167,756
----------------- --------------
End of period.................. $ 1,211,054,819 $1,344,328,262
----------------- --------------
----------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7

<PAGE>
Notes to Financial Statements
(Unaudited) 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, strips and other debt securities
issued by the U.S. Treasury, and obligations, including mortgage-related
securities, issued or guaranteed by U.S. Government agencies or
instrumentalities.
- ------------------------------------------------------------
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.

Repurchase Agreements: 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. There were no loans outstanding as of August 31, 1999.

Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund accretes discount on portfolio securities as
- --------------------------------------------------------------------------------
8

<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------------------------------------
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.

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

Pursuant to the Class A Plan, the Fund compensates PIMS 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 for the six months ended August 31, 1999 were
.25 of 1% of the average daily net assets of the Class A shares.

Pursuant to the Class B Plan, the Fund compensates PIMS for its
distribution-related activities 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 .825 of 1% of the
average daily net assets of the Class B shares for the six months ended August
31, 1999.

Pursuant to the Class C Plan, the Fund compensates PIMS for its
distribution-related activities at an annual rate of up to 1% of the average
daily net assets of the Class C shares. Such expenses under the Class C Plan
were .75 of 1% of the average daily net assets of the Class C shares for the six
months ended August 31, 1999.

PIMS has advised the Fund that it received approximately $124,200 and $30,500 in
front-end sales charges resulting from sales of Class A and Class C shares,
respectively, during the six months ended August 31, 1999. From these fees, PIMS
paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.

PIMS has advised the Fund that for the six months ended August 31, 1999 it
received approximately $277,400 and $4,200 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.

PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.

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

Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended August 31,
1999, the Fund incurred fees of approximately $1,030,500 for the services of
PMFS. As of August 31, 1999, approximately $168,800 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 six months ended August 31, 1999, were $399,926,754 and $413,290,214,
respectively.

During the six months ended August 31, 1999, the Fund entered into financial
futures contracts. Details of open contracts at August 31, 1999 are as follows:
<TABLE>
<CAPTION>
Value at Value at
Number of Expiration Trade August 31, Unrealized
Contracts Type Date Date 1999 Depreciation
- --------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Long
positions:
20 yr. Dec.
150 T-Bond 1999 $17,100,250 $17,095,313 $ (4,937)
10 yr. Dec.
94 T-Note 1999 10,369,875 10,279,781 (90,094)
------------
$(95,031)
------------
------------
</TABLE>

The federal income tax basis of the Fund's investments at August 31, 1999 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized depreciation for federal income tax purposes was $42,148,318 (gross
unrealized appreciation-$5,386,034; gross unrealized depreciation-$47,534,352).

The Fund had a capital loss carryforward as of February 28, 1999 of
approximately $105,956,000 of which $17,809,000 expires in 2001, $2,920,000
expires in 2002, $66,560,000 expires in 2003, $717,000 expires in 2004 and
$17,950,000 expires in 2005. Accordingly, no capital gains distribution is
expected to be paid to shareholders until net gains have been realized in excess
of such amounts.

The average balance of dollar rolls outstanding during the six months ended
August 31, 1999 was approximately $30,374,000. The amount of dollar rolls
outstanding at August 31, 1999 was $379,234,991 (principal $363,490,000), which
was 24.1% of total assets.

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 August 31, 1999, the Fund
had a 17.62% undivided interest in the repurchase agreements in the joint
account. This undivided interest represented $122,451,000 in principal amount.
As of such date, the repurchase agreements in the joint account and the value of
the collateral therefor were as follows:

Bear, Stearns & Co., Inc., 5.43%, in the principal amount of $190,000,000,
repurchase price $190,028,658, due 9/1/99. The value of the collateral including
accrued interest was $196,788,426.

Deutsche Bank Securities, Inc., 5.43%, in the principal amount of $190,000,000,
repurchase price $190,028,658, due 9/1/99. The value of the collateral including
accrued interest was $193,800,014.

Salomon Smith Barney, Inc., 5.43%, in the principal amount of $190,000,000,
repurchase price $190,028,658, due 9/1/99. The value of the collateral including
accrued interest was $193,887,675.

Warburg Dillon Read LLC, 5.52%, in the principal amount of $125,089,000,
repurchase price $125,108,180, due 9/1/99. The value of the collateral including
accrued interest was $127,594,690.

- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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.
- --------------------------------------------------------------------------------
10

<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------------------------------------
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ----------- -------------
<S> <C> <C>
Six months ended August 31, 1999:
Shares sold........................ 8,077,866 $ 70,992,261
Shares issued in reinvestment of
dividends........................ 1,922,954 16,901,213
Shares reacquired.................. (13,845,857) (121,643,872)
----------- -------------
Net decrease in shares outstanding
before conversion................ (3,845,037) (33,750,398)
Shares issued upon conversion from
Class B.......................... 2,169,884 19,075,678
----------- -------------
Net decrease in shares
outstanding...................... (1,675,153) $ (14,674,720)
----------- -------------
----------- -------------
Year ended February 28, 1999:
Shares sold........................ 11,337,948 $ 103,420,990
Shares issued in connection with
the acquisition of Prudential
Mortgage Income Fund............. 9,218,999 85,302,295
Shares issued in reinvestment of
dividends........................ 3,393,079 30,992,330
Shares reacquired.................. (18,175,930) (166,229,454)
----------- -------------
Net increase in shares outstanding
before conversion................ 5,774,096 53,486,161
Shares issued upon conversion from
Class B.......................... 3,289,549 30,222,531
----------- -------------
Net increase in shares
outstanding...................... 9,063,645 $ 83,708,692
----------- -------------
----------- -------------
<CAPTION>
Class B
- -----------------------------------
Six months ended August 31, 1999:
Shares sold........................ 2,243,887 $ 19,865,391
Shares issued in reinvestment of
dividends........................ 609,605 5,364,055
Shares reacquired.................. (7,878,001) (69,385,668)
----------- -------------
Net decrease in shares outstanding
before conversion................ (5,024,509) (44,156,222)
Shares reacquired upon conversion
into Class A..................... (2,167,418) (19,075,678)
----------- -------------
Net decrease in shares
outstanding...................... (7,191,927) $ (63,231,900)
----------- -------------
----------- -------------
<CAPTION>
Class B Shares Amount
- ----------------------------------- ----------- -------------
<S> <C> <C>
Year ended February 28, 1999:
Shares sold........................ 8,957,322 $ 82,525,127
Shares issued in connection with
the acquisition of Prudential
Mortgage Income Fund............. 5,348,280 49,472,834
Shares issued in reinvestment of
dividends........................ 1,197,788 10,945,704
Shares reacquired.................. (12,229,393) (112,158,657)
----------- -------------
Net increase in shares outstanding
before conversion................ 3,273,997 30,785,008
Shares reacquired upon conversion
into Class A..................... (3,285,972) (30,222,531)
----------- -------------
Net decrease in shares
outstanding...................... (11,975) $ 562,477
----------- -------------
----------- -------------
<CAPTION>
Class C
- -----------------------------------
Six months ended August 31, 1999:
Shares sold........................ 411,189 $ 3,648,490
Shares issued in reinvestment of
dividends........................ 21,666 190,402
Shares reacquired.................. (310,157) (2,728,666)
----------- -------------
Net increase in shares
outstanding...................... 122,698 $ 1,110,226
----------- -------------
----------- -------------
Year ended February 28, 1999:
Shares sold........................ 737,124 $ 6,785,510
Shares issued in connection with
the acquisition of Prudential
Mortgage Income Fund............. 157,565 1,457,390
Shares issued in reinvestment of
dividends........................ 24,242 221,821
Shares reacquired.................. (316,198) (2,907,003)
----------- -------------
Net increase in shares
outstanding...................... 602,733 $ 5,557,718
----------- -------------
----------- -------------
<CAPTION>
Class Z
- -----------------------------------
Six months ended August 31, 1999:
Shares sold........................ 4,469,842 $ 39,321,306
Shares issued in reinvestment of
dividends........................ 356,360 3,126,166
Shares reacquired.................. (4,053,920) (35,782,486)
----------- -------------
Net increase in shares
outstanding...................... 772,282 $ 6,664,986
----------- -------------
----------- -------------
Year ended February 28, 1999:
Shares sold........................ 7,074,770 $ 64,867,892
Shares issued in connection with
the acquisition of Prudential
Mortgage Income Fund............. 14,932 137,972
Shares issued in reinvestment of
dividends........................ 585,585 5,342,925
Shares reacquired.................. (6,169,039) (56,583,222)
----------- -------------
Net increase in shares
outstanding...................... 1,506,248 $ 13,765,567
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
11

<CAPTION>
1995
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 9.13
--------
Income from investment operations
Net investment income.................................. 0.59
Net realized and unrealized gain (loss) on investment
transactions........................................ (0.54)
--------
Total from investment operations.................... 0.05
--------
Less distributions
Dividends from net investment income................... (0.59)
--------
Net asset value, end of period......................... $ 8.59
--------
--------
TOTAL RETURN(a):....................................... .83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $871,145
Average net assets (000)............................... $ 95,560
Ratios to average net assets:
Expenses, including distribution fees............... 0.98%
Expenses, excluding distribution fees............... 0.83%
Net investment income............................... 7.45%
For Class A, B, C and Z shares:
Portfolio turnover rate............................. 206%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12

<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------
Six Months
Ended Year Ended February 28/29,
August 31, -----------------------------------------------
1999 1999 1998 1997 1996
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 8.99 $ 9.05 $ 8.77 $ 9.04 $ 8.60
---------- -------- -------- -------- --------
Income from investment operations
Net investment income.................................. 0.25 0.49 0.52 0.54 0.54
Net realized and unrealized gain (loss) on investment
transactions........................................ (0.44) (0.06) 0.28 (0.27) 0.44
---------- -------- -------- -------- --------
Total from investment operations.................... (0.19) 0.43 0.80 0.27 0.98
---------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................... (0.25) (0.49) (0.52) (0.54) (0.54)
---------- -------- -------- -------- --------
Net asset value, end of period......................... $ 8.55 $ 8.99 $ 9.05 $ 8.77 $ 9.04
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
TOTAL RETURN(a):....................................... (2.21)% 4.83% 9.40% 3.12% 11.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $265,290 $343,425 $346,059 $461,988 $641,946
Average net assets (000)............................... $301,583 $322,626 $385,145 $543,796 $647,515
Ratios to average net assets:
Expenses, including distribution fees............... 1.51%(b) 1.50% 1.53% 1.57% 1.58%
Expenses, excluding distribution fees............... 0.68%(b) 0.68% 0.71% 0.75% 0.76%
Net investment income............................... 5.61%(b) 5.39% 5.85% 6.11% 5.99%
<CAPTION>
1995
----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 9.13
----------
Income from investment operations
Net investment income.................................. 0.53
Net realized and unrealized gain (loss) on investment
transactions........................................ (0.53)
----------
Total from investment operations.................... --
----------
Less distributions
Dividends from net investment income................... (0.53)
----------
Net asset value, end of period......................... $ 8.60
----------
----------
TOTAL RETURN(a):....................................... .24%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 705,732
Average net assets (000)............................... $1,735,413
Ratios to average net assets:
Expenses, including distribution fees............... 1.66%
Expenses, excluding distribution fees............... 0.80%
Net investment income............................... 6.17%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13

<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------------------------
August 1,
Six Months Year Ended 1994(c)
Ended February 28/29, Through
August 31, --------------------------------------- February 28,
1999 1999 1998 1997 1996 1995
---------- ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 8.99 $ 9.05 $ 8.77 $ 9.04 $ 8.60 $ 8.69
----- ------ ------ ------ ------ -----
Income from investment operations
Net investment income.................................. 0.25 0.50 0.53 0.54 0.54 0.31
Net realized and unrealized gain (loss) on investment
transactions........................................ (0.44) (0.06) 0.28 (0.27) 0.44 (0.09)
----- ------ ------ ------ ------ -----
Total from investment operations.................... (0.19) 0.44 0.81 0.27 0.98 0.22
----- ------ ------ ------ ------ -----
Less distributions
Dividends from net investment income................... (0.25) (0.50) (0.53) (0.54) (0.54) (0.31)
----- ------ ------ ------ ------ -----
Net asset value, end of period......................... $ 8.55 $ 8.99 $ 9.05 $ 8.77 $ 9.04 $ 8.60
----- ------ ------ ------ ------ -----
----- ------ ------ ------ ------ -----
TOTAL RETURN(a):....................................... (2.17)% 4.91% 9.48% 3.20% 11.63% 2.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $8,886 $8,236 $2,840 $2,569 $1,799 $ 204
Average net assets (000)............................... $9,074 $4,878 $2,523 $2,440 $ 765 $ 111
Ratios to average net assets:
Expenses, including distribution fees............... 1.43%(b) 1.43% 1.46% 1.50% 1.51% 1.63%(b)
Expenses, excluding distribution fees............... 0.68%(b) 0.68% 0.71% 0.75% 0.76% 0.88%(b)
Net investment income............................... 5.69%(b) 5.50% 5.92% 6.19% 5.99% 6.69%(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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 14

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>
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 D. Gold
Robert F. Gunia
Thomas T. Mooney
Stephen P. Munn
Thomas H. O'Brien
David R. Odenath, Jr.
Richard A. Redeker
John R. Strangfeld
Nancy H. Teeters
Louis A. Weil, III

Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Deborah A. Docs, 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 Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077

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

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

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

Legal Counsel
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022

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

The accompanying financial statements as of August 31, 1999, were not audited
and, accordingly, no opinion is expressed on them.

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

<PAGE>

(LOGO)
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
BULK RATE
U.S. POSTAGE
PAID
Permit 6807
New York, NY

Class NASDAQ Cusip
A PGVAX 744339102
B PBGPX 744339201
C -- 744339300
Z PGVZX 744339409 MF128E2