<PAGE>
(ICON)
SEMIANNUAL REPORT AUGUST 31, 2000
Prudential
Government Income Fund, Inc.
Fund Type Government securities
Objective High current return
(GRAPHIC)
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.
(LOGO)
<PAGE>
Build on the Rock
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. The guarantee on
U.S. government securities applies only to the
underlying securities of the Fund's portfolio, and
not to the value of the Fund's shares. 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.
Portfolio Composition
Expressed as a percentage of
total investments as of 8/31/00
40.3% Mortgages
21.2 Treasuries
17.6 Government Agency
2.3 Corporates
0.8 Asset-Backed
17.8 Cash Equivalents
Ten Largest Issuers
Expressed as a percentage of
net assets as of 8/31/00
29.6% Federal National Mortgage Assoc.
25.6 U.S. Treasury Obligations
22.5 Gov't National Mortgage Assoc.
9.3 Small Business Administration
4.0 Barton Capital Corp.*
4.0 Blue Ridge Asset Funding Corp.*
3.0 Windmill Funding Corp.*
2.9 Tennessee Valley Auth.
2.8 New Jersey Economic Dev. Auth.
2.8 American Home Products Corp.*
*Short-term securities that matured in September 2000.
<PAGE>
www.prudential.com (800) 225-1852
Performance at a Glance
Cumulative Total Returns1 As of 8/31/00
<TABLE>
<CAPTION>
Six One Five Ten Since
Months Year Years Years Inception2
<S> <C> <C> <C> <C> <C>
Class A 5.17% 6.96% 31.58% 101.89% 106.25%
Class B 4.99 6.47 27.45 88.24 186.37 (182.70)
Class C 5.03 6.55 27.94 N/A 41.71
Class Z 5.30 7.23 N/A N/A 26.60
Lipper General U.S.
Gov't Fund Avg.3 5.36 6.85 30.73 98.54 ***
</TABLE>
Average Annual Total Returns1 As of 9/30/00
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 2.01% 4.66% 6.80% 6.64%
Class B 0.65 4.68 6.49 7.07 (6.98)
Class C 3.67 4.72 N/A 5.70
Class Z 6.52 N/A N/A 5.37
</TABLE>
Distributions and Yields As of 8/31/00
<TABLE>
<CAPTION>
Total Distributions 30-Day
Paid for Six Months SEC-Yield
<S> <C> <C>
Class A $0.27 5.85%
Class B $0.25 5.52
Class C $0.25 5.54
Class Z $0.28 6.35
</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 Z shares are not subject to a sales charge or
distribution and service (12b-1) fees. Without
waiver of management fees and/or expense
subsidization, the Fund's cumulative and average
annual total returns would have been lower, as
indicated in parentheses ( ).
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
Fund category. General U.S. Government Funds invest
at least 65% of their assets in U.S. government
agency issues.
*** Lipper Since Inception returns are 105.20% for
Class A, 207.87% for Class B, 44.06% for
Class C, and 26.07% for Class Z, based on all funds
in each share class.
1
<PAGE>
(LOGO) October 18, 2000
DEAR SHAREHOLER,
Despite a difficult period in the fixed-income
markets, the Prudential Government Income Fund
produced solid results for shareholders. During the
reporting period that covers the six months ended
August 31, 2000, the Fund's Class A shares returned
5.17%, -- 0.96% to those paying the Class A shares'
initial sales charge. This was relatively
consistent with the 5.36% return for the Lipper
General U.S. Government Fund Average.
Gaining momentum
The economy continued to grow at an extremely fast
pace, leading to concerns of an increase in
inflation. As a result, the Federal Reserve Board
(the Fed) maintained its policy of raising short-
term interest rates to slow economic growth. This
led to a decline in the price of most fixed-income
securities. However, in June and August, the Fed
chose not to raise rates further, as data indicated
that economic growth was beginning to moderate. The
fixed-income market subsequently rebounded, helping
the Fund to register strong gains. A further
discussion of the economic environment and your
Fund's investments follows.
Focusing on the big picture
We believe the last six months exemplify the
importance of maintaining a disciplined investment
approach. As we've recently seen, investment
classes will move in and out of favor over time. As
a result, investors who attempt to "chase" the best
performance are typically not rewarded. We believe
a more effective strategy is to maintain a well-
diversified portfolio, and to focus on your long-
term financial objectives.
Sincerely,
John R. Strangfeld, President
Prudential Government Income Fund, Inc.
2
<PAGE>
Prudential Government Income Fund, Inc.
Semiannual Report August 31, 2000
Investment Adviser's Report
An accurate crystal ball
In our last report to shareholders at the end of
February 2000, we described a fairly bleak
environment in the fixed-income markets. The Fed's
policy of raising interest rates to ward off
inflation had taken its toll on bond prices, and
virtually every sector of the bond market was
posting negative total returns.
However, in the report's Fund Outlook section, we
pointed out that relief was in sight. We believed
that the Fed would continue its efforts to
moderate U.S. economic growth. Yet, at some point
in the near future, we expected that the delayed
effect of higher short-term rates would kick in,
and that the lengthy economic expansion would begin
to slow. In summary, we pointed out that "if the
Fed can achieve its goal of slowing economic growth
without causing a recession, the environment for
bonds should improve." In hindsight, the scenario
we described has largely come to pass.
A tale of two markets
Early in the reporting period, the bond market's
performance mirrored that of 1999. As it did in
1999, the Fed increased its federal funds rate (the
rate U.S. banks charge each other for overnight
loans) three times. This led to falling prices in
most fixed-income sectors, as bond prices move in
the opposite direction of interest rates.
Then in June, signs of a slowdown began to appear.
Rising interest rates had caused mortgage rates to
rise substantially, which, in turn, took some steam
out of the housing market. Consumer spending also
appeared to be moderating, while employee
productivity levels remained strong and inflation
(aside from energy prices) was not an issue. The
Fed then chose to hold interest rates steady during
the summer months. Investors took this as a sign
that interest rate hikes would end sooner rather
than later, and bond prices rallied.
3
<PAGE>
Prudential Government Income Fund, Inc.
Semiannual Report August 31, 2000
Treasury buyback continues to affect the market
While most fixed-income securities demonstrated
lackluster performance during the first half of the
reporting period, there was a notable exception--
long-term Treasuries. As a result of strong demand
and dwindling supply, these issues outperformed
other types of fixed-income securities throughout
the reporting period.
Investors have aggressively purchased 30-year
securities, as the U.S. Treasury Department has
moved to limit their supply. By repurchasing these
bonds with higher relative yields, the Treasury is
seeking to lower the government's borrowing costs.
This supply/demand trend helped long-term Treasury
prices rally sharply and resulted in an inverted yield
curve (where interest rates for short-term securities
are higher than their longer-term counterparts).
Normally, investments with longer maturities
command higher yields due to their heightened price
sensitivity to rising interest rates.
Drawn to the positive fundamentals of GNMAs
During the period, we substantially increased our
exposure of Government National Mortgage
Association securities (GNMAs, also known as
"Ginnie Maes"), raising our position in GNMAs from
11.8% at the end of February to 22.5% of the Fund's
net assets at the end of August. To accomplish
this, we decreased our holdings in both Treasuries
and Federal National Mortgage Association
securities (FNMAs, also known as "Fannie Maes").
There were several factors that contributed to this
strategic shifting of assets. First, GNMAs are
guaranteed by the full faith and credit of the U.S.
government. With the buyback of Treasuries, the
supply of "full faith and credit" securities has
diminished, and we believed this would lead to an
increased demand for GNMAs.
Second, we felt that the political uncertainty
surrounding Government Sponsored Enterprises (GSEs)
could favor GNMAs. GSEs are privately owned
entities established by Congress to provide
liquidity for various borrowing sectors of the
economy. Examples include FNMA and Federal Home
4
<PAGE>
www.prudential.com (800) 225-1852
Loan Mortgage Corporation securities (FHLMC, also
known as "Freddie Mac"). While the U.S. government
does not directly back these securities, it seemed
unlikely that it would ever allow GSEs to default
on their debt obligations. However, for a short
time, some members of Congress questioned this
"implied guarantee." Again, we believed this could
lead to strong interest in GNMAs.
Despite these very positive fundamentals for GNMAs,
our efforts were not rewarded, as they
underperformed Treasuries during the period. The
combination of an increase in the supply of GNMAs,
coupled with Congress backing off its stance for
GSEs, led to relative lackluster results for these
securities.
Strong performance from our selective Treasury Holdings
Fortunately, the Fund's exposure to two categories
of Treasuries continued to enhance returns. Our
older, or "off-the-run," Treasuries with maturities
of 15 to 23 years, and our "callable" issues that
were issued with the option for the Treasury to
retire them prior to maturity, both performed well.
The Treasury buyback program aided both of these
securities, as it was believed they would be
candidates for repurchase. As a result, their
incremental yields and rising prices aided the
Fund.
Looking ahead--Signs for optimism
As we look ahead, we believe the signs are largely
positive for the fixed-income market and the Fund.
The economy appears to be slowing, and we expect
the Fed to switch to a more neutral bias toward
interest rates in the coming months. Should a "soft
landing" be orchestrated--where growth falls to a
more moderate and acceptable level--it would be a
positive outcome for bonds.
Given this outlook, we anticipate emphasizing non-
Treasury spread products with shorter durations and
longer-term Treasuries, both of which could perform
well in this environment.
Prudential Government Income Fund Management Team
5
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of August 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C> <C>
----------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 99.1%
-------------------------------------------------------------------------------------
U.S. Government Agency Mortgage Pass - Throughs 45.6%
Federal Home Loan Mortgage Corp.,
$ 382(c) 7.50%, 6/01/24 $ 382
3,751 8.00%, 1/01/22 - 5/01/23 3,812,680
1,704 8.50%, 6/01/07 - 4/01/20 1,733,998
3,651 9.00%, 1/01/20 3,774,698
815 11.50%, 10/01/19 892,751
Federal National Mortgage Assoc.,
67,000(a) 6.00%, 9/01/15 64,047,310
53,000(a) 6.50%, 9/01/15 51,608,750
29,258 7.00%, 7/01/03 - 9/01/26 28,679,203
30,898 7.125%, 2/01/07 30,579,736
53,061(a) 7.50%, 12/01/06 - 10/01/26 53,287,969
6(b)(e) 8.00%, 10/01/24 5,673
2,137 8.50%, 6/01/17 - 3/01/25 2,187,123
2,653 9.00%, 8/01/24 - 4/01/25 2,733,567
579 9.50%, 10/01/19 - 3/01/25 603,332
Government National Mortgage Assoc.,
50,588 7.00%, 2/15/09 - 2/15/29 49,797,467
95,334(a)(b)(e) 7.50%, 5/15/02 - 12/15/99 95,394,279
67,940 8.00%, 7/15/16 - 3/15/24 69,152,513
13,613 8.50%, 4/15/25 13,972,585
6,980 9.50%, 10/15/09 - 12/15/17 7,322,915
Government National Mortgage Assoc. II,
1,091 9.50%, 5/20/18 - 8/20/21 1,130,970
--------------
Total U.S. Government Agency Mortgage Pass -
Throughs
(cost $476,481,932) 480,717,901
-------------------------------------------------------------------------------------
U.S. Government Obligations 25.6%
United States Treasury Bonds,
20,475 6.125%, 8/15/29 21,447,563
23,035(b)(e) 7.125%, 2/15/23 26,439,803
39,000(d) 7.50%, 11/15/24 46,909,590
</TABLE>
6 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of August 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C> <C>
$ 5,500(b)(e) 8.00%, 11/15/21 $ 6,856,960
26,470(b)(e) 8.125%, 8/15/19 32,926,298
30,400(b)(e) 8.125%, 8/15/21 38,275,424
5,945(b)(e) 8.75%, 5/15/17 7,682,961
11,000(b) 8.75%, 5/15/20 14,537,160
12,000(e) 8.75%, 8/15/20 15,885,000
44,000(b)(e) 11.75%, 2/15/10 53,267,280
United States Treasury Strips,
6,200 Zero Coupon, 11/15/09 3,556,692
500 Zero Coupon, 11/15/15 204,430
3,750 Zero Coupon, 2/15/18 1,347,712
--------------
Total U.S. Government Obligations (cost
$270,327,983) 269,336,873
-------------------------------------------------------------------------------------
U.S. Government Agency Securities 20.9%
Federal Home Loan Bank,
25,000(b)(e) 5.75%, 10/15/07 24,591,797
Federal National Mortgage Assoc., M.T.N.,
13,500 5.875%, 4/23/04 12,964,185
40,000(b)(e) 6.06%, 5/21/03 39,006,400
15,000 6.30%, 9/25/02 14,791,350
Small Business Administration,
15,070(b)(e) Ser. 1995-20B, 8.15%, 2/01/15 15,753,255
18,976 Ser. 1995-20L, 6.45%, 12/01/15 18,240,797
27,197(b)(e) Ser. 1996-20H, 7.25%, 8/01/16 27,220,185
16,414 Ser. 1996-20K, 6.95%, 11/01/16 16,175,162
8,209 Ser. 1997-20A, 7.15%, 1/01/17 8,172,165
13,245 Ser. 1998-20I, 6.00%, 9/01/18 12,343,849
Tennessee Valley Authority,
600 Ser. 1993-D, 7.25%, 7/15/43 567,084
30,000(b)(e) Ser. 1995-B, 6.235%, 7/15/45 30,073,800
--------------
Total U.S. Government Agency Securities
(cost $226,389,577) 219,900,029
--------------
<CAPTION>
-------------------------------------------------------------------------------------
Corporate Bonds 2.8%
New Jersey Economic Development Authority, Ser. A,
30,000(b)(e) 7.425%, 2/15/29
(cost $31,091,850) 29,763,000
--------------
</TABLE>
See Notes to Financial Statements 7
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of August 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
----------------------------------------------------------------------------------------
Collateralized Mortgage Obligations 2.9%
<C> <S> <C> <C>
Asset Securitization Corp.,
$ 5,255 Ser. 1997-D4, Class A1A,
7.35%, 4/14/29 $ 5,280,157
Federal Home Loan Mortgage Corp.,
8,727 5.75%, 4/15/00 8,516,802
Federal National Mortgage Assoc.,
11,570 REMIC Trust 1993-76, Class B,
6.00%, 6/25/08 10,948,534
Resolution Trust Corp.,
4,301 Ser. 1994-1, Class B2, 7.75%, 9/25/29 4,162,944
Ryland Mortgage Participation Securities,
761 Ser. 1993-3, Class A3, 7.232%, 9/25/24, (ARM) 722,902
Structured Asset Securities Corp.,
1,042 Ser. 1995-C1, Class C,
7.375%, 9/25/24 1,037,747
--------------
Total Collateralized Mortgage Obligation
(cost $30,459,697) 30,669,086
--------------
-------------------------------------------------------------------------------------
U.S. Government Agency - Stripped Security 0.4%
Financing Corp.,
5,000 Zero Coupon, 3/07/04
(cost $4,061,870) 3,938,500
--------------
-------------------------------------------------------------------------------------
Asset Backed Security 0.9%
Aesop Funding II LLC,
10,000 Ser. 1997-1, Class A2,
6.40%, 10/20/03
(cost $9,998,437) 9,877,309
--------------
Total Long-Term Investments (cost
$1,048,811,346) 1,044,202,698
--------------
SHORT-TERM INVESTMENTS 21.4%
-------------------------------------------------------------------------------------
Commerical Paper 17.8%
American Home Products Corp.,
29,100 6.50%, 9/07/00 29,068,475
</TABLE>
8 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of August 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
----------------------------------------------------------------------------------------
<C> <S> <C> <C>
Barton Capital Corp.,
$ 28,000 6.51%, 9/08/00 $ 27,964,557
14,388 6.53%, 9/08/00 14,369,731
Blue Ridge Asset Funding Corp.,
42,400 6.52%, 9/13/00 42,307,851
Edison Asset Securitization, LLC,
12,090 6.51%, 9/14/00 12,061,578
Receivable Capital Corp.,
19,657 6.50%, 9/14/00 19,610,861
Thunder Bay Funding, Inc.,
10,772 6.52%, 9/11/00 10,752,491
Windmill Funding Corp.,
20,559 6.51%, 9/05/00 20,544,129
10,323 6.51%, 9/07/00 10,311,799
634 6.51%, 9/12/00 632,739
--------------
Total Commercial Paper (cost $187,624,211) 187,624,211
--------------
-------------------------------------------------------------------------------------
Repurchase Agreement 3.6%
Joint Repurchase Agreement Account,
38,204 6.59%, 9/01/00
(cost $38,204,000; Note 5) 38,204,000
--------------
Total Short-Term Investments (cost $225,828,211) 225,828,211
--------------
Total Investments 120.5% (cost $1,274,639,557;
Note 4) 1,270,030,909
Liabilities in excess of other assets (20.5%) (216,367,985)
--------------
Net Assets 100% $1,053,662,924
--------------
--------------
</TABLE>
------------------------------
ARM--Adjustable Rate Mortgage
LLC--Limited Liability Company
M.T.N.--Medium-Term Note
REMIC--Real Estate Mortgage Investment Conduit
(a) Partial principal amount of $205,000,000 represents a to-be-announced
('TBA') mortgaged 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).
(d) Securities, or portion thereof, on loan, see Note 4.
(e) Partial principal amount pledged as collateral for financial future
contracts.
See Notes to Financial Statements 9
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Assets and Liabilities (Unaudited)
<TABLE>
<CAPTION>
August 31, 2000
<S> <C> <C>
----------------------------------------------------------------------------------------
ASSETS
Investments, at value
(cost $1,274,639,557) $ 1,270,030,909
Cash 127,275
Receivable for investments sold 45,823,688
Interest receivable 8,401,602
Receivable for Fund shares sold 879,314
Due from broker - variation margin 46,748
Prepaid expenses and other assets 31,176
-----------------
Total assets 1,325,340,712
-----------------
LIABILITIES
Payable for investments purchased 266,663,474
Payable for Fund shares reacquired 2,641,675
Accrued expenses 948,495
Dividends payable 696,875
Management fee payable 449,059
Distribution fee payable 278,210
-----------------
Total liabilities 271,677,788
-----------------
NET ASSETS $ 1,053,662,924
-----------------
-----------------
Net assets were comprised of:
Common stock, at par $ 1,229,062
Paid-in capital in excess of par 1,216,079,811
-----------------
1,217,308,873
Accumulated net realized loss on investments (159,258,738)
Net unrealized depreciation on investments (4,387,211)
-----------------
Net assets, August 31, 2000 $ 1,053,662,924
-----------------
-----------------
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Assets and Liabilities (Unaudited) Cont'd.
<TABLE>
<CAPTION>
August 31, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
Class A:
Net asset value and redemption price per share
($803,228,925 / 93,694,385 shares of common stock
issued and outstanding) $8.57
Maximum sales charge (4% of offering price) .36
-----------------
Maximum offering price to public $8.93
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per
share
($144,690,719 / 16,865,238 shares of common stock
issued and outstanding) $8.58
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($7,836,984 / 913,498 shares of common stock issued
and outstanding) $8.58
Sales charge (1% of offering price) .09
-----------------
Offering price to public $8.67
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per
share
($97,906,296 / 11,433,090 shares of common stock
issued and outstanding) $8.56
-----------------
-----------------
</TABLE>
See Notes to Financial Statements 11
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
August 31, 2000
<S> <C> <C>
----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 39,499,267
Income from securities loan, net 21,486
-----------------
Total income 39,520,753
-----------------
Expenses
Management fee 2,687,323
Distribution fee--Class A 1,012,690
Distribution fee--Class B 667,687
Distribution fee--Class C 29,498
Transfer agent's fees and expenses 1,112,000
Custodian's fees and expenses 158,000
Reports to shareholders 98,000
Registration fees 32,000
Audit fee 22,000
Directors' fees 13,000
Insurance expense 9,000
Legal fees and expenses 8,000
Miscellaneous 5,033
-----------------
Total expenses 5,854,231
-----------------
Net investment income 33,666,522
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (16,929,587)
Financial futures contracts 298,077
-----------------
(16,631,510)
-----------------
Net change in unrealized depreciation on:
Investment transactions 36,884,458
Financial futures contracts 268,531
-----------------
37,152,989
-----------------
Net gain on investments 20,521,479
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 54,188,001
-----------------
-----------------
</TABLE>
12 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year
August 31, Ended
2000 February 29, 2000
<S> <C> <C> <C>
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 33,666,522 $ 76,976,498
Net realized loss on investment
transactions (16,631,510) (36,670,862)
Net change in unrealized appreciation
(depreciation) on investments 37,152,989 (45,361,066)
-------------- -----------------
Net increase (decrease) in net assets
resulting from operations 54,188,001 (5,055,430)
-------------- -----------------
Dividends from net investment income (Note
1)
Class A (25,651,275) (54,772,627)
Class B (4,657,479) (15,174,492)
Class C (229,288) (531,416)
Class Z (3,128,480) (6,497,963)
-------------- -----------------
(33,666,522) (76,976,498)
-------------- -----------------
Fund share transactions (net of share
conversions) (Note 6):
Net proceeds from shares subscribed 119,136,323 242,255,365
Net asset value of shares issued to
shareholders in reinvestment of
dividends 22,211,125 51,114,813
Cost of shares reacquired (210,117,130) (453,755,385)
-------------- -----------------
Net decrease in net assets from Fund share
transactions (68,769,682) (160,385,207)
-------------- -----------------
Total decrease (48,248,203) (242,417,135)
NET ASSETS
Beginning of period 1,101,911,127 1,344,328,262
-------------- -----------------
End of period $1,053,662,924 $ 1,101,911,127
-------------- -----------------
-------------- -----------------
</TABLE>
See Notes to Financial Statements 13
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited)
Prudential Government Income Fund, Inc., (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 high current income. 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. Financial futures contracts and options thereon are valued
at their last sales prices as of the close of the commodities exchange or board
of trade or, if there was no sale on such day, at the mean between the most
recently quoted bid and asked prices. Should an extraordinary event, which is
likely to affect the value of a security, occur after the close of an exchange
on which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established under the general supervision of the Fund's 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.
14
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
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.
15
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
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 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'). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, the cost of
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 the Fund's average daily net assets up to and including
$3 billion and .035% of 1% of the average daily net assets of the Fund in excess
of $3 billion.
16
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund up to and including $3 billion and .166 of
1% of the average daily net assets of the Fund in excess of $3 billion. Prior to
January 1, 2000, PIC was reimbursed by PIFM for reasonable costs and expenses
incurred in furnishing investment advisory services. The change in the
subadvisory fee structure has no impact on the management fee charged to the
Fund or its shareholders.
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 were .25 of 1% of the average daily net assets
of the Class A shares for the six months ended August 31, 2000.
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, 2000.
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, 2000.
PIMS has advised the Fund that it received approximately $42,100 and
$2,900 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the six months ended August 31, 2000. From these
fees, PIMS paid such sales charges to affiliated broker-dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
17
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
PIMS has advised the Fund that for the six months ended August 31, 2000 it
received approximately $176,200 and $4,800 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America ('The Prudential').
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 such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the six months ended August 31, 2000.
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 the six months ended August 31,
2000, the Fund incurred fees of approximately $941,138 for the services of PMFS.
As of August 31, 2000, approximately $150,866 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 2000, were $751,024,819 and $848,436,607,
respectively.
During the six months ended August 31, 2000, the Fund entered into
financial futures contracts. Details of open contracts at August 31, 2000 are as
follows:
<TABLE>
<CAPTION>
Value at Unrealized
Number of Expiration Value at August 31, Appreciation
Contracts Type Date Trade Date 2000 (Depreciation)
--------- ----------------- ------------- ---------- ------------ --------------
<C> <S> <C> <C> <C> <C>
Long positions:
37 30 yr. T-Note Sept. 2000 $3,602,875 $3,713,875 $111,000
31 30 yr. T-Note Sept. 2000 3,001,188 3,111,625 110,437
--------------
$221,437
--------------
--------------
</TABLE>
18
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
The federal income tax basis of the Fund's investments at August 31, 2000
was substantially the same as for financial reporting purposes and, accordingly,
net unrealized depreciation for federal income tax purposes was $4,608,648
(gross unrealized appreciation-$9,858,295; gross unrealized
depreciation-$14,466,943).
The Fund had a capital loss carryforward as of February 29, 2000 of
approximately $124,629,000 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,
$17,950,000 expires in 2005, and $18,673,000 expires in 2008. 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, 2000 was approximately $36,128,000. The amount of dollar rolls
outstanding at August 31, 2000 was $201,774,380 (principal $205,000,000), which
was 15.2% of total assets.
As of August 31, 2000, the Fund had securities on loan with an aggregate
market value of $46,909,590. As of this date, the collateral held for securities
on loan was comprised of U.S. government securities with an aggregate market
value of $48,939,196.
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, 2000, the Fund
had a 5.69% undivided interest in the repurchase agreements in the joint
account. This undivided interest represented $38,204,000 in principal amount. As
of such date, the repurchase agreements in the joint account and the value of
the collateral therefor were as follows:
ABN AMRO Incorporated, 6.61%, in the principal amount of $180,000,000,
repurchase price $180,033,050, due 9/1/00. The value of the collateral including
accrued interest was $183,600,295.
Bear, Stearns & Co., Inc., 6.62%, in the principal amount of $100,000,000,
repurchase price $100,018,389, due 9/1/00. The value of the collateral including
accrued interest was $102,294,995.
Salomon Smith Barney, Inc., 6.62%, in the principal amount of
$190,000,000, repurchase price $190,034,939, due 9/1/00. The value of the
collateral including accrued interest was $193,916,346.
19
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
UBS Warburg, 6.61%, in the principal amount of $100,000,000, repurchase
price $100,018,361, due 9/1/00. The value of the collateral including accrued
interest was $102,002,880.
UBS Warburg, 6.45%, in the principal amount of $101,386,000, repurchase
price $101,404,165, due 9/1/00. The value of the collateral including accrued
interest was $103,414,456.
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.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
---------------------------------------------------------- ----------- -------------
<S> <C> <C>
Six months ended August 31, 2000:
Shares sold 10,320,921 $ 87,438,812
Shares issued in reinvestment of dividends 1,892,560 15,993,614
Shares reacquired (18,876,168) (159,616,899)
----------- -------------
Net decrease in shares outstanding before conversion (6,662,687) (56,184,473)
Shares issued upon conversion from Class B 4,420,496 37,237,119
----------- -------------
Net increase (decrease) in shares outstanding (2,242,191) $ (18,947,354)
----------- -------------
----------- -------------
Year ended February 29, 2000:
Shares sold 16,424,755 $ 141,843,573
Shares issued in reinvestment of dividends 4,001,400 34,524,034
Shares reacquired (28,860,546) (248,688,001)
----------- -------------
Net decrease in shares outstanding before conversion (8,434,391) (72,320,394)
Shares issued upon conversion from Class B 4,701,032 40,767,586
----------- -------------
Net increase (decrease) in shares outstanding (3,733,359) $ (31,552,808)
----------- -------------
----------- -------------
</TABLE>
20
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class B Shares Amount
---------------------------------------------------------- ----------- -------------
Six months ended August 31, 2000:
<S> <C> <C>
Shares sold 1,145,138 $ 9,670,308
Shares issued in reinvestment of dividends 351,810 2,974,643
Shares reacquired (3,196,576) (27,006,386)
----------- -------------
Net decrease in shares outstanding before conversion (1,699,628) (14,361,435)
Shares reacquired upon conversion into Class A (4,420,496) (37,237,119)
----------- -------------
Net increase (decrease) in shares outstanding (6,120,124) $ (51,598,554)
----------- -------------
----------- -------------
Year ended February 29, 2000:
Shares sold 3,881,043 $ 33,796,581
Shares issued in reinvestment of dividends 1,123,997 9,731,345
Shares reacquired (15,538,651) (134,608,190)
----------- -------------
Net decrease in shares outstanding before conversion (10,533,611) (91,080,264)
Shares reacquired upon conversion into Class A (4,695,615) (40,767,586)
----------- -------------
Net increase (decrease) in shares outstanding (15,229,226) $(131,847,850)
----------- -------------
----------- -------------
<CAPTION>
Class C
----------------------------------------------------------
<S> <C> <C>
Six months ended August 31, 2000:
Shares sold 153,423 $ 1,299,865
Shares issued in reinvestment of dividends 20,360 172,191
Shares reacquired (271,496) (2,297,090)
----------- -------------
Net increase (decrease) in shares outstanding (97,713) $ (825,034)
----------- -------------
----------- -------------
Year ended February 29, 2000:
Shares sold 824,481 $ 7,159,778
Shares issued in reinvestment of dividends 46,492 400,984
Shares reacquired (776,182) (6,687,075)
----------- -------------
Net increase (decrease) in shares outstanding 94,791 $ 873,687
----------- -------------
----------- -------------
<CAPTION>
Class Z
----------------------------------------------------------
<S> <C> <C>
Six months ended August 31, 2000:
Shares sold 2,459,687 $ 20,727,338
Shares issued in reinvestment of dividends 363,763 3,070,677
Shares reacquired (2,509,797) (21,196,755)
----------- -------------
Net increase (decrease) in shares outstanding 313,653 $ 2,601,260
----------- -------------
----------- -------------
Year ended February 29 2000:
Shares sold 6,852,261 $ 59,455,433
Shares issued in reinvestment of dividends 749,774 6,458,450
Shares reacquired (7,365,536) (63,772,119)
----------- -------------
Net increase (decrease) in shares outstanding 236,499 $ 2,141,764
----------- -------------
----------- -------------
</TABLE>
21
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Class A
----------------
Six Months Ended
August 31, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.41
----------------
Income from investment operations
Net investment income 0.27
Net realized and unrealized gain (loss) on investment
transactions 0.16
----------------
Total from investment operations 0.43
----------------
Less distributions
Dividends from net investment income 0.27
----------------
Net asset value, end of period $ 8.57
----------------
----------------
TOTAL RETURN(a): 5.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $803,229
Average net assets (000) $803,546
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.02%(b)
Expenses, excluding distribution and service (12b-1) fees 0.77%(b)
Net investment income 6.33%(b)
For Class A, B, C and Z shares:
Portfolio turnover rate 70%
</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 period of less than a full year are not
annualized.
(b) Annualized.
22 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class A
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
---------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------
$ 8.98 $ 9.05 $ 8.76 $ 9.04 $ 8.59
---------------- ---------------- ---------------- ---------------- ----------------
0.55 0.55 0.58 0.60 0.60
(0.57) (0.07) 0.29 (0.28) 0.45
---------------- ---------------- ---------------- ---------------- ----------------
(0.02) 0.48 0.87 0.32 1.05
---------------- ---------------- ---------------- ---------------- ----------------
(0.55) (0.55) (0.58) (0.60) (0.60)
---------------- ---------------- ---------------- ---------------- ----------------
$ 8.41 $ 8.98 $ 9.05 $ 8.76 $ 9.04
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
(0.15)% 5.40% 10.26% 3.70% 12.41%
$806,620 $895,039 $819,536 $860,319 $945,038
$857,586 $836,143 $842,431 $884,862 $909,169
0.94% 0.84% 0.86% 0.90% 0.91%
0.69% 0.68% 0.71% 0.75% 0.76%
6.39% 6.05% 6.52% 6.78% 6.65%
68% 106% 88% 107% 123%
</TABLE>
See Notes to Financial Statements 23
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class B
----------------
Six Months Ended
August 31, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.41
----------------
Income from investment operations
Net investment income 0.25
Net realized and unrealized gain (loss) on investment
transactions 0.17
----------------
Total from investment operations 0.42
----------------
Less distributions
Dividends from net investment income (0.25)
----------------
Net asset value, end of period $ 8.58
----------------
----------------
TOTAL RETURN(a): 4.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $144,691
Average net assets (000) $160,544
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.60%(b)
Expenses, excluding distribution and service (12b-1) fees 0.77%(b)
Net investment income 5.76%(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 period of less than a full year are not
annualized.
(b) Annualized.
24 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
---------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.99 $ 9.05 $ 8.77 $ 9.04 $ 8.60
---------------- ---------------- ---------------- ---------------- ----------------
0.50 0.49 0.52 0.54 0.54
(0.58) (0.06) 0.28 (0.27) 0.44
---------------- ---------------- ---------------- ---------------- ----------------
(0.08) 0.43 0.80 0.27 0.98
---------------- ---------------- ---------------- ---------------- ----------------
(0.50) (0.49) (0.52) (0.54) (0.54)
---------------- ---------------- ---------------- ---------------- ----------------
$ 8.41 $ 8.99 $ 9.05 $ 8.77 $ 9.04
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
(0.83)% 4.83% 9.40% 3.12% 11.54%
$193,394 $343,425 $346,059 $461,988 $641,946
$262,863 $322,626 $385,145 $543,796 $647,515
1.52% 1.50% 1.53% 1.57% 1.58%
0.69% 0.68% 0.71% 0.75% 0.76%
5.77% 5.39% 5.85% 6.11% 5.99%
</TABLE>
See Notes to Financial Statements 25
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C
----------------
Six Months Ended
August 31, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.41
----------------
Income from investment operations
Net investment income 0.25
Net realized and unrealized gain (loss) on investment
transactions 0.17
----------------
Total from investment operations 0.42
----------------
Less distributions
Dividends from net investment income (0.25)
----------------
Net asset value, end of period $ 8.58
----------------
----------------
TOTAL RETURN(a): 5.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 7,837
Average net assets (000) $ 7,802
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.52%(b)
Expenses, excluding distribution and service (12b-1) fees 0.77%(b)
Net investment income 5.83%(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 period of less than a full year are not
annualized.
(b) Annualized.
26 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C
----------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.99 $ 9.05 $ 8.77 $ 9.04 $ 8.60
---------------- ---------------- ---------------- ---------------- ----------------
0.51 0.50 0.53 0.54 0.54
(0.58) (0.06) 0.28 (0.27) 0.44
---------------- ---------------- ---------------- ---------------- ----------------
(0.07) 0.44 0.81 0.27 0.98
---------------- ---------------- ---------------- ---------------- ----------------
(0.51) (0.50) (0.53) (0.54) (0.54)
---------------- ---------------- ---------------- ---------------- ----------------
$ 8.41 $ 8.99 $ 9.05 $ 8.77 $ 9.04
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
(0.76)% 4.91% 9.48% 3.20% 11.63%
$ 8,508 $ 8,236 $ 2,840 $ 2,569 $ 1,799
$ 9,014 $ 4,878 $ 2,523 $ 2,440 $ 765
1.44% 1.43% 1.46% 1.50% 1.51%
0.69% 0.68% 0.71% 0.75% 0.76%
5.90% 5.50% 5.92% 6.19% 5.99%
</TABLE>
See Notes to Financial Statements 27
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class Z
----------------
Six Months Ended
August 31, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.40
----------------
Income from investment operations
Net investment income 0.28
Net realized and unrealized gain (loss) on investment
transactions 0.16
----------------
Total from investment operations 0.44
----------------
Less distributions
Dividends from net investment income (0.28)
----------------
Net asset value, end of period $ 8.56
----------------
----------------
TOTAL RETURN(a): 5.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 97,906
Average net assets (000) $ 94,273
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 0.77%(b)
Expenses, excluding distribution and service (12b-1) fees 0.77%(b)
Net investment income 6.58%(b)
</TABLE>
------------------------------
(a) 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 Z shares.
28 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class Z
---------------------------------------------------------------------------------------
Year Ended February 28/29, March 4, 1999(c)
-------------------------------------------------------------- through February 28,
2000 1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 8.97 $ 9.04 $ 8.76 $ 9.13
---------------- ---------------- ---------------- ----------
0.57 0.57 0.59 0.61
(0.57) (0.07) 0.28 (0.37)
---------------- ---------------- ---------------- ----------
-- 0.50 0.87 0.24
---------------- ---------------- ---------------- ----------
(0.57) (0.57) (0.59) (0.61)
---------------- ---------------- ---------------- ----------
$ 8.40 $ 8.97 $ 9.04 $ 8.76
---------------- ---------------- ---------------- ----------
---------------- ---------------- ---------------- ----------
0.09% 5.58% 10.30% 3.16%
$ 93,390 $ 97,629 $ 84,733 $ 73,411
$ 97,811 $ 86,892 $ 71,425 $ 39,551
0.69% 0.68% 0.71% 0.75%(b)
0.69% 0.68% 0.71% 0.75%(b)
6.64% 6.22% 6.67% 6.76%(b)
</TABLE>
See Notes to Financial Statements 29
<PAGE>
Prudential Government Income Fund, Inc.
Prudential Mutual Funds
Prudential offers a broad range of mutual funds
designed to meet your individual needs. For
information about these funds, contact your
financial adviser or call us at (800) 225-1852.
Read the prospectus carefully before you invest or
send money.
STOCK FUNDS
Large Capitalization Stock Funds
Prudential 20/20 Focus Fund
Prudential Equity Fund, Inc.
Prudential Stock Index Fund
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Strategic Partners Focused Growth Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Value Fund
Small- to Mid-Capitalization Stock Funds
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Prudential Small Company Fund, Inc.
Prudential Tax-Managed Small-Cap Fund, Inc.
Prudential U.S. Emerging Growth Fund, Inc.
Target Funds
Small Capitalization Growth Fund
Small Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Equity Opportunity Fund
Sector Stock Funds
Prudential Natural Resources Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Global/International Stock Funds
Global Utility Fund, Inc.
Prudential Europe Growth Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Target Funds
International Equity Fund
BALANCED/ALLOCATION FUNDS
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
<PAGE>
www.prudential.com (800) 225-1852
BOND FUNDS
Taxable Bond Funds
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Short-Term Corporate Bond Fund, Inc.
Income Portfolio
Prudential Total Return Bond Fund, Inc.
Target Funds
Total Return Bond Fund
Tax-Free Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global/International Bond Funds
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.
MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Money Market Series
Tax-Free Money Market Funds
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
Prudential Tax-Free Money Fund, Inc.
Other Money Market Funds
Command Government Fund
Command Money Fund
Command Tax-Free Fund
<PAGE>
Prudential Government Income Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this--
they don't read annual and semiannual reports. It's
quite understandable. These annual and semiannual
reports are prepared to comply with federal
regulations, and are often written in language that
is difficult to understand. So when most people run
into those particularly daunting sections of these
reports, they don't read them.
We think that's a mistake
At Prudential Mutual Funds, we've made some changes
to our report to make it easier to understand and
more pleasant to read. We hope you'll find it
profitable to spend a few minutes familiarizing
yourself with your investment. Here's what you'll
find in the report:
Performance at a Glance
Since an investment's performance is often a
shareholder's primary concern, we present
performance information in two different formats.
You'll find it first on the "Performance at a
Glance" page where we compare the Fund and the
comparable average calculated by Lipper, Inc., a
nationally recognized mutual fund rating agency. We
report both the cumulative total returns and the
average annual total returns. The cumulative total
return is the total amount of income and
appreciation the Fund has achieved in various time
periods. The average annual total return is an
annualized representation of the Fund's
performance. It gives you an idea of how much the
Fund has earned in an average year for a given time
period. Under the performance box, you'll see
legends that explain the performance information,
whether fees and sales charges have been included
in returns, and the inception dates for the Fund's
share classes.
See the performance comparison charts at the back
of the report for more performance information.
Please keep in mind that past performance is not
indicative of future results.
<PAGE>
www.prudential.com (800) 225-1852
INVESTMENT ADVISER'S REPORT
The portfolio manager, who invests your money for
you, reports on
successful--and not-so-successful--strategies in this
section of your report. Look for recent purchases
and sales here, as well as information about the
sectors the portfolio manager favors, and any
changes that are on the
drawing board.
Portfolio of Investments
This is where the report begins to appear
technical, but it's really just a
listing of each security held at the end of the
reporting period, along with valuations and other
information. Please note that sometimes we discuss
a security in the "Investment Adviser's Report"
section that doesn't appear in this listing because
it was sold before the close of the reporting
period.
Statement of Assets and Liabilities
The balance sheet shows the assets (the value of
the Fund's holdings),
liabilities (how much the Fund owes), and net
assets (the Fund's
equity, or holdings after the Fund pays its debts)
as of the end of the reporting period. It also
shows how we calculate the net asset value per
share for each class of shares. The net asset value
is reduced by payment of your
dividend, capital gain, or other distribution, but
remember that the money or new shares are being
paid or issued to you. The net asset value
fluctuates daily, along with the value of every
security in the portfolio.
Statement of Operations
This is the income statement, which details income
(mostly interest and
dividends earned) and expenses (including what you
pay us to manage your money). You'll also see
capital gains here--both realized and unrealized.
<PAGE>
Prudential Government Income Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
Statement of Changes in Net Assets
This schedule shows how income and expenses
translate into changes
in net assets. The Fund is required to pay out the
bulk of its income to shareholders every year, and
this statement shows you how we do it (through
dividends and distributions) and how that affects
the net assets. This statement also shows how money
from investors flowed into and out of the Fund.
Notes to Financial Statements
This is the kind of technical material that can
intimidate readers, but it does contain useful
information. The Notes provide a brief history and
explanation of your Fund's objectives. In addition,
they outline how Prudential Mutual Funds prices
securities. The Notes also explain who manages and
distributes the Fund's shares and, more
importantly, how much they are paid for doing so.
Finally, the Notes explain how many shares are
outstanding and the number issued and redeemed over
the period.
Financial Highlights
This information contains many elements from prior
pages, but on a
per-share basis. It is designed to help you
understand how the Fund
performed, and to compare this year's performance
and expenses to those of prior years.
Independent accountant's Report
Once a year, an outside auditor looks over our
books and certifies that
the financial statements are fairly presented and
comply with generally accepted accounting
principles.
Tax Information
This is information that we report annually about
how much of your total return is taxable. Should
you have any questions, you may want to consult a
tax adviser.
<PAGE>
www.prudential.com (800) 225-1852
Performance Comparison
These charts are included in the annual report and
are required by the Securities Exchange Commission.
Performance is presented here as a hypothetical
$10,000 investment in the Fund since its inception
or for 10 years (whichever is shorter). To help you
put that return in context, we
are required to include the performance of an
unmanaged, broad-based securities index as well.
The index does not reflect the cost of buying the
securities it contains or the cost of managing a
mutual fund. Of course, the index holdings do not
mirror those of the Fund--the index is a broad-based
reference point commonly used by investors to
measure how well they are doing. A definition of
the selected index is also provided. Investors
cannot invest directly in an index.
<PAGE>
Prudential Government Income Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
When you invest through Prudential Mutual Funds,
you receive financial advice from a Prudential
Securities Financial Advisor or Pruco Securities
registered representative. Your advisor or
representative can provide you with the following
services:
There's No Reward Without Risk; but Is This Risk
Worth It?
Your financial advisor or registered representative
can help you match the reward you seek with the
risk you can tolerate. Risk can be difficult to
gauge--sometimes even the simplest investments bear
surprising risks. The educated investor knows that
markets seldom move in just one direction. There
are times when a market sector or asset class will
lose value or provide little in the way of total
return. Managing your own expectations is easier
with help from someone who understands the markets
and who knows you!
Keeping Up With the Joneses
A financial advisor or registered representative
can help you wade through the numerous available
mutual funds to find the ones that fit your
individual investment profile and risk tolerance.
While the newspapers and popular magazines are full
of advice about investing, they are aimed at
generic groups of people or representative
individuals--not at you personally. Your financial
advisor or registered representative will review
your investment objectives with you. This means you
can make financial decisions based on the assets
and liabilities in your current portfolio and your
risk tolerance--not just based on the current
investment fad.
Buy Low, Sell High
Buying at the top of a market cycle and selling at
the bottom are among the most common investor
mistakes. But sometimes it's difficult to hold on
to an investment when it's losing value every
month. Your financial advisor or registered
representative can answer questions when you're
confused or worried about your investment, and
should remind you that you're investing for the
long haul.
<PAGE>
www.prudential.com (800) 225-1852
FOR MORE INFORMATION
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Directors
Eugene C. Dorsey
Delayne D. Gold
Robert F. Gunia
Thomas T. Mooney
Stephen P. Munn
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
David R. Odenath, Jr., Vice President
Grace C. Torres, Treasurer
Deborah A. Docs, Secretary
William V. Healey, 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 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 8098
Philadelphia, PA 19101
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Fund Symbols NASDAQ CUSIP
Class A PGVAX 744339102
Class B PBGPX 744339201
Class C PRICX 744339300
Class Z PGVZX 744339409
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, 2000, were not audited and,
accordingly, no opinion is expressed on them.
<PAGE>
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Gateway Center Three
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(800) 225-1852
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