<PAGE>
1996
Annual
Report
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DELAWARE
GROUP
U.S. GOVERNMENT
FUND
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[PHOTO OF VARIOUS PHILADELPHIA HISTORIC SITES]
[COVER PICTURE]
A Tradition of Sound Investing Since 1929
DELAWARE
GROUP
========
Philadelphia o London
<PAGE>
U.S. GOVERNMENT
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FUND INVESTMENT
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OBJECTIVE
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To seek high current income with safety of principal by investing primarily in
debt obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
[PHOTO OF VARIOUS PHILADELPHIA HISTORIC SITES]
ABOUT OUR COVER
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Headquartered in Philadelphia, Pennsylvania, Delaware Group shares in the
tradition of a city built on the vision of opportunity. Amidst the city's
historic sites, symbolic of our nation's freedom and prosperity, Delaware Group
provides both individual and institutional investors with a conservative,
disciplined approach to money management.
DELAWARE GROUP
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A TRADITION OF
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SOUND INVESTING
- ------------------
Delaware Management Company's investment experience dates back to 1929. Our
first mutual fund was established in 1938. Headquartered in Philadelphia with an
affiliate in London, Delaware manages a full range of mutual fund and annuity
investments and also offers retirement plan services. Delaware International
Advisers Ltd., our London-based international affiliate, was established in
1990.
Delaware Group manages mutual funds with the same time-tested,
disciplined strategies demanded by the large public and private pension plans,
foundations and endowments that are among our clients. With over 60 years of
experience, we have demonstrated our commitment to quality investment management
and service.
Today, Delaware manages some $29 billion in mutual funds and
institutional investment advisory accounts. We measure our success by the
financial success and satisfaction of our nearly 500,000 shareholders.
<PAGE>
AUGUST 16, 1996
DEAR
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SHAREHOLDER:
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The past fiscal year was less than kind to bond investors. Prices of U.S.
government securities generally rose in the fall of calendar 1995, but these
gains were largely erased during the bitter winter of 1996.
As of July 31, 1996, the yield on 30-year U.S. Treasury Bonds stood at
6.97%, just 13 basis points (0.13%) higher than 12 months earlier. However, this
mild net change masks a high degree of volatility that resulted from sharp
shifts in investors' expectations about inflation and Federal Reserve Board
policy.
U.S. Government Fund began its 11th year in operation last August amid
investor optimism about interest rates. Bond prices rose for the balance of
calendar 1995, and the yield on 30-year Treasuries dropped below 6% for a brief
period around Christmas.
Then, after government statistics suggested U.S. economic and job
growth were surprisingly robust, the short-term outlook for bonds turned
pessimistic. Concern grew that the Fed would raise its target for short-term
interest rates to fight inflation. As a result, bond prices fell.
Despite this environment, U.S. Government Fund provided a positive
total return of +4.09% for the 12 months ended July 31, 1996 (for Class A shares
at net asset value with dividends reinvested). During the past six months, your
Fund's conservative approach enabled us to preserve more principal than the
Lipper General U.S. Government Fund Average, the unmanaged Lehman Brothers
Government Index and Five-Year U.S. Treasury Notes, as shown below.
Providing high current income consistent with reasonable safety of
principal is a delicate balancing act, especially in a volatile bond market.
Your Fund continues to favor intermediate-term, government-backed mortgage
securities as a way to maximize income and maintain a relatively modest risk
profile.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN
-------------------------------------------
August 1, 1995 January 31, 1996
to July 31, 1996 to July 31, 1996
---------------------------------------------
<S> <C> <C>
U.S. Government Fund Class A +4.09% -1.98%
Lipper General U.S. Government Fund Average +4.15% -2.89%
Five-Year U.S. Treasury Notes +4.80% -2.69%
Lehman Brothers Government Bond Index +5.16% -2.15%
U.S. Government Fund Class A performance and that of the funds in the Lipper
Average are based on net asset value and reinvestment of all distributions.
Interest payments and return of principal at maturity are guaranteed for U.S.
Treasuries. Fund shares and dividends are not guaranteed. For Fund performance
for all classes, see page 7. There were 174 and 179 funds in the Lipper General
U.S. Government Fund Average, respectively, for the 12 months and six months
ended July 31, 1996.
- ---------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
For long-term investors in U.S. government bonds, short-term price
movements are irrelevant since the return of principal is guaranteed at
maturity. If a government bond's price falls below its face value (par), it will
rise back to par by the time the bond matures. Likewise, if the price rises
above face value, it eventually depreciates to par. Thus, holding a government
bond to maturity prevents loss of principal.
Your Fund's shares, of course, are not guaranteed and do not mature.
However, in selecting investments for their income potential, your Fund's
portfolio manager, Roger A. Early, considers how bond prices have historically
behaved and how this has affected total return. This provides him with a guide
to potential value in the market.
In 1996, Mr. Early repositioned the portfolio in a way that we believe
has the potential to allow your Fund's net asset value to benefit should
interest rates decline and at the same time help maintain principal should
interest rates rise. Mr. Early details these adjustments in his report.
Our economic outlook for the coming months is that inflation is likely
to remain fairly modest. As long as there are no extreme changes in Washington's
fiscal policies, we believe that the long-term trend toward higher bond prices
since the early 1980s can resume once the U.S.
Presidential election is over.
With Alan Greenspan's recent reappointment to a second term as chairman
of the Federal Reserve Board, we believe the Fed will maintain a prudent
monetary policy that can prevent an acceleration in consumer prices.
This bodes well for fixed-income investors.
We thank you for choosing U.S. Government Fund to help you reach the
bond market objectives you have established with your financial adviser. As
always, Delaware Group stands ready to serve you as you strive to reach your
financial goals.
Sincerely,
/s/ Wayne A. Stork
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Wayne A. Stork
Chairman, President
and Chief Executive Officer
<TABLE>
<CAPTION>
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PORTFOLIO HIGHLIGHTS
July 31, 1995 January 31, 1996 July 31, 1996
<S> <C> <C> <C>
Average Effective Duration 4.1 years 5.4 4.8
Average Effective Maturity 6.0 years 7.1 7.5
Average Quality AAA AAA AAA
30-Day Yield* 6.20% 5.70% 5.83%
Largest Source of Income - Mortgage-Backed Securities
Number of Bonds 282 280 279
*For Class A shares measured according to SEC guidelines. Yield as of July 31,
1996, for Class B and C shares was 5.42%. See page 7 for average annual total
returns for all classes.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
PORTFOLIO
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MANAGER'S
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REVIEW
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Calendar year 1995 was an excellent year for the U.S. bond market. Inflation
was very low. The Federal Reserve Board reduced its target for short-term
interest rates. The U.S. government's budget deficit declined.
In early 1996, however, the climate changed. Investors were faced with
the challenge of trying to interpret government economic statistics that were
skewed by the effects of a temporary government shutdown, unusually snowy
weather and sharp swings in commodity prices.
The bond market began worrying that the Fed would raise rates in the
wake of reports that job growth was quite strong. Bond prices declined, reducing
gains that investors had achieved during the fall of 1995.
Still, at the end of the fiscal year, U.S. Treasury yields were only
modestly higher than they were 12 months earlier. The biggest change was that
the difference between intermediate (five- to 10-year maturity) bond yields and
30-year bond yields narrowed considerably.
This was beneficial for your Fund because by focusing on bonds maturing
in five to seven years, it was able, as of July 31, to generate more than 93% of
the income available from longer term U.S. Treasury bonds at less risk to
principal from any future increase in interest rates.
THE DIFFERENCE BETWEEN YIELDS ON FIVE-YEAR U.S. TREASURIES AND 30-YEAR
TREASURIES NARROWED FROM 70 BASIS POINTS (0.70%) TO 40 BASIS POINTS (0.40%)
DURING FISCAL 1996. THIS INCREASED YOUR FUND'S POTENTIAL TO PROVIDE MORE INCOME
WITH LESS INTEREST RATE RISK.
U.S. TREASURY YIELDS: JULY 1995 VS. JULY 1996
7/31/95 7/31/96
3 month 5.572% 5.301%
6 month 5.586% 5.457%
1 year 5.645% 5.826%
2 year 5.866% 6.216%
3 year 5.985% 6.358%
5 year 6.151% 6.562%
10 year 6.424% 6.794%
30 year 6.844% 6.973%
Source: Bloomberg Business News
3
<PAGE>
MORTGAGES AND MORTGAGE-RELATED SECURITIES GENERALLY PROVIDE GREATER INCOME THAN
U.S. TREASURIES. AS OF JULY 31, 1996, SUCH SECURITIES COMPRISED MORE THAN HALF
OF YOUR FUND'S HOLDINGS.
PORTFOLIO MIX
JULY 31, 1996
U.S. TREASURIES 28.72%
GNMAS 17.47%
CMOS 16.74%
ASSET-BACKED SECURITIES 7.39%
CORPORATE BONDS 6.73%
GOVERNMENT AGENCY OBLIGATIONS 5.86%
AGENCY MORTGAGE-BACKED SECURITIES 15.14%
CASH 0.5%
THE FUND'S INVESTMENT STRATEGY
U.S. Government Fund seeks to strike a balance between high current income
and capital preservation. To that end, we invest in high-quality U.S.
government and corporate securities. During the year, we emphasized
government-backed mortgage securities.
While your Fund is primarily designed to provide current income, we are
attentive to how the movement of interest rates affects the principal value of
your shares, and thus your total return. When we weigh the bond market's risks
and rewards, we adjust your Fund's average effective duration to reflect our
view of what's happening in the U.S. economy. We examine how market trends may
affect how much the government and private industry have to pay to borrow money.
Duration is the most common measure of a bond's sensitivity to changes
in interest rates. It shows the likely percentage of change in a bond's price
given a 1% change in interest rates. For a further explanation of duration and
how it can affect bond prices, see page 8. Maintaining a shorter effective
duration has the potential to minimize fluctuations in principal, but it does
not eliminate the negative effect of rising interest rates.
At the start of the fiscal year, when it appeared the U.S. economy was
slowing, we increased your Fund's duration by 1.3 years, as shown on page 2.
Since February, we have reduced the Fund's average effective duration by more
than six months to 4.8 years, a relatively conservative posture.
This reduction helped your Fund retain more of its value compared to
its unmanaged benchmark and comparable mutual funds during the past six months.
Nevertheless, your Fund's share price declined from February to the end of July,
reflecting the fact that interest rates on intermediate-term government
securities rose more than 130 basis points (1.3%). Your Fund's yield, as shown
on page 2, rose slightly during the period.
4
<PAGE>
OUR POSITIONING IN MORTGAGES
During the year, we repositioned the portfolio to put more emphasis on agency
mortgage-backed securities rather than collateralized mortgage obligations
(CMOs) since prices of CMOs generally tend to be more sensitive to changes in
interest rates. Mortgage-backed securities are issued by agencies such as the
Government National Mortgage Association (Ginnie Mae) and the Federal Home
Loan Mortgage Association (Freddie Mac).
Investing in mortgages carries with it the risk that homeowners will
prepay the balances they owe when interest rates drop sharply. However, when
rates rise, prices of mortgage securities have historically been less affected
than prices of Treasuries. This has been true for much of 1996.
To position the Fund to benefit from any capital appreciation potential
in the bond market and help preserve principal, we began purchasing "discount
mortgages." Generally, we have been purchasing mortgages with interest rates
between 6% and 6.5%.
Homeowners who enjoy such "bargain" rates are unlikely to refinance
even if interest rates decline substantially from current levels. By buying
mortgages at a discount, we believe the Fund will have a more reliable stream of
income and be in a good position to benefit from any rebound in bond prices.
Such mortgages accounted for about 11% of the Fund's net assets as of July 31.
Our purchase of discount mortgages explains why your Fund's average
effective maturity increased modestly during the second half of fiscal 1996 even
though we shortened duration. Generally, discount bonds have a longer "life"
than bonds selling at face value or at a premium, in part because they are
unlikely to be pre-paid.
OUTLOOK
Given the Federal Reserve's success at keeping inflation at a modest 2% to 3%
level during the past five years, we believe the long-term outlook for bond
prices is not as pessimistic as market activity in recent
ROGER A. EARLY HAS MANAGED U.S. GOVERNMENT FUND SINCE 1994. HE IS A GRADUATE OF
THE UNIVERSITY OF PENNSYLVANIA'S WHARTON SCHOOL AND THE UNIVERSITY OF
PITTSBURGH.
(Photo of Roger A. Early Goes Here)
5
<PAGE>
months would suggest. However, judging the short-term direction of U.S.
interest rates is at best difficult. In a potentially volatile environment,
your Fund remains committed to maximizing current income by investing in what
we believe to be the most attractive, high-quality bonds available.
Generally, we believe the U.S. economy will remain relatively healthy,
at least through the end of 1996. Currently there are no signs of a recession on
the horizon for 1997, although in our opinion, growth should slow from its
current pace. If the Fed does raise its target for interest rates to temper
increases in consumer prices, we believe any increase will be temporary.
Our investment strategy is based on our belief that long-term bond
rates will remain between 6.5% and 7.5% in the coming months. In our opinion,
though, it is more likely that yields will be closer to the top of this range
than the bottom.
Since late 1993, when interest rates hit generational lows, investors
have seen several major shifts in bond prices. Rather than trying to "time" when
such shifts might occur, we believe that most fixed-income investors want a
mutual fund with the potential to earn an attractive level of current income and
preserve capital during market declines. We will continue to view this as our
mission.
/s/ Roger A. Early
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Roger A. Early
Vice President and Senior Portfolio Manager
August 16, 1996
A PERSPECTIVE
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ON LONG-TERM
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PERFORMANCE
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Throughout its history, U.S. Government Fund has sought to provide shareholders
with attractive current income.
On the facing page, we provide a comparison of how a $10,000 investment
in U.S. Government Fund would have performed relative to the Lehman Brothers
Government Index and the U. S. Consumer Price Index during the past 10 years.
With dividends reinvested, a $10,000 investment in the Fund would have grown to
$18,576, less than the Lehman Brothers Government Bond Index but substantially
more than inflation. Thus, the purchasing power of your investment dollars would
have increased since July 1986.
The Lehman Brothers Government Bond Index is unmanaged, does not
reflect the "real world" costs of managing a mutual fund, and as of July 31, had
a much greater percentage of Treasuries than the Fund. Treasuries tend to be
more interest rate sensitive than mortgage-related securities and generally do
not provide as high an income stream.
6
<PAGE>
YOUR FUND'S PERFORMANCE IS COMPARED TO THAT OF LEHMAN BROTHERS GOVERNMENT BOND
INDEX AND THE U.S. CONSUMER PRICE INDEX.
A LOOK AT LONG-TERM PERFORMANCE
Growth of a $10,000 Investment
August 1, 1986 to July 31, 1996
<TABLE>
<CAPTION>
Lehman Brothers
Government Bond Index U.S. Government Fund Class A U.S. Consumer Price Index
<S> <C> <C> <C>
July 86 $10000 $ 9478 $10000
July 87 $10316 $ 9987 $10390
July 88 $11006 $10821 $10820
July 89 $12682 $11729 $11358
July 90 $13452 $12567 $11906
July 91 $14804 $14099 $12436
July 92 $17062 $15929 $12828
July 93 $18904 $17314 $13184
July 94 $18879 $16707 $13550
July 95 $20697 $17847 $13924
July 96 $21765 $18576 $14360
</TABLE>
Chart includes the effect of a 4.75% sales charge and reinvestment of all
distributions. Performance for other classes will differ due to different
charges and expenses.
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND PERFORMANCE
Average Annual Return Through July 31, 1996
LIFETIME 10 YEARS FIVE YEARS ONE YEAR
<S> <C> <C> <C> <C>
Class A (Est.1985) +6.75% +6.39% +4.66% -0.84%
- ------------------------------------------------------------------------------------------------------------
Class B (Est.1994)
Excluding Sales Charge +3.96% -- -- +3.36%
Including Sales Charge +2.78% -- -- -0.50%
- -------------------------------------------------------------------------------------------------------------
Class C* (Est.1995)
Excluding Sales Charge -0.17%
Including Sales Charge -1.12%
</TABLE>
*aggregate return through July 31, 1996
ALL RESULTS INCLUDE REINVESTMENT OF DISTRIBUTIONS AND THE IMPACT OF ANY SALES
CHARGES AS DESCRIBED BELOW. RETURN AND SHARE VALUE WILL FLUCTUATE WITH RISING
AND FALLING INTEREST RATES SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE
RESULTS. B AND C CLASS RESULTS "EXCLUDING SALES CHARGE" ASSUME INVESTMENT WAS
NOT REDEEMED.
Class A returns reflect the effect of the 4.75% maximum front-end sales charge
and the 12b-1 fee.
Class B shares, initially offered on May 2, 1994, do not carry a front-end sales
charge, but are subject to a 1% annual distribution and service fee. They are
subject to a deferred sales charge of up to 4% if redeemed before the end of the
sixth year.
Class C performance is for only eight months and may not be representative of
longer term results. C shares, initially offered on November 29, 1995, have a 1%
annual distribution and service fee. If redeemed within 12 months, a 1%
contingent deferred sales charge applies.
The average annual total returns for the lifetime, 10-year, five-year and
one-year periods ended July 31, 1996, for U.S. Government Fund's Institutional
Class, which is available without sales or asset-based distribution charges only
to certain eligible institutional accounts, were +7.44%, +7.14%, +5.98% and
+4.39%. The Institutional Class began operating on June 1, 1992. Performance for
periods prior to June 1, 1992, is based on Class A performance, adjusted to
eliminate the front-end sales charge, but not the 12b-1 fee.
7
<PAGE>
ANNUAL DIVIDENDS FROM A $10,000 INVESTMENT IN U.S. GOVERNMENT FUND CLASS A MADE
ON JULY 31, 1986, WOULD HAVE GROWN FROM $936 TO $1,382 AS OF JULY 31, 1996, IF
DIVIDENDS WERE CONTINUOUSLY REINVESTED.
U.S. GOVERNMENT A CLASS ANNUAL INCOME 1986-1996
ANNUAL INCOME FROM A $10,000 INVESTMENT* WITH DIVIDENDS REINVESTED
TOTAL INCOME: US GOVERNMENT FUND A CLASS $12,046
July '87 $ 936
July '88 $ 966
July '89 $ 993
July '90 $1,059
July '91 $1,165
July '92 $1,297
July '93 $1,400
July '94 $1,424
July '95 $1,424
July '96 $1,382
*Assumes Class A purchase and a 4.75% front-end sales charge with distributions
paid in cash.
<TABLE>
<CAPTION>
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HOW DURATION CAN AFFECT BOND PRICES
<S> <C> <C>
IF INTEREST RATES... ...RISE 100 BASIS POINTS (1%) ...FALL 100 BASIS POINTS (1%)
- ----------------------------------------------------------------------------------------------------------
EFFECTIVE DURATION PROBABLE CHANGE IN PRICE PROBABLE CHANGE IN PRICE
Two Years -1.8% +1.9%
Five Years -4.1% +4.3%
20 Years -10.6% +12.5%
The above illustration is not intended to represent the past or future
performance of U.S. Government Fund. It assumes a high-quality bond paying 6%
interest and does not show changes in mortgage prepayment risk or credit risk.
These additional risks may increase principal losses when rates rise and reduce
capital appreciation potential when rates fall.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
MAINTAINING A SHORT OR INTERMEDIATE EFFECTIVE DURATION HAS THE POTENTIAL TO
REDUCE FLUCTUATIONS IN PRINCIPAL, BUT IT DOES NOT ELIMINATE THE NEGATIVE EFFECT
OF RISING INTEREST RATES. WE BELIEVE THE INCOME THAT AN INTERMEDIATE-TERM BOND
FUND CAN PROVIDE HAS THE POTENTIAL TO HELP REDUCE INTEREST RATE RISK.
8
<PAGE>
FINANCIAL
- -------------
STATEMENTS
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DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES*
STATEMENT OF NET ASSETS
JULY 31, 1996
Principal Market
Amount Value
U.S. GOVERNMENT OBLIGATIONS -- 28.72%
U.S. Treasury Bonds 8.125% 8/15/19 ......... $ 4,505,000 $ 5,030,283
U.S. Treasury Bonds 9.375% 2/15/06 ......... 13,765,000 16,254,124
U.S. Treasury Notes 6.50% 5/15/05 .......... 17,500,000 17,199,700
U.S. Treasury Notes 7.00% 7/15/06 .......... 4,000,000 4,056,960
U.S. Treasury Strip 0.00% 2/15/17 .......... 46,630,000 10,799,500
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TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $56,675,360) ......................... 53,340,567
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GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS (GNMA) -- 17.47%
GNMA I 9.00% 2021 .......................... 2,520,004 2,651,517
GNMA II 9.00% 2001 to 2005 ................. 1,264,597 1,321,676
GNMA I 9.50% 2021 .......................... 70,803 75,980
GNMA I 10.00% 2018 ......................... 1,579,536 1,717,745
GNMA II 10.00% 2015 to 2021 ................ 4,263,507 4,569,948
GNMA I GPM 10.25% 2019 to 2021 ............. 517,505 563,919
GNMA II GPM 10.25% 2018 to 2019 ............ 96,474 105,127
GNMA II GPM 10.50% 2015 to 2021 ............ 1,829,703 1,988,086
GNMA I GPM 10.75% 2017 ..................... 43,724 48,014
GNMA II GPM 10.75% 2016 to 2019 ............ 974,548 1,070,175
GNMA I 11.00% 2009 to 2015 ................. 3,274,294 3,664,140
GNMA I GPM 11.00% 2010 to 2013 ............. 418,269 466,660
GNMA II 11.00% 2015 to 2019 ................ 495,419 542,099
GNMA I 11.50% 2015 ......................... 146,923 166,391
GNMA I GPM 11.50% 2013 to 2014 ............. 574,058 641,785
GNMA II 11.50% 2014 to 2015 ................ 168,730 187,290
GNMA II GPM 11.50% 2014 .................... 23,534 26,079
GNMA I GPM 11.75% 2013 ..................... 558,646 636,507
GNMA I 12.00% 2011 to 2015 ................. 6,353,739 7,282,976
GNMA I GPM 12.00% 2011 to 2013 ............. 202,857 232,524
GNMA II 12.00% 2014 to 2015 ................ 837,816 949,349
GNMA II GPM 12.00% 2013 .................... 279,450 310,015
GNMA I GPM 12.25% 2014 ..................... 179,606 206,995
GNMA I 12.50% 2010 to 2016 ................. 1,048,568 1,215,027
GNMA II 12.50% 2013 to 2015 ................ 1,595,633 1,813,038
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS
(COST $32,057,142) ........................ 32,453,062
-----------
<PAGE>
Principal Market
Amount Value
GOVERNMENT AGENCY OBLIGATIONS -- 5.86%
Cajun Electric Power 9.52% 3/15/19 ......... $10,000,000 $10,875,000
-----------
TOTAL GOVERNMENT AGENCY OBLIGATIONS
(COST $11,855,100) ......................... 10,875,000
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS -
16.74%
Collateralized Mortgage Securities
Corporation 11.45% 11/1/15 ................ 447,547 487,057
Federal Home Loan Mortgage Corporation
26-F 9.50% 2/15/20 ........................ 1,368,788 1,454,376
Federal National Mortgage Association
Strip Series J-1 7.00% 11/1/10 ............ 140,486 138,554
Federal National Mortgage Association
G-19 H 8.40% 6/25/20 ...................... 4,000,000 4,110,156
Federal National Mortgage Association
88-15A 9.00% 6/25/18 ...................... 53,081 55,193
Federal National Mortgage Association
Strip Series D-2 11.00% 4/1/09 ............ 2,885,365 3,140,539
Federal National Mortgage Association
Strip Series F-2 11.50% 5/1/09 ............ 1,285,224 1,413,144
Federal National Mortgage Association
Strip Series H-2 11.50% 5/1/09 ............ 2,690,878 2,958,704
Federal National Mortgage Association
Strip Series C-2 12.00% 5/1/09 ............ 3,443,873 3,822,161
Federal National Mortgage Association
Strip Series 35-2 12.00% 7/1/18 ........... 2,898,214 3,252,339
Investor GNMA Mortgage-Backed Securities
Trust Series 84-F5 10.875% 10/25/13 ....... 2,892,504 3,176,446
Kidder Peabody Mortgage Assets Trust
20C 9.50% 10/01/18 ........................ 688,000 717,214
Resolution Trust Corporation
1995 -- C1 6.55% 2/25/27 .................. 2,490,581 2,482,020
Travelers Mortgage Securities
1-Z2 12.00% 3/1/14 ........................ 3,458,140 3,881,763
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $31,117,936) ........................ 31,089,666
-----------
ASSET-BACKED SECURITIES -- 7.39%
Advanta Home Equity Loan Trust
1992-4A 1 7.20% 11/25/08 .................. 1,895,318 1,884,135
AFC Home Equity Loan Trust
1992-3 A 7.05% 8/15/07 .................... 2,398,863 2,380,152
AFC Home Equity Loan Trust
1992-1 A 7.50% 2/15/07 .................... 1,552,001 1,552,466
IMC Home Equity Loan Trust
1995-3 A2 6.50% 11/25/10 .................. 1,515,000 1,495,002
Neiman Marcus Group Credit Card Trust
1995-1 A 7.60% 6/15/03 .................... 1,850,000 1,897,360
UCFC Home Equity Loan
1996-B1 A3 7.30% 4/15/14 .................. 4,480,000 4,508,224
-----------
TOTAL ASSET-BACKED SECURITIES
(COST $13,789,978) ........................ 13,717,339
-----------
9
- -----------------
*This Fund is known and does business at U.S. Government Fund.
<PAGE>
Statement of Net Assets (Continued)
Principal Market
Amount Value
CORPORATE BONDS -- 6.73%
NationsBank 10.20% 7/15/15 ................. $ 4,000,000 $ 4,940,000
RBSG Capital 10.125% 3/1/04 ................ 1,908,000 2,203,740
Republic of Finland 9.625% 4/1/28 .......... 5,000,000 5,356,250
-----------
TOTAL CORPORATE BONDS
(COST $11,825,361) ........................ 12,499,990
-----------
AGENCY MORTGAGE-BACKED SECURITIES -- 15.14%
FHA Project Loan 241(f)
8.75% 10/1/27 ............................. 701,152 715,394
Federal Home Loan Mortgage Corporation
Gold 6.50% 4/1/23 ......................... 1,694,860 1,591,050
Federal Home Loan Mortgage Corporation
Gold 7.00% 5/1/24 to 11/1/24 .............. 11,591,708 11,187,300
Federal Home Loan Mortgage Corporation
10.25% 4/1/08 ............................. 68,077 73,757
Federal Home Loan Mortgage Corporation
11.50% 7/1/99 to 3/1/16 ................... 3,811,539 4,215,851
Federal Home Loan Mortgage Corporation
Gold 12.00% 12/1/10 ....................... 161,340 183,877
Federal National Mortgage Association
6.50% 3/1/23 to 3/1/26 .................... 7,071,425 6,607,363
Federal National Mortgage Association
7.00% 5/1/24 .............................. 3,174,580 3,058,510
Federal National Mortgage Association
10.75% 9/1/11 ............................. 177,895 196,407
Federal National Mortgage Association
11.25% 6/1/00 to 1/1/01 ................... 201,243 214,764
Federal National Mortgage Association
14.25% 9/1/99 ............................. 69,727 77,571
-----------
TOTAL AGENCY MORTGAGE-BACKED SECURITIES
(COST $28,270,764) ........................ 28,121,844
-----------
REPURCHASE AGREEMENTS -- 0.45%
With Chase Manhattan 5.60% 8/1/96
(dated 7/31/96 collateralized by
$291,000 U.S. Treasury Bills 102% due
1/16/97, market value $283,289)............ 277,000 277,000
With J.P. Morgan Securities 5.60% 8/1/96
(dated 7/31/96 collateralized by
$281,000 U.S. Treasury Notes 6.00% due
8/31/97 market value $287,590)............. 282,000 282,000
With PaineWebber 5.60% 8/1/96
(dated 7/31/96 collateralized by
$264,000 U.S. Treasury Notes 8.50%
due 11/15/00 market value $287,552)........ 282,000 282,000
------------
TOTAL REPURCHASE AGREEMENTS
(COST $841,000)............................ 841,000
------------
<PAGE>
Market
Value
TOTAL MARKET VALUE OF SECURITIES OWNED
-- 98.50% (cost $186,432,641).............. $182,938,468
RECEIVABLES AND OTHER ASSETS NET OF
LIABILITIES -- 1.50%....................... 2,780,602
-------------
NET ASSETS:
APPLICABLE TO 21,633,510
U.S. GOVERNMENT FUND A CLASS SHARES,
1,285,378 U.S. GOVERNMENT FUND B CLASS
SHARES, 135,664 U.S. GOVERNMENT FUND C
CLASS SHARES AND 1,420,656 U.S. GOVERNMENT
INSTITUTIONAL CLASS SHARES ($.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO $7.59 PER
SHARE -- 100.00%........................... $185,719,070
============
COMPONENTS OF NET ASSETS AT JULY, 31, 1996
Common Stock, $.01 par value, 500,000,000
shares authorized to the fund with
80,000,000 shares allocated to U.S.
Government Fund A Class, 80,000,000 shares
allocated to U.S. Government Fund B Class,
50,000,000 shares allocated to U.S.
Government Fund C Class and 20,000,000
shares allocated to U.S. Government
Fund Institutional Class................... $225,930,485
Accumulated undistributed loss:
Net realized loss from security
transactions.............................. (36,743,179)
Net Unrealized depreciation of
investments............................... (3,468,236)
-------------
Total Net Assets............................ $185,719,070
============
- -------------------------
Summary of Abbreviations:
GPM - Graduated Payment Mortgage
See accompanying notes
10
<PAGE>
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1996
INVESTMENT INCOME:
Interest.................................... $17,773,382
EXPENSES:
Management fees ($1,205,666)
and directors' fees ($13,766) ............. $ 1,219,432
Distribution expenses ...................... 643,215
Dividend disbursing and transfer agent
fees and expenses ......................... 345,143
Salaries ................................... 50,712
Registration fees .......................... 38,382
Reports and statements to shareholders ..... 54,085
Taxes (other than income) .................. 24,897
Custodian fees ............................. 15,000
Professional fees .......................... 24,704
Other ...................................... 60,571 2,476,141
----------- -----------
NET INVESTMENT INCOME ...................... 15,297,241
-----------
NET REALIZED LOSS AND
UNREALIZED LOSS ON INVESTMENTS:
Net realized loss
from security transactions ............... (2,329,125)
Net realized loss
from futures contracts ................... (380,437) (2,709,562)
Net unrealized depreciation of
investments during the period ............ (4,029,957)
------------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENT SECURITIES
AND FUTURE CONTRACTS ...................... (6,739,519)
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................. $ 8,557,722
============
COMPUTATION OF NET ASSET VALUE AND OFFERING
PRICE FOR THE U.S. GOVERNMENT FUND A
CLASS - JULY 31, 1996
Net asset value per share (A)................ $7.59
Sales charge (4.75% of offering price or
4.96% of amount invested per share)(B)..... .38
-----
Offering price.............................. $7.97
=====
- ------------------
(A) Net asset value per share illustrated is the estimated amount which would be
paid upon the redemption or repurchase of shares.
(B) See Purchasing Shares in the current Prospectus for purchases of $100,000
or more for U.S. Government Fund A Class.
See accompanying notes
<PAGE>
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
STATEMENT OF CHANGES IN NET ASSETS
Year Year
Ended Ended
7/31/96 7/31/95
OPERATIONS:
Net investment income ...................... $ 15,297,241 $ 18,963,735
Net realized loss from investment security
transactions and futures contracts ........ (2,709,562) (10,373,225)
Net unrealized (depreciation) appreciation
during the period ......................... (4,029,957) 6,214,405
------------- -------------
Net increase in net assets
resulting from operations ................. 8,557,722 14,804,915
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME:
A Class ................................... (13,913,461) (17,686,022)
B Class ................................... (620,228) (376,635)
C Class ................................... (29,681) --
Institutional Class ....................... (733,871) (901,078)
------------- -------------
(15,297,241) (18,963,735)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
A Class ................................... 14,252,035 31,347,463
B Class ................................... 5,218,315 6,000,585
C Class ................................... 1,047,617 --
Institutional Class ....................... 7,278,585 2,264,170
Net asset value of shares issued upon
reinvestment of dividends from net
investment income:
A Class ................................... 7,997,866 9,991,918
B Class ................................... 255,760 198,985
C Class ................................... 27,921 --
Institutional Class ....................... 733,844 898,901
------------- -------------
36,811,943 50,702,022
------------- -------------
Cost of shares repurchased:
A Class ................................... (58,191,387) (54,016,027)
B Class ................................... (2,766,470) (1,016,216)
C Class ................................... (6,547) --
Institutional Class ....................... (5,181,523) (8,504,256)
------------- -------------
(66,145,927) (63,536,499)
------------- -------------
Decrease in net assets derived from
capital share transactions ................ (29,333,984) (12,834,477)
------------- -------------
NET DECREASE IN NET ASSETS ................. (36,073,503) (16,993,297)
NET ASSETS:
Beginning of period ........................ 221,792,573 238,785,870
------------- -------------
End of period .............................. $ 185,719,070 $ 221,792,573
============= =============
See accompanying notes
11
<PAGE>
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996
Delaware Group Government Fund, Inc., (the "Company") is a diversified, open-end
investment company of the series type, organized under the laws of Maryland and
is registered under the Investment Company Act of 1940 (as amended). The Company
currently offers the Government Income Series (the "Fund"). The Fund offers four
classes of shares.
The Fund seeks to provide high current income consistent with safety of
principal by investing primarily in debt obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
1. SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies are in accordance with generally accepted
accounting principles and are consistently followed by the Fund for financial
statement preparation:
SECURITY VALUATION - Securities listed on an exchange are valued at the last
quoted sales price as of 4:00 p.m. EST on the valuation date. Securities not
traded or not listed on an exchange are valued at the mean of the last quoted
bid and asked prices. Long-term debt securities are valued by an independent
pricing service and are believed to reflect the fair value of such securities.
Money market instruments having less than 60 days maturity are valued at
amortized cost.
FEDERAL INCOME TAXES - The Fund intends to continue to qualify as a regulated
investment company and make the requisite distributions to shareholders.
Accordingly, no provision for federal income taxes is required in the financial
statements.
REPURCHASE AGREEMENTS - The Fund may invest in a pooled cash account along with
other members of the Delaware Group of Funds. The aggregate daily balance of the
pooled cash account is invested in repurchase agreements secured by obligations
of the U.S. government. The respective collateral is held by the Fund's
custodian bank until the maturity of the respective repurchase agreements. Each
repurchase agreement is a least 100% collateralized. However, in the event of
default or bankruptcy by the counterparty to the agreement, realization of the
collateral may be subject to legal proceedings.
CLASS ACCOUNTING - Expenses directly attributable to a class are charged to that
class. Other common expenses are prorated between all classes of the Fund.
OTHER - Expenses common to all funds within the Delaware Group of Funds are
allocated amongst the funds on the basis of average net assets. Security
transactions are recorded on the date the securities are purchased or sold
(trade date). Costs used in calculating realized gains and losses on the sale of
investment securities are those of the specific securities sold. Interest income
is recorded on an accrual basis. Original issue discounts are accreted to
interest income over the lives of the respective securities. The Fund declares
dividends daily from net investment income and pays such dividends monthly.
Certain Fund expenses are paid directly by brokers. The amount of these expenses
is less than 0.01% of the Fund's average net assets.
<PAGE>
2. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
In accordance with the terms of the Investment Management Agreement, the Fund
pays Delaware Management Company, Inc. (DMC), the Investment Manager of the
Fund, an annual fee which is calculated daily at 0.60% of the average daily net
assets of the Fund, less fees paid to the independent directors. At July 31,
1996, the Fund had a liability for Investment Management fees and other expenses
payable to DMC for $1,258.
Pursuant to the Distribution Agreement, the Fund pays Delaware Distributors,
L.P. (DDLP), the Distributor and an affiliate of DMC, an annual fee not to
exceed 0.30% of the average daily net assets of the A Class and 1.00% of the
average daily net assets of the B Class and the C Class. No distribution
expenses are paid by the Institutional Class. At July 31, 1996, the Fund had
a liability for distribution fees and other expenses payable to DDLP for $9,744.
For the year ended July 31, 1996, the Fund paid DDLP $50,571 for commissions
earned on sales of U.S. Government Fund A Class shares.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of DMC,
to serve as dividend disbursing and transfer agent for the Fund. For the year
ended July 31, 1996, the Fund expensed $345,143 for these services. At July 31,
1996, the Fund had no liability for such fees and other expenses payable to DSC.
Certain officers of DMC are officers, directors, and/or employees of the Fund.
These officers, directors, and employees are paid no compensation by the Fund.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
During the year ended July 31, 1996, the Fund made purchases of $45,992,456 and
sales of $49,235,201 of investment securities other than U.S. government
securities and temporary cash investments.
At July 31, 1996, net unrealized depreciation for federal income tax
purposes aggregated $3,468,236 of which $1,729,381 related to unrealized
appreciation of securities and $5,197,617 related to unrealized depreciation of
securities.
The realized loss for federal income tax purposes was $4,166,601 for the year
ended July 31, 1996. For federal income tax purposes, the Fund had accumulated
capital losses at July 31, 1996, of $36,739,017 which may be carried forward and
applied against future capital gains. The capital loss carryforward expires as
follows: 1997 -- $2,596,096, 1998 -- $1,746,916, 2001 -- $1,622,896, 2002 --
$17,400,711, 2003 -- $9,205,797, and 2004 -- $4,166,601.
At July 31, 1996, the Fund reclassified $5,736,818 from accumulated net
undistributed realized loss from security transactions to common stock due to
the expiration of capital loss carryforward.
The Fund had financial futures contracts open at July 31, 1996, as follows:
CONTRACTS UNDERLYING EXPIRATION UNREALIZED
TO DELIVER FACE AMOUNT DATE GAIN
60 Five-Year Treasury
Note Contracts $6,351,250 September, 1996 $25,937
The market value of investments pledged to cover margin requirements for open
positions at July 31, 1996, was $2,360,620.
4. CAPITAL STOCK
Transactions in capital stock shares were as follows:
Year Ended Year Ended
7/31/96 7/31/95
Shares sold:
U.S. Government Fund A Class................. 1,819,368 4,028,169
U.S. Government Fund B Class................. 663,515 767,507
U.S. Government Fund C Class................. 132,896 --
U.S. Government Fund Institutional Class..... 939,492 290,401
Shares issued upon reinvestment of dividends
from net investment income:
U.S. Government Fund A Class................. 1,021,509 1,279,474
U.S. Government Fund B Class................. 32,710 25,477
U.S. Government Fund C Class................. 3,619 --
U.S. Government Fund Institutional Class..... 94,026 115,153
---------- ----------
4,707,135 6,506,181
---------- ----------
Shares repurchased:
U.S. Government Fund A Class................. (7,423,018) (6,923,016)
U.S. Government Fund B Class................. (351,415) (129,422)
U.S. Government Fund C Class................. (851) --
U.S. Government Fund Institutional Class..... (670,765) (1,100,347)
---------- ----------
(8,446,049) (8,152,785)
---------- ----------
Net decrease.................................. (3,738,914) (1,646,604)
========== ==========
<PAGE>
5. LINES OF CREDIT
The Fund has a committed line of credit for $500,000. No amount was outstanding
at July 31, 1996, or at any time during the year ended July 31, 1996.
6. CONCENTRATION OF CREDIT RISK
The Fund invests in securities whose value is derived from an underlying pool of
mortgages or consumer loans. Some of these securities are collateralized
mortgage obligations (CMOs). CMOs are debt securities issued by U.S. government
agencies or by financial institutions and other mortgage lenders which are
collateralized by a pool of mortgages held under an indenture. The Fund invests
in private-backed CMOs only if they are 100% collateralized at the time of
issuance by securities or certificates issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Prepayment of mortgages may
shorten the stated maturity of the obligations and can result in a loss of
premium, if any has been paid. Certain of these securities may be stripped
(securities which provide only the principal or interest feature of the
underlying security). The yield to maturity on an interest-only CMO is extremely
sensitive not only to changes in prevailing interest rates, but also to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets and a rapid rate of principal payments may have a material adverse affect
on the Fund's yield to maturity. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities even if the securities are
rated in the highest rating categories. The Fund will, from time to time, invest
in higher risk interest-only CMOs. At July 31, 1996, the Fund had no holdings in
interest-only CMOs.
The Fund engaged in trading financial futures contracts during the fiscal year
ended July 31, 1996. The Fund is exposed to market risk as a result of changes
in the value of the underlying financial instruments. Investments in financial
futures require the Fund to "mark to market" on a daily basis, which reflects
the change in the market value of the contract at the close of each day's
trading. Accordingly, variation margin payments are made or received to reflect
daily unrealized gains or losses. When the contracts are closed, the Fund
recognizes a realized gain or loss. These investments require initial margin
deposits with a custodian which consist of cash or cash equivalents, up to
approximately 10% of the contract amount. The amount of these deposits is
determined by the exchange or Board of Trade on which the contract is traded and
is subject to change. The Fund will not enter into futures contracts to the
extent that more than 5% of the Fund's assets are required as futures contract
margin deposits and will not engage in such transactions to the extent that
obligations relating to such transactions exceed 20% of the Fund's assets.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FINANCIAL HIGHLIGHTS
Selected data for each share of the Fund outstanding throughout each period
were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND A CLASS
-------------------------------------------------------------------
YEAR ENDED
7/31/96 7/31/95 7/31/94 7/31/93 7/31/92
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $7.860 $8.000 $9.010 $9.020 $8.700
Income from investment operations:
Net investment income................. 0.588 0.656 0.714 0.763 0.769
Net realized gain (loss) from
security transactions................ (0.270) (0.140) (1.010) (0.010) 0.320
------ ------ ------ ------ ------
Total from investment operations...... 0.318 0.516 (0.296) 0.753 1.089
Less distributions:
Dividends............................. (0.588) (0.656) (0.714) (0.763) (0.769)
Distributions from net realized
gain on security transactions........ none none none none none
------ ------ ------ ------ ------
Total distributions................... (0.588) (0.656) (0.714) (0.763) (0.769)
------ ------ ------ ------ ------
Net asset value, end of period......... $7.590 $7.860 $8.000 $9.010 $9.02
====== ====== ====== ====== ======
Total return(1)........................ 4.09% 6.82% (3.51%) 8.70% 12.98%
Ratios/Supplemental Data:
Net assets, end of period
(000 omitted)........................ $164,156 $206,083 $222,555 $223,416 $184,401
Ratio of expenses to average
net assets........................... 1.20% 1.24% 1.23% 1.26% 1.17%
Ratio of net investment income
to average net assets................ 7.55% 8.40% 8.31% 8.45% 8.60%
Portfolio turnover.................... 81% 70% 309% 285% 196%
</TABLE>
- ------------------
(1) Does not reflect the maximum sales charge of 4.75% nor the 1% limited
contingent deferred sales charge that would apply in the event of certain
redemptions within 12 months of purchase.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for each share of the Fund outstanding throughout each period were
as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT U.S. GOVERNMENT U.S. GOVERNMENT FUND
FUND B CLASS FUND C CLASS INSTITUTIONAL CLASS(1)
--------------------------- --------------- -----------------------------------------------
PERIOD PERIOD
YEAR YEAR 5/2/94(3) 11/28/95(3) YEAR
ENDED ENDED TO TO ENDED YEAR ENDED
7/31/96 7/31/95 7/31/94 7/31/96 7/31/96 7/31/95 7/31/94 7/31/93 7/31/92(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.............. $7.860 $8.000 $8.190 $7.950 $7.860 $8.000 $9.010 $9.020 $8.700
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
investment operations:
Net investment income............ 0.533 0.601 0.151 0.348 0.611 0.679 0.739 0.791 0.792
Net realized and unrealized
gain (loss) from
security transactions........... (0.270) (0.140) (0.190) (0.360) (0.270) (0.140) (1.010) (0.010) 0.320
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment operations........... 0.263 0.461 (0.039) (0.012) 0.341 0.539 (0.271) 0.781 1.112
------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income............... (0.533) (0.601) (0.151) (0.348) (0.611) (0.679) (0.739) (0.791) (0.792)
Distributions from
net realized gain on
security transactions........... none none none none none none none none none
------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions.............. (0.533) (0.601) (0.151) (0.348) (0.611) (0.679) (0.739) (0.791) (0.792)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period.... $7.590 $7.860 $8.000 $7.590 $7.590 $7.860 $8.000 $9.010 $9.020
====== ====== ====== ====== ======= ====== ====== ====== ======
Total return(4)................... 3.36% 6.08% (0.46%) (0.17%) 4.39% 7.14% (3.23%) 9.04% 13.27%
Ratios/supplemental data:
Net assets, end of period
(000 omitted)................... $9,754 $7,394 $2,215 $1,029 $10,780 $8,316 $14,016 $16,475 $19,421
Ratio of expenses to average
net assets...................... 1.90% 1.94% 1.94% 1.90% 0.90% 0.94% 0.94% 0.97% 0.91%
Ratio of net investment
income to average
net assets...................... 6.85% 7.66% 7.60% 6.85% 7.85% 8.66% 8.60% 8.74% 8.85%
Portfolio turnover............... 81% 70% 309% 81% 81% 70% 309% 285% 196%
</TABLE>
- ------------------
(1) Government Income Series I class was converted into U.S. Government Fund A
Class on June 1, 1992, pursuant to a Plan of Recapitalization approved by
shareholders of Government Income Series I class.
(2) The per share data and ratios for Government Income Series I class and the
U.S. Government Fund Institutional Class have been combined for 1992. For
the 10 months ended May 31, 1992, the Government Income Series I class'
operating expenses and net investment income per share were $0.068 and
$0.657, respectively. For the two months ended July 31, 1992, the U.S.
Government Fund Institutional Class' operating expenses and net investment
income per share were $0.014 and $0.135, respectively. All net investment
income was distributed to shareholders.
(3) Date of initial public offering; ratios have been annualized but total
return has not been annualized.
(4) Does not include contingent deferred sales charge which varies from 1%-4%
for the U.S. Government Fund B Class and which is 1% for the U.S. Government
Fund C Class depending upon the holding period.
15
<PAGE>
DELAWARE GROUP GOVERNMENT FUND, INC. - GOVERNMENT INCOME SERIES
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
DELAWARE GROUP GOVERNMENT FUND, INC. - GOVERNMENT INCOME SERIES
We have audited the accompanying statement of net assets of Delaware Group
Government Fund, Inc. - Government Income Series (the "Fund") as of July 31,
1996, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Government Fund, Inc. - Government Income Series at July 31,
1996, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
September 10, 1996
16
<PAGE>
This annual report is for the information of U.S. Government Fund shareholders,
but it may be used with prospective investors when preceded or accompanied by
a current Prospectus for U.S. Government Fund, which sets forth details about
charges, expenses, investment objectives and operating policies of the Fund. You
should read the prospectus carefully before you invest. Summary investment
results are documented in the Fund's current Statement of Additional
Information. The figures in this report represent past results which are not a
guarantee of future results. The return and principal value of an investment in
the Fund will fluctuate so that shares, when redeemed, may be worth more or less
than their original cost.
- -------------------------------------------------------------------------------
BOARD
- ------------------
MEMBERS
- ------------------
WAYNE A. STORK
Chairman, President and Chief Executive Officer
Delaware Group of Funds
Philadelphia, PA
WALTER P. BABICH
Board Chairman, Citadel Constructors, Inc.
King of Prussia, PA
ANTHONY D. KNERR
Consultant, Anthony Knerr & Associates
New York, NY
ANN R. LEVEN
Treasurer, National Gallery of Art
Washington, DC
W. THACHER LONGSTRETH
Vice Chairman, Packquisition Corp.
Philadelphia, PA
CHARLES E. PECK
Secretary of Enterprise Homes, Inc.
Fredericksburg, VA
former Chairman and CEO
The Ryland Group, Inc.
Columbia, MD
AFFILIATED
- -----------------
OFFICERS
- -----------------
GEORGE M. CHAMBERLAIN, JR.
Senior Vice President and Secretary,
Delaware Group of Funds
Philadelphia, PA
KEITH E. MITCHELL
President and CEO,
Delaware Distributors, L.P.
Philadelphia, PA
DAVID K. DOWNES
Senior Vice President, Chief Financial Officer and
Chief Administrative Officer
Delaware Group of Funds
Philadelphia, PA
<PAGE>
DELAWARE GROUP
- -------------------
OF FUNDS
- -------------------
FOR GROWTH OF CAPITAL
Trend Fund
Enterprise Fund
DelCap Fund
Value Fund
U.S. Growth Fund
FOR TOTAL RETURN
Devon Fund
Decatur Total Return Fund
Decatur Income Fund
Delaware Fund
FOR GLOBAL DIVERSIFICATION
Emerging Markets Fund
New Pacific Fund
World Growth Fund
International Equity Fund
Global Assets Fund
Global Bond Fund
FOR CURRENT INCOME
Delchester Fund
Corporate Income Fund
Federal Bond Fund
U.S. Government Fund
Limited-Term Government Fund
FOR TAX-FREE CURRENT INCOME
Tax-Free Pennsylvania Fund
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
MONEY MARKET FUNDS
Delaware Cash Reserve
U.S. Government Money Fund
Tax-Free Money Fund
CLOSED-END EQUITY/INCOME*
Dividend and Income Fund
Global Dividend and Income Fund
THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT U.S. GOVERNMENT FUND
PROSPECTUS AND THE DELAWARE GROUP FUND PERFORMANCE UPDATE FOR THE MOST RECENTLY
COMPLETED CALENDAR QUARTER. FOR A PROSPECTUS OF ANY OTHER DELAWARE GROUP FUND,
CONTACT YOUR FINANCIAL ADVISER OR DELAWARE GROUP.
* Delaware Group Dividend and Income Fund and Delaware Group Global Dividend
and Income Fund purchases can be made through any registered broker.
DELAWARE
GROUP
========
Philadelphia o London
<PAGE>
Be sure to consult your financial adviser when making investment decisions.
Mutual funds can be a valuable part of your financial plan; however, shares of
the Fund are not FDIC or NCUSIF insured, are not guaranteed by any bank or any
credit union, are not obligations of or deposits of any bank or any credit
union, and involve investment risk, including the possible loss of principal.
Shares of the Fund are not bank or credit union deposits.
INVESTMENT MANAGER
Delaware Management Company, Inc.
Philadelphia, Pennsylvania
INTERNATIONAL AFFILIATE
Delaware International Advisers Ltd.
London, England
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
Philadelphia, Pennsylvania
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING
AND TRANSFER AGENT
Delaware Service Company, Inc.
Philadelphia, Pennsylvania
1818 Market Street
Philadelphia, PA 19103-3682
Nationwide (800) 523-4640
SECURITIES DEALERS ONLY
Nationwide (800) 362-7500
FINANCIAL INSTITUTIONS REPRESENTATIVES ONLY
Nationwide (800) 659-2265
Copy Rights Delaware Distributors, L.P.
Printed in the U.S.A. on recycled paper.
AR-023[7/96]TKO9/96
