<PAGE>
For Current Income
DELAWARE GROUP
U.S. Government Fund
(Various photos demonstrating service and
guidance, professional management and goals)
service and guidance
professional management
1997
Annual
Report
goals
DELAWARE
GROUP
=========
<PAGE>
A Commitment To Our Investors
(Photo of glasses, pen and keyboard)
(Photo of waterfall)
Delaware Group's investment tradition dates back to 1929. We have a long
and distinguished history of helping individuals and institutions including
some of America's largest pension funds - reach their financial goals.
Headquartered in Philadelphia, a block from the nation's oldest stock
exchange, Delaware Group's first mutual fund was established in 1938.
Delaware International Advisers Ltd., our international affiliate, was
established in 1990 and is headquartered in London.
Delaware Group offers a full range of mutual funds. We also manage
variable annuity investments, unit investment trusts and closed-end funds,
and offer retirement plan services for individuals and businesses.
Delaware manages more than $39 billion in mutual fund assets and
institutional advisory accounts for more than half-a-million investors. We're
part of a global financial service and investment management business owned
by Lincoln National Corporation, whose subsidiaries manage more than $115
billion in assets.
current income
A TRADITION OF SOUND INVESTING
U.S. Government Fund Objective
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.
commitment
<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 of Directors
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
City Councilman
Philadelphia, PA
CHARLES E. PECK
Secretary/Treasurer, Enterprise Homes, Inc.
Fredericksburg, VA
Affiliated Officers
GEORGE M. CHAMBERLAIN, JR.
Senior Vice President and Secretary,
Delaware Group of Funds
Philadelphia, PA
DAVID K. DOWNES
Senior Vice President, Chief Financial Officer and
Chief Administrative Officer
Delaware Group of Funds
Philadelphia, PA
BRUCE D. BARTON
President and CEO,
Delaware Distributors, L.P.
Philadelphia, PA
(Photo of globes)
directors & officers
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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
<PAGE>
August 16, 1997
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(Photo of Wayne A. Stork, Chairman)
U.S. GOVERNMENT FUND'S TOTAL RETURN DURING FISCAL 1997
WAS THE HIGHEST IN FIVE YEARS
Dear Shareholder:
FOR FIXED-INCOME INVESTORS WILLING TO RIDE OUT short-term volatility during
fiscal 1997, the U.S. government securities market offered attractive returns.
U.S. Government Fund provided a positive total return of +9.77% for
the 12 months ended July 31, 1997, (for A Class shares at net asset value
with dividends reinvested). It was your Fund's strongest performance since
fiscal 1992.
On February 21, 1997, Paul Grillo was named your Fund's portfolio
manager. He has 11 years of professional investment experience and has been
managing fixed-income investments for institutional accounts at Delaware
since 1993.
As his predecessor Roger A. Early did, Mr. Grillo focuses on
intermediate-term, government-backed mortgage securities as a way to maximize
income and maintain a relatively conservative risk profile. As it has since
the Fund's inception 12 years ago, U.S. Government Fund aims to provide high
current income consistent with reasonable safety of principal.
Fiscal 1997 was a challenging time for your Fund. Prices of U.S.
government securities generally rose in the fall of calendar 1996, with
intermediate-term bonds benefiting the most. However, between January and
July, 1997 the bond market experienced wide swings in sentiment amid
uncertainty about inflation and Federal Reserve Board policy.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
August 1, 1996
to July 31, 1997
- --------------------------------------------------------------------------------
U.S. Government Fund A Class +9.77%
Lipper General U.S. Government Fund Average (174 funds) +9.74%
Lehman Brothers Government Bond Index +10.76%
- --------------------------------------------------------------------------------
U.S. Government Fund A Class performance and that of the funds in the Lipper
Average is based on net asset value and reinvestment of all distributions.
Returns for other classes vary due to different charges and expenses. For
Fund performance for all classes, see page 8. The Lehman Brothers Government
Bond Index is an unmanaged composite of several types of U.S. government
securities.
1
1997 annual report
<PAGE>
Reflecting a sharp rise in bond prices this past spring, the yield on
30-year U.S. Treasury bonds stood at 6.30% as of July 31, 1997, some 67 basis
points (0.67%) lower than a year earlier. Yields had been as high as 7.18%
this past March when government statistics briefly suggested that the U.S.
economy was overheating.
Nationwide, our country's output of goods and services has been
growing at a strong but not necessarily excessive pace. Many economists
believe that in order to prevent the economy from overheating, the Fed may
need to raise its short-term interest rate target by only 25 basis points, if
at all, by year's end.
U.S. Government Fund's results reflected a conservative positioning
in mortgage bonds, which are generally not as sensitive to changes in
economic perceptions as Treasuries. This strategy helped when bond prices
were weak, although it did not allow the Fund to benefit from rising bond
prices as much as some of its peers.
During fiscal 1997, Mr. Grillo and Mr. Early increased the Fund's
holdings of mortgage bonds selling at a discount to their face value during
fiscal 1997. Both men also focused on mortgage securities with relatively
predictable prepayment patterns. We believe this strategy may benefit the
Fund should interest rates decline and prepayments increase.
The Spanish writer Miguel de Cervantes once wrote that diligence is
the mother of good fortune. We believe a consistent disciplined approach to
managing fixed-income securities can be ultimately more rewarding than a
strategy of chasing interest rate movements like proverbial windmills.
I've seen many interest rate cycles since I joined Delaware Group in
1962, and I've learned that it is always prudent to carefully weigh both risk
and potential reward in evaluating fixed-income opportunities. I wish to
thank you for your continued confidence in U.S. Government Fund.
Sincerely,
/s/ Wayne A. Stork discipline
- ---------------------
WAYNE A. STORK
Chairman, President and Chief Executive Officer
2
1997 annual report
<PAGE>
Introducing Your Fund's Portfolio Manager
(Photo of Paul Grillo)
Effective February 21, 1997, Paul Grillo became portfolio manager of U.S.
Government Fund. Mr. Grillo has managed fixed-income portfolios for
institutional accounts at Delaware since 1993. Prior to joining Delaware, he
served as a mortgage strategist and trader at Dreyfus Corp. He has also served
as a mortgage strategist, portfolio manager and financial analyst at
Chemical Bank.
Performance Review
STRATEGIC POSITIONING U.S. GOVERNMENT FUND SEEKS
to strike a balance between income and capital preservation. We invest
primarily in high quality U.S. government and, to a lesser extent, in
corporate securities. We have generally emphasized government-backed mortgage
securities because of their superior income potential.
Your Fund has historically focused on the intermediate sector of the
bond market - securities with maturities between five and seven years. Longer
term bonds, in our opinion, present too many risks relative to the income
they currently provide.
The Fund's duration was 4.4 years as of July 31, 1997, a full year
lower than that of our unmanaged benchmark - the Lehman Brothers Government
Bond Index - and almost half-a-year lower than in July, 1996. Duration is the
most common measure of a bond's sensitivity to changes in interest rates. It
indicates the approximate percentage of change in a bond's price given a 1%
change in interest rates.
strategy
3
1997 annual report
<PAGE>
PORTFOLIO HIGHLIGHTS AND ASSET ALLOCATION
- --------------------------------------------------------------------------------
July 31, 1997
July 31, 1996 July 31, 1997
- -------------------------------------------------------------
Average Effective Duration 4.8 years 4.4 years
Average Effective Maturity 7.5 years 7.1 years
Average Quality AAA AAA
Thirty-Day Current Yield* 5.83% 5.93%
Number of Bonds 279 279
Mortgage-backed Securities 39.7%
Collateralized Mortgage Obligations (CMOs) 16.6%
Taxable Municipal Bonds 0.9%
Agency Obligations 6.6%
Corporate Bonds 8.0%
Asset-Backed Securities 5.1%
Treasuries 21.8%
Cash Equivalents 1.3%
*For A Class shares measured according to Securities and Exchange
Commission guidelines. For B and C Class shares, the 30-day SEC current
yield as of July 31, 1997, was 5.55%. Institutional Class yield was 6.55%.
Mortgages and mortgage-related securities generally provide greater income
than U.S. Treasuries. As of July 31, 1997, such securities comprised more
than half of your Fund's holdings.
Our relatively conservative positioning reflected a concern that the
Federal Reserve Board would raise interest rates substantially in an effort
to forestall inflation. Because of this concern, between July 1996 and April
1997 bond prices were volatile, especially prices of U.S. Treasuries.
By late spring, however, a market consensus developed that the Fed's
modest 25 basis point (0.25%) increase in banks' overnight lending rate was
all that was needed to prevent U.S. economic growth from reaching a feverish
pace.
As the second calendar quarter of 1997 progressed, the bond market
welcomed news of possible slower U.S. economic growth. Indeed producer prices
- - what companies pay for raw materials and semi-finished goods - have
actually fallen in recent months.
AS OF JULY 31, 1997, FIVE-YEAR GOVERNMENT SECURITIES PROVIDED 93% OF THE INCOME
AVAILABLE FROM THE LONGEST TERM U.S. TREASURIES WITH SUBSTANTIALLY LESS INTEREST
RATE RISK.
During fiscal 1997, we added to the Fund's holdings of discount
mortgages, mortgages issued when interest rates were lower. This subsector
represented 13% of U.S. Government Fund's net assets as of July 31, 1997.
1997 annual report
4
<PAGE>
(Photo of man in shirt and tie)
By investing in more discount bonds, we reduced the average price of
the bonds in your Fund's portfolio from $103.0 to $102.1, less than the
$105.7 average price of bonds in the Lehman Brothers Government Bond Index as
of July 31. Our purpose in doing this is two-fold. First, we wish to limit
mortgage prepayment risks. Because their interest rates are lower than
current rates, discount mortgages are a bargain for homeowners. Generally,
homeowners who enjoy bargain rates are unlikely to refinance even if interest
rates decline substantially.
Second, owning some discount bonds helps balance ownership of bonds
trading at a premium to face value. Premium bonds - which we value for their
superior income potential - depreciate in value to $100 as they near
maturity, while discount bonds tend to appreciate.
A HIGH-TECH APPROACH TO MORTGAGE INVESTING
During the second half of fiscal 1997, we took advantage of computer
technology that allows investment professionals to buy pre-selected pools of
mortgage loans. We searched the market for mortgages with certain homeowner
characteristics such as:
* Low loan balances ($60,000 or less) and
* A strong likelihood of relocation by an employer.
In our opinion, pools of mortgages with low loan balances have a more
attractive risk/reward profile than other mortgages because
U.S. TREASURY YIELDS HAVE FALLEN AS BONDS HAVE RISEN
- --------------------------------------------------------------------------------
July 31, 1996, vs July 31, 1997
July 31, 1996 July 31, 1997
M 3 Months 5.301% 5.227%
A 6 Months 5.457% 5.307%
T 1 Year 5.826% 5.408%
U 2 Years 6.216% 5.724%
R 3 Years 6.358% 5.780%
I 5 Years 6.562% 5.898%
T 10 Years 6.794% 6.009%
Y 30 Years 6.973% 6.299%
Y I E L D
PRICES OF TREASURY BONDS MATURING IN THREE TO FIVE YEARS ROSE AND YIELDS
DECLINED DURING THE 12 MONTHS ENDED JULY 31, 1997. YOUR FUND'S NET ASSET
VALUE ROSE +2.2% DURING THE PERIOD.
Source: Bloomberg Business News.
5
1997 annual report
<PAGE>
U.S. GOVERNMENT FUND ANNUAL INCOME 1987-1997
Annual Income from a $100,000 investment with distributions reinvested*
- --------------------------------------------------------------------------------
Total Income: $120,511
Increase in Income +42.2%
July '88 $9,326
July '89 $9,649
July '90 $10,240
July '91 $11,231
July '92 $12,508
July '93 $13,503
July '94 $13,733
July '95 $13,728
July '96 $13,330
July '97 $13,263
* Chart assumes a $100,000 investment on July 31, 1987, in A Class shares,
and includes the effect of a 3.75% front-end sales charge. Performance for
other classes will differ due to different charges and expenses. See page 8
for performance for all classes.
a homeowner who has a smaller debt obligation is less likely to refinance than a
homeowner with a large one.
Employer-subsidized mortgages for homeowners who are likely to be
asked to relocate can also be attractive when such mortgage pools sell at a
discount to face value (par). Unlike most other mortgages, refinancing for
these homeowners depends on a corporate decision rather than interest rates.
Because these homeowners may have to prepay their mortgage and buy new homes
at a time when interest rates are actually higher, we believe such
refinancing activity may even increase income and total return potential for
investors holding the mortgage.
Investors who buy "relo" mortgages at a discount can thus benefit in
two ways - 1) they are paid par when the mortgage is prepaid, and 2) such
mortgages generally have a more predictable prepayment pattern, making them
more attractive to hold during periods of interest rate volatility.
income
HOW DURATION AFFECTS BOND PRICES
- --------------------------------------------------------------------------------
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 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.
1997 annual report
6
<PAGE>
OUTLOOK
In early August, Congress passed new tax legislation that is expected to
result in a balanced federal budget for the first time in three decades. We
believe this bodes well for bond prices over the long term because its
suggests the U.S. government will need less capital from private investors to
finance operations. A reduced supply of government securities can lead to
lower interest rates, assuming investor demand remains steady.
Still, we have some reservations about whether or not government bond
prices can rise substantially in the coming months. U.S. economic growth is
still strong and, as of July 31, the nation's unemployment rate was at its
lowest level since the early 1970s. This signals a need for continuing
caution about consumer price inflation. In the year ahead, U.S. Government
Fund plans to stand by its strategy of maximizing income potential and
minimizing fluctuations in principal.
During the early 1990s, when bond prices rose to the point where the
yield on 10-year U.S. Treasury notes dropped below 6% for an extended period,
up to 50% of existing mortgages faced an increased risk of being prepaid. In
our opinion, uncertainty about inflation is likely to keep the yield on
long-term U.S. Treasuries within a range of 6% to 7% for the balance of
calendar 1997. Should rates remain stable or rise modestly, we believe the
superior income of mortgage-backed securities has the potential to reward
investors to a greater degree than other types of government securities.
PAUL GRILLO
Vice President and
Senior Portfolio Manager
August 16, 1997
outlook
GLOSSARY
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(Photo of keyboard)
Basis Points
A measure of the yield difference between bonds. A basis point is one
hundredth of a percent (1/100 of 1%).
Face Value
The amount of principal an issuer will pay when the bond matures and the
amount on which interest is calculated.
Discount Bonds
Bonds that are selling at less than face value, usually bonds that pay
interest lower than prevailing interest rates.
Premium Bonds
Bonds whose market prices are greater than face value. These bonds tend to
depreciate in value as they near maturity.
Duration
The most common measure of a bond's sensitivity to interest rates. It
indicates the approximate changes in a bond's price given a 1% movement in
interest rates.
1997 annual report
7
<PAGE>
A Look at Long-Term Performance
U.S. GOVERNMENT FUND'S LONG-TERM PERFORMANCE
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Growth of a $10,000 Investment
August 1, 1987, to July 31, 1997
U.S. Government U.S. Consumer Price Lehman Brothers
Fund A Index (Inflation) Government Bond Index
July '87 $9,524 $10,000 $10,000
July '88 $10,287 $10,413 $10,580
July '89 $11,360 $10,932 $13,094
July '90 $12,171 $11,459 $13,516
July '91 $13,449 $11,969 $14,821
July '92 $15,194 $12,347 $17,674
July '93 $16,516 $12,889 $20,854
July '94 $15,937 $13,041 $20,227
July '95 $17,024 $13,401 $22,975
July '96 $17,720 $13,793 $24,139
July '97 $19,451 $14,104 $27,793
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.
U.S. Government Fund Performance
AVERAGE ANNUAL RETURN THROUGH JULY 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Lifetime Ten Years Five Years One Year
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (Est.8/16/85)
Excluding Sales Charge +7.44% +7.40% +5.06% +9.77%
Including Sales Charge +7.00% +6.88% +4.05% +4.54%
- --------------------------------------------------------------------------------------------------------------
Class B (Est.5/2/94)
Excluding Sales Charge +5.49% - - +9.01%
Including Sales Charge +4.71% - - +5.01%
- --------------------------------------------------------------------------------------------------------------
Class C (Est.11/28/95)
Excluding Sales Charge +5.19% - - +9.01%
Including Sales Charge +5.19% - - +8.01%
</TABLE>
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 shares have a 4.75% maximum sales charge and a 12b-1 fee of 30 basis
points of net assets.
Class B shares 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 shares 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, 1997, 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
+7.66%, +7.67%, +5.38%, +10.10%.
1997 annual report
8
<PAGE>
Financial Statements
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES*
STATEMENT OF NET ASSETS/JULY 31, 1997
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Principal Market
Amount Value
------------------------------------
AGENCY MORTGAGE-BACKED SECURITIES -
9.50%
FHA Project Loan 8.75% 10/01/27 ............. $ 697,109 $ 723,468
Federal Home Loan Mortgage Corporation
10.00% 1/01/19 ............................ 611,032 667,934
Federal Home Loan Mortgage Corporation
10.25% 4/01/08 ............................ 60,237 65,941
Federal Home Loan Mortgage Corporation
11.50% 7/1/99 to 3/1/16 ................... 2,678,016 2,995,744
Federal Home Loan Mortgage Corporation - Gold
6.00% 11/1/26 ............................. 1,029,417 985,345
Federal Home Loan Mortgage Corporation - Gold
7.00% 7/01/11 ............................. 494,336 501,751
Federal Home Loan Mortgage Corporation - Gold
9.00% 12/01/05 ............................ 2,117,870 2,201,923
Federal Home Loan Mortgage Corporation - Gold
12.00% 12/01/10 ........................... 156,900 179,405
Federal National Mortgage Association
7.50% 2/01/27 ............................. 3,455,829 3,518,466
Federal National Mortgage Association
10.75% 9/01/11 ............................ 165,016 182,910
Federal National Mortgage Association
11.25% 6/01/00 to 1/01/01 .................. 149,479 160,176
Federal National Mortgage Association
12.00% 5/01/09 ............................ 2,813,794 3,229,708
Federal National Mortgage Association
14.25% 9/01/99 ............................ 50,666 56,556
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Total Agency Mortgage-Backed Securities
(cost $15,179,074) ........................ 15,469,327
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ASSET-BACKED SECURITIES - 5.10%
ADVANTA Home Equity Loan Trust 1992-4 1A
7.20% 11/25/08 ............................ 1,849,025 1,870,307
AFC Home Equity Loan Trust 1992-3A
7.05% 8/15/07 ............................. 1,694,097 1,715,432
AFC Home Equity Loan Trust 1992-1A
7.50% 3/15/07 ............................. 1,084,311 1,106,647
Ford Credit Auto Loan Master Trust 1995-1A
6.50% 8/15/02 ............................. 180,000 182,291
IMC Home Equity Loan Trust 1995-3A 2
6.50% 11/25/10 ............................ 1,515,000 1,516,977
Neiman Marcus Group Credit Card Trust 1995-1A
7.60% 6/15/03 ............................. 1,850,000 1,918,577
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Total Asset-Backed Securities
(cost $8,256,804) ......................... 8,310,231
-----------
- ----------
*This fund is known and does business as U.S. Government Fund.
<PAGE>
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Principal Market
Amount Value
------------------------------------
COLLATERALIZED MORTGAGE OBLIGATION
(CMO) 16.56%
COLLATERALIZED MORTGAGE SECURITIES CORPORATION
F-1 11.45% 11/01/15 ................... $ 319,120 $ 346,409
Federal National Mortgage Association
G-19H 8.40% 6/25/20 ................... 4,000,000 4,177,850
Federal National Mortgage Association
88-15A 9.00% 6/25/18 .................. 43,201 45,953
Federal National Mortgage Association
Alpha H-2 11.50% 5/01/09 ............... 2,202,859 2,516,766
Federal National Mortgage Association
Strip Series J-1 7.00% 11/01/10 ........ 111,216 113,336
Federal National Mortgage Association
Strip Series D-2 11.00% 4/01/09 ........ 2,370,197 2,670,175
Federal National Mortgage Association
Strip Series F-2 11.50% 5/25/09 ........ 1,087,055 1,233,467
Federal National Mortgage Association
Strip Series 35-2 12.00% 7/25/18 ....... 2,387,735 2,797,381
Federal Home Loan Mortgage Corporation
1608 GA 9.00% 6/15/21 ................. 5,000,000 5,427,804
Federal Home Loan Mortgage Corporation
26-F 9.50% 2/15/20 .................... 1,081,697 1,183,480
Investor GNMA Mortgage-Backed Securities
Trust Series 84-F5 10.875% 10/25/13 .... 2,330,604 2,606,160
Kidder Peabody Mortgage Assets Trust
20-C 9.50% 10/01/18 ................... 522,000 535,504
Travelers Mortgage Securities 1-Z2
12.00% 3/01/14 ........................ 2,890,265 3,323,805
-----------
Total Collateralized Mortgage Obligations
(cost $26,457,646) .................... 26,978,090
-----------
CORPORATE BONDS - 8.00%
Credit Foncier de France 8.00% 1/14/02 .. 200,000 212,000
Nations Bank 10.20% 7/15/15 ............. 4,000,000 5,245,000
RBSG Capital 10.125% 3/01/04 ............ 1,908,000 2,263,365
Republic of Finland 9.625% 4/01/28 ...... 5,000,000 5,318,750
-----------
Total Corporate Bonds
(cost $12,031,799) .................... 13,039,115
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GOVERNMENT AGENCY OBLIGATION - 6.55%
Cajun Electric Power 9.52% 3/15/19 . 10,000,000 10,662,500
----------
Total Government Agency Obligations
(cost $11,855,100) ............... 10,662,500
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1997 annual report
9
<PAGE>
STATEMENT OF NET ASSETS (Continued)
- --------------------------------------------------------------------------------
Principal Market
Amount Value
------------------------------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS - 30.22%
GNMA 7.00% 12/15/22 to 12/15/23 ........... $20,368,913 $20,529,553
GNMA 9.00% 11/15/21 ...................... 1,988,047 2,142,742
GNMA 9.50% 9/15/17 to 3/15/23 ............. 3,184,501 3,467,878
GNMA 10.00% 1/15/18 to 9/15/18 ............ 1,130,671 1,241,973
GNMA 11.00% 12/15/09 to 8/15/13 ........... 2,723,660 3,088,474
GNMA 11.50% 7/15/15 ...................... 93,310 106,839
GNMA 12.00% 5/15/11 to 12/15/15 ........... 5,817,222 6,665,468
GNMA 12.25% 3/15/14 ...................... 139,333 161,365
GNMA 12.50% 5/15/10 to 1/15/16 ............ 822,579 963,190
GNMA GPM 10.25% 6/15/20 to 10/15/20 ....... 258,229 282,922
GNMA GPM 10.75% 12/15/17 .................. 11,312 12,493
GNMA GPM 11.50% 8/15/14 .................. 403,717 462,760
GNMA GPM 11.75% 8/15/13 .................. 450,809 517,585
GNMA II 9.00% 10/20/01 to 10/20/05 ........ 1,003,466 1,055,586
GNMA II 10.00% 11/20/15 to 6/20/21 ........ 3,181,466 3,482,711
GNMA II 10.50% 3/20/16 to 7/20/21 ......... 1,456,277 1,601,438
GNMA II 11.00% 5/20/15 to 7/20/19 ......... 281,762 315,908
GNMA II 11.50% 10/20/14 to 10/20/15 ....... 152,873 174,678
GNMA II 12.00% 3/20/14 to 5/20/15 ......... 356,792 412,283
GNMA II 12.50% 10/20/13 to 7/20/15 ........ 1,203,652 1,410,989
GNMA II GPM 10.25% 3/20/18 to 5/20/19 ..... 81,068 88,820
GNMA II GPM 10.75% 3/20/16 to 1/20/19 ..... 680,985 752,065
GNMA II GPM 11.50% 3/20/14 ................ 23,067 26,325
GNMA II GPM 12.00% 11/20/13 to 12/20/13 ... 236,955 271,338
-----------
Total Government National Mortgage
Association Obligations (cost $47,965,479) 49,235,383
-----------
MUNICIPAL BONDS - 0.92%
Cook County,Illinois, Chicago Heights
School District, Taxable-Series B
13.15% 12/01/05 ......................... 1,055,000 1,496,887
-----------
Total Municipal Bonds (cost $1,467,477) ... 1,496,887
-----------
U.S. TREASURY OBLIGATIONS - 21.81%
U.S. Treasury Bonds 10.375% 11/15/12 ...... 19,095,000 25,106,295
U.S. Treasury Bonds 10.75% 8/15/05 ........ 2,180,000 2,826,196
U.S. Treasury Strip 6.47% 2/15/17 ......... 26,330,000 7,587,771
-----------
Totals U.S. Treasury Obligations
(cost $34,872,397) ...................... 35,520,262
-----------
REPURCHASE AGREEMENT - 0.27%
With Chase Manhattan 5.72% 8/01/97
(dated 7/31/97, collateralized by
$150,000 U.S. Treasury Notes 5.625%
due 11/30/98, market value $151,485) ..... 149,000 149,000
With J.P. Morgan Securities 5.72% 8/01//97
(dated 7/31/97, collateralized by
$78,000 U.S. Treasury Notes 6.875%
due 7/31/99, market value $79,911 and
$67,000 U.S. Treasury Notes 7.50% due
10/31/99, market value $70,473) .......... 147,000 147,000
<PAGE>
- --------------------------------------------------------------------------------
Principal Market
Amount Value
------------------------------------
REPURCHASE AGREEMENT (Continued)
With PaineWebber 5.72% 8/01/97
(dated 7/31/97, collateralized by
$152,000 U.S. Treasury Notes 6.25%
due 6/30/98, market value $153,527)......... 150,000 $ 150,000
------------
Total Repurchase Agreement
(cost $446,000)............................................ 446,000
-----------
TOTAL MARKET VALUE OF SECURITIES OWNED - 98.93%
(cost $158,531,776)........................................ 161,157,795
RECEIVABLES AND OTHER ASSETS
NET OF LIABILITIES - 1.07%................................. 1,742,151
------------
NET ASSETS APPLICABLE TO 17,888,130 U.S. GOVERNMENT
FUND A CLASS SHARES,1,377,863 U.S. GOVERNMENT FUND
B CLASS SHARES,168,575 U.S. GOVERNMENT FUND C CLASS
SHARES, 1,552,795 U.S. GOVERNMENT FUND INSTITUTIONAL
CLASS SHARES ($0.01 PAR VALUE) OUTSTANDING;
EQUIVALENT TO $7.76 PER SHARE - 100.00%.................... $162,899,946
============
COMPONENTS OF NET ASSETS AT JULY 31, 1997:
Common stock, $0.01 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, 20,000,000 shares allocated to
U.S. Government Fund Institutional Class ................... $196,762,180
Undistributed net investment income. ....................... 6,108
Accumulated net realized loss on investments ................ (36,599,517)
Net unrealized appreciation on investments and future
contracts .................................................. 2,731,175
------------
Total net assets............................................. $162,899,946
============
NET ASSET VALUE AND OFFERING PRICE FOR
U.S. GOVERNMENT FUND A CLASS
Net asset value per share (A)................................ $7.76
Sales charge (4.75% of offering price or 5.03% of
amount invested per share) (B).............................. 0.39
-----
Offering price............................................... $8.15
=====
- ------------------
(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.
- ------------------
GPM - Graduate Payment Mortgage
+ Principal amount of $2,000,000 pledged as initial margin for futures
transactions.
See accompanying notes
10
1997 annual report
<PAGE>
DELAWARE GROUP
GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest ................................... $ 14,303,129
EXPENSES:
Management fees ............................ $ 1,023,062
Distribution expense ....................... 561,648
Dividend disbursing and transfer agent fees
and expenses .............................. 331,681
Accounting fees and salaries ............... 67,219
Registration fees .......................... 29,707
Reports and statements to shareholders ..... 21,776
Professional fees .......................... 14,192
Directors' fees ............................ 10,735
Custodian fees ............................. 2,450
Other ...................................... 1,406 2,063,876
------------ ------------
NET INVESTMENT INCOME ...................... 12,239,253
------------
NET REALIZED GAIN (LOSS) AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized loss from security transactions (2,346,401)
Net realized loss on futures contracts ..... (106,033)
Net change in unrealized appreciation of
investments during the year ............... 6,199,411
------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS ............................ 3,746,977
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ........................... $ 15,986,230
============
See accompanying notes
<PAGE>
DELAWARE GROUP
GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Year Ended Year Ended
07/31/97 07/31/96
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ...................... $ 12,239,253 $ 15,297,241
Net realized loss from investment
transactions .............................. (2,452,434) (2,709,562)
Net change in unrealized appreciation of
investments during the year ............... 6,199,411 (4,029,957)
------------- -------------
Net increase in net assets resulting
from operations ........................... 15,986,230 8,557,722
------------- -------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income:
U.S. Government Fund A Class .............. (10,751,487) (13,913,461)
U.S. Government Fund B Class .............. (662,604) (620,228)
U.S. Government Fund C Class .............. (73,758) (29,681)
U.S. Government Fund Institutional Class .. (745,296) (733,871)
------------- -------------
(12,233,145) (15,297,241)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
U.S. Government Fund A Class .............. 9,934,814 14,252,035
U.S. Government Fund B Class .............. 4,378,511 5,218,315
U.S. Government Fund C Class .............. 435,947 1,047,617
U.S. Government Fund Institutional Class .. 6,421,853 7,278,585
Net asset value of shares issued upon
reinvestment of dividends from net
investment income
U.S. Government Fund A Class .............. 5,998,073 7,997,866
U.S. Government Fund B Class .............. 262,401 255,760
U.S. Government Fund C Class .............. 64,504 27,921
U.S. Government Fund Institutional Class .. 696,201 733,844
------------- -------------
28,192,304 36,811,943
------------- -------------
Cost of shares repurchased:
U.S. Government Fund A Class .............. (44,465,144) (58,191,387)
U.S. Government Fund B Class .............. (3,928,919) (2,766,470)
U.S. Government Fund C Class .............. (248,046) (6,547)
U.S. Government Fund Institutional Class .. (6,122,404) (5,181,523)
------------- -------------
(54,764,513) (66,145,927)
------------- -------------
Decrease in net assets derived from capital
share transactions ........................ (26,572,209) (29,333,984)
------------- -------------
NET DECREASE IN NET ASSETS ................. (22,819,124) (36,073,503)
NET ASSETS:
Beginning of year .......................... 185,719,070 221,792,573
------------- -------------
End of year ................................ $ 162,899,946 $ 185,719,070
============= =============
See accompanying notes
11
1997 annual report
<PAGE>
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
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
7/31/97 7/31/96 7/31/95 7/31/94 7/31/93
Net asset value, beginning of period.............. $7.5900 $7.8600 $8.0000 $9.0100 $9.0200
Income from investment operations:
Net investment income............................ 0.5438 0.5880 0.6560 0.7140 0.7630
Net realized and unrealized gain (loss)
from investment transactions ................... 0.1700 (0.2700) (0.1400) (1.0100) (0.0100)
------ ------- ------- ------- -------
Total from investment operations................. 0.7138 0.3180 0.5160 (0.2960) 0.7530
------ ------- ------- ------- -------
Less distributions:
Dividends from net investment income............. (0.5438) (0.5880) (0.6560) (0.7140) (0.7630)
------ ------- ------- ------- -------
Total distributions.............................. (0.5438) (0.5880) (0.6560) (0.7140) (0.7630)
------ ------- ------- ------- -------
Net asset value, end of period.................... $7.7600 $7.5900 $7.8600 $8.0000 $9.0100
======= ======= ======= ======= =======
Total return(1)................................... 9.77% 4.09% 6.82% (3.51%) 8.70%
Ratios and supplemental data:
Net assets, end of period (000 omitted).......... $138,844 $164,156 $206,083 $222,555 $223,416
Ratio of expenses to average net assets.......... 1.16% 1.20% 1.24% 1.23% 1.26%
Ratio of net investment income
to average net assets........................... 7.13% 7.55% 8.40% 8.31% 8.45%
Portfolio Turnover............................... 63% 81% 70% 309% 285%
U.S. Government Fund U.S. Government Fund
B Class C Class
--------------------------------- ----------------------------------
Period Period
Year 5/2/94(2) Year 11/28/95(2)
Ended to Ended to
7/31/97 7/31/96 7/31/95 7/31/94 7/31/97 7/31/96
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $7.5900 $7.8600 $8.0000 $8.1900 $7.5900 $7.9500
Income from investment operations:
Net investment income............................ 0.4904 0.5330 0.6010 0.1510 0.4905 0.3480
Net realized and unrealized gain (loss)
from investment transactions ................... 0.1700 (0.2700) (0.1400) (0.1900) 0.1700 (0.3600)
------ ------- ------- ------- ------ -------
Total from investment operations................. 0.6604 0.2630 0.4610 (0.0390) 0.6605 (0.0120)
------ ------- ------- ------- ------ -------
Less distributions:
Dividends from net investment income............. (0.4904) (0.5330) (0.6010) (0.1510) (0.4905) (0.3480)
------ ------- ------- ------- ------ -------
Total distributions.............................. (0.4904) (0.5330) (0.6010) (0.1510) (0.4905) (0.3480)
------ ------- ------- ------- ------ -------
Net asset value, end of period.................... $7.7600 $7.5900 $7.8600 $8.0000 $7.7600 $7.5900
======= ======= ======= ======= ======= =======
Total return(3) .................................. 9.01% 3.36% 6.08% (0.46%) 9.01% (0.17%)
Ratios and supplemental data:
Net assets, end of period (000 omitted)......... $10,695 $9,754 $7,394 $2,215 $1,308 $1,029
Ratio of expenses to average net assets......... 1.86% 1.90% 1.94% 1.94% 1.86% 1.90%
Ratio of net investment income to average net
assets ....................................... 6.43% 6.85% 7.66% 7.60% 6.43% 6.85%
Portfolio turnover.............................. 63% 81% 70% 309% 63% 81%
</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 the purchase.
2 Date of initial public offering; ratios have been annualized but total
return has not been annualized.
3 Does not include contingent deferred sales charge which varies from 1%-4%
for the U.S. Government Fund B Class and 1% for the U.S. Government Fund C
Class depending upon the holding period.
1997 annual report
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
Selected data for each share of the Fund outstanding throughout each
period were as follows:
<TABLE>
<CAPTION>
U.S. Government Fund Institutional Class
----------------------------------------------------------
Year Ended
7/31/97 7/31/96 7/31/95 7/31/94 7/31/93
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............. $7.5900 $7.8600 $8.0000 $9.0100 $9.0200
Income from investment operations:
Net investment income........................... 0.5667 0.6110 0.6790 0.7390 0.7910
Net realized and unrealized gain (loss) from
investment transactions ....................... 0.1700 (0.2700) (0.1400) (1.0100) (0.0100)
------ ------- ------- ------- -------
Total from investment operations................ 0.7367 0.3410 0.5390 (0.2710) 0.7810
------ ------- ------- ------- -------
Less distributions:
Dividends from net investment income............ (0.5667) (0.6110) (0.6790) (0.7390) (0.7910)
------ ------- ------- ------- -------
Total distributions............................. (0.5667) (0.6110) (0.6790) (0.7390) (0.7910)
------ ------- ------- ------- -------
Net asset value, end of period................... $7.7600 $7.5900 $7.8600 $8.0000 $9.0100
======= ======= ======= ======= =======
Total return..................................... 10.10% 4.39% 7.14% (3.23%) 9.04%
Ratios and supplemental data:
Net assets, end of period (000 omitted)......... $12,053 $10,780 $8,316 $14,016 $16,475
Ratio of expenses to average net assets......... 0.86% 0.90% 0.94% 0.94% 0.97%
Ratio of net investment income to
average net assets............................. 7.43% 7.85% 8.66% 8.60% 8.74%
Portfolio turnover.............................. 63% 81% 70% 309% 285%
</TABLE>
See accompanying notes
13
1997 annual report
<PAGE>
DELAWARE GROUP
GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997
- --------------------------------------------------------------------------------
Delaware Group Government Fund, Inc. the "Company" is registered as a
diversified open-end investment company under the Investment Company Act of
1940, as amended. The Company is organized as a Maryland corporation and
currently offers the Government Income Series (the "Fund"). The Fund offers
four classes of shares. The U.S. Government Fund A Class carries a
front-end sales charge of 4.75%. The U.S. Government Fund B Class carries a
back-end deferred sales charge, U.S. Government Fund C Class carries a
level load deferred sales charge and U.S. Government Fund Institutional
Class has no sales charge. 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.
Security Valuation - Securities listed on an exchange are valued at the
lasted quoted sales price as of the close of the NYSE on the valuation
date. Securities not traded or securities 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 such prices are
believed to reflect the fair value of such securities. Money market
instruments having less than 60 days to maturity are valued at amortized
cost which approximates market value. Other securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
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 has been
made in the financial statements. Income and capital gain distributions are
determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles.
Class Accounting - Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes
of the Fund on the basis of daily net assets of each class. Distribution
expenses relating to a specific class are charged directly to that class.
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 at 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.
Other - Expenses common to all Funds within the Delaware Group of Funds
are allocated amongst the funds on the basis of average net assets.
<PAGE>
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. Dividend income is recorded on the ex-dividend date and interest
income is recorded on the 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 through "soft dollar" arrangements with
brokers. The amount of these expenses is less than 0.01% of the Fund's
average daily net assets.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. Investment Management 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 the rate of 0.60% on
the average daily net assets of the Fund less the fees paid to the
unaffiliated directors. At July 31, 1997, the Fund had a liability for
Investment Management fees and other expenses payable to DMC for $8,875.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate
of DMC, to serve as dividend disbursing and transfer agent for the Fund.
Effective August 19, 1996, the Fund also engaged DSC to provide accounting
services for the Fund. Previously, fund personnel provided this service and
the related costs were recorded in salaries and other expense categories in
the statement of operations. For the year ended July 31, 1997, the Fund
expensed $331,681 for dividend disbursing and transfer agent services and
$47,456 for accounting services. At July 31, 1997, the Fund had a liability
for such fees and other expenses payable to DSC of $9,021.
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 and C Class. No
distribution expenses are paid by the Institutional Class. For the year
ended July 31, 1997, the Fund expensed $561,648 for distribution expenses.
For the year ended July 31, 1997, DDLP earned $24,543 for commissions on
sales of the U.S. Government Fund A Class shares.
Certain officers of DMC, DSC and DDLP are officers, directors and/or
employees of the Fund. These officers, directors and employees are paid no
compensation by the Fund.
1997 annual report
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. Investments
During the year ended July 31, 1997, the Fund made purchases of
$51,839,599 and sales of $56,430,695 of investment securities other than
U.S. government securities and temporary cash investments. During the year ended
July 31, 1997, the Fund made purchases of $42,330,898 and sales of $37,131,126
of long term U.S. government securities.
At July 31, 1997, the aggregate cost of securities for federal income tax
purposes was $158,533,411.
At July 31, 1997, unrealized appreciation for federal income tax purposes
aggregated $2,624,384 of which $3,943,237 related to unrealized
appreciation of securities and $1,318,853 related to unrealized
depreciation of securities.
For federal income tax purposes, the Fund had accumulated capital losses
of $36,593,714 at July 31, 1997 which may be carried forward and applied
against future capital gains. The capital loss carryforward expire as
follows: 1998 - $1,746,916, 2001 - $1,622,896, 2002 - $17,400,711, 2003 -
$9,205,797, 2004 - $4,166,601 and 2005 - $2,450,793.
At July 31, 1997, the Fund reclassified $2,596,096 from accumulated net
undistributed realized loss from security transactions to common stock due
to the expiration of capital loss carry forward.
During the year ended July 31, 1997, the Fund entered into futures
contracts in accordance with its investment objectives. Upon entering into
a futures contract, the Fund deposits cash or pledges U.S. government
securities to a broker, equal to the minimum "initial margin" requirements
of the exchange on which the contract is traded. Subsequent payments are
received from or paid to the broker each day, based on the daily
fluctuation in the market value of the contract. These receipts or payments
are known as "variation margin" and are recorded daily by the Fund as
unrealized gains or losses until the contracts are closed. When the
contracts are closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed.
At July 31, 1997, the Fund had outstanding 95 long futures contracts on
the 20 Year U.S. Treasury Notes, which expire in September 1997. The value
of such contracts on July 31, 1997 was $10,545,000 which resulted in an
unrealized gain of $105,156.
Risks may arise upon entering into futures contracts from potential
imperfect correlations between the futures contracts and the underlying
securities and from the possibility of an illiquid secondary market for
these instruments.
<PAGE>
4. Capital Stock
Year Ended Year Ended
07/31/97 07/31/96
Shares sold:
U.S. Government Fund A Class ................... 1,302,403 1,819,368
U.S. Government Fund B Class ................... 573,254 663,515
U.S. Government Fund C Class ................... 57,039 132,896
U.S. Government Fund Institutional Class ....... 840,271 939,492
Shares issued upon reinvestment of
dividends from net investment income
U.S. Government Fund A Class ................... 786,354 1,021,509
U.S. Government Fund B Class ................... 34,398 32,710
U.S. Government Fund C Class ................... 8,457 3,619
U.S. Government Fund Institutional Class ....... 91,360 94,026
--------- ---------
3,693,536 4,707,135
Shares repurchased:
U.S. Government Fund A Class ................... (5,834,137) (7,423,018)
U.S. Government Fund B Class ................... (515,167) (351,415)
U.S. Government Fund C Class ................... (32,585) (851)
U.S. Government Fund Institutional Class ....... (799,492) (670,765)
--------- ---------
(7,181,381) (8,446,049)
--------- ---------
Net decrease..................................... (3,487,845) (3,738,914)
--------- ---------
5. 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 CMO's 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, 1997, the Fund had no holdings
in interest-only CMO's.
1997 annual report
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, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated therein. 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 and financial highlights. Our procedures
included confirmation of securities owned as of July 31, 1997, by correspond
ence with the Fund's 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, 1997, 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 periods
indicated therein, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
September 5, 1997
16
1997 annual report
<PAGE>
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.
FOR SHAREHOLDERS
1.800.523.1918
FOR SECURITIES DEALERS
1.800.362.7500
FOR FINANCIAL INSTITUTIONS REPRESENTATIVES ONLY
1.800.659.2265
DELAWARE
GROUP
========
Philadelphia o London
Be sure to consult your financial adviser when making investments. 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, and involve investment risk, including the possible loss of the
principal amount invested. Shares of the Fund are not bank or credit union
deposits.
Printed in the USA on
recycled paper
(194)
AR-023[7/31/97]TKO9/97
Copy Rights Delaware Distributors, L.P.
