U.S. Government Fund
service and guidance
[GRAPHIC OMITTED: PHOTO OF TWO MEN AND A WOMAN IN DISCUSSION]
[GRAPHIC OMITTED: PHOTO OF A COMPUTER KEYBOARD]
[GRAPHIC OMITTED: PHOTO OF A MAN IN SUIT WITH ARMS CROSSED]
professional management
[GRAPHIC OMITTED: PHOTO OF GLASSES, KEYBOARD AND BALANCE SHEET]
goals
[GRAPHIC OMITTED: PHOTO OF MAN, WOMAN CHILD LOOKING AT OCEAN ON BEACH]
1998
Annual
Report
[GRAPHIC OMITTED: LOGO OF DELAWARE INVESTMENTS
----------------------------
Philadelphia * London]
A TRADITION OF SOUND INVESTING
commitment
A Commitment To Our Investors
[GRAPHICS OMITTED: PHOTO OF COMPUTER KEYBOARD AND A ILLUSTRATION OF A
LANDSCAPE]
Delaware Investments has a tradition of money management that 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, the Delaware organization established its first mutual
fund in 1938. Delaware International Advisers Ltd., our international
affiliate, was established in 1990 and is headquartered in London.
Delaware Investments offers a full range of mutual funds. We also
manage investments for variable annuity products, closed-end funds, and
offer retirement plan services for individuals and businesses.
Delaware manages more than $42 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, which manages more than
$130 billion in assets.
U.S. Government
Fund Objective
To seek 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.
Table of Contents
Letter to Shareholders Page 1
Portfolio Highlights and Asset Mix Page 2
Portfolio Manager's Review Page 3
Performance Page 6
Statement of Net Assets Page 7
Financial Highlights Page 10
current income
August 10, 1998
Dear Shareholder:
A ROBUST U.S. ECONOMY FUELED A BOND market rally throughout much of the
1998 fiscal year. Bond prices surged while yields fell to historic lows
- - presenting a challenge for income-oriented investors.
U.S. Government Fund provided a total return of +6.50% (for Class A
shares with dividends reinvested at net asset value) for the 12 months
ended July 31, 1998. We adhered to our investment discipline of
maximizing income while striving to minimize risk to principal.
Throughout the year, the Fund distributed an attractive stream of
current income. During fiscal 1998, bonds in the Fund's portfolio did
not rise in value as much as the Fund's unmanaged benchmark - the Lehman
Brothers Government Bond Index - because the index was more heavily
weighted in U.S. Treasuries than the Fund. This past spring Treasury
yields fell to all-time lows amid strong demand from investors around
the world.
WE ADHERED TO OUR INVESTMENT DISCIPLINE OF MAXIMIZING INCOME WHILE
STRIVING TO MINIMIZE RISK TO PRINCIPAL.
Government-backed mortgage securities, the primary component of
your Fund's portfolio as shown on page 2, offer more income potential
than Treasuries and have historically provided better results in a
stable interest rate environment. However, since last summer mortgage
bonds have underperformed other fixed-income securities.
A combination of low interest rates, record low unemployment and
rising wages prompted many homeowners to refinance their mortgages.
Flush with cash, some homeowners bought more expensive houses.
CUMULATIVE TOTAL RETURN
12 Months Ended
July 31, 1998
U.S. Government Fund A Class +6.50%
Lehman Brothers Government Bond Index +8.35%
Lipper General U.S. Government Fund Average (185 funds) +7.32%
U.S. Consumer Price Index (Inflation) +1.70%
All performance shown above is at net asset value without effect of
sales charges and assumes reinvestment of distributions. Interest and
principal repayment at maturity for U.S. Treasury securities is
guaranteed by the U.S. government, unlike mutual fund dividends and
share values. Complete Fund performance for all classes can be found on
page 6. Past performance does not guarantee future results. A direct
investment in the unmanaged Lehman Brothers Government Bond Index is not
possible.
Others took advantage of low interest rates to reduce monthly payments. A
booming resale market for existing homes also increased mortgage
prepayments throughout the year.
Our position in Treasury bonds bolstered your Fund's share price during
fiscal 1998. Treasuries rose in value because of:
(bullet) Federal budget discipline which generated a budget surplus for
the first time since 1969;
(bullet) Increased demand for U.S. government securities from foreign
investors reallocating capital from slumping stock and bond markets in
Asia;
(bullet) A strong U.S. dollar that allowed many foreign investors to
convert a Treasury bond's income payments to local currencies at
attractive exchange rates.
On the pages that follow, Paul Grillo, your Fund's portfolio
manager, explains U.S. Government Fund's positioning during the period
and provides a bond market outlook for the coming months. He also
provides additional insight as to how your Fund addressed mortgage
prepayment risk during the 1998 fiscal year.
Sincerely,
/s/ Wayne A. Stork
WAYNE A. STORK
Chairman
/s/Jeffrey J. Nick
JEFFREY J. NICK
President and Chief Executive Officer
PORTFOLIO HIGHLIGHTS AND ASSET MIX
July 31, 1998
[GRAPHIC PIE CHART OMITTED: PORTFOLIO HIGHLIGHTS AND ASSET MIX]
Asset-Backed
Securities 6.7%
Corporate
Bonds 7.6%
Collaterized
Mortgage
Obligations
(CMOs) 14.9%
U.S. Government
Agencies 6.0%
Municipal
Bonds 0.9%
Mortgage-Backed
Securities 33.0%
Treasuries 30.9%
July 31, 1998 July 31, 1997
Average Effective Duration 4.8 years 4.4 years
Average Effective Maturity 8.3 years 7.1 years
Average Quality AAA AAA
Current 30-Day SEC Yield* 5.33% 5.93%
Number of Bonds 269 279
*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, 1998 was 4.89%. Institutional Class yield was
5.90%.
Portfolio Manager's Review
ADDING INCOME POTENTIAL,
ALLEVIATING PREPAYMENT RISKS
A favorable inflation environment during fiscal 1998 led to a bond
market rally and reduced yields. By diversifying across several high
quality bond sectors, U.S. Government Fund sought to maximize income and
minimize risk to principal.
About one-third of your Fund's net assets were allocated to
government-backed mortgage bonds as of July 31, 1998. These bonds
enabled the Fund to generate a higher level of income than if we focused
on other types of bonds. We invest only in mortgage securities rated
AAA, the highest quality available.
Mortgage bonds returned less than other high quality bonds in
fiscal 1998 due to a dramatic increase in mortgage prepayments. Record
low interest rates and three market factors increased refinancing
activity.
(bullet) Greater efficiency - Homeowners became more savvy about an
increased array of cost-saving refinancing options;
(bullet) Increased home equity loan volume - More homeowners decided to
consolidate their total debt burden into one monthly payment secured by
a new mortgage with a lower interest rate;
(bullet) Heightened competition among mortgage lenders - Mortgage
prepayment activity was strong throughout the fiscal year, and became
more acute this past winter and spring. We sought to lessen prepayment
risks by investing in:
(bullet) Seasoned mortgage bonds - Bonds issued prior to 1992. Such
bonds successfully weathered the last wave of mortgage refinancing in
1993.
(bullet) Preselected mortgage pools - We invested in pools of mortgages
with low loan balances. Our investment experience indicates that
homeowners with balances below $80,000 are less inclined to refinance.
(bullet) Discount mortgages - Bonds issued when interest rates were
lower. Discount mortgages have interest rates lower than current rates -
so there is little incentive for homeowners to refinance, unless they
have credit card or auto debt with higher interest rates.
By maintaining a position in Collateralized Mortgage Obligations
(CMOs), we were further able to reduce prepayment risks this past year.
The cash flow stream on many CMOs are structured to be more predictable
than pass-through mortgage securities.
U.S. TREASURIES: CERTAINTY
IN AN UNCERTAIN WORLD
Treasury bond prices benefited from favorable supply and demand dynamics
during fiscal 1998. The federal government had to issue fewer bonds
because it achieved a budget surplus. Demand for Treasuries, meanwhile,
rose as global investors sought to reallocate capital from volatile
Pacific Rim equity markets.
To benefit from the bond market's total return potential, we
increased your Fund's allocation to U.S. Treasury bonds by eight
percentage points during fiscal 1998 to nearly one-third of net assets.
In fiscal 1998, there was little advantage in extending the average
maturity of your Fund as yields between 10 and 30 year Treasuries
narrowed. We focused on intermediate-term bonds, which provided almost
as much income as longer term bonds and had less price volatility. On
July 31, 30-year U.S. Treasury bonds yielded 5.71%, just 22 basis points
(0.22%) higher than 10-year U.S. Treasury notes.
CORPORATE AND ASSET-BACKED
BONDS: AN ELEMENT OF
DIVERSIFICATION
In order to enhance your Fund's income potential, we slightly increased
our position in 5- to 10-year investment grade corporate bonds during
fiscal 1998. Corporate bonds offer higher income potential than other
bonds of comparable credit quality.
When investing in corporate bonds, your Fund seeks only those bonds
rated A or better by Standard & Poor's and Moody's Investors Services,
two of the best known independent bond rating agencies.
The strong U.S. economy also provided a favorable environment for
certain types of asset-backed securities in fiscal 1998. Asset-backed
bonds represent pooled debt - originated by providers of credit such as
banks, who then pass income to investors.
All of the asset-backed bonds that we own are rated AAA by
independent rating agencies. This means the bonds have ample credit
characteristics to weather a slowing economic environment. We preferred
asset-backed securities such as credit card receivables, automobile
loans and seasoned home equity loans.
Since last summer, we have modestly increased your Fund's average
effective duration to 4.8 years as of July 31, 1998. Duration measures a
bond's sensitivity to interest rates by indicating the approximate
percentage of change in a bond's price given a 1% change in interest
rates.
[GRAPHIC OMITTED: VERTICAL BAR CHART OF U.S. GOVERNMENT FUND A CLASS]
U.S. GOVERNMENT FUND A CLASS
INCOME FROM A $100,000 INVESTMENT 1988-1998
TOTAL INCOME = $115,583
July
1989 8,946
July
1990 9,493
July
1991 10,412
July
1992 11,596
July
1993 12,518
July
1994 12,731
July
1995 12,727
July
1996 12,357
July
1997 12,295
July
1998 12,507
Chart assumes $100,000 investment on August 1, 1988, includes the effect
of a 3.75% front-end sales charge and reinvestment of distributions.
Performance of other Fund classes will vary due to other charges and
expenses. Past performance does not guarantee future results. Sales
charges are reduced on purchases of $100,000 or more.
Duration measures a bond's sensitivity to interest rates by indicating
the approximate percentage of change in a bond's price given a 1% change
in interest rates.
OUTLOOK
Prolonged economic expansion and tight labor markets have historically
led to an acceleration of inflation. However, we believe consumer and
producer prices, and consequently interest rates, are likely to be
subdued for the remainder of calendar 1998.
U.S. economic growth, as measured by Gross Domestic Product (GDP),
appears to be slowing as the effects of the Pacific Rim's financial
turmoil spread. In our view, this is likely to prompt the Federal
Reserve Board to maintain a stable monetary policy. Indeed, Fed Chairman
Alan Greenspan told Congress this past June that inflation appears tame.
Low inflation benefits bond investors because it means the purchasing
power of interest payments are not being significantly eroded over time.
We suspect that mortgage securities may hold their value over the
coming months because we believe mortgage refinancing may have peaked.
In the meantime, we plan to continue our strategy of investing in
seasoned mortgage bonds, preselected mortgage pools and discount
mortgages to lessen prepayment risks.
LOW INFLATION BENEFITS BOND INVESTORS BECAUSE IT MEANS THE PURCHASING
POWER OF A BOND'S INCOME PAYMENTS ARE NOT BEING SIGNIFICANTLY ERODED
OVER TIME.
By primarily focusing on U.S. government-backed mortgage
securities, we believe your Fund's investment portfolio is well-
positioned to provide attractive income and total return over the coming
months.
Paul Grillo
Vice President and Senior Portfolio Manager
August 10, 1998
GLOSSARY
[GRAPHIC OMITTED: PHOTO OF A COMPUTER 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.
[GRAPHIC OMITTED: WORM CHART OF A LONG-TERM CHOICE FOR INFLATION
PROTECTION GROWTH OF A $10,000 INVESTMENT]
U.S. GOVERNMENT FUND:
A LONG-TERM CHOICE FOR INFLATION PROTECTION
GROWTH OF A $10,000 INVESTMENT
AUGUST 1, 1988 TO JULY 31, 1998
Lehman Brothers U.S.
Month and U.S. Government Government Bond Consumer Price
Year Fund A Class Index Index (Inflation)
July
1988 9,526 10,000 10,000
July
1989 10,541 12,379 10,498
July
1990 11,294 12,774 11,004
July
1991 12,479 14,008 11,494
July
1992 14,099 16,705 11,857
July
1993 15,325 19,711 12,186
July
1994 14,788 19,117 12,523
July
1995 15,797 21,715 12,869
July
1996 16,442 22,815 13,245
July
1997 18,049 26,269 13,544
July
1998 $19,194 $29,734 $13,792
Chart assumes $10,000 investment on August 1, 1988, and includes the
effect of a 4.75% front-end sales charge and the reinvestment of all
distributions. Performance for other classes will differ due to
different charges and expenses. Past performance does not guarantee
future results.
U.S. GOVERNMENT FUND PERFORMANCE
AVERAGE ANNUAL RETURNS THROUGH JULY 31, 1998
Lifetime Ten Years Five Years One Year
Class A (Est. 8/16/85)
Excluding Sales Charge +7.37% +7.27% +4.63% +6.50%
Including Sales Charge +6.96% +6.75% +3.62% +1.40%
Class B (Est. 5/2/94)
Excluding Sales Charge +5.55% +5.76%
Including Sales Charge +5.18% +1.78%
Class C (Est. 11/28/95)
Excluding Sales Charge +5.40% +5.76%
Including Sales Charge +5.40% +4.77%
All performance includes reinvestment of distributions and applicable
sales charge as described below. Return and share value will fluctuate
so that shares when redeemed may be worth more or less than the original
cost. Past performance is not a guarantee of future results. Performance
for Class B and C shares excluding sales charge assumes either
contingent sales charges did not apply or the investment was not
redeemed.
Class A shares have a 4.75% maximum sales charge and a 12b-1 fee.
Class B shares do not carry a front-end sales charge, but are subject to
a 1% annual distribution and service fee. They are also 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 shares
are redeemed within 12 months, a 1% contingent deferred sales charge
applies.
As of July 31, 1998, the average annual total returns for the lifetime,
10-year, five-year and one-year periods 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 +7.59%, +7.57%, +4.94%, +6.80%.
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES*
STATEMENT OF NET ASSETS
JULY 31, 1998
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
- ------------------------------------------------------------------------------------
AGENCY MORTGAGE-BACKED SECURITIES - 19.54%
FHA Project Loan 8.75% 10/1/27 $ 693,082 $ 731,631
Federal Home Loan Mortgage Corporation 6.00%
11/1/26 814,625 800,369
Federal Home Loan Mortgage Corporation 8.065%
1/27/05 3,500,000 3,923,255
Federal Home Loan Mortgage Corporation 9.00%
12/1/05 1,484,455 1,541,042
Federal Home Loan Mortgage Corporation 10.00%
1/1/19 425,907 471,956
Federal Home Loan Mortgage Corporation 10.25%
4/1/08 55,824 60,970
Federal Home Loan Mortgage Corporation 11.50%
7/1/99 to 3/1/16 1,862,070 2,098,538
Federal Home Loan Mortgage Corporation - Gold
7.50% 3/1/28 242,941 249,544
Federal Home Loan Mortgage Corporation - Gold
12.00% 12/1/10 97,215 111,189
Federal National Mortgage Association 7.00%
3/1/28 to 7/1/28 4,186,637 4,249,745
Federal National Mortgage Association 7.50%
2/1/27 to 3/1/28 10,106,578 10,387,441
Federal National Mortgage Association 10.00%
7/1/20 to 5/1/22 1,665,556 1,825,771
Federal National Mortgage Association 10.75%
9/1/11 99,054 109,268
Federal National Mortgage Association 11.25%
6/1/00 to 1/1/01 97,711 104,733
Federal National Mortgage Association 12.00%
5/1/09 2,250,205 2,539,806
Federal National Mortgage Association 14.25%
9/1/99 13,824 15,435
Federal National Mortgage Association - Global Bond
7.40% 7/1/04 2,000,000 2,158,060
------------
Total Agency Mortgage-Backed Securities
(cost $31,205,085) 31,378,753
------------
ASSET-BACKED SECURITIES - 6.67%
ADVANTA Home Equity Loan Trust 1992-4 1A 7.20%
11/25/08 1,414,148 1,436,417
AFC Home Equity Loan Trust 1992-3A 7.05%
8/15/07 1,196,719 1,206,552
AFC Home Equity Loan Trust 1992-1A 7.50%
3/15/07 730,574 730,374
CIT RV Trust 1998-A A5 6.12% 7/15/14 3,000,000 3,010,781
Standard Credit Card Master Trust Series 1994-4 A
8.25% 11/7/03 4,050,000 4,330,662
------------
Total Asset-Backed Securities (cost $10,716,224) 10,714,786
------------
- ------------
*This Fund is known and does business as U.S. Government Fund.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMO) - 14.92%
Collateralized Mortgage Securities Corporation F-1
11.45% 11/1/15 248,583 271,470
Federal Home Loan Mortgage Corporation 1541-G
6.75% 11/15/21 5,874,003 5,966,812
Federal Home Loan Mortgage Corporation 1608 GA
9.00% 6/15/21 5,000,000 5,349,431
Federal Home Loan Mortgage Corporation 26-F
9.50% 2/15/20 839,583 905,174
Federal National Mortgage Association Alpha H-2
11.50% 5/1/09 1,745,643 1,951,803
Federal National Mortgage Association J-1 7.00%
11/1/10 87,522 88,328
Federal National Mortgage Association 88-15A 9.00%
6/25/18 31,014 33,407
Federal National Mortgage Association 35-2 12.00%
7/25/18 1,714,523 1,927,758
Federal National Mortgage Association D-2 11.00%
4/1/09 1,922,735 2,127,507
Federal National Mortgage Association F-2 11.50%
5/25/09 890,219 995,354
Investor GNMA Mortgage-Backed Securities
Trust Series 84-F5 10.875% 10/25/13 1,588,499 1,795,862
Travelers Mortgage Securities 1-Z2 12.00% 3/1/14 2,281,160 2,546,345
------------
Total Collateralized Mortgage Obligations
(cost $23,872,733) 23,959,251
------------
CORPORATE BONDS - 7.59%
American General Institute 7.57% 12/1/46 2,000,000 2,112,500
Credit Foncier de France 8.00% 1/14/02 2,300,000 2,432,250
Nations Bank 10.20% 7/15/15 4,000,000 5,390,000
RBSG Capital 10.13% 3/1/04 1,908,000 2,246,670
------------
Total Corporate Bonds (cost $11,034,818) 12,181,420
------------
GOVERNMENT AGENCY OBLIGATION - 6.55%
Cajun Electric Power 9.52% 3/15/19 10,000,000 10,512,500
------------
Total Government Agency Obligations
(cost $11,855,100) 10,512,500
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATIONS - 13.43%
GNMA 6.50% 12/15/23 517,832 519,608
GNMA 9.00% 11/15/21 1,426,709 1,538,606
GNMA 9.50% 9/15/17 to 3/15/23 2,196,128 2,386,143
GNMA 10.00% 1/15/18 to 9/15/18 888,171 985,586
GNMA 11.00% 12/15/09 to 8/15/13 2,066,074 2,347,382
GNMA 11.50% 7/15/15 90,228 103,394
GNMA 12.00% 5/15/11 to 12/15/15 4,340,167 5,043,722
GNMA 12.25% 3/15/14 113,805 132,156
GNMA 12.50% 5/15/10 to 1/15/16 674,229 789,691
GNMA GPM 10.25% 3/15/19 112,187 122,213
GNMA GPM 11.50% 3/15/13 391,186 448,761
GNMA GPM 11.75% 8/15/13 438,181 504,591
GNMA II 9.00% 10/20/01 to 10/20/05 741,347 777,370
GNMA II 10.00% 11/20/15 to 6/20/21 2,094,232 2,310,079
GNMA II 10.50% 5/20/15 to 7/20/21 1,075,036 1,199,665
GNMA II 11.00% 5/20/15 to 7/20/19 190,447 216,508
GNMA II 11.50% 10/20/14 to 10/20/15 144,084 164,817
GNMA II 12.00% 1/20/14 to 5/20/15 243,481 282,872
GNMA II 12.50% 10/20/13 to 7/20/15 965,658 1,129,961
GNMA II GPM 10.25% 3/20/18 to 5/20/19 48,660 53,010
GNMA II GPM 10.75% 1/20/16 to 2/20/18 440,569 485,176
GNMA II GPM 12.00% 11/20/13 20,443 23,694
------------
Total Government National Mortgage
Association Obligations (cost $20,937,012) 21,565,005
------------
MUNICIPAL BONDS - 0.93%
Cook County, Illinois, Chicago Heights School
District, Taxable-Series B 13.15% 12/1/05 1,055,000 1,488,763
------------
Total Municipal Bonds (cost $1,429,372) 1,488,763
------------
U.S. TREASURY OBLIGATIONS - 30.86%
U.S. Treasury Bond 6.125% 11/15/27 10,445,000 11,041,617
+U.S. Treasury Bond 10.375% 11/15/12 20,445,000 27,222,924
U.S. Treasury Bond 10.75% 8/15/05 2,180,000 2,823,754
U.S. Treasury Note 5.625% 5/15/08 4,160,000 4,198,521
U.S. Treasury Strip 0.00% 2/15/17 6,730,000 2,294,929
U.S. Treasury Strip 0.00% 5/15/18 6,000,000 1,958,879
------------
Total U.S. Treasury Obligations (cost $48,353,660) 49,540,624
------------
REPURCHASE AGREEMENTS - 1.51%
With J.P. Morgan Securities 5.60% 8/03/98
(dated 7/31/98, collateralized by $1,228,000
U.S. Treasury Notes 6.00% due 6/30/99,
market value $1,239,444) 1,214,000 1,214,000
With PaineWebber 5.60% 8/03/98
(dated 7/31/98, collateralized by $1,207,000
U.S. Treasury Notes 6.125% due 12/31/01,
market value $1,234,675) 1,210,000 1,210,000
------------
Total Repurchase Agreement (cost $2,424,000) 2,424,000
------------
- ------------
GPM - Graduate Payment Mortgage
+Principal amount of $2,000,000 pledged as initial margin for futures transactions
TOTAL MARKET VALUE OF SECURITIES OWNED
(cost $161,828,004) - 102.00% $163,765,102
LIABILITIES NET OF RECEIVABLES
AND OTHER ASSETS - (2.00%) (3,209,182)
------------
TOTAL NET ASSETS APPLICABLE TO 20,795,768
SHARES ($0.01 PAR VALUE)
OUTSTANDING - 100.00% $160,555,920
============
NET ASSET VALUE - U.S. GOVERNMENT FUND A CLASS
($127,001,499 / 16,449,683 shares) $7.72
=====
NET ASSET VALUE - U.S. GOVERNMENT FUND B CLASS
($13,642,154 / 1,766,976 shares) $7.72
=====
NET ASSET VALUE - U.S. GOVERNMENT FUND C CLASS
($2,047,105 / 265,149 shares) $7.72
=====
NET ASSET VALUE - U.S. GOVERNMENT FUND
INSTITUTIONAL CLASS
($17,865,162 / 2,313,960 shares) $7.72
=====
COMPONENTS OF NET ASSETS AT JULY 31, 1998:
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 the U.S. Government Fund C Class, and
20,000,000 shares allocated to the U.S. Government Fund
Institutional Class $193,624,799
Undistributed net investment income 625
Accumulated net realized loss on investments and futures
contracts (34,910,888)
Net unrealized appreciation of investments and futures contracts 1,841,384
------------
Total net assets $160,555,920
============
NET ASSET VALUE AND OFFERING PRICE FOR
U.S. GOVERNMENT FUND A CLASS
Net asset value per share (A) $7.72
Sales charge (4.75% of offering price or 4.92%
of amount invested per share) (B) 0.38
-----
Offering price $8.10
=====
- ------------
(A) Net asset value per share illustrated is the estimated amount which would be
paid upon the redemption or repurchase of shares.
(B) See How to Buy Shares in the current Prospectus for purchases of $100,000 or
more for U.S. Government Fund A Class.
See accompanying notes
</TABLE>
<TABLE>
<CAPTION>
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
STATEMENT OF ASSETS AND LIABILITIES
JULY 31, 1998
<S> <C>
ASSETS:
Investments at market (cost $161,828,004) $163,765,102
Receivable for securities sold 10,311,790
Dividends and interest receivable 2,202,009
Subscriptions receivable 301,557
Cash 3,290
Other assets 302
------------
Total assets 176,584,050
------------
LIABILITIES:
Payable for securities purchased 15,500,661
Other accounts payable and accrued expenses 345,389
Liquidations payable 182,080
------------
Total liabilities 16,028,130
------------
TOTAL NET ASSETS $160,555,920
============
See accompanying notes
</TABLE>
<TABLE>
<CAPTION>
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1998
<S> <C> <C>
INVESTMENT INCOME:
Interest $13,389,016
EXPENSES:
Management fees $991,089
Distribution expense 553,468
Dividend disbursing and transfer agent
fees and expenses 350,035
Accounting and administration fees 82,142
Registration fees 50,532
Professional fees 14,590
Directors' fees 9,324
Custodian fees 7,791
Reports and statements to shareholders expense 3,777 2,062,748
------------ ------------
NET INVESTMENT INCOME 11,326,268
------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions 214,261
Net realized loss on futures contracts (272,548)
------------
Net realized loss (58,287)
Net change in unrealized appreciation/depreciation
on investments and futures contracts (889,791)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (948,078)
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $10,378,190
============
See accompanying notes
</TABLE>
<TABLE>
<CAPTION>
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
7/31/98 7/31/97
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 11,326,268 $ 12,239,253
Net realized loss on investment transactions and
future contracts (58,287) (2,452,434)
Net change in unrealized appreciation/depreciation
of investments and futures contracts (889,791) 6,199,411
------------ ------------
Net increase in net assets resulting from
operations 10,378,190 15,986,230
------------ ------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income:
U.S. Government Fund A Class (9,370,096) (10,751,487)
U.S. Government Fund B Class (799,395) (662,604)
U.S. Government Fund C Class (98,357) (73,758)
U.S. Government Fund Institutional Class (1,063,903) (745,296)
------------ ------------
(11,331,751) (12,233,145)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold:
U.S. Government Fund A Class 35,363,890 9,934,814
U.S. Government Fund B Class 9,297,920 4,378,511
U.S. Government Fund C Class 2,932,593 435,947
U.S. Government Fund Institutional Class 17,276,780 6,421,853
Net asset value of shares issued upon reinvestment
of dividends from net investment income
U.S. Government Fund A Class 5,430,259 5,998,073
U.S. Government Fund B Class 380,595 262,401
U.S. Government Fund C Class 86,512 64,504
U.S. Government Fund Institutional Class 983,847 696,201
------------ ------------
71,752,396 28,192,304
------------ ------------
Cost of shares repurchased:
U.S. Government Fund A Class (51,932,640) (44,465,144)
U.S. Government Fund B Class (6,666,858) (3,928,919)
U.S. Government Fund C Class (2,273,984) (248,046)
U.S. Government Fund Institutional Class (12,269,379) (6,122,404)
------------ ------------
(73,142,861) (54,764,513)
------------ ------------
Decrease in net assets derived from capital share
transactions (1,390,465) (26,572,209)
------------ ------------
NET DECREASE IN NET ASSETS (2,344,026) (22,819,124)
NET ASSETS:
Beginning of year 162,899,946 185,719,070
------------ ------------
End of year $160,555,920 $162,899,946
============ ============
See accompanying notes
</TABLE>
<TABLE>
<CAPTION>
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:
U.S. GOVERNMENT FUND A CLASS
----------------------------------------------------------
YEAR ENDED JULY 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 7.760 $ 7.590 $ 7.860 $ 8.000 $ 9.010
Income from investment
operations:
Net investment income 0.528 0.544 0.588 0.656 0.714
Net realized and
unrealized gain
(loss) on investments (0.040) 0.170 (0.270) (0.140) (1.010)
--------- --------- --------- --------- ---------
Total from
investment
operations 0.488 0.714 0.318 0.516 (0.296)
--------- --------- --------- --------- ---------
Less dividends:
Dividends from net
investment income (0.528) (0.544) (0.588) (0.656) (0.714)
--------- --------- --------- --------- ---------
Total dividends (0.528) (0.544) (0.588) (0.656) (0.714)
--------- --------- --------- --------- ---------
Net asset value,
end of period $ 7.720 $ 7.760 $ 7.590 $ 7.860 $ 8.000
========= ========= ========= ========= =========
Total return1 6.50% 9.77% 4.09% 6.82% (3.51%)
Ratios and supplemental
data:
Net assets, end of
period (000
omitted) $127,001 $138,844 $164,156 $206,083 $222,555
Ratio of expenses
to average net
assets 1.20% 1.16% 1.20% 1.24% 1.23%
Ratio of net
investment income
to average net assets 6.80% 7.13% 7.55% 8.40% 8.31%
Portfolio turnover 119% 63% 81% 70% 309%
- ------------
1 Does not include 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.
See accompanying notes
<CAPTION>
U.S. GOVERNMENT FUND B CLASS
----------------------------------------------------------
PERIOD
YEAR ENDED JULY 31, 5/2/941 TO
1998 1997 1996 1995 7/31/94
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 7.760 $ 7.590 $ 7.860 $ 8.000 $ 8.190
Income from investment
operations:
Net investment income 0.474 0.490 0.533 0.601 0.151
Net realized and
unrealized gain
(loss) on investments (0.040) 0.170 (0.270) (0.140) (0.190)
--------- --------- --------- --------- ---------
Total from investment
operations 0.434 0.660 0.263 0.461 (0.039)
--------- --------- --------- --------- ---------
Less dividends:
Dividends from net
investment income (0.474) (0.490) (0.533) (0.601) (0.151)
--------- --------- --------- --------- ---------
Total dividends (0.474) (0.490) (0.533) (0.601) (0.151)
--------- --------- --------- --------- ---------
Net asset value,
end of period $ 7.720 $ 7.760 $ 7.590 $ 7.860 $ 8.000
========= ========= ========= ========= =========
Total return2 5.76% 9.01% 3.36% 6.08% (0.46%)
Ratios and supplemental
data:
Net assets,
end of period
(000 omitted) $ 13,642 $ 10,695 $ 9,754 $ 7,394 $ 2,215
Ratio of expenses
to average net assets 1.90% 1.86% 1.90% 1.94% 1.94%
Ratio of net
investment income
to average net assets 6.10% 6.43% 6.85% 7.66% 7.60%
Portfolio turnover 119% 63% 81% 70% 309%
- ------------
1 Date of initial public offering; ratios have been annualized but total return
has not been annualized.
2 Does not include contingent deferred sales charge which varies from 1%-4%
depending upon the holding period.
See accompanying notes
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND C CLASS
-----------------------------------------------------
PERIOD
YEAR ENDED JULY 31, 11/28/951 TO
1998 1997 7/31/96
<S> <C> <C> <C>
Net asset value,
beginning of period $ 7.760 $ 7.590 $ 7.950
Income from investment operations:
Net investment income 0.474 0.491 0.348
Net realized and unrealized
gain (loss) on investments (0.040) 0.170 (0.360)
--------- --------- ---------
Total from investment
operations 0.434 0.661 (0.012)
--------- --------- ---------
Less dividends:
Dividends from net investment
income (0.474) (0.491) (0.348)
--------- --------- ---------
Total dividends (0.474) (0.491) (0.348)
--------- --------- ---------
Net asset value, end of period $ 7.720 $ 7.760 $ 7.590
========= ========= =========
Total return2 5.76% 9.01% (0.17%)
Ratios and supplemental data:
Net assets, end of period
(000 omitted) $2,047 $1,308 $1,029
Ratio of expenses to average
net assets 1.90% 1.86% 1.90%
Ratio of net investment
income to average net assets 6.10% 6.43% 6.85%
Portfolio turnover 119% 63% 81%
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT FUND INSTITUTIONAL CLASS
--------------------------------------------------
YEAR ENDED JULY 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 7.760 $ 7.590 $ 7.860 $ 8.000 $ 9.010
Income from investment
operations:
Net investment income 0.550 0.567 0.611 0.679 0.739
Net realized and
unrealized gain (loss)
on investments (0.040) 0.170 (0.270) (0.140) (1.010)
--------- --------- --------- --------- ---------
Total from investment
operations 0.510 0.737 0.341 0.539 (0.271)
--------- --------- --------- --------- ---------
Less dividends:
Dividends from net
investment income (0.550) (0.567) (0.611) (0.679) (0.739)
--------- --------- --------- --------- ---------
Total dividends (0.550) (0.567) (0.611) (0.679) (0.739)
--------- --------- --------- --------- ---------
Net asset value, end of
period $ 7.720 $ 7.760 $ 7.590 $ 7.860 $ 8.000
========= ========= ========= ========= =========
Total return 6.80% 10.10% 4.39% 7.14% (3.23%)
Ratios and supplemental data:
Net assets, end of
period (000 omitted) $17,865 $12,053 $10,780 $8,316 $14,016
Ratio of expenses to
average net assets 0.90% 0.86% 0.90% 0.94% 0.94%
Ratio of net investment
income to average net
assets 7.10% 7.43% 7.85% 8.66% 8.60%
Portfolio turnover 119% 63% 81% 70% 309%
- ------------
1 Date of initial public offering; ratios have been annualized but total return
has not been annualized.
2 Does not include contingent deferred sales charge of 1% if redeemed within 12
months of purchase.
See accompanying notes
</TABLE>
DELAWARE GROUP GOVERNMENT FUND, INC. -
GOVERNMENT INCOME SERIES
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998
Delaware Group Government Funds, 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. The 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
last 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 Investments Family 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 Investments
Family 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 the
accrual basis. Premiums and discounts are recorded on a pro-rata basis
and are included in interest income. 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% of the net assets of the Fund, less the fees paid to the
unaffiliated directors. At July 31, 1998, the Fund had a liability for
investment management fees and other expenses payable to DMC for
$44,189.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliates
of DMC, to provide dividend disbursing, transfer agent and accounting
services for the Fund. For the period ended July 31, 1998, the Fund
expensed $350,035 for dividend disbursing and transfer agent services
and $64,930 for accounting services. At July 31, 1998, the Fund had a
liability for such fees and other expenses payable to DSC of $3,843.
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
period ended July 31, 1998, the Fund expensed $553,468 for distribution
expenses.
For the year ended July 31, 1998, DDLP earned $32,642 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.
3. Investments
For the year ended July 31, 1998, the Fund made purchases of $61,542,190
and sales of $73,236,157 of investment securities other than U.S.
government securities and temporary cash investments. For the year ended
July 31, 1998, the Fund made purchases of $136,443,226 and sales of
$123,815,212 of long term U.S. government securities.
At July 31, 1998, the aggregate cost of securities for federal income
tax purposes was $161,829,644.
At July 31, 1998, net unrealized appreciation for federal income tax
purposes aggregate $1,935,458 of which $3,583,934 related to unrealized
appreciation of securities and $1,648,476 related to unrealized
depreciation of securities.
For federal income tax purposes, the Fund had accumulated capital losses
of $35,026,734 at July 31, 1998 which may be carried forward and applied
against future capital gains. The capital loss carry forward expire as
follows: 2001 - $1,622,896, 2002 - $17,400,711, 2003 - $9,205,797, 2004
- - $4,166,601, 2005 - $2,371,574 and 2006 - $259,155.
At July 31, 1998, the Fund reclassified $1,746,916 from accumulated net
undistributed realized loss from securities transactions to common stock
due to the expiration of capital loss carryforward.
During the period ended July 31, 1998, the Fund entered into future
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, 1998, the Fund had outstanding 100 long futures on the 5
Year U.S. Treasury Notes, which expire in September 1998 and 50 long
futures on the 20 Year U.S. Treasury Notes, which expire in September
1998. The notional value of such contracts on July 31, 1998 was
$17,078,125 which resulted in an unrealized loss of $95,714.
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.
4. Capital Stock
Transactions in capital stock shares were as follows:
YEAR ENDED YEAR ENDED
7/31/98 7/31/97
---------- ----------
Shares sold:
U.S. Government Fund A Class 4,571,770 1,302,403
U.S. Government Fund B Class 1,201,317 573,254
U.S. Government Fund C Class 379,435 57,039
U.S. Government Fund Institutional
Class 2,226,903 840,271
Shares issued upon reinvestment of
dividends from net investment income:
U.S. Government Fund A Class 701,989 786,354
U.S. Government Fund B Class 49,177 34,398
U.S. Government Fund C Class 11,182 8,457
U.S. Government Fund Institutional
Class 127,146 91,360
---------- ----------
9,268,919 3,693,536
---------- ----------
YEAR ENDED YEAR ENDED
7/31/98 7/31/97
---------- ----------
Shares repurchased:
U.S. Government Fund A Class (6,712,206) (5,834,137)
U.S. Government Fund B Class (861,381) (515,167)
U.S. Government Fund C Class (294,043) (32,585)
U.S. Government Fund Institutional
Class (1,592,884) (799,492)
---------- ----------
(9,460,514) (7,181,381)
---------- ----------
Net decrease (191,595) (3,487,845)
========== ==========
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, 1998 the Fund had no
holdings in interest-only CMO's.
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 and statement
of assets and liabilities of Delaware Group Government Fund, Inc. -
Government Income Series (the "Fund") as of July 31, 1998, 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,
1998, 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, 1998, 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 its financial highlights for each of the
periods indicated therein, in conformity with generally accepted
accounting principles.
/S/Ernst & Young LLP
Philadelphia, Pennsylvania
September 4, 1998
DELAWARE INVESTMENTS FAMILY OF FUNDS
FOR GROWTH OF CAPITAL
Aggressive Growth Fund
Trend Fund
DelCap Fund
Small Cap Value Fund
U.S. Growth Fund
Growth Stock Fund
Tax-Efficient Equity Fund
FOR TOTAL RETURN
Social Awareness Fund
Blue Chip Fund
Devon Fund
Decatur Total Return Fund
Decatur Income Fund
REIT Fund
Delaware Fund
FOR INTERNATIONAL DIVERSIFICATION
Emerging Markets Fund
New Pacific Fund
Overseas Equity Fund
International Equity Fund
Global Bond Fund
FOR CURRENT INCOME
Delchester Fund
High-Yield Opportunities Fund
Extended Duration Bond Fund
Strategic Income Fund
Corporate Bond Fund
U.S. Government Fund
Delaware-Voyageur
US Government Securities Fund
Limited-Term Government Fund
FOR TAX-EXEMPT INCOME
National High Yield Municipal Bond Fund
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
State Tax-Free Funds*
MONEY MARKET FUNDS
Delaware Cash Reserve
Tax-Free Money Fund
ASSET ALLOCATION FUNDS
Foundation Growth Portfolio
Foundation Balanced Portfolio
Foundation Income Portfolio
* Available for the following states: Arizona, California, Colorado,
Florida, Idaho, Iowa, Kansas, Minnesota, Missouri, North Dakota,
New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Utah,
Washington, Wisconsin. Insured bond funds are available in selected states.
funds
[GRAPHIC OMITTED: PHOTO OF A COMPUTER KEYBOARD]
Complete information on any fund offered by Delaware Investments can be
found in each fund's current prospectus. Prospectuses for all funds
offered by Delaware Investments are available from your financial
adviser. Please read the prospectus carefully before you invest or send
money.
THIS ANNUAL REPORT IS FOR THE INFORMATION OF U.S. GOVERNMENT FUND'S
SHAREHOLDERS, but it may be used with prospective investors when
preceded or accompanied by current Prospectuses for U.S. Government
Fund, which sets forth details about charges, expenses, investment
objectives and operating policies of the Fund. You should read each
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
Delaware Investments Family of Funds
Philadelphia, PA
JEFFREY J. NICK
President and Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA
WALTER P. BABICH
Board Chairman, Citadel Constructors, Inc.
King of Prussia, PA
JOHN H. DURHAM
Partner, Complete Care Services
Horsham, 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
THOMAS F. MADISON
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
CHARLES E. PECK
Secretary/Treasurer, Enterprise Homes, Inc.
Fredericksburg, VA
AFFILIATED OFFICERS
DAVID K. DOWNES
Executive Vice President, Chief Financial Officer
and Chief Operating Officer
Delaware Investments Family of Funds
Philadelphia, PA
GEORGE M. CHAMBERLAIN, JR.
Senior Vice President, Secretary
and General Counsel
Delaware Investments Family of Funds
Philadelphia, PA
BRUCE D. BARTON
President and Chief Executive Officer
Delaware Distributors, L.P.
Philadelphia, PA
directors
& officers
INVESTMENT MANAGER
Delaware Management Company
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
This report must be preceded or accompanied by a current U.S. Government
Fund prospectus and the Delaware Investments Fund Performance Update for
the most recently completed calendar quarter. For a prospectus of any
other Delaware Investments fund, contact your financial adviser or
Delaware Investments.
[GRAPHIC OMITTED: PHOTO OF SEVERAL GLOBES]
For Shareholders
1.800.523.1918
For Securities Dealers
1.800.362.7500
For Financial Institutions
Representatives Only
1.800.659.2265
www.delawarefunds.com
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 Funds 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 Funds
are not bank or credit union deposits.
(copyright) Delaware Distributors, L.P.
[GRAPHIC OMITTED: LOGO OF DELAWARE INVESTMENTS
----------------------------
Philadelphia * London]
Printed in the USA
on recycled paper
(1012)
AR-023[7/98]TKO9/98
