<PAGE>
For Current Income
U.S. Government Fund
service and guidance
professional management
goals
1998
Semi-Annual
Report
[WATER WHEEL GRAPHIC]
DELAWARE
INVESTMENTS
=====================
Philadelphia o London
<PAGE>
for current
income
2 February 11, 1998
Dear Shareholder:
Strong U.S. economic growth, low inflation and Washington's commitment to
balance the Federal budget spurred the U.S. bond market to vigorous performance
during the first half of fiscal 1998.
U.S. Government Fund provided a total return of +4.09% for the six
months ended January 31, 1998 (Class A shares at net asset value with
dividends reinvested). Your Fund sought to maximize income by focusing on
mortgage-backed securities and by maintaining a relatively conservative risk
profile.
Since the summer, your Fund has not benefited as much from the
positive interest rate environment as its unmanaged benchmark - the Lehman
Brothers Government Bond Index. The index is heavily weighted toward U.S.
Treasury bonds, whose prices tend to rise more than mortgage-backed
securities during bond market rallies.
This past summer, the Fund implemented a defensive strategy in
anticipation of higher interest rates. Unemployment was at its lowest level
in over a generation and we were concerned that employers' costs would
increase - triggering inflation.
Remarkably, inflation has been milder than many economists
anticipated - helped along by banking and currency turmoil in several
Pacific-Rim countries. The Consumer Price Index (CPI) rose just 1.7% for the
1997 calendar year, the smallest increase since 1986. We now believe
developments in Asia have the potential to slow the U.S. economy enough to
cool inflationary pressures in the year ahead.
Our sentiments were echoed by the Federal Reserve Board during their
first meeting of 1998. The Board left the Federal Funds Rate (the interest
rate that banks charge each other for overnight loans) unchanged at 5.5%.
Your Fund sought to maximize income by focusing on government-backed mortgage
securities and by maintaining a relatively conservative risk profile.
Cumulative Return
Six Months Ended
January 31, 1998
U.S. Government Fund A Class +4.09%
Lipper General U.S. Government Fund Average (195 Funds) +4.79%
Lehman Brothers Government Bond Index +5.39%
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 7. Past performance does not
guarantee future results. A direct investment in the unmanaged Lehman
Brothers Government Bond Index is not possible.
<PAGE>
for current
income
3
Between July and January, the difference in yield between long- and
short-term U.S. Treasury bonds narrowed, reducing the added income potential
normally associated with extending the maturity of a bond portfolio. We
believe the Fund's focus on bonds in the intermediate range of five to 10
years can potentially offer investors a more attractive risk/reward ratio.
Adding to the attractiveness of U.S. government securities since the
summer has been Washington's apparent commitment to balance the Federal
budget. Spending restraint, changes in tax policy and a strong U.S. economy
enabled the Federal government to project a modest budget surplus for the
first time since 1969.
On the pages that follow, your Fund's manager, Paul Grillo, explains
U.S. Government Fund's investment strategy and positioning during the first
half of fiscal 1998 and shares his outlook for the coming months.
Sincerely,
/s/ Wayne A. Stork
- ------------------
Wayne A. Stork
Chairman
/s/ Jeffrey J. Nick
- -------------------
Jeffrey J. Nick
President and Chief Executive Officer
U.S. Treasury Yields Have Fallen As Bond Prices Have Rallied
Yield Curve chart
U.S. Treasury Yields July 31, 1997
U.S. Treasury Yields January 31, 1998
7/31/97 1/31/98
3 months 5.227% 5.183%
Years 6 months 5.307% 5.219%
1 year 5.408% 5.215%
to 2 years 5.724% 5.308%
3 years 5.780% 5.324%
Maturity 5 years 5.898% 5.377%
10 years 6.009% 5.512%
30 years 6.3 % 5.8 %
YIELD
Low inflation helped spur a strong bond market rally during the autumn of
1997, reducing yields on government securities.
Source: Bloomberg Business News.
<PAGE>
for current
income
4
Performance Review
We focused on maintaining U.S. Government Fund's income potential during the
bond market's strong performance in the first half of fiscal 1998, primarily
through investing in mortgage-backed bonds such as Government National Mortgage
Association (GNMA) securities. These were complemented by U.S. Treasuries and
high quality corporate bonds, allowing us to strike a balance between income and
safety of principal.
Since July, we have increased your Fund's duration modestly to 4.8
years as of January 31, 1998 to participate in what we believe may be a
continuing rally in bond prices this year. 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.
How We Manage Mortgage Refinancing Risk
Half of your Fund's portfolio was invested in mortgages as of January 31,
1998. Mortgage securities carry the additional risk that property owners will
prepay what they owe, forcing the bondholders to reinvest that money, often
at lower interest rates. Investors began to fear during the fall of 1997 that
refinancing activity would increase sharply, and prices of mortgage
securities consequently suffered.
Your Fund's management seeks to mitigate refinancing risk by
investing in:
* older, more seasoned mortgages;
* mortgages issued when rates
were lower;
We have increased your Fund's duration modestly to 4.8 years to participate
in what we believe may be a continuing rally in bond prices in 1998.
Portfolio Highlights and Asset Mix
January 31, 1998
Mortgage-Backed Securities 37.3%
Treasuries 25.0%
Collateralized Mortgage Obligations 12.6%
Other Investment Grade Bonds 2.9%
Corporate Bonds 9.9%
Agency Obligations 6.0%
Asset-Backed Securities 6.3%
July 31, 1997 January 31, 1998
Average Effective Duration 4.4 years 4.8 years
Average Effective Maturity 7.1 years 7.8 years
Average Quality AAA AAA
Current 30-Day SEC Yield* 5.93% 5.67%
Number of Bonds 279 272
*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
January 31, 1998 was 5.26%. Institutional Class yield was 6.26%.
<PAGE>
for current
income
5
* pools of mortgages with low loan balances;
* mortgages with refinancing penalties paid by the borrower if he or she
pays off a loan ahead of schedule; and,
* mortgages issued to workers who are likely to be relocated by an
employer.
Homeowners with low mortgage balances are not as likely to refinance
as homeowners with a bigger debt load, according to data compiled by Credit
Suisse First Boston. This is primarily because the potential interest savings
are less, all other things being equal.
The chart below shows that only 15% of homeowners with mortgage
balances less than $50,000 will consider refinancing when interest rates drop
about 200 basis points (2%). That compares with about 50% of homeowners who
have loan balances of more than $85,000. As you can see below, when the
interest rate advantage rises to 300 basis points (3%), the difference in
likely prepayment activity widens even further.
When targeting low loan balance pools, we seek investments where the
maximum loan size is no more than $85,000, and the average loan balance of
the entire pool is $65,000 or lower.
During the first half of fiscal 1998, we added to the Fund's holdings
of discount mortgages - mortgages issued when interest rates were lower. We
believe this limits mortgage prepayment risks because their interest rates
are lower than current rates - giving homeowners no incentive to refinance.
Another way we have attempted to limit prepayment risks since July 31
has been to increase our positioning in Collateralized Mortgage Obligations
(CMOs) - pools of mortgage obligations with generally shorter average
maturities than GNMAs. Although CMOs are usually lower yielding than GNMAs and
aren't guaranteed like U.S. Treasuries, their more predictable income stream
offers a measure of protection against both interest rate risk and prepayment
risk. As of January 31, 1998, CMOs offered an average of 100 basis points (1%)
higher income potential than U.S. Treasury securities of comparable maturity.
Mortgage Refinancing Activity By Loan Balance
Percentage of Homeowners
likely to consider Refinancing
Potential Interest Loan Balance
Rate Savings from -----------------------------------------
Refinancing for Less than $50,000 to Greater than
Homeowners $50,000 $85,000 $85,000
0 7% 7% 6%
0.5% 7% 8% 8%
1% 8% 9% 11%
1.5% 11% 16% 25%
2% 17% 31% 46%
2.5% 22% 41% 55%
3% 30% 51% 59%
Source: Credit Suisse-First Boston.
<PAGE>
for current
income
6
Outlook
We believe that selected U.S. government securities can continue to offer
attractive income potential and stability of principal for the remainder
of 1998.
An expanding economy along with a tight labor market often lead to
wage increases and consequently, an acceleration of inflation. A report in
early February by the National Federation of Independent Businesses indicated
that a near record 19% of small business owners plan to hire new workers
in 1998 and 27% report hard-to-fill job openings.
However, we believe interest rates are unlikely to rise significantly
from current levels, in part because of the deflationary effects of financial
turmoil in the Pacific Rim. As the region recovers, we believe many Asian
countries will increase exports to the U.S. to rebuild their economies and
pay down debt. This increased supply of goods and services may help limit
consumer price increases.
The weak economic condition of some Asian countries may also spur
continuing demand for U.S. government securities. In our opinion,
international investors will continue to see U.S. government
securities as a stable and attractive alternative to their own country's
public and corporate debt.
Washington's apparent commitment to balancing the federal budget also
bodes well for bond investors as we believe the U.S. government will need
less capital from private investors to finance operations. A reduced supply
of government debt can lead to lower interest rates, assuming investor demand
remains steady.
Given that our national leaders appear to have made fiscal
responsibility a priority, a fund emphasizing U. S. government securities may
make sense for an income-oriented investor seeking to reduce his or her risk
profile.
Paul Grillo
Vice President and Senior Portfolio Manager
February 11, 1998
We believe interest rates are unlikely to rise significantly from current
levels, in part because of the deflationary effects of financial turmoil in
the Pacific Rim.
(photo of keyboard)
Glossary
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.
<PAGE>
for current
income
7
U.S. Government Fund's Annual Income
Income from a $100,000 Investment Since Inception
Total Income = $167,703
Yearly Income
Jan-86 $ 4,497
Jan-87 $10,634
Jan-88 $10,777
Jan-89 $10,742
Jan-90 $11,570
Jan-91 $12,153
Jan-92 $13,811
Jan-93 $15,092
Jan-94 $15,881
Jan-95 $15,513
Jan-96 $16,004
Jan-97 $14,981
Jan-98 $15,419
Chart assumes a $100,000 investment on August 16, 1985, includes the effect
of a 4.75% 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.
<TABLE>
<CAPTION>
U.S. Government Fund Performance
Average Annual Returns Through January 31, 1998
Lifetime Ten Years Five Years One Year
<S> <C> <C> <C> <C>
Class A (Est. 8/16/85)
Excluding Sales Charge +7.47% +7.24% +5.10% +9.41%
Including Sales Charge +7.05% +6.72% +4.07% +4.23%
Class B (Est. 5/2/94)
Excluding Sales Charge +5.76% +8.65%
Including Sales Charge +5.10% +4.65%
Class C (Est. 11/28/95)
Excluding Sales Charge +5.73% +8.65%
Including Sales Charge +5.73% +7.65%
</TABLE>
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 THIER 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.
The average annual total returns for the lifetime, 10-year, five-year and
one-year periods and cumulative return for the six-month period ended January
31, 1998 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 +7.70%, +7.52%, 5.40%, +9.72% and +4.23%,
respectively.
<PAGE>
8 for current income
Financial Statements
Delaware Group Government Fund, Inc. -
Government Income Series*
Statement of Net Assets
January 31, 1998 (Unaudited)
Principal Market
Amount Value
------ -----
Agency Mortgage-Backed Securities - 15.44%
FHA Project Loan 8.75% 10/11/27 ................ $ 696,757 $ 729,199
Federal Home Loan Mortgage Corporation
6.00% 11/1/26 ................................. 936,147 925,031
Federal Home Loan Mortgage Corporation
8.065% 1/27/05 ................................ 3,500,000 3,956,435
Federal Home Loan Mortgage Corporation
8.115% 1/31/05 ................................ 1,705,000 1,932,515
Federal Home Loan Mortgage Corporation
9.00% 12/1/05 ................................. 1,793,901 1,864,535
Federal Home Loan Mortgage Corporation
10.00% 1/1/19 ................................. 545,228 605,033
Federal Home Loan Mortgage Corporation
10.25% 4/1/08 ................................. 58,141 63,537
Federal Home Loan Mortgage Corporation
11.50% 7/1/99 to 3/1/16 ....................... 2,257,301 2,516,385
Federal Home Loan Mortgage Corporation-Gold
12.00% 12/1/10 ................................ 154,332 176,469
Federal National Mortgage Association
7.50% 2/1/27 .................................. 3,388,478 3,488,015
Federal National Mortgage Association
10.00% 7/1/20 to 5/1/22 ....................... 2,016,694 2,213,863
Federal National Mortgage Association
10.75% 9/1/11 ................................. 157,476 173,667
Federal National Mortgage Association
11.25% 6/1/00 to 1/1/01 ....................... 118,456 126,934
Federal National Mortgage Association
12.00% 5/1/09 ................................. 2,562,978 2,864,929
Federal National Mortgage Association
14.25% 9/1/99 ................................. 32,066 35,793
Federal National Mortgage Association-
Global Bond 7.40% 7/1/04 ....................... 5,000,000 5,434,200
-----------
Total Agency Mortgage-Backed Securities
(cost $26,884,101) ............................ 27,106,540
-----------
Asset-Backed Securities - 6.27%
ADVANTA Home Equity Loan Trust
1992-4 1A 7.20% 11/25/08 ...................... 1,601,503 1,631,544
AFC Home Equity Loan Trust
1992-3A 7.05% 8/15/07 ......................... 1,433,751 1,450,382
AFC Home Equity Loan Trust
1992-1A 7.50% 3/15/07 ......................... 910,620 915,719
**Citibank Credit Card Master Trust
1997-6A 5.99% 8/15/06 ......................... 7,000,000 4,757,831
Ford Credit Auto Loan Master Trust
1995-1A 6.50% 8/15/02 ......................... 185,000 188,145
- ---------
* This Fund is known and does business as U.S. Government Fund.
<PAGE>
Principal Market
Amount Value
------ -----
Asset-Backed Securities (Continued)
IMC Home Equity Loan Trust
1995-3A 6.50% 11/25/10 ......................... $ 1,065,074 $ 1,067,737
Standard Credit Card Master Trust
1993-2 A 5.95% 9/7/03 .......................... 1,000,000 1,000,000
----------
Total Asset-Backed Securities
(cost $10,951,956) ............................. 11,011,358
----------
Collateralized Mortgage Obligations (CMO) - 12.56%
Collateralized Mortgage Securities Corporation
F-1 11.45% 11/1/15 ............................. 276,715 303,414
Federal Home Loan Mortgage Corporation
1608 GA 9.00% 6/15/21 .......................... 5,000,000 5,447,662
Federal Home Loan Mortgage Corporation
26-F 9.50% 2/15/20 ............................. 983,395 1,075,060
Federal National Mortgage Association Alpha
H-2 11.50% 5/1/09 .............................. 1,995,761 2,210,929
Federal National Mortgage Association
1993-53H 5.75% 1/25/22 ......................... 1,750,000 1,710,420
Federal National Mortgage Association
J-1 7.00% 11/1/10 .............................. 98,494 99,109
Federal National Mortgage Association
88-15A 9.00% 6/25/18 ........................... 37,281 40,362
Federal National Mortgage Association
35-2 12.00% 7/25/18 ............................ 2,097,497 2,438,340
Federal National Mortgage Association
D-2 11.00% 4/1/09 .............................. 2,146,406 2,334,887
Federal National Mortgage Association
F-2 11.50% 5/25/09 ............................. 983,826 1,080,057
Investor GNMA Mortgage-Backed Securities Trust
84-F5 10.875% 10/25/13 ......................... 2,094,372 2,380,744
Travelers Mortgage Securities
1-Z2 12.00% 3/1/14 ............................. 2,565,837 2,929,063
----------
Total Collateralized Mortgage Obligations
(cost $21,646,640) ............................. 22,050,047
----------
Corporate Bonds - 9.89%
American General Institute 7.57% 12/1/46 ......... 2,000,000 2,075,000
Credit Foncier de France 8.00% 1/14/02 ........... 2,200,000 2,326,500
Nations Bank 10.20% 7/15/15 ...................... 4,000,000 5,440,000
RBSG Capital 10.125% 3/1/04 ...................... 1,908,000 2,280,060
Republic of Finland 9.625% 4/1/28 ................ 5,000,000 5,243,750
----------
Total Corporate Bonds (cost $16,051,319) ......... 17,365,310
----------
Government Agency Obligations - 5.99%
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
----------
<PAGE>
for current income 9
Government Income Series
Statement of Net Assets (Continued)
Principal Market
Amount Value
------ -----
Government National Mortgage
Association Obligations - 21.93%
GNMA 6.50% 12/15/23 ......................... $ 543,063 $ 542,724
GNMA 7.00% 1/15/23 to 11/15/23 ............... 12,430,866 12,692,349
GNMA 9.00% 11/15/21 ......................... 1,760,456 1,912,845
GNMA 9.50% 9/15/17 to 3/15/23 ................ 2,734,818 2,988,224
GNMA 10.00% 1/15/18 to 9/15/18 ............... 1,057,866 1,174,563
GNMA 11.00% 12/15/09 to 8/15/13 .............. 2,328,020 2,644,250
GNMA 11.50% 7/15/15 ......................... 91,839 105,213
GNMA 12.00% 5/15/11 to 12/15/15 .............. 5,085,414 5,908,244
GNMA 12.25% 3/15/14 ......................... 114,931 133,428
GNMA 12.50% 5/15/10 to 1/15/16 ............... 737,216 863,231
GNMA GPM 10.25% 3/15/19 ..................... 209,286 228,385
GNMA GPM 11.50% 3/15/13 ..................... 397,792 456,218
GNMA GPM 11.75% 8/15/13 ..................... 444,899 512,190
GNMA II 9.00% 10/20/01 to 10/20/05 ........... 881,540 926,831
GNMA II 10.00% 11/20/15 to 6/20/21 ........... 2,695,709 2,975,244
GNMA II 10.50% 5/20/15 to 7/20/21 ............ 1,307,482 1,463,154
GNMA II 11.00% 5/20/15 to 7/20/19 ............ 261,223 296,891
GNMA II 11.50% 10/20/14 to 10/20/15 .......... 151,334 173,015
GNMA II 12.00% 1/20/14 to 5/20/15 ............ 272,884 316,960
GNMA II 12.50% 10/20/13 to 7/20/15 ........... 1,039,179 1,218,114
GNMA II GPM 10.25% 3/20/18 to 5/20/19 ........ 74,536 81,338
GNMA II GPM 10.75% 1/20/16 to 2/20/18 ........ 599,060 660,651
GNMA II GPM 11.50% 3/20/14 ................... 22,899 26,147
GNMA II GPM 12.00% 11/20/13 to 12/20/13 ...... 172,185 199,468
----------
Total Government National Mortgage Association
Obligations (cost $37,184,747) .............. 38,499,677
----------
Municipal Bonds - 0.86%
Cook County, Illinois, Chicago Heights School
District, Taxable-Series B
13.15% 12/1/05 ............................. 1,055,000 1,512,142
----------
Total Municipal Bonds (cost $1,448,607) ...... 1,512,142
----------
U.S. Treasury Obligations - 25.02%
U.S.Treasury Bonds 10.375% 11/15/12+ ......... 20,445,000 27,516,926
U.S.Treasury Bonds 10.75 8/15/05 ............. 2,180,000 2,868,771
U.S. Treasury Notes 7.625% 2/15/25 ........... 8,400,000 10,372,235
U.S.Treasury Strip 6.125% 2/15/17 ............ 9,730,000 3,175,191
----------
Total U.S. Treasury Obligations
(cost $41,987,452) ......................... 43,933,123
----------
Repurchase Agreements - 0.25%
With J.P. Morgan Securities 5.57%
2/2/98 (dated 1/30/98,
collateralized by $141,000 U.S. .............
Treasury Notes 6.875% due 7/31/99,
market value $148,294) ..................... 145,000 145,000
With PaineWebber 5.57% 2/2/98
(dated 1/30/98, collateralized
by $22,000 U.S. Treasury Notes 6.125%
due 5/15/98, market value $22,347,
$62,000 U.S. Treasury Notes 6.25% due
4/30/01, market value $64,519 and
$57,000 U.S. Treasury Notes 6.25% due
10/31/01, market value $59,474) ............. 143,000 143,000
<PAGE>
Principal Market
Amount Value
--------- ------
Repurchase Agreements (Continued)
With Prudential Bache 5.56% 2/2/98
(dated 1/30/98, collateralized
by $74,000 U.S. Treasury Bills due
5/7/98, market value $72,904 and
$72,000 U.S. Treasury Notes 5.00% due
2/15/99, market value $73,436) .............. $ 144,000 $ 144,000
------------
Total Repurchase Agreements
(cost $432,000) ............................. 432,000
------------
Total market value of securities owned
(cost $168,441,922) - 98.21% .............................. $172,422,697
Receivables and other assets
net of liabilities - 1.79% ................................ 3,141,986
------------
Total net assets applicable to 22,501,169
shares ($0.01 par value) outstanding - 100.00%.............. $175,564,683
============
Net asset value - U.S. Government Fund A Class
($141,841,968 / 18,179,096 shares) ......................... $7.80
=====
Net asset value - U.S. Government Fund B Class
($14,232,368 / 1,824,078 shares) .......................... $7.80
=====
Net asset value - U.S. Government Fund C Class
($1,931,114 / 247,493 shares) ............................. $7.80
=====
Net asset value - U.S. Government Fund
Institutional Class
($17,559,233 / 2,250,502 shares) .......................... $7.80
=====
- ----------------
GPM - Graduate Payment Mortgage
** The interest rate shown for this security is the effective yield.
+ Principal amount of $2,000,000 pledged as initial margin for futures
transactions.
Components of net assets at January 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 U.S. Government Fund
Institutional Class) ..................................... $ 208,580,567
Undistributed net investment income ........................ 4,427
Accumulated net realized loss on investments ............... (37,036,394)
Net unrealized appreciation of investments and futures
contracts ................................................. 4,016,083
-------------
Total net assets ........................................... $ 175,564,683
=============
NET ASSET VALUE AND OFFERING PRICE FOR
U.S. GOVERNMENT FUND A CLASS
Net asset value per share (A) .............................. $7.80
Sales charge (4.75% of offering price or 5.00% of
amount invested per share) (B) ........................... 0.39
=====
Offering price ............................................. $8.19
=====
- ----------------
(A) Net asset value per share illustrated is the estimated amount which would
be paid upon the redemption or repurchase of shares.
(B) See Purchasing Shares in the current Prospectus for purchases of $100,000
or more for U.S. Government Fund A Class.
See accompanying notes
<PAGE>
10 for current income
Delaware Group Government Fund, Inc. -
Government Income Series
Statement of Operations
Six Months Ended January 31, 1998 (Unaudited)
Investment Income:
Interest .................................. $6,871,421
Expenses:
Management fees ........................... $ 497,915
Distribution expense ...................... 283,702
Dividend disbursing and transfer agent
fees and expenses ........................ 186,134
Registration fees ......................... 24,732
Accounting and administration ............. 15,324
Professional fees ......................... 10,648
Reports and statements to shareholders .... 6,668
Directors' fees ........................... 4,523
Custodian fees ............................ 4,391 1,034,037
---------- ---------
Net investment income ..................... 5,837,384
---------
Net realized and unrealized gain
(loss) on investments:
Net realized loss on investment
transactions ............................. (366,717)
Net realized loss on futures contracts .... (70,160)
----------
Net realized loss ......................... (436,877)
Net change in unrealized appreciation
on investments ........................... 1,284,908
----------
Net realized and unrealized gain
on investments ........................... 848,031
----------
Net increase in net assets resulting
from operations .......................... $6,685,415
==========
See accompanying notes
<PAGE>
Delaware Group Government Fund, Inc. -
Government Income Series
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended Year
1/31/98 Ended
(Unaudited) 7/31/97
----------- -------
<S> <C> <C>
Increase (decrease) in net assets from operations:
Net investment income ............................ $ 5,837,384 $ 12,239,253
Net realized loss on investment transactions
and futures contracts ........................... (436,877) (2,452,434)
Net change in unrealized appreciation
on investments .................................. 1,284,908 6,199,411
------------- -------------
Net increase in net assets resulting
from operations ................................. 6,685,415 15,986,230
------------- -------------
Distribution to shareholders from:
Net investment income:
U.S. Government Fund A Class .................... (4,940,034) (10,751,487)
U.S. Government Fund B Class .................... (395,468) (662,604)
U.S. Government Fund C Class .................... (46,489) (73,758)
U.S. Government Fund Institutional Class ........ (457,074) (745,296)
------------- -------------
(5,839,065) (12,233,145)
------------- -------------
Capital share transactions:
Proceeds from shares sold:
U.S. Government Fund A Class .................... 23,378,202 9,934,814
U.S. Government Fund B Class .................... 6,873,990 4,378,511
U.S. Government Fund C Class .................... 2,073,273 435,947
U.S. Government Fund Institutional Class ........ 14,446,266 6,421,853
Net asset value of shares issued upon reinvestment
of dividends from net investment income:
U.S. Government Fund A Class .................... 2,771,748 5,998,073
U.S. Government Fund B Class .................... 185,255 262,401
U.S. Government Fund C Class .................... 39,339 64,504
U.S. Government Fund Institutional Class ........ 378,855 696,201
------------- -------------
50,146,928 28,192,304
------------- -------------
Cost of shares repurchased:
U.S. Government Fund A Class .................... (23,890,337) (44,465,144)
U.S. Government Fund B Class .................... (3,610,649) (3,928,919)
U.S. Government Fund C Class .................... (1,504,563) (248,046)
U.S. Government Fund Institutional Class ........ (9,322,992) (6,122,404)
------------- -------------
(38,328,541) (54,764,513)
------------- -------------
Increase (decrease) in net assets derived
from capital share transactions ................. 11,818,387 (26,572,209)
------------- -------------
Net increase (decrease) in net assets ............ 12,664,737 (22,819,124)
Net assets:
Beginning of period .............................. 162,899,946 185,719,070
------------- -------------
End of period .................................... $ 175,564,683 $ 162,899,946
============= =============
</TABLE>
See accompanying notes
<PAGE>
for current income 11
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
----------------------------------------------------------------------------------
Six Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
1/31/98(1) 7/31/97 7/31/96 7/31/95 7/31/94 7/31/93
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ......... $7.760 $7.590 $7.860 $8.000 $9.010 $9.020
Income from investment operations:
Net investment income .................... 0.271 0.544 0.588 0.656 0.714 0.763
Net realized and unrealized gain (loss)
from investments .................. 0.040 0.170 (0.270) (0.140) (1.010) (0.010)
------ ------ ------ ------ ------ ------
Total from investment operations ......... 0.311 0.714 0.318 0.516 (0.296) 0.753
------ ------ ------ ------ ------ ------
Less dividends:
Dividends from net investment income ..... (0.271) (0.544) (0.588) (0.656) (0.714) (0.763)
------ ------ ------ ------ ------ ------
Total dividends .......................... (0.271) (0.544) (0.588) (0.656) (0.714) (0.763)
Net asset value, end of period ............... $7.800 $7.760 $7.590 $7.860 $8.000 $9.010
====== ====== ====== ====== ====== ======
Total return(2) .............................. 4.09% 9.77% 4.09% 6.82% (3.51%) 8.70%
Ratios and supplemental data:
Net assets, end of period (000 omitted) .. $141,842 $138,844 $164,156 $206,083 $222,555 $223,416
Ratio of expenses to average net assets .. 1.19% 1.16% 1.20% 1.24% 1.23% 1.26%
Ratio of net investment income to
average net assets ............... 6.92% 7.13% 7.55% 8.40% 8.31% 8.45%
Portfolio turnover ....................... 80% 63% 81% 70% 309% 285%
</TABLE>
- ---------
(1) Ratios have been annualized and total return has not been annualized.
(2) 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
<PAGE>
12 for current income
Financial Highlights (Continued)
Selected data for each share of the Fund outstanding throughout each
period were as follows:
<TABLE>
<CAPTION>
U.S. Government Fund B Class U.S. Government Fund C Class
-------------------------------------------------- ----------------------------
Six Months Year Year Year Period Six Months Year Period
Ended Ended Ended Ended 5/2/94(2) Ended Ended 11/28/95(2)
1/31/98(1)7/31/97 7/31/96 7/31/95 to 7/31/94 1/31/98(1)7/31/97 to 7/31/96
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $7.760 $7.590 $7.860 $8.000 $8.190 $7.760 $7.590 $7.950
Income from investment operations:
Net investment income ..................... 0.244 0.490 0.533 0.601 0.151 0.244 0.490 0.348
Net realized and unrealized gain (loss)
from investments ................. 0.040 0.170 (0.270) (0.140) (0.190) 0.040 0.170 (0.360)
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations .......... 0.284 0.660 0.263 0.461 (0.039) 0.284 0.660 (0.012)
------ ------ ------ ------ ------ ------ ------ ------
Less dividends:
Dividends from net investment income ...... (0.244) (0.490) (0.533) (0.601) (0.151) (0.244) (0.490) (0.348)
------ ------ ------ ------ ------ ------ ------ ------
Total dividends ........................... (0.244) (0.490) (0.533) (0.601) (0.151) (0.224) (0.490) (0.348)
Net asset value, end of period ................ $7.800 $7.760 $7.590 $7.860 $8.000 $7.800 $7.760 $7.590
====== ====== ====== ====== ====== ====== ====== ======
Total return(3) ............................... 3.72% 9.01% 3.36% 6.08% (0.46%) 3.72% 9.01% (0.17%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) ... $14,233 $10,695 $9,754 $7,394 $2,215 $1,931 $1,308 $1,029
Ratio of expenses to average net assets ... 1.89% 1.86% 1.90% 1.94% 1.94% 1.89% 1.86% 1.90%
Ratio of net investment income to
average net assets ................ 6.22% 6.43% 6.85% 7.66% 7.60% 6.22% 6.43% 6.85%
Portfolio turnover ........................ 80% 63% 81% 70% 309% 80% 63% 81%
</TABLE>
- ---------
(1) Ratios have been annualized and total return has not been annualized.
(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.
See accompanying notes
<PAGE>
for current income 13
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
----------------------------------------------------------------------------
Six Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
1/31/98(1) 7/31/97 7/31/96 7/31/95 7/31/94 7/31/93
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $7.760 $7.590 $.860 $8.000 $9.010 $9.020
Income from investment operations:
Net investment income ..................... 0.281 0.567 0.611 0.679 0.739 0.791
Net realized and unrealized gain (loss)
from investments ................. 0.040 0.170 (0.270) (0.140) (1.010) (0.010)
------ ------ ----- ------ ------ ------
Total from investment operations .......... 0.321 0.737 0.341 0.539 (0.271) 0.781
------ ------ ----- ------ ------ ------
Less dividends:
Dividends from net investment income ...... (0.281) (0.567) (0.611) (0.679) (0.739) (0.791)
------ ------ ----- ------ ------ ------
Total dividends ........................... (0.281) (0.567) (0.611) (0.679) (0.739) (0.791)
Net asset value, end of period ................ $7.800 $7.760 $7.590 $7.860 $8.000 $9.010
====== ====== ====== ====== ====== ======
Total return .................................. 4.23% 10.10% 4.39% 7.14% (3.23%) 9.04%
Ratios and supplemental data:
Net assets, end of period (000 omitted) ... $17,559 $12,053 $10,780 $8,316 $14,016 $16,475
Ratio of expenses to average net assets ... 0.89% 0.86% 0.90% 0.94% 0.94% 0.97%
Ratio of net investment income to
average net assets ................ 7.22% 7.43% 7.85% 8.66% 8.60% 8.74%
Portfolio turnover ........................ 80% 63% 81% 70% 309% 285%
</TABLE>
- ---------
(1) Ratios have been annualized and total return has not been annualized.
See accompanying notes
<PAGE>
14 for current income
Delaware Group
Government Fund, Inc. - Government Income Series
Notes to Financial Statements
January 31, 1998 (Unaudited)
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 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 Delaware Investments. 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 Delaware Investments 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 amortized 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 (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 January 31,
1998, the Fund had a liability for investment management fees and other
expenses payable to DMC of $31,279.
The Fund has engaged Delaware Service Company, Inc. (DSC), an affiliate of
DMC, to provide dividend disbursing, transfer agent and accounting services
for the Fund. For the six months ended January 31, 1998, the Fund expensed
$186,134 for dividend disbursing and transfer agent services and $32,612 for
accounting services. At January 31, 1998, the Fund had a liability for such
fees and other expenses payable to DSC of $31,838.
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 six months ended January 31, 1998,
the Fund expensed $283,702 for distribution expenses. At January 31, 1998, the
Fund had a liability for expenses payable to DDLP of $49,699.
For the six-month period ended January 31, 1998, DDLP earned $18,458 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
During the six months ended January 31, 1998, the Fund made purchases of
$25,658,806 and sales of $22,490,102 of investment securities other than U.S.
government securities and temporary cash investments. During the six months
ended January 31, 1998, the Fund made purchases of $52,102,979 and sales
$45,090,556 of long-term U.S. government securities.
At January 31, 1998, the aggregate cost of securities for federal income tax
purposes was $168,468,445.
At January 31, 1998, unrealized appreciation for federal income tax purposes
aggregate $3,954,252 of which $5,454,682 related to unrealized appreciation of
securities and $1,500,430 related to unrealized depreciation of securities.
For federal income tax purposes, the Fund had accumulated capital losses of
$36,514,495 at July 31, 1997 which may be carried forward and applied against
future capital gains. The capital loss carryforward expires as follows:
1998-$1,746,916, 2001-$1,622,896, 2002-$17,400,711, 2003-$9,205,797,
2004-$4,166,601 and 2005-$2,371,574.
<PAGE>
for current income 15
Notes to Financial Statments (Continued)
During the period ended January 31, 1998, 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 January 31, 1998, the Fund had outstanding 100 long futures on 5 Year U.S.
Treasury Notes, which expire in March 1998 and 40 long futures on 10 Year U.S.
Treasury Notes, which expire in March 1998. The notional value of such
contracts on January 31, 1998 was $15,545,625 which resulted in an unrealized
gain of $35,313.
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:
Six Months Year
Ended Ended
1/31/98 7/31/97
Shares sold:
U.S. Government Fund A Class ............... 3,021,840 1,302,403
U.S. Government Fund B Class ............... 888,174 573,254
U.S. Government Fund C Class ............... 268,474 57,039
U.S. Government Fund Institutional Class ... 1,861,237 840,271
Shares issued upon reinvestment of
dividends from net investment income:
U.S. Government Fund A Class ............... 358,608 786,354
U.S. Government Fund B Class ............... 23,947 34,398
U.S. Government Fund C Class ............... 5,089 8,457
U.S. Government Fund Institutional Class ... 48,999 91,360
--------- ---------
6,476,368 3,693,536
--------- ---------
Shares repurchased:
U.S. Government Fund A Class ............... (3,089,482) (5,834,137)
U.S. Government Fund B Class ............... (465,906) (515,167)
U.S. Government Fund C Class ............... (194,645) (32,585)
U.S. Government Fund Institutional Class ... (1,212,529) (799,492)
--------- ---------
(4,962,562) (7,181,381)
--------- ---------
Net Increase (Decrease) ..................... 1,513,806 (3,487,845)
========= ==========
5. Credit and Market Risk
The Fund invests in securities whose value is derived from an underlying pool
of mortgages or consumer loans. Some of these securities are collateralized
mortgage obligations (CMOs). CMOs are debt securities issued by U.S.
government agencies or by financial institutions and other mortgage lenders
which are collateralized by a pool of mortgages held under an indenture. The
Fund invests in private-backed CMOs only if they are 100% collateralized at
the time of issuance by securities or certificates issued or guaranteed by the
U.S. government, its agencies or instrumentalities. Prepayment of mortgages
may shorten the stated maturity of the obligations and can result in a loss of
premium, if any has been paid. Certain of these securities may be stripped
(securities which provide only the principal or interest feature of the
underlying security). The yield to maturity on an interest-only CMO is
extremely sensitive not only to changes in prevailing interest rates, but also
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets and a rapid rate of principal payments may have a
material adverse affect on the Fund's yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to fully recoup its initial investment in these securities
even if the securities are rated in the highest rating categories. The Fund
will, from time to time, invest in higher risk interest-only CMOs. At January
31, 1998, the Fund had no holdings in interest-only CMOs.
<PAGE>
This Semi-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.
- ---------------------------------------------------------------------------
Investment Manager
Delaware Management Company
Philadelphia, Pennsylvania
International Affiliate
Delaware Investment 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
(Photo of 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
[LOGO]
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.
Copy Rights Delaware Distributors, L.P.
Printed in the USA
on recycled paper
SA-023[1/98] PP3/98
(534)
