PROSPECTUS May 4, 2000 PRUDENTIAL GOVERNMENT INCOME FUND, INC. FUND TYPE Government securities INVESTMENT OBJECTIVE High current return [GRAPHIC -- BUILD ON THE ROCK] As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved the Fund's shares nor has the SEC determined that this prospectus is complete or accurate. It is a criminal offense to state otherwise. [PRUDENTIAL LOGO] TABLE OF CONTENTS - - ------------------------------------- 1 RISK/RETURN SUMMARY 1 Investment Objective and Principal Strategies 1 Principal Risks 2 Evaluating Performance 3 Fees and Expenses 5 HOW THE FUND INVESTS 5 Investment Objective and Policies 7 Other Investments and Strategies 11 Investment Risks 16 HOW THE FUND IS MANAGED 16 Board of Directors 16 Manager 16 Investment Adviser 18 Distributor 19 FUND DISTRIBUTIONS AND TAX ISSUES 19 Distributions 20 Tax Issues 21 If You Sell or Exchange Your Shares 23 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND 23 How to Buy Shares 31 How to Sell Your Shares 35 How to Exchange Your Shares 36 Telephone Redemptions or Exchanges 38 FINANCIAL HIGHLIGHTS 38 Class A Shares 39 Class B Shares 40 Class C Shares 41 Class Z Shares 44 THE PRUDENTIAL MUTUAL FUND FAMILY FOR MORE INFORMATION (Back Cover) - - ------------------------------------------------------------------- PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 RISK/RETURN SUMMARY - - ------------------------------------- This section highlights key information about the PRUDENTIAL GOVERNMENT INCOME FUND, INC. which we refer to as "the Fund." Additional information follows this summary. INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES Our investment objective is HIGH CURRENT RETURN. We normally invest at least 65% of the Fund's total assets in U.S. Government securities, including U.S. Treasury bills, notes, bonds, strips and other debt securities issued by the U.S. Treasury, and obligations, including mortgage-related securities, issued or guaranteed by U.S. Government agencies or instrumentalities. We may also engage in active trading. While we make every effort to achieve our objective, we can't guarantee success. The investment adviser has a team of fixed-income professionals, including credit analysts and traders, with experience in many sectors of the U.S. and foreign fixed-income securities markets. In deciding which portfolio securities to buy and sell, the investment adviser will consider economic conditions and interest rate fundamentals. The investment adviser will also evaluate individual issues within each bond sector based upon their relative investment merit and will consider factors such as yield and potential for price appreciation, as well as credit quality, maturity and risk. PRINCIPAL RISKS Although we try to invest wisely, all investments involve risk. The debt obligations in which the Fund invests are subject to the risk of losing value because interest rates change or there is a lack of confidence in the borrower. In addition, these securities may be subject to the risk that the issuer may be unable to make principal and interest payments when they are due. Mortgage-related securities are also subject to prepayment risk, which means that if they are prepaid, the Fund may have to replace them with lower-yielding securities. The Fund may actively and frequently trade its portfolio securities. High portfolio turnover results in higher transaction costs and can affect the Fund's performance and have adverse tax consequences. Like any mutual fund, an investment in the Fund could lose value, and you could lose money. For more detailed information about the risks associated with the Fund, see "How the Fund Invests--Investment Risks." An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. - - ------------------------------------------------------------------------------ 1 RISK/RETURN SUMMARY - - ------------------------------------------------ EVALUATING PERFORMANCE A number of factors--including risk--can affect how the Fund performs. The following bar chart shows the Fund's performance for each full calendar year of operation for the last 10 years. The bar chart and table below demonstrate the risk of investing in the Fund by showing how returns can change from year to year and by showing how the Fund's average annual total returns compare with those of a broad measure of market performance and a group of similar mutual funds. Past performance does not mean that the Fund will achieve similar results in the future. ANNUAL RETURNS* (CLASS B SHARES) EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC 1990 7.07% 1991 14.32% 1992 5.83% 1993 6.90% 1994 -4.76% 1995 19.01% 1996 0.81% 1997 8.56% 1998 8.02% 1999 -3.60% BEST QUARTER: 6.49% (2nd quarter of 1995) WORST QUARTER: -3.45% (1st quarter of 1994) * THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE BEEN LOWER, TOO. AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99) 1 YR 5 YRS 10 YRS SINCE INCEPTION Class A shares (7.03)% 6.09% N/A 6.47% (since 1-22-90) Class B shares (8.60)% 6.13% 5.99% 6.95% (since 4-22-85) Class C shares (5.49)% 6.16% N/A 5.34% (since 8-1-94) Class Z shares (2.93)% N/A N/A 4.65% (since 3-4-96) Lehman Bros. Government Bond Index(2) (2.23)% 7.44% 7.48% N/A Lipper Average(3) (3.02)% 6.50% 6.63% N/A 1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES. WITHOUT THE DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER FOR CLASS A, CLASS B, AND CLASS C SHARES, THE RETURNS WOULD HAVE BEEN LOWER. 2 THE LEHMAN BROTHERS GOVERNMENT BOND INDEX (GOV'T BOND INDEX) -- AN UNMANAGED INDEX OF SECURITIES ISSUED OR BACKED BY THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES WITH BETWEEN ONE AND THIRTY YEARS REMAINING TO MATURITY -- GIVES A BROAD LOOK AT HOW U.S. GOVERNMENT BONDS WITH SUCH MATURITIES HAVE PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGES OR OPERATING EXPENSES OF A MUTUAL FUND. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES AND OPERATING EXPENSES. GOV'T BOND INDEX RETURNS SINCE THE INCEPTION OF EACH CLASS ARE 108.70% FOR CLASS A, 242.76% FOR CLASS B, 41.64% FOR CLASS C AND 22.72% FOR CLASS Z SHARES. SOURCE: LEHMAN BROTHERS. 3 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN THE LIPPER GENERAL U.S. GOVERNMENT BOND FUND CATEGORY. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES. LIPPER RETURNS SINCE THE INCEPTION OF EACH CLASS ARE 93.23% FOR CLASS A, 190.44% FOR CLASS B, 35.24% FOR CLASS C AND 18.42% FOR CLASS Z SHARES. SOURCE: LIPPER INC. - - ------------------------------------------------------------------- 2 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 RISK/RETURN SUMMARY - - ------------------------------------------------ FEES AND EXPENSES These tables show the sales charges, fees and expenses that you may pay if you buy and hold shares of each class of the Fund--Class A, B, C and Z. Each share class has different sales charges-- known as loads--and expenses, but represents an investment in the same fund. Class Z shares are available only to a limited group of investors. For more information about which share class may be right for you, see "How to Buy, Sell and Exchange Shares of the Fund." SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A CLASS B CLASS C CLASS Z Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 4% None 1% None Maximum deferred sales charge (load) (as a percentage of the lower of original purchase price or sale proceeds) None 5%(2) 1%(3) None Maximum sales charge (load) imposed on reinvested dividends and other distributions None None None None Redemption fees None None None None Exchange fee None None None None ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS) CLASS A CLASS B CLASS C CLASS Z Management fees .50% .50% .50% .50% + Distribution and service (12b-1) fees(4) .30% 1.00% 1.00% None + Other expenses .19% .19% .19% .19% = Total annual Fund operating expenses .99% 1.69% 1.69% .69% - Fee waiver or expense reimbursement(4) .05% .175% .25% None = NET ANNUAL FUND OPERATING EXPENSES .94% 1.52% 1.44% .69% 1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND SALES OF SHARES. 2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY 1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR. CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER PURCHASE. 3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF PURCHASE. 4 FOR THE FISCAL YEAR ENDING FEBRUARY 28, 2001, THE DISTRIBUTOR OF THE FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1) FEES FOR CLASS A, CLASS B AND CLASS C SHARES TO .25 OF 1%, .825 OF 1% AND .75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF CLASS A, CLASS B AND CLASS C SHARES, RESPECTIVELY. - - ------------------------------------------------------------------------------ 3 RISK/RETURN SUMMARY - - ------------------------------------------------ EXAMPLE This example will help you compare the fees and expenses of the Fund's different share classes and compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same, except for the Distributor's reduction of distribution and service (12b-1) fees for Class A, Class B and Class C shares during the first year. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: 1 YR 3 YRS 5 YRS 10 YRS Class A shares $492 $698 $921 $1,560 Class B shares $654 $816 $1,001 $1,710 Class C shares $345 $603 $985 $2,057 Class Z shares $70 $221 $384 $859 You would pay the following expenses on the same investment if you did not sell your shares: 1 YR 3 YRS 5 YRS 10 YRS Class A shares $492 $698 $921 $1,560 Class B shares $154 $516 $901 $1,710 Class C shares $245 $603 $985 $2,057 Class Z shares $70 $221 $384 $859 - - ------------------------------------------------------------------- 4 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW THE FUND INVESTS - - ------------------------------------- INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is HIGH CURRENT RETURN. While we make every effort to achieve our objective, we can't guarantee success. The Fund seeks to achieve its objective by investing under normal market conditions at least 65% of its total assets in U.S. GOVERNMENT SECURITIES. These include DEBT OBLIGATIONS ISSUED BY THE U.S. TREASURY. Treasury securities are all backed by the full faith and credit of the U.S. Government, which means that payment of interest and principal is guaranteed, but yield and market value are not. The Fund may also acquire U.S. Government securities in the form of custodial receipts that show ownership of future interest payments, principal payments or both on certain U.S. Treasury notes or bonds. Such notes or bonds are held in custody by a bank on behalf of the owners. These custodial receipts are commonly referred to as TREASURY STRIPS. The Fund may also invest in other DEBT OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT and government-related entities. Some of these debt securities are backed by the full faith and credit of the U.S. Government. These include obligations of the Government National Mortgage Association (GNMA or "Ginnie Mae"), the Farmers Home Administration and the Export-Import Bank. Debt securities issued by other government entities, like obligations of the Federal National Mortgage Association (FNMA or "Fannie Mae"), the Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"), the Federal Home Loan Bank, the Tennessee Valley Authority and the United States Postal Service are not backed by the full faith and credit of the U.S. Government. However, these issuers have the right to borrow from the U.S. Treasury to meet their obligations. In contrast, the debt securities of other issuers, like the Farm Credit System, depend entirely upon their own resources to repay their debt obligations. The Fund has no limitations with respect to the maturities of portfolio securities in which it may invest. The Fund invests in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S. governmental entities. The Fund may also invest in privately issued MORTGAGE-RELATED SECURITIES. These securities are usually pass-through instruments that pay investors a share of all interest and principal payments from an underlying pool of fixed or adjustable rate mortgages. Mortgage-related securities issued by the U.S. Government or its agencies - - ------------------------------------------------------------------------------ 5 HOW THE FUND INVESTS - - ------------------------------------------------ include FNMAs, GNMAs and FHLMCs. The U.S. Government or the issuing agency directly or indirectly guarantees the payment of interest and principal on these securities. Privately issued mortgage-related securities are not guaranteed by U.S. governmental entities and generally have one or more types of credit enhancement to ensure timely receipt of payments and to protect against default. Mortgage pass-through securities include collateralized mortgage obligations, real estate mortgage investment conduits, multi-class pass-through securities, stripped mortgage-backed securities and balloon payment mortgage-backed securities. A COLLATERALIZED MORTGAGE OBLIGATION (CMO) is a security backed by an underlying portfolio of mortgages or mortgage-backed securities that may be issued or guaranteed by a bank or by U.S. governmental entities. A REAL ESTATE MORTGAGE INVESTMENT CONDUIT (REMIC) is a security issued by a U.S. Government agency or private issuer and secured by real property. REMICs consist of classes of regular interest, some of which may be adjustable rate, and a single class of residual interests. The Fund does not intend to invest in residual interests. A MULTI-CLASS PASS-THROUGH SECURITY is an equity interest in a trust composed of underlying mortgage assets. Payments of principal of and interest on the mortgage assets and any reinvestment income thereon provide funds to pay debt service on the CMO or to make scheduled distributions on the multi-class pass-through security. A STRIPPED MORTGAGE-BACKED SECURITY (MBS STRIP) may be issued by U.S. governmental entities or by private institutions. MBS strips take the pieces of a debt security (principal and interest) and break them apart. The resulting securities may be sold separately and may perform differently. The Fund may also invest in BALLOON PAYMENT MORTGAGE-BACKED SECURITIES, which are amortizing mortgage securities offering payments of principal and interest, the last payment of which is predominantly principal. The values of mortgage-related securities vary with changes in market interest rates generally and changes in yields among various kinds of mortgage-related securities. Such values are particularly sensitive to changes in prepayments of the underlying mortgages. For example, during periods of falling interest rates, prepayments tend to accelerate as homeowners and others refinance their higher rate mortgages; these prepayments reduce the anticipated duration of the mortgage-related securities. Conversely, during periods of rising interest rates, prepayments - - ------------------------------------------------------------------- 6 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW THE FUND INVESTS - - ------------------------------------------------ can be expected to decelerate, which has the effect of extending the anticipated duration at the same time that the value of the securities declines. MBS strips tend to be even more highly sensitive to changes in prepayment and interest rates than mortgage-related securities and CMOs generally. The Fund may also engage in ACTIVE TRADING--that is, frequent trading of its securities--in order to take advantage of new investment opportunities or yield differentials. There may be tax consequences, such as a possible increase in short-term capital gains or losses, when the Fund sells a security without regard to how long it has held the security. In addition, active trading may result in greater transaction costs, which will reduce the Fund's return. For more information, see "Investment Risks" below and the Statement of Additional Information, "Description of the Fund, Its Investments and Risks." The Statement of Additional Information--which we refer to as the SAI--contains additional information about the Fund. To obtain a copy, see the back cover page of this prospectus. The Fund's investment objective is a fundamental policy that cannot be changed without shareholder approval. The Board of the Fund can change investment policies of the Fund that are not fundamental. OTHER INVESTMENTS AND STRATEGIES In addition to the principal strategies, we also may use the following investment strategies to increase the Fund's returns or protect its assets if market conditions warrant. ASSET-BACKED SECURITIES The Fund may invest up to 20% of the Fund's total assets in PRIVATELY-ISSUED ASSET-BACKED SECURITIES. An asset-backed security is another type of pass-through instrument that pays interest based upon the cash flow of an underlying pool of assets, such as automobile loans and credit card receivables. FOREIGN BANK OBLIGATIONS The Fund may invest in OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS only if, after making that investment, all such investments would make up less than 10% of the Fund's total assets (determined at the time of investment). - - ------------------------------------------------------------------------------ 7 HOW THE FUND INVESTS - - ------------------------------------------------ The Fund may invest in OBLIGATIONS OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (THE WORLD BANK). Obligations of the World Bank are supported by appropriated but unpaid commitments of its member countries, including the U.S., and there is no assurance these commitments will be undertaken or met in the future. FIXED AND ADJUSTABLE RATE DEBT SECURITIES The Fund is permitted to invest in both fixed and adjustable rate debt securities. FIXED RATE DEBT SECURITIES are securities that have an interest rate that is set at the time the security is issued. ADJUSTABLE RATE DEBT SECURITES are securities that have an interest rate that is adjusted based on the market rate at a specified period. The value of adjustable rate debt securities will, like other debt securities, generally vary inversely with changes in prevailing interest rates. The value of adjustable rate debt securities is unlikely to rise in periods of declining interest rates to the same extent as fixed rate instruments. In periods of rising interest rates, changes in the coupon will lag behind changes in the market rate, resulting in a lower net asset value until the coupon resets to market rates. The debt obligations in which the Fund may invest are rated at least A by Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's") or, if unrated, are deemed to be of comparable credit quality by the Fund's investment adviser. REPURCHASE AND REVERSE REPURCHASE AGREEMENTS The Fund may use REPURCHASE AGREEMENTS, where a party agrees to sell a security to the Fund and then repurchases it at an agreed-upon price at a stated time. A repurchase agreement is like a loan by the Fund to the other party which creates a fixed return for the Fund. Repurchase agreements are used for cash management purposes. The Fund may use REVERSE REPURCHASE AGREEMENTS, where the Fund borrows money on a temporary basis by selling a security with an obligation to repurchase it at an agreed-upon price and time. MONEY MARKET INSTRUMENTS The Fund may, under normal circumstances, invest up to 20% of its total assets in high-quality MONEY MARKET INSTRUMENTS, including commercial paper of domestic companies, certificates of deposit, bankers' acceptances and other obligations of domestic and foreign banks. Investments in money market instruments for coverage purposes will be excluded in calculating - - ------------------------------------------------------------------- 8 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW THE FUND INVESTS - - ------------------------------------------------ the 20%. The Fund will only purchase money market instruments that are in one of the two highest quality grades of a major rating service or that we determine are of comparable equality. TEMPORARY DEFENSIVE INVESTMENTS In response to adverse market, economic or political conditions, we may temporarily invest up to 100% of the Fund's total assets in high-quality money market instruments, cash, repurchase agreements or U.S. Government securities. Investing heavily in these securities limits our ability to achieve our investment objective, but can help to preserve the Fund's assets. DERIVATIVE STRATEGIES We may use various DERIVATIVE STRATEGIES to try to improve the Fund's returns. We may use hedging techniques to try to protect the Fund's assets. We cannot guarantee that these strategies and techniques will work, that the instruments necessary to implement these strategies and techniques will be available, or that the Fund will not lose money. Derivatives--such as futures contracts, including interest rate futures contracts and Eurodollar instruments, options, including straddles, options on futures, and interest rate swaps--involve costs and can be volatile. With derivatives, the investment adviser tries to predict if the underlying investment, whether a security, market index, currency, interest rate, or some other investment, will go up or down at some future date. We may use derivatives to try to reduce risk or to increase return consistent with the Fund's overall investment objective. The investment adviser will consider other factors (such as cost) in deciding whether to employ any particular strategy or use any particular instrument. Any derivatives we may use may not match the Fund's underlying holdings. OPTIONS The Fund may buy and sell call or put options on U.S. Government securities traded on U.S. securities exchanges or in the over-the-counter market. An OPTION is the right to buy or sell a security in exchange for a premium. The Fund will sell only covered options. The Fund may use straddles. A STRADDLE is a combination of a call and a put written on the same security at the same exercise price. The Fund's use of straddles will not exceed 5% of its net assets. - - ------------------------------------------------------------------------------ 9 HOW THE FUND INVESTS - - ------------------------------------------------ FUTURES CONTRACTS AND RELATED OPTIONS The Fund may purchase and sell financial futures contracts and related options on financial futures. A FUTURES CONTRACT is an agreement to buy or sell a set quantity of an underlying product at a future date, or to make or receive a cash payment based on the value of a securities index. The Fund may invest up to 5% of its total assets for initial margin deposits on existing futures and options on futures and for premiums paid for these types of options. The Fund may invest in Eurodollar instruments. EURODOLLAR INSTRUMENTS are essentially U.S. dollar-denominated futures contracts linked to the London Interbank Offered Rate (LIBOR). Eurodollar instruments enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. INTEREST RATE SWAP TRANSACTIONS The Fund may enter into INTEREST RATE SWAP TRANSACTIONS. In a swap transaction, the Fund and another party "trade" income streams. The swap is done to preserve a return or spread on a particular investment or portion of a portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. DOLLAR ROLLS The Fund may enter into DOLLAR ROLLS in which the Fund sells securities to be delivered in the current month and repurchases substantially similar (same type and coupon) securities to be delivered on a specified future date by the same party. The Fund is paid the difference between the current sales price and the forward price for the future purchase as well as the interest earned on the cash proceeds of the initial sale. WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES The Fund may purchase money market obligations on a WHEN-ISSUED or DELAYED-DELIVERY basis. When the Fund makes this type of purchase, the price and interest rate are fixed at the time of purchase, but delivery and payment for the obligations take place at a later time. The Fund does not earn interest income until the date the obligations are delivered. ZERO COUPON BONDS The Fund may invest up to 5% of its total assets in zero coupon U.S. Government securities. ZERO COUPON BONDS do not pay interest during the - - ------------------------------------------------------------------- 10 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW THE FUND INVESTS - - ------------------------------------------------ life of the security. An investor makes money by purchasing the security at a price that is less than the money the investor will receive when the borrower repays the amount borrowed (face value). The Fund records the amount zero coupon bonds rise in price each year (phantom income) for accounting and federal income tax purposes, but does not receive income currently. Because the Fund is required under federal tax laws to distribute income to its shareholders, in certain circumstances, the Fund may have to dispose of its portfolio securities under disadvantageous conditions or borrow to generate enough cash to distribute phantom income. SHORT SALES AGAINST-THE-BOX The Fund may use SHORT SALES AGAINST-THE-BOX. In a short sale "against the box," the Fund owns or has the right to acquire the security at no additional cost through conversion or exchange of other securities it owns. The Fund may engage in such short sales only to the extent that not more than 10% of the Fund's net assets (as determined at the time of the short sale) are held as collateral for such sales. For more information about these strategies, see the SAI, "Description of the Fund, Its Investments and Risks." ADDITIONAL STRATEGIES The Fund also follows certain policies when it LENDS ITS SECURITIES to others (the Fund may lend up to 30% of the value of its total assets); BORROWS MONEY (the Fund can borrow up to 20% of the value of its total assets); and HOLDS ILLIQUID SECURITIES (the Fund may hold up to 15% of its net assets in illiquid securities, including securities with legal or contractual restrictions on resale, those without a readily available market and repurchase agreements with maturities longer than seven days). The Fund is subject to certain investment restrictions that are fundamental policies, which means they cannot be changed without shareholder approval. For more information about these restrictions, see the SAI. INVESTMENT RISKS As noted, all investments involve risk, and investing in the Fund is no exception. Since the Fund's holdings can vary significantly from broad market indexes, performance of the Fund can deviate from performance of the indexes. This chart outlines the key risks and potential rewards of the Fund's principal investments and certain other non-principal investments the Fund may make. See, too, "Description of the Fund, Its Investments and Risks" in the SAI. - - ------------------------------------------------------------------------------ 11 HOW THE FUND INVESTS - - ------------------------------------------------ INVESTMENT TYPE % OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS - - --------------------------------------------------------------------------------- U.S. GOVERNMENT -- Credit risk--the risk -- Regular interest SECURITIES that the borrower income can't pay back the -- Generally more secure UP TO 100%; AT LEAST money borrowed or than lower quality 65% make interest debt securities and payments (relatively equity securities low for U.S. -- The U.S. Government Government guarantees interest securities) and principal -- Market risk--the risk payments on certain that obligations U.S. Government will lose value in securities the market because -- May preserve the interest rates rise Fund's assets or there is a lack of confidence in the borrower -- Not all U.S. Government securities are insured or guaranteed by the U.S. Government--some are backed by the issuing agency - - --------------------------------------------------------------------------------- MORTGAGE-RELATED -- Prepayment risk--the -- Regular interest SECURITIES risk that the income underlying mortgages -- The U.S. Government PERCENTAGE VARIES; UP may be pre-paid, guarantees interest TO 100% IN U.S. partially or and principal GOVERNMENT BACKED completely, payments on certain generally during securities periods of falling -- May benefit from interest rates, security interest in which could real estate adversely affect collateral yield to maturity -- Pass-through and could require instruments provide the Fund to reinvest greater in lower-yielding diversification than securities direct ownership of -- Credit risk--the risk loans that the underlying mortgages will not be paid by debtors or by credit insurers or guarantors of such instruments. Some private mortgage securities are unsecured or secured by lower-rated insurers or guarantors and thus may involve greater risk -- See market risk - - --------------------------------------------------------------------------------- - - ------------------------------------------------------------------- 12 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW THE FUND INVESTS - - ------------------------------------------------ INVESTMENT TYPE (CONT'D) % OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS - - --------------------------------------------------------------------------------- ASSET-BACKED SECURITIES -- The security interest -- Regular interest in the underlying income UP TO 20% collateral may not -- Prepayment risk is be as great as with generally lower than mortgage-related with securities mortgage-related -- Credit risk--the risk securities that the underlying -- Pass-through receivables will not instruments provide be paid by debtors greater or by credit diversification than insurers or direct ownership of guarantors of such loans instruments. Some asset-backed securities are unsecured or secured by lower-rated insurers or guarantors and thus may involve greater risk -- See market risk and prepayment risk - - --------------------------------------------------------------------------------- DERIVATIVES -- Derivatives such as -- The Fund could make futures, options, money and protect PERCENTAGE VARIES options on futures against losses if and interest rate the investment swaps that are used analysis proves for hedging purposes correct may not fully offset -- One way to manage the the underlying Fund's risk/return positions and this balance is to lock could result in in the value of an losses to the Fund investment ahead of that would not have time otherwise occurred -- Derivatives used for -- Derivatives used for return enhancement risk management may purposes involve a not have the type of leverage and intended effects and could generate may result in losses substantial gains at or missed low cost opportunities -- The other party to a derivatives contract could default -- Certain types of derivatives involve costs to the Fund that can reduce returns -- Derivatives used for return enhancement purposes involve a type of leverage (borrowing for investment) and could magnify losses - - --------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------ 13 HOW THE FUND INVESTS - - ------------------------------------------------ INVESTMENT TYPE (CONT'D) % OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS - - --------------------------------------------------------------------------------- MONEY MARKET -- Limits potential for -- May preserve the INSTRUMENTS capital appreciation Fund's assets -- See credit risk and UP TO 20%; UP TO 100% market risk (which ON A TEMPORARY BASIS are less of a concern for money market instruments) - - --------------------------------------------------------------------------------- ILLIQUID SECURITIES -- Illiquidity risk--the -- May offer a more risk that bonds may attractive yield or UP TO 15% OF NET ASSETS be difficult to potential for growth value precisely and than more widely sell at time or traded securities price desired, in which case valuation would depend more on investment adviser's judgment than is generally the case with higher-rated securities - - --------------------------------------------------------------------------------- FOREIGN BANK -- Foreign markets, -- Investors can OBLIGATIONS economies and participate in the political systems growth of foreign LESS THAN 10% may not be as stable markets and as those in the companies operating U.S., particularly in those markets those in developing -- Changing value of countries foreign currencies -- May be less liquid can cause gains than U.S. debt -- Opportunities for securities diversification -- Differences in foreign laws, accounting standards, public information, custody and settlement practices provide less reliable information on foreign investments and involve more risks -- Currency risk-- changing value of foreign currencies can cause losses - - --------------------------------------------------------------------------------- - - ------------------------------------------------------------------- 14 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW THE FUND INVESTS - - ------------------------------------------------ INVESTMENT TYPE (CONT'D) % OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS - - --------------------------------------------------------------------------------- WHEN-ISSUED AND -- May magnify -- May magnify DELAYED-DELIVERY underlying underlying SECURITIES, REPURCHASE investment losses investment gains AGREEMENTS, REVERSE -- Investment costs may REPURCHASE AGREEMENTS, exceed potential DOLLAR ROLLS AND SHORT underlying SALES investment gains PERCENTAGE VARIES - - --------------------------------------------------------------------------------- ZERO COUPON BONDS -- Typically subject to -- Value rises faster greater volatility when interest rates PERCENTAGE VARIES; and less liquidity fall USUALLY LESS THAN 5% in adverse markets than other debt securities -- See credit risk and market risk - - --------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------ 15 HOW THE FUND IS MANAGED - - ------------------------------------- BOARD OF DIRECTORS The Fund's Board of Directors oversees the actions of the Manager, investment adviser and Distributor and decides on general policies. The Board also oversees the Fund's officers, who conduct and supervise the daily business operations of the Fund. MANAGER PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM) GATEWAY CENTER THREE, 100 MULBERRY STREET NEWARK, NJ 07102-4077 Under a management agreement with the Fund, PIFM manages the Fund's investment operations and administers its business affairs. PIFM also is responsible for supervising the Fund's investment adviser. For the fiscal year ended February 29, 2000, the Fund paid PIFM management fees of .50% of the Fund's average daily net assets. PIFM and its predecessors have served as manager or administrator to investment companies since 1987. As of January 31, 2000, PIFM served as the manager to all 43 of the Prudential mutual funds, and as manager or administrator to 22 closed-end investment companies, with aggregate assets of approximately $74.9 billion. INVESTMENT ADVISER The Prudential Investment Corporation, called Prudential Investments, is the Fund's investment adviser and has served as an investment adviser to investment companies since 1984. Its address is Prudential Plaza, 751 Broad Street, Newark, NJ 07102. PIFM has responsibility for all investment advisory services, supervises Prudential Investments and pays Prudential Investments for its services. Prudential Investments' Fixed Income Group manages more than $135 billion for Prudential's retail investors, institutional investors, and policyholders. Senior Managing Directors James J. Sullivan and Jack W. Gaston head the Group, which is organized into teams specializing in different market sectors. Top-down, broad investment decisions are made by the Fixed Income Policy Committee, whereas bottom-up security selection is made by the sector teams. - - ------------------------------------------------------------------- 16 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW THE FUND IS MANAGED - - ------------------------------------------------ Mr. Sullivan has overall responsibility for overseeing portfolio management and credit research. Prior to joining Prudential Investments in 1998, he was a managing director in Prudential's Capital Management Group, where he oversaw portfolio management and credit research for Prudential's General Account and subsidiary fixed-income portfolios. He has more than 16 years of experience in risk management, arbitrage trading, and corporate bond investing. Mr. Gaston has overall responsibility for overseeing quantitative research and risk management. Prior to this appointment in 1999, he was senior managing director of the Capital Management Group where he was responsible for the investment performance and risk management for Prudential's General Account and subsidiary fixed-income portfolios. He has more than 20 years of experience in investment management, including extensive experience applying quantitative techniques to portfolio management. The Fixed Income Investment Policy Committee is comprised of key senior investment managers. Members include seven sector team leaders, the chief investment strategist, and the head of risk management. The Committee uses a top-down approach to investment strategy, asset allocation, and general risk management, identifying sectors in which to invest. The U.S. Liquidity Team, headed by Michael Lillard, is primarily responsible for overseeing the day-to-day management of the Fund. This Team uses a bottom-up approach, which focuses on individual securities, while staying within the guidelines of the Investment Policy Committee and the Fund's investment restrictions and policies. In addition, the Credit Research team of analysts supports the sector teams using bottom-up fundamentals, as well as economic and industry trends. Other sector teams may contribute to securities selection when appropriate. U.S. LIQUIDITY ASSETS UNDER MANAGEMENT: $22.6 billion (as of December 31, 1999). TEAM LEADER: Michael Lillard. GENERAL INVESTMENT EXPERIENCE: 12 years. PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which includes team members with significant mutual fund experience. SECTOR: U.S. Treasuries, agencies and mortgages. - - ------------------------------------------------------------------------------ 17 HOW THE FUND IS MANAGED - - ------------------------------------------------ INVESTMENT STRATEGY: Focus is on high quality, liquidity and controlled risk. DISTRIBUTOR Prudential Investment Management Services LLC (PIMS) distributes the Fund's shares under a Distribution Agreement with the Fund. The Fund has Distribution and Service Plans under Rule 12b-1 under the Investment Company Act. Under the Plans and the Distribution Agreement, PIMS pays the expenses of distributing the Fund's Class A, B, C and Z shares and provides certain shareholder support services. The Fund pays distribution and other fees to PIMS as compensation for its services for each class of shares other than Class Z. These fees--known as 12b-1 fees--are shown in the "Fees and Expenses" tables. - - ------------------------------------------------------------------- 18 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 FUND DISTRIBUTIONS AND TAX ISSUES - - ------------------------------------- Investors who buy shares of the Fund should be aware of some important tax issues. For example, the Fund distributes DIVIDENDS of ordinary income and CAPITAL GAINS, if any, to shareholders. These distributions are subject to federal income taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement Account (IRA) or some other qualified or tax-deferred plan or account. Dividends and distributions from the Fund also may be subject to state and local income tax in the state where you live. Also, if you sell shares of the Fund for a profit, you may have to pay capital gains taxes on the amount of your profit, again unless you hold your shares in a qualified or tax-deferred plan or account. The following briefly discusses some of the important tax issues you should be aware of, but is not meant to be tax advice. For tax advice, please speak with your tax adviser. DISTRIBUTIONS The Fund distributes DIVIDENDS out of any net investment income, plus short-term capital gains, to shareholders typically every quarter. For example, if the Fund owns a U.S. Government bond and the bond pays interest, the Fund will pay out a portion of this interest as a dividend to its shareholders, assuming the Fund's income is more than its costs and expenses. The dividends you receive from the Fund will be taxed as ordinary income whether or not they are reinvested in the Fund. The Fund also distributes LONG-TERM CAPITAL GAINS to shareholders-- typically once a year. Long-term capital gains are generated when the Fund sells assets that it held for more than 12 months for a profit. For an individual, the maximum long-term capital gains rate is 20%. For your convenience, Fund distributions of dividends and capital gains are AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to pay the distributions in cash, we will send you a check if your account is with the Transfer Agent. Otherwise, if your account is with a broker, you will receive a credit to your account. Either way, the distributions may be subject to taxes, unless your shares are held in a qualified or tax-deferred plan or account. For more information about automatic reinvestment and other shareholder services, see "Step 4: Additional Shareholder Services" in the next section. - - ------------------------------------------------------------------------------ 19 FUND DISTRIBUTIONS AND TAX ISSUES - - ------------------------------------------------ TAX ISSUES FORM 1099 Every year, you will receive a Form 1099, which reports the amount of dividends and long-term capital gains we distributed to you during the prior year. If you own shares of the Fund as part of a qualified or tax-deferred plan or account, your taxes are deferred, so you will not receive a Form 1099. However, you will receive a Form 1099 when you take any distributions from your qualified or tax-deferred plan or account. Fund distributions are generally taxable to you in the calendar year they are received, except when we declare certain dividends in the fourth quarter, and actually pay them in January of the following year. In such cases, the dividends are treated as if they were paid on December 31 of the prior year. WITHHOLDING TAXES If federal law requires you to provide the Fund with your taxpayer identification number and certifications as to your tax status, and you fail to do this, or if you are otherwise subject to backup withholding, we will withhold and pay to the U.S. Treasury 31% of your taxable distributions and gross sale proceeds. Dividends of net investment income and short-term capital gains paid to a nonresident foreign shareholder generally will be subject to a U.S. withholding tax of 30%. This rate may be lower, depending on any tax treaty the U.S. may have with the shareholder's country. IF YOU PURCHASE JUST BEFORE RECORD DATE If you buy shares of the Fund just before the record date for a distribution (the date that determines who receives the distribution), that distribution will be paid to you. As explained above, the distribution may be subject to income or capital gains taxes. You may think you've done well, since you bought shares one day and soon thereafter received a distribution. That is not so because when dividends are paid out, the value of each share of the Fund decreases by the amount of the dividend to reflect the payout although this may not be apparent because the value of each share of the Fund also will be affected by market changes, if any. The distribution you receive makes up for the decrease in share value. However, the timing of your purchase does mean that part of your investment came back to you as taxable income. - - ------------------------------------------------------------------- 20 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 FUND DISTRIBUTIONS AND TAX ISSUES - - ------------------------------------------------ QUALIFIED OR TAX-DEFERRED RETIREMENT PLANS Retirement plans and accounts allow you to defer paying taxes on investment income and capital gains. Contributions to these plans may also be tax deductible, although distributions from these plans generally are taxable. In the case of Roth IRA accounts, contributions are not tax deductible, but distributions from the plan may be tax free. Please contact your financial adviser for information on a variety of Prudential mutual funds that are suitable for retirement plans offered by Prudential. IF YOU SELL OR EXCHANGE YOUR SHARES If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL GAIN, which is subject to tax unless the shares are held in a qualified or tax-deferred plan or account. For individuals, the maximum capital gains tax rate is 20% for shares held for more than twelve months. If you sell shares of the Fund for a loss, you may have a capital loss, which you may use to offset certain capital gains you have. - - --------------------------------------------------------------------- +$ CAPITAL GAIN (taxes owed) Receipts from Sale $ OR -$ CAPITAL LOSS (offset against gain) - - --------------------------------------------------------------------- If you sell shares and realize a loss, you will not be permitted to use the loss to the extent you replace the shares (including pursuant to the reinvestment of a dividend) within a 61-day period (beginning 30 days before the sale of the shares). Under certain circumstances, if you acquire shares of the Fund and sell or exchange your shares within 90 days, you may not be allowed to include certain charges incurred in acquiring the shares for purposes of calculating gain or loss realized upon the sale of the shares. Exchanging your shares of the Fund for the shares of another Prudential mutual fund is considered a sale for tax purposes. In other words, it's a "taxable event." Therefore, if the shares you exchanged have increased in value since you purchased them, you have capital gains, which are subject to the taxes described above. Any gain or loss you may have from selling or exchanging Fund shares will not be reported on Form 1099; however, proceeds from the sale or exchange will be reported on Form 1099-B. Therefore, unless you hold your - - ------------------------------------------------------------------------------ 21 FUND DISTRIBUTIONS AND TAX ISSUES - - ------------------------------------------------ shares in a qualified or tax-deferred plan or account, you or your financial adviser should keep track of the dates on which you buy and sell--or exchange--Fund shares, as well as the amount of any gain or loss on each transaction. For tax advice, please see your tax adviser. AUTOMATIC CONVERSION OF CLASS B SHARES We have obtained a legal opinion that the conversion of Class B shares into Class A shares--which happens automatically approximately seven years after purchase--is not a "taxable event". This opinion, however, is not binding on the Internal Revenue Service. For more information about the automatic conversion of Class B shares, see "Class B Shares Convert to Class A Shares After Approximately Seven Years" in the next section. - - ------------------------------------------------------------------- 22 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------- HOW TO BUY SHARES STEP 1: OPEN AN ACCOUNT If you don't have an account with us or a securities firm that is permitted to buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC (PMFS) at (800) 225-1852 or contact: PRUDENTIAL MUTUAL FUND SERVICES LLC ATTN: INVESTMENT SERVICES P.O. BOX 15020 NEW BRUNSWICK, NJ 08906-5020 To purchase by wire, call the number above to obtain an application. After PMFS receives your completed application, you will receive an account number. For additional information about purchasing shares of the Fund, see the back cover page of this prospectus. We have the right to reject any purchase order (including an exchange into the Fund) or suspend or modify the Fund's sale of its shares. STEP 2: CHOOSE A SHARE CLASS Individual investors can choose among Class A, Class B, Class C and Class Z shares of the Fund, although Class Z shares are available only to a limited group of investors. Multiple share classes let you choose a cost structure that meets your needs. With Class A shares, you pay the sales charge at the time of purchase, but the operating expenses each year are lower than the expenses of Class B and Class C shares. With Class B shares, you only pay a sales charge if you sell your shares within six years (that is why it is called a Contingent Deferred Sales Charge or CDSC), but the operating expenses each year are higher than Class A share expenses. With Class C shares, you pay a 1% front-end sales charge and a 1% CDSC if you sell within 18 months of purchase, but the operating expenses are also higher than the expenses for Class A shares. When choosing a share class, you should consider the following: -- The amount of your investment -- The length of time you expect to hold the shares and the impact of the varying distribution fees -- The different sales charges that apply to each share class-- Class A's front-end sales charge vs. Class B's CDSC vs. Class C's lower front-end sales charge and low CDSC -- Whether you qualify for any reduction or waiver of sales charges - - ------------------------------------------------------------------------------ 23 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ -- The fact that Class B shares automatically convert to Class A shares approximately seven years after purchase -- Whether you qualify to purchase Class Z shares. See "How to Sell Your Shares" for a description of the impact of CDSCs. SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different share classes. The discussion following this chart will tell you whether you are entitled to a reduction or waiver of any sales charges. CLASS A CLASS B CLASS C CLASS Z Minimum purchase amount(1) $1,000 $1,000 $2,500 None Minimum amount for $100 $100 $100 None subsequent purchases(1) Maximum initial sales 4% of the None 1% of the None charge public public offering offering price price Contingent Deferred Sales None If sold during: 1% on sales None Charge (CDSC)(2) Year 1 5% made within Year 2 4% 18 months of Year 3 3% purchase(2) Year 4 2% Year 5 1% Year 6 1% Year 7 0% Annual distribution and .30 of 1% 1% up to 1% None service (12b-1) fees (shown (.25 of 1% $3 billion, (.75 of 1% as a percentage currently) .80 of 1% next currently) of average net assets)(3) $1 billion, and .50 of 1% over $4 billion (.825 of 1% currently) 1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "STEP 4: ADDITIONAL SHAREHOLDER SERVICES--AUTOMATIC INVESTMENT PLAN." 2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO SELL YOUR SHARES--CONTINGENT DEFERRED SALES CHARGE (CDSC)." CLASS C SHARES BOUGHT BEFORE NOVEMBER 2, 1998 HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR. 3 THESE DISTRIBUTION AND SERVICE (12b-1) FEES ARE PAID FROM THE FUND'S ASSETS ON A CONTINUOUS BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR INVESTMENT AND MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES. CLASS A SHARES MAY PAY A SERVICE FEE OF UP TO .25 OF 1%. CLASS B AND CLASS C SHARES WILL PAY A SERVICE FEE OF .25 OF 1%. THE DISTRIBUTION FEE FOR CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING UP TO .25 OF 1% AS A SERVICE FEE), IS .75 OF 1% UP TO $3 BILLION, .55 OF 1% OF THE NEXT $1 BILLION, AND .25 OF 1% OVER $4 BILLION FOR CLASS B SHARES AND IS .75 OF 1% FOR CLASS C SHARES. FOR THE FISCAL YEAR ENDING FEBRUARY 28, 2001, THE DISTRIBUTOR OF THE FUND HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1) FEES FOR CLASS A, CLASS B, AND CLASS C SHARES TO .25 OF 1%, .825 OF 1%, AND .75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF CLASS A, CLASS B, AND CLASS C SHARES, RESPECTIVELY. - - ------------------------------------------------------------------- 24 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE The following describes the different ways investors can reduce or avoid paying Class A's initial sales charge. INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's initial sales charge by increasing the amount of your investment. This table shows how the sales charge decreases as the amount of your investment increases. SALES CHARGE AS % SALES CHARGE AS % DEALER AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE Less than $50,000 4.00% 4.17% 3.75% $50,000 to $99,999 3.50% 3.63% 3.25% $100,000 to $249,999 2.75% 2.83% 2.50% $250,000 to $499,999 2.00% 2.04% 1.90% $500,000 to $999,999 1.50% 1.52% 1.40% $1,000,000 and above(1) None None None 1 IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS YOU QUALIFY TO BUY CLASS Z SHARES. To satisfy the purchase amounts above, you can: -- Invest with an eligible group of related investors -- Buy Class A shares of two or more Prudential mutual funds at the same time -- Use your RIGHTS OF ACCUMULATION, which allow you to combine the current value of Prudential mutual fund shares you already own with the value of the shares you are purchasing for purposes of determining the applicable sales charge (note: you must notify the Transfer Agent if you qualify for Rights of Accumulation) -- Sign a LETTER OF INTENT, stating in writing that you or an eligible group of related investors will purchase a certain amount of shares in the Fund and other Prudential mutual funds within 13 months. The Distributor may reallow Class A's sales charge to dealers. BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A shares without the initial sales charge if they meet the required minimum for amount of assets, average account balance or number of eligible employees. For more information about these requirements, call Prudential at (800) 353-2847. - - ------------------------------------------------------------------------------ 25 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in certain programs sponsored by broker-dealers, investment advisers and financial planners who have agreements with Prudential Investments Advisory Group relating to: -- Mutual fund "wrap" or asset allocation programs, where the sponsor places Fund trades and charges its clients a management, consulting or other fee for its services -- Mutual fund "supermarket" programs, where the sponsor links its clients' accounts to a master account in the sponsor's name and the sponsor charges a fee for its services. Broker-dealers, investment advisers or financial planners sponsoring these mutual fund programs may offer their clients more than one class of shares in the Fund in connection with different pricing options for their programs. Investors should consider carefully any separate transaction and other fees charged by these programs in connection with investing in each available share class before selecting a share class. OTHER TYPES OF INVESTORS. Other investors may pay no sales charges, including certain officers, employees or agents of Prudential and its affiliates, the Prudential mutual funds, the subadvisers of the Prudential mutual funds and registered representatives and employees of brokers that have entered into a selected dealer agreement with the Distributor. To qualify for a reduction or waiver of the sales charge, you must notify the Transfer Agent or your broker at the time of purchase. For more information about reducing or eliminating Class A's sales charge, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares." WAIVING CLASS C'S INITIAL SALES CHARGE BENEFIT PLANS. Certain group retirement plans may purchase Class C shares without the initial sales charge. For more information, call Prudential at (800) 353-2847. INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial sales charge will be waived for purchases of Class C shares if the purchase is made with money from the redemption of shares of any - - ------------------------------------------------------------------- 26 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ unaffiliated investment company, as long as the shares were not held in an account at Prudential Securities Incorporated (Prudential Securities) or one of its affiliates. These purchases must be made within 60 days of redemption. To qualify for this waiver, you must do one of the following: -- Purchase your shares through an account at Prudential Securities -- Purchase your shares through an ADVANTAGE Account or an Investor Account with Pruco Securities Corporation -- Purchase your shares through another broker. This waiver is not available to investors who purchase shares directly from the Transfer Agent. If you are entitled to the waiver, you must notify either the Transfer Agent or your broker. The Transfer Agent may require any supporting documents it considers to be appropriate. QUALIFYING FOR CLASS Z SHARES BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if they meet the required minimum for amount of assets, average account balance or number of eligible employees. For more information about these requirements, call Prudential at (800) 353-2847. MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants in any fee-based program or trust program sponsored by Prudential or an affiliate that includes the Fund as an available option. Class Z shares also can be purchased by investors in certain programs sponsored by broker-dealers, investment advisers and financial planners who have agreements with Prudential Investments Advisory Group relating to: -- Mutual fund "wrap" or asset allocation programs, where the sponsor places Fund trades, links its clients' accounts to a master account in the sponsor's name and charges its clients a management, consulting or other fee for its services -- Mutual fund "supermarket" programs, where the sponsor links its clients' accounts to a master account in the sponsor's name and the sponsor charges a fee for its services. Broker-dealers, investment advisers or financial planners sponsoring these mutual fund programs may offer their clients more than one class of shares in the Fund in connection with different pricing options for their programs. Investors should consider carefully any separate transaction and - - ------------------------------------------------------------------------------ 27 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ other fees charged by these programs in connection with investing in each available share class before selecting a share class. OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the following: -- Certain participants in the MEDLEY Program (group variable annuity contracts) sponsored by Prudential for whom Class Z shares of the Prudential mutual funds are an available option -- Current and former Directors/Trustees of the Prudential mutual funds (including the Fund) -- Prudential, with an investment of $10 million or more. In connection with the sale of shares, the Manager, the Distributor or one of their affiliates may pay brokers, financial advisers and other persons a commission of up to 4% of the purchase price for Class B shares, up to 2% of the purchase price for Class C shares and a finder's fee for Class A or Class Z shares from their own resources based on a percentage of the net asset value of shares sold or otherwise. CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS If you buy Class B shares and hold them for approximately seven years, we will automatically convert them into Class A shares without charge. At that time, we will also convert any Class B shares that you purchased with reinvested dividends and other distributions. Since the 12b-1 fees for Class A shares are lower than for Class B shares, converting to Class A shares lowers your Fund expenses. When we do the conversion, you will get fewer Class A shares than the number of converted Class B shares if the price of the Class A shares is higher than the price of Class B shares. The total dollar value will be the same, so you will not have lost any money by getting fewer Class A shares. We do the conversions quarterly, not on the anniversary date of your purchase. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Class B Shares." STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY The price you pay for each share of the Fund is based on the share value. The share value of a mutual fund--known as the NET ASSET VALUE or NAV--is determined by a simple calculation: it's the total value of the Fund - - ------------------------------------------------------------------- 28 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ (assets minus liabilities) divided by the total number of shares outstanding. For example, if the value of the investments held by Fund XYZ (minus its liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio securities are valued based upon market quotations or, if not readily available, at fair value as determined in good faith under procedures established by the Fund's Board. Most national newspapers report the NAVs of most mutual funds, which allows investors to check the price of mutual funds daily. We determine the NAV of our shares once each business day at 4:15 p.m., New York time, on days that the New York Stock Exchange (NYSE) is open for trading. The NYSE is closed on most national holidays and Good Friday. Because the Fund may invest in foreign securities, its NAV may change on days when you cannot buy or sell Fund shares. We do not determine the NAV on days when we have not received any orders to purchase, sell or exchange Fund shares, or when changes in the value of the Fund's portfolio do not materially affect the NAV. WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND? For Class A and Class C shares, you'll pay the public offering price, which is the NAV next determined after we receive your order to purchase, plus an initial sales charge (unless you're entitled to a waiver). For Class B and Class Z shares, you will pay the NAV next determined after we receive your order to purchase (remember, there are no up-front sales charges for these share classes). Your broker may charge you a separate or additional fee for purchases of shares. - - ------------------------------------------------------------------- MUTUAL FUND SHARES The NAV of mutual fund shares changes every day because the value of a fund's portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. bonds in its portfolio and the price of ACME bonds goes up while the value of the fund's other holdings remains the same and expenses don't change, the NAV of Fund XYZ will increase. - - ------------------------------------------------------------------- - - ------------------------------------------------------------------------------ 29 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ STEP 4: ADDITIONAL SHAREHOLDER SERVICES As a Fund shareholder, you can take advantage of the following services and privileges: AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax Issues" section, the Fund pays out--or distributes--its net investment income and capital gains to all shareholders. For your convenience, we will automatically reinvest your distributions in the Fund at NAV, without any sales charge. If you want your distributions paid in cash, you can indicate this preference on your application, notify your broker, or notify the Transfer Agent in writing (at the address below) at least five business days before the date we determine who receives dividends. PRUDENTIAL MUTUAL FUND SERVICES LLC ATTN: ACCOUNT MAINTENANCE P.O. BOX 15015 NEW BRUNSWICK, NJ 08906-5015 AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as little as $50 by having the money automatically withdrawn from your bank or brokerage account at specified intervals. RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans for individuals and institutions, including large and small businesses. For information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business, please contact your financial adviser. If you are interested in opening a 401(k) or other company-sponsored retirement plan (SIMPLEs, SEP plans, Keoghs, 403(b) plans, pension and profit-sharing plans), your financial adviser will help you determine which retirement plan best meets your needs. Complete instructions about how to establish and maintain your plan and how to open accounts for you and your employees will be included in the retirement plan kit you receive in the mail. THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the value of your Prudential mutual fund investment for your beneficiaries against market declines--is available to investors who purchase their shares through Prudential. Eligible investors who apply for PruTector coverage after the initial 6-month enrollment period will need to provide satisfactory - - ------------------------------------------------------------------- 30 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ evidence of insurability. This insurance is subject to other restrictions and is not available in all states. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will provide you with monthly, quarterly, semi-annual or annual redemption checks. Remember, the sale of Class B and Class C shares may be subject to a CDSC. REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along with an updated prospectus) and a semi-annual report, which contain important financial information about the Fund. To reduce Fund expenses, we will send one annual shareholder report, one semi-annual shareholder report and one annual prospectus per household, unless you instruct us or your broker otherwise. HOW TO SELL YOUR SHARES You can sell your shares of the Fund for cash (in the form of a check) at any time, subject to certain restrictions. When you sell shares of the Fund--also known as redeeming your shares--the price you will receive will be the NAV next determined after the Transfer Agent, the Distributor or your broker receives your order to sell (less any applicable CDSC). If your broker holds your shares, your broker must receive your order to sell by 4:15 p.m., New York time, to process the sale on that day. Otherwise, contact: PRUDENTIAL MUTUAL FUND SERVICES LLC ATTN: REDEMPTION SERVICES P.O. BOX 15010 NEW BRUNSWICK, NJ 08906-5010 Generally, we will pay you for the shares that you sell within seven days after the Transfer Agent, the Distributor or your broker receives your sell order. If you hold shares through a broker, payment will be credited to your account. If you are selling shares you recently purchased with a check, we may delay sending you the proceeds until your check clears, which can take up to 10 days from the purchase date. You can avoid delay if you purchase by wire, certified check or cashier's check. Your broker may charge you a separate or additional fee for sales of shares. - - ------------------------------------------------------------------------------ 31 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ RESTRICTIONS ON SALES There are certain times when you may not be able to sell shares of the Fund, or when we may delay paying you the proceeds from a sale. As permitted by the Securities and Exchange Commission, this may happen only during unusual market conditions or emergencies when the Fund can't determine the value of its assets or sell its holdings. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares." If you are selling more than $100,000 of shares, if you want the check payable or sent to someone or some place that is not in our records, or you are a business or a trust and if you hold your shares directly with the Transfer Agent, you will need to have the signature on your sell order signature guaranteed by an "eligible guarantor institution." An "eligible guarantor institution" includes any bank, broker-dealer or credit union. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares--Signature Guarantee." CONTINGENT DEFERRED SALES CHARGE (CDSC) If you sell Class B shares within six years of purchase or Class C shares within 18 months of purchase (one year for Class C shares purchased before November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will sell amounts representing shares in the following order: -- Amounts representing shares you purchased with reinvested dividends and distributions -- Amounts representing the increase in NAV above the total amount of payments for shares made during the past six years for Class B shares and 18 months for Class C shares (one year for Class C shares purchased before November 2, 1998) -- Amounts representing the cost of shares held beyond the CDSC period (six years for Class B shares and 18 months for Class C shares). Since shares that fall into any of the categories listed above are not subject to the CDSC, selling them first helps you to avoid--or at least minimize--the CDSC. - - ------------------------------------------------------------------- 32 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ Having sold the exempt shares first, if there are any remaining shares that are subject to the CDSC, we will apply the CDSC to amounts representing the cost of shares held for the longest period of time within the applicable CDSC period. As we noted before in the "Share Class Comparison" chart, the CDSC for Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the fourth, and 1% in the fifth and sixth years. The rate decreases on the first day of the month following the anniversary date of your purchase, not on the anniversary date itself. The CDSC is 1% for Class C shares--which is applied to shares sold within 18 months of purchase (one year for Class C shares purchased before November 2, 1998). For both Class B and Class C shares, the CDSC is calculated based on the lesser of the original purchase price or the redemption proceeds. For purposes of determining how long you've held your shares, all purchases during the month are grouped together and considered to have been made on the last day of the month. The holding period for purposes of determining the applicable CDSC will be calculated from the first day of the month after purchase, excluding any time shares were held in a money market fund. WAIVER OF THE CDSC--CLASS B SHARES The CDSC will be waived if the Class B shares are sold: -- After a shareholder is deceased or disabled (or, in the case of a trust account, the death or disability of the grantor). This waiver applies to individual shareholders, as well as shares owned in joint tenancy, provided the shares were purchased before the death or disability -- To provide for certain distributions--made without IRS penalty--from a qualified or tax-deferred retirement plan, IRA or Section 403(b) custodial account -- On certain sales from a Systematic Withdrawal Plan. For more information on the above and other waivers, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Contingent Deferred Sales Charge--Waiver of Contingent Deferred Sales Charge--Class B Shares." - - ------------------------------------------------------------------------------ 33 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ WAIVER OF THE CDSC--CLASS C SHARES BENEFIT PLANS. The CDSC will be waived for redemptions by certain group retirement plans for which Prudential or brokers not affiliated with Prudential provide administrative or recordkeeping services. The CDSC also will be waived for certain redemptions by benefit plans sponsored by Prudential and its affiliates. For more information, call Prudential at (800) 353-2847. REDEMPTION IN KIND If the sales of Fund shares you make during any 90-day period reach the lesser of $250,000 or 1% of the value of the Fund's net assets, we can then give you securities from the Fund's portfolio instead of cash. If you want to sell the securities for cash, you would have to pay the costs charged by a broker. SMALL ACCOUNTS If you make a sale that reduces your account value to less than $500, we may sell the rest of your shares (without charging any CDSC) and close your account. We would do this to minimize the Fund's expenses paid by other shareholders. We will give you 60 days' notice, during which time you can purchase additional shares to avoid this action. This involuntary sale does not apply to shareholders who own their shares as part of a 401(k) plan, an IRA, or some other qualified or tax-deferred plan or account. 90-DAY REPURCHASE PRIVILEGE After you redeem your shares, you have a 90-day period during which you may reinvest back into your account any of the redemption proceeds in shares of the same Fund without paying an initial sales charge. Also, if you paid a CDSC when you redeemed your shares, we will credit your account with the appropriate number of shares to reflect the amount of the CDSC you paid on that reinvested portion of your redemption proceeds. In order to take advantage of this one-time privilege, you must notify the Transfer Agent or your broker at the time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares." - - ------------------------------------------------------------------- 34 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ RETIREMENT PLANS To sell shares and receive a distribution from your retirement account, call your broker or the Transfer Agent for a distribution request form. There are special distribution and income tax withholding requirements for distributions from retirement plans and you must submit a withholding form with your request to avoid delay. If your retirement plan account is held for you by your employer or plan trustee, you must arrange for the distribution request to be signed and sent by the plan administrator or trustee. For additional information, see the SAI. HOW TO EXCHANGE YOUR SHARES You can exchange your shares of the Fund for shares of the same class in certain other Prudential mutual funds--including certain money market funds--if you satisfy the minimum investment requirements. For example, you can exchange Class A shares of the Fund for Class A shares of another Prudential mutual fund, but you can't exchange Class A shares for Class B, Class C or Class Z shares. Class B and Class C shares may not be exchanged into money market funds other than Prudential Special Money Market Fund, Inc. After an exchange, at redemption the CDSC will be calculated from the first day of the month after initial purchase, excluding any time shares were held in a money market fund. We may change the terms of the exchange privilege after giving you 60 days' notice. If you hold shares through a broker, you must exchange shares through your broker. Otherwise contact: PRUDENTIAL MUTUAL FUND SERVICES LLC ATTN: EXCHANGE PROCESSING P.O. BOX 15010 NEW BRUNSWICK, NJ 08906-5010 There is no sales charge for exchanges. If, however, you exchange--and then sell--Class B shares within approximately six years of your original purchase or Class C shares within 18 months of your original purchase, you must still pay the applicable CDSC. If you have exchanged Class B or Class C shares into a money market fund, the time you hold the shares in the money market account will not be counted in calculating the required holding period for CDSC liability. - - ------------------------------------------------------------------------------ 35 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ Remember, as we explained in the section entitled "Fund Distributions and Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is considered a sale for tax purposes. Therefore, if the shares you exchange are worth more than you paid for them, you may have to pay capital gains tax. For additional information about exchanging shares, see the SAI, "Shareholder Investment Account--Exchange Privilege." If you own Class B or Class C shares and qualify to purchase Class A shares without paying an initial sales charge, we will automatically exchange your Class B or Class C shares which are not subject to a CDSC for Class A shares. We make such exchanges on a quarterly basis if you qualify for this exchange privilege. We have obtained a legal opinion that this exchange is not a "taxable event" for federal income tax purposes. This opinion is not binding on the IRS. FREQUENT TRADING Frequent trading of Fund shares in response to short-term fluctuations in the market--also known as "market timing"--may make it very difficult to manage the Fund's investments. When market timing occurs, the Fund may have to sell portfolio securities to have the cash necessary to redeem the market timer's shares. This can happen at a time when it is not advantageous to sell any securities, so the Fund's performance may be hurt. When large dollar amounts are involved, market timing can also make it difficult to use long-term investment strategies because we cannot predict how much cash the Fund will have to invest. When, in our opinion, such activity would have a disruptive effect on portfolio management, the Fund reserves the right to refuse purchase orders and exchanges into the Fund by any person, group or commonly controlled account. The decision may be based upon dollar amount, volume and frequency of trading. The Fund may notify a market timer of rejection of an exchange or purchase order after the day the order is placed. If the Fund allows a market timer to trade Fund shares, it may require the market timer to enter into a written agreement to follow certain procedures and limitations. TELEPHONE REDEMPTIONS OR EXCHANGES You may redeem or exchange your shares in any amount by calling the Fund at (800) 225-1852 before 4:15 p.m. New York time. You will receive a redemption amount based on that day's NAV. - - ------------------------------------------------------------------- 36 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND - - ------------------------------------------------ The Fund's Transfer Agent will record your telephone instructions and request specific account information before redeeming or exchanging shares. The Fund will not be liable if it follows instructions that it reasonably believes are made by the shareholder. If the Fund does not follow reasonable procedures, it may be liable for losses due to unauthorized or fraudulent telephone instructions. In the event of drastic economic or market changes, you may have difficulty in redeeming or exchanging your shares by telephone. If this occurs, you should consider redeeming or exchanging your shares by mail. The telephone redemption and exchange privileges may be modified or terminated at any time. If this occurs, you will receive a written notice from the Fund. - - ------------------------------------------------------------------------------ 37 FINANCIAL HIGHLIGHTS - - ------------------------------------- The financial highlights will help you evaluate the Fund's financial performance. The TOTAL RETURN in each chart represents the rate that a shareholder earned on an investment in that share class of the Fund, assuming reinvestment of all dividends and other distributions. The information is for each share class for the periods indicated. Review each chart with the financial statements and the report of independent accountants, which appear in the annual report and the SAI and are available upon request. Additional performance information for each share class is contained in the annual report, which you can receive at no charge. CLASS A SHARES The financial highlights for the three years ended February 29, 2000, were audited by PricewaterhouseCoopers LLP, independent accountants, and the financial highlights for the two years ended February 28, 1997, were audited by other independent auditors, whose reports were unqualified. CLASS A SHARES (FISCAL YEARS ENDED 2-28/29) PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997 1996 NET ASSET VALUE, BEGINNING OF YEAR $8.98 $9.05 $8.76 $9.04 $8.59 INCOME FROM INVESTMENT OPERATIONS: Net investment income(2) 0.55 0.55 0.58 0.60 0.60 Net realized and unrealized gain (loss) on investment transactions (0.57) (0.07) 0.29 (0.28) 0.45 TOTAL FROM INVESTMENT OPERATIONS (0.02) 0.48 0.87 0.32 1.05 - - -------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (0.55) (0.55) (0.58) (0.60) (0.60) NET ASSET VALUE, END OF YEAR $8.41 $8.98 $9.05 $8.76 $9.04 TOTAL RETURN(1) (0.15)% 5.40% 10.26% 3.70% 12.41% - - -------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 1996 - - -------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000) $806,620 $895,039 $819,536 $860,319 $945,038 Average net assets (000) $857,586 $836,143 $842,431 $884,862 $909,169 RATIOS TO AVERAGE NET ASSETS:(2) Expenses, including distribution and service (12b-1) fees 0.94% 0.84% 0.86% 0.90% 0.91% Expenses, excluding distribution and service (12b-1) fees 0.69% 0.68% 0.71% 0.75% 0.76% Net investment income 6.39% 6.05% 6.52% 6.78% 6.65% Portfolio turnover rate 68% 106% 88% 107% 123% 1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR REPORTED. 2 NET OF EXPENSE SUBSIDY AND/OR FEE WAIVER. - - ------------------------------------------------------------------- 38 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 FINANCIAL HIGHLIGHTS - - ------------------------------------------------ CLASS B SHARES The financial highlights for the three years ended February 29, 2000, were audited by PricewaterhouseCoopers LLP, independent accountants, and the financial highlights for the two years ended February 28, 1997, were audited by other independent auditors, whose reports were unqualified. CLASS B SHARES (FISCAL YEARS ENDED 2-28/29) PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997 1996 NET ASSET VALUE, BEGINNING OF YEAR $8.99 $9.05 $8.77 $9.04 $8.60 INCOME FROM INVESTMENT OPERATIONS: Net investment income(2) 0.50 0.49 0.52 0.54 0.54 Net realized and unrealized gain (loss) on investment transactions (0.58) (0.06) 0.28 (0.27) 0.44 TOTAL FROM INVESTMENT OPERATIONS (0.08) 0.43 0.80 0.27 0.98 - - ---------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (0.50) (0.49) (0.52) (0.54) (0.54) NET ASSET VALUE, END OF YEAR $8.41 $8.99 $9.05 $8.77 $9.04 TOTAL RETURN(1) (0.83)% 4.83% 9.40% 3.12% 11.54% - - ---------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000) $193,394 $343,425 $346,059 $461,988 $641,946 Average net assets (000) $262,863 $322,626 $385,145 $543,796 $647,515 RATIOS TO AVERAGE NET ASSETS:(2) Expenses, including distribution and service (12b-1) fees 1.52% 1.50% 1.53% 1.57% 1.58% Expenses, excluding distribution and service (12b-1) fees 0.69% 0.68% 0.71% 0.75% 0.76% Net investment income 5.77% 5.39% 5.85% 6.11% 5.99% Portfolio turnover 68% 106% 88% 107% 123% 1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR REPORTED. 2 NET OF EXPENSE SUBSIDY AND/OR FEE WAIVER. - - ------------------------------------------------------------------------------ 39 FINANCIAL HIGHLIGHTS - - ------------------------------------------------ CLASS C SHARES The financial highlights for the three years ended February 29, 2000, were audited by PricewaterhouseCoopers LLP, independent accountants, and the financial highlights for the two years ended February 28, 1997, were audited by other independent auditors, whose reports were unqualified. CLASS C SHARES (FISCAL YEARS ENDED 2-28/29) PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997 1996 NET ASSET VALUE, BEGINNING OF YEAR $8.99 $9.05 $8.77 $9.04 $8.60 INCOME FROM INVESTMENT OPERATIONS: Net investment income(2) 0.51 0.50 0.53 0.54 0.54 Net realized and unrealized gain (loss) on investment transactions (0.58) (0.06) 0.28 (0.27) 0.44 TOTAL FROM INVESTMENT OPERATIONS (0.07) 0.44 0.81 0.27 0.98 - - ------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (0.51) (0.50) (0.53) (0.54) (0.54) NET ASSET VALUE, END OF YEAR $8.41 $8.99 $9.05 $8.77 $9.04 TOTAL RETURN(1) (0.76)% 4.91% 9.48% 3.20% 11.63% - - ------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 1996 - - ------------------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000) $8,508 $8,236 $2,840 $2,569 $1,799 Average net assets (000) $9,014 $4,878 $2,523 $2,440 $765 RATIOS TO AVERAGE NET ASSETS:(2) Expenses, including distribution and service (12b-1) fees 1.44% 1.43% 1.46% 1.50% 1.51% Expenses, excluding distribution and service (12b-1) fees 0.69% 0.68% 0.71% 0.75% 0.76% Net investment income 5.90% 5.50% 5.92% 6.19% 5.99% Portfolio turnover 68% 106% 88% 107% 123% 1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR REPORTED. 2 NET OF EXPENSE SUBSIDY AND/OR FEE WAIVER. - - ------------------------------------------------------------------- 40 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 FINANCIAL HIGHLIGHTS - - ------------------------------------------------ CLASS Z SHARES The financial highlights for the three years ended February 29, 2000, were audited by PricewaterhouseCoopers LLP, independent accountants, and the financial highlights for the period from March 1, 1996, through February 28, 1997, were audited by other independent auditors, whose reports were unqualified. CLASS Z SHARES (FISCAL YEARS ENDED 2-28/29) PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997(1) NET ASSET VALUE, BEGINNING OF YEAR $8.97 $9.04 $8.76 $9.13 INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.57 0.57 0.59 0.61 Net realized and unrealized gain (loss) on investment transactions (0.57) (0.07) 0.28 (0.37) TOTAL FROM INVESTMENT OPERATIONS -- 0.50 0.87 0.24 - - ------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (0.57) (0.57) (0.59) (0.61) NET ASSET VALUE, END OF YEAR $8.40 $8.97 $9.04 $8.76 TOTAL RETURN(2) 0.09% 5.58% 10.30% 3.16% - - ------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 - - ------------------------------------------------------------------------------------------- NET ASSETS, END OF YEAR (000) $93,390 $97,629 $84,733 $73,411 Average net assets (000) $97,811 $86,892 $71,425 $39,551 RATIOS TO AVERAGE NET ASSETS: Expenses 0.69% 0.68% 0.71% 0.75%(3) Net investment income 6.64% 6.22% 6.67% 6.76%(3) Portfolio turnover 68% 106% 88% 107% 1 INFORMATION SHOWN IS FOR THE PERIOD FROM MARCH 4, 1996 (WHEN CLASS Z SHARES WERE FIRST OFFERED) THROUGH FEBRUARY 28, 1997. 2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN A FULL YEAR ARE NOT ANNUALIZED. 3 ANNUALIZED. - - ------------------------------------------------------------------------------ 41 - - ------------------------------------- NOTES - - ------------------------------------------------------------------- 42 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 - - ------------------------------------------------ NOTES - - ------------------------------------------------------------------------------ 43 THE PRUDENTIAL MUTUAL FUND FAMILY - - ------------------------------------- Prudential offers a broad range of mutual funds designed to meet your individual needs. For information about these funds, contact your financial adviser or call us at (800) 225-1852. Read the prospectus carefully before you invest or send money. STOCK FUNDS PRUDENTIAL EMERGING GROWTH FUND, INC. PRUDENTIAL EQUITY FUND, INC. PRUDENTIAL EQUITY INCOME FUND PRUDENTIAL INDEX SERIES FUND PRUDENTIAL SMALL-CAP INDEX FUND PRUDENTIAL STOCK INDEX FUND THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC. PRUDENTIAL JENNISON GROWTH FUND PRUDENTIAL JENNISON GROWTH & INCOME FUND PRUDENTIAL MID-CAP VALUE FUND PRUDENTIAL REAL ESTATE SECURITIES FUND PRUDENTIAL SECTOR FUNDS, INC. PRUDENTIAL FINANCIAL SERVICES FUND PRUDENTIAL HEALTH SCIENCES FUND PRUDENTIAL TECHNOLOGY FUND PRUDENTIAL UTILITY FUND PRUDENTIAL SMALL-CAP QUANTUM FUND, INC. PRUDENTIAL SMALL COMPANY VALUE FUND, INC. PRUDENTIAL TAX-MANAGED FUNDS PRUDENTIAL TAX-MANAGED EQUITY FUND PRUDENTIAL 20/20 FOCUS FUND NICHOLAS-APPLEGATE FUND, INC. NICHOLAS-APPLEGATE GROWTH EQUITY FUND TARGET FUNDS LARGE CAPITALIZATION GROWTH FUND LARGE CAPITALIZATION VALUE FUND SMALL CAPITALIZATION GROWTH FUND SMALL CAPITALIZATION VALUE FUND ASSET ALLOCATION/BALANCED FUNDS PRUDENTIAL BALANCED FUND PRUDENTIAL DIVERSIFIED FUNDS CONSERVATIVE GROWTH FUND MODERATE GROWTH FUND HIGH GROWTH FUND THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC. PRUDENTIAL ACTIVE BALANCED FUND GLOBAL FUNDS GLOBAL STOCK FUNDS PRUDENTIAL DEVELOPING MARKETS FUND PRUDENTIAL DEVELOPING MARKETS EQUITY FUND PRUDENTIAL LATIN AMERICA EQUITY FUND PRUDENTIAL EUROPE GROWTH FUND, INC. PRUDENTIAL GLOBAL GENESIS FUND, INC. PRUDENTIAL INDEX SERIES FUND PRUDENTIAL EUROPE INDEX FUND PRUDENTIAL PACIFIC INDEX FUND PRUDENTIAL NATURAL RESOURCES FUND, INC. PRUDENTIAL PACIFIC GROWTH FUND, INC. PRUDENTIAL WORLD FUND, INC. PRUDENTIAL GLOBAL GROWTH FUND PRUDENTIAL INTERNATIONAL VALUE FUND PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND GLOBAL UTILITY FUND, INC. TARGET FUNDS INTERNATIONAL EQUITY FUND GLOBAL BOND FUNDS PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC. PRUDENTIAL INTERNATIONAL BOND FUND, INC. - - ------------------------------------------------------------------- 44 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [LOGO] (800) 225-1852 BOND FUNDS TAXABLE BOND FUNDS PRUDENTIAL DIVERSIFIED BOND FUND, INC. PRUDENTIAL GOVERNMENT INCOME FUND, INC. PRUDENTIAL GOVERNMENT SECURITIES TRUST SHORT-INTERMEDIATE TERM SERIES PRUDENTIAL HIGH YIELD FUND, INC. PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC. PRUDENTIAL INDEX SERIES FUND PRUDENTIAL BOND MARKET INDEX FUND PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, INC. INCOME PORTFOLIO TARGET FUNDS TOTAL RETURN BOND FUND TAX-EXEMPT BOND FUNDS PRUDENTIAL CALIFORNIA MUNICIPAL FUND CALIFORNIA SERIES CALIFORNIA INCOME SERIES PRUDENTIAL MUNICIPAL BOND FUND HIGH INCOME SERIES INSURED SERIES PRUDENTIAL MUNICIPAL SERIES FUND FLORIDA SERIES MASSACHUSETTS SERIES NEW JERSEY SERIES NEW YORK SERIES NORTH CAROLINA SERIES OHIO SERIES PENNSYLVANIA SERIES PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. MONEY MARKET FUNDS TAXABLE MONEY MARKET FUNDS CASH ACCUMULATION TRUST LIQUID ASSETS FUND NATIONAL MONEY MARKET FUND PRUDENTIAL GOVERNMENT SECURITIES TRUST MONEY MARKET SERIES U.S. TREASURY MONEY MARKET SERIES PRUDENTIAL SPECIAL MONEY MARKET FUND, INC. MONEY MARKET SERIES PRUDENTIAL MONEYMART ASSETS, INC. TAX-FREE MONEY MARKET FUNDS PRUDENTIAL TAX-FREE MONEY FUND, INC. PRUDENTIAL CALIFORNIA MUNICIPAL FUND CALIFORNIA MONEY MARKET SERIES PRUDENTIAL MUNICIPAL SERIES FUND CONNECTICUT MONEY MARKET SERIES MASSACHUSETTS MONEY MARKET SERIES NEW JERSEY MONEY MARKET SERIES NEW YORK MONEY MARKET SERIES COMMAND FUNDS COMMAND MONEY FUND COMMAND GOVERNMENT FUND COMMAND TAX-FREE FUND INSTITUTIONAL MONEY MARKET FUNDS PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC. INSTITUTIONAL MONEY MARKET SERIES - - ------------------------------------------------------------------------------ 45 FOR MORE INFORMATION Please read this prospectus before you invest in the Fund and keep it for future reference. For information or shareholder questions contact PRUDENTIAL MUTUAL FUND SERVICES LLC P.O. BOX 15005 NEW BRUNSWICK, NJ 08906-5005 (800) 225-1852 (732) 482-7555 (Calling from outside the U.S.) Outside Brokers should contact PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC P.O. BOX 15035 NEW BRUNSWICK, NJ 08906-5035 (800) 778-8769 Visit Prudential's website at http://www.prudential.com Additional information about the Fund can be obtained without charge and can be found in the following documents STATEMENT OF ADDITIONAL INFORMATION (SAI) (incorporated by reference into this prospectus) ANNUAL REPORT (contains a discussion of the market conditions and investment strategies that significantly affected the Fund's performance) SEMI-ANNUAL REPORT You can also obtain copies of Fund documents from the Securities and Exchange Commission as follows BY MAIL Securities and Exchange Commission Public Reference Section Washington, DC 20549-0102 BY ELECTRONIC REQUEST publicinfo@sec.gov (The SEC charges a fee to copy documents.) IN PERSON Public Reference Room in Washington, DC (For hours of operation, call) 1-202-942-8090 VIA THE INTERNET on the EDGAR Database at http://www.sec.gov CUSIP Numbers NASDAQ Symbols Class A Shares--744339-10-2 PGVAX Class B Shares--744339-20-1 PBGPX Class C Shares--744339-30-0 -- Class Z Shares--744339-40-9 PGVZX Investment Company Act File No. 811-3712 MF128A [RECYCLED LOGO] Printed on Recycled Paper