Edgar Filing: BlackRock Enhanced Government Fund, Inc.

Variable rate security. Rate shown is as of report date.

Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration to qualified institutional investors.

All or a portion of security has been pledged as collateral in connection with swaps.

Represents or includes a TBA transaction. Unsettled TBA transactions as of December 31, 2012 were as follows:

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES

Investment Company Act file number 811-21793

Name of Fund: BlackRock Enhanced Government Fund, Inc. (EGF)

Fund Address: 100 Bellevue Parkway, Wilmington, DE 19809

Name and address of agent for service: John M. Perlowski, Chief Executive Officer, BlackRock Enhanced Government Fund, Inc., 55 East 52^nd Street, New York, NY 10055

Registrant’s telephone number, including area code: (800) 882-0052, Option 4

Date of fiscal year end: 12/31/2012

Date of reporting period: 12/31/2012

Item 1 – Report to Stockholders

DECEMBER 31, 2012

ANNUAL REPORT

BlackRock Enhanced Government Fund, Inc. (EGF)

Not FDIC Insured • May Lose Value • No Bank Guarantee

Section 19(a) Notice

BlackRock Enhanced Government Fund, Inc.’s (EGF) (the “Fund”) reported amounts and sources of distributions are estimates and are not being provided for tax reporting purposes. The actual amounts and sources for tax reporting purposes will depend upon the Fund’s investment experience during the year and may be subject to changes based on the tax regulations. The Fund will provide a Form 1099-DIV each calendar year that will explain the character of these dividends and distributions for federal income tax purposes.

December 31, 2012
	Total Fiscal Year-to-Date Cumulative Distributions by Character				Percentage of Fiscal Year-to-Date Cumulative Distributions by Character
	Net Investment Income	Net Realized Capital Gains	Return of Capital	Total Per Common Share	Net Investment Income	Net Realized Capital Gains	Return of Capital	Total Per Common Share
EGF	$0.640659	—	$0.189341	$0.830000	77%	0%	23%	100%

The Fund estimates that it has distributed more than the amount of earned income and net realized gains; therefore, a portion of the distribution may be a return of capital. A return of capital may occur, for example, when some or all of the shareholder’s investment in the Fund is returned to the shareholder. A return of capital does not necessarily reflect the Fund’s investment performance and should not be confused with ‘yield’ or ‘income.’ When distributions exceed total return performance, the difference will incrementally reduce the Fund’s net asset value per share.

Section 19(a) notices for the Fund, as applicable, are available on the BlackRock website http://www.blackrock.com.

Section 19(b) Disclosure

The Fund acting pursuant to a Securities and Exchange Commission (“SEC”) exemptive order and with the approval of the Fund’s Board of Directors (the “Board”), has adopted a plan, consistent with its investment objectives and policies to support a level distribution of income, capital gains and/or return of capital (the “Plan”). In accordance with the Plan, the Fund currently distributes $0.065 per share on a monthly basis.

The fixed amount distributed per share is subject to change at the discretion of the Fund’s Board. Under its Plan, the Fund will distribute all available investment income to its shareholders, consistent with its primary investment objectives and as required by the Internal Revenue Code of 1986, as amended (the “Code”). If sufficient investment income is not available on a monthly basis, the Fund will distribute long-term capital gains and/or return of capital to shareholders in order to maintain a level distribution. Each monthly distribution to shareholders is expected to be at the fixed amount established by the Board, except for extraordinary distributions and potential distribution rate increases or decreases to enable the Fund to comply with the distribution requirements imposed by the Code.

Shareholders should not draw any conclusions about the Fund’s investment performance from the amount of these distributions or from the terms of the Plan. The Fund’s total return performance on net asset value is presented in its financial highlights table.

The Board may amend, suspend or terminate the Fund’s Plan without prior notice if it deems such actions to be in the best interests of the Fund or its shareholders. The suspension or termination of the Plan could have the effect of creating a trading discount (if the Fund’s stock is trading at or above net asset value) or widening an existing trading discount. The Fund is subject to risks that could have an adverse impact on its ability to maintain a level distribution. Examples of potential risks include, but are not limited to, economic downturns impacting the markets, decreased market volatility, companies suspending or decreasing corporate dividend distributions and changes in the Code. Please refer to the Fund’s prospectus for a more complete description of its risks.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012

Table of Contents

Page
Section 19(a) Notice	2
Section 19(b) Disclosure	2
Dear Shareholder	4
Annual Report:
Option Over-Writing	5
Fund Summary	6
The Benefits and Risks of Leveraging	8
Derivative Financial Instruments	8
Financial Statements:
Schedule of Investments	9
Statement of Assets and Liabilities	13
Statement of Operations	14
Statements of Changes in Net Assets	15
Statement of Cash Flows	16
Financial Highlights	17
Notes to Financial Statements	18
Report of Independent Registered Public Accounting Firm	26
Important Tax Information	26
Automatic Dividend Reinvestment Plan	27
Officers and Directors	28
Additional Information	31

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Dear Shareholder

Financial markets substantially improved in 2012 as compared to the prior year, due largely to central bank intervention and considerable relief from the global turmoil seen in 2011. Although 2012 brought its share of headwinds, the strongest returns came from higher-risk asset classes as investors reached for yield in an environment of extremely low interest rates.

The year opened with investor confidence on the rise as global liquidity had been restored and financial news headlines became less daunting. Equity markets moved higher through the first two months of 2012, while climbing US Treasury yields pressured higher-quality fixed income assets. However, markets reversed course in the spring when Europe’s debt crisis boiled over once again. Political instability in Greece and severe deficit and liquidity problems in Spain raised the prospect of a euro collapse. Government borrowing costs in peripheral European countries soared while the region’s finance leaders deliberated over the fiscal integration of the currency bloc. Alongside the drama in Europe, investors were discouraged by gloomy economic reports from various parts of the world. A slowdown in China, a key powerhouse for global growth, emerged as a particular concern. In the United States, disappointing jobs reports signaled that the recovery was losing steam. Risk assets sold off as investors retreated to safe-haven assets.

As the outlook for the global economy worsened, investors grew increasingly optimistic that the world’s largest central banks soon would intervene to stimulate growth. This theme, along with increased cooperation among finance ministers in Europe, fueled a powerful risk-asset rebound in June. In July, the European Central Bank (“ECB”) president stated that the bank would do “whatever it takes” to preserve the euro currency bloc. This assurance along with expectations for policy stimulus from central banks in Europe and the United States drove most asset classes higher through the summer. Early in September, the ECB announced its decision to support the eurozone’s troubled peripheral countries with unlimited purchases of short term sovereign debt. Days later, the US Federal Reserve announced an aggressive stimulus package involving open-ended monthly purchases of agency mortgage-backed securities.

Going into the fall, US stocks slid on lackluster corporate earnings reports and market volatility rose leading up to the US Presidential election. Global trade slowed as many European countries fell into recession and growth continued to decelerate in China, where a once-a-decade leadership change compounded uncertainty. In the United States, automatic tax increases and spending cuts that had been scheduled to take effect at the beginning of 2013 (known as the “fiscal cliff”) threatened to push the nation into recession unless politicians could agree upon alternate measures to reduce the deficit before the end of 2012. Worries that bipartisan gridlock would preclude a budget deal prior to the deadline drove high levels of volatility in financial markets around the world in the months leading up to the last day of the year. Ultimately, the United States averted the worst of the fiscal cliff with a last-minute tax deal. Relief from US fiscal worries, however, was only partial as decisions relating to spending cuts and the debt ceiling remained pending as financial markets closed for the year.

All major asset classes generated positive returns for the 6- and 12-month periods ended December 31, 2012. Riskier assets outperformed higher quality investments as investors sought meaningful returns in a low interest rate environment. International and emerging market equities were the strongest performers. US Treasury yields were volatile, but declined overall, resulting in moderate gains for higher quality fixed income sectors. Tax-exempt municipal bonds benefited from a favorable supply-and-demand environment. Near-zero short term interest rates continued to keep yields on money market securities near their all-time lows.

The New Year brings a host of unknowns, but we believe new opportunities abound. BlackRock was built to provide the global market insight, breadth of capabilities, unbiased investment advice and deep risk management expertise these times require. With access to every asset class, geography and investment style, and extensive market intelligence, we help investors of all sizes build dynamic, diverse portfolios to achieve better, more consistent returns over time. We encourage you to visit www.blackrock.com/newworld for more information.

Sincerely,

Rob Kapito
President, BlackRock Advisors, LLC

“

Although 2012 brought its share of headwinds, the strongest returns came from higher-risk asset classes as investors reached for yield in an environment of extremely low interest rates.”

Rob Kapito
President, BlackRock Advisors, LLC

Total Returns as of December 31, 2012

	6-month			12-month
US large cap equities (S&P 500^® Index)		5.95	%		16.00	%
US small cap equities (Russell 2000^® Index)		7.20			16.35
International equities (MSCI Europe, Australasia, Far East Index)		13.95			17.32
Emerging market equities (MSCI Emerging Markets Index)		13.75			18.22
3-month Treasury bill (BofA Merrill Lynch 3-Month US Treasury Bill Index)		0.07			0.11
US Treasury securities (BofA Merrill Lynch 10-Year US Treasury Index)		0.71			4.18
US investment grade bonds (Barclays US Aggregate Bond Index)		1.80			4.21
Tax-exempt municipal bonds (S&P Municipal Bond Index)		3.15			7.42
US high yield bonds (Barclays US Corporate High Yield 2% Issuer Capped Index)		7.97			15.78

Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

THIS PAGE NOT PART OF YOUR FUND REPORT


Option Over-Writing

In general, the goal of the Fund is to provide shareholders with current income and gains. The Fund seeks to pursue this goal primarily by investing in a portfolio of US Government and US Agency securities and utilizing an option over-write strategy in an effort to enhance distribution yield and total return performance. However, these objectives cannot be achieved in all market conditions.

The Fund writes call options on individual US Government and US Agency securities or on baskets of such securities or on interest rate swaps (“swaptions”), and may write call options on other debt securities. When writing (selling) a call option, the Fund grants the counterparty the right to buy an underlying reference security or enter into a defined transaction (e.g., a swap contract, in the case of the swaption) at an agreed-upon price (“strike price”) within an agreed upon time period. The Fund receives cash premiums from the counterparties upon writing (selling) the option or swaption, which along with net investment income and net realized gains, if any, are generally available to support current or future distributions paid by the Fund. During the option term, the counterparty will elect to exercise the option if the market value of the underlying reference security or underlying contract rises above the strike price, and the Fund will be obligated to sell the security or contract to the counterparty at the strike price, realizing a gain or loss. If the option remains unexercised upon its expiration, the Fund will realize gains equal to the premiums received.

Writing call options and swaptions entails certain risks, which include but are not limited to, the following: an increase in the value of the underlying security above the strike price can result in the exercise of a written option (sale by the Fund to the counterparty) when the Fund might not otherwise have sold the security; exercise of the option by the counterparty will result in a sale below the current market value and will result in a gain or loss realized by the Fund; writing call options and swaptions limits the potential appreciation on the underlying interest rate swap or security and the yield on the Fund could decline; if current market interest rates fall below the strike price, the counterparty could exercise a written swaption when the Fund might not otherwise have entered into an interest rate swap; the Fund is bound by the terms of the underlying interest rate swap agreement upon exercise of the option by the counterparty which can result in a loss to the Fund in excess of the premium received. As such, an option over-write strategy may outperform the general fixed income market in rising or flat interest rate environments (when bond prices are steady or falling) but underperform in a falling interest rate environment (when bond prices are rising).

The Fund employs a plan to support a level distribution of income, capital gains and/or return of capital. The goal of the plan is to provide shareholders with consistent and predictable cash flows by setting distribution rates based on expected long-term returns of the Fund. Such distributions, under certain circumstances, may exceed the Fund’s total return performance. When total distributions exceed total return performance for the period, the excess will reduce the Fund’s total assets and net asset value per share (“NAV”) and, therefore, could have the effect of increasing the Fund’s expense ratio and/or reducing the amount of assets the Fund has available for long-term investment. In order to make these distributions, the Fund may have to sell portfolio securities at less than opportune times.

The final tax characterization of distributions is determined after the fiscal year and is reported in the Fund’s annual report to shareholders. Distributions will be characterized as ordinary income, capital gains and/or return of capital. The Fund’s taxable net investment income or net realized capital gains (“taxable income”) may not be sufficient to support the level of distributions paid. To the extent that distributions exceed the Fund’s current and accumulated earnings and profits, the excess may be treated as a non-taxable return of capital. Distributions that exceed the Fund’s taxable income but do not exceed the Fund’s current and accumulated earnings and profits may be classified as ordinary income, which is taxable to shareholders.

A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with ‘yield’ or ‘income.’ A return of capital is a return of a portion of an investor’s original investment. A return of capital is not taxable, but it reduces a shareholder’s tax basis in his or her shares, thus reducing any loss or increasing any gain on a subsequent disposition by the shareholder of his or her shares. It is possible that a substantial portion of the distributions paid during a calendar year may ultimately be classified as return of capital for income tax purposes when the final determination of the source and character of the distributions is made.

The Fund intends to write call options to varying degrees depending upon market conditions. Please refer to the Schedule of Investments and the Notes to Financial Statements for details of written swaptions.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Fund Summary as of December 31, 2012

Fund Overview

The Fund’s investment objective is to provide shareholders with current income and gains. The Fund seeks to achieve its investment objective by investing primarily in a portfolio of US Government securities and US Government Agency securities, including US Government mortgage-backed securities that pay interest in an attempt to generate current income, and by employing a strategy of writing (selling) call options on individual or baskets of US Government securities, US Government Agency securities or other debt securities held by the Fund in an attempt to generate gains from option premiums.

No assurance can be given that the Fund’s investment objective will be achieved.

Portfolio Management Commentary

How did the Fund perform?

• For the 12-month period ended December 31, 2012, the Fund returned 8.13% based on market price and 4.59% based on net asset value (“NAV”). For the same period, the BofA Merrill Lynch 1-3 Year US Treasury Index returned 0.43% and the Citigroup Government/Mortgage Index posted a return of 2.30%. All returns reflect reinvestment of dividends. The Fund’s discount to NAV, which narrowed during the period, accounts for the difference between performance based on price and performance based on NAV. The following discussion relates to performance based on NAV.

What factors influenced performance?

• The Fund’s performance is reviewed on an absolute basis due to the unique nature of the Fund, which employs a strategy of writing call options on individual or baskets of US securities or interest rates. The index returns listed above are for reference purposes only as these indices do not utilize an option writing strategy.

• As part of its principal investment strategy, the Fund writes covered calls on interest rates to generate income while dampening the level of NAV volatility. Covered calls contributed positively to performance for the period as the unprecedented level of support from the US Federal Reserve resulted in low volatility in the US Treasury market. The Fund took advantage of this environment to increase leverage by purchasing Treasury securities and writing additional call options to generate incremental yield.

• The Fund’s significant allocation to agency mortgage-backed securities (“MBS”) had a positive impact on performance as the sector benefited from heavy purchasing activity in connection with the US Federal Reserve’s stimulus program. The Fund especially benefited from adding to its agency MBS positions prior to the September policy announcement from the central bank. Within agency MBS, the Fund’s exposure to interest-only mortgages with favorable pre-payment features and seasoned 30-year mortgages that are less vulnerable to refinancing helped performance as yields moved lower in the MBS market.

• The Fund’s small allocations to non-agency residential MBS, high yield credit and securitized sectors, such as commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”), enhanced results.

• The Fund’s shorter duration bias (lower sensitivity to interest rates) had a negative impact on performance during certain months of the year. The Fund’s yield curve positioning also had a negative impact.

• The Fund utilized interest rate swaps as a hedge against long US Treasury positions and as a means to manage duration and yield curve positioning. During the period, the use of swaps detracted from performance. However, the use of swaps continues to be an efficient interest rate management tool and the effect of these derivatives should be viewed in the context of their overall contribution to risk reduction as well as performance.

Describe recent portfolio activity.

• The Fund tactically traded its yield curve positioning throughout the period, while maintaining a flattening bias in the short end of the curve. The Fund traded agency MBS to take advantage of opportunities stemming from uncertainty leading up to the US Federal Reserve’s announcement of additional policy stimulus in September. As discussed above, the Fund wrote covered calls during the period as part of its principal investment strategy.

Describe portfolio positioning at period end.

• The Fund’s call-writing strategy has the effect of reducing overall portfolio duration, which stood at 2.43 years at the end of the period. The Fund continued to maintain a high degree of liquidity through a core exposure to government-owned and government-related debt. The largest allocations in the Fund continued to be US agency MBS and Treasury securities. The Fund also maintained limited exposure to a diversified basket of non-government spread sectors, including CMBS, ABS, non-agency residential MBS and corporate credit.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012

Fund Information


Symbol on New York Stock Exchange (“NYSE”)				EGF
Initial Offering Date				October 31, 2005
Current Distribution Rate on Closing Market Price as of December 31, 2012 ($15.63)¹				4.99%
Current Monthly Distribution per Common Share²				$0.065
Current Annualized Distribution per Common Share²				$0.780
Economic Leverage as of December 31, 2012³				29%

Current Distribution Rate on closing market price is calculated by dividing the current annualized distribution per share by the closing market price. The current distribution rate consists of income, net realized gains and/or a tax return of capital. See the financial highlights for the actual sources and character of distributions. Past performance does not guarantee future results.

The distribution rate is not constant and is subject to change. A portion of the distribution may be deemed a tax return of capital or net realized gain.

Represents reverse repurchase agreements as a percentage of total managed assets, which is the total assets of the Fund, including any assets attributable to reverse repurchase agreements, minus the sum of liabilities (other than borrowings representing financial leverage). For a discussion of leveraging techniques utilized by the Fund, please see The Benefits and Risks of Leveraging on page 8.

The table below summarizes the changes in the Fund’s market price and NAV per share:

	12/31/12		12/31/11		Change			High		Low
Market Price	$	15.63	$	15.25		2.49	%	$	16.17	$	15.03
Net Asset Value	$	16.11	$	16.25		(0.86	)%	$	16.31	$	16.01

The following charts show the portfolio composition and credit quality allocation of the Fund’s long-term investments:

Portfolio Composition


	12/31/12		12/31/11
US Government Sponsored Agency Securities	60	%	60	%
US Treasury Obligations	34		30
Asset-Backed Securities	2		2
Preferred Securities	2		3
Non-Agency Mortgage-Backed Securities	1		4
Municipal Bonds	1		1

Credit Quality Allocation⁴

	12/31/12		12/31/11
AAA/Aaa⁵	96	%	93	%
AA/Aa	1		2
A	1		1
BBB/Baa	1		2
BB/Ba	1		1
CCC/Caa	—		1

⁴

Using the higher of Standard & Poor’s or Moody’s Investors Service ratings.

⁵

Includes US Government Sponsored Agency Securities and US Treasury Obligations, which are deemed AAA/Aaa by the investment advisor.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


The Benefits and Risks of Leveraging

The Fund may utilize leverage to seek to enhance its yield and NAV. However, these objectives cannot be achieved in all interest rate environments.

The Fund may utilize leverage by entering into reverse repurchase agreements. In general, the concept of leveraging is based on the premise that the financing cost of assets to be obtained from leverage, which will be based on short-term interest rates, will normally be lower than the income earned by the Fund on its longer-term portfolio investments. To the extent that the total assets of the Fund (including the assets obtained from leverage) are invested in higher-yielding portfolio investments, the Fund’s shareholders will benefit from the incremental net income.

The interest earned on securities purchased with the proceeds from leverage is paid to shareholders in the form of dividends, and the value of these portfolio holdings is reflected in the per share NAV. However, in order to benefit shareholders, the yield curve must be positively sloped; that is, short-term interest rates must be lower than long-term interest rates. If the yield curve becomes negatively sloped, meaning short-term interest rates exceed long-term interest rates, income to shareholders will be lower than if the Fund had not used leverage.

To illustrate these concepts, assume a Fund’s capitalization is $100 million and it borrows for an additional $30 million, creating a total value of $130 million available for investment in long-term securities. If prevailing short-term interest rates are 3% and long-term interest rates are 6%, the yield curve has a strongly positive slope. In this case, the Fund pays interest expense on the $30 million of borrowings based on the lower short-term interest rates. At the same time, the Fund’s total portfolio of $130 million earns income based on long-term interest rates. In this case, the interest expense of the borrowings is significantly lower than the income earned on the Fund’s long-term investments, and therefore the Fund’s shareholders are the beneficiaries of the incremental net income.

If short-term interest rates rise, narrowing the differential between short-term and long-term interest rates, the incremental net income pickup will be reduced or eliminated completely. Furthermore, if prevailing short-term interest rates rise above long-term interest rates, the yield curve has a negative slope. In this case, the Fund pays higher short-term interest rates whereas the Fund’s total portfolio earns income based on lower long-term interest rates.

Furthermore, the value of the Fund’s portfolio investments generally varies inversely with the direction of long-term interest rates, although other factors can influence the value of portfolio investments. In contrast, the redemption value of the Fund’s borrowings does not fluctuate in relation to interest rates. As a result, changes in interest rates can influence the Fund’s NAV positively or negatively in addition to the impact on Fund performance from borrowings discussed above.

The use of leverage may enhance opportunities for increased income to the Fund and shareholders, but as described above, it also creates risks as short- or long-term interest rates fluctuate. Leverage also will generally cause greater changes in the Fund’s NAV, market price and dividend rate than a comparable portfolio without leverage. If the income derived from securities purchased with assets received from leverage exceeds the cost of leverage, the Fund’s net income will be greater than if leverage had not been used. Conversely, if the income from the securities purchased is not sufficient to cover the cost of leverage, the Fund’s net income will be less than if leverage had not been used, and therefore the amount available for distribution to shareholders will be reduced. The Fund may be required to sell portfolio securities at inopportune times or at distressed values in order to comply with regulatory requirements applicable to the use of leverage or as required by the terms of leverage instruments, which may cause the Fund to incur losses. The use of leverage may limit the Fund’s ability to invest in certain types of securities or use certain types of hedging strategies. The Fund will incur expenses in connection with the use of leverage, all of which are borne by shareholders and may reduce income.

Under the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund is permitted to issue senior securities representing indebtedness up to 33¹⁄3% of its total managed assets (the Fund’s net assets plus the proceeds of any outstanding borrowings used for leverage). If the Fund segregates liquid assets having a value not less than the repurchase price (including accrued interest), a reverse repurchase agreement will not be considered a senior security and therefore will not be subject to this limitation. In addition, the Fund voluntarily limits its aggregate economic leverage to 50% of its managed assets. As of December 31, 2012, the Fund had aggregate economic leverage of 29% from reverse repurchase agreements as a percentage of its total managed assets.

Derivative Financial Instruments

The Fund may invest in various derivative financial instruments, including financial futures contracts, options, swaps and foreign currency exchange contracts, as specified in Note 2 of the Notes to Financial Statements, which may constitute forms of economic leverage. Such derivative financial instruments are used to obtain exposure to a security, index and/or market without owning or taking physical custody of securities or to hedge market, credit, equity and/or foreign currency exchange rate risk. Derivative financial instruments involve risks, including the imperfect correlation between the value of a derivative financial instrument and the underlying asset, possible default of the counterparty to the transaction or illiquidity of the derivative financial instrument. The Fund’s ability to use a derivative financial instrument successfully depends on the investment advisor’s ability to predict pertinent market movements accurately, which cannot be assured. The use of derivative financial instruments may result in losses greater than if they had not been used, may require the Fund to sell or purchase portfolio investments at inopportune times or for distressed values, may limit the amount of appreciation the Fund can realize on an investment, may result in lower dividends paid to shareholders or may cause the Fund to hold an investment that it might otherwise sell. The Fund’s investments in these instruments are discussed in detail in the Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Schedule of Investments December 31, 2012	(Percentages shown are based on Net Assets)


Asset-Backed Securities	Par (000)		Value
First Franklin Mortgage Loan Asset-Backed Certificates Series 2005-FF2, Class M2, 0.65%, 3/25/35 (a)	$	2,511	$	2,451,893
Motor Plc, 1.29%, 2/25/20 (b)		252		252,714
Securitized Asset-Backed Receivables LLC Trust (a):
Series 2005-0P1, Class M2, 0.66%, 1/25/35		2,000		1,567,338
Series 2005-OP2, Class M1, 0.64%, 10/25/35		1,025		744,341
Total Asset-Backed Securities — 3.1%				5,016,286



Corporate Bonds
Energy Equipment & Services — 0.3%
Transocean, Inc.:
4.95%, 11/15/15		295		323,003
5.05%, 12/15/16		50		55,671
6.00%, 3/15/18		60		69,587
Total Corporate Bonds — 0.3%				448,261



Municipal Bonds
State of California, GO, Various Purpose 3, Mandatory Put Bonds, 5.65%, 4/01/39 (a)		1,220		1,234,921
Total Municipal Bonds — 0.8%				1,234,921



Non-Agency Mortgage-Backed Securities
Collateralized Mortgage Obligations — 1.0%
Bank of America Mortgage Securities, Inc., Series 2003-J, Class 2A1, 3.17%, 11/25/33 (a)		233		236,857
Bear Stearns Alt-A Trust, Series 2004-13, Class A1, 0.95%, 11/25/34 (a)		318		313,129
Homebanc Mortgage Trust, Series 2005-4, Class A1, 0.48%, 10/25/35 (a)		1,403		1,099,164
				1,649,150
Commercial Mortgage-Backed Securities — 0.6%
Commercial Mortgage Pass-Through Certificates, Series 2007-C9, Class A2, 5.80%, 12/10/49 (a)		272		271,330
Credit Suisse Mortgage Capital Certificates, Series 2007-C5, Class A2, 5.59%, 9/15/40		635		634,254
				905,584
Interest Only Collateralized Mortgage Obligations — 0.1%
CitiMortgage Alternative Loan Trust, Series 2007-A5, Class 1A7, 6.00%, 5/25/37		422		104,227
Total Non-Agency Mortgage-Backed Securities — 1.7%				2,658,961

Preferred Securities	Par (000)		Value
Capital Trusts — 1.6%
Diversified Financial Services — 0.3%
ZFS Finance (USA) Trust V, 6.50%, 5/09/37 (a)(b)	$	504	$	537,390
Electric Utilities — 1.3%
PPL Capital Funding, Inc., 6.70%, 3/30/67 (a)		2,000		2,115,000
Total Capital Trusts — 1.6%				2,652,390



Trust Preferreds — 1.3%		Shares
Capital Markets — 1.3%
Morgan Stanley Capital Trust VIII, 6.45%, 4/15/67		80,000		1,963,608
Total Preferred Securities — 2.9%				4,615,998



US Government Sponsored Agency Securities		Par (000)
Agency Obligations — 2.7%
Federal Farm Credit Bank, 4.55%, 6/08/20	$	3,500		4,275,785
Collateralized Mortgage Obligations — 11.1%
Ginnie Mae Mortgage-Backed Securities, Class C (a):
Series 2005-87, 5.13%, 9/16/34		6,350		6,642,681
Series 2006-3, 5.24%, 4/16/39		10,000		11,097,440
				17,740,121
Interest Only Collateralized Mortgage Obligations — 2.8%
Fannie Mae Mortgage-Backed Securities:
Series 2010-126, Class UI, 5.50%, 10/25/40		3,270		498,337
Series 2012-47, Class NI, 4.50%, 4/25/42		2,750		410,429
Series 2012-96, Class DI, 4.00%, 2/25/27		3,993		401,850
Series 2012-M9, Class X1, 4.08%, 12/25/17 (a)		5,875		980,862
Ginnie Mae Mortgage-Backed Securities (a):
Series 2006-30, Class IO, 0.36%, 5/16/46		4,125		127,191
Series 2009-78, Class SD, 5.99%, 9/20/32		3,324		646,516
Series 2011-52, Class NS, 6.46%, 4/16/41		9,064		1,514,790
				4,579,975
Mortgage-Backed Securities — 68.9%
Fannie Mae Mortgage-Backed Securities:
3.00%, 6/01/42–1/01/43 (d)		8,997		9,429,474
3.50%, 8/01/26–6/01/42		17,632		18,875,869
4.00%, 4/01/24–2/01/41		25,068		26,973,541
4.50%, 4/01/39–8/01/40		16,600		18,405,551
4.89%, 2/01/13		519		518,560
5.00%, 11/01/33–2/01/40		11,525		12,637,633
5.50%, 10/01/23–1/01/43 (c)(d)		17,706		19,357,742
6.00%, 2/01/36–3/01/38		2,906		3,181,530

Portfolio Abbreviations

To simplify the listings of portfolio holdings in the Schedule of Investments, the
names and descriptions of many of the securities have been abbreviated according
to the following list:

GO
LIBOR
TBA

General Obligation Bonds
London Interbank Offered Rate
To Be Announced

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Schedule of Investments (continued)	(Percentages shown are based on Net Assets)


US Government Sponsored Agency Securities	Par (000)		Value
Mortgage-Backed Securities (concluded)
Freddie Mac Mortgage-Backed Securities, 4.50%, 5/01/34	$	401	$	431,379
Ginnie Mae Mortgage-Backed Securities, 5.00%, 11/15/35		18		19,406
				109,830,685
Total US Government Sponsored Agency Securities — 85.5%				136,426,566



US Treasury Obligations
US Treasury Bonds:
6.63%, 2/15/27 (e)		4,000		6,153,124
5.38%, 2/15/31		2,000		2,855,000
3.88%, 8/15/40 (e)		12,000		14,422,500
4.38%, 5/15/41 (e)		10,000		13,028,120
3.75%, 8/15/41 (e)		10,000		11,753,120
US Treasury Notes:
0.25%, 1/31/14		300		300,188
0.38%, 11/15/15 (e)		10,000		10,009,380
0.75%, 6/30/17 (e)		4,000		4,023,752
3.13%, 5/15/21 (e)		10,000		11,339,840
1.75%, 5/15/22		5,000		5,043,360
Total US Treasury Obligations — 49.5%				78,928,384
Total Long-Term Investments (Cost — $217,189,245) — 143.8%				229,329,377

Short-Term Securities	Shares		Value
BlackRock Liquidity Funds, TempFund, Institutional Class, 0.11% (f)(g)		10,928,321	$	10,928,321
Total Short-Term Securities (Cost — $10,928,321) — 6.9%				10,928,321
Total Investments Before TBA Sale Commitments and Options Written (Cost — $228,117,566) — 150.7%				240,257,698



TBA Sale Commitments (d)		Par (000)
Fannie Mae Mortgage-Backed Securities, 5.50%, 1/01/43–2/01/43	$	12,200		(13,257,015	)
Total TBA Sale Commitments (Proceeds — $13,262,734) — (8.3)%				(13,257,015	)



Options Written
(Premiums Received — $362,000) — (0.2)%				(306,250	)
Total Investments, Net of TBA Sale Commitments and Options Written — 142.2%				226,694,433
Liabilities in Excess of Other Assets — (42.2)%				(67,229,592	)
Net Assets — 100.0%			$	159,464,841

Notes to Schedule of Investments

Counterparty	Value			Unrealized Appreciation (Depreciation)
Deutsche Bank AG	$	7,439,469		$	(25,238	)
JPMorgan Chase & Co.	$	(6,629,937	)	$	7,149

(e)				All or a portion of security has been pledged as collateral in connection with open reverse repurchase agreements.
(f)				Investments in issuers considered to be an affiliate of the Fund during the year ended December 31, 2012, for purposes of Section 2(a)(3) of the 1940 Act, were as follows:

Affiliate				Shares Held at December 31, 2011				Net Activity				Shares Held at December 31, 2012				Income
BlackRock Liquidity Funds, TempFund, Institutional Class					7,261,074				3,667,247				10,928,321				$8,016

(g)

Represents the current yield as of report date.

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Schedule of Investments (continued)


•				Reverse repurchase agreements outstanding as of December 31, 2012 were as follows:

Counterparty	Interest Rate	Trade Date	Maturity Date	Face Value	Face Value Including Accrued Interest
Deutsche Bank AG	0.12%	4/24/12	Open	$ 6,100,000	$ 6,105,124
Deutsche Bank AG	0.19%	7/10/12	Open	8,235,000	8,242,606
Credit Suisse Securities (USA) LLC	0.16%	8/22/12	Open	14,580,000	14,588,553
Bank of America Corp.	0.22%	12/10/12	Open	11,475,000	11,476,543
Deutsche Bank AG	0.10%	12/11/12	Open	10,012,500	10,013,084
Deutsche Bank AG	0.27%	12/11/12	Open	4,045,000	4,045,637
Credit Suisse Securities (USA) LLC	0.22%	12/13/12	Open	11,962,500	11,963,889

Total				$66,410,000	$66,435,436

•

Over-the-counter interest rate swaptions written as of December 31, 2012 were as follows:

Description

Counterparty

Put/
Call

Exercise
Rate

Pay/Receive
Exercise Rate

Floating Rate
Index

Expiration
Date

Notional
Amount
(000)

Market
Value

2-Year Interest Rate Swap

Citigroup, Inc.

Call

0.40%

Pays

3-Month LIBOR

1/29/13

$50,000

$ (31,216)

5-Year Interest Rate Swap

Citigroup, Inc.

Call

0.80%

Pays

3-Month LIBOR

1/29/13

$50,000

(50,079)

10-Year Interest Rate Swap

Citigroup, Inc.

Call

1.75%

Pays

3-Month LIBOR

1/29/13

$30,000

(114,964)

30-Year Interest Rate Swap

Citigroup, Inc.

Call

2.65%

Pays

3-Month LIBOR

1/29/13

$15,000

(109,991)

Total

$(306,250)

•

Interest rate swaps outstanding as of December 31, 2012 were as follows:

Fixed Rate

Floating Rate

Counterparty

Expiration
Date

Notional
Amount
(000)

Unrealized
Depreciation

5.96%¹

3-Month LIBOR

Deutsche Bank AG

12/27/37

$23,900

$(14,540,792)

Fund pays a fixed interest rate and receives floating rate.

•

Fair Value Measurements — Various inputs are used in determining the fair value of investments and derivative financial instruments. These inputs to valuation techniques are categorized into a disclosure hierarchy consisting of three broad levels for financial statement purposes as follows:

•				Level 1 — unadjusted price quotations in active markets/exchanges for identical assets and liabilities that the Fund has the ability to access
•				Level 2 — other observable inputs (including, but not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs)
•				Level 3 — unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including the Fund’s own assumptions used in determining the fair value of investments and derivative financial instruments)

				The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
				Changes in valuation techniques may result in transfers into or out of an assigned level within the disclosure hierarchy. In accordance with the Fund’s policy, transfers between different levels of the fair value disclosure hierarchy are deemed to have occurred as of the beginning of the reporting period. The categorization of a value determined for investments and derivative financial instruments is based on the pricing transparency of the investment and derivative financial instrument and is not necessarily an indication of the risks associated with investing in those securities. For information about the Fund’s policy regarding valuation of investments and derivative financial instruments and other significant accounting policies, please refer to Note 1 of the Notes to Financial Statements.

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Schedule of Investments (concluded)

The following tables summarize the Fund’s investments and derivative financial instruments categorized in the disclosure hierarchy as of December 31, 2012:

	Level 1		Level 2			Level 3		Total
Assets:
Investments:
Long-Term Investments:
Asset-Backed Securities		—	$	5,016,286			—	$	5,016,286
Corporate Bonds		—		448,261			—		448,261
Municipal Bonds		—		1,234,921			—		1,234,921
Non-Agency Mortgage-Backed Securities		—		2,658,961			—		2,658,961
Preferred Securities	$	1,963,608		2,652,390			—		4,615,998
US Government Sponsored Agency Securities		—		136,426,566			—		136,426,566
US Treasury Obligations		—		78,928,384			—		78,928,384
Short-Term Securities		10,928,321		—			—		10,928,321
Liabilities:
TBA Sale Commitments		—		(13,257,015	)		—		(13,257,015	)
Total	$	12,891,929	$	214,108,754			—	$	227,000,683

	Level 1		Level 2			Level 3		Total
Derivative Financial Instruments¹
Liabilities:
Interest rate contracts		—	$	(14,847,042	)		—	$	(14,847,042	)

Derivative financial instruments are swaps and written options. Swaps are valued at the unrealized appreciation/depreciation on the instrument and written options are shown at value.

Certain of the Fund’s assets and liabilities are held at carrying amount or face value, which approximates fair value for financial statement purposes. As of December 31, 2012, such assets and liabilities are categorized within the disclosure hierarchy as follows:

	Level 1		Level 2			Level 3		Total
Assets:
Cash	$	15,000		—			—	$	15,000
Cash pledged as collateral for swaps		13,890,000		—			—		13,890,000
Foreign currency at value		804		—			—		804
Liabilities:
Reverse repurchase agreements		—	$	(66,410,000	)		—		(66,410,000	)
Total	$	13,905,804	$	(66,410,000	)		—	$	(52,504,196	)

There were no transfers between levels during the year ended December 31, 2012.

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Statement of Assets and Liabilities

Investments at value — unaffiliated (cost — $217,189,245)

Investments at value — affiliated (cost — $10,928,321)

Cash pledged as collateral for swaps

TBA sale commitments receivable

Premiums receivable from options written

Principal paydown receivable

Investments sold receivable

Foreign currency at value (cost — $742)

Reverse repurchase agreements

Unrealized depreciation on swaps

Investments purchased payable

TBA sale commitments at value (proceeds — $13,262,734)

Income dividends payable

Options written at value (premiums received — $362,000)

Investment advisory fees payable

Interest expense payable

Officer’s and Directors’ fees payable

Other affiliates payable

Other accrued expenses payable

Net Assets Consist of

Distributions in excess of net investment income

Accumulated net realized loss

Net unrealized appreciation/depreciation

Based on net assets of $159,464,841 and 9,899,677 shares outstanding, 200 million shares authorized, $0.10 par value

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Statement of Operations

Income — affiliated

Officer and Directors

Total expenses excluding interest expense

Less fees waived by Manager

Total expenses after fees waived

Net investment income

Realized and Unrealized Gain (Loss)

Net realized gain (loss) from:

Financial futures contracts

Foreign currency transactions

Net change in unrealized appreciation/depreciation on:

Foreign currency translations

Total realized and unrealized loss

Net Increase in Net Assets Resulting from Operations

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Statements of Changes in Net Assets

Net investment income

Net change in unrealized appreciation/depreciation

Net increase in net assets resulting from operations

Dividends and Distributions to Shareholders From¹

Net investment income

Tax return of capital

Decrease in net assets resulting from dividends and distributions to shareholders

Capital Share Transactions

Redemption of shares resulting from a repurchase offer²

Decrease in net assets derived from capital share transactions

Total decrease in net assets

Distributions in excess of net investment income

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Statement of Cash Flows

Cash Provided by Operating Activities

Net increase in net assets resulting from operations

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:

Decrease in interest receivable

Decrease in swap receivable

Decrease in prepaid expenses

Decrease in cash pledged as collateral in connection with options written

Increase in cash pledged as collateral for swaps

Decrease in investment advisory fees payable

Increase in interest expense payable

Increase in other affiliates payable

Increase in other accrued expenses payable

Decrease in swaps payable

Increase in Officer’s and Directors’ fees payable

Net periodic and termination payments of swaps

Net realized and unrealized loss on investments

Amortization of premium and accretion of discount on investments

Premiums received from options written

Proceeds from sales and paydowns of long-term investments

Purchases of long-term investments

Net payments on purchases of short-term securities

Premiums paid on closing options written

Cash provided by operating activities

Cash Used for Financing Activities

Cash payments on Common Shares redeemed

Cash dividends paid to Common Shareholders

Net borrowing of reverse repurchase agreements

Cash used for financing activities

Cash Impact from Foreign Exchange Fluctuations

Cash impact from foreign exchange fluctuations

Cash and Foreign Currency

Net increase in cash

Cash and foreign currency at beginning of year

Cash and foreign currency at end of year

Cash Flow Information

Cash paid during the year for interest

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Financial Highlights

Per Share Operating Performance

Net asset value, beginning of year

Net investment income¹

Net realized and unrealized gain (loss)²

Net increase (decrease) from investment operations

Dividends and distributions from:³

Net investment income

Tax return of capital

Total dividends and distributions

Net asset value, end of year

Market price, end of year

Total Investment Return⁴

Based on net asset value

Based on market price

Ratios to Average Net Assets

Total expenses after fees waived and paid indirectly

Total expenses after fees waived and paid indirectly and excluding interest expense

Net investment income

Net assets, end of year (000)

Borrowings outstanding, end of year (000)

Average borrowings outstanding during the year (000)

Asset coverage, end of year $1,000

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012

1. Organization and Significant Accounting Policies:

BlackRock Enhanced Government Fund, Inc. (the “Fund”) is registered under the 1940 Act, as a diversified, closed-end management investment company. The Fund is organized as a Maryland corporation. The Fund’s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. The Fund determines, and makes available for publication its NAV on a daily basis.

The following is a summary of significant accounting policies followed by the Fund:

Valuation: US GAAP defines fair value as the price the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Fund determines the fair values of its financial instruments at market value using independent dealers or pricing services under policies approved by the Board of Directors of the Fund (the “Board”). The BlackRock Global Valuation Methodologies Committee (the “Global Valuation Committee”) is the committee formed by management to develop global pricing policies and procedures and to provide oversight of the pricing function for the Fund for all financial instruments.

The Fund values its bond investments on the basis of last available bid prices or current market quotations provided by dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrixes, market transactions in comparable investments, various relationships observed in the market between investments and calculated yield measures. Asset-backed and mortgage-backed securities are valued by independent pricing services using models that consider estimated cash flows of each tranche of the security, establish a benchmark yield and develop an estimated tranche specific spread to the benchmark yield based on the unique attributes of the tranche. Financial futures contracts traded on exchanges are valued at their last sale price. To-be-announced (“TBA”) commitments are valued on the basis of last available bid prices or current market quotations provided by pricing services. Swap agreements are valued utilizing quotes received daily by the Fund’s pricing service or through brokers, which are derived using daily swap curves and models that incorporate a number of market data factors, such as discounted cash flows, trades and values of the underlying reference instruments. Investments in open-end registered investment companies are valued at NAV each business day. Short-term securities with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.

Securities and other assets and liabilities denominated in foreign currencies are translated into US dollars using exchange rates determined as of the close of business on the New York Stock Exchange (“NYSE”). Foreign currency exchange contracts are valued at the mean between the bid and ask prices and are determined as of the close of business on the NYSE. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available.

Exchange-traded options are valued at the mean between the last bid and ask prices at the close of the options market in which the options trade. An exchange-traded option for which there is no mean price is valued at the last bid (long positions) or ask (short positions) price. If no bid or ask price is available, the prior day’s price will be used, unless it is determined that the prior day’s price no longer reflects the fair value of the option. Over-the-counter (“OTC”) options and swaptions are valued by an independent pricing service using a mathematical model which incorporates a number of market data factors, such as the trades and prices of the underlying instruments.

In the event that application of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available, the investment will be valued by the Global Valuation Committee or its delegate, in accordance with a policy approved by the Board as reflecting fair value (“Fair Value Assets”). When determining the price for Fair Value Assets, the Global Valuation Committee, or its delegate, seeks to determine the price that the Fund might reasonably expect to receive from the current sale of that asset in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that the investment advisor and/or sub-advisor deem relevant consistent with the principles of fair value measurement which include the market approach, income approach and/or in the case of recent investments, the cost approach, as appropriate. A market approach generally consists of using comparable market transactions. The income approach generally is used to discount future cash flows to present value and adjusted for liquidity as appropriate. These factors include but are not limited to: (i) attributes specific to the investment or asset; (ii) the principal market for the investment or asset; (iii) the customary participants in the principal market for the investment or asset; (iv) data assumptions by market participants for the investment or asset, if reasonably available; (v) quoted prices for similar investments or assets in active markets; and (vi) other factors, such as future cash flows, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery rates, liquidation amounts and/or default rates. Due to the inherent uncertainty of valuations of such investments, the fair values may differ from the values that would have been used had an active market existed. The Global Valuation Committee, or its delegate, employs various methods for calibrating valuation approaches for investments where an active market does not

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Notes to Financial Statements (continued)

exist, including regular due diligence of the Fund’s pricing vendors, a regular review of key inputs and assumptions, transactional back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of missing or stale prices and large movements in market values and reviews of any market related activity. The pricing of all Fair Value Assets is subsequently reported to the Board or a committee thereof on a quarterly basis.

Generally, trading in foreign instruments is substantially completed each day at various times prior to the close of business on the NYSE. Occasionally, events affecting the values of such instruments may occur between the foreign market close and the close of business on the NYSE that may not be reflected in the computation of the Fund’s net assets. If events (for example, a company announcement, market volatility or a natural disaster) occur during such periods that are expected to affect the value of such instruments materially, those instruments may be Fair Value Assets and valued at their fair value, as determined in good faith by the Global Valuation Committee using a pricing service and/or policies approved by the Board.

Foreign Currency: The Fund’s books and records are maintained in US dollars. Purchases and sales of investment securities are recorded at the rates of exchange prevailing on the respective date of such transactions. Generally, when the US dollar rises in value against a foreign currency, the Fund’s investments denominated in that currency will lose value because that currency is worth fewer US dollars; the opposite effect occurs if the US dollar falls in relative value.

The Fund does not isolate the portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of investments held or sold for financial reporting purposes. Accordingly, the effects of changes in foreign currency exchange rates on investments are not segregated in the Statement of Operations from the effects of changes in market prices of those investments but are included as a component of net realized and unrealized gain (loss) from investments. The Fund reports realized currency gains (losses) on foreign currency related transactions as components of net realized gain (loss) for financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes.

Asset-Backed and Mortgage-Backed Securities: The Fund may invest in asset-backed securities. Asset-backed securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in an underlying pool of assets, or as debt instruments, which are also known as collateralized obligations, and are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. The yield characteristics of certain asset-backed securities may differ from traditional debt securities. One such major difference is that all or a principal part of the obligations may be prepaid at any time because the underlying assets (i.e., loans) may be prepaid at any time. As a result, a decrease in interest rates in the market may result in increases in the level of prepayments as borrowers, particularly mortgagors, refinance and repay their loans. An increased prepayment rate with respect to an asset-backed security subject to such a prepayment feature will have the effect of shortening the maturity of the security. If the Fund has purchased such an asset-backed security at a premium, a faster than anticipated prepayment rate could result in a loss of principal to the extent of the premium paid.

The Fund may purchase certain mortgage pass-through securities. There are a number of important differences among the agencies and instrumentalities of the US government that issue mortgage-related securities and among the securities that they issue. For example, mortgage-related securities guaranteed by Ginnie Mae are guaranteed as to the timely payment of principal and interest by Ginnie Mae and such guarantee is backed by the full faith and credit of the United States. However, mortgage-related securities issued by Freddie Mac and Fannie Mae, including Freddie Mac and Fannie Mae guaranteed Mortgage Pass-Through Certificates, which are solely the obligations of Freddie Mac and Fannie Mae, are not backed by or entitled to the full faith and credit of the United States but are supported by the right of the issuer to borrow from the Treasury.

Multiple Class Pass-Through Securities: The Fund may invest in multiple class pass-through securities, including collateralized mortgage obligations (“CMOs”) and commercial mortgage-backed securities. These multiple class securities may be issued by Ginnie Mae, US government agencies or instrumentalities or by trusts formed by private originators of, or investors in, mortgage loans. In general, CMOs are debt obligations of a legal entity that are collateralized by, and multiple class pass-through securities represent direct ownership interests in, a pool of residential or commercial mortgage loans or mortgage pass-through securities (the “Mortgage Assets”), the payments on which are used to make payments on the CMOs or multiple pass-through securities. Classes of CMOs include interest only (“IOs”), principal only (“POs”), planned amortization classes and targeted amortization classes. IOs and POs are stripped mortgage-backed securities representing interests in a pool of mortgages, the cash flow from which has been separated into interest and principal components. IOs receive the interest portion of the cash flow while POs receive the principal portion. IOs and POs can be extremely volatile in response to changes in interest rates. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. POs perform best when prepayments on the underlying mortgages rise since this increases the rate at which the principal is returned and the yield to maturity on the PO. When payments on mortgages underlying a PO are slower than anticipated, the life of the

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Notes to Financial Statements (continued)

PO is lengthened and the yield to maturity is reduced. If the underlying Mortgage Assets experience greater than anticipated pre-payments of principal, the Fund may not fully recoup its initial investment in IOs.

Stripped Mortgage-Backed Securities: The Fund may invest in stripped mortgage-backed securities issued by the US government, its agencies and instrumentalities. Stripped mortgage-backed securities are usually structured with two classes that receive different proportions of the interest (IOs) and principal (POs) distributions on a pool of Mortgage Assets. The Fund also may invest in stripped mortgage-backed securities that are privately issued.

Capital Trusts: The Fund may invest in capital trusts. These securities are typically issued by corporations, generally in the form of interest-bearing notes with preferred securities characteristics, or by an affiliated business trust of a corporation, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The securities can be structured as either fixed or adjustable coupon securities that can have either a perpetual or stated maturity date. Dividends can be deferred without creating an event of default or acceleration, although maturity cannot take place unless all cumulative payment obligations have been met. The deferral of payments does not affect the purchase or sale of these securities in the open market. Payments on these securities are treated as interest rather than dividends for federal income tax purposes. These securities generally are rated below that of the issuing company’s senior debt securities.

TBA Commitments: The Fund may enter into TBA commitments. TBA commitments are forward agreements for the purchase or sale of mortgage-backed securities for a fixed price, with payment and delivery on an agreed upon future settlement date. The specific securities to be delivered are not identified at the trade date. However, delivered securities must meet specified terms, including issuer, rate and mortgage terms. The Fund generally enters into TBA commitments with the intent to take possession of or deliver the underlying mortgage-backed securities but can extend the settlement or roll the transaction. TBA commitments involve a risk of loss if the value of the security to be purchased or sold declines or increases, respectively, prior to settlement date.

Mortgage Dollar Roll Transactions: The Fund may sell TBA mortgage-backed securities and simultaneously contract to repurchase substantially similar (same type, coupon and maturity) securities on a specific future date at an agreed upon price. During the period between the sale and repurchase, the Fund will not be entitled to receive interest and principal payments on the securities sold. The Fund accounts for mortgage dollar roll transactions as purchases and sales and realizes gains and losses on these transactions. These transactions may increase the Fund’s portfolio turnover rate. Mortgage dollar rolls involve the risk that the market value of the securities that the Fund is required to purchase may decline below the agreed upon repurchase price of those securities.

Reverse Repurchase Agreements: The Fund may enter into reverse repurchase agreements with qualified third party broker-dealers. In a reverse repurchase agreement, the Fund sells securities to a bank or broker-dealer and agrees to repurchase the same securities at a mutually agreed upon date and price. Securities sold under reverse repurchase agreements are recorded as a liability in the Statement of Assets and Liabilities at face value including accrued interest. Due to the short term nature of the reverse repurchase agreements, face value approximates fair value. During the term of the reverse repurchase agreement, the Fund continues to receive the principal and interest payments on these securities. Certain agreements have no stated maturity and can be terminated by either party at any time. Interest on the value of the reverse repurchase agreements issued and outstanding is based upon competitive market rates determined at the time of issuance. The Fund may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. Reverse repurchase agreements involve leverage risk and also the risk that the market value of the securities that the Fund is obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the agreement may be restricted while the other party, or its trustee or receiver, determines whether or not to enforce the Fund’s obligation to repurchase the securities.

Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that the Fund either deliver collateral or segregate assets in connection with certain investments (e.g., dollar rolls, TBA sale commitments, financial futures contracts, swaps and options written), or certain borrowings (e.g., reverse repurchase agreements), the Fund will, consistent with SEC rules and/or certain interpretive letters issued by the SEC, segregate collateral or designate on its books and records cash or liquid securities having a market value at least equal to the amount that would otherwise be required to be physically segregated. Furthermore, based on requirements and agreements with certain exchanges and third party broker-dealers, a fund engaging in such transactions may have requirements to deliver/deposit securities to/with an exchange or broker-dealer as collateral for certain investments.

Investment Transactions and Investment Income: For financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on investment transactions are determined on the identified cost

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Notes to Financial Statements (continued)

basis. Interest income, including amortization and accretion of premiums and discounts on debt securities, is recognized on the accrual basis.

Dividends and Distributions: Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. Subject to the Fund’s level distribution plan, the Fund intends to make monthly cash dividends and/or distributions to shareholders, which may consist of net investment income, net options premium and net realized and unrealized gains on investments. The portion of distributions that exceeds a Fund’s current and accumulated earnings and profits, which are measured on a tax basis, will constitute a nontaxable return of capital. Distributions in excess of a Fund’s taxable income and net capital gains, but not in excess of a Fund’s earnings and profits, will be taxable to shareholders as ordinary income and will not constitute a nontaxable return of capital. Capital losses carried forward from years beginning before 2011 do not reduce earnings and profits, even if such carried forward losses offset current year realized gains. The character of dividends and distributions is determined in accordance with federal income tax regulations, which may differ from US GAAP.

Income Taxes: It is the Fund’s policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required.

The Fund files US federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Fund’s US federal tax returns remains open for each of the four years ended December 31, 2012. The statutes of limitations on the the Fund’s state and local tax returns may remain open for an additional year depending upon the jurisdiction. Management does not believe there are any uncertain tax positions that require recognition of a tax liability.

Recent Accounting Standards: In December 2011, the Financial Accounting Standards Board (the “FASB”) issued guidance that will expand current disclosure requirements on the offsetting of certain assets and liabilities. The new disclosures will be required for investments and derivative financial instruments subject to master netting or similar agreements, which are eligible for offset in the Statement of Assets and Liabilities and will require an entity to disclose both gross and net information about such investments and transactions in the financial statements. In January 2013, the FASB issued guidance that clarifies which investments and transactions are subject to the offsetting disclosure requirements. The scope of the disclosure requirements for offsetting will be limited to derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. The guidance is effective for financial statements with fiscal years beginning on or after January 1, 2013, and interim periods within those fiscal years. Management is evaluating the impact of this guidance on the Fund’s financial statement disclosures.

Deferred Compensation Plan: Under the Deferred Compensation Plan (the “Plan”) approved by the Fund’s Board, the independent Directors (“Independent Directors”) may defer a portion of their annual complex-wide compensation. Deferred amounts earn an approximate return as though equivalent dollar amounts had been invested in common shares of certain other BlackRock Closed-End Funds selected by the Independent Directors. This has the same economic effect for the Independent Directors as if the Independent Directors had invested the deferred amounts directly in certain other BlackRock Closed-End Funds.

The Plan is not funded and obligations thereunder represent general unsecured claims against the general assets of the Fund. Prior to March 31, 2012, the Fund elected to invest in common shares of certain other BlackRock Closed-End Funds selected by the Independent Directors in order to match its deferred compensation obligations. Dividends and distributions received from the BlackRock Closed-End Fund investments through March 31, 2012 are included in income — affiliated in the Statement of Operations. Deferred compensation liabilities are included in officers’ and directors’ fees payable on the Statement of Assets and Liabilities and will remain as a liability of the Fund until such amounts are distributed in accordance with the Plan.

Other: Expenses directly related to the Fund are charged to the Fund. Other operating expenses shared by several funds are pro rated among those funds on the basis of relative net assets or other appropriate methods.

The Fund has an arrangement with the custodian whereby fees may be reduced by credits earned on uninvested cash balances, which, if applicable, are shown as fees paid indirectly in the Statement of Operations. The custodian imposes fees on overdrawn cash balances, which can be offset by accumulated credits earned or may result in additional custody charges.

2. Derivative Financial Instruments:

The Fund engages in various portfolio investment strategies using derivative contracts both to increase the returns of the Fund and/or to economically hedge, or protect, its exposure to certain risks such as credit risk, equity risk and foreign currency exchange rate risk. These contracts may be transacted on an exchange or OTC.

Losses may arise if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument or if the counterparty does not perform under the contract. The Fund’s maximum risk of loss from counterparty credit risk on OTC derivatives is generally the aggregate unrealized gain netted against any collateral pledged by/posted to the counterparty. For OTC options

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Notes to Financial Statements (continued)

purchased, the Fund bears the risk of loss in the amount of the premiums paid plus the positive change in market values net of any collateral received on the options should the counterparty fail to perform under the contracts. Options written by the Fund do not give rise to counterparty credit risk, as options written obligate the Fund to perform and not the counterparty. Counterparty risk related to exchange-traded financial futures contracts and options is deemed to be minimal due to the protection against defaults provided by the exchange on which these contracts trade.

The Fund may mitigate counterparty risk by procuring collateral and through netting provisions included within an International Swaps and Derivatives Association, Inc. master agreement (“ISDA Master Agreement”) implemented between the Fund and each of its respective counterparties. An ISDA Master Agreement allows the Fund to offset with each separate counterparty certain derivative financial instrument’s payables and/or receivables with collateral held. The amount of collateral moved to/from applicable counterparties is generally based upon minimum transfer amounts of up to $500,000. To the extent amounts due to the Fund from its counterparties are not fully collateralized, contractually or otherwise, the Fund bears the risk of loss from counterparty non-performance. See Note 1 “Segregation and Collateralization” for information with respect to collateral practices. In addition, the Fund manages counterparty risk by entering into agreements only with counterparties that it believes have the financial resources to honor its obligations and by monitoring the financial stability of those counterparties.

Certain ISDA Master Agreements allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity in the event the Fund’s net assets decline by a stated percentage or the Fund fails to meet the terms of its ISDA Master Agreements, which would cause the Fund to accelerate payment of any net liability owed to the counterparty.

Financial Futures Contracts: The Fund purchases or sells financial futures contracts and options on financial futures contracts to gain exposure to, or economically hedge against, changes in interest rates (interest rate risk). Financial futures contracts are agreements between the Fund and the counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and at a specified date. Depending on the terms of the particular contract, financial futures contracts are settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized appreciation or depreciation. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of financial futures contracts involves the risk of an imperfect correlation in the movements in the price of financial futures contracts, interest rates and the underlying assets.

Foreign Currency Exchange Contracts: The Funds enter into foreign currency exchange contracts as an economic hedge against either specific transactions or portfolio instruments or to obtain exposure to foreign currencies (foreign currency exchange rate risk). A foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a future date. Foreign currency exchange contracts, when used by the Fund, help to manage the overall exposure to the currencies in which some of the investments held by the Fund are denominated. The contract is marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The use of foreign currency exchange contracts involves the risk that the value of a foreign currency exchange contract changes unfavorably due to movements in the value of the referenced foreign currencies and the risk that the counterparty to the contract does not perform its obligations under the agreement.

Options: The Fund purchases and writes call and put options to increase or decrease its exposure to underlying instruments (including equity risk, interest rate risk and/or commodity price risk) and/or, in the case of options written, to generate gains from options premiums. A call option gives the purchaser (holder) of the option the right (but not the obligation) to buy, and obligates the seller (writer) to sell (when the option is exercised), the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. A put option gives the holder the right to sell and obligates the writer to buy the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. When the Fund purchases (writes) an option, an amount equal to the premium paid (received) by the Fund is reflected as an asset (liability). The amount of the asset (liability) is subsequently marked-to-market to reflect the current market value of the option purchased (written). When an instrument is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the instrument acquired or deducted from (or added to) the proceeds of the instrument sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premiums received or paid). When the Fund writes a call option, such option is “covered,” meaning that the Fund holds the underlying instrument subject to being called by the option counterparty. When the Fund writes a put option, such option is covered by cash in an amount sufficient to cover the obligation.

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Notes to Financial Statements (continued)

Options on swaps (swaptions) are similar to options on securities except that instead of selling or purchasing the right to buy or sell a security, the writer or purchaser of the swap option is granting or buying the right to enter into a previously agreed upon interest rate swap agreement (interest rate risk and/or credit risk) at any time before the expiration of the option.

In purchasing and writing options, the Fund bears the risk of an unfavorable change in the value of the underlying instrument or the risk that the Fund may not be able to enter into a closing transaction due to an illiquid market. Exercise of a written option could result in the Fund purchasing or selling a security at a price different from the current market value.

Swaps: The Fund enters into swap agreements, in which the fund and a counterparty agree either to make periodic net payments on a specified notional amount or a net payment upon termination. Swap agreements are privately negotiated in the OTC market and may be entered into as a bilateral contract or centrally cleared (“centrally cleared swaps”). In a centrally cleared swap, immediately following execution of the swap agreement, the swap agreement is novated to a central counterparty (the ”CCP“) and the Fund faces the CCP through a future commission merchant. Unlike a bilateral swap agreement, for centrally cleared swaps, the Fund has no credit exposure to the counterparty as the CCP stands between the Fund and the counterparty. These payments received or made by the Fund are recorded in the Statement of Operations as realized gains or losses, respectively. Any upfront fees paid are recorded as assets and any upfront fees received are recorded as liabilities and are shown as swap premiums paid and swap premiums received, respectively in the Statement of Assets and Liabilities and amortized over the term of the swap. Swaps are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of centrally cleared swaps, if any, is recorded as a receivable or payable for variation margin in the Statement of Assets and Liabilities. When the swap is terminated, the Fund will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund’s basis in the contract, if any. Generally, the basis of the contracts is the premium received or paid. Swap transactions involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and that there may be unfavorable changes in interest rates and/or market values associated with these transactions.

Derivative Financial Instruments Categorized by Risk Exposure:

Interest rate contracts

Unrealized depreciation on swaps; Options written at value

Interest rate contracts

Foreign currency transactions

Interest rate contracts

BLACKROCK ENHANCED GOVERNMENT FUND, INC.

DECEMBER 31, 2012


Notes to Financial Statements (continued)

For the year ended December 31, 2012, the average quarterly balances of outstanding derivative financial instruments were as follows:

Financial futures contracts:

Average number of contracts sold

Average notional value of contracts sold

Foreign currency exchange contracts:

Average number of contracts US dollars purchased¹

Average US dollars amount purchased¹

Average number of options contracts purchased¹

Average notional value of options contracts
purchased¹

Average number of swaptions contracts written

Average notional value of swaptions contracts written

Interest rate swaps:

Average number of contracts — pays fixed rate

Average notional value — pays fixed rate

3. Investment Advisory Agreement and Other Transactions with Affiliates:

Year Ended December 31, 2012
Investment Income
Interest	$	9,861,861
Income — affiliated		8,016
Total income		9,869,877

Expenses
Investment advisory		2,083,394
Professional		116,382
Accounting services		38,106
Repurchase offer		36,375
Transfer agent		35,630
Custodian		27,898
Officer and Directors		21,545
Printing		18,908
Registration		8,624
Miscellaneous		13,028
Total expenses excluding interest expense		2,399,890
Interest expense		123,926
Total expenses		2,523,816
Less fees waived by Manager		(3,883	)
Total expenses after fees waived		2,519,933
Net investment income		7,349,944

Realized and Unrealized Gain (Loss)
Net realized gain (loss) from:
Investments		(1,066,527	)
Financial futures contracts		(80,247	)
Foreign currency transactions		4,969
Options written		2,573,300
Swaps		(3,599,890	)
		(2,168,395	)

Net change in unrealized appreciation/depreciation on:
Investments		609,130
Foreign currency translations		22
Options written		224,430
Swaps		1,101,978
		1,935,560
Total realized and unrealized loss		(232,835	)
Net Increase in Net Assets Resulting from Operations	$	7,117,109

	Year Ended December 31,
Increase (Decrease) in Net Assets:	2012			2011
Operations
Net investment income	$	7,349,944		$	8,091,632
Net realized loss		(2,168,395	)		(8,378,105	)
Net change in unrealized appreciation/depreciation		1,935,560			8,958,937
Net increase in net assets resulting from operations		7,117,109			8,672,464

Dividends and Distributions to Shareholders From¹
Net investment income		(5,916,283	)		(4,435,787	)
Tax return of capital		(3,070,424	)		(6,175,972	)
Decrease in net assets resulting from dividends and distributions to shareholders		(8,986,707	)		(10,611,759	)

Capital Share Transactions
Redemption of shares resulting from a repurchase offer²		(17,430,690	)		(9,213,755	)
Decrease in net assets derived from capital share transactions		(17,430,690	)		(9,213,755	)

Net Assets
Total decrease in net assets		(19,300,288	)		(11,153,050	)
Beginning of year		178,765,129			189,918,179
End of year	$	159,464,841		$	178,765,129
Distributions in excess of net investment income	$	(643,479	)	$	(775,071	)

Year Ended December 31, 2012
Cash Provided by Operating Activities
Net increase in net assets resulting from operations	$	7,117,109
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:
Decrease in interest receivable		294,722
Decrease in swap receivable		1,432
Decrease in prepaid expenses		6,266
Decrease in cash pledged as collateral in connection with options written		200,000
Increase in cash pledged as collateral for swaps		(6,590,000	)
Decrease in investment advisory fees payable		(34,761	)
Increase in interest expense payable		11,552
Increase in other affiliates payable		1,848
Increase in other accrued expenses payable		39,718
Decrease in swaps payable		(3,955	)
Increase in Officer’s and Directors’ fees payable		5,294
Net periodic and termination payments of swaps		(4,339,890	)
Net realized and unrealized loss on investments		157,557
Amortization of premium and accretion of discount on investments		526,894
Premiums received from options written		5,460,500
Proceeds from sales and paydowns of long-term investments		386,393,466
Purchases of long-term investments		(332,350,296	)
Net payments on purchases of short-term securities		(3,667,247	)
Premiums paid on closing options written		(2,622,200	)
Cash provided by operating activities		50,608,009

Cash Used for Financing Activities
Cash payments on Common Shares redeemed		(17,430,690	)
Cash dividends paid to Common Shareholders		(9,113,203	)
Net borrowing of reverse repurchase agreements		(24,050,419	)
Cash used for financing activities		(50,594,312	)

Cash Impact from Foreign Exchange Fluctuations
Cash impact from foreign exchange fluctuations		22

Cash and Foreign Currency
Net increase in cash		13,719
Cash and foreign currency at beginning of year		2,085
Cash and foreign currency at end of year	$	15,804

Cash Flow Information
Cash paid during the year for interest	$	112,374

	Year Ended December 31,
	2012			2011			2010			2009			2008
Per Share Operating Performance

Net asset value, beginning of year	$	16.25		$	16.40		$	16.59		$	16.03		$	17.42
Net investment income¹		0.67			0.70			0.64			0.67			0.97
Net realized and unrealized gain (loss)²		0.02			0.07			0.16			1.32			(1.10	)
Net increase (decrease) from investment operations		0.69			0.77			0.80			1.99			(0.13	)
Dividends and distributions from:³
Net investment income		(0.55	)		(0.39	)		(0.80	)		(0.26	)		(0.46	)
Net realized gain		—			—			—			(1.01	)		(0.80	)
Tax return of capital		(0.28	)		(0.53	)		(0.19	)		(0.16	)		—
Total dividends and distributions		(0.83	)		(0.92	)		(0.99	)		(1.43	)		(1.26	)
Net asset value, end of year	$	16.11		$	16.25		$	16.40		$	16.59		$	16.03
Market price, end of year	$	15.63		$	15.25		$	15.51		$	17.07		$	16.57

Total Investment Return⁴

Based on net asset value		4.59%			5.15%			4.95	%		12.68%			(0.73	)%
Based on market price		8.13%			4.34%			(3.54	)%		12.17%			12.85	%

Ratios to Average Net Assets

Total expenses		1.43%			1.39%			1.22%			1.00%			1.07%
Total expenses after fees waived and paid indirectly		1.42%			1.39%			1.22%			0.99%			1.07%
Total expenses after fees waived and paid indirectly and excluding interest expense		1.35%			1.35%			1.18%			0.99%			0.97%
Net investment income		4.15%			4.32%			3.87%			3.96%			5.40%

Supplemental Data

Net assets, end of year (000)	$	159,465		$	178,765		$	189,918		$	194,472		$	186,803
Borrowings outstanding, end of year (000)	$	66,410		$	90,460		$	75,230		$	10,934			—
Average borrowings outstanding during the year (000)	$	68,515		$	71,183		$	40,046		$	3,415			—
Portfolio turnover		142%	⁵		115%	⁶		163%	⁷		483%	⁸		367%	⁹
Asset coverage, end of year $1,000	$	3,401		$	2,976		$	3,525		$	18,786			—

Net Change in Unrealized Appreciation/Depreciation on
	Swaps		Options¹
Interest rate contracts	$	1,101,978	$	224,430

December 31, 2012
Assets
Investments at value — unaffiliated (cost — $217,189,245)	$	229,329,377
Investments at value — affiliated (cost — $10,928,321)		10,928,321
Cash		15,000
Cash pledged as collateral for swaps		13,890,000
TBA sale commitments receivable		13,262,734
Interest receivable		1,167,011
Premiums receivable from options written		362,000
Principal paydown receivable		89,356
Investments sold receivable		22,367
Swaps receivable		1,235
Foreign currency at value (cost — $742)		804
Prepaid expenses		5,296
Total assets		269,073,501

Liabilities
Reverse repurchase agreements		66,410,000
Unrealized depreciation on swaps		14,540,792
Investments purchased payable		14,110,162
TBA sale commitments at value (proceeds — $13,262,734)		13,257,015
Income dividends payable		643,479
Options written at value (premiums received — $362,000)		306,250
Investment advisory fees payable		161,363
Interest expense payable		25,436
Swaps payable		23,731
Officer’s and Directors’ fees payable		5,961
Other affiliates payable		1,848
Other accrued expenses payable		122,623
Total liabilities		109,608,660
Net Assets	$	159,464,841

Net Assets Consist of
Paid-in capital	$	170,223,577
Distributions in excess of net investment income		(643,479	)
Accumulated net realized loss		(7,776,128	)
Net unrealized appreciation/depreciation		(2,339,129	)
Net Assets	$	159,464,841

Net Asset Value
Based on net assets of $159,464,841 and 9,899,677 shares outstanding, 200 million shares authorized, $0.10 par value	$	16.11

The Effect of Derivative Financial Instruments in the Statement of Operations Year Ended December 31, 2012
	Net Realized Gain (Loss) from
	Financial Futures Contracts			Swaps			Options¹		Foreign Currency Exchange Contracts
Interest rate contracts	$	(80,247	)	$	(3,599,890	)	$	2,576,785		—
Foreign currency transactions		—			—			—	$	(5	)
Total	$	(80,247	)	$	(3,599,890	)	$	2,576,780	$	(5	)

	Calls
	Notional Amount (000)			Premiums Received
Outstanding options, beginning of year	$	135,000		$	475,000
Options written		1,675,000			5,822,500
Options closed		(765,000	)		(1,823,725	)
Options exercised		(160,000	)		(740,000	)
Options expired		(740,000	)		(3,371,775	)
Outstanding options, end of year	$	145,000		$	362,000

Distributions in excess of net investment income				$	(1,302,069	)
Accumulated net realized loss				$	1,302,069

	12/31/2012		12/31/2011
Ordinary income	$	5,916,283	$	4,435,787
Tax return of capital		3,070,424		6,175,972
Total	$	8,986,707	$	10,611,759

Capital loss carryforwards	$	(7,776,128	)
Net unrealized losses¹		(2,982,608	)
Total	$	(10,758,736	)

Expires December 31,
2017	$	2,037,204
No expiration date²		5,738,924
Total	$	7,776,128

Tax cost	$	228,117,566
Gross unrealized appreciation	$	13,616,068
Gross unrealized depreciation		(1,475,936	)
Net unrealized appreciation	$	12,140,132

	Months Paid	Percentage
Interest-Related Dividends for Non-US Residents¹	January – December 2012	100.00%
Federal Obligation Interest²	January – December 2012	16.35%

Name, Address and Year of Birth	Position(s) Held with Fund	Length of Time Served as a Director²	Principal Occupation(s) During Past Five Years	Number of BlackRock- Advised Registered Investment Companies (“RICs”) Consisting of Investment Portfolios (“Portfolios”) Overseen	Public Directorships
Independent Directors¹

Richard E. Cavanagh 55 East 52nd Street New York, NY 10055 1946	Chairman of the Board and Director	Since 2007	Trustee, Aircraft Finance Trust from 1999 to 2009; Director, The Guardian Life Insurance Company of America since 1998; Director, Arch Chemical (chemical and allied products) from 1999 to 2011; Trustee, Educational Testing Service from 1997 to 2009 and Chairman thereof from 2005 to 2009; Senior Advisor, The Fremont Group since 2008 and Director thereof since 1996; Adjunct Lecturer, Harvard University since 2007; President and Chief Executive Officer, The Conference Board, Inc. (global business research organization) from 1995 to 2007.	93 RICs consisting of 89 Portfolios	None

Karen P. Robards 55 East 52nd Street New York, NY 10055 1950	Vice Chairperson of the Board, Chairperson of the Audit Committee and Director	Since 2004	Partner of Robards & Company, LLC (financial advisory firm) since 1987; Co-founder and Director of the Cooke Center for Learning and Development (a not-for-profit organization) since 1987; Director of Care Investment Trust, Inc. (health care real estate investment trust) from 2007 to 2010; Investment Banker at Morgan Stanley from 1976 to 1987.	93 RICs consisting of 89 Portfolios	AtriCure, Inc. (medical devices)

Michael J. Castellano 55 East 52nd Street New York, NY 10055 1946	Director and Member of the Audit Committee	Since 2011	Managing Director and Chief Financial Officer of Lazard Group LLC from 2001 to 2011; Chief Financial Officer of Lazard Ltd from 2004 to 2011; Director, Support Our Aging Religious (non-profit) since 2009; Director, National Advisory Board of Church Management at Villanova University since 2010.	93 RICs consisting of 89 Portfolios	None

Frank J. Fabozzi 55 East 52nd Street New York, NY 10055 1948	Director and Member of the Audit Committee	Since 2007	Editor of and Consultant for The Journal of Portfolio Management since 1986; Professor of Finance, EDHEC Business School since 2011; Professor in the Practice of Finance and Becton Fellow, Yale University School of Management from 2006 to 2011; Adjunct Professor of Finance and Becton Fellow, Yale University from 1994 to 2006.	93 RICs consisting of 89 Portfolios	None

Kathleen F. Feldstein 55 East 52nd Street New York, NY 10055 1941	Director	Since 2007	President of Economics Studies, Inc. (private economic consulting firm) since 1987; Chair, Board of Trustees, McLean Hospital from 2000 to 2008 and Trustee Emeritus thereof since 2008; Member of the Board of Partners Community Healthcare, Inc. from 2005 to 2009; Member of the Corporation of Partners HealthCare since 1995; Trustee, Museum of Fine Arts, Boston since 1992; Member of the Visiting Committee to the Harvard University Art Museum since 2003; Director, Catholic Charities of Boston since 2009.	93 RICs consisting of 89 Portfolios	The McClatchy Company (publishing) BellSouth (telecommunications); Knight Ridder (publishing)

James T. Flynn 55 East 52nd Street New York, NY 10055 1939	Director and Member of the Audit Committee	Since 2004	Chief Financial Officer of JP Morgan & Co., Inc. from 1990 to 1995.	93 RICs consisting of 89 Portfolios	None

Jerrold B. Harris 55 East 52nd Street New York, NY 10055 1942	Director	Since 2007	Trustee, Ursinus College since 2000; Director, Troemner LLC (scientific equipment) since 2000; Director of Delta Waterfowl Foundation since 2001; President and Chief Executive Officer, VWR Scientific Products Corporation from 1990 to 1999.	93 RICs consisting of 89 Portfolios	BlackRock Kelso Capital Corp. (business development company)

Investment Advisor BlackRock Advisors, LLC Wilmington, DE 19809	Custodian and Accounting Agent State Street Bank and Trust Company Boston, MA 02110	Independent Registered Public Accounting Firm Deloitte & Touche LLP Boston, MA 02116	Address of the Fund 100 Bellevue Parkway Wilmington, DE 19809

Sub-Advisor BlackRock Financial Management, Inc. New York, NY 10055	Transfer Agent Computershare Trust Company, N.A. Canton, MA 02021	Legal Counsel Skadden, Arps, Slate, Meagher & Flom LLP New York, NY 10036


		Votes For	Votes Withheld	Abstain
Approved the Directors as follows:	Paul L. Audet	10,261,821	239,648	0
	Michael J. Castellano	10,257,194	244,275	0
	Richard E. Cavanagh	10,259,074	242,395	0
	Frank J. Fabozzi	10,253,997	247,472	0
	Kathleen F. Feldstein	10,253,630	247,839	0
	James T. Flynn	10,246,659	254,810	0
	Henry Gabbay	10,260,132	241,337	0
	Jerrold B. Harris	10,247,187	254,282	0
	R. Glenn Hubbard	10,253,927	247,542	0
	W. Carl Kester	10,261,259	240,210	0
	Karen P. Robards	10,262,277	239,192	0

Number of Repurchase Offers		Number of Shares Repurchased		Number of Shares Tendered
1		1,099,964		3,367,976

	(a) Audit Fees		(b) Audit-Related Fees¹		(c) Tax Fees²		(d) All Other Fees³
Entity Name	Current Fiscal Year End	Previous Fiscal Year End	Current Fiscal Year End	Previous Fiscal Year End	Current Fiscal Year End	Previous Fiscal Year End	Current Fiscal Year End	Previous Fiscal Year End
BlackRock Enhanced Government Fund, Inc.	$36,800	$36,800	$0	$0	$10,300	$9,800	$0	$0

Portfolio Manager	Biography
Stuart Spodek	Managing Director of BlackRock since 2002; Co-head of US Fixed Income within BlackRock's Fixed Income Portfolio Management Group since 2007.
Thomas Musmanno, CFA	Managing Director of BlackRock since 2010; Director of BlackRock from 2006 to 2009.

	(ii) Number of Other Accounts Managed and Assets by Account Type			(iii) Number of Other Accounts and Assets for Which Advisory Fee is Performance-Based
(i) Name of Portfolio Manager	Other Registered Investment Companies	Other Pooled Investment Vehicles	Other Accounts	Other Registered Investment Companies	Other Pooled Investment Vehicles	Other Accounts
Stuart Spodek	0	4	4	0	2	2
	$0	$1.57 Billion	$2.74 Billion	$0	$1.22 Billion	$344 Million
Thomas Musmanno, CFA	5	10	184	0	0	1
	$3.58 Billion	$1.4 Billion	$53.31 Billion	$0	$0	$14.17 Million

Portfolio Manager	Dollar Range of Equity Securities of the Fund Beneficially Owned
Stuart Spodek	None
Thomas Musmanno, CFA	None

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1-31, 2012	N/A	N/A	N/A	N/A
August 1-31, 2012	N/A	N/A	N/A	N/A
September 1-30, 2012	N/A	N/A	N/A	N/A
October 1-31, 2012	N/A	N/A	N/A	N/A
November 1-30, 2012	N/A	N/A	N/A	N/A
December 1-31, 2012	3,367,976	$16.17 ¹	3,367,976²	0
Total:	3,367,976	$16.17 ¹	3,367,976²	0