UNITEDSTATES
SECURITIESANDEXCHANGECOMMISSION
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., 40 East 52^nd Street, New York, NY 10022

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

Date of fiscal year end: 12/31/2010

Date of reporting period: 12/31/2010

Item 1 – Report to Stockholders

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December 31, 2010

Annual Report

BlackRock Enhanced Government Fund, Inc. (EGF)

Not FDIC Insured • No Bank Guarantee • May Lose Value

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Table of Contents

 

Section 19(b) Disclosure

BlackRock Enhanced Government Fund, Inc. (EGF) (the “Fund”), acting pursuant to a Securities and Exchange Commission (“SEC”) exemptive order and
with 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 $0.08 per share on
a monthly basis.

The fixed amounts distributed per share are subject to change at the discretion of the Board. Under its Plan, the Fund will distribute all available invest-
ment 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 cap-
ital to shareholders in order to maintain a level distribution. Each monthly distribution to shareholders is expected to be at the fixed amount estab-
lished 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 com-
plete description of its risks.

Please refer to the Additional Information for a cumulative summary of the Section 19(a) notices for the Fund’s current fiscal period. Section 19(a)
notices for the Fund are available on the BlackRock website http://www.blackrock.com.

2 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Dear Shareholder

Economic data fluctuated widely throughout 2010 as the global economy continued to emerge from the “Great Recession.” As the year drew to a
close, it became clear that cyclical stimulus had beaten out structural problems as economic data releases generally became more positive and
financial markets showed signs of continuing improvement.

Debt and deflationary risks remained present throughout 2010, causing central banks worldwide to respond with unprecedented actions, most notably
a second round of quantitative easing (informally known as “QE2”) from the US Federal Reserve Board (the “Fed”). Inflation remained a non-issue in
the developed world, but continued to rear its ugly head in some emerging economies, most evidently in China. Global and US gross domestic product
(“GDP”) growth both continued in a positive direction but remained subpar compared to most historical economic recoveries. In the United States, the
corporate sector has been an important area of strength and consumer spending has shown improvement, although weakness in the housing and
labor markets continues to burden the economy.

Stocks moved higher in the early months of 2010 on the continuation of the 2009 asset recovery story. The mid-year months saw a double-digit
percentage correction on the back of the Greek sovereign debt crisis and a stalling in jobs growth, leading to fears of a double-dip recession. After
touching a late summer low, equity markets rallied through year end as these concerns receded. The announcement of QE2 and extension of the
Bush-era tax cuts further boosted equities as the year came to a close. Although the course was uneven and high volatility remained a constant for
stocks, equity markets globally ended the year strong. Emerging markets outpaced the developed world in terms of economic growth and posted
respectable gains for the year despite sovereign debt problems and heightening inflationary pressures. US stocks recorded double-digit percentage
gains for the second consecutive year. Small cap stocks outperformed large caps as investors began to move into higher-risk assets.

In fixed income markets, yields trended lower over most of the year as investors continued to favor safer assets. That trend reversed abruptly in the
fourth quarter when market fears abated and investors began seeking higher-risk assets, driving yields sharply upward through year end. However,
yields were lower overall for the year and fixed income markets finished 2010 in positive territory. Although fixed income securities generally underper-
formed equities, high yield bonds only marginally trailed large cap stocks. Conversely, the tax-exempt municipal market was dealt an additional blow
as it became apparent that an extension of the Build America Bond program was unlikely. In addition, the fourth quarter brought an increase in
negative headlines regarding fiscal challenges faced by state and local governments, sparking additional volatility in the municipal market.

Cash investments, as represented by the 3-month Treasury bill, returned only a fraction over 0% for the year as short-term interest rates remained low.
Yields on money market securities remain near all-time lows.

 

While no one can peer into a crystal ball and eliminate the uncertainties presented by the economic landscape and financial markets, BlackRock
can offer investors the next best thing: partnership with the world’s largest asset management firm and a unique global perspective that allows us to
identify trends early and capitalize on market opportunities. For additional market perspective and investment insight, visit www.blackrock.com/share-
holdermagazine, where you’ll find the most recent issue of our award-winning Shareholder® magazine, as well as its quarterly companion newsletter,
Shareholder Perspectives. As always, we thank you for entrusting BlackRock with your investments, and we look forward to your continued partnership
in the months and years ahead.

Sincerely,

Rob Kapito
President, BlackRock Advisors, LLC

THIS PAGE NOT PART OF YOUR FUND REPORT 3

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Fund Summary as of December 31, 2010

Fund Overview

BlackRock Enhanced Government Fund, Inc.'s (EGF) (the “Fund”) 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 writ-
ing (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 acheived.

Performance

For the 12 months ended December 31, 2010, the Fund returned (3.54)% based on market price and 4.95% based on net asset value (“NAV”).
For the same period, the Fund’s benchmark, Citigroup Government/Mortgage Index, posted a total return of 5.59%. All returns reflect reinvestment of
dividends and distributions. The Fund moved from a premium to NAV to a discount by period end, which accounts for the difference between perform-
ance based on price and performance based on NAV. The following discussion relates to performance based on NAV. The Fund’s underweight positions
relative to the benchmark in US Treasuries and government agency debt detracted from performance as these sectors rallied over most of the year when
fears of a double-dip recession drove investors to safer assets. During the first half of the year, the call-writing strategy hampered performance as calls
written on mortgages and interest rates lost value when Treasuries rallied. In addition, the Fund employed interest rate swaps to synthetically reduce the
duration of its portfolio. As interest rates declined, the swaps lost value, negatively impacting performance. The negative impact of these positions dur-
ing the first half of the year was slightly offset toward the end of the year when the Treasury market sold off, pushing yields higher. Although spread sec-
tors saw significant volatility in 2010, they outperformed government sectors for the 12-month period overall. Spread sectors lost ground in the earlier
part of the year, but rebounded strongly later in the year as investor fears abated and demand for yield rose sharply. The Fund benefited from its spread
sector holdings, which included overweights in residential mortgage-backed securities and corporate debt as well as out-of-index allocations to com-
mercial mortgage-backed securities and asset-backed securities. In addition, the Fund’s yield curve-flattening bias contributed positively to overall per-
formance as interest rates declined over most of the year. The Fund engaged in financial futures contracts for purposes of managing risk related to
duration and yield curve positioning, which overall was beneficial to performance.
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.

¹ Yield on closing market price is calculated by dividing the current annualized distribution per share by the closing market price. Past performance does not guarantee
future results.
² The distribution 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.
³ 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 accrued liabilities. For a discussion of leveraging techniques utilized by the Fund, please see The Benefits and Risks of Leveraging
on page 5.

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

 

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

 

⁴ Using the higher of Standard & Poor’s or Moody’s Investors Service ratings.
⁵ Includes U.S. Government Sponsored Agency Securities and U.S. Treasury
Obligations, which are deemed AAA/Aaa by the investment advisor.

4 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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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 through borrowings by entering into
reverse repurchase agreements and Treasury rolls. In general, the con-
cept 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 share-
holders 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 mil-
lion and it issues debt securities for an additional $30 million, creating
a total value of $130 million available for investment in long-term secu-
rities. 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 debt securities
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 debt securities 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 of 6%, the yield curve
has a negative slope. In this case, the Fund pays interest expense on the
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 con-
trast, the redemption value of the Fund’s debt securities do 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 leverage from debt securities.

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 gener-
ally 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 lever-
age 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 lever-
age 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 sharehold-
ers and may reduce income.

Under the Investment Company Act of 1940, the Fund is permitted to
borrow up to 33 ¹ / ₃ % of total managed assets. As of December 31, 2010,
the Fund had economic leverage of 28% from reverse repurchase agree-
ments as a percentage of its total of managed assets.

Derivative Financial Instruments

The Fund may invest in various derivative instruments, including finan-
cial futures contracts, swaps, foreign currency exchange contracts and
options, as specified in Note 2 of the Notes to Financial Statements,
which may constitute forms of economic leverage. Such instruments are
used to obtain exposure to a market without owning or taking physical
custody of securities or to hedge market, interest rate and/or foreign
currency exchange rate risks. Such derivative instruments involve risks,
including the imperfect correlation between the value of a derivative
instrument and the underlying asset, possible default of the counter-
party to the transaction or illiquidity of the derivative instrument. The

Fund’s ability to successfully use a derivative instrument depends on
the investment advisor’s ability to accurately predict pertinent market
movements, which cannot be assured. The use of derivative 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, 2010 5

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Schedule of Investments December 31, 2010 (Percentages shown are based on Net Assets)

 

 

 

See Notes to Financial Statements.

6 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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

 

* The cost and unrealized appreciation (depreciation) of investments as of
December 31, 2010, as computed for federal income tax purposes were
as follows:

(a) Variable rate security. Rate shown is as of report date.
(b) Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration
to qualified institutional investors.
(c) Represents or includes a to-be-announced (“TBA”) transaction. Unsettled TBA
transactions as of report date were as follows:

(d) All or a portion of security has been pledged as collateral in connection
with swaps.
(e) All or a portion of security has been pledged as collateral in connection with
open financial futures contracts.
(f) All or a portion of security has been pledged as collateral in connection with
open reverse repurchase agreements.
(g) Represents the current yield as of report date.

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 7

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Schedule of Investments (continued)

(h) Investments in companies considered to be an affiliate of the Fund during the
year, for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as
amended, were as follows:

 

•Financial futures contracts purchased as of December 31, 2010 were
as follows:

 

•Reverse repurchase agreements outstanding as of December 31, 2010 were
as follows:

 

•Interest rate swaps outstanding as of December 31, 2010 were as follows:

¹ Pays floating interest rate and receives fixed rate.
² Pays fixed interest rate and receives floating rate.
•Fair Value Measurements — Various inputs are used in determining the fair value
of investments and derivatives, which are as follows:
•Level 1 — price quotations in active markets/exchanges for identical assets
and liabilities
•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 liabili-
ties (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 invest-
ments and derivatives)
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risk associated with investing in those securities. For
information about the Fund’s policy regarding valuation of investments and
derivatives and other significant accounting policies, please refer to Note 1
of the Notes to Financial Statements.

See Notes to Financial Statements.

8 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Schedule of Investments (concluded)

The following tables summarize the inputs used as of December 31, 2010 in
determining the fair valuation of the Fund’s investments and derivatives:

¹ Derivative financial instruments are financial futures contracts, swaps and options written. Financial futures con-
tracts and swaps are shown at the unrealized appreciation/depreciation on the instrument and options written
are shown at value.

The following table is a reconciliation of Level 3 investments for which significant
unobservable inputs were used in determining fair value:

² Included in the related change in unrealized appreciation/depreciation
in the Statement of Operations. The change in unrealized appreciation/
depreciation on securities still held at December 31, 2010 was $0.

The following table is a reconciliation of Level 3 derivative financial instruments
for which significant unobservable inputs were used in determining fair value:

³ The Fund’s policy is to recognize transfers in and transfers out as of the
end of the period of the event or the change in circumstances that caused
the transfer.

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 9

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Statement of Assets and Liabilities

 

See Notes to Financial Statements.

10 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Statement of Operations

 

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 11

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Statements of Changes in Net Assets

 

See Notes to Financial Statements.

12 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Statement of Cash Flows

 

A Statement of Cash Flows is presented when the Fund has a significant amount of borrowings during the year, based on the average borrowings outstanding in relation to
total assets.

See Notes to Financial Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 13

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Financial Highlights

¹ Based on average shares outstanding.
² Amount is less than $(0.01) per share.
³ Total investment returns based on market value, which can be significantly greater or lesser than the net asset value, may result in substantially different returns. Where
applicable, total investment returns exclude the effects of any sales charges and include the reinvestment of dividends and distributions.
⁴ Includes mortgage dollar transactions; excluding these transactions the portfolio turnover would have been 137%.
⁵ Includes mortgage dollar transactions; excluding these transactions the portfolio turnover would have been 174%.
⁶ Includes mortgage dollar transactions; excluding these transactions the portfolio turnover would have been 212%.

See Notes to Financial Statements.

14 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Notes to Financial Statements

1. Organization and Significant Accounting Policies:

BlackRock Enhanced Government Fund, Inc. (the “Fund”) is registered
under the Investment Company Act of 1940, as amended (the “1940
Act”), as a diversified, closed-end management investment company. The
Fund is organized as a Maryland corporation. The Fund's financial state-
ments 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 and disclosures in the financial statements. Actual
results could differ from those estimates. The Fund determines and
makes available for publication the net asset value of its shares on a
daily basis.

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

Valuation: The Fund fair values its financial instruments at market value
using independent dealers or pricing services under policies approved
by the Board of Directors (the "Board"). The Fund values its bond invest-
ments on the basis of last available bid prices or current market quota-
tions 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 deal-
ers, pricing matrixes, market transactions in comparable investments,
various relationships observed in the market between investments and
calculated yield measures based on valuation technology commonly
employed in the market for such investments. Asset-backed and mort-
gage-backed securities are valued by independent pricing services using
models that consider estimated cash flows of each tranche of the secu-
rity, establish a benchmark yield and develop an estimated tranche spe-
cific 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 val-
ued on the basis of last available bid prices or current market quota-
tions 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 and
trades and values of the underlying reference instruments. Investments
in open-end registered investment companies are valued at net asset
value 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 curren-
cies 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 val-
ued 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 which is deemed not to be representative of the
market value of such investment or is not available, the investment will
be valued in accordance with a policy approved by the Board as reflect-
ing fair value (“Fair Value Assets”). When determining the price for Fair
Value Assets, the investment advisor and/or the sub-advisor 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 deems relevant. The pricing of
all Fair Value Assets is subsequently reported to the Board or a
committee thereof.

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 materi-
ally affect the value of such instruments, those instruments may be Fair
Value Assets and be valued at their fair value, as determined in good
faith by the investment advisor using a pricing service and/or policies
approved by the Board.

Foreign Currency Transactions: The Fund's books and records are main-
tained in US dollars. Purchases and sales of investment securities are
recorded at the rates of exchange prevailing on the date the transactions
are entered into. Generally, when the US dollar rises in value against a
foreign currency, the Fund's investments denominated in that currency
will lose value because its currency is worth fewer US dollars; the oppo-
site effect occurs if the US dollar falls in relative value.

The Fund reports foreign currency related transactions as components of
realized gain (loss) for financial reporting purposes, whereas such com-
ponents are treated as ordinary income for federal income tax purposes.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 15

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Notes to Financial Statements (continued)

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 num-
ber of different parties. The yield characteristics of certain asset-backed
securities may differ from traditional debt securities. One such major dif-
ference 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 prepay-
ment feature will have the effect of shortening the maturity of the secu-
rity. 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 instru-
mentalities of the US Government that issue mortgage-related securities
and among the securities that they issue. For example, mortgage-related
securities guaranteed by the 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 the 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 and 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 obliga-
tions (“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 mort-
gages underlying a PO are slower than anticipated, the life of the 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 inter-
est (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 busi-
ness 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 mort-
gage-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 securi-
ties 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.

16 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Notes to Financial Statements (continued)

Mortgage Dollar Roll Transactions: The Fund may sell TBA mortgage-
backed securities and simultaneously contract to repurchase substan-
tially 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 dollar
roll transactions as purchases and sales and realizes gains and losses
on these transactions. These transactions may increase the Fund's port-
folio 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.

Treasury Roll Transactions: The Fund may enter into treasury roll trans-
actions. In a treasury roll transaction, the Fund sells a Treasury security
to a counterparty with a simultaneous agreement to repurchase the
same security at an agreed upon price and future settlement date.
The Fund received cash from the sale of the Treasury security to use
for other investment purposes. For US GAAP purposes, a treasury roll is
accounted for as a secured borrowing and not as a purchase or sale.
The difference between the sale price and repurchase price represents
net interest income or net interest expense reflective of an agreed
upon rate between the Fund and the counterparty over the term of
the borrowing. The Fund will benefit from the transaction if the income
earned on the investment purchased with the cash received in the
treasury roll transaction exceeds the interest expense incurred by the
Fund. If the interest expense exceeds the income earned, the Fund’s
net investment income and dividends to shareholders may be adversely
impacted. Treasury roll transactions involve the risk that the market value
of the securities that the Fund is required to repurchase may decline
below the agreed upon repurchase price of those securities.

Reverse Repurchase Agreements: The Fund may enter into reverse repur-
chase 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. 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 pro-
ceeds 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 delivers collateral or segregates
assets in connection with certain investments (e.g., dollar rolls, TBA sale
commitments, financial futures contracts, foreign currency exchange
contracts, swaps and written options), 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 other liquid securities having
a market value at least equal to the amount that would otherwise be
required to be physically segregated. Furthermore, based on require-
ments and agreements with certain exchanges and third party broker-
dealers, each party has requirements to deliver/deposit securities as
collateral for certain investments.

Investment Transactions and Investment Income: For financial reporting
purposes, investment transactions are recorded on the dates the trans-
actions are entered into (the trade dates). Realized gains and losses
on investment transactions are determined on the identified cost 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 invest-
ment income, net options premium and net realized and unrealized
gains on investments. The portion of dividends and distributions that
exceeds the Fund’s current and accumulated earnings and profits,
which are measured on a tax basis, may be treated as a tax return of
capital. The character of dividends and distributions are 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 limita-
tions on the Fund's US federal tax returns remains open for each of the
four years ended December 31, 2010. The statutes of limitations on
the Fund's state and local tax returns may remain open for an additional
year depending upon the jurisdiction. Management does not believe

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 17

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Notes to Financial Statements (continued)

there are any uncertain tax positions that require recognition of a
tax liability.

Deferred Compensation and BlackRock Closed-End Share Equivalent
Investment Plan: Under the deferred compensation plan approved by
the Fund’s Board, non-interested 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 approximately 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 deferred compensation plan is not funded and obligations
there-under represent general unsecured claims against the general
assets of the Fund. The Fund may, however, elect to invest in common
shares of certain other BlackRock Closed-End Funds selected by the
Independent Directors in order to match its deferred compensation obli-
gations. Investments to cover the Fund's deferred compensation liability,
if any, are included in other assets in the Statement of Assets and
Liabilities. Dividends and distributions from the BlackRock Closed-End
Fund investments under the plan, if any, are included in income —
affiliated in the Statement of Operations.

Other: Expenses directly related to the Fund are charged to that 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 to
economically hedge, or protect, its exposure to certain risks such as
interest rate 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 unfa-
vorable change in the market rates or values of the underlying instru-
ment 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

purchased, the Fund bears the risk of loss in the amount of the premi-
ums 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 counter-
party credit risk, as options written obligate the Fund to perform and
not the counterparty. Counterparty risk related to exchange-traded finan-
cial 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. (“ISDA”) Master Agreement implemented
between the Fund and each of its respective counterparties. The ISDA
Master Agreement allows the Fund to offset with each separate counter-
party certain derivative financial instrument’s payables and/or receiv-
ables 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 other-
wise, 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 counter-
party 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 expo-
sure to, or economically hedge against, changes in interest rates (inter-
est rate risk). Financial futures contracts are agreements between the
Fund and 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, 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 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 margin variation and
are recorded by the Fund as unrealized gains or losses. When the con-
tract 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

18 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Notes to Financial Statements (continued)

and the value at the time it was closed. The use of financial futures
transactions involves the risk of an imperfect correlation in the move-
ments in the price of financial futures contracts, interest rates and the
underlying assets.

Foreign Currency Exchange Contracts: The Fund enters into foreign cur-
rency 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 currency backing some of the investments held by the
Fund. 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 a 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 (interest rate risk)
and/or, in the case of options written, to generate gains from options
premiums. A call option gives the purchaser of the option the right (but
not the obligation) to buy, and obligates the seller to sell (when the
option is exercised), the underlying instrument at the exercise 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 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.

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) at any time before the expiration of the option.

In purchasing and writing options, the Fund bears the risk of an unfavor-
able 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 to make periodic net payments on a specified
notional amount. These periodic 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 amortized over
the term of the swap. Swaps are marked-to-market daily and changes in
value are recorded as unrealized appreciation (depreciation). 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 trans-
action 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.

•Interest rate swaps — The Fund enters into interest rate swaps to gain
or reduce exposure to or manage duration, the yield curve or interest
rate risk by economically hedging the value of the fixed rate bonds
which may decrease when interest rates rise (interest rate risk).
Interest rate swaps are agreements in which one party pays a stream
of interest payments, either fixed or floating rate, for another party's
stream of interest payments, either fixed or floating, on the same
notional amount for a specified period of time. In more complex
swaps, the notional principal amount may decline (or amortize)
over time.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 19

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Notes to Financial Statements (continued)

* Includes cumulative appreciation/depreciation on financial futures contracts as reported in the Schedule of Investments. Only current day’s margin variation is reported within
the Statement of Assets and Liabilities.

**Options purchased are included in the net realized gain (loss) from investments and net change in unrealized appreciation/depreciation on investments.

For the year ended December 31, 2010, the average quarterly balances
of outstanding derivative financial instruments were as follows:

 

3. Investment Advisory Agreement and Other Transactions
with Affiliates:

The PNC Financial Services Group, Inc. ("PNC"), Bank of America
Corporation ("BAC") and Barclays Bank PLC ("Barclays") are the largest
stockholders of BlackRock, Inc. ("BlackRock"). Due to the ownership
structure, PNC is an affiliate of the Fund for 1940 Act purposes, but BAC
and Barclays are not.

The Fund entered into an Investment Advisory Agreement with BlackRock
Advisors, LLC (the “Manager”), the Fund's investment advisor, an indirect,
wholly owned subsidiary of BlackRock, to provide investment advisory

and administration services. The Manager is responsible for the
management of the Fund's portfolio and provides the necessary
personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays the
Manager a monthly fee at an annual rate of 0.85% of the Fund's aver-
age daily net assets, plus the proceeds of any outstanding borrowings
used for leverage.

The Manager entered into a sub-advisory agreement with BlackRock
Financial Management, Inc. (“BFM”), an affiliate of the Manager.
The Manager pays BFM for services it provides, a monthly fee that is
a percentage of the investment advisory fees paid by the Fund to
the Manager.

The Manager voluntarily agreed to waive its investment advisory fees by
the amount of investment advisory fees the Fund pays to the Manager
indirectly through its investment in affiliated money market funds, how-
ever the Manager does not waive its investment advisory fees by the
amount of investment advisory fees paid through the Fund's investment
in other affiliated investment companies, if any. This amount is shown as
fees waived by advisor in the Statement of Operations.

For the year ended December 31, 2010, the Fund reimbursed the
Manager $4,361 for certain accounting services, which is included in
accounting services in the Statement of Operations.

Certain officers and/or directors of the Fund are officers and/or directors
of BlackRock or its affiliates. The Fund reimburses the Manager for com-
pensation paid to the Fund's Chief Compliance Officer.

20 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Notes to Financial Statements (continued)

4. Investments:

Purchases and sales of investments including paydowns, mortgage dollar
roll and TBA transactions and excluding short-term securities and US
government securities for the year ended December 31, 2010, were
$139,456,574 and $154,275,550, respectively.

Purchases and sales of US government securities for the Fund for
the year ended December 31, 2010, were $310,628,736 and
$260,230,672, respectively.

For the year ended December 31, 2010, purchases and sales of mort-
gage dollar rolls were $65,709,415 and $65,863,098, respectively.

Transactions in options written for the year ended December 31, 2010,
were as follows:

 

5. Income Tax Information:

Reclassifications: US GAAP require that certain components of net
assets be adjusted to reflect permanent differences between financial
and tax reporting. This reclassification has no effect on net assets or net
asset value per share. The following permanent differences as of
December 31, 2010 attributable to the accounting for swap agreements,
foreign currency transactions, net paydown losses, distributions paid in
excess of taxable income and non-deductible expenses were reclassified
to the following accounts:

 

The tax character of distributions paid during the fiscal years ended
December 31, 2010 and December 31, 2009 was as follows:

 

As of December 31, 2010, the tax components of accumulated net
losses were as follows:

 

* As of December 31, 2010, the Fund had a net capital loss carryforward of
$2,037,204, which expires in 2017. This amount will be available to offset like
amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized losses is attribut-
able primarily to the tax deferral of losses on wash sales and realization for tax
purposes of unrealized gains/losses on certain futures contracts and options.

Under the recently enacted Regulated Investment Company
Modernization Act of 2010, capital losses incurred by the Fund
after December 31, 2010 will not be subject to expiration. In addition,
such losses must be utilized prior to the losses incurred in the years
preceding enactment.

6. Concentration, Market and Credit Risk:

In the normal course of business, the Fund invests in securities and
enters into transactions where risks exist due to fluctuations in the
market (market risk) or failure of the issuer of a security to meet all its
obligations (issuer credit risk). The value of securities held by the Fund
may decline in response to certain events, including those directly involv-
ing the issuers whose securities are owned by the Fund; conditions
affecting the general economy; overall market changes; local, regional or
global political, social or economic instability; and currency and interest
rate and price fluctuations. Similar to issuer credit risk, the Fund may be
exposed to counterparty credit risk, or the risk that an entity with which
the Fund has unsettled or open transactions may fail to or be unable to
perform on its commitments. The Fund manages counterparty credit risk
by entering into transactions only with counterparties that it believes
have the financial resources to honor their obligations and by monitoring
the financial stability of those counterparties. Financial assets, which
potentially expose the Fund to market, issuer and counterparty credit
risks, consist principally of financial instruments and receivables due
from counterparties. The extent of the Fund's exposure to market, issuer
and counterparty credit risks with respect to these financial assets is
generally approximated by their value recorded in the Fund's Statement
of Assets and Liabilities, less any collateral held by the Fund.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 21

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Notes to Financial Statements (concluded)

The Fund invests a significant portion of its assets in securities backed
by commercial or residential mortgage loans or in issuers that hold mort-
gage and other asset-backed securities. Please see the Schedule of
Investments for these securities. Changes in economic conditions, includ-
ing delinquencies and/or defaults on assets underlying these securities,
can affect the value, income and/or liquidity of such positions.

7. Capital Share Transactions:

The Fund is authorized to issue 200 million shares, par value $0.10,
all of which were initially classified as Common Shares. The Board is
authorized, however, to reclassify any unissued shares without approval
of Common Shareholders.

The Fund will make offers to repurchase its shares at approximately
12-month intervals. The shares tendered in the repurchase offer may
be subject to a repurchase fee retained by the Fund to compensate
the Fund for expenses directly related to the repurchase offer.

Changes in capital shares issued and outstanding, for the years ended
December 31, 2010 and December 31, 2009 were as follows:

 

8. Borrowings:

For the year ended December 31, 2010, the Fund's daily average
amount of outstanding transactions considered as borrowings from
reverse repurchase agreements and treasury roll transactions was
approximately $40,046,000 and the daily weighted average interest
rate was 0.18%.

9. Subsequent Events:

Management's evaluation of the impact of all subsequent events on
the Fund's financial statements was completed through the date the
financial statements were issued and the following items were noted:

The Fund paid a net investment income dividend in the amount of
$0.08 per share on January 10, 2011 to shareholders of record on
December 31, 2010.

22 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of BlackRock
Enhanced Government Fund, Inc.:

We have audited the accompanying statement of assets and liabilities
of BlackRock Enhanced Government Fund, Inc. (the “Fund”), including
the schedule of investments, as of December 31, 2010, and the related
statements of operations and cash flows for the year then ended, the
statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and financial high-
lights are the responsibility of the Fund’s management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assur-
ance about whether the financial statements and financial highlights
are free of material misstatement. The Fund is not required to have, nor
were we engaged to perform, an audit of its internal control over finan-
cial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Fund’s internal control over

financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation.
Our procedures included confirmation of the securities owned as of
December 31, 2010, by correspondence with the custodian and brokers;
where replies were not received from brokers, we performed other audit-
ing procedures. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
BlackRock Enhanced Government Fund, Inc. as of December 31, 2010,
the results of its operations and its cash flows for the year then ended,
the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally
accepted in the United States of America.

Deloitte & Touche LLP
Princeton, New Jersey
February 28, 2011

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 23

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Important Tax Information

The following information is provided with respect to the ordinary income distributions paid by BlackRock Enhanced Government Fund, Inc. for the tax-
able year ended December 31, 2010:

¹ Represents the portion of the distributions eligible for exemption from US withholding tax for non resident aliens and foreign corporations.
² The law varies in each state as to whether and what percentage of dividend income attributable to federal obligations is exempt from state income tax.
We recommend that you consult your advisor to determine if any portion of the dividends you received is exempt from state income taxes.

24 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Automatic Dividend Reinvestment Plan

Pursuant to the Fund’s Dividend Reinvestment Plan (the “Reinvestment
Plan”), Common Shareholders are automatically enrolled to have all
distributions of dividends and capital gains reinvested by BNY Mellon
Shareowner Services (the “Plan Agent”) in the Fund’s shares pursuant
to the Reinvestment Plan. Shareholders who do not participate in the
Reinvestment Plan will receive all distributions in cash paid by check
and mailed directly to the shareholders of record (or if the shares are
held in street or other nominee name, then to the nominee) by the Plan
Agent, which serves as agent for the shareholders in administering the
Reinvestment Plan.

After the Fund declares a dividend or determine to make a capital
gain distribution, the Plan Agent will acquire shares for the participants’
accounts, depending upon the following circumstances, either (i) through
receipt of unissued but authorized shares from the Fund (“newly issued
shares”) or (ii) by purchase of outstanding shares on the open market,
on the Fund’s primary exchange (“open-market purchases”). If, on the
dividend payment date, the net asset value per share (“NAV”) is equal
to or less than the market price per share plus estimated brokerage
commissions (such condition often referred to as a “market premium”),
the Plan Agent will invest the dividend amount in newly issued shares
on behalf of the participants. The number of newly issued shares to be
credited to each participant’s account will be determined by dividing the
dollar amount of the dividend by the NAV on the date the shares are
issued. However, if the NAV is less than 95% of the market price on the
payment date, the dollar amount of the dividend will be divided by 95%
of the market price on the payment date. If, on the dividend payment
date, the NAV is greater than the market value per share plus estimated
brokerage commissions (such condition often referred to as a “market
discount”), the Plan Agent will invest the dividend amount in shares
acquired on behalf of the participants in open-market purchases. If the
Plan Agent is unable to invest the full dividend amount in open market
purchases, or if the market discount shifts to a market premium during
the purchase period, the Plan Agent will invest any un-invested portion in
newly issued shares.

Participation in the Reinvestment Plan is completely voluntary and may
be terminated or resumed at any time without penalty by notice if
received and processed by the Plan Administrator prior to the dividend
record date; otherwise such termination or resumption will be effective
with respect to any subsequently declared dividend or other distribution.

The Plan Agent’s fees for the handling of the reinvestment of dividends
and distributions will be paid by the Fund. However, each participant will
pay a pro rata share of brokerage commissions incurred with respect
to the Plan Agent’s open market purchases in connection with the rein-
vestment of dividends and distributions. The automatic reinvestment of
dividends and distributions will not relieve participants of any federal
income tax that may be payable on such dividends or distributions.

The Fund reserves the right to amend or terminate the Reinvest-
ment Plan. There is no direct service charge to participants in the
Reinvestment Plan; however, the Fund reserves the right to amend
the Reinvestment Plan to include a service charge payable by the
participants. Participants that request a sale of shares through BNY
Mellon Shareowner Services are subject to a $0.02 per share sold
brokerage commission. All correspondence concerning the Reinvestment
Plan should be directed to the Plan Agent: BNY Mellon Shareowner
Services, P.0. Box 358035, Pittsburgh, PA 15252-8035, Telephone:
(866) 216-0242.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 25

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Officers and Directors

 

26 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Officers and Directors (continued)

³ Mr. Davis is an “interested person,” as defined in the 1940 Act, of the Fund based on his position with BlackRock, Inc.
and its affiliates. Mr. Gabbay is an “interested person” of the Fund based on his former positions with BlackRock, Inc. and its affiliates as well as
his ownership of BlackRock, Inc. and The PNC Financial Services Group, Inc. securities. Directors serve until their resignation, removal or death, or until
December 31 of the year in which they turn 72.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 27

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Officers and Directors (concluded)

¹ Officers of the Fund serve at the pleasure of the Board.
² Ms. Ackerley has been President and Chief Executive Officer since 2009 and Vice President from 2007 to 2009.

 

Effective November 12, 2010, Ira Shapiro became Secretary of the Fund.

28 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Additional Information

Proxy Results

The Annual Meeting of Shareholders was held on September 2, 2010 for shareholders of record on July 6, 2010, to elect director nominees for
BlackRock Enhanced Government Fund, Inc. There were no broker non-votes with regard to the Fund.

Approved the Directors as follows:

 

Fund Certification

The Fund is listed for trading on the New York Stock Exchange (“NYSE”)
and has filed with the NYSE its annual chief executive officer certification
regarding compliance with the NYSE’s listing standards. The Fund filed

with the SEC the certification of its chief executive officer and chief
financial officer required by section 302 of the Sabanes-Oxley Act.

Fundamental Periodic Repurchase Policy

The Board approved a fundamental policy whereby the Fund has
adopted an “interval fund” structure pursuant to Rule 23c-3 under the
1940 Act. As an interval fund, the Fund will make annual repurchase
offers at net asset value (less repurchase fee not to exceed 2%) to all
Fund shareholders. The percentage of outstanding shares that the Fund
can repurchase in each offer will be established by the Fund’s Board
shortly before the commencement of each offer, and will be between
5% and 25% of the Fund’s then outstanding shares.

The Fund has adopted the following fundamental policies regarding
periodic repurchases:

(a) The Fund will make repurchase offers at periodic intervals pursuant
to Rule 23c-3 under the 1940 Act.

(b) The periodic interval between repurchase request deadlines will be
approximately 12 months.

(c) The repurchase request deadline for each repurchase offer will be
14 days prior to the second Friday in December; provided, that in
the event that such day is not a business day, the repurchase
request deadline will be the subsequent business day.

(d) The maximum number of days between a repurchase request
deadline and the next repurchase pricing date will be 14 days;
provided that if the 14^th day after a repurchase request deadline
is not a business day, the repurchase pricing date shall be the
next business day.

The Board may place such conditions and limitations on a repurchase
offer as may be permitted under Rule 23c-3. Repurchase offers may be
suspended or postponed under certain circumstances, as provided in
Rule 23c-3.

During the fiscal year ended December 31, 2010, the Fund conducted
repurchase offer for its shares, pursuant to Rule 23c-3 under the 1940
Act as summarized in the following table:

 

For additional information, see Note 7 in the Notes to Financial
Statements.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 29

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Additional Information (continued)

General Information

The Fund does not make available copies of its Statement of Additional
Information because the Fund’s shares are not continuously offered,
which means that the Statement of Additional Information of the Fund
has not been updated after completion of the Fund’s offerings and the
information contained in the Fund’s Statement of Additional Information
may have become outdated.

During the period, there were no material changes in the Fund’s invest-
ment objectives or policies or to the Fund’s charter or by-laws that were
not approved by the shareholders or in the principal risk factors associ-
ated with investment in the Fund. There have been no changes in the
persons who are primarily responsible for the day-to-day management of
the Fund’s portfolio.

Quarterly performance, semi-annual and annual reports and other
information regarding the Fund may be found on BlackRock’s website,
which can be accessed at http://www.blackrock.com. This reference
to BlackRock’s website is intended to allow investors public access to
information regarding the Fund and does not, and is not intended to,
incorporate BlackRock’s website into this report.

Electronic Delivery

Electronic copies of most financial reports are available on the Fund’s
website or shareholders can sign up for e-mail notifications of quarterly
statements, annual and semi-annual reports by enrolling in the Fund’s
electronic delivery program.

To enroll:

Shareholders Who Hold Accounts with Investment Advisors, Banks
or Brokerages:

Please contact your financial advisor. Please note that not all investment
advisors, banks or brokerages may offer this service.

Shareholders Who Hold Accounts Directly with BlackRock:

1) Access the BlackRock website at
http://www.blackrock.com/edelivery

2) Select “eDelivery” under the “More Information” section

3) Log into your account

Householding

The Fund will mail only one copy of shareholder documents, including
annual and semi-annual reports and proxy statements, to shareholders
with multiple accounts at the same address. This practice is commonly
called “householding” and it is intended to reduce expenses and elimi-
nate duplicate mailings of shareholder documents. Mailings of your
shareholder documents may be householded indefinitely unless you
instruct us otherwise. If you do not want the mailing of these documents
to be combined with those for other members of your household, please
contact the Fund at (800) 441-7762.

Availability of Quarterly Portfolio Schedule of Investments

The Fund files its complete schedule of portfolio holdings with the Secu-
rities and Exchange Commission (“SEC”) for the first and third quarters of
each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the
SEC’s website at http://www.sec.gov and may also be reviewed and
copied at the SEC’s Public Reference Room in Washington, D.C. Informa-
tion on the operation of the Public Reference Room may be obtained by
calling (800) SEC-0330. The Fund’s Form N-Q may also be obtained
upon request and without charge by calling (800) 441 7762.

Availability of Proxy Voting Policies and Procedures

A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is avail-
able (1) without charge, upon request, by calling (800) 441-7762;
(2) at http://www.blackrock.com; and (3) on the SEC’s website at
http://www.sec.gov.

Availability of Proxy Voting Record

Information about how the Fund voted proxies relating to securities
held in the Fund’s portfolio during the most recent 12-month period
ended June 30 is available upon request and without charge (1) at
http://www.blackrock.com or by calling (800) 441-7762 and
(2) on the SEC’s website at http://www.sec.gov.

Availability of Fund Updates

BlackRock will update performance data for the Fund on a monthly
basis on its website in the “Closed-end Funds” section of www.black-
rock.com. Investors and others are advised to periodically check the
website for updated performance information and the release of other
material information about the Fund.

30 BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010

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Additional Information (concluded)

Section 19(a) Notices

These 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.

 

The Fund estimates that it has distributed more than the amount of
earned income and net realized gains; therefore, a portion of the distribu
tion 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.’

BlackRock Privacy Principles

BlackRock is committed to maintaining the privacy of its current and for-
mer fund investors and individual clients (collectively, “Clients”) and to
safeguarding their non-public personal information. The following informa-
tion is provided to help you understand what personal information
BlackRock collects, how we protect that information and why in certain
cases we share such information with select parties.

If you are located in a jurisdiction where specific laws, rules or regulations
require BlackRock to provide you with additional or different privacy-related
rights beyond what is set forth below, then BlackRock will comply with
those specific laws, rules or regulations.

BlackRock obtains or verifies personal non-public information from and
about you from different sources, including the following: (i) information
we receive from you or, if applicable, your financial intermediary, on appli-
cations, forms or other documents; (ii) information about your transac-
tions with us, our affiliates, or others; (iii) information we receive from a
consumer reporting agency; and (iv) from visits to our websites.

BlackRock does not sell or disclose to non-affiliated third parties any non-
public personal information about its Clients, except as permitted by law
or as is necessary to respond to regulatory requests or to service Client
accounts. These non-affiliated third parties are required to protect the
confidentiality and security of this information and to use it only for its
intended purpose.

We may share information with our affiliates to service your account
or to provide you with information about other BlackRock products or
services that may be of interest to you. In addition, BlackRock restricts
access to non-public personal information about its Clients to those
BlackRock employees with a legitimate business need for the information.
BlackRock maintains physical, electronic and procedural safeguards
that are designed to protect the non-public personal information of its
Clients, including procedures relating to the proper storage and disposal
of such information.

BLACKROCK ENHANCED GOVERNMENT FUND, INC. DECEMBER 31, 2010 31

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This report is transmitted to shareholders only. It is not a

prospectus. Past performance results shown in this report

should not be considered a representation of future per-

formance. Statements and other information herein are

as dated and are subject to change.

---

Item 2 – Code of Ethics – The registrant (or the “Fund”) has adopted a code of ethics, as of the end of the
period covered by this report, applicable to the registrant’s principal executive officer, principal
financial officer and principal accounting officer, or persons performing similar functions. During
the period covered by this report, there have been no amendments to or waivers granted under the
code of ethics. A copy of the code of ethics is available without charge at www.blackrock.com.

Item 3 – Audit Committee Financial Expert – The registrant’s board of directors or trustees, as applicable
(the “board of directors”), has determined that (i) the registrant has the following audit committee
financial experts serving on its audit committee and (ii) each audit committee financial expert is
independent:
Kent Dixon (retired effective December 31, 2009)
Frank J. Fabozzi
James T. Flynn
W. Carl Kester
Karen P. Robards

The registrant’s board of directors has determined that W. Carl Kester and Karen P. Robards qualify
as financial experts pursuant to Item 3(c)(4) of Form N-CSR.

Prof. Kester has a thorough understanding of generally accepted accounting principles, financial
statements and internal control over financial reporting as well as audit committee functions. Prof.
Kester has been involved in providing valuation and other financial consulting services to corporate
clients since 1978. Prof. Kester’s financial consulting services present a breadth and level of
complexity of accounting issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the registrant’s financial statements.

Ms. Robards has a thorough understanding of generally accepted accounting principles, financial
statements and internal control over financial reporting as well as audit committee functions. Ms.
Robards has been President of Robards & Company, a financial advisory firm, since 1987. Ms.
Robards was formerly an investment banker for more than 10 years where she was responsible for
evaluating and assessing the performance of companies based on their financial results. Ms.
Robards has over 30 years of experience analyzing financial statements. She also is a member of
the audit committee of one publicly held company and a non-profit organization.

Under applicable securities laws, a person determined to be an audit committee financial expert will
not be deemed an “expert” for any purpose, including without limitation for the purposes of Section
11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee
financial expert. The designation or identification as an audit committee financial expert does not
impose on such person any duties, obligations, or liabilities greater than the duties, obligations, and
liabilities imposed on such person as a member of the audit committee and board of directors in the
absence of such designation or identification. The designation or identification as an audit
committee financial expert does not affect the duties, obligations, or liability of any other member of
the audit committee or board of directors.

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Item 4 – Principal Accountant Fees and Services

1 The nature of the services include assurance and related services reasonably related to the performance of the audit
of financial statements not included in Audit Fees.
2 The nature of the services include tax compliance, tax advice and tax planning.
3 The nature of the services include a review of compliance procedures and attestation thereto.

(e)(1) Audit Committee Pre-Approval Policies and Procedures:
The registrant’s audit committee (the “Committee”) has adopted policies and procedures with
regard to the pre-approval of services. Audit, audit-related and tax compliance services provided to
the registrant on an annual basis require specific pre-approval by the Committee. The Committee
also must approve other non-audit services provided to the registrant and those non-audit services
provided to the registrant’s affiliated service providers that relate directly to the operations and the
financial reporting of the registrant. Certain of these non-audit services that the Committee believes
are a) consistent with the SEC’s auditor independence rules and b) routine and recurring services
that will not impair the independence of the independent accountants may be approved by the
Committee without consideration on a specific case-by-case basis (“general pre-approval”). The
term of any general pre-approval is 12 months from the date of the pre-approval, unless the
Committee provides for a different period. Tax or other non-audit services provided to the registrant
which have a direct impact on the operation or financial reporting of the registrant will only be
deemed pre-approved provided that any individual project does not exceed $10,000 attributable to
the registrant or $50,000 per project. For this purpose, multiple projects will be aggregated to
determine if they exceed the previously mentioned cost levels.

Any proposed services exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to general pre-approval (e.g.,
unanticipated but permissible services). The Committee is informed of each service approved
subject to general pre-approval at the next regularly scheduled in-person board meeting. At this
meeting, an analysis of such services is presented to the Committee for ratification. The Committee
may delegate to the Committee Chairman the authority to approve the provision of and fees for any
specific engagement of permitted non-audit services, including services exceeding pre-approved
cost levels.

(e)(2) None of the services described in each of Items 4(b) through (d) were approved by the audit
committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f) Not Applicable

(g) Affiliates’ Aggregate Non-Audit Fees:

 

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(h) The registrant’s audit committee has considered and determined that the provision of non-audit
services that were rendered to the registrant’s investment adviser (not including any non-affiliated
sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by
the registrant’s investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the registrant that were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant’s independence.

Regulation S-X Rule 2-01(c)(7)(ii) – $10,777, 0%

Item 5 – Audit Committee of Listed Registrants

(a) The following individuals are members of the registrant’s separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of
1934 (15 U.S.C. 78c(a)(58)(A)):

Kent Dixon (retired effective December 31, 2009)
Frank J. Fabozzi
James T. Flynn
W. Carl Kester
Karen P. Robards

(b) Not Applicable

Item 6 – Investments
(a) The registrant’s Schedule of Investments is included as part of the Report to Stockholders filed
under Item 1 of this form.
(b) Not Applicable due to no such divestments during the semi-annual period covered since the
previous Form N-CSR filing.

Item 7 – Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment
Companies – The board of directors has delegated the voting of proxies for the Fund securities to the
Fund’s investment adviser (“Investment Adviser”) pursuant to the Investment Adviser’s proxy
voting guidelines. Under these guidelines, the Investment Adviser will vote proxies related to Fund
securities in the best interests of the Fund and its stockholders. From time to time, a vote may
present a conflict between the interests of the Fund’s stockholders, on the one hand, and those of the
Investment Adviser, or any affiliated person of the Fund or the Investment Adviser, on the other. In
such event, provided that the Investment Adviser’s Equity Investment Policy Oversight Committee,
or a sub-committee thereof (the “Oversight Committee”) is aware of the real or potential conflict or
material non-routine matter and if the Oversight Committee does not reasonably believe it is able to
follow its general voting guidelines (or if the particular proxy matter is not addressed in the
guidelines) and vote impartially, the Oversight Committee may retain an independent fiduciary to
advise the Oversight Committee on how to vote or to cast votes on behalf of the Investment
Adviser’s clients. If the Investment Adviser determines not to retain an independent fiduciary, or
does not desire to follow the advice of such independent fiduciary, the Oversight Committee shall

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determine how to vote the proxy after consulting with the Investment Adviser’s Portfolio
Management Group and/or the Investment Adviser’s Legal and Compliance Department and
concluding that the vote cast is in its client’s best interest notwithstanding the conflict. A copy of the
Fund’s Proxy Voting Policy and Procedures are attached as Exhibit 99.PROXYPOL. Information on
how the Fund voted proxies relating to portfolio securities during the most recent 12-month period
ended June 30 is available without charge, (i) at www.blackrock.com and (ii) on the SEC’s website
at http://www.sec.gov.

Item 8 – Portfolio Managers of Closed-End Management Investment Companies – as of December 31, 2010.

(a)(1) The Fund is managed by a team of investment professionals comprised of Stuart Spodek,
Managing Director at BlackRock and Thomas Musmanno, Managing Director at BlackRock.
Each is a member of BlackRock’s Fundamental Fixed Income group. Each is jointly
responsible for the day-to-day management of the registrant’s portfolio, which includes
setting the registrant’s overall investment strategy, overseeing the management of the
registrant and/or selection of its investments. Messrs. Spodek and Musmanno have been
members of the registrant’s portfolio management team since 2006 and 2009, respectively.

 

(a)(2) As of December 31, 2010:

 

(iv) Potential Material Conflicts of Interest

BlackRock, Inc. (individually and together with its affiliates, “BlackRock”) has built a professional
working environment, firm-wide compliance culture and compliance procedures and systems
designed to protect against potential incentives that may favor one account over another. BlackRock
has adopted policies and procedures that address the allocation of investment opportunities,
execution of portfolio transactions, personal trading by employees and other potential conflicts of
interest that are designed to ensure that all client accounts are treated equitably over time.

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Nevertheless, BlackRock furnishes investment management and advisory services to numerous
clients in addition to the Fund, and BlackRock may, consistent with applicable law, make
investment recommendations to other clients or accounts (including accounts which are hedge funds
or have performance or higher fees paid to BlackRock, or in which portfolio managers have a
personal interest in the receipt of such fees), which may be the same as or different from those made
to the Fund. In addition, BlackRock, its affiliates and significant shareholders and any officer,
director, stockholder or employee may or may not have an interest in the securities whose purchase
and sale BlackRock recommends to the Fund. BlackRock, or any of its affiliates or significant
shareholders, or any officer, director, stockholder, employee or any member of their families may
take different actions than those recommended to the Fund by BlackRock with respect to the same
securities. Moreover, BlackRock may refrain from rendering any advice or services concerning
securities of companies of which any of BlackRock’s (or its affiliates’ or significant shareholders’)
officers, directors or employees are directors or officers, or companies as to which BlackRock or
any of its affiliates or significant shareholders or the officers, directors and employees of any of
them has any substantial economic interest or possesses material non-public information. Each
portfolio manager also may manage accounts whose investment strategies may at times be opposed
to the strategy utilized for a fund. In this connection, it should be noted that Messrs. Spodek and
Musmanno currently manage certain accounts that are subject to performance fees. In addition, Mr.
Spodek assists in managing certain hedge funds and may be entitled to receive a portion of any
incentive fees earned on such funds and a portion of such incentive fees may be voluntarily or
involuntarily deferred. Additional portfolio managers may in the future manage other such accounts
or funds and may be entitled to receive incentive fees.

As a fiduciary, BlackRock owes a duty of loyalty to its clients and must treat each client fairly.
When BlackRock purchases or sells securities for more than one account, the trades must be
allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate
investments in a fair and equitable manner among client accounts, with no account receiving
preferential treatment. To this end, BlackRock has adopted a policy that is intended to ensure that
investment opportunities are allocated fairly and equitably among client accounts over time. This
policy also seeks to achieve reasonable efficiency in client transactions and provide BlackRock with
sufficient flexibility to allocate investments in a manner that is consistent with the particular
investment discipline and client base.

(a)(3) As of December 31, 2010:

Portfolio Manager Compensation Overview

BlackRock’s financial arrangements with its portfolio managers, its competitive compensation and
its career path emphasis at all levels reflect the value senior management places on key resources.
Compensation may include a variety of components and may vary from year to year based on a
number of factors. The principal components of compensation include a base salary, a performance-
based discretionary bonus, participation in various benefits programs and one or more of the
incentive compensation programs established by BlackRock such as its Long-Term Retention and
Incentive Plan.

Base compensation. Generally, portfolio managers receive base compensation based on their
seniority and/or their position with the firm. Senior portfolio managers who perform additional

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management functions within the portfolio management group or within BlackRock may receive
additional compensation for serving in these other capacities.

Discretionary Incentive Compensation
Discretionary incentive compensation is a function of several components: the performance of
BlackRock, Inc., the performance of the portfolio manager’s group within BlackRock, the
investment performance, including risk-adjusted returns, of the firm’s assets under management or
supervision by that portfolio manager relative to predetermined benchmarks, and the individual’s
seniority, role within the portfolio management team, teamwork and contribution to the overall
performance of these portfolios and BlackRock. In most cases, including for the portfolio managers
of the Fund, these benchmarks are the same as the benchmark or benchmarks against which the
performance of the Fund or other accounts managed by the portfolio managers are measured.
BlackRock’s Chief Investment Officers determine the benchmarks against which the performance of
funds and other accounts managed by each portfolio manager is compared and the period of time
over which performance is evaluated. With respect to the portfolio managers, such benchmarks for
the Fund include the following:

 

BlackRock’s Chief Investment Officers make a subjective determination with respect to the
portfolio managers’ compensation based on the performance of the funds and other accounts
managed by each portfolio manager relative to the various benchmarks noted above. Performance is
measured on both a pre-tax and after-tax basis over various time periods including 1, 3, 5 and 10-
year periods, as applicable.

Distribution of Discretionary Incentive Compensation
Discretionary incentive compensation is distributed to portfolio managers in a combination of cash
and BlackRock, Inc. restricted stock units which vest ratably over a number of years. The
BlackRock, Inc. restricted stock units, if properly vested, will be settled in BlackRock, Inc. common
stock. Typically, the cash bonus, when combined with base salary, represents more than 60% of
total compensation for the portfolio managers. Paying a portion of annual bonuses in stock puts
compensation earned by a portfolio manager for a given year “at risk” based on BlackRock’s ability
to sustain and improve its performance over future periods.

Long-Term Retention and Incentive Plan (“LTIP”) — From time to time long-term
incentive equity awards are granted to certain key employees to aid in retention, align their interests
with long-term shareholder interests and motivate performance. Equity awards are generally
granted in the form of BlackRock, Inc. restricted stock units that, once vested, settle in BlackRock,
Inc. common stock. Mr. Spodek has received awards under the LTIP.

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Deferred Compensation Program — A portion of the compensation paid to eligible
BlackRock employees may be voluntarily deferred into an account that tracks the performance of
certain of the firm’s investment products. Each participant in the deferred compensation program is
permitted to allocate his deferred amounts among the various investment options. Messrs. Spodek
and Musmanno have each participated in the deferred compensation program.

Other compensation benefits. In addition to base compensation and discretionary incentive
compensation, portfolio managers may be eligible to receive or participate in one or more of the
following:

Incentive Savings Plans — BlackRock, Inc. has created a variety of incentive savings
plans in which BlackRock employees are eligible to participate, including a 401(k) plan, the
BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan
(ESPP). The employer contribution components of the RSP include a company match equal to 50%
of the first 6% of eligible pay contributed to the plan capped at $4,000 per year, and a company
retirement contribution equal to 3-5% of eligible compensation. The RSP offers a range of
investment options, including registered investment companies managed by the firm. BlackRock
contributions follow the investment direction set by participants for their own contributions or,
absent employee investment direction, are invested into a balanced portfolio. The ESPP allows for
investment in BlackRock common stock at a 5% discount on the fair market value of the stock on
the purchase date. Annual participation in the ESPP is limited to the purchase of 1,000 shares or a
dollar value of $25,000. Each portfolio manager is eligible to participate in these plans.

(a)(4) Beneficial Ownership of Securities – As of December 31, 2010.

 

(b) Not Applicable

Item 9 – Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated
Purchasers

 

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date of the offer was November 26, 2010. The registrant may conduct annual repurchases for between 5% and 25% of its
outstanding shares pursuant to Rule 23c-3 under the Investment Company Act of 1940, as amended.

Item 10 – Submission of Matters to a Vote of Security Holders – On September 17, 2010, the Board of
Directors of the Fund amended and restated in its entirety the bylaws of the Fund (the "Amended
and Restated Bylaws"). The Amended and Restated Bylaws were deemed effective as of September
17, 2010 and set forth, among other things, the processes and procedures that shareholders of the
Fund must follow, and specifies additional information that shareholders of the Fund must provide,
when proposing director nominations at any annual meeting or special meeting in lieu of an annual
meeting or other business to be considered at an annual meeting or special meeting.

Item 11 – Controls and Procedures

(a) – The registrant’s principal executive and principal financial officers or persons performing
similar functions have concluded that the registrant’s disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are
effective as of a date within 90 days of the filing of this report based on the evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) under the
Securities Exchange Act of 1934, as amended.

(b) – There were no changes in the registrant’s internal control over financial reporting (as defined
in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period
covered by this report that have materially affected, or are reasonably likely to materially affect, the
registrant’s internal control over financial reporting.

Item 12 – Exhibits attached hereto

(a)(1) – Code of Ethics – See Item 2

(a)(2) – Certifications – Attached hereto

(a)(3) – Not Applicable

(b) – Certifications – Attached hereto

(c) – Notices to the registrant’s common shareholders in accordance with 1940 Act Section 19(a)
and Rule 19a-1<sup>1

1</sup> The Fund has received exemptive relief from the Securities and Exchange Commission permitting it to make
periodic distributions of long-term capital gains with respect to its outstanding common stock as frequently as
twelve times each year, and as frequently as distributions are specified by or in accordance with the terms of
its outstanding preferred stock. This relief is conditioned, in part, on an undertaking by the Fund to make the
disclosures to the holders of the Fund’s common shares, in addition to the information required by Section
19(a) of the 1940 Act and Rule 19a-1 thereunder. The Fund is likewise obligated to file with the SEC the
information contained in any such notice to shareholders and, in that regard, has attached hereto copies of each
such notice made during the period.

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Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company
Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

BlackRock Enhanced Government Fund, Inc.

By: /S/ John M. Perlowski
John M. Perlowski
Chief Executive Officer (principal executive officer) of
BlackRock Enhanced Government Fund, Inc.

Date: March 4, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company
Act of 1940, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

By: /S/ John M. Perlowski
John M. Perlowski
Chief Executive Officer (principal executive officer) of
BlackRock Enhanced Government Fund, Inc.

Date: March 4, 2011

By: /S/ Neal J. Andrews
Neal J. Andrews
Chief Financial Officer (principal financial officer) of
BlackRock Enhanced Government Fund, Inc.

Date: March 4, 2011

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