LIPPER FUNDS INC, N-30D, 1997-09-02

LIPPER FUNDS INC
N-30D, 1997-09-02

Previous: CLUCKCORP INTERNATIONAL INC, 10QSB, 1997-09-02

Next: DAIMLER BENZ AUTO GRANTOR TRUST 1995-A, 8-K, 1997-09-02

THE LIPPER FUNDS, INC.

LIPPER HIGH INCOME BOND FUND
LIPPER U.S. EQUITY FUND
PRIME LIPPER EUROPE EQUITY FUND

SEMI-ANNUAL REPORT
--------------------------------------------------
June 30, 1997

<PAGE>

TABLE OF CONTENTS

Shareholder's Letter .................................... 1-4

Portfolio of Investments
Lipper High Income Bond Fund ........................... 5-10
Lipper U.S. Equity Fund ................................ 11
Prime Lipper Europe Equity Fund ........................ 12-15

Statement of Assets and Liabilities ..................... 16

Statement of Operations ................................. 17

Statement of Changes in Net Assets ...................... 18

Financial Highlights
Lipper High Income Bond Fund ........................... 19
Lipper U.S. Equity Fund ................................ 20
Prime Lipper Europe Equity Fund ........................ 21

Notes to Financial Statements ........................... 22-26

<PAGE>

THE LIPPER FUNDS, INC. SEMI-ANNUAL REPORT
JUNE 30, 1997

Dear Shareholder:

We are pleased to present the semi-annual report for The Lipper Funds, Inc.
for the fiscal period ended June 30, 1997. The Lipper Funds currently represent
three investment portfolios--The Lipper High Income Bond Fund, The Lipper US
Equity Fund and The Prime Lipper Europe Equity Fund. Each Fund is made available
to individual, institutional and group retirement plan investors through a
separate class of shares. This report presents the financial statements of The
Lipper Funds, and reviews the performance of each of the Funds for the fiscal
period ended June 30, 1997.

PERFORMANCE AND PORTFOLIO REVIEW

Performance as discussed below reflects the performance of each Fund's
Premier class of shares. Performance for the Funds' Retail and Group Retirement
Plan Shares (illustrated on page 4) differs from Premier Shares performance due
to the higher class specific expenses associated with the Retail and Group
Retirement Plan classes of shares.

THE LIPPER HIGH INCOME BOND FUND

The High Income Bond Fund seeks high current income by investing in a
diversified portfolio of quality, high yield, intermediate-term bonds rated BBB
to B-. The Fund seeks to simultaneously manage risk through in-depth credit
analysis and portfolio diversification, and by focusing its investments in
short-to-intermediate term maturities.

Bond prices in general suffered during the first quarter of 1997 following
a downward trend which began in mid-February due to U.S. inflation concerns and
an anticipated increase in the Federal Funds rate. Bond prices improved across
all investment grades during May and June of 1997 in response to signs of
continued economic expansion, combined with no real signs of inflationary
pressures. The Lipper High Income Bond Fund performed well in this environment
with the Fund's Premier shares generating a total return of 5.84% for the six
month period ended June 30, 1997. This compares favorably to the Fund's
benchmark index, the Lehman Intermediate BB Index which generated a total return
of 5.30% for the same period. As an additional comparison, the average return of
all high yield funds tracked by Morningstar, Inc. was 5.75% for the six month
period ended June 30, 1997. On a trailing twelve month basis ending June 30,
1997 the Fund's Premier Shares generated a total return of 14.69%, compared to a
total return of 13.01% for the Lehman Intermediate BB Index, and an average
14.61% for all high yield funds tracked by Morningstar, Inc.

High yield investors, and the Fund in particular, benefited from a
combination of a general downward movement in interest rates, continued strong
investor demand, and a positive economic environment. The demand for high yield
issues remained strong during the first six months of 1997, despite record new
issue volume, as investors continued to cross over to high yield investments
from investment grade issues in search of incremental yield.

During the period, Lipper continued to search for attractive yield spreads,
focusing on issues in the shorter end of the intermediate spectrum. The Fund's
new investments during the six month period were concentrated in shorter-term
credits which offered more attractive yield spreads and reduced the portfolio's
exposure to changes in interest rates. By the end of the half of 1997, the
Fund's assumed average life had been reduced from 5.5 years to approximately 5.0
years.

Our outlook for The High Income Bond Fund remains positive, as the outlook
for moderate economic growth and resultant growth in corporate earnings remains
favorable. We believe inflation should not present a major threat to bond
investors over the remainder of the year, and interest rates should stay at or
near current levels.

The Lipper High Income Bond Fund will continue to pursue its investment
strategy of adding value by investing and trading issues which, based upon
internal analysis, offer attractive yields compared to their official credit
rating or market perceptions.

THE LIPPER U.S. EQUITY FUND

The Lipper U.S. Equity Fund employs a value-oriented investment strategy
designed to seek long-term capital appreciation with safety by investing
primarily in large capitalization U.S. equities which are believed to be selling
at substantially below their true economic values.

<PAGE>

Most large capitalization U.S. stocks continued to soar during the first
six months of 1997, pushing valuation levels, and the Fund's benchmark S&P 500
index to record high levels. With large capitalization stocks at record highs,
Lipper took a cautious approach to investing the Fund's capital during the first
six months of 1997. Looking back perhaps we were excessively cautious in
maintaining large cash balances because we felt that stock prices were too high
and therefore risky. We remain committed to our investment approach--building
the portfolio from the bottom-up by selecting only those securities which we
determine to be significantly undervalued, regardless of market momentum.

During the first six months ended June 30, 1997, Premier Shares of the
Lipper U.S. Equity Fund generated a total return of 6.06%. This compares to an
average total return of 13.06% for all domestic equity funds tracked by
Morningstar, Inc. over the same period. On a trailing twelve month basis ended
June 30, 1997, the Fund's Premier Shares generated a total return or 20.90%,
compared to an average 22.18% for all domestic equity funds tracked by
Morningstar, Inc. During the six and trailing twelve month periods ended June
30, 1997, the S&P 500 Index generated a total return of 20.60%, and 33.63%,
respectively.

The Fund experienced downward pricing pressure in several important
computer and technology holdings during the first quarter, as valuation levels
were challenged in both sectors due to concerns about earnings growth. Both
sectors turned around during the second quarter of 1997 as the earnings outlooks
improved--including the Fund's largest position, IBM which increased 33% in
price during the second quarter.

Given the extraordinary rise in U.S. equity prices, several of the Fund's
holdings were sold during the six month period, as they reached our projected
target values. Several securities which failed to meet expectations in terms of
earnings potential were also sold during the period. As a result, the Fund's
cash level during the period was high, both on an absolute and relative basis.
At the end of the second half of 1997, the Fund had a cash position of
approximately 41%, with the remaining assets of the Fund invested in the
technology, computers and computer-related services, financial services and
telecommunications sectors. Our high cash position for the period results from
the fact that finding individual holdings that meet our criteria of attractive
earnings growth at "reasonable" prices have become much more challenging to
find.

The environment for U.S. stocks continues to appear positive in several key
respects as a result of moderate economic growth, low interest rates, strong
consumer confidence and continued strong capital inflows into the equity
markets--and we remain cautiously optimistic about the U.S. market as a whole.
However, based on current prices, we believe that the U.S. benchmark valuations
in large part reflect an optimistic outlook for corporate earnings.
Disappointing news in the form of inflation or less than stellar corporate
earnings reports will challenge the new trading levels established for most
large capitalization U.S. stocks.

The U.S. Equity Fund's current holdings continue to reflect our value
orientation, representing primarily large capitalization companies which we
believe have excellent long-term earnings prospects and low downside risk, even
in the current market environment and we are continuously seeking other
value-laden stocks. We believe that these select holdings will--over
time--reflect their inherent value as they benefit from both strong industry
specific fundamentals, and company specific initiatives intended to improve
revenues and operating efficiencies.

THE PRIME LIPPER EUROPE EQUITY FUND

The Prime Lipper Europe Equity Fund seeks long-term capital appreciation
through investment in a diversified portfolio consisting primarily of
widely-traded, large capitalization European growth stocks. The Fund's
investments are selected according to a highly disciplined and structured
investment process which targets companies offering the potential for strong
earnings growth and capital appreciation. Investments are selected based on a
number of criteria including financial strength, competitive position, product
lines, and services offered.

During the first six months of 1997, European equity markets posted
attractive returns for U.S. investors, reflecting a positive environment for
European stocks. U.S. dollar-based performance was strong for the year despite a
continued strengthening of the U.S. dollar against most European currencies.
Factors which contributed to this environment included an ongoing economic
recovery, a general improvement in corporate earnings, low inflation rates, and
lower interest rates across the region. The Prime Lipper Europe Fund performed
well in this environment, generating a total return of 10.67% for the six months
ended June 30, 1997, compared to an average total return of all European mutual
funds tracked by Morningstar, Inc. of 12.53% over the same period. On a trailing
twelve month

<PAGE>

basis ending June 30, 1997, the Fund's Premier Shares generated a total return
of 24.88%, compared to an average 22.93% for all European funds tracked by
Morningstar, Inc. For the six and trailing twelve month periods ended June 30,
1997, the Morgan Stanley Capital International ("MSCI") Europe Index generated a
total return of 14.45% and 30.4%, respectively.

During the six month period, the Prime Lipper Europe Fund under performed
its benchmark primarily as a result of its strategic focus on non-cyclical,
well-positioned large capitalization growth stocks. European growth stock prices
came under pressure during the first quarter of 1997 following signs of more
robust economic growth. The change in economic outlook for Europe caused
momentum investors to shift out of growth stocks, resulting in some cases,
downward pressure on growth stock prices as investors moved back into more
cyclical issues. These events resulted in a relatively flat first quarter period
ended March 31, 1997, with the Fund's Premier Shares generating a total return
of 1.33% versus a 4.9% for the MSCI Europe Index.

During the second quarter of 1997, Europe's economic indicators settled and
again reflect Prime Lipper's outlook of moderate economic growth. As a result,
in the second quarter of 1997, the Fund outperformed the MSCI Europe Index 9.22%
versus 9.03%. Prime Lipper's strategy is also showing signs of outperforming
other pan-European managers. On a trailing twelve month basis ending June 30,
1997 the Fund received the top performing European Fund ranking within the top
quintile in terms of performance for the period by Lipper Analytical Services.

For the second half of 1997, European stock markets should continue to
benefit from a favorable environment for stocks including continued,
non-inflationary economic growth, a general downward trend in interest rates,
and positive outlook for corporate earnings growth. Corporate earnings growth is
currently projected to slightly outpace that of the U.S. as European companies
address the changing competitive environment through medium to long-term plans
of capital investment and restructuring. Given this outlook, broad market
valuations indicate that on a price-to-earnings basis, Europe is currently
trading at lower values relative to the U.S. market.

The Prime Lipper Europe Equity Fund continues to focus its investments on
companies with high growth prospects in a sound financial position, offering
competitive products or services, leading market share, and competent management
which we believe will produce stable and visible earnings growth, superior to
the market average. We believe the prospects for the Prime Lipper Europe Equity
Fund are positive. The Fund is well-positioned in strong growth stocks which
should benefit from both the advancing economic cycle and Europe's progress
toward economic and political unity.

IN CONCLUSION: The Lipper Funds remain dedicated to superior long-term
results, which we believe are best achieved by adhering to a rigorous and
consistently applied investment strategy designed to generate positive results
and protect principal under various market conditions. We hope you find the
enclosed report informative. We very much appreciate your participation in The
Lipper Funds, Inc.

Sincerely,

/s/ KENNETH LIPPER
---------------------------------------
Kenneth Lipper
President and Chairman of the Board

<PAGE>

THE LIPPER FUNDS, INC.

Set forth below is performance information through June 30, 1997 for the
various classes of shares of The Lipper Funds, and for their respective indexes.
Fee waivers and reimbursements were in effect during the period for each of the
Funds, without which total returns would have been lower.

TOTAL RETURN TOTAL RETURN
FOR THE FOR THE
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, 1997 (1) JUNE 30, 1997 (1)
----------------- -------------------

LIPPER HIGH INCOME BOND FUND

Premier Shares .......................... 5.84% 14.69%
Retail Shares ........................... 5.64 14.31
Group Retirement Plan Shares ............ 5.63 14.28
Lehman Intermediate BB Index (1) ........ 5.30 13.01

LIPPER U.S. EQUITY FUND

Premier Shares .......................... 6.06 20.90
Retail Shares ........................... 5.89 20.63
Group Retirement Plan Shares ............ 5.89 20.70
S&P Index (1) ........................... 20.60 33.63

PRIME LIPPER EUROPE EQUITY FUND

Premier Shares .......................... 10.67 24.88
Retail Shares ........................... 10.58 24.63
Group Retirement Plan Shares ............ 10.59 24.55
Morgan Stanley Capital
International Europe Index (1) ......... 14.45 30.47

- --------------

(1) The S&P 500 Index, the Morgan Stanley Capital International (MSCI) Europe
Index and the Lehman Brothers Intermediate BB Index are unmanaged indices.
The MSCI Europe and the S&P 500 Index are indices of common stock from the
European and U.S. regions, respectively. The Lehman Brothers Intermediate
BB Index is an index of BB Intermediate Bonds. Performance data assumes the
reinvestment of dividends, and does not reflect the expenses and management
fees incurred by the Funds.

Past performance is not indicative of future results.

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED)

FACE
AMOUNT VALUE+
---------- -----------
CORPORATE BONDS (91.2%)
AUTO MANUFACTURING & RELATED (1.9%)
++Hawk Corp.
10.25%, 12/01/03 ............................... $ 650,000 $ 671,125
Hayes Wheels International, Inc.
11.00%, 07/15/06 ............................... 1,000,000 1,105,000
-----------
1,776,125
-----------
BEVERAGES & BOTTLING (0.7%)
Delta Beverage Group
9.75%, 12/15/03 ................................ 650,000 680,875
-----------
CABLE (6.0%)
Cablevision Systems Corp.
10.75%, 04/01/04 ............................... 1,475,000 1,527,672
Fundy Cable Ltd.
11.00%, 11/15/05 ............................... 750,000 810,000
Rogers Communications, Inc.
10.875%, 04/15/04 .............................. 1,500,000 1,578,750
Telewest Communications plc
9.625%, 10/01/06 ............................... 1,000,000 1,035,000
Videotron Ltd.
10.25%, 10/15/02 ............................... 500,000 530,000
-----------
5,481,422
-----------
CAPITAL GOODS, EQUIPMENT & OTHER MANUFACTURING (5.2%)
Amtrol, Inc.
10.625%, 12/31/06 .............................. 1,000,000 1,057,500
Communications & Power Industries, Series B
12.00%, 08/01/05 ............................... 625,000 698,436
International Knife & Saw, Inc.
11.375%, 11/15/06 .............................. 1,000,000 1,077,500
Sequa Corp.
9.625%, 10/15/99 ............................... 1,850,000 1,905,500
-----------
4,738,936
-----------
CHEMICALS (1.9%)
Sifto Canada, Inc.
8.50%, 07/15/00 ................................ 1,250,000 1,262,500
Uniroyal Chemical Co.
9.00%, 09/01/00 ................................ 450,000 469,472
-----------
1,731,972
-----------
COMMERCIAL SERVICES (3.6%)
Cort Furniture Rental
12.00%, 09/01/00 ............................... 800,000 884,000
Host Mar Travel Plaza, Class B
9.50%, 05/15/05 ................................ 1,000,000 1,042,500

The accompanying notes are an integral part of the financial statements.

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
JUNE 30, 1997 (UNAUDITED)

FACE
AMOUNT VALUE+
---------- ----------
COMMERCIAL SERVICES (3.6%) (Continued)
Pierce Leahy Corp.
9.125%, 07/15/07 ............................... $ 350,000 $ 350,000
++Rose Hills Acquisition
9.50%, 11/15/04 ................................ 1,000,000 1,040,000
----------
3,316,500
----------
CONSUMER PRODUCTS (5.1%)
Coty, Inc.
10.25%, 05/01/05 ............................... 600,000 643,500
Harman International
12.00%, 08/01/02 ............................... 300,000 319,500
Herff Jones, Inc.
11.00%, 08/15/05 ............................... 1,000,000 1,085,000
Sealy Corp.
10.25%, 05/01/03 ............................... 1,045,000 1,086,800
Selmer Co., Inc.
11.00%, 05/15/05 ............................... 500,000 552,500
@ Sola Group Ltd.
6.00%, 12/15/03 ................................ 750,000 731,250
Syratech Corp.
11.00%, 04/15/07 ............................... 250,000 266,875
----------
4,685,425
----------
CONTAINER/PACKAGE MANUFACTURING (1.2%)
++Tekni-Plex, Inc.
11.25%, 04/01/07 ............................... 1,000,000 1,085,000
----------
ENERGY (1.4%)
AES Corp.
9.75%, 06/15/00 ................................ 1,225,000 1,270,937
----------
ENTERTAINMENT (3.0%)
AMF Group, Inc., Series B
10.875%, 03/15/06 .............................. 1,000,000 1,085,000
Premier Parks
12.00%, 08/15/03 ............................... 1,500,000 1,661,250
----------
2,746,250
----------
ENVIRONMENTAL SERVICES (1.2%)
++Allied Waste N.A.
10.25%, 12/01/06 ............................... 1,000,000 1,073,750
----------
FINANCIAL INSTITUTIONS (4.1%)
Aames Financial Corp.
9.125%, 11/01/03 ............................... 1,250,000 1,281,250
Americredit Corp.
9.25%, 02/01/04 ................................ 1,500,000 1,462,500
DVI, Inc.
9.875%, 02/01/04 ............................... 1,000,000 1,007,500
----------
3,751,250
----------

The accompanying notes are an integral part of the financial statements.

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
JUNE 30, 1997 (UNAUDITED)

FACE
AMOUNT VALUE+
---------- ----------
FOOD & FOOD SERVICES (5.4%)
Canandaigua Wine, Inc.
8.75%, 12/15/03 ................................ $ 875,000 $ 879,375
Carrols Corp.
11.50%, 08/15/03 ............................... 1,500,000 1,608,750
Keebler Corp.
10.75%, 07/01/06 ................................ 375,000 401,719
Rykoff Sexton, Inc.
8.875%, 11/01/03 ............................... 1,125,000 1,139,062
SC International Services, Inc.
13.00%, 10/01/05 ............................... 825,000 948,750
----------
4,977,656
----------
HEALTHCARE SERVICES & RELATED (3.0%)
Quorum Health Group, Inc.
8.75%, 11/01/05 ................................ 650,000 670,313
Regency Health Services, Inc.
9.875%, 10/15/02 ............................... 1,500,000 1,541,250
Universal Health Services, Inc.
8.75%, 08/15/05 ................................ 500,000 527,500
----------
2,739,063
----------
HOMEBUILDING & BUILDING MATERIALS (6.4%)
Congoleum Corp.
9.00%, 02/01/01 ................................ 1,500,000 1,518,750
Johns Manville International Group
10.875%, 12/15/04 .............................. 750,000 835,313
Kaufman & Broad Home Corp.
10.375%, 09/01/99 .............................. 430,000 436,450
Nortek, Inc.
9.875%, 03/01/04 ............................... 1,000,000 1,022,500
Ryland Group
10.50%, 07/15/02 ............................... 1,000,000 1,030,000
Triangle Pacific Corp.
10.50%, 08/01/03 ............................... 1,000,000 1,065,000
----------
5,908,013
----------
HOTELS (1.4%)
Orient Express Hotels, Inc.
10.25%, 09/01/98 ............................... 272,000 274,380
Red Roof Inns, Inc.
9.625%, 12/15/03 ............................... 1,000,000 1,035,000
----------
1,309,380
----------
MEDIA (2.1%)
Heritage Media Corp.
11.00%, 06/15/02 ............................... 1,850,000 1,963,313
----------

The accompanying notes are an integral part of the financial statements.

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
JUNE 30, 1997 (UNAUDITED)

FACE
AMOUNT VALUE+
----------- -----------
METALS (3.9%)
Armco, Inc.
9.375%, 11/01/00 ............................... $ 1,350,000 $ 1,390,500
GS Technologies Operating Co.
12.25%, 10/01/05 ............................... 1,000,000 1,097,500
Ivaco, Inc.
11.50%, 09/15/05 ............................... 1,025,000 1,096,750
-----------
3,584,750
-----------
MULTIMEDIA (4.0%)
Ackerly Communications, Inc.
10.75%, 10/01/03 ............................... 1,525,000 1,639,375
Outdoor Systems, Inc., Series B
9.375%, 10/15/06 ............................... 1,250,000 1,268,750
Valassis Inserts, Inc.
9.375%, 03/15/99 ............................... 750,000 778,605
-----------
3,686,730
-----------
OIL & GAS (11.0%)
Coda Energy, Inc.
10.50%, 04/01/06 ............................... 500,000 531,875
Ferrell Gas Inc.
10.00%, 08/01/01 ............................... 1,800,000 1,881,000
Giant Industries
9.75%, 11/15/03 ................................ 700,000 721,000
Global Marine, Inc.
12.75%, 12/15/99 ............................... 1,250,000 1,315,625
Gulf Canada Resources Ltd.
9.25%, 01/15/04 ................................ 1,000,000 1,053,750
Nuevo Energy Co.
9.50%, 04/15/06 ................................ 1,000,000 1,045,000
Pride Petroleum Services, Inc.
9.375%, 05/01/07 ............................... 650,000 674,375
United Meridian Corp.
10.375%, 10/15/05 .............................. 1,000,000 1,087,500
Veritas DGC, Inc.
9.75%, 10/15/03 ................................ 1,700,000 1,785,000
-----------
10,095,125
-----------
PUBLISHING (2.5%)
K-III Communications Corp.
10.25%, 06/01/04 ............................... 1,125,000 1,192,500
Newsquest Capital plc
11.00%, 05/01/06 ............................... 1,000,000 1,095,000
-----------
2,287,500
-----------

The accompanying notes are an integral part of the financial statements.

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
JUNE 30, 1997 (UNAUDITED)

FACE
AMOUNT VALUE+
----------- -----------
RETAILERS (3.5%)
Ann Taylor Inc.
8.75%, 06/15/00 ................................ $ 1,350,000 $ 1,365,188
K Mart Corp.
12.50%, 03/01/05 ............................... 750,000 903,750
++Leslie's Poolmart
10.375%, 07/15/04 .............................. 500,000 512,500
Southland Corp.
5.00%, 12/15/03 ................................ 550,000 466,125
----------
3,247,563
----------
SUPERMARKETS (1.4%)
Jitney-Jungle Stores
12.00%, 03/01/06 ............................... 1,150,000 1,288,000
----------
TECHNOLOGY (3.0%)
Clark-Schwebel, Inc.
10.50%, 04/15/06 ............................... 750,000 806,250
Plantronics, Inc.
10.00%, 01/15/01 ............................... 1,825,000 1,907,125
----------
2,713,375
----------
TEXTILE/APPAREL MANUFACTURING (4.2%)
Dominion Textile, Inc.
8.875%, 11/01/03 ............................... 675,000 695,250
++Glenoit Corp.
11.00%, 04/15/07 ............................... 1,000,000 1,052,500
Interface, Inc., Series B
9.50%, 11/15/05 ................................ 250,000 262,500
Pillowtex Corp.
10.00%, 11/15/06 ............................... 750,000 787,500
Westpoint Stevens, Inc.
9.375%, 12/15/05 ............................... 1,000,000 1,045,000
----------
3,842,750
----------
TRANSPORTATION (4.1%)
Ameritruck Distribution Corp., Series B
12.25%, 11/15/05 ............................... 1,000,000 1,022,500
Continental Airlines, Inc.
9.50%, 12/15/01 ................................ 750,000 787,500
Sea Containers Ltd.
9.50%, 07/01/03 ................................ 750,000 780,000
Sea Containers Ltd., Series A
12.50%, 12/01/04 ............................... 1,000,000 1,130,000
----------
3,720,000
----------
TOTAL CORPORATE BONDS (COST $81,186,911) ........... 83,701,660
----------

The accompanying notes are an integral part of the financial statements.

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
JUNE 30, 1997 (UNAUDITED)

FACE
AMOUNT VALUE+
----------- ------------
CONVERTIBLE BONDS (2.2%)
AUTO MANUFACTURING & RELATED (0.7%)
++Exide Corp.
2.90%, 12/15/05 .............................. $ 1,000,000 $ 627,500
------------
HEALTHCARE SERVICES & RELATED (1.5%)
Novacare, Inc.
5.50%, 01/15/00 .............................. 1,500,000 1,412,820
------------
TOTAL CONVERTIBLE BONDS (COST $1,953,808) ........ 2,040,320
------------
SHORT-TERM INVESTMENT (36.6%)
U.S. TREASURY BILL (36.6%)
*4.94%, 09/25/97 (COST $33,600,344) ........... 34,009,000 33,597,899
------------
TOTAL INVESTMENTS (130.0%) (COST $116,741,063) ... 119,339,879
NET OTHER ASSETS AND LIABILITIES (-30.0%) ........ (27,525,600)
------------
NET ASSETS (100%) ................................ $ 91,814,279
============

- ------------

+ See Note A to Financial Statements.
* Interest rate disclosed represents yield at time of purchase.
@ Step Bond--coupon rate increases in increments to maturity. Rate disclosed
is as of June 30, 1997. Maturity date disclosed is the ultimate maturity.
++ 144A Security--certain conditions for public resale may exist.

The accompanying notes are an integral part of the financial statements.

<PAGE>

LIPPER U.S. EQUITY FUND
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED)

SHARES VALUE+
------ -----------
COMMON STOCKS (59.0%)
CONSUMER CYCLICAL (4.6%)
General Motors Corp., Class H ................. 12,900 $ 744,975
-----------
FINANCE (5.1%)
Chase Manhattan Corp. ......................... 8,600 834,738
-----------
TECHNOLOGY (30.8%)
Electronic Data Systems Corp. ................. 18,000 738,000
Hewlett-Packard Co. ........................... 12,400 694,400
@ International Business Machines Corp, ......... 20,000 1,803,750
@ Motorola, Inc. ................................ 11,000 836,000
@ Xerox Corp. ................................... 12,000 946,500
-----------
5,018,650
-----------
TELECOMMUNICATIONS (18.5%)
AT&T Corp. .................................... 19,000 666,187
* LCI International, Inc. ....................... 36,100 789,688
* Loral Space & Communications .................. 45,200 678,000
Qwest Communications International Inc. ....... 5,200 141,050
* Teleport Communications Group Inc., Class A ... 21,900 744,600
-----------
3,019,525
-----------
TOTAL COMMON STOCKS (COST $7,194,087) ............ 9,617,888
-----------

FACE
AMOUNT
------
SHORT-TERM INVESTMENTS (41.4%)
** U.S. Treasury Bill 4.94%, 09/25/97
(COST $6,749,906) ............................. $6,832,000 6,749,906
-----------
TOTAL INVESTMENTS (100.4%) (COST $13,943,993) .... 16,367,794
NET OTHER ASSETS AND LIABILITIES (-0.4%) ......... (61,098)
-----------
NET ASSETS (100%) ................................ $16,306,696
===========

NO. OF
CONTRACTS
---------
WRITTEN CALL OPTIONS
International Business Machines Corp., expiring
07/19/97, Strike Price $85 ..................... 200 $ 135,000
Motorola, Inc., expiring 10/18/97,
Strike Price $60 ............................... 110 199,375
Xerox Corp., expiring 10/18/97, Strike Price $65 . 120 183,000
-----------
TOTAL WRITTEN CALL OPTIONS (PREMIUM RECEIVED
$206,781) ...................................... $ 517,375
-----------

- -------------

+ See Note A to Financial Statements.
* Non-Income Producing Security.
** Interest rate disclosed represents yield at time of purchase.
@ All, or a portion of these shares, can not be sold pending expiration or
repurchase of written call options.

The accompanying notes are an integral part of the financial statements.

<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED)

SHARES VALUE+
------ -----------
COMMON AND PREFERRED STOCKS (97.5%)
BELGIUM (1.7%)
Credit Communal de Belique Holding--DEXIA ........ 12,000 $ 1,290,125
-----------
DENMARK (1.1%)
Danisco A/S ....................................... 14,120 864,573
-----------
FINLAND (1.4%)
Oy Nokia AB, Preferred ............................ 14,320 1,069,410
-----------
FRANCE (11.9%)
Carrefour Supermarche S.A. ........................ 1,250 908,704
Castorama Dubois Investissement, S.A. ............. 5,100 718,395
Cetelem, S.A. ..................................... 7,960 1,001,949
Grand Optical Photoservice ........................ 4,000 607,733
L'Oreal, S.A. ..................................... 2,218 935,406
LVMH, S.A. ........................................ 3,155 849,072
Promodes, S.A. .................................... 2,500 974,706
Sanofi S.A. ....................................... 8,000 784,875
Scor S.A. ......................................... 17,500 705,246
Societe Technip S.A. .............................. 6,000 696,985
Total S.A., B shares .............................. 8,390 848,860
-----------
9,031,931
-----------
GERMANY (15.0%)
Allianz Holding, AG ............................... 5,500 1,175,686
Altana AG ......................................... 1,300 1,395,042
Bayer AG .......................................... 34,000 1,311,144
Bayerische Motoren Werke AG ....................... 1,100 907,724
BHW Holding AG .................................... 50,000 846,436
Mannesmann AG ..................................... 2,665 1,191,343
Muenchener Rueckversicherungs-Gesellschaft AG ..... 370 1,048,893
SAP AG ............................................ 7,000 1,444,107
Siemens AG ........................................ 16,950 1,015,969
VEBA AG ........................................... 20,070 1,134,451
-----------
11,470,795
-----------
IRELAND (1.1%)
Bank of Ireland ................................... 76,720 842,066
-----------
ITALY (5.4%)
Edison S.p.A. ..................................... 84,590 420,340
ENI S.p.A. ........................................ 109,190 617,663
Italgas S.p.A. .................................... 151,720 490,426
Parmalat Finanziaria S.p.A. ....................... 323,612 457,412
Rinascente S.p.A. ................................. 73,670 408,941
Societa Assicuratrice Industriale S.p.A. .......... 55,060 425,854
Stet Societa Finanziaria Telefonica S.p.A. ........ 113,730 661,726
Telecom Italia Mobile S.p.A. ...................... 186,080 601,493
-----------
4,083,855
-----------

The accompanying notes are an integral part of the financial statements.

<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
JUNE 30, 1997 (UNAUDITED)

SHARES VALUE+
NETHERLANDS (7.6%) -------- ----------
Aegon N.V. ........................................... 8,300 $ 580,360
* Baan Company N.V. .................................... 7,500 509,111
Elsevier N.V. ........................................ 40,450 677,160
Getronics N.V. ....................................... 15,700 508,028
ING Groep N.V., Certificate shares ................... 14,312 661,071
Koninklijke Ahold N.V. ............................... 9,320 787,726
Nutricia Verenigde Bedrijven N.V. .................... 4,415 698,540
Koninklijke PTT Nederland N.V. ....................... 16,000 628,796
Wolters Kluwer N.V. .................................. 6,140 748,972
----------
5,799,764
----------
SPAIN (4.1%)
Banco Santander S.A. ................................. 17,800 549,480
Centros Comerciales Pryca, S.A. ...................... 20,500 444,652
Corporacion Mapfre, Registered shares ................ 8,200 437,125
Empresa Nacional de Electricidad, Registered shares .. 6,900 580,356
Gas Natural SDG ...................................... 2,700 590,964
* Sol Melia, S.A. ...................................... 13,000 534,779
----------
3,137,356
----------
SWEDEN (4.5%)
Astra AB, Class B .................................... 77,520 1,378,486
Ericsson LM, Class B ................................. 28,640 1,127,836
Sandvik AB, Class B .................................. 31,720 900,437
----------
3,406,759
----------
SWITZERLAND (11.2%)
Adecco S.A., Bearer .................................. 3,700 1,421,222
Nestle S.A., Registered .............................. 1,050 1,387,132
Novartis AG, Registered .............................. 950 1,520,886
Roche Holding AG, Participation Certificates ......... 145 1,313,345
Schweizerische Bankgesellschaft (UBS), Bearer ........ 1,350 1,546,402
Zurich Versicherungsgesellschaft Oil, Registered ..... 3,400 1,354,963
----------
8,543,950
----------

The accompanying notes are an integral part of the financial statements.

<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
JUNE 30, 1997 (UNAUDITED)

SHARES VALUE+
------ -----------
UNITED KINGDOM (32.5%)
Abbey National plc ................................... 71,620 $ 977,422
Boots plc ............................................ 90,975 1,066,687
British Airways plc .................................. 92,420 1,052,867
British Petroleum plc ................................ 89,160 1,108,472
British Telecom plc .................................. 146,700 1,088,927
Cadbury Schweppes plc ................................ 115,639 1,031,580
Carlton Communications plc ........................... 123,700 1,046,874
Compass Group plc .................................... 80,000 894,732
Electrocomponents plc ................................ 149,220 1,110,116
EMI Group plc ........................................ 51,660 928,564
HSBC Holdings plc .................................... 33,000 1,015,237
Legal & General Group plc ............................ 143,625 972,878
Lloyds TSB Group plc ................................. 101,323 1,040,464
Marks & Spencer plc .................................. 134,330 1,113,362
Medeva plc ........................................... 200,000 855,455
Misys plc ............................................ 52,000 1,169,210
Reed International plc ............................... 110,500 1,066,656
Reuters Holdings plc ................................. 97,158 1,023,567
Siebe plc ............................................ 77,740 1,317,123
SmithKline Beecham plc ............................... 67,981 1,250,778
Smiths Industries plc ................................ 97,000 1,239,844
Vodafone Group plc ................................... 264,560 1,290,107
Zeneca Group plc ..................................... 35,000 1,156,861
-----------
24,817,783
-----------
TOTAL COMMON AND PREFERRED STOCKS (COST $56,475,681) .... 74,358,367
-----------
RIGHTS (0.0%)

ITALY (0.0%)
* Rinascente "A", expiring 7/23/97 ...................... 73,670 3,195
* Rinascente "B", expiring 7/23/97 ...................... 73,670 11,872
-----------
TOTAL RIGHTS (COST $0) .................................. 15,067
-----------
TOTAL INVESTMENTS (97.5%) (COST $56,475,681) ............ 74,373,434
NET OTHER ASSETS AND LIABILITIES (2.5%) ................. 1,934,379
-----------
NET ASSETS (100%) ....................................... $76,307,813
===========

- -------------

+ See Note A to Financial Statements.
* Non-Income Producing Security.

The accompanying notes are an integral part of the financial statements.

<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
JUNE 30, 1997 (UNAUDITED)

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION

PERCENT OF
NET
INDUSTRY ASSETS VALUE
- -------- ---------- ----------
Automobiles ........................................ 1.2% $ 907,724
Banking ............................................ 10.6 8,107,632
Beverage & Tobacco ................................. 1.1 849,072
Broadcast & Publishing ............................. 4.6 3,539,662
Building Materials ................................. 0.9 696,985
Business & Public Services ......................... 8.5 6,461,948
Chemicals .......................................... 1.7 1,311,144
Data Processing .................................... 0.7 508,028
Electrical/Electronics ............................. 2.8 2,143,805
Electrical/Components/Instruments .................. 2.9 2,179,526
Energy Sources ..................................... 3.4 2,574,995
Financial Services ................................. 1.3 1,001,949
Food & Household Products .......................... 5.8 4,439,237
Health & Personal Care ............................. 13.9 10,591,133
Insurance .......................................... 9.7 7,362,075
Leisure & Tourism .................................. 0.7 534,779
Machinery & Engineering ............................ 3.2 2,431,187
Merchandising ...................................... 9.2 7,045,974
Multi-Industry ..................................... 1.7 1,317,123
Recreation & Other Consumer Goods .................. 1.2 928,565
Steel & Metals ..................................... 1.2 900,437
Telecommunications ................................. 5.6 4,271,050
Transportation ..................................... 1.4 1,052,867
Utilities--Electric-Gas ............................ 4.2 3,216,537
----- -----------
Total Investments .................................. 97.5 74,373,434
Net Other Assets and Liabilities ................... 2.5 1,934,379
----- -----------
Net Assets ......................................... 100.0% $76,307,813
===== ===========

The accompanying notes are an integral part of the financial statements.

<PAGE>

THE LIPPER FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)

LIPPER LIPPER PRIME LIPPER
HIGH INCOME U.S. EQUITY EUROPE EQUITY
BOND FUND FUND FUND
------------ ----------- -------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Note A) ................................. $119,339,879 $16,367,794 $74,373,434
Cash ........................................................... 1,116 221 2,328,697
Interest Receivable ............................................ 1,943,874 -- --
Dividends Receivable ........................................... -- 17,853 256,723
Foreign Withholding Tax Reclaim Receivable ..................... -- -- 85,125
Receivable for Investments Sold ................................ 1,897,253 396,657 886,267
Deferred Organization Costs (Note A) ........................... 69,130 64,517 69,130
Prepaid Assets ................................................. 583 39 289
------------ ----------- -----------
TOTAL ASSETS ................................................ 123,251,835 16,847,081 77,999,665
------------ ----------- -----------
LIABILITIES:
Payable for Investments Purchased .............................. 350,000 -- 1,551,155
Payable for Fund Shares Redeemed ............................... 30,909,964 -- --
Written Call Options, at value (premiums received $206,781) .... -- 517,375 --
Custodian Fees Payable ......................................... 3,989 1,658 10,411
Investment Advisory Fees Payable (Note B) ...................... 64,514 3,986 65,768
Administrative Fees Payable (Note C) ........................... 24,006 6,156 14,280
Directors' Fees Payable (Note D) ............................... 6,918 905 4,199
Distribution Fees Payable--Retail Shares (Note E) .............. 2,730 2,159 1,868
Shareholder Servicing Fees Payable--Group Retirement Plan Shares
(Note E) ...................................................... 6,278 1,568 743
Other Liabilities .............................................. 69,157 6,578 43,428
------------ ----------- -----------
TOTAL LIABILITIES ........................................... 31,437,556 540,385 1,691,852
------------ ----------- -----------
NET ASSETS ...................................................... $ 91,814,279 $16,306,696 $76,307,813
============ =========== ===========
NET ASSETS CONSIST OF:
Paid in Captial ................................................ $ 86,779,090 $13,772,985 $54,460,465
Undistributed Net Investment Income ............................ 860,226 109,302 416,478
Accumulated Net Realized Gain .................................. 1,576,147 311,202 3,535,043
Unrealized Appreciation on Investments, Written Options
and Foreign Currency Translations ............................. 2,598,816 2,113,207 17,895,827
------------ ----------- -----------
$ 91,814,279 $16,306,696 $76,307,813
============ =========== ===========
PREMIER SHARES:
Net Assets ..................................................... $ 87,233,115 $14,942,876 $75,097,875
Shares Issued and Outstanding ($.001 par value)
(authorized 3,333,333,333) .................................... 8,391,614 1,237,776 6,030,559
Net Asset Value, Offering and Redemption Price Per Share ....... $ 10.40 $ 12.07 $ 12.45
============ =========== ===========
RETAIL SHARES:
Net Assets ..................................................... $ 2,036,562 $ 724,816 $ 918,248
Shares Issued and Outstanding ($.001 par value)
(authorized 3,333,333,333) .................................... 196,075 60,143 73,826
Net Asset Value, Offering and Redemption Price Per Share ....... $ 10.39 $ 12.05 $ 12.44
============ =========== ===========
GROUP RETIREMENT PLAN SHARES:
Net Assets ..................................................... $ 2,544,602 $ 639,004 $ 291,690
Shares Issued and Outstanding ($.001 par value)
(authorized 3,333,333,334) .................................... 244,971 53,024 23,463
Net Asset Value, Offering and Redemption Price Per Share ....... $ 10.39 $ 12.05 $ 12.43
============ =========== ===========
Investments at Cost ............................................ $116,741,063 $13,943,993 $56,475,681
============ =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

<PAGE>

<TABLE>
THE LIPPER FUNDS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 1997 (UNAUDITED)

<CAPTION>
LIPPER LIPPER PRIME LIPPER
HIGH INCOME U.S. EQUITY EUROPE EQUITY
BOND FUND* FUND** FUND***
----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ...................................................... $ -- $ 75,730 $1,107,176
Interest ....................................................... 5,473,351 118,688 36,506
Less: Foreign Taxes Withheld ................................... -- -- (158,531)
---------- ---------- ----------
Total Income ................................................ 5,473,351 194,418 985,151
---------- ---------- ----------
EXPENSES
Investment Advisory Fees (Note B)
Basic Fee ..................................................... $426,366 $63,744 $383,866
Less: Fee Waived .............................................. (99,643) 326,723 (59,758) 3,986 (15,119) 368,747
Administrative Fees (Note C) ................................... -------- 135,250 ------- 36,856 -------- 81,725
Directors' Fees (Note D) ....................................... 11,605 1,534 7,184
Distribution Fees--Retail Shares (Note E) ...................... 1,980 1,131 1,038
Servicing Fees--Group Retirement Plan Shares (Note E) .......... 3,535 1,069 550
Custodian Fees ................................................. 8,111 4,317 32,013
Auditing Fees .................................................. 20,904 2,443 12,847
Legal Fees ..................................................... 14,718 1,936 9,045
Registration and Filing Fees ................................... 23,525 19,032 20,564
Amortization of Organization Costs (Note A) .................... 9,133 9,122 9,133
Other Expenses ................................................. 18,484 3,245 16,859
---------- ---------- ----------
Total Expenses .............................................. 573,968 84,671 559,705
---------- ---------- ----------
NET INVESTMENT INCOME ....................................... 4,899,383 109,747 425,446
---------- ---------- ----------
NET REALIZED GAIN (LOSS) FROM:
Investments Sold ............................................... 1,573,352 275,533 3,088,830
Written Options ................................................ -- 120,922 --
Foreign Currency Transactions .................................. -- -- (71,587)
---------- ---------- ----------
TOTAL NET REALIZED GAIN ........................................ 1,573,352 396,455 3,017,243
---------- ---------- ----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Investments .................................................... 55,065 797,048 4,065,919
Written Options ................................................ -- (301,061) --
Foreign Currency Translations .................................. -- -- (6,419)
---------- ---------- ----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION .............. 55,065 495,987 4,059,500
---------- ---------- ----------
TOTAL REALIZED GAIN AND NET CHANGE IN
UNREALIZED APPRECIATION/DEPRECIATION ........................... 1,628,417 892,442 7,076,743
---------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $6,527,800 $1,002,189 $7,502,189
========== ========== ==========
- ----------------

* The Lipper High Income Bond Fund commenced operations on April 1, 1996.

** The Lipper U.S. Equity Fund commenced operations on January 2, 1996.

*** The Prime Lipper Europe Equity Fund commenced operations on April 1, 1996.

The accompanying notes are an integral part of the financial statements.
</TABLE>

<PAGE>

<TABLE>
THE LIPPER FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED JUNE 30, 1997 (UNAUDITED)

<CAPTION>
LIPPER HIGH INCOME LIPPER U.S. PRIME LIPPER
BOND FUND* EQUITY FUND** EUROPE EQUITY FUND***
--------------------------- ------------------------- -------------------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED PERIOD ENDED ENDED YEAR ENDED ENDED PERIOD ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS:
Net Investment Income ................... $ 4,899,383 $ 6,542,947 $ 109,747 $ 194,642 $ 425,446 $ 217,605
Net Realized Gain ....................... 1,573,352 349,656 396,455 389,102 3,017,243 2,536,039
Net Change in Unrealized Appreciation/
Depreciation ........................... 55,065 2,206,383 495,987 1,617,220 4,059,500 6,248,392
------------ ------------ ----------- ----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations .............. 6,527,800 9,098,986 1,002,189 2,200,964 7,502,189 9,002,036
------------ ------------ ----------- ----------- ----------- -----------
DISTRIBUTIONS:
PREMIER SHARES:
From net investment income .............. (3,883,760) (6,418,067) -- (197,998) -- (112,430)
In excess of net investment income ...... -- -- -- (445) -- (8,968)
From net realized gains ................. -- (336,936) -- (352,126) -- (2,105,589)
In excess of net realized gains ......... -- -- -- (78,607) -- --
RETAIL SHARES:
From net investment income .............. (55,411) (33,219) -- (8,629) -- (583)
From net realized gains ................. -- (2,731) -- (21,286) -- (24,560)
In excess of net realized gains ......... -- -- -- (3,826) -- --
GROUP RETIREMENT PLAN SHARES:
From net investment income .............. (100,402) (105,226) -- (6,620) -- (180)
From net realized gains ................. -- (7,194) -- (15,690) -- (6,483)
In excess of net realized gains ......... -- -- -- (2,820) -- --
------------ ------------ ----------- ----------- ----------- -----------
Total Distributions ................... (4,039,573) (6,903,373) -- (688,047) -- (2,258,793)
------------ ------------ ----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTES G AND H):
PREMIUM SHARES:
Issued--Regular ......................... 19,154,569 51,337,878 2,693,172 13,421,010 9,320,211 11,734,044
--Distributions Reinvested ........ 3,309,940 6,181,966 -- 635,822 -- 2,231,361
--Contribution from Partnerships .. -- 74,518,244 -- -- -- 47,208,423
Redeemed ................................ (40,576,319) (31,229,026) (3,745,376) (477,485) (4,506,325) (4,901,018)
------------ ------------ ----------- ----------- ----------- -----------
Net Increase (Decrease) in Premier
Shares Transactions .................... (18,111,810) 100,809,062 (1,052,204) 13,579,347 4,813,886 56,272,810
------------ ------------ ----------- ----------- ----------- -----------
RETAIL SHARES:
Issued--Regular ......................... 1,128,090 859,030 391,499 538,500 209,429 533,316
--Distributions Reinvested ........ 40,355 19,312 -- 29,915 -- 20,769
Redeemed ................................ (8,717) (47,408) (337,472) -- -- --
------------ ------------ ----------- ----------- ----------- -----------
Net Increase in Retail
Shares Transactions .................... 1,159,728 830,934 54,027 568,415 209,429 554,085
------------ ------------ ----------- ----------- ----------- -----------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ......................... 942,571 2,040,052 641,538 380,652 366,446 168,832
--Distributions Reinvested ........ 100,402 112,419 -- 22,310 -- 6,664
Redeemed ................................ (752,919) -- (502,495) -- (329,771) --
------------ ------------ ----------- ----------- ----------- -----------
Net Increase in Group
Retirement Plan Shares Transactions .... 290,054 2,152,471 139,043 402,962 36,675 175,496
------------ ------------ ----------- ----------- ----------- -----------
Net Increase in Net Assets from
Capital Share Transactions ............. (16,662,028) 103,792,467 (859,134) 14,550,724 5,059,990 57,002,391
------------ ------------ ----------- ----------- ----------- -----------
TOTAL INCREASE (DECREASE) ................ (14,173,801) 105,988,080 143,055 16,063,641 12,562,179 63,745,634

NET ASSETS:
Beginning of Period ...................... 105,988,080 -- 16,163,641 100,000 63,745,634 --
------------ ------------ ----------- ----------- ----------- -----------
End of Period (A) ........................ $ 91,814,279 $105,988,080 $16,306,696 $16,163,641 $76,307,813 $63,745,634
============ ============ =========== =========== =========== ===========
(A) Includes undistributed (distributions
in excess of) net investment income
(loss) ................................ $ 860,226 $ 416 $ 109,302 $ (445) $ 416,478 $ (8,968)
============ ============ =========== =========== =========== ===========
- ----------------

* The Lipper High Income Bond Fund commenced operations on April 1, 1996.

** The Lipper U.S. Equity Fund commenced operations on January 2, 1996.

*** The Prime Lipper Europe Equity Fund commenced operations on April 1, 1996.

The accompanying notes are an integral part of the financial statements.
</TABLE>

<PAGE>

<TABLE>
LIPPER HIGH INCOME BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD. (UNAUDITED)

GROUP GROUP
RETIREMENT RETIREMENT
PREMIER SHARES PREMIER SHARES RETAIL SHARES RETAIL SHARES PLAN SHARES PLAN SHARES
-------------- -------------- ------------- ------------- ----------- -----------
FOR THE APRIL 1, FOR THE APRIL 11, FOR THE APRIL 12,
SIX MONTHS 1996** SIX MONTHS 1996*** SIX MONTHS 1996***
ENDED TO ENDED TO ENDED TO
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..... $10.18 $10.00 $10.18 $ 9.91 $10.18 $ 9.93
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) .............. 1.38 0.68 0.97 0.62 1.24 0.62
Net Realized and Unrealized Gain (Loss)
on Investments ....................... (0.80) 0.21 (0.41) 0.34 (0.68) 0.32
------ ------ ------ ------ ------ ------
Total From Investment Operations ... 0.58 0.89 0.56 0.96 0.56 0.94
------ ------ ------ ------ ------ ------
DISTRIBUTIONS:
Net Investment Income .................. (0.36) (0.68) (0.35) (0.66) (0.35) (0.66)
Net Realized Gain ...................... -- (0.03) -- (0.03) -- (0.03)
------ ------ ------ ------ ------ ------
Total Distributions ................ (0.36) (0.71) (0.35) (0.69) (0.35) (0.69)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ........... $10.40 $10.18 $10.39 $10.18 $10.39 $10.18
====== ====== ====== ====== ====== ======
TOTAL RETURN (2) ......................... 5.84% 9.23% 5.64% 10.04% 5.63% 9.78%
====== ====== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ........ $87,233 $102,945 $2,037 $ 845 $2,545 $2,198
Ratios After Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ......... 1.00%* 1.00%* 1.25%* 1.25%* 1.25%* 1.25%*
Net Investment Income to Average
Net Assets ........................... 8.64%* 9.01%* 8.39%* 8.95%* 8.39%* 8.91%*
Ratios Before Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ......... 1.18%* 1.27%* 1.48%* 1.59%* 1.44%* 1.55%*
Net Investment Income to Average
Net Assets ............................ 8.47%* 8.74%* 8.16%* 8.61%* 8.20%* 8.61%*
Portfolio Turnover Rate .................. 140% 74% 140% 74% 140% 74%*

- ----------------

* Annualized.

** Commencement of Fund Operations.

*** Initial offering of shares by the Fund.

(1) The effect to net investment income per share by voluntarily waived fees and reimbursed expenses were:

PERIOD ENDED PERIOD ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Premier Shares ...................... $0.03 $0.02
Retail Shares ....................... $0.03 $0.02
Group Retirement Plan Shares ........ $0.03 $0.02

(2) Total return would have been lower had the Adviser not waived or reimbursed certain expenses during the periods shown.
Total returns for periods of less than one year are not annualized.

The accompanying notes are an integral part of the financial statements.

</TABLE>

<PAGE>

<TABLE>
LIPPER U.S. EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD (UNAUDITED)
<CAPTION>

GROUP GROUP
RETIREMENT RETIREMENT
PREMIER SHARES PREMIER SHARES RETAIL SHARES RETAIL SHARES PLAN SHARES PLAN SHARES
-------------- -------------- ------------- ------------- ----------- -----------
FOR THE JANUARY 2, FOR THE JANUARY 5, FOR THE JANUARY 5,
SIX MONTHS 1995** SIX MONTHS 1996*** SIX MONTHS 1996***
ENDED TO ENDED TO ENDED TO
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996
-------------- -------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..... $11.38 $10.00 $11.38 $10.00 $11.38 $10.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) .............. 0.08 0.18 0.09 0.11 0.11 0.07
Net Realized and Unrealized Gain
on Investments ........................ 0.61 1.81 0.58 1.86 0.56 1.91
------ ------ ------ ------ ------ ------
Total From Investment Operations .... 0.69 1.99 0.67 1.97 0.67 1.98
------ ------ ------ ------ ------ ------
DISTRIBUTIONS:
Net Investment Income .................. -- (0.19) -- (0.17) -- (0.18)
Net Realized Gain ...................... -- (0.34) -- (0.34) -- (0.34)
In Excess of Net Realized Gain ......... -- (0.08) -- (0.08) -- (0.08)
------ ------ ------ ------ ------ ------
Total Distributions ................. -- (0.61) -- (0.59) -- (0.60)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ........... $12.07 $11.38 $12.05 $11.38 $12.05 $11.38
====== ====== ====== ====== ====== ======
TOTAL RETURN (2) ......................... 6.06% 19.81% 5.89% 19.62% 5.89% 19.69%
====== ====== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ........ $14,943 $15,098 $725 $613 $639 $452
Ratios After Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ......... 1.10%* 1.10%* 1.35%* 1.35%* 1.35%* 1.35%*
Net Investment Income to Average
Net Assets ........................... 1.49%* 1.68%* 1.21%* 1.31%* 1.31%* 1.29%*
Ratios Before Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ......... 1.90%* 2.28%* 2.08%* 2.75%* 2.11%* 2.39%*
Net Investment Income to Average
Net Assets ........................... 0.69%* 0.50%* 0.49%* (0.09)%* 0.55%* 0.25%*
Portfolio Turnover Rate .................. 66% 117% 66% 117% 66% 117%
Broker Commission Rate ................... $0.0487 $0.0445 $0.0487 $0.0445 $0.0487 $0.0445

- ----------------

* Annualized.

** Commencement of Fund Operations.

*** Initial offering of shares by the Fund.

(1) The effect to net investment income per share by voluntarily waived fees and reimbursed expenses were:

PERIOD ENDED PERIOD ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Premier Shares ...................... $0.04 $0.13
Retail Shares ....................... $0.06 $0.12
Group Retirement Plan Shares ........ $0.06 $0.06

(2) Total return would have been lower had the Adviser not waived or reimbursed certain expenses during the periods shown.
Total returns for periods of less than one year are not annualized.

The accompanying notes are an integral part of the financial statements.

</TABLE>

<PAGE>

<TABLE>
PRIME LIPPER EUROPE EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<CAPTION>

GROUP GROUP
RETIREMENT RETIREMENT
PREMIER SHARES PREMIER SHARES RETAIL SHARES RETAIL SHARES PLAN SHARES PLAN SHARES
-------------- -------------- ------------- ------------- ----------- -----------
FOR THE APRIL 1, FOR THE APRIL 11, FOR THE APRIL 12,
SIX MONTHS 1996** SIX MONTHS 1996*** SIX MONTHS 1996***
ENDED TO ENDED TO ENDED TO
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996
-------------- -------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ...... $11.25 $10.00 $11.25 $ 9.93 $11.24 $ 9.92
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss)(1) ......... 0.07 0.04 0.06 (0.01) 0.06 (0.02)
Net Realized and Unrealized Gain
on Investments ......................... 1.13 1.62 1.13 1.73 1.13 1.74
------ ------ ------ ------ ------ ------
Total From Investment Operations .... 1.20 1.66 1.19 1.72 1.19 1.72
------ ------ ------ ------ ------ ------
DISTRIBUTIONS:
Net Investment Income ................... -- (0.02) -- (0.01) -- (0.01)
Net Realized Gain ....................... -- (0.39) -- (0.39) -- (0.39)
------ ------ ------ ------ ------ ------
Total Distributions ................. -- (0.41) -- (0.40) -- (0.40)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ............ $12.45 $11.25 $12.44 $11.25 $12.43 $11.24
====== ====== ====== ====== ====== ======
TOTAL RETURN (2) .......................... 10.67% 16.68% 10.58% 17.37% 10.59% 17.40%
====== ====== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ......... $75,098 $62,942 $918 $609 $292 $195
Ratios After Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets .......... 1.60%* 1.60%* 1.85%* 1.85%* 1.85%* 1.85%*
Net Investment Income to Average
Net Assets ............................. 1.22%* 0.53%* 0.97%* (0.13)%* 0.97%* (0.43)%*
Ratios Before Expense Waiver and/or
Reimbursement
Expenses to Average Net Assets .......... 1.64%* 1.78%* 1.89%* 2.07%* 1.89%* 2.04%*
Net Investment Income to Average
Net Assets ............................. 1.18%* 0.35%* 0.93%* (0.35)%* 0.93%* (0.62)%*
Portfolio Turnover Rate ................... 39% 34% 39% 34% 39% 34%
Broker Commission Rate .................... $0.0507 $0.0746 $0.0507 $0.0746 $0.0507 $0.0746

- ----------------

* Annualized.

** Commencement of Fund Operations.

*** Initial offering of shares by the Fund.

(1) The effect to net investment income per share by voluntarily waived fees and reimbursed expenses were:

PERIOD ENDED PERIOD ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Premier Shares ........................... $0.00 $0.01
Retail Shares ............................ $0.00 $0.02
Group Retirement Plan Shares ............. $0.00 $0.01

(2) Total return would have been lower had the Adviser not waived or reimbursed certain expenses during the periods shown.
Total returns for periods of less than one year are not annualized.

The accompanying notes are an integral part of the financial statements.

</TABLE>

<PAGE>

THE LIPPER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

The Lipper Funds, Inc. (the "Company") is registered under the Investment
Company Act of 1940 as an open-end management investment company and was
incorporated on August 22, 1995. As of June 30, 1997 the Company was comprised
of three diversified portfolios (each referred to as the "Fund" and collectively
as the "Funds"): Lipper High Income Bond Fund, Lipper U.S. Equity Fund, and
Prime Lipper Europe Equity Fund. The Company offers the shares of each Fund in
three classes: Premier Shares, Retail Shares and Group Retirement Plan Shares.
The Lipper U.S. Equity Fund commenced investment operations on January 2, 1996.
The Lipper High Income Bond Fund and Prime Lipper Europe Equity Fund were both
funded as registered investment companies on April 1, 1996 with a contribution
of securities to each Fund from a corresponding limited partnership
(see Note G).

The Lipper High Income Bond Fund seeks high current income by investing
primarily in high yield securities with maturities of less than 10 years. The
Lipper U.S. Equity Fund seeks capital appreciation by investing primarily in a
diversified portfolio of common stocks of U.S. issuers with market
capitalization in excess of $500 million. The Prime Lipper Europe Equity Fund
seeks capital appreciation by investing primarily in a diversified portfolio of
common stocks of issuers located in Europe that have strong levels of growth
based on such factors as liquidity, financial strength, earnings growth,
industry position and management.

A. SIGNIFICANT ACCOUNTING POLICIES. The following significant accounting
policies are in conformity with generally accepted accounting principles for
investment companies. Such policies are consistently followed by the Funds in
the preparation of their financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.

1. SECURITY VALUATION: Securities listed on a securities exchange for which
market quotations are readily available are valued at the last sale price as of
the close of the exchange on the day the valuation is made or, if no sale
occurred on such day, at the mean of the closing bid and asked prices on such
day. Price information on listed securities is taken from the exchange where the
security is primarily traded. Over-the-counter and unlisted securities are
valued at the bid price. Fixed income securities are stated on the basis of
valuations provided by brokers and/or a pricing service which uses information
with respect to transactions in fixed income securities, quotations from
dealers, market transactions in comparable securities and various relationships
between securities in determining value. Short-term investments that have
remaining maturities of sixty days or less at time of purchase are valued at
amortized cost, if it approximates market value. The value of securities for
which no quotations are readily available is determined in good faith at fair
value using methods determined by the Board of Directors.

2. FEDERAL INCOME TAXES: It is each Fund's intention to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code and
to distribute all of its taxable income. Accordingly, no provision for Federal
income taxes is required in the financial statements. The Prime Lipper Europe
Equity Fund may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income earned or reported and are accrued when
the related income is earned.

Net capital and net currency losses incurred after October 31 and within
the taxable year are deemed to arise on the first business day of the Fund's
next taxable year. For the period from November 1, 1996 to December 31, 1996 the
U.S. Equity Fund and the Prime Lipper Equity Fund incurred and elected to defer
until January 1, 1997 for U.S. Federal income tax purposes net capital and net
currency losses of approximately $85,252 and $6,147, respectively.

At June 30, 1997 cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:

NET
APPRECIATION
FUND COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
---- ---- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Lipper High Income Bond Fund ................... $116,741,063 $ 2,616,458 $ (17,642) $ 2,598,816
Lipper U.S. Equity Fund ........................ 13,943,993 2,572,684 (148,883) 2,423,801
Prime Lipper Europe Equity Fund ................ 56,475,681 18,374,812 (477,059) 17,897,753

</TABLE>

<PAGE>

THE LIPPER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

3. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and
records of the Funds are maintained in U.S. dollars. Foreign currency amounts
are translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars quoted by a major U.S. or foreign bank. Although
the net assets of the Funds are presented at the foreign exchange rates and
market values at the close of the period, the Funds do not isolate that portion
of operations arising as a result of changes in the foreign exchange rates from
the fluctuations arising from changes in the market prices of the securities
held at period end. Similarly, the Funds do not isolate the effect of changes in
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and balances.
Pursuant to U.S. Federal income tax regulations, gains and losses from certain
foreign currency transactions are treated as ordinary income for U.S. Federal
income tax purposes.

Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign currency
exchange contracts, dispositions of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions and
the difference between the amount of investment income and foreign withholding
taxes recorded on the Funds' books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized currency gains (losses) from valuing
foreign currency denominated assets and liabilities at period end exchange rates
are reflected as a component of unrealized appreciation (depreciation) in the
Statement of Asset and Liabilities. The change in net unrealized currency gains
(losses) for the period is reflected in the Statement of Operations.

Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. dollar
denominated transactions as a result of, among other factors, the possibility of
lower levels of governmental supervision and regulation of foreign securities
markets and the possibility of political or economic instability.

4. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Prime Lipper Europe
Equity Fund may enter into forward foreign currency exchange contracts to
attempt to protect securities and related receivables and payables against
changes in future foreign currency exchange rates. A forward foreign currency
exchange contract is an agreement between two parties to buy or sell currency at
a set price on a future date. The market value of the contract will fluctuate
with changes in currency exchange rates. The contract is marked-to-market daily
using the forward rate and the change in market value is recorded by the Fund as
unrealized gain or loss. The Fund records realized gains or losses, when the
contract is closed, equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed. Risk may arise
upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and is generally limited to
the amount of the unrealized gain on the contracts, if any, at the date of
default. Risks may also arise from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.

5. DISTRIBUTIONS TO SHAREHOLDERS: The Lipper High Income Fund intends to
distribute substantially all of its net investment income monthly. The Lipper
U.S. Equity and Prime Lipper Europe Equity Funds intend to distribute
substantially all of their net investment income annually. Net realized capital
gains, if any, will be distributed at least annually by each Fund. All
distributions are recorded on ex-dividend date.

Income and capital gains distributions are determined in accordance with
U.S. Federal income tax regulations which may differ from generally accepted
accounting principles. Those differences are primarily due to differing book and
tax treatments for deferred organization costs, foreign currency transactions,
post-October losses and losses due to wash sales transactions.

Permanent book and tax differences relating to shareholder distributions
may result in reclassifications to undistributed net investment income (loss),
undistributed realized net gain (loss) and paid in capital.

<PAGE>

THE LIPPER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

6. PURCHASED AND WRITTEN OPTIONS: Each Fund may purchase or write put and
call options on securities, securities indices, currencies and other financial
instruments. A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, index or other instrument at the exercise price. The Fund may purchase
a put option on a security to protect its holdings in the underlying instrument,
or a similar instrument, against a substantial decline in the market value of
such instrument by giving the Fund the right to sell the instrument at the
option exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to sell,
the underlying instrument at the exercise price. The purchase of a call option
on a security, index or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase the
instrument. Each Fund may purchase a put or call option to close out a written
put or call option or write a put or call option to close out a purchased put or
call option. This closing out would be in lieu of taking or making delivery of
the underlying securities.

Options contracts are valued daily and unrealized appreciation or
depreciation is recorded based upon the last sales price on the principal
exchange on which the option is traded. A Fund will realize a gain or loss upon
the expiration or closing of the option transaction. Premiums received or paid
from the writing or purchasing of options are offset against the proceeds of
securities sold or added to the cost of securities purchased upon the exercise
of the option. Upon expiration of a purchased or written option, the premium is
recorded as a realized loss or gain, respectively. Possible losses on purchased
options can not exceed the total premium paid.

Use of written put and call options could result in losses to a Fund, force
the purchase or sale of portfolio securities at inopportune times or for prices
higher or lower than current market values, or cause the Fund to hold a security
it might otherwise not purchase or sell. Losses which may result from the use of
options will reduce a Fund's net asset value, and possibly income, and such
losses may be greater than if options had not been used.

During the period ended June 30, 1997 the Lipper U.S. Equity Fund
participated in writing call options. The Fund had option activity as follows:

NUMBER OF
CONTRACTS PREMIUM
--------- --------
Options outstanding at December 31, 1996 ............ 348 $ 94,792
Options written during the period ................... 1,378 456,249
Options closed during the period .................... (1,296) (344,260)
------ --------
Options outstanding as of June 30, 1997 ............. 430 $206,781
====== ========

7. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains and
losses on the sale of investment securities are based on the specific
identification method. Dividend income is recorded on the ex-dividend date.
Interest income is recognized on the accrual basis. Discounts and premiums on
securities purchased are amortized according to the effective yield method over
their respective lives. Income, expenses (other than class specific expenses)
and realized and unrealized gains or losses that are directly attributable to a
Fund are charged to that Fund and expenses directly attributable to a particular
class of shares in a fund are charged to such class of shares based upon their
relative net assets.

8. ORGANIZATION COSTS: Costs incurred by the Funds in connection with their
organization have been deferred and are being amortized on a straight-line basis
over a five year period.

B. ADVISORY SERVICES: Lipper & Company, L.L.C. (the "U.S. Adviser") serves as
the investment adviser to the Lipper High Income Bond Fund and Lipper U.S.
Equity Fund. Prime Lipper Asset Management (the "European Adviser" and together
with the U.S. Adviser, the "Advisers") serves as the investment adviser to the
Prime Lipper Europe Equity Fund. Under the terms of separate Investment Advisory
Agreements (the "Agreements"), the

<PAGE>

THE LIPPER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

Advisers provide investment advisory services for a fee calculated at an annual
rate of 0.75%, 0.85% and 1.10% of the average daily net assets of the Lipper
High Income Bond, Lipper U.S. Equity and Prime Lipper Europe Equity Funds,
respectively. From time to time, the Advisers may voluntarily waive, for a
period of time, all or a portion of the fee to which they are entitled under
their Agreements with the Funds. Until further notice, the Advisers have agreed
to voluntarily waive fees and reimburse expenses to the extent necessary to
maintain an annual operating expense ratio to average net assets of not more
than the following:

GROUP
PREMIER SHARES RETAIL SHARES RETIREMENT SHARES
-------------- ------------- ------------------
<S> <C> <C> <C>
Lipper High Income Bond Fund ........................ 1.00% 1.25% 1.25%
Lipper U.S. Equity Fund ............................. 1.10% 1.35% 1.35%
Lipper Europe Equity Fund ........................... 1.60% 1.85% 1.85%

</TABLE>

C. ADMINISTRATIVE SERVICES: Chase Global Funds Services Company, a wholly owned
subsidiary of The Chase Manhattan Bank ("Chase"), serves as the Company's
administrator (the "Administrator") pursuant to an Administrative Agreement.
Under the Administrative Agreement, the Administrator provides administrative,
fund accounting, dividend disbursing and transfer agent services to the Company.
As compensation for its services, the Company pays the Administrator a monthly
fee at the annual rate of 0.20% of the Company's average daily net assets up to
and including $200 million; 0.10% of the Company's average daily net assets in
excess of $200 million up to and including $400 million and 0.05% of the
Company's average daily net assets in excess of $400 million. Under a separate
agreement Chase also acts as the Company's custodian for each Fund's assets. The
Company is subject to a minimum annual fee per Fund of $70,000 per year. Under a
separate agreement, Chase also acts as the Company's custodian for each Fund's
assets.

D. DIRECTORS' FEES: The Company pays each Director who is not a director,
officer or employee of the Advisers or any of their affiliates, a fee of $8,000
per annum plus $500 per quarterly meeting attended and reimbursements for
expenses incurred in attending Board meetings.

E. DISTRIBUTION SERVICES: Lipper & Company, L.P. serves as the Company's
distributor (the "Distributor"). The Distributor is entitled to receive an
annual distribution fee payable from the net assets of each Fund's Retail Shares
of up to 0.25% of the average daily net assets of such Fund's Retail Shares. The
Company has entered into servicing agreements with respect to each Fund's Group
Retirement Plan Shares. Under such servicing agreements, each servicing agent
will be entitled to receive from the net assets of each Fund's Group Retirement
Plan Shares, an annual servicing fee of up to 0.25% of the average daily net
assets of such Fund's Group Retirement Plan Shares for certain support services
which supplement the services provided by the Company's administrator and
transfer agent.

F. PURCHASES AND SALES: For the period ended June 30, 1997, the cost of
purchases and proceeds of sales for investment securities other than long-term
U.S. Government and short-term securities were:

FUND PURCHASES SALES
---- --------- -----
Lipper High Income Bond Fund ............... $69,477,969 $81,142,019
Lipper U.S. Equity Fund .................... 3,414,113 4,557,236
Prime Lipper Europe Equity Fund ............ 17,820,929 13,115,531

There were no long-term purchases or sales of U.S. Government securities.

<PAGE>

THE LIPPER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)

G. CAPITAL SHARE TRANSACTIONS: Capital share transactions for the period ended
June 30, 1997 for each Fund, by class of shares, were as follows:

LIPPER LIPPER PRIME LIPPER
HIGH INCOME U.S. EQUITY EUROPE EQUITY
BOND FUND FUND FUND
----------- ----------- -------------
<S> <C> <C> <C>
PREMIER SHARES:
Issued--Regular ............................................ 1,875,400 231,071 833,979
--Distributions Reinvested .............................. 324,448 -- --
--Contribution from Partnerships ........................ -- -- --
Redeemed ................................................... (3,921,939) (319,474) (398,182)
---------- -------- --------
Net Increase (Decrease) .................................... (1,722,091) (88,403) 435,797
---------- -------- --------
RETAIL SHARES:
Issued--Regular ............................................ 109,952 34,123 19,657
--Distributions Reinvested .............................. 3,958 -- --
Redeemed ................................................... (850) (27,844) --
---------- -------- --------
Net Increase (Decrease) .................................... 113,060 6,279 19,657
---------- -------- --------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ............................................ 91,450 54,924 32,692
--Distributions Reinvested .............................. 9,846 -- --
Redeemed ................................................... (72,343) (41,627) (26,544)
---------- -------- --------
Net Increase (Decrease) .................................... 28,953 13,297 6,148
---------- -------- --------
</TABLE>

H. OTHER: At June 30, 1997, the percentage of total shares outstanding held by
record shareholders owning 10% or greater of the aggregate total shares for each
fund was as follows:

NO. OF %
SHAREHOLDERS OWNERSHIP
------------ ---------
<S> <C> <C>
Lipper High Income Fund
Premier Shares .................................... 2 25.14%
Retail Shares ..................................... 1 13.90%
Group Retirement Shares ........................... 2 90.30%
Lipper U.S. Equity Fund
Premier Shares .................................... 2 68.42%
Retail Shares ..................................... 3 66.37%
Group Retirement Shares ........................... 2 91.16%
Prime Lipper Europe Equity Fund
Premier Shares .................................... 1 10.95%
Retail Shares ..................................... 3 68.10%
Group Retirment Plan Shares ....................... 1 91.34%

</TABLE>

The Lipper High Income Bond Fund currently invests in high yield lower
grade debt. The market values of these higher yielding debt securities tend to
be more sensitive to economic conditions and individual corporate developments
than do higher rated securities.

<PAGE>

BOARD OF DIRECTORS KENNETH LIPPER
- ------------------ Director, President and Chairman

ABRAHAM BIDERMAN
Director and Executive Vice President

STANLEY BREZENOFF
Director

MARTIN MALTZ
Director

IRWIN RUSSELL
Director

INVESTMENT ADVISERS Lipper & Company, L.L.C and
- ------------------- Prime Lipper Asset Management
101 Park Avenue, 6th floor
New York, NY 10178
(212) 883-6333

ADMINISTRATOR AND Chase Global Funds Services Company
TRANSFER AGENT 73 Tremont Street, 9th floor
- ------------------- Boston, MA 02108
1-800-LIPPER9

CUSTODIAN The Chase Manhattan Bank
- --------- 770 Broadway
New York, NY 10003

LEGAL COUNSEL Simpson Thacher & Bartlett
- ------------- 425 Lexington Avenue
New York, NY 10017

INDEPENDENT ACCOUNTANT Price Waterhouse LLP
- ---------------------- 1177 Avenue of the Americas
New York, NY 10036