LIPPER FUNDS INC, N-30D, 1997-03-06

LIPPER FUNDS INC
N-30D, 1997-03-06

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--------------------------
THE LIPPER FUNDS, INC.
--------------------------

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

Annual Report
================================================================================
December 31, 1996

<PAGE>

-----------------------
TABLE OF CONTENTS
-----------------------

Shareholder's Letter .................................................. 1-7

Portfolio of Investments
Lipper High Income Bond Fund ........................................ 8-13
Lipper U.S. Equity Fund ............................................. 14
Prime Lipper Europe Equity Fund ..................................... 15-18

Statement of Assets and Liabilities ................................... 19

Statement of Operations ............................................... 20

Statement of Changes in Net Assets .................................... 21

Financial Highlights
Lipper High Income Bond Fund ........................................ 22
Lipper U.S. Equity Fund ............................................. 23
Prime Lipper Europe Equity Fund ..................................... 24

Notes to Financial Statements ......................................... 25-29

Report of Independent Accountants ..................................... 30

Tax Information ....................................................... 30

<PAGE>

THE LIPPER FUNDS, INC. ANNUAL REPORT
December 31, 1996

Dear Shareholder:

We are pleased to present the first Annual Report for The Lipper Funds,
Inc. for the fiscal period ended December 31, 1996. During the first six months
of the year, The Lipper Funds successfully funded and launched three investment
portfolios--The Lipper U.S. Equity Fund, The Lipper High Income Bond Fund and
The Prime Lipper Europe Equity Fund--as regulated investment companies. 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 since commencement of their status as investment
companies in 1996, and reviews the performance of each of the Funds (including,
where applicable, predecessor partnerships) for the fiscal period ended December
31, 1996.

Funding of the Investment Portfolios:

The Lipper U.S. Equity Fund was funded on January 2, 1996 by an initial
cash investment. Both the Lipper High Income Bond Fund and Prime Lipper Europe
Equity Fund were funded on April 1, 1996 with an in-kind transfer of securities
from their predecessor limited partnerships managed by Lipper & Company, L.P.
and Prime Lipper Asset Management, respectively. In exchange for their limited
partnership interests, each limited partner received Premier Shares in the
respective new mutual fund portfolio equal to their previous limited partnership
interest.

The Lipper High Income Bond Fund and the Prime Lipper Europe Equity Fund
were designed to mirror the former limited partnerships--with identical
investment objectives and management teams. These new mutual fund portfolios are
being managed in the same manner as their predecessor limited partnerships. As a
result, the performance information presented for these Funds includes the use
of the historical performance records relating to the predecessor limited
partnerships.

Assets under management increased in all three Funds during 1996: The U.S.
Equity Fund increased from total net assets of $10.1 million on January 2, 1996
to $16.2 million on December 31, 1996; The Lipper High Income Bond Fund grew
from $74.5 million on April 1, 1996 to $106 million in total net assets as of
December 31, 1996; and the Prime Lipper Europe Equity Fund increased from $47.2
million on April 1, 1996 to $63.7 million on December 31, 1996.

PERFORMANCE AND PORTFOLIO REVIEW

Performance as discussed herein reflects the performance of each Fund's
Premier class of shares. Performance for the Funds' Retail and Group Retirement
Plan Shares (illustrated on pages 5-7) differs from Premier Shares performance
due 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.

In 1996, high yield investors benefited from continued strength in the U.S.
economy coupled with strong investor demand, and a low inflation, low interest
rate environment. Bond prices which suffered during the first half of the year,
rebounded during the second half as fears of inflation and rising interest rates
dissipated. High yield investors additionally benefited from the low interest
rate environment in the form of strong investor demand, as many investors
crossed over to high yield investments from investment grade issues in search of
incremental yield.

The Lipper High Income Bond Fund (including its predecessor partnership)
fared well in this environment, generating a total return for the twelve months
ended December 31, 1996 of 11.0%. The Fund performed well against its benchmark
index, the Lehman Intermediate BB Index, which generated a 9.40% return. During
the period, the

<PAGE>

Fund benefited from a number of factors including price appreciation resulting
from several credit upgrades, merger activity associated with particular
holdings, and in more general terms, from the improved earnings and credit
outlook related to the strength of the overall economy. During 1996, the Fund
also benefited from its participation in a number of the quality new issues
which came to market.

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 next year, and interest rates should stay at or near current
levels.

In 1997, the 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. For the year ahead, we expect to shorten the duration of the
portfolio as spreads for longer dated paper have tightened significantly. New
investments will likely be concentrated in shorter-term credits which currently
offer more attractive yield spreads and reduce the portfolio's exposure to
changes in interest rates. The Fund will also look to increase its exposure to
select, well-positioned companies within a number of industries which have
recently come under pressure.

The Lipper U.S. Equity Fund

The Lipper U.S. Equity Fund employs a value-oriented investment strategy
seeking long-term capital appreciation in the United States equity markets. The
Fund seeks to accomplish its objective by investing primarily in companies with
market capitalizations in excess of $500 million which, in our opinion, are
currently undervalued by the investment community.

The Lipper U.S. Equity Fund generated a total return of 19.81% for the
period ended December 31, 1996. For comparison purposes, the S&P 500 Index had a
total return of 22.96% for the same period.

U.S. equity investors experienced another good year in 1996 as the equity
markets posted record highs throughout most of the second half of the year.
Stock prices were propelled to new highs based on a number of factors, including
evidence of continued moderate economic growth, achieved without evidence of
inflationary pressures, strong consumer confidence, and positive corporate
earnings. Blue chip, large capitalization stocks, in particular, benefited from
strong demand as investors continued to pour record levels of capital into U.S.
equity mutual funds.

Given the record valuations for U.S. stocks, both at the beginning, and
throughout most of the year, we took a cautious approach to investing the U.S.
Equity Fund's initial capital in 1996 and strictly adhered to our investment
discipline of selecting only those issues which offered attractive earnings
growth prospects at a "reasonable" price. This strategy resulted in a cash and
marketable securities position which averaged approximately 39% for the period
ended December 31, 1996.

Despite our conservative approach, the Fund performed well during the
period due to its primary focus on well-positioned companies within the
financial services, telecommunications, and technology sectors. The Fund
particularly benefited from its largest single position held for the period,
IBM, which increased from $91 per share in January 1996 to over $151 at the end
of December 1996 due to an improved earnings outlook and below market average
valuation.

The environment for U.S. stocks continues to appear positive in several key
areas, including moderate economic growth, low interest rates, strong consumer
confidence and continued strong capital inflows into the equity markets. We
remain cautiously optimistic about the U.S. market as a whole over the next
year. 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, even in the current market
environment.

As of December 31, 1996, the Fund remains overweighted relative to the S&P
500 Index in the telecommunications, banking, technology and basic materials
industry groups. 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.

2
<PAGE>

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 1996, European equity markets posted attractive returns for U.S.
investors, reflecting a positive environment for European stocks. Factors which
contributed to this environment included ongoing economic recovery, a general
improvement in corporate earnings, low inflation rates, and lower interest rates
across the region. The Prime Lipper Europe Equity Fund performed well in this
environment, generating a total return of 2l .92% for the twelve months ended
December 31, 1996. The Fund's performance compared favorably to its benchmark,
the Morgan Stanley Capital International ("MSCI") Europe Index which posted a
total return of 21.57% for the same period. The Fund outperformed its benchmark
during the period due to stock selection as opposed to sector or country
allocation. U.S. dollar-based performance was strong for the year despite a
continued strengthening of the U.S. dollar against most European currencies.

Based on the progressive changes occurring today, we believe that the
European markets have only just begun to reflect the positive long-term
expectations for European Monetary Union and the forthcoming economic
development and integration of the region. In the race toward European Unity,
each country is restructuring its social security system, increasing flexibility
in its labor markets, and reducing state ownership in key industries. Interest
rates are expected to decline further before leveling off, particularly in those
countries where the rates set to finance government debt are being drastically
reduced.

In 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 a 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. In addition, on a price to earnings basis, Europe is currently
trading at a lower value than 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. We target
those companies which offer 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.

Going forward, competition, both regionally and globally will play an
increasing role in European corporate profits and earnings growth. As a result,
the Fund is focusing on select European companies offering advanced and
innovative products and services such as telecommunications and pharmaceuticals,
which we believe can successfully compete on both a regional and global basis.
The Fund is also invested in well-positioned data processing, communications,
infrastructure and outsourcing companies which we believe are currently
undergoing corporate restructuring in order to improve efficiency in operations
and production.

The Fund's country allocation decisions typically reflect the equity market
capitalization across the region, with the United Kingdom representing the
largest allocation at approximately 36%. Given our outlook for 1997, the Fund is
slightly over-weighting its allocation to Germany and Italy, which we believe
offer the strongest growth prospects.

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.

The Advisor: The Prime Lipper Europe Equity Fund has been managed since its
inception as a limited partnership by Prime Lipper Asset Management, a joint
venture between Lipper & Company and Prime S.p.A., an Italian asset management
firm.

As discussed in the recent proxy statement submitted to shareholders of the
Fund, Prime S.p.A. was recently sold by its parent company, Fiat S.p.A. to
Assicurazioni Generali S.p.A., Italy's largest insurance company. The sale
resulted in an indirect change of control of the investment advisor under the
Investment Company Act of 1940, which

3
<PAGE>

governs the Fund's operations. It is expected that this change of control at the
parent level will have no material effect on the organization, day-to-day
management, or operations of Prime Lipper Asset Management, or its services as
investment advisor to the Fund. We appreciate Fiat's commitment to Prime Lipper
Asset Management over the years and look forward to a positive new relationship
with Generali.

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, and
look forward to a successful long-term relationship.

Sincerely,

/s/ Kenneth Lipper

KENNETH LIPPER
President and Chairman of the Board

4
<PAGE>

THE LIPPER HIGH INCOME BOND FUND PERFORMANCE

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED DECEMBER 31, 1996*
- --------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- --------------------------------------------------------------------------------
PREMIER SHARES 11.00% 10.22%
- --------------------------------------------------------------------------------
RETAIL SHARES 10.82% 10.18%
- --------------------------------------------------------------------------------
GROUP RETIREMENT PLAN SHARES 10.77% 10.17%
- --------------------------------------------------------------------------------

LIPPER HIGH INCOME BOND FUND--PREMIER SHARES*+

Comparison of a $10,000 Investment in the Fund with the Lehman Intermediate BB
Index

PERIODS ENDED DECEMBER 31

[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]

+ The minimum investment for Premier Shares is $1,000,000.

Past performance is not indicative of future results. Investment return and
principal value will fluctuate with market conditions. When shares are redeemed,
they may be worth more or less than their original cost.

* This chart illustrates comparative performance of $10,000 invested in
Premier Shares of The Lipper High Income Bond Fund with the Lehman Intermediate
BB Bond Index. The performance information presented reflects performance of a
predecessor partnership for the period from commencement of the partnership's
investment operations on February 1, 1992 through April 1, 1996, and the
performance of the Fund as a registered investment company, for the period April
1, 1996 through December 31, 1996. As a registered investment company under the
Investment Company Act of 1940, the Fund is subject to certain restrictions
under the Act and the Internal Revenue Code to which its corresponding
partnership was not subject. Had the partnership been registered under the Act
and subject to the provisions of the Code, its investment performance may have
been adversely affected. Fee waivers and reimbursements were in effect in 1996
for the Fund without which total returns would have been lower.

The Lipper High Income Bond Fund's Retail and Group Retirement Plan Shares
were introduced on April 11, and April 12, 1996, respectively. Performance
information presented for the Retail and Group Retirement Plan Shares prior to
their introduction dates reflects the performance of the Fund's Premier Shares
which are not subject to the shareholder servicing or distribution fees borne by
these classes of shares. The Fund's performance assumes the reinvestment of all
dividends and distributions. Fee waivers and reimbursements are currently in
effect for the Fund without which total returns would have been lower.

The comparative Lehman Intermediate BB Index has not been adjusted to
reflect expenses or other fees that the SEC requires to be reflected in the
Fund's performance. The fees, if reflected, would reduce the performance. The
comparative index has been adjusted to reflect reinvestment of dividends and
disbursements on securities in the index.

The Lehman Intermediate BB Index is an unmanaged index comprised of
intermediate-term, bonds. Please note that one cannot invest in an unmanaged
index.

5
<PAGE>

THE LIPPER U.S. EQUITY FUND PERFORMANCE

- --------------------------------------------------------------------------------
TOTAL RETURN
FOR PERIOD ENDED DECEMBER 31, 1996*
- --------------------------------------------------------------------------------
SINCE INCEPTION*
- --------------------------------------------------------------------------------
PREMIER SHARES 19.81%
- --------------------------------------------------------------------------------
RETAIL SHARES 19.62%
- --------------------------------------------------------------------------------
GROUP RETIREMENT PLAN SHARES 19.69%
- --------------------------------------------------------------------------------

LIPPER U.S. EQUITY FUND--PREMIER SHARES*+

Comparison of a $10,000 Investment in the Fund with the Standard & Poor's 500
Index

PERIOD ENDED DECEMBER 31

[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]

+ The minimum investment for Premier Shares is $1,000,000.

* This chart illustrates comparative performance of $10,000 invested in
Premier Shares of The Lipper U.S. Equity Fund with the Standard & Poor's ("S&P")
500 Index from the commencement of the Fund's investment operations on January
2, 1996, to December 31, 1996. The Lipper U.S. Equity Fund's Retail and Group
Retirement Plan Shares were introduced on January 4, 1996. Performance
information presented for the Retail and Group Retirement Plan Shares prior to
their introduction dates reflects the performance of the Fund's Premier Shares
which are not subject to the shareholder servicing or distribution fees borne by
these classes of shares. The Fund's performance assumes the reinvestment of all
dividends and distributions. Fee waivers and reimbursements are currently in
effect for the Fund without which total returns would have been lower.

The comparative S&P 500 Index has not been adjusted to reflect expenses or
other fees that the SEC requires to be reflected in the Fund's performance. The
fees, if reflected, would reduce the performance. The comparative index has been
adjusted to reflect reinvestment of dividends on securities in the index.

The S&P 500 Index is an unmanaged index composed of 400 industrial, 40
financial, 40 utilities and 20 transportation stocks. Please note that one
cannot invest in an unmanaged index.

6
<PAGE>

THE PRIME LIPPER EUROPE EQUITY FUND PERFORMANCE

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED DECEMBER 31, 1996*
- --------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- --------------------------------------------------------------------------------
PREMIER SHARES 21.92% 11.50%
- --------------------------------------------------------------------------------
RETAIL SHARES 21.78% 11.48%
- --------------------------------------------------------------------------------
GROUP RETIREMENT PLAN SHARES 21.69% 11.46%
- --------------------------------------------------------------------------------

PRIME LIPPER EUROPE EQUITY FUND--PREMIER SHARES*+

Comparison of a $10,000 Investment in the Fund with the MSCI Europe Index

PERIODS ENDED DECEMBER 31

[GRAPHICAL REPRESENTAION OF MOUNTAIN}

+ The minimum investment for Premier Shares is $1,000,000.

* This chart illustrates comparative performance of $10,000 invested in
Premier Shares of The Prime Lipper Europe Equity Fund with the Morgan Stanley
Capital International (MSCI) Europe Index. The performance information presented
reflects performance of a predecessor partnership for the period from
commencement of the partnership's investment operations on January 13, 1992
through April 1, 1996, and the performance of the Fund as a registered
investment company for the period from April 1, 1996 through December 31, 1996.
As a registered investment company under the Investment Company Act of 1940, the
Fund is subject to certain restrictions under the Act and the Internal Revenue
Code to which its corresponding partnership was not subject. Had the partnership
been registered under the Act and subject to the provisions of the Code, its
investment performance may have been adversely affected. Fee waivers and
reimbursements were in effect in 1996 for the Fund without which total returns
would have been lower.

The Prime Lipper Europe Equity Fund's Retail and Group Retirement Plan
Shares were introduced on April 11, and April 12, 1996, respectively.
Performance information presented for the Retail and Group Retirement Plan
Shares prior to their introduction dates reflects the performance of the Fund's
Premier Shares which are not subject to the shareholder servicing or
distribution fees borne by these classes of shares. The Fund's performance
assumes the reinvestment of all dividends and distributions. Fee waivers and
reimbursements are currently in effect for the Fund without which total returns
would have been lower.

The comparative MSCI Europe Index has not been adjusted to reflect expenses
or other fees that the SEC requires to be reflected in the Fund's performance.
The fees, if reflected, would reduce the performance of the comparison index
quoted. The comparative index has been adjusted to reflect reinvestment of
dividends and disbursements on securities in the index.

The MSCI Europe Index is an unmanaged index comprised of European common
equities. Please note that one cannot invest in an unmanaged index.

7
<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996

FACE
AMOUNT VALUE+
---------- ------------
CORPORATE BONDS (87.5%)
AUTO MANUFACTURING & RELATED (4.8%)
APS, Inc.
11.875%, 01/15/06 ............................. $1,000,000 $ 1,087,500
Aetna Industries, Inc.
11.875%, 10/01/06 ............................. 1,000,000 1,080,000
Hayes Wheels International, Inc.
11.00%, 07/15/06 .............................. 1,250,000 1,362,500
Speedy Muffler King, Inc.
10.875%, 10/01/06 ............................. 1,000,000 1,075,000
Walbro Corp., Series B
9.875%, 07/15/05 .............................. 500,000 513,750
------------
5,118,750
------------
BEVERAGES & BOTTLING (0.6%)
++Delta Beverage Group
9.75%, 12/15/03 ............................... 650,000 669,500
------------
CABLE (7.9%)
Cablevision Systems Corp.
10.75%, 04/01/04 .............................. 2,000,000 2,075,000
Comcast Corp.
10.25%, 10/15/01 .............................. 750,000 800,625
Fundy Cable Ltd.
11.00%, 11/15/05 .............................. 750,000 796,875
Rogers Communications, Inc.
10.875%, 04/15/04 ............................. 1,500,000 1,586,250
Storer Communications, Inc.
10.00%, 05/15/03 .............................. 1,000,000 1,005,000
Telewest Communications plc
9.625%, 10/01/06 .............................. 1,500,000 1,531,875
Videotron Ltd.
10.25%, 10/15/02 .............................. 500,000 533,750
------------
8,329,375
------------
CAPITAL GOODS, EQUIPMENT & OTHER MANUFACTURING (5.7%)
Communications & Power Industries, Series B
12.00%, 08/01/05 .............................. 625,000 701,562
IDEX Corp.
9.75%, 09/15/02 ............................... 250,000 261,250
++International Knife & Saw, Inc.
11.375%, 11/15/06 ............................. 800,000 828,000
Magnetek, Inc.
10.75%, 11/15/98 .............................. 2,250,000 2,362,500
Sequa Corp.
9.625%, 10/15/99 .............................. 1,850,000 1,919,375
------------
6,072,687
------------

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

8
<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1996

FACE
AMOUNT VALUE+
---------- ------------
CHEMICALS (2.2%)
Plastic Specialties and Technologies, Inc.
11.25%, 12/01/03 .............................. $1,000,000 $ 1,055,000
Sifto Canada, Inc.
8.50%, 07/15/00 ............................... 1,250,000 1,243,750
------------
2,298,750
------------
COMMERCIAL SERVICES (3.2%)
Cort Furniture Rental
12.00%, 09/01/00 .............................. 915,000 1,021,369
Host Mar Travel Plaza, Class B
9.50%, 05/15/05 ............................... 1,500,000 1,571,250
++Rose Hills Acquisition
9.50%, 11/15/04 ............................... 750,000 768,750
------------
3,361,369
------------
CONSUMER PRODUCTS (4.0%)
Coty, Inc.
10.25%, 05/01/05 .............................. 500,000 542,500
Harman International
12.00%, 08/01/02 .............................. 300,000 328,500
Herff Jones, Inc.
11.00%, 08/15/05 .............................. 1,000,000 1,081,250
Sealy Corp.
9.50%, 05/01/03 ............................... 1,045,000 1,055,450
Selmer Co., Inc.
11.00%, 05/15/05 .............................. 500,000 547,500
@ Sola Group Ltd.
6.00%, 12/15/03 ............................... 750,000 728,437
------------
4,283,637
------------
CONTAINER/PACKAGE MANUFACTURING (1.5%)
Owens-Illinois, Inc.
10.50%, 06/15/02 .............................. 750,000 796,875
10.00%, 08/01/02 .............................. 800,000 840,000
------------
1,636,875
------------
ENERGY (11.3%)
AES Corp.
9.75%, 06/15/00 ............................... 1,225,000 1,275,531
Coda Energy, Inc.
10.50%, 04/01/06 .............................. 500,000 531,250
Ferrell Gas Inc.
10.00%, 08/01/01 .............................. 1,800,000 1,901,250
Global Marine, Inc.
12.75%, 12/15/99 .............................. 1,250,000 1,350,000
Gulf Canada Resources Ltd.
9.25%, 01/15/04 ............................... 1,000,000 1,062,500

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

9
<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1996

FACE
AMOUNT VALUE+
---------- ------------
ENERGY (11.3%) (Continued)
Nuevo Energy Co.
12.50%, 06/15/02 .............................. $ 525,000 $ 561,750
9.50%, 04/15/06 ............................... 1,000,000 1,065,000
++Parker Drilling Corp.
9.75%, 11/15/06 ............................... 1,000,000 1,055,000
United Meridan Corp.
10.375%, 10/15/05 ............................. 1,000,000 1,102,500
Veritas DGC, Inc.
9.75%, 10/15/03 ............................... 1,000,000 1,030,000
Vintage Petroleum
9.00%, 12/15/05 ............................... 1,000,000 1,032,500
------------
11,967,281
------------
ENTERTAINMENT (1.0%)
AMF Group, Inc., Series B
10.875%, 03/15/06 ............................. 1,000,000 1,057,500
------------
FINANCIAL INSTITUTIONS (1.0%)
Navistar Financial Corp.
8.875%, 11/15/98 .............................. 1,000,000 1,013,750
------------
FOOD & FOOD SERVICES (3.8%)
Canandaigua Wine, Inc.
8.75%, 12/15/03 ............................... 1,000,000 970,000
Carrols Corp.
11.50%, 08/15/03 .............................. 750,000 798,750
Keebler Corp.
10.75%, 07/01/06 .............................. 375,000 408,750
Rykoff Sexton, Inc.
8.875%, 11/01/03 .............................. 1,000,000 950,000
SC International Services, Inc.
13.00%, 10/01/05 .............................. 825,000 934,312
------------
4,061,812
------------
HEALTHCARE SERVICES & RELATED (5.1%)
Abbey Healthcare Group, Inc.
9.50%, 11/01/02 ............................... 500,000 524,375
Integrated Health Services, Inc.
9.625%, 05/31/02 .............................. 1,500,000 1,552,500
Quorum Health Group, Inc.
8.75%, 11/01/05 ............................... 750,000 773,437
Regency Health Services, Inc.
9.875%, 10/15/02 .............................. 850,000 862,750
Tenet Healthcare Corp.
8.625%, 12/01/03 .............................. 875,000 928,594
Universal Health Services, Inc.
8.75%, 08/15/05 ............................... 750,000 774,375
------------
5,416,031
------------

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

10
<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1996

FACE
AMOUNT VALUE+
---------- ------------
HOMEBUILDING & BUILDING MATERIALS (4.5%)
Congoleum Corp.
9.00%, 02/01/01 ............................... $1,500,000 $ 1,505,625
Kaufman & Broad Home Corp.
10.375%, 09/01/99 ............................. 500,000 515,000
Schuller International Group, Inc.
10.875%, 12/15/04 ............................. 750,000 839,062
Toll Corp.
10.50%, 03/15/02 .............................. 1,075,000 1,118,000
Webb (Del E.) Corp.
10.875%, 03/31/00 ............................. 768,000 781,440
------------
4,759,127
------------
HOTELS (1.3%)
Marriott Corp., Series D
8.875%, 05/01/97 .............................. 100,000 100,250
Orient Express Hotels, Inc.
10.25%, 09/01/98 .............................. 272,000 273,360
Red Roof Inns, Inc.
9.625%, 12/15/03 .............................. 1,000,000 1,008,750
------------
1,382,360
------------
METALS (3.6%)
Armco, Inc.
11.375%, 10/15/99 ............................. 1,500,000 1,578,750
GS Technologies Operating Co.
12.25%, 10/01/05 .............................. 1,000,000 1,052,500
Ivaco, Inc.
11.50%, 09/15/05 .............................. 500,000 502,500
Republic Engineered Steels, Inc.
9.875%, 12/15/01 .............................. 750,000 705,938
------------
3,839,688
------------
MULTIMEDIA (9.2%)
Ackerly Communications, Inc., Series B
10.75%, 10/01/03 .............................. 1,525,000 1,624,125
Heritage Media Corp.
11.00%, 06/15/02 .............................. 1,850,000 1,974,875
Jacor Communications Co.
9.75%, 12/15/06 ............................... 1,125,000 1,155,937
++Katz Media Corp.
10.50%, 01/15/07 .............................. 375,000 384,844
Lamar Advertising Co.
9.625%, 12/01/06 .............................. 1,000,000 1,032,500
Outdoor Systems, Inc.
9.375%, 10/15/06 .............................. 1,000,000 1,035,000
@ Telemundo Group, Inc.
7.00%, 02/15/06 ............................... 750,000 725,625

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

11
<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1996

FACE
AMOUNT VALUE+
---------- ------------
MULTIMEDIA (9.2%) (Continued)
Universal Outdoor, Inc.
9.75%, 10/15/06 ............................... $1,000,000 $ 1,035,000
Valassis Inserts, Inc.
9.375%, 03/15/99 .............................. 750,000 772,327
------------
9,740,233
------------
PUBLISHING (3.2%)
Golden Books Family Entertainment, Inc.
7.65%, 09/15/02 ............................... 750,000 686,250
Hollinger International, Inc.
9.25%, 02/01/06 ............................... 1,000,000 993,750
K-III Communications Corp.
10.625%, 05/01/02 ............................. 625,000 661,719
++Newsquest Capital plc
11.00%, 05/01/06 .............................. 1,000,000 1,030,000
------------
3,371,719
------------
RETAILERS (1.8%)
K Mart Corp.
12.50%, 03/01/05 .............................. 1,250,000 1,443,750
Southland Corp.
5.00%, 12/15/03 ............................... 550,000 456,500
------------
1,900,250
------------
TECHNOLOGY (2.6%)
Clark-Schwebel, Inc.
10.50%, 04/15/06 .............................. 750,000 793,125
Plantronics, Inc.
10.00%, 01/15/01 .............................. 1,825,000 1,920,813
------------
2,713,938
------------
TEXTILE/APPAREL MANUFACTURING (4.6%)
Dominion Textile, Inc.
8.875%, 11/01/03 .............................. 1,000,000 1,007,500
Interface, Inc., Series B
9.50%, 11/15/05 ............................... 250,000 256,250
++Pillowtex Corp.
10.00%, 11/15/06 .............................. 750,000 784,688
++Willcox & Gibbs, Inc.
12.25%, 12/15/03 .............................. 1,000,000 995,000
Westpoint Stevens, Inc.
9.375%, 12/15/05 .............................. 1,750,000 1,815,625
------------
4,859,063
------------

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

12
<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1996

FACE
AMOUNT VALUE+
---------- ------------
TRANSPORTATION (4.6%)
Ameritruck Distribution Corp., Series B
12.25%, 11/15/05 .............................. $1,000,000 $ 1,010,000
++Continental Airlines, Inc.
9.50%, 12/15/01 ............................... 1,000,000 1,025,000
Sea Containers Ltd.
9.50%, 07/01/03 ............................... 750,000 758,438
Sea Containers Ltd., Series A
12.50%, 12/01/04 .............................. 1,000,000 1,110,000
Trism, Inc.
10.75%, 12/15/00 .............................. 1,000,000 965,000
------------
4,868,438
------------
TOTAL CORPORATE BONDS (COST $90,169,026) .......... 92,722,133
------------
CONVERTIBLE BONDS (2.8%)
AUTO MANUFACTURING & RELATED (1.6%)
Mascotech, Inc.
4.50%, 12/15/03 ............................... 500,000 415,000
++Exide Corp.
2.90%, 12/15/05 ............................... 2,000,000 1,198,180
------------
1,613,180
------------
HEALTHCARE SERVICES & RELATED (1.2%)
++Healthsource, Inc.
5.00%, 03/01/03 ............................... 1,000,000 798,260
Novacare, Inc.
5.50%, 01/15/00 ............................... 550,000 499,125
------------
1,297,385
------------
TOTAL CONVERTIBLE BONDS (COST $2,919,921) ......... 2,910,565
------------
SHORT-TERM INVESTMENTS (7.7%)
U.S. TREASURY BILL (7.7%)
* 4.60%, 01/16/97 .............................. 6,035,000 6,023,433
* 4.50%, 01/09/97 .............................. 2,183,000 2,180,817
------------
TOTAL SHORT-TERM INVESTMENTS (COST $8,204,250) .... 8,204,250
------------
TOTAL INVESTMENTS (98.0%) (COST $101,293,197) ..... 103,836,948
NET OTHER ASSETS AND LIABILITIES (2.0%) ........... 2,151,132
------------
NET ASSETS (100%) ................................. $105,988,080
============
- ----------
+ 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 December 31, 1996. Maturity date disclosed is the ultimate
maturity.
++ 144A Security--certain conditions for public sale may exist.

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

13
<PAGE>

LIPPER U.S. EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996

SHARES VALUE+
------ -----------
COMMON STOCKS (60.2%)
BASIC MATERIALS (3.2%)
Cyprus Amax Minerals Co. ......................... 22,300 $ 521,263
-----------
CONSUMER CYCLICAL (4.2%)
General Motors Corp., Class H .................... 12,000 675,000
-----------
FINANCE (8.9%)
Chase Manhattan Corp. ............................ 8,600 767,550
@ Mercantile Bancorporation ........................ 13,000 667,875
-----------
1,435,425
-----------
TECHNOLOGY (30.7%)
Computer Associates International, Inc. .......... 15,000 746,250
Electronic Data Systems Corp. .................... 18,000 778,500
Hewlett-Packard Co. .............................. 12,400 623,100
International Business Machines Corp. ............ 10,000 1,510,000
Motorola, Inc. ................................... 11,000 675,125
Xerox Corp. ...................................... 12,000 631,500
-----------
4,964,475
-----------
TELECOMMUNICATIONS (13.2%)
AT&T Corp. ....................................... 8,000 334,000
*@ LCI International, Inc. .......................... 36,100 776,150
*Teleport Communications Group Inc., Class A ...... 33,700 1,023,638
-----------
2,133,788
-----------
TOTAL COMMON STOCKS (COST $8,103,198) ............... 9,729,951
-----------
FACE
AMOUNT
----------
SHORT-TERM INVESTMENTS (34.4%)
**U.S. Treasury Bill 4.50%, 01/09/97 ............... $ 544,000 543,456
**U.S. Treasury Bill 4.61%, 01/16/97 ............... 5,035,000 5,025,349
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $5,568,805) ...... 5,568,805
-----------
TOTAL INVESTMENTS (94.6%) (COST $13,672,003) ........ 15,298,756
-----------
NET OTHER ASSETS AND LIABILITIES (5.4%) ............. 864,885
-----------
NET ASSETS (100%) ................................... $16,163,641
===========
NO. OF
CONTRACTS
---------
WRITTEN CALL OPTIONS
LCI International, Inc., expiring 06/21/97,
Strike Price $25 ............................... 218 $53,138
Mercantile Bancorporation, expiring 06/21/97,
Strike Price $50 ............................... 130 51,187
-----------
TOTAL WRITTEN CALL OPTIONS (PREMIUM RECEIVED $94,792) $104,325
-----------
- ----------
+ 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 of
written call options.

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

14
<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996

SHARES VALUE+
------ -----------
COMMON AND PREFERRED STOCKS (98.1%)
BELGIUM (1.1%)
* Credit Communal de Belique Holding--DEXIA ............. 8,000 $ 729,966
-----------

DENMARK (1.4%)
Danisco A/S ........................................... 14,120 858,118
-----------
FINLAND (1.3%)
Oy Nokia AB, Preferred ................................ 14,320 830,560
-----------
FRANCE (12.6%)
Assurances Generales de France, S.A ................... 26,080 842,182
Carrefour Supermarche S.A ............................. 1,400 911,201
Castorama Dubois Investissement, S.A .................. 3,080 530,256
Cetelem, S.A .......................................... 7,560 874,494
Legrand S.A ........................................... 3,800 647,619
L'Oreal, S.A .......................................... 1,918 722,532
LVMH , S.A ............................................ 2,955 825,486
Promodes, S.A ......................................... 2,825 797,884
Sanofi S.A ............................................ 6,000 596,877
Scor S.A .............................................. 16,000 562,946
Total S.A., B shares .................................. 8,990 731,402
-----------
8,042,879
-----------
GERMANY (14.1%)
Allianz Holding, AG ................................... 600 1,080,097
Altana AG ............................................. 1,150 896,084
Bayer AG .............................................. 30,750 1,247,985
Bayerische Motoren Werke AG ........................... 1,620 1,118,076
Mannesmann AG ......................................... 2,665 1,146,881
Muenchener Rueckversicherungs-Gesellschaft AG ......... 320 776,734
SAP AG ................................................ 8,345 1,148,641
Siemens AG ............................................ 12,950 601,065
VEBA AG ............................................... 17,070 981,768
-----------
8,997,331
-----------
IRELAND (1.1%)
Bank of Ireland ....................................... 76,720 688,853
-----------
ITALY (4.6%)
Banco Ambrosiano Veneto S.p.A ......................... 141,940 341,517
Edison S.p.A .......................................... 59,590 377,102
ENI S.p.A ............................................. 68,190 349,940
Italgas S.p.A ......................................... 86,720 362,143
Parmalat Finanziaria S.p.A ............................ 163,612 250,217
Rinascente S.p.A ...................................... 38,670 224,322
Societa Assicuratrice Industriale S.p.A ............... 29,060 268,187
Stet Societa Finanziaria Telefonica S.p.A ............. 88,730 403,584
Telecom Italia Mobile S.p.A ........................... 141,080 356,652
-----------
2,933,664
-----------

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

15
<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1996

SHARES VALUE+
------ ----------
NETHERLANDS (6.9%)
Aegon N.V ............................................. 10,160 $ 647,497
Elsevier N.V .......................................... 30,450 514,668
Getronics N.V ......................................... 17,100 464,222
ING Groep N.V., Certificate shares .................... 14,812 533,287
Koninklijke Ahold N.V ................................. 9,020 563,881
Nutricia Verenigde Bedrijven N.V ...................... 4,015 610,059
Koninklijke PTT Nederland N.V ......................... 12,000 457,745
Wolters Kluwer N.V .................................... 4,340 576,540
-----------
4,367,899
-----------
SPAIN (4.0%)
Banco Santander S.A ................................... 7,600 486,470
Centros Comerciales Pryca, S.A ........................ 13,500 285,962
Corporacion Mapfre, Registered shares ................. 6,500 396,033
Empresa Nacional de Electricidad, Registered shares ... 6,200 441,271
Gas Natural SDG ....................................... 2,100 488,504
* Sol Melia, S.A ........................................ 13,000 465,627
-----------
2,563,867
-----------
SWEDEN (4.7%)
ABB AB, Class B ....................................... 6,750 764,485
Astra AB, Class B ..................................... 18,070 872,172
Ericsson LM, Class B .................................. 24,640 762,731
Sandvik AB, Class B ................................... 22,720 616,635
-----------
3,016,023
-----------
SWITZERLAND (10.8%)
Adecco S.A., Bearer ................................... 2,300 577,363
ABB AG, Bearer ........................................ 668 830,945
Nestle S.A., Registered ............................... 704 755,807
* Novartis AG, Registered ............................... 650 744,453
* Novartis AG, Bearer ................................... 666 762,280
Roche Holding AG, Participation Certificates .......... 105 817,015
Schweizerische Bankgesellschaft, Bearer ............... 848 743,148
SGS Societe Generale de Surveillance Holding S.A.,
Bearer .............................................. 340 835,712
Zurich Versicherungsgesellschaft Oil, Registered ...... 2,995 832,380
-----------
6,899,103
-----------

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

16
<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1996

SHARES VALUE+
------- -----------

UNITED KINGDOM (35.5%)
Abbey National plc .................................... 96,620 $ 1,266,220
Boots plc ............................................. 92,975 959,630
British Airways plc ................................... 91,420 948,279
British Petroleum plc ................................. 82,160 985,937
British Telecom plc ................................... 146,700 991,420
Cadbury Schweppes plc ................................. 107,639 908,148
Carlton Communications plc ............................ 123,700 1,090,274
Compass Group plc ..................................... 70,000 743,482
Electrocomponents plc ................................. 139,220 1,101,854
Legal & General Group plc ............................. 159,625 1,018,610
Lloyds TSB Group plc .................................. 161,323 1,191,116
Marks & Spencer plc ................................... 109,330 919,605
Misys plc ............................................. 55,000 989,687
Reed International plc ................................ 48,250 910,463
Reuters Holdings plc .................................. 81,158 1,044,819
Siebe plc ............................................. 55,740 1,033,177
Smith (David S.) Holdings plc ......................... 135,660 729,730
SmithKline Beecham plc ................................ 71,981 996,345
Smiths Industries plc ................................. 55,000 755,645
EMI Group plc ......................................... 38,660 913,948
Tesco plc ............................................. 167,450 1,016,909
Vodafone Group plc .................................... 249,560 1,053,834
Zeneca Group plc ...................................... 35,995 1,015,892
-----------
22,585,024
-----------
TOTAL COMMON AND PREFERRED STOCKS (COST $48,681,453) ..... 62,513,287
-----------

FACE
AMOUNT
------
FOREIGN CURRENCY (0.1%)
Deutsche Mark (COST $68,777) .......................DEM 104,920 68,186
-----------
TOTAL INVESTMENTS AND FOREIGN CURRENCY (98.2%)
(COST $48,750,230) ................................... 62,581,473
NET OTHER ASSETS AND LIABILITIES (1.8%) ............... 1,164,161
-----------
NET ASSETS (100%) ..................................... $63,745,634
===========

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:

Under the terms of forward foreign currency exchange contracts open at
December 31, 1996, the Fund is obligated to deliver or is to receive foreign
currency in exchange for foreign currency as indicated below:

<TABLE>
<CAPTION>
NET
CURRENCY TO SETTLEMENT UNREALIZED
DELIVER VALUE DATE IN EXCHANGE FOR VALUE APPRECIATION
----------- ----- ---------- --------------- ----- ------------
<S> <C> <C> <C> <C> <C>
ITL 451,959,945 $297,930 01/02/97 DEM 459,346 $298,519 $589
======== ======== ====
</TABLE>

- ----------
+ See Note A to Financial Statements.
* Non-Income Producing Security.
DEM Deutsche Mark
ITL Italian Lira

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

17
<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1996

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)

PERCENT OF
NET
INDUSTRY ASSETS VALUE
- -------- ---------- -----------
Automobiles ....................................... 1.8% $ 1,118,076
Banking ........................................... 8.5 5,447,290
Beverage & Tobacco ................................ 1.3 825,486
Broadcast & Publishing ............................ 4.9 3,091,944
Business & Public Services ........................ 8.4 5,339,702
Chemicals ......................................... 2.0 1,247,985
Data Processing ................................... 0.7 464,222
Electrical/Electronics ............................ 5.7 3,606,845
Electrical/Components/Instruments ................. 3.0 1,932,414
Energy Sources .................................... 3.2 2,067,279
Financial Services ................................ 1.4 874,494
Food & Household Products ......................... 5.3 3,382,349
Forest Products & Paper ........................... 1.2 729,730
Health & Personal Care ............................ 11.6 7,423,652
Insurance ......................................... 10.9 6,957,953
Machinery & Engineering ........................... 3.0 1,902,526
Merchandising ..................................... 9.7 6,209,649
Multi-Industry .................................... 1.6 1,033,177
Recreation & Other Consumer Goods ................. 1.4 913,947
Services, Leisure, & Tourism ...................... 0.7 465,626
Steel & Metals .................................... 1.0 616,635
Telecommunications ................................ 5.1 3,263,236
Transportation .................................... 1.5 948,279
Utilities--Electrical-Gas ......................... 4.2 2,650,791
Foreign Currency .................................. 0.1 68,186
----- -----------
Total Investments and Foreign Currency ............ 98.2 62,581,473
Net Other Assets and Liabilities .................. 1.8 1,164,161
----- -----------
Net Assets ........................................ 100.0% $63,745,634
===== ===========

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

18
<PAGE>

THE LIPPER FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
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) ........................................ $103,836,948 $ 15,298,756 $ 62,513,287
Cash .................................................................. 14,291 43,288 979,086
Foreign Currency, at value (Cost $68,777) ............................. -- -- 68,186
Interest Receivable ................................................... 1,973,080 -- --
Dividends Receivable .................................................. -- 8,928 423,973
Foreign Withholding Tax Reclaim Receivable ............................ -- -- 33,283
Receivable for Investments Sold ....................................... 927,690 18,980 297,930
Receivable for Fund Shares Sold ....................................... 358,280 2,478,679 201,167
Receivable from Investment Adviser (Note B) ........................... -- 38,577 --
Deferred Organization Costs (Note A) .................................. 78,263 73,640 79,555
Unrealized appreciation on forward foreign currency exchange contracts -- -- 589
Prepaid Assets ........................................................ 5,462 771 3,332
------------ ------------ ------------
TOTAL ASSETS ....................................................... 107,194,014 17,961,619 64,600,388
------------ ------------ ------------
LIABILITIES:
Dividends payable--Premier Shares ..................................... 76,727 -- --
Dividends payable--Retail Shares ...................................... 2,996 -- --
Payable for Investments Purchased ..................................... 982,500 1,678,923 --
Payable for Fund Shares Redeemed ...................................... -- -- 711,199
Written Call Options, at value (premiums received $94,792) ............ -- 104,325 --
Custodian Fees Payable ................................................ 3,679 1,591 47,647
Investment Advisory Fees Payable (Note B) ............................. 9,295 -- 27,942
Administrative Fees Payable (Note C) .................................. 22,016 6,874 11,027
Directors' Fees Payable (Note D) ...................................... 8,131 982 4,781
Distribution Fees Payable--Retail Shares (Note E) ..................... 750 1,029 829
Shareholder Servicing Fees Payable--Group Retirement Plan Shares
(Note E) ............................................................. 2,743 499 193
Other Liabilities ..................................................... 97,097 3,755 51,136
------------ ------------ ------------
TOTAL LIABILITIES .................................................. 1,205,934 1,797,978 854,754
------------ ------------ ------------
NET ASSETS ............................................................. $105,988,080 $ 16,163,641 $ 63,745,634
============ ============ ============
NET ASSETS CONSIST OF:
Paid in Captial ....................................................... $103,441,118 $ 14,632,119 $ 49,400,475
Undistributed (Distributions in Excess of) Net Investment Income (Loss) 416 (445) (8,968)
Accumulated Net Realized Gain (Loss) .................................. 2,795 (85,253) 517,800
Unrealized Appreciation (Depreciation) on Investments,
Written Options and Foreign Currency Translations .................... 2,543,751 1,617,220 13,836,327
------------ ------------ ------------
$105,988,080 $ 16,163,641 $ 63,745,634
============ ============ ============
PREMIER SHARES:
Net Assets ............................................................ $102,944,764 $ 15,098,493 $ 62,941,502
Shares Issued and Outstanding ($.001 par value)
(authorized 3,333,333,333) ........................................... 10,113,705 1,326,179 5,594,762
Net Asset Value, Offering and Redemption Price Per Share .............. $ 10.18 $ 11.38 $ 11.25
============ ============ ============
RETAIL SHARES:
Net Assets ............................................................ $ 844,872 $ 613,036 $ 609,469
Shares Issued and Outstanding ($.001 par value)
(authorized 3,333,333,333) ........................................... 83,015 53,864 54,169
Net Asset Value, Offering and Redemption Price Per Share .............. $ 10.18 $ 11.38 $ 11.25
============ ============ ============
GROUP RETIREMENT PLAN SHARES:
Net Assets ............................................................ $ 2,198,444 $ 452,112 $ 194,663
Shares Issued and Outstanding ($.001 par value)
(authorized 3,333,333,334) ........................................... 216,018 39,727 17,315
Net Asset Value, Offering and Redemption Price Per Share .............. $ 10.18 $ 11.38 $ 11.24
============ ============ ============
Investments at Cost (including Foreign Currency) ...................... $101,293,197 $ 13,672,003 $ 48,750,230
============ ============ ============
</TABLE>

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

19
<PAGE>

THE LIPPER FUNDS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<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 .......................................... $ -- $ 83,005 $ 974,264
Interest ........................................... 7,272,331 241,645 49,091
Less: Foreign Taxes Withheld ....................... -- -- (136,726)
---------- ----------- -----------
Total Income .................................... 7,272,331 324,650 886,629
---------- ----------- -----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee $543,224 $99,280 $458,129
Less: Fee Waived (198,834) 344,390 (99,280) -- (74,333) 383,796
-------- ------- --------
Administrative Fees--Note C ........................ 164,042 76,284 96,187
Directors' Fees--Note D ............................ 21,276 11,127 12,825
Distribution Fees--Retail Shares--Note E ........... 824 1,028 829
Servicing Fees--Group Retirement Plan Shares--Note E 2,743 499 193
Custodian Fees ..................................... 16,137 9,509 47,646
Auditing Fees ...................................... 31,881 3,850 18,269
Legal Fees ......................................... 30,021 3,795 17,585
Registration and Filing Fees ....................... 65,830 38,129 53,449
Amortization of Organization Costs (Note A) ........ 13,981 18,605 13,981
Other Expenses ..................................... 38,259 7,069 24,264
Reimbursement from Investment Adviser--Note B ...... -- (39,887) --
---------- ----------- -----------
Total Expenses .................................. 729,384 130,008 669,024
---------- ----------- -----------
NET INVESTMENT INCOME ........................... 6,542,947 194,642 217,605
---------- ----------- -----------
NET REALIZED GAIN (LOSS) FROM:
Investments Sold ................................... 349,656 333,709 2,655,250
Written Options .................................... -- 55,393 --
Foreign Currency Transactions ...................... -- -- (119,211)
---------- ----------- -----------
NET REALIZED GAIN .................................. 349,656 389,102 2,536,039
---------- ----------- -----------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION):
Investments ........................................ 2,206,383 1,626,753 6,243,899
Written Options .................................... -- (9,533) --
Foreign Currency Translations ...................... -- -- 4,493
---------- ----------- -----------
NET CHANGE IN UNREALIZED APPRECIATION ............... 2,206,383 1,617,220 6,248,392
---------- ----------- -----------
NET REALIZED GAIN AND NET CHANGE IN
UNREALIZED APPRECIATION ............................ 2,556,039 2,006,322 8,784,431
---------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $9,098,986 $ 2,200,964 $ 9,002,036
========== =========== ===========
</TABLE>
- ----------
* 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.

20
<PAGE>

THE LIPPER FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
LIPPER LIPPER PRIME LIPPER
HIGH INCOME U.S. EQUITY EUROPE EQUITY
BOND FUND* FUND** FUND***
------------- ------------ ------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net Investment Income ................................... $ 6,542,947 $ 194,642 $ 217,605
Net Realized Gain ....................................... 349,656 389,102 2,536,039
Net Unrealized Appreciation ............................. 2,206,383 1,617,220 6,248,392
------------- ------------ ------------
Net Increase in Net Assets Resulting from Operations ... 9,098,986 2,200,964 9,002,036
------------- ------------ ------------
DISTRIBUTIONS:
PREMIER SHARES:
From net investment income .............................. (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 .............................. (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 .............................. (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 ................................... (6,903,373) (688,047) (2,258,793)
------------- ------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTES G AND H):
PREMIER SHARES:
Issued--Regular ......................................... 51,337,878 13,421,010 11,734,044
--Distributions Reinvested ............................. 6,181,966 635,822 2,231,361
--Contribution from Partnerships ....................... 74,518,244 -- 47,208,423
Redeemed ................................................ (31,229,026) (477,485) (4,901,018)
------------- ------------ ------------
Net Increase in Premier Shares Transactions ............ 100,809,062 13,579,347 56,272,810
------------- ------------ ------------
RETAIL SHARES:
Issued--Regular ......................................... 859,030 538,500 533,316
--Distributions Reinvested ............................. 19,312 29,915 20,769
Redeemed ................................................ (47,408) -- --
------------- ------------ ------------
Net Increase in Retail Shares Transactions ............. 830,934 568,415 554,085
------------- ------------ ------------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ......................................... 2,040,052 380,652 168,832
--Distributions Reinvested ............................. 112,419 22,310 6,664
------------- ------------ ------------
Net Increase in Group Retirement Plan
Shares Transactions ..................................... 2,152,471 402,962 175,496
------------- ------------ ------------
Net Increase in Net Assets from Capital Share Transactions 103,792,467 14,550,724 57,002,391
------------- ------------ ------------
TOTAL INCREASE ......................................... 105,988,080 16,063,641 63,745,634
NET ASSETS:
Beginning of Period ..................................... -- 100,000 --
------------- ------------ ------------
End of Period (A) ....................................... $ 105,988,080 $ 16,163,641 $ 63,745,634
============= ============ ============
(A) Includes undistributed (distributions in excess of)
net investment income (loss) ............................ $ 416 $ (445) $ (8,968)
============= ============ ============
</TABLE>

- ----------
* 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.

21
<PAGE>

LIPPER HIGH INCOME BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

<TABLE>
<CAPTION>
GROUP
PREMIER RETAIL RETIREMENT
SHARES SHARES PLAN SHARES
-------------- ------------- -------------
APRIL 1, APRIL 11, APRIL 12,
1996** TO 1996*** TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996
-------------- ------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............. $ 10.00 $ 9.91 $ 9.93
-------- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) ....................... 0.68 0.62 0.62
Net Realized and Unrealized Gain
on Investments ................................. 0.21 0.34 0.32
-------- ------ ------
Total From Investment Operations ............. 0.89 0.96 0.94
-------- ------ ------
DISTRIBUTIONS:
Net Investment Income ........................... (0.68) (0.66) (0.66)
Net Realized Gain ............................... (0.03) (0.03) (0.03)
-------- ------ ------
Total Distributions .......................... (0.71) (0.69) (0.69)
-------- ------ ------
NET ASSET VALUE, END OF PERIOD ................... $ 10.18 $10.18 $10.18
======== ====== ======
TOTAL RETURN(2) .................................. 9.23% 10.04% 9.78%
======== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ................ $102,945 $ 845 $2,198
Ratios After Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets .................. 1.00%* 1.25%* 1.25%*
Net Investment Income to Average Net Assets ..... 9.01%* 8.95%* 8.91%*
Ratios Before Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets .................. 1.27%* 1.59%* 1.55%*
Net Investment Income to Average Net Assets ..... 8.74%* 8.61%* 8.61%*
Portfolio Turnover Rate .......................... 74% 74% 74%
</TABLE>
- ----------
* Annualized
** Commencement of Fund operations
*** Initial offering of shares by the Fund
(1) The effect to net investment income per share of voluntarily waived fees and
reimbursed expenses were:
PERIOD ENDED
DECEMBER 31, 1996
-----------------
Premier Shares ....................................... $0.02
Retail Shares ........................................ 0.02
Group Retirement Plan Shares ......................... 0.02

(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the period ended December 31, 1996. Returns are not
annualized.

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

22
<PAGE>

LIPPER U.S. EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

<TABLE>
<CAPTION>
GROUP
PREMIER RETAIL RETIREMENT
SHARES SHARES PLAN SHARES
-------------- ------------ ------------
JANUARY 2, JANUARY 4, JANUARY 4,
1996** TO 1996*** TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996
-------------- ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............. $ 10.00 $ 10.00 $ 10.00
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) ....................... 0.18 0.11 0.07
Net Realized and UnreaIized Gain
on Investments ................................. 1.81 1.86 1.91
------- ------- -------
Total From Investment Operations ............. 1.99 1.97 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 ................... $ 11.38 $ 11.38 $ 11.38
======= ======= =======
TOTAL RETURN(2) .................................. 19.81% 19.62% 19.69%
======= ======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ................ $15,098 $ 613 $ 452
Ratios After Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets .................. 1.10%* 1.35%* 1.35%*
Net Investment Income to Average Net Assets ..... 1.68%* 1.31%* 1.29%*
Ratios Before Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets .................. 2.28%* 2.75%* 2.39%*
Net Investment Income to Average Net Assets ..... 0.50%* (0.09)%* 0.25%*
Portfolio Turnover Rate .......................... 117% 117% 117%
Broker Commission Rate ........................... $0.0445 $0.0445 $0.0445
</TABLE>
- ----------
* Annualized
** Commencement of Fund Operations
*** Initial offering of shares by the Fund
(1) The effect to net investment income per share of voluntarily waived fees and
reimbursed expenses were:
PERIOD ENDED
DECEMBER 31, 1996
-----------------
Premier Shares ....................................... $0.13
Retail Shares ........................................ $0.12
Group Retirement Plan Shares ......................... $0.06

(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the period ended December 31, 1996. Returns are not
annualized.

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

23
<PAGE>

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

<TABLE>
<CAPTION>
GROUP
PREMIER RETAIL RETIREMENT
SHARES SHARES PLAN SHARES
------------ ------------ ------------
APRIL 1, APRIL 11, APRIL 12,
1996** TO 1996*** TO 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............. $ 10.00 $ 9.93 $ 9.92
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) ....................... 0.04 (0.01) (0.02)
Net Realized and Unrealized Gain
on Investments ................................. 1.62 1.73 1.74
------- ------- -------
Total From Investment Operations ............. 1.66 1.72 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 ................... $ 11.25 $ 11.25 $ 11.24
======= ======= =======
TOTAL RETURN(2) .................................. 16.68% 17.37% 17.40%
======= ======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ................ $62,942 $ 609 $ 195
Ratios After Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets .................. 1.60%* 1.85%* 1.85%*
Net Investment Income to Average Net Assets ..... 0.53%* (0.13)%* (0.43)%*
Ratios Before Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets .................. 1.78%* 2.07%* 2.04%*
Net Investment Income to Average Net Assets ..... 0.35%* (0.35)%* (0.62)%*
Portfolio Turnover Rate .......................... 34% 34% 34%
Broker Commission Rate ........................... $0.0746 $0.0746 $0.0746
</TABLE>
- ----------
* Annualized
** Commencement of Fund operations
*** Initial offering of shares by the Fund
(1) The effect to net investment income per share of voluntarily waived fees and
reimbursed expenses was:
PERIOD ENDED
DECEMBER 31, 1996
-----------------
Premier Shares ....................................... $0.01
Retail Shares ........................................ $0.02
Group Retirement Plan Shares ......................... $0.01

(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the period ended December 31, 1996. Returns are not
annualized.

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

24
<PAGE>

THE LIPPER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS

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 December 31, 1996, the Company was
comprised of three diversified portfolios (each referred to as a "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, which 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 Europe 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 December 31, 1996, cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:

<TABLE>
<CAPTION>
NET
APPRECIATION
FUND COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
---- ---- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Lipper High Income Bond Fund ................ $101,314,372 $ 2,685,887 $(163,311) $ 2,522,576
Lipper U.S. Equity Fund ..................... 13,672,003 1,700,677 (73,924) 1,626,753
Prime Lipper Europe Equity Fund ............. 48,688,923 14,298,780 (474,416) 13,824,364
</TABLE>

<PAGE>

THE LIPPER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS--(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 Bond 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 deferred due to wash sale 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.

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, or other

<PAGE>

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

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 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. 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 December 31,1996, the Lipper U.S. Equity Fund
participated in writing call options. The Fund had option activity as follows:

NO. OF
CONTRACTS PREMIUM
--------- --------
Options outstanding at January 2, 1996* -- $ --
Options written during the period 1,066 205,467
Options closed during the period (718) (110,675)
--------- --------
Options outstanding as of December 31, 1996 348 $ 94,792
--------- --------
- ----------
* Commencement of Fund investment operations.

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 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 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 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

<PAGE>

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

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
-------------- ------------- -----------------
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%

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. 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 is
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 December 31, 1996, 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 ..................... $86,219,513 $65,856,280
Lipper U.S. Equity Fund .......................... 15,659,159 7,891,920
Prime Lipper Europe Equity Fund .................. 25,982,594 17,911,953

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

G. LIMITED PARTNERSHIP TRANSFERS: Each of the Lipper High Income Bond Fund and
the Prime Lipper Europe Equity Fund has been formed as a successor investment
vehicle for a corresponding limited partnership (each individually a
"Partnership" and collectively the "Partnerships") for which Lipper & Company,
L.P., an affiliate of the U.S. Adviser, or the European Adviser acted as general
partner and investment adviser since inception. On April 1, 1996, each such Fund
exchanged Premier Shares for portfolio securities of its corresponding
Partnership (individually a "Transfer" and collectively the "Transfers").
Premier Shares issued by each such Fund in the Transfers were issued at the net
asset value of Premier Shares prior to the Transfers. Premier Shares received in
the Transfers have been distributed to each Partnership's limited partners who
elected to participate in the Transfers. Assets valued at $74,518,244 and
$47,208,423 at the date of Transfers, including securities with unrealized
appreciation of $337,368 and $7,587,935 were contributed to the Lipper High
Income Bond Fund and the Prime Lipper Europe Equity Fund, respectively. To the
extent that a Fund acquired securities in a Transfer that had appreciated in
value from the date originally acquired by its corresponding Partnership, the
Transfer may have adverse tax consequences to investors who acquire shares of
the Fund in the continuous offering after the Transfer.

<PAGE>

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

H. CAPITAL SHARE TRANSACTIONS: For the period ended December 31, 1996 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
----------- ----------- -------------
PREMIER SHARES (1):
Issued--Regular .................. 5,168,834 1,304,210 1,142,688
--Distributions Reinvested ..... 616,706 55,580 201,933
--Contribution from Partnerships 7,451,824 -- 4,720,842
Redeemed ......................... (3,123,659) (43,611) (470,701)
---------- --------- ---------
Net Increase (Decrease) .......... 10,113,705 1,316,179 5,594,762
---------- --------- ---------
RETAIL SHARES (2):
Issued--Regular .................. 85,832 51,245 52,290
--Distributions Reinvested ..... 1,913 2,619 1,879
Redeemed ......................... (4,730) -- --
---------- --------- ---------
Net Increase (Decrease) .......... 83,015 53,864 54,169
---------- --------- ---------
GROUP RETIREMENT PLAN SHARES (3):
Issued--Regular .................. 204,841 37,774 16,711
--Distributions Reinvested ..... 11,177 1,953 604
---------- --------- ---------
Net Increase (Decrease) .......... 216,018 39,727 17,315
---------- --------- ---------
- ----------
1. Initial offering of Premier Shares commenced on April 1, 1996, January 2,
1996 and April 1, 1996 for the Lipper High Income Bond Fund, the Lipper U.S.
Equity Fund and the Prime Lipper Europe Equity Fund, respectively.

2. Initial offering of Retail Shares commenced on April 11, 1996, January 4,
1996 and April 11, 1996 for the Lipper High Income Bond Fund, the Lipper
U.S. Equity Fund and the Prime Lipper Europe Equity Fund, respectively.

3. Initial offering of Group Retirement Plan Shares commenced on April 12,
1996, January 4, 1996 and April 12, 1996 for the Lipper High Income Bond
Fund, the Lipper U.S. Equity Fund and the Prime Lipper Europe Equity Fund,
respectively.

I. OTHER: At December 31, 1996, 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
------------ ---------
Lipper High Income Fund
Premier Shares ...................................... 2 37.1%
Retail Shares ....................................... 3 34.7%
Group Retirement Shares ............................. 2 96.5%
Lipper U.S. Equity Fund
Premier Shares ...................................... 3 81.7%
Retail Shares ....................................... 3 64.6%
Group Retirement Shares ............................. 2 93.5%
Prime Lipper Europe Equity Fund
Premier Shares ...................................... 1 11.7%
Retail Shares ....................................... 3 84.1%
Group Retirment Plan Shares ......................... 1 97.0%

The 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>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of The Lipper Funds, Inc.

In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Lipper High Income
Bond Fund, Lipper U.S. Equity Fund and Prime Lipper Europe Equity Fund
(constituting The Lipper Funds, Inc., hereafter referred to as the "Fund") at
December 31, 1996, the results of each of their operations, the changes in each
of their net assets and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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 management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondance with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

1177 Avenue of the Americas
New York, New York 10036
February 14, 1997

================================================================================

FEDERAL INCOME TAX INFORMATION
(UNAUDITED)

Lipper High Income Bond Fund and Prime Lipper Europe Equity Fund hereby
designate $204,071 and $2,137,452, respectively as a long-term capital gain
dividend for the purpose of the dividend paid deduction on each Funds' Federal
income tax return.

For the Lipper U.S. Equity Fund in 1996, 12.07% of the distribution taxable
as ordinary income, as reported on Form 1099-DIV, qualifies for the dividends
received deduction for corporations.

Foreign taxes accrued during the year ended December 31, 1996, amounting to
$136,726 for the Prime Lipper Europe Equity Fund, are expected to be passed
through to shareholders as foreign tax credits on Form 1099-DIV. In addition,
for the year ended December 31, 1996, gross income derived from sources within
foreign countries amounted to $1,023,356 for the Prime Lipper Europe Equity
Fund.

<PAGE>

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
- --------------------------------- 73 Tremont Street
TRANSFER AGENT Boston, MA 02108
1-800-LIPPER9

CUSTODIAN The Chase Manhattan Bank
- --------------------------------- 3 MetroTech Center
Brooklyn, NY 11245

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