LIPPER FUNDS INC, N-30D, 1998-03-04

LIPPER FUNDS INC
N-30D, 1998-03-04

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============================
THE LIPPER FUNDS, INC.
============================
LIPPER HIGH INCOME BOND FUND

Annual Report
==============================================
December 31, 1997

<PAGE>
=================
TABLE OF CONTENTS
=================

Shareholder's Letter .............. 1-3

Portfolio of Investments .......... 4-9

Statement of Assets and Liabilities 10

Statement of Operations ........... 11

Statement of Changes in Net Assets 12

Financial Highlights .............. 13

Notes to Financial Statements ..... 14-16

Report of Independent Accountants . 17

Tax Information ................... 17
<PAGE>

LIPPER FUNDS, INC. ANNUAL REPORT
THE LIPPER HIGH INCOME BOND FUND December 31, 1997

Dear Shareholder:

We are pleased to present the Annual Report for The Lipper High Income Bond
Fund for the year ended December 31, 1997. The Lipper High Income Bond Fund is
one of three investment portfolios--along with The Lipper U.S. Equity Fund and
The Prime Lipper Europe Equity Fund--which comprise The Lipper Funds, Inc. Each
of The Lipper Funds is made available to individual, institutional and group
retirement plan investors through a separate class of shares. This report
presents the financial statements and performance review of The Lipper High
Income Bond Fund for the year ended December 31, 1997.

PERFORMANCE AND PORTFOLIO REVIEW

Performance as discussed below reflects the performance of the Fund's
Premier class of shares. Performance for the Fund's Retail and Group Retirement
Plan Shares (illustrated on page 3) differs from Premier Shares performance due
to the different inception dates and 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 at the time of investment. 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.

The high yield bond market was impressive on all counts in 1997. Investors
benefited from a number of factors including continued strength in the U.S.
economy, a low inflation, low interest rate environment, and a record level of
new high yield issues coming to market--factors which helped increase stability
in the high yield market, as well as improve the economic fundamentals of the
issuing companies. High yield bond prices also benefited from strong investor
demand. Some investors crossed-over to high yield investments from investment
grade issues in search of incremental yield. Alternatively, some investors
sought refuge from the Asian crisis by moving their assets from riskier U.S. and
foreign equity holdings into high yield investments.

The Lipper High Income Bond Fund performed well in this environment,
generating a total return for the year ended December 31, 1997 of 11.22% net of
fees and expenses. The Fund performed well against its unmanaged benchmark
index, the Lehman Intermediate BB Index, which generated an 11.25% return over
the twelve month period. Given its more conservative investment approach, the
Fund slightly underperformed the average return of 13.07% for the twelve month
period for all intermediate-term high yield funds tracked by Morningstar, Inc.
For example, unlike its more aggressive peers, the Fund limits its exposure to
any particular sector and does not invest in emerging market securities--two
factors which boosted the returns of other high yield funds during the year.
Although this approach may limit the Fund's return under optimal market
conditions such as those witnessed in 1997, Lipper remains 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.

During the year, The Lipper High Income Bond 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. The Fund also benefited from its participation in a number of
the quality new issues which came to market.

In October, as with virtually all markets worldwide--the high yield market
came under some pressure in reaction to the Asian economic and financial crisis
as investors became concerned about how the crisis would affect corporate
earnings. The high yield market was quick to recover, however, as investors
refocused on the strong condition of the U.S. economy and continued growth of
corporate earnings. Given its focus on quality issues, shorter maturities and
lack of international exposure, The Lipper High Income Bond Fund fared well in
this difficult market

<PAGE>

environment, declining by less than 0.15% for the month of October--compared to
more than double that for most high yield mutual funds during the same period.

Over the course of the year, the Fund's investments were highly diversified
across approximately 90 securities, representing over 25 industries. During the
12-month period, the portfolio's weighted average coupon was approximately 9.5%.
Duration was maintained on the shorter end of the spectrum at approximately
3.25, and the average credit quality of the portfolio was maintained at BB-.

The Fund's cash flow from maturing and called issues, which exceeded 20% of
assets during the year, was reinvested primarily in seasoned, liquid high yield
issues. The portfolio manager focused on well-positioned companies with
improving cash flow which he believes offer better returns than the average high
yield issue. In addition, the Fund selectively invested in several of the new
high yield issues which came to market in 1997.

In 1998, 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. We expect to maintain the portfolio's duration on the shorter end
of the maturity spectrum which currently offers greater value than longer dated
paper. The Fund will also continue to increase its exposure to select,
well-positioned companies within a number of industries which have recently come
under pressure.

Our outlook for The High Income Bond Fund is positive. Domestic economic
growth should remain moderate and inflationary pressures benign, making U.S.
bond yields attractive relative to inflation. Given the low interest rate
environment and strong economy, demand for high yield issues continues to remain
high into early 1998, and cash flowing into high yield mutual funds is strong.

We hope you find the enclosed report informative. We very much appreciate
your participation in The Lipper Funds, Inc.

Sincerely,

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

2
<PAGE>

The Lipper High Income Bond Fund Performance

Average Annual Total Return*
For Periods Ended December 31, 1997

Since
1 Year 5 Year Inception*
------ ------ ----------

Premier Shares 11.22% 10.14% 10.38%
Retail Shares 10.97% 10.06% 10.30%
Group Retirement Plan Shares 10.96% 10.05% 10.29%

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. Also shown is
the predecessor partnership's performance for the five year average annualized
period and the performance of the Fund as a registered investment company, for
the period April 1, 1996 through December 31, 1997. As a registered investment
company under the Investment Company Act of 1940 ("the Act"), the Fund is
subject to certain restrictions under the Act and the Internal Revenue Code
("the 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.

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 directly invest in an
unmanaged index.

3
<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997

FACE
AMOUNT VALUE+
---------- ----------

CORPORATE BONDS (89.4%)
AEROSPACE (2.1%)
Sequa Corp.
9.625%, 10/15/99 ................................. $1,850,000 $1,919,375
----------
AUTO MANUFACTURING & RELATED (2.2%)
Delco Remy International, Inc.
8.625%, 12/15/07 ................................. 250,000 254,375
HawkCorp
10.25%, 12/01/03 ................................. 650,000 695,500
Hayes Wheels International, Inc.
11.00%, 07/15/06 ................................. 1,000,000 1,080,000
----------
2,029,875
----------
BEVERAGES & BOTTLING (0.7%)
Delta Beverage Group
9.75%, 12/15/03 .................................. 650,000 682,500
----------
CABLE (2.0%)
Adelphia Communications
9.25%, 10/01/02 .................................. 500,000 511,875
Fundy Cable Ltd.
11.00%, 11/15/05 ................................. 750,000 808,125
Videotron Ltd.
10.25%, 10/15/02 ................................. 500,000 530,625
----------
1,850,625
----------
CAPITAL GOODS, EQUIPMENT & OTHER MANUFACTURING (4.5%)
American Standard
9.875%, 06/01/01 ................................. 250,000 261,250
Amtrol, Inc.
10.625%, 12/31/06 ................................ 1,000,000 1,035,000
Communications & Power Industries, Series B
12.00%, 08/01/05 ................................. 625,000 703,125
International Knife & Saw, Inc.
11.375%, 11/15/06 ................................ 1,500,000 1,627,500
Specialty Equipment Company
11.375%, 12/01/03 ................................ 500,000 543,750
----------
4,170,625
----------
CHEMICALS (0.6%)
Sifto Canada, Inc.
8.50%, 07/15/00 .................................. 500,000 522,500
----------
COMMERCIAL SERVICES (2.9%)
Cort Furniture Rental
12.00%, 09/01/00 ................................. 800,000 884,000
Host Mar Travel Plaza, Class B
9.50%, 05/15/05 .................................. 750,000 800,625
Rose Hills Company
9.50%, 11/15/04 .................................. 1,000,000 1,045,000
----------
2,729,625
----------

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

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997

FACE
AMOUNT VALUE+
---------- ----------
CONSUMER PRODUCTS (3.9%)
Coty, Inc.
10.25%, 05/01/05 ........................... $1,000,000 $1,055,000
Herff Jones, Inc.
11.00%, 08/15/05 ........................... 1,000,000 1,092,500
Selmer Co., Inc.
11.00%, 05/15/05 ........................... 500,000 552,500
Syratech Corp.
11.00%, 04/15/07 ........................... 1,000,000 935,000
----------
3,635,000
----------
CONTAINER/PACKAGE MANUFACTURING (1.2%)
Tekni-Plex, Inc.
11.25%, 04/01/07 ........................... 1,000,000 1,082,500
----------
ENERGY (0.8%)
AES Corp.
8.375%, 08/15/07 ........................... 750,000 751,875
----------
ENTERTAINMENT (3.1%)
AMF Group, Inc., Series B
10.875%, 03/15/06 .......................... 1,000,000 1,100,000
Premier Parks
12.00%, 08/15/03 ........................... 1,625,000 1,811,875
----------
2,911,875
----------
ENVIRONMENTAL SERVICES (1.2%)
Allied Waste N.A.
10.25%, 12/01/06 ........................... 1,000,000 1,102,500
----------
FINANCIAL INSTITUTIONS (5.0%)
Aames Financial Corp.
9.125%, 11/01/03 ........................... 1,250,000 1,231,250
Americredit Corp.
9.25%, 02/01/04 ............................ 1,500,000 1,500,000
DVI, Inc.
9.875%, 02/01/04 ........................... 1,875,000 1,964,063
----------
4,695,313
----------
FOOD & FOOD SERVICES (3.9%)
Canandaigua Wine, Inc.
8.75%, 12/15/03 ............................ 875,000 896,875
Carrols Corp.
11.50%, 08/15/03 ........................... 1,500,000 1,597,500
Keebler Corp.
10.75%, 07/01/06 ........................... 375,000 423,750
Rykoff Sexton, Inc.
8.875%, 11/01/03 ........................... 750,000 778,125
----------
3,696,250
----------

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

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997

FACE
AMOUNT VALUE+
---------- ----------

HEALTHCARE SERVICES & RELATED (2.4%)
Quorum Health Group, Inc.
8.75%, 11/01/05 .............................. $ 650,000 $ 673,563
Universal Health Services, Inc.
8.75%, 08/15/05 .............................. 500,000 528,750
Vencor, Inc.
8.625%, 07/15/07 ............................. 1,000,000 1,002,500
----------
2,204,813
----------
HOMEBUILDING & BUILDING MATERIALS (7.7%)
Congoleum Corp.
9.00%, 02/01/01 .............................. 1,500,000 1,530,000
Del E. Webb
9.75%, 03/01/03 .............................. 650,000 676,812
Johns Manville International Group
10.875%, 12/15/04 ............................ 750,000 834,375
Nortek, Inc.
9.875%, 03/01/04 ............................. 1,000,000 1,027,500
Ryland Group
10.50%, 07/15/02 ............................. 1,000,000 1,055,000
Toll Corp.
9.50%, 03/15/03 .............................. 500,000 522,500
Triangle Pacitic Corp.
10.50%, 08/01/03 ............................. 1,250,000 1,328,125
U.S. Home Corp.
8.88%, 08/15/07 .............................. 250,000 255,000
----------
7,229,312
----------
HOTELS (2.2%)
Orient Express Hotels, Inc.
10.25%, 09/01/98 ............................. 209,000 211,090
Red Roof Inns, Inc.
9.625%, 12/15/03 ............................. 1,750,000 1,815,625
----------
2,026,715
----------
MEDIA (2.1%)
Heritage Media Corp.
11.00%, 06/15/02 ............................. 1,850,000 1,933,250
----------
METALS (2.8%)
GS Technologies Operating Co.
12.25%, 10/01/05 ............................. 1,000,000 1,122,500
Ivaco, Inc.
11.50%, 09/15/05 ............................. 1,400,000 1,519,000
----------
2,641,500
----------
MULTIMEDIA (3.8%)
Ackerly Communications, Inc.
10.75%, 10/01/03 ............................. 1,525,000 1,631,750
++ Lamar Advertising Co.
9.625%, 12/01/06 ............................. 750,000 811,875
Outdoor Systems, Inc.
9.375%, 10/15/06 ............................. 1,000,000 1,070,000
----------
3,513,625
----------

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

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997

FACE
AMOUNT VALUE+
---------- ----------
OIL & GAS (9.8%)
Coda Energy, Inc.
10.50%, 04/01/06 ......................... $ 750,000 $ 813,750
Ferrell Gas Inc.
10.00%, 08/01/01 ......................... 1,800,000 1,917,000
Giant Industries
9.75%, 11/15/03 .......................... 1,125,000 1,164,375
Gulf Canada Resources Ltd.
9.25%, 01/15/04 .......................... 1,000,000 1,055,930
Nuevo Energy Co.
9.50%, 04/15/06 .......................... 500,000 534,375
Pride Petroleum Services, Inc.
9.375%, 05/01/07 ......................... 650,000 702,000
United Meridan Corp.
10.375%, 10/15/05 ........................ 1,000,000 1,110,000
Veritas DGC, Inc.
9.75%, 10/15/03 .......................... 1,700,000 1,844,500
----------
9,141,930
----------
PAPER & FOREST PRODUCTS (0.8%)
U.S. Timberlands
9.625%, 11/15/07 ......................... 750,000 783,750
----------
PUBLISHING (2.2%)
K-III Communications Corp.
10.25%, 06/01/04 ......................... 1,250,000 1,356,250
Newsquest Capital plc
11.00%, 05/01/06 ......................... 600,000 676,500
----------
2,032,750
----------
RETAILERS (6.2%)
Ann Taylor Inc.
8.75%, 06/15/00 .......................... 1,350,000 1,370,250
Brylane
10.00%, 09/01/03 ......................... 2,000,000 2,132,500
Leslie's Poolmart
10.375%, 07/15/04 ........................ 1,000,000 1,040,000
Southland Corp.
4.50%, 06/15/04 .......................... 1,000,000 810,000
Southland Corp.
5.00%, 12/15/03 .......................... 550,000 474,424
----------
5,827,174
----------
TECHNOLOGY (4.0%)
Amphenol Corp.
9.875%, 05/15/07 ......................... 1,000,000 1,070,000
Clark-Schwebel, Inc.
10.50%, 04/15/06 ......................... 750,000 817,500
Plantronics, Inc.
10.00%, 01/15/01 ......................... 1,825,000 1,898,000
----------
3,785,500
----------

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

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997

FACE
AMOUNT VALUE+
----------- -----------
TELECOMMUNICATIONS (1.7%)
++ Globalstar LP
10.75%, 11/01/04 ........................... $ 500,000 $ 488,750
Iridium LLC/Capital Corp.
14.00%, 07/15/05 ........................... 1,000,000 1,092,500
----------
1,581,250
----------
TEXTILE/APPAREL MANUFACTURING (5.6%)
Dan River Inc.
10.125%, 12/15/03 .......................... 500,000 533,750
Dominion Textile, Inc.
8.875%, 11/01/03 ........................... 675,000 718,875
++ Glenoit Corp.
11.00%, 04/15/07 ........................... 1,000,000 1,080,000
Interface, Inc., Series B
9.50%, 11/15/05 ............................ 250,000 270,000
Pillowtex Corp.
10.00%, 11/15/06 ........................... 1,000,000 1,075,000
Tultex Corp.
10.625%, 03/15/05 .......................... 500,000 520,000
Westpoint Stevens, Inc.
9.375%, 12/15/05 ........................... 1,000,000 1,055,000
----------
5,252,625
----------
TRANSPORTATION (4.0%)
Ameritruck Distribution Corp., Series B
12.25%, 11/15/05 ........................... 1,000,000 995,000
Continental Airlines, Inc.
9.50%, 12/15/01 ............................ 750,000 791,250
Sea Containers Ltd.
9.50%, 07/01/03 ............................ 750,000 783,750
Sea Containers Ltd., Series A
12.50%, 12/01/04 ........................... 1,000,000 1,132,500
----------
3,702,500
----------
TOTAL CORPORATE BONDS (COST $82,701,822) ....... 83,437,132
----------
CONVERTIBLE BONDS (3.8%)
AUTO MANUFACTURING & RELATED (0.7%)
Exide Corp.
2.90%, 12/15/05 ............................ 1,000,000 669,720
----------
COMMERCIAL SERVICES (1.2%)
Danka Business
6.75%, 04/01/02 ............................ 1,200,000 1,073,976
----------
HEALTHCARE SERVICES & RELATED (1.5%)
Novacare, Inc.
5.50%, 01/15/00 ............................ 1,500,000 1,418,430
----------
RETAILERS (0.4%)
Nine West Group
5.50%, 07/15/03 ............................ 500,000 406,795
----------
TOTAL CONVERTIBLE BONDS (COST $2,056,154) ...... 3,568,921
----------

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

<PAGE>

LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997

FACE
AMOUNT VALUE+
------------ ------------
SHORT-TERM INVESTMENT (6.0%)
REPURCHASE AGREEMENTS (6.0%)
Chase Securities, Inc., 5.95%, dated
12/31/97, due 1/02/98, to be repurchased
at $5,617,856, collateralized by $5,675,000
U.S. Treasury Note, 5.625%, due 02/15/06,
valued at $5,733,523 (COST $5,616,000) ........ $ 5,616,000 $ 5,616,000
-----------
TOTAL INVESTMENTS (99.2%) (COST $90,373,976) ..... 92,622,053
NET OTHER ASSETS AND LIABILITIES (0.8%) .......... 744,106
-----------
NET ASSETS (100%) ................................ $93,366,159
-----------
- ----------

+ See Note A to Financial Statements.

++ 144A Security. Certain conditions for public sale may exist.

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

9
<PAGE>

LIPPER HIGH INCOME BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997

ASSETS:
Investments, at value (Cost $90,373,976) (Note A) ............. $92,622,053
Cash .......................................................... 924
Interest Receivable ........................................... 2,023,829
Deferred Organization Costs (Note A) .......................... 61,065
Prepaid Assets ................................................ 9,329
-----------
TOTAL ASSETS ............................................... 94,717,200
-----------
LIABILITIES:
Dividends Payable--Premier Shares ............................. 390,354
Dividends Payable--Retail Shares .............................. 18,425
Payable for Investments Purchased ............................. 765,904
Custodian Fees Payable ........................................ 5,672
Investment Advisory Fees Payable (Note B) ..................... 51,318
Administrative Fees Payable (Note C) .......................... 26,773
Directors' Fees Payable (Note D) .............................. 5,765
Distribution Fees Payable - Retail Shares (Note E) ............ 6,461
Shareholder Servicing Fees Payable - Group
Retirement Plan Shares (Note E) .............................. 9,900
Other Liabilities ............................................. 70,469
-----------
TOTAL LIABILITIES .......................................... 1,351,041
-----------
NET ASSETS ..................................................... $93,366,159
===========
NET ASSETS CONSIST OF:
Paid in Capital ............................................... $90,807,563
Accumulated Net Realized Gain ................................. 310,519
Unrealized Appreciation on Investments ........................ 2,248,077
-----------
$93,366,159
===========
PREMIER SHARES:
Net Assets .................................................... $85,151,354
Shares Issued and Outstanding ($.001 par value)
(Authorized 3,333,333,333) ................................... 8,419,839
Net Asset Value, Offering and Redemption Price Per Share ...... $ 10.11
===========
RETAIL SHARES:
Net Assets .................................................... $ 4,697,061
Shares Issued and Outstanding ($.001 par value)
(Authorized 3,333,333,333) ................................... 464,774
Net Asset Value, Offering and Redemption Price Per Share ...... $ 10.11
===========
GROUP RETIREMENT PLAN SHARES:
Net Assets .................................................... $ 3,517,744
Shares Issued and Outstanding ($.001 par value)
(Authorized 3,333,333,333) ................................... 348,101
Net Asset Value, Offering and Redemption Price Per Share ...... $ 10.11
===========

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

10
<PAGE>

LIPPER HIGH INCOME BOND FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997

INVESTMENT INCOME
Interest ..................................... $ 9,953,668
-----------
EXPENSES
Investment Advisory Fees (Note B)
Basic Fee ................................... $ 779,370
Less: Fee Waived ............................ (170,854) 608,516
------------
Administrative Fees (Note C) ................. 245,328
Directors' Fees (Note D) ..................... 19,965
Distribution Fees - Retail Shares (Note E) ... 6,323
Shareholder Servicing Fees - Group
Retirement Plan Shares (Note E) ........... 7,156
Professional Fees ............................ 61,863
Custodian Fees ............................... 21,720
Registration and Filing Fees ................. 20,696
Amortization of Organization Costs
(Note A) .................................. 18,569
Other Expenses ............................... 43,213
-----------
Total Expenses .......................... 1,053,349
-----------
NET INVESTMENT INCOME ................... 8,900,319
-----------
NET REALIZED GAIN FROM:
Investments sold ............................ 2,631,435
-----------
NET CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION:
Investments .................................. (295,674)
-----------
TOTAL REALIZED GAIN AND NET CHANGE IN
UNREALIZED APPRECIATION/DEPRECIATION ......... 2,335,761
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS ................................. $11,236,080
===========

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

11
<PAGE>

LIPPER HIGH INCOME BOND FUND
STATEMENT OF CHANGES IN NET ASSETS

FOR THE PERIOD
APRIL 1, 1996*
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------

INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS:
Net Investment Income ....................... $ 8,900,319 $ 6,542,947
Net Realized Gain ........................... 2,631,435 349,656
Net Change in Unrealized
Appreciation/Depreciation ................ (295,674) 2,206,383
------------- -------------
Net Increase in Net Assets Resulting
from Operations ........................ 11,236,080 9,098,986
------------- -------------
DISTRIBUTIONS:
PREMIER SHARES:
From net investment income .................. (8,415,284) (6,418,067)
From net realized gains ..................... (2,140,829) (336,936)
RETAIL SHARES:
From net investment income .................. (228,895) (33,219)
From net realized gains ..................... (120,871) (2,731)
GROUP RETIREMENT PLAN SHARES:
From net investment income .................. (248,840) (105,226)
From net realized gains ..................... (88,296) (7,194)
------------- -------------
Total Distributions ..................... (11,243,015) (6,903,373)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTES G AND H):
PREMIER SHARES:
Issued--Regular ............................. 22,290,649 51,337,878
--Distributions Reinvested ............... 8,673,740 6,181,966
--Contribution from Partnership .......... -- 74,518,244
Redeemed .................................... (48,895,579) (31,229,026)
------------- -------------
Net Increase (Decrease) in Premier
Shares Transactions ................... (17,931,190) 100,809,062
------------- -------------
RETAIL SHARES:
Issued--Regular ............................. 3,993,908 859,030
--Distributions Reinvested ............... 292,126 19,312
Redeemed .................................... (327,954) (47,408)
------------- -------------
Net Increase in Retail Shares
Transactions .......................... 3,958,080 830,934
------------- -------------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ............................. 1,773,908 2,040,052
--Distributions Reinvested ............... 337,135 112,419
Redeemed .................................... (752,919) --
------------- -------------
Net Increase in Group Retirement Plan
Shares Transactions ................... 1,358,124 2,152,471
------------- -------------
Net Increase (Decrease) in Net Assets
From Capital Share Transactions ........... (12,614,986) 103,792,467
------------- -------------
TOTAL INCREASE (DECREASE) ............... (12,621,921) 105,988,080
------------- -------------
NET ASSETS:
Beginning of Period ......................... 105,988,080 --
------------- -------------
End of Period (A) ........................... $ 93,366,159 $ 105,988,080
(A) Includes undistributed net investment
income .................................. $ -- $ 416
============= =============
- ----------

* Commencement of Operations.

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

12
<PAGE>

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

GROUP GROUP
PREMIER PREMIER RETAIL RETAIL RETIREMENT RETIREMENT
SHARES SHARES SHARES SHARES PLAN SHARES PLAN SHARES
----------- ------------ ------------ ------------ ------------ ------------
YEAR APRIL 1, YEAR APRIL 11, YEAR APRIL 12,
ENDED 1996** TO ENDED 1996*** TO ENDED 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996 1997 1996
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... $ 10.18 $ 10.00 $10.18 $ 9.91 $10.18 $ 9.93
------- -------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) .................. 0.91 0.68 0.84 0.62 0.85 0.62
Net Realized and Unrealized Gain on
Investments .............................. 0.19 0.21 0.23 0.34 0.22 0.32
------- -------- ------ ------ ------ ------
Total From Investment Operations ....... 1.10 0.89 1.07 0.96 1.07 0.94
------- -------- ------ ------ ------ ------
DISTRIBUTIONS:
Net Investment Income ..................... (0.91) (0.68) (0.88) (0.66) (0.88) (0.66)
Net Realized Gain ......................... (0.26) (0.03) (0.26) (0.03) (0.26) (0.03)
------- -------- ------ ------ ------ ------
Total Distributions .................... (1.17) (0.71) (1.14) (0.69) (1.14) (0.69)
------- -------- ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ............. $ 10.11 $ 10.18 $10.11 $10.18 $10.11 $10.18
======= ======== ====== ====== ====== ======
TOTAL RETURN(2) ............................ 11.22% 9.23% 10.97% 10.04% 10.96% 9.78%
======= ======== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) .......... $85,151 $102,945 $4,697 $ 845 $3,518 $2,198
Ratios After Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ........... 1.00% 1.00%* 1.25% 1.25%* 1.25% 1.25%*
Net Investment Income to Average
Net Assets .............................. 8.58% 9.01%* 8.31% 8.95%* 8.32% 8.91%*
Ratios Before Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ........... 1.16% 1.27%* 1.41% 1.59%* 1.41% 1.55%*
Net Investment Income to Average
Net Assets .............................. 8.42% 8.74%* 8.15% 8.61%* 8.16% 8.61%*
Portfolio Turnover Rate .................... 105% 74% 105% 74% 105% 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:

YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Premier Shares ................................. $0.02 $0.02
Retail Shares .................................. $0.02 $0.02
Group Retirement Plan Shares ................... $0.02 $0.02

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

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

13
<PAGE>

LIPPER HIGH INCOME BOND FUND
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, 1997 the Company was
comprised of three diversified portfolios: Lipper High Income Bond Fund, Lipper
U.S. Equity Fund, and Prime Lipper Europe Equity Fund. These financial
statements pertain to Lipper High Income Bond Fund only. The financial
statements of the remaining Funds are presented separately. The Company offers
the shares of each Fund in three classes: Premier Shares, Retail Shares and
Group Retirement Plan Shares. The Lipper High Income Bond Fund (the "Fund") was
funded as a registered investment company on April 1, 1996 with a contribution
of securities 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.

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 Fund in the
preparation of its 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: Fixed income securities are stated on the basis of
valuations provided by brokers and/or a pricing service which uses information
with respect to transactions in fixed income securities, quotations from
dealers, market transactions in comparable securities and various relationships
between securities in determining value. Short-term investments that have
remaining maturities of sixty days or less at time of purchase are valued at
amortized cost, if it approximates market value. The value of securities for
which no quotations are readily available is determined in good faith at fair
value using methods determined by the Board of Directors.

At December 31, 1997 the cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:

NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
---- ------------ -------------- ------------
$90,388,797 $2,520,986 $(287,730) $2,233,256

3. DISTRIBUTIONS TO SHAREHOLDERS: The Fund intends to distribute
substantially all of its net investment income monthly. Net realized capital
gains, if any, will be distributed at least annually by the Fund. All
distributions are recorded on the 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 and losses due to wash sales
transactions.

Permanent book and tax differences between U.S. federal income tax
regulations and generally accepted accounting principles may result in
reclassifications to undistributed net investment income (loss), undistributed
realized net gain (loss) and paid in capital.

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

5. OTHER: Securities 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. Interest income is recognized on the accrual basis.
Discounts and premiums on securities purchased are

<PAGE>

LIPPER HIGH INCOME BOND FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

amortized according to the effective yield method over their respective lives.
Expenses of the Company, which are not directly attributable to a Fund, are
allocated among the Funds based on their relative net assets. Income, expenses
(other than class specific expenses) and realized and unrealized gains or losses
are allocated to each class of shares based upon their relative net assets.

B. ADVISORY SERVICES: Lipper & Company, L.L.C. (the "Adviser") serves as the
investment adviser to the Fund. Under the terms of the Investment Advisory
Agreement (the "Agreement"), the Adviser provides investment advisory services
for a fee calculated at an annual rate of 0.75% of the Fund's average daily net
assets. From time to time, the Adviser may voluntarily waive, for a period of
time, all or a portion of the fee to which it is entitled under its Agreement
with the Fund. Until further notice, the Adviser has agreed to voluntarily waive
fees and reimburse expenses to the extent necessary to maintain an annual
operating expense ratio to net assets of not more than the following:

GROUP
PREMIER SHARES RETAIL SHARES RETIREMENT PLAN SHARES
-------------- ------------- ----------------------
1.00% 1.25% 1.25%

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 Fund is
subject to a minimum annual fee of $70,000 per year. Under a separate agreement,
Chase also acts as the Company's custodian for the Fund's assets.

D. DIRECTORS' FEES: The Company pays each Director who is not a director,
officer or employee of the Adviser or any of its 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., an affiliate
of the Adviser, serves as the Company's distributor (the "Distributor"). The
Distributor is entitled to receive an annual distribution fee payable from the
net assets of the 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 shareholder
servicing agreements with respect to the Fund's Group Retirement Plan Shares.
Under such servicing agreements, each servicing agent will be entitled to
receive from the net assets of the 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 year ended December 31, 1997, the cost of
purchases and proceeds of sales for investment securities other than long-term
U.S. Government and short-term securities were:

PURCHASES SALES
----------- ------------
$99,217,258 $110,537,241

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

G. LIMITED PARTNERSHIP TRANSFER: The Fund was formed as a successor investment
vehicle for a limited partnership (a "Partnership") for which Lipper & Company,
L.P., an affiliate of the Adviser acted as general partner and investment
adviser since inception. On April 1, 1996, the Fund exchanged Premier Shares for
portfolio securities of the Partnership (the "Transfer"). Premier Shares issued
by the Fund in the Transfer were issued at the net asset value of Premier Shares
prior to the Transfer. Premier Shares received in the Transfer have been
distributed to the Partnership's limited partners who elected to participate in
the Transfer. Securities valued at $74,518,234 at the

<PAGE>

LIPPER HIGH INCOME BOND FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

date of Transfer with unrealized appreciation of $337,368 were contributed to
the Fund on a tax-free basis. To the extent that the Fund acquired securities in
the 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 subsequently acquire shares of the Fund.

H. OTHER: Capital share transactions for the Fund, by class of shares, were as
follows:

YEARS ENDED DECEMBER 31,
---------------------------
1997 1996
--------- ----------
PREMIER SHARES (1):
Issued--Regular ............................ 2,177,661 5,168,834
Distributions Reinvested ............... 847,370 616,706
Contribution from Partnerships ......... -- 7,451,824
Redeemed ................................... (4,718,897) (3,123,659)
--------- ----------
Net Increase (Decrease) .................... (1,693,866) 10,113,705
--------- ----------
RETAIL SHARES (2):
Issued--Regular ............................ 385,019 85,832
Distributions Reinvested ............... 28,585 1,913
Redeemed ................................... (31,845) (4,730)
--------- ----------
Net Increase ............................... 381,759 83,015
--------- ----------
GROUP RETIREMENT PLAN SHARES (3):
Issued--Regular ............................ 171,458 204,841
Distributions Reinvested ............... 32,968 11,177
Redeemed ................................... (72,343) --
--------- ----------
Net Increase ............................... 132,083 216,018
--------- ----------
- ----------
1. Initial offering of Premier Shares commenced on April 1, 1996.

2. Initial offering of Retail Shares commenced on April 11, 1996.

3. Initial offering of Group Retirement Plan Shares commenced on April 12,
1996.

I. OTHER: At December 31, 1997, the percentage of total shares outstanding held
by record shareholders owning 10% or greater of the aggregate total shares for
the Fund was as follows:

NO. OF %
SHAREHOLDERS OWNERSHIP
------------ ---------
2 23.31%

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.

16
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of Lipper High Income Bond Fund:

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio 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 (one
of the Funds constituting The Lipper Funds, Inc., hereafter referred to as the
"Fund") at December 31, 1997, the results of its operations for the year then
ended, the changes in its net assets for the year then ended and for the period
April 1, 1996 (commencement of operations) through December 31, 1996 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, 1997 by
correspondence with the custodian and brokers and the application of a
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
February 13, 1998

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

FEDERAL INCOME TAX INFORMATION
(UNAUDITED)

Lipper High Income Bond Fund, hereby designates $31,412 as 28% and $524,116
as 20% long-term capital gain dividends for the purpose of the dividend paid
deduction on the Fund's Federal income tax return.

17
<PAGE>

BOARD OF DIRECTORS KENNETH LIPPER
Director, President and Chairman

STANLEY BREZENOFF
Director

MARTIN MALTZ
Director

IRWIN RUSSELL
Director

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

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

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

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

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

<PAGE>

===========================
THE LIPPER FUNDS, INC.
===========================

LIPPER U.S. EQUITY FUND

Annual Report
================================================================================
December 31, 1997

<PAGE>

=====================
TABLE OF CONTENTS
=====================

Shareholder's Letter .................................... 1-3

Portfolio of Investments ................................ 4

Statement of Assets and Liabilities ..................... 5

Statement of Operations ................................. 6

Statement of Changes in Net Assets ...................... 7

Financial Highlights .................................... 8

Notes to Financial Statements ........................... 9-11

Report of Independent Accountants ....................... 12

Tax Information ......................................... 12

<PAGE>

THE LIPPER FUNDS, INC. ANNUAL REPORT
THE LIPPER U.S. EQUITY FUND December 31, 1997

Dear Shareholder:

We are pleased to present the Annual Report for The Lipper U.S. Equity Fund
for the year ended December 31, 1997. The Lipper U.S. Equity Fund is one of
three investment portfolios--along with The Lipper High Income Bond Fund and The
Prime Lipper Europe Equity Fund--which comprise The Lipper Funds, Inc. Each of
the Lipper Funds is made available to individual, institutional and group
retirement plan investors through a separate class of shares. This report
presents the financial statements and performance review for The Lipper U.S.
Equity Fund for the year ended December 31, 1997.

PERFORMANCE AND PORTFOLIO REVIEW

Performance as discussed below reflects the performance of the Fund's
Premier class of shares. Performance for the Fund's Retail and Group Retirement
Plan Shares (illustrated on page 3) differs from Premier Share performance due
to different inception dates and the higher class specific expenses associated
with the Retail and Group Retirement Plan classes of shares.

THE LIPPER U.S. EQUITY FUND

U.S. equity investors experienced yet another incredible year in 1997. Few
investors expected to see another year of impressive gains, especially following
two prior years of double digit gains. However, despite several setbacks, the
U.S. equity markets continued on an upward spiral, with the S&P 500 Index
increasing 33.36%. In general, large capitalization stocks outperformed small
stocks for the fourth straight year in a row, with the largest, most liquid
stocks being rewarded the most.

The Lipper U.S. Equity Fund employs a value-oriented investment strategy
seeking long-term capital appreciation by investing primarily in large
capitalization U.S. equities which are believed to be selling at substantially
below their true economic values. The Fund performed fairly well during the
twelve month period ended December 31, 1997--generating a total return of 18.96%
net of all fees and expenses. For comparison purposes the average return of all
domestic equity funds tracked by Morningstar, Inc. was 24.35% over the same
period.

U.S. stock prices were propelled to new highs in early 1997, fueled by
nearly full employment, record high consumer confidence and low inflation.
Despite several setbacks, continued growth in corporate profits, declining
interest rates, and continued money flows into stock mutual funds kept the
market rising throughout most of the year.

Given the record valuation levels, the U.S. markets experienced increased
price volatility during the year. Computer and technology stock prices, which
came under pressure early in the year, rebounded during the second half as the
earnings outlook for select companies improved. In late October, news of the
Asian financial crisis surfaced, affecting the equity markets on a global
basis--leading to the largest point decline in the U.S. equity markets (although
not the largest percentage decline). The U.S. market, however, quickly rebounded
but has since led some investors to a flight to quality and has created an even
greater focus on corporate earnings and resulting valuations going into 1998.

In 1997, The Lipper U.S. Equity Fund benefited from its focus on
well-positioned companies within the financial services, telecommunications, and
technology sectors. Given the continued rise in equity prices, several of the
Fund's holdings were sold during the year, as they reached our projected target
values, including the Fund's largest position, IBM. The Fund also began to
reduce its position in Xerox by the end of 1997. Several securities, including
EDS and Cyprus Amax which failed to meet expectations in terms of earnings
potential were also sold during the period.

Investing the Fund's cash and new capital proved to be a challenging
exercise during most of the year given the market's upward surges. Despite the
market momentum we remained committed to our investment approach --investing
only in those securities representing well-positioned large capitalization
stocks which offer attractive earnings growth prospects which we determine to be
significantly undervalued. As a result, Lipper took a conservative approach to
investing the Fund's cash, opting to maintain larger than normal cash balances,
primarily during the first half of the year.

<PAGE>

In the second half of 1997, we invested the Fund's assets in several
well-positioned companies within the basic material, aerospace/defense, metals &
mining and capital equipment sectors. We believe that these select holdings will
reflect their inherent value over time as they benefit from both strong industry
specific fundamentals, and company specific initiatives intended to improve
revenues and operating efficiencies.

The Fund has also increased its exposure to the banking sector--reflecting
our view that select money center and super-regional institutions will continue
to benefit from both consolidation within their industries, as well as a
continued benign interest rate environment. Bank stock prices, however,
temporarily came under pressure in late 1997 in response to the Asian financial
crisis, which in turn, had a negative impact on the Fund's fourth quarter
performance. Bank stock prices have since rebounded and the Fund's bank sector
investments have since proved to be strong contributors to the Fund's overall
performance in early 1998.

The U.S. market as a whole over the next year will most likely be volatile
as the impact of the Asian financial crisis filters into multinational corporate
earnings figures. Many large capitalization stocks will likely be vulnerable at
their current levels should the impact of the Asian crisis prove to be greater
than currently estimated by economists and analysts. On a positive note,
however, money will flow to those companies with sound valuations and strong
earnings prospects. As a result, the market environment will likely prove to be
much more selective and should benefit stock pickers and active managers over
the broad market indices.

The Lipper 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.

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

Sincerely,

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

<PAGE>

THE LIPPER U.S. EQUITY FUND PERFORMANCE

-----------------------------------------------------------------
Average Annual Total Return
for Periods Ended December 31, 1997*
-----------------------------------------------------------------
1 Year Since Inception*
-----------------------------------------------------------------
Premier Shares 18.96% 19.24%
-----------------------------------------------------------------
Retail Shares 18.58% 19.15%
-----------------------------------------------------------------
Group Retirement Plan Shares 18.55% 19.17%
-----------------------------------------------------------------

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

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

Periods 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, 1997. The Lipper U.S. Equity Fund's
Retail and Group Retirement Plan Shares were introduced on January 4, 1996.
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 directly in an unmanaged index.

3
<PAGE>

LIPPER U.S. EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997

SHARES VALUE+
------ -----------
COMMON STOCKS (100.5%)
BASIC MATERIALS (5.0%)
E.I. du Pont de Nemours and Company .............. 14,000 $ 840,875
-----------
METALS & MINING (4.7%)
Nucor Corp. ...................................... 16,500 797,156
-----------
PHARMACEUTICALS (11.2%)
Merck & Company .................................. 8,800 935,000
Zeneca Group plc ................................. 9,000 972,000
-----------
1,907,000
-----------
AEROSPACE/DEFENSE (6.7%)
Northrop Grumman Corp. ........................... 6,800 782,000
Raytheon Co.--Class A ............................ 7,255 357,760
-----------
1,139,760
-----------
CAPITAL EQUIPMENT (5.1%)
Deere & Company .................................. 15,000 874,688
-----------
TELECOMMUNICATIONS/SATELLITE (14.3%)
General Motors Corp., Class H .................... 12,900 476,494
* Loral Space & Communications ..................... 54,200 1,161,912
Motorola, Inc. ................................... 13,900 793,169
-----------
2,431,575
-----------
AG. BIO./LIFE SCIENCES (4.7%)
Monsanto Company ................................. 19,100 802,200
-----------
BUSINESS SERVICES & RELATED (11.4%)
First Data Corp. ................................. 26,700 780,975
* J.D. Edwards & Co. ............................... 12,000 354,000
Olsten Corp. ..................................... 53,000 795,000
-----------
1,929,975
-----------
BANKS-MONEY CENTER (9.7%)
Chase Manhattan Corp. ............................ 8,600 941,700
J.P. Morgan & Company, Inc. ...................... 6,300 711,113
-----------
1,652,813
-----------
BANKS-SUPER REGIONAL (7.9%)
First Union Corp. ................................ 12,000 615,000
NationsBank Corp. ................................ 12,000 729,750
-----------
1,344,750
-----------
TECHNOLOGY (15.2%)
Hewlett-Packard Co. .............................. 12,400 775,000
Intel Corp. ...................................... 11,500 807,516
* Technology Solutions Co. ......................... 30,500 804,437
Xerox Corp. ...................................... 2,600 191,912
-----------
2,578,865
-----------
SPECIALTY MATERIALS (4.6%)
Corning, Inc. .................................... 21,000 779,625
-----------
TOTAL INVESTMENTS (100.5%) (COST $15,493,817) ....... 17,079,282
-----------
NET OTHER ASSETS AND LIABILITIES (-0.5%) ............ (90,377)
-----------
NET ASSETS (100%) ................................... $16,988,905
===========
- ----------

+ See Note A to Financial Statements.

* Non-Income Producing Security.

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

<PAGE>

LIPPER U.S. EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997

ASSETS:
Investments, at value (Cost $15,493,817) (Note A) ............. $17,079,282
Cash .......................................................... 2,527,565
Dividends Receivable .......................................... 23,726
Deferred Organization Costs (Note A) .......................... 56,446
Prepaid Assets ................................................ 1,410
-----------
TOTAL ASSETS ............................................. 19,688,429
-----------
LIABILITIES:
Payable for Investments Purchased ............................. 2,663,340
Custodian Fees Payable ........................................ 2,008
Investment Advisory Fees Payable (Note B) ..................... 10,959
Administrative Fees Payable (Note C) .......................... 6,374
Directors' Fees Payable (Note D) .............................. 812
Distribution Fees Payable -- Retail Shares (Note E) ........... 2,810
Shareholder Servicing Fees Payable -- Group
Retirement Plan Shares (Note E) ............................. 2,878
Other Liabilities ............................................. 10,343
-----------
TOTAL LIABILITIES ........................................ 2,699,524
-----------
NET ASSETS ..................................................... $16,988,905
===========
NET ASSETS CONSIST OF:
Paid in Captial ............................................... $14,612,494
Undistributed Net Investment Income ........................... 1,837
Accumulated Net Realized Gain ................................. 789,109
Unrealized Appreciation on Investments ........................ 1,585,465
-----------
$16,988,905
===========
PREMIER SHARES:
Net Assets .................................................... $14,203,108
Shares Issued and Outstanding ($.001 par value)
(Authorized 3,333,333,333) .................................. 1,180,005
Net Asset Value, Offering and Redemption Price Per Share ...... $ 12.04
===========
RETAIL SHARES:
Net Assets .................................................... $ 899,081
Shares Issued and Outstanding ($.001 par value)
(Authorized 3,333,333,333) .................................. 74,752
Net Asset Value, Offering and Redemption Price Per Share ...... $ 12.03
===========
GROUP RETIREMENT PLAN SHARES:
Net Assets .................................................... $ 1,886,716
Shares Issued and Outstanding ($.001 par value)
(Authorized 3,333,333,333) .................................. 157,155
Net Asset Value, Offering and Redemption Price Per Share ...... $ 12.01
===========

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

5
<PAGE>

LIPPER U.S. EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997

INVESTMENT INCOME
Dividends ...................................... $ 150,115
Interest ....................................... 207,678
-----------
Total Income ................................ 357,793
----------
EXPENSES
Investment Advisory Fees (Note B)
Basic Fee ..................................... $ 130,462
Less: Fee Waived .............................. (100,445) 30,017
----------
Administrative Fees (Note C) ................... 73,478
Directors' Fees (Note D) ....................... 2,849
Distribution Fees - Retail Shares (Note E) ..... 2,180
Shareholder Servicing Fees - Group
Retirement Plan Shares (Note E) ............. 2,379
Custodian Fees ................................. 7,347
Professional Fees .............................. 8,199
Registration and Filing Fees ................... 19,873
Amortization of Organization Costs
(Note A) .................................... 18,564
Other Expenses ................................. 8,415
----------
Total Expenses .............................. 173,301
----------
NET INVESTMENT INCOME ....................... 184,492
----------
NET REALIZED GAIN (LOSS) FROM:
Investments sold ............................... 2,801,832
Written Options ................................ (294,037)
----------
TOTAL NET REALIZED GAIN (LOSS) .................. 2,507,795
----------
NET CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION:
Investments .................................... (41,288)
Written Options ................................ 9,533
----------
NET CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION ................................. (31,755)
----------
TOTAL REALIZED GAIN AND NET CHANGE IN
UNREALIZED APPRECIATION/DEPRECIATION ........... 2,476,040
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................... $2,660,532
==========

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

<PAGE>

LIPPER U.S. EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS

FOR THE PERIOD
JANUARY 2, 1996*
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ----------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS:
Net Investment Income ....................... $ 184,492 $ 194,642
Net Realized Gain ........................... 2,507,795 389,102
Net Change in Unrealized
Appreciation/Depreciation .................. (31,755) 1,617,220
----------- -----------
Net Increase in Net Assets Resulting
from Operations ....................... 2,660,532 2,200,964
----------- -----------
DISTRIBUTIONS:
PREMIER SHARES:
From net investment income .................. (171,940) (197,998)
In excess of net investment income .......... -- (445)
From net realized gains ..................... (1,364,816) (352,126)
In excess of net realized gains ............. -- (78,607)
RETAIL SHARES:
From net investment income .................. (8,737) (8,629)
From net realized gains ..................... (86,666) (21,286)
In excess of net realized gains ............. -- (3,826)
GROUP RETIREMENT PLAN SHARES:
From net investment income .................. (20,542) (6,620)
From net realized gains ..................... (181,951) (15,690)
In excess of net realized gains ............. -- (2,820)
----------- -----------
Total Distributions ...................... (1,834,652) (688,047)
----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTE G):
PREMIER SHARES:
Issued--Regular ............................. 6,377,636 13,421,010
--Distributions Reinvested ............ 1,536,755 635,822
Redeemed .................................... (9,627,970) (477,485)
----------- -----------
Net Increase (Decrease) in Premier
Shares Transactions ................... (1,713,579) 13,579,347
----------- -----------
RETAIL SHARES:
Issued--Regular ............................. 574,703 538,500
--Distributions Reinvested ............ 95,403 29,915
Redeemed .................................... (437,479) --
----------- -----------
Net Increase in Retail Shares
Transactions .......................... 232,627 568,415
----------- -----------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ............................. 1,780,338 380,652
--Distributions Reinvested ............ 202,493 22,310
Redeemed .................................... (502,495) --
----------- -----------
Net Increase in Group Retirement
Plan Shares Transactions ............... 1,480,336 402,962
----------- -----------
Net Increase (Decrease) in Net Assets
From Capital Share Transactions ........... (616) 14,550,724
----------- -----------
TOTAL INCREASE ............................ 825,264 16,063,641
----------- -----------
NET ASSETS:
Beginning of Period ......................... 16,163,641 100,000
----------- -----------
End of Period (A) ........................... $16,988,905 $16,163,641
=========== ===========
(A) Includes undistributed (distributions
in excess of) net investment income
(loss) ................................... $ 1,837 $ (445)
=========== ===========

- ----------
* Commencement of Operations.

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

7
<PAGE>

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

<CAPTION>
GROUP GROUP
PREMIER PREMIER RETAIL RETAIL RETIREMENT RETIREMENT
SHARES SHARES SHARES SHARES PLAN SHARES PLAN SHARES
----------- ------------ ------------ ------------ ------------ ------------
JANUARY 2, JANUARY 4, JANUARY 4,
YEAR ENDED 1996** TO YEAR ENDED 1996*** TO YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996 1997 1996
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.38 $ 10.00 $ 11.38 $ 10.00 $ 11.38 $ 10.00
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) .......... 0.16 0.18 0.13 0.11 0.08 0.07
Net Realized and Unrealized Gain
on Investments .................... 1.96 1.81 1.95 1.86 2.00 1.91
------- ------- ------- ------- ------- -------
Total From Investment Operations 2.12 1.99 2.08 1.97 2.08 1.98
------- ------- ------- ------- ------- -------
DISTRIBUTIONS:
Net Investment Income .............. (0.16) (0.19) (0.13) (0.17) (0.15) (0.18)
Net Realized Gain .................. (1.30) (0.34) (1.30) (0.34) (1.30) (0.34)
In Excess of Net Realized Gain ..... -- (0.08) -- (0.08) -- (0.08)
------- ------- ------- ------- ------- -------
Total Distributions ............. (1.46) (0.61) (1.43) (0.59) (1.45) (0.60)
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD ...... $ 12.04 $ 11.38 $ 12.03 $ 11.38 $ 12.01 $ 11.38
======= ======= ======= ======= ======= =======
TOTAL RETURN (2) .................... 18.96% 19.81% 18.58% 19.62% 18.55% 19.69%
======= ======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ... $14,203 $15,098 $ 899 $ 613 $ 1,887 $ 452
Ratios After Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets .... 1.10% 1.10%* 1.35% 1.35%* 1.35% 1.35%*
Net Investment Income to Average
Net Assets ....................... 1.24% 1.68%* 0.96% 1.31%* 0.89% 1.29%*
Ratios Before Expense Waiver and/or
Reimbursement
Expenses to Average Net Assets .... 1.76% 2.28%* 2.01% 2.75%* 2.01% 2.39%*
Net Investment Income to Average
Net Assets ....................... 0.58% 0.50%* 0.30% (0.09)%* 0.25% 0.25%*
Portfolio Turnover Rate ............. 145% 117% 145% 117% 145% 117%
Broker Commission Rate .............. $0.0342 $0.0445 $0.0342 $0.0445 $0.0342 $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:

YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------

Premier Shares ........................ $0.08 $0.13
Retail Shares ......................... $0.09 $0.12
Group Retirement Plan Shares .......... $0.06 $0.06

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

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

8
<PAGE>

LIPPER U.S. EQUITY FUND
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, 1997 the Company was
comprised of three diversified portfolios: Lipper High Income Bond Fund, Lipper
U.S. Equity Fund, and Prime Lipper Europe Equity Fund. These financial
statements pertain to Lipper U.S. Equity Fund only. The financial statements of
the remaining portfolios are presented separately. The Company offers the shares
of each Fund in three classes: Premier Shares, Retail Shares and Group
Retirement Plan Shares. Lipper U.S. Equity Fund (the "Fund") commenced
investment operations on January 2, 1996.

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.

A. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of significant
accounting policies followed by the Fund which are in conformity with generally
accepted accounting principles for investment companies. Such policies are
consistently followed by the Fund in the preparation of its 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. Short-term investments that have remaining maturities
of sixty days or less at time of purchase are valued at amortized cost, if it
approximates market value. The value of securities for which no quotations are
readily available is determined in good faith at fair value using methods
determined by the Board of Directors.

At December 31, 1997 the cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:

NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
---- ------------ -------------- ------------
$15,493,817 $1,767,714 $(182,249) $1,585,465

3. DISTRIBUTIONS TO SHAREHOLDERS: The Fund intends to distribute
substantially all of its net investment income annually. Net realized capital
gains, if any, will be distributed at least annually by the Fund. All
distributions are recorded on ex-dividend date.

Permanent book and tax differences between U.S. Federal income tax
regulations and generally accepted accounting principles may result in
reclassifications to undistributed net investment income (loss), accumulated net
realized gain (loss) and paid in capital.

4. PURCHASED AND WRITTEN OPTIONS: The Fund may purchase or write put and
call options on securities, securities indices, currencies and other financial
instruments. A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, index or other instrument at the exercise price. The Fund may purchase
a put option on a security to protect its holdings in the underlying instrument,
or a similar instrument, against a substantial decline in the market value of
such instrument by giving the Fund the right to sell the instrument at the
option exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to sell,
the underlying instrument at the exercise price. The purchase of a call option
on a security, index or other instrument might be intended to protect the

<PAGE>

LIPPER U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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. The Fund may purchase a put or call option to close out a
written 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. The 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 the 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 the Fund's net asset value, and possibly income,
and such losses may be greater than if options had not been used.

During the year ended December 31, 1997, the Fund participated in writing
call options. The Fund had option activity as follows:

NUMBER OF
CONTRACTS PREMIUM
--------- -------

Options outstanding at December 31,1996 .......... 348 $94,792
Options written during the year .................. 1,178 371,549
Options exercised during the year ................ (1,526) (466,341)
----- -------
Options outstanding as of December 31, 1997 ...... -- $ --
===== =======

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

6. OTHER: Securities 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. Expenses of the Company,
which are not directly attributable to a Fund, are allocated among the Funds
based on their relative net assets. Income, expenses (other than class specific
expenses) and realized and unrealized gains or losses are allocated to each
class of shares based upon their relative net assets.

B. ADVISORY SERVICES: Lipper & Company, L.L.C. (the "Adviser") serves as the
investment adviser to the Fund. Under the terms of the Investment Advisory
Agreement (the "Agreement"), the Adviser provides investment advisory services
for a fee calculated at an annual rate of 0.85% of the Fund's average daily net
assets. From time to time, the Adviser may voluntarily waive, for a period of
time, all or a portion of the fee to which it is entitled under its Agreement
with the Fund. Until further notice, the Adviser has agreed to voluntarily waive
fees and reimburse expenses to the extent necessary to maintain an annual
operating expense ratio to net assets of not more than the following:

GROUP RETIREMENT
PREMIER SHARES RETAIL SHARES PLAN SHARES
-------------- ------------- ----------------
1.10% 1.35% 1.35%

<PAGE>

LIPPER U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

subject to a minimum annual fee of $70,000 per year. Under a separate
agreement, Chase also acts as the Company's custodian for the Fund's assets.

E. DISTRIBUTION SERVICES: Lipper & Company, L.P., an affiliate of the Adviser,
serves as the Company's distributor (the "Distributor"). The Distributor is
entitled to receive an annual distribution fee payable from the net assets of
the 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 shareholder servicing
agreements with respect to the Fund's Group Retirement Plan Shares. Under such
servicing agreements, each servicing agent will be entitled to receive from the
net assets of the 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.

PURCHASES SALES
----------- -----------
$21,226,205 $16,510,668

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

G. OTHER: Capital share transactions for the Fund, by class of shares, were as
follows:

YEARS ENDED DECEMBER 31,
-------------------------
1997 1996
------- ---------

PREMIER SHARES (1):
Issued--Regular ............................ 506,749 1,304,210
Distributions Reinvested ............... 130,566 55,580
Redeemed ................................... (783,489) (43,611)
------- ---------
Net Increase (Decrease) .................... (146,174) 1,316,179
------- ---------
RETAIL SHARES (2):
Issued--Regular ............................ 48,391 51,245
Distributions Reinvested ............... 8,112 2,619
Redeemed ................................... (35,615) --
------- ---------
Net Increase (Decrease) .................... 20,888 53,864
------- ---------
GROUP RETIREMENT PLAN SHARES (3):
Issued--Regular ............................ 141,807 37,774
Distributions Reinvested ............... 17,248 1,953
Redeemed ................................... (41,627) --
------- ---------
Net Increase (Decrease) .................... 117,428 39,727
------- ---------

- ----------

1. Initial offering of Premier Shares commenced on January 2, 1996.

2. Initial offering of Retail Shares commenced on January 4, 1996.

3. Initial offering of Group Retirement Plan Shares commenced January 4, 1996.

H. OTHER: At December 31, 1997, the percentage of total shares outstanding held
by record shareholders owning 10% or greater of the aggregate total shares for
the Fund was as follows:

NO. OF %
SHAREHOLDERS OWNERSHIP
------------ ---------
2 33.90%

11
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of Lipper U.S. Equity Fund:

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio 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 U.S. Equity Fund (one of the
Funds constituting The Lipper Funds, Inc., hereafter referred to as the "Fund")
at December 31, 1997, the results of its operations for the year then ended, the
changes in its net assets for the year then ended and for the period January 2,
1996 (commencement of operations) through December 31, 1996 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, 1997 by
correspondence 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
February 13, 1998

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

FEDERAL INCOME TAX INFORMATION
(UNAUDITED)

Lipper U.S. Equity Fund hereby designates $1,309,102 as 20% long-term
capital gain dividend for the purpose of the dividend paid deduction on the
Fund's Federal income tax return.

For the Lipper U.S. Equity Fund in 1997, 11.31% of the distribution taxable
as ordinary income, as reported on Form 1099-DIV, qualifies for the dividends
received deduction for corporations.

12
<PAGE>

BOARD OF DIRECTORS KENNETH LIPPER
Director, President and Chairman

STANLEY BREZENOFF
Director

MARTIN MALTZ
Director

IRWIN RUSSELL
Director

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

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

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

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

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

<PAGE>

===========================
THE LIPPER FUNDS, INC.
===========================

PRIME LIPPER EUROPE EQUITY FUND

Annual Report
================================================================================
December 31, 1997
<PAGE>

=====================
TABLE OF CONTENTS
=====================

Shareholder's Letter .................................... 1-3

Portfolio of Investments ................................ 4-7

Statement of Assets and Liabilities ..................... 8

Statement of Operations ................................. 9

Statement of Changes in Net Assets ...................... 10

Financial Highlights .................................... 11

Notes to Financial Statements ........................... 12-15

Report of Independent Accountants ....................... 16

Tax Information ......................................... 16

<PAGE>

THE LIPPER FUNDS, INC. ANNUAL REPORT
THE PRIME LIPPER EUROPE EQUITY FUND December 31, 1997

Dear Shareholder:

We are pleased to present the Annual Report for The Prime Lipper Europe
Equity Fund for the year ended December 31, 1997. The Prime Lipper Europe Equity
Fund is one of three investment portfolios--along with The Lipper U.S. Equity
Fund and The Lipper High Income Bond Fund--which comprise The Lipper Funds, Inc.
Each of The Lipper Funds is made available to individual, institutional and
group retirement plan investors through a separate class of shares. This report
presents the financial statements and performance review of The Prime Lipper
Europe Equity Fund for the year ended December 31, 1997.

PERFORMANCE AND PORTFOLIO REVIEW

Performance as discussed below reflects the performance of the Fund's
Premier class of shares. Performance for the Fund's Retail and Group Retirement
Plan Shares (illustrated on page 3) differs from Premier Shares performance due
to different inception dates and the higher class specific expenses associated
with the Retail and Group Retirement Plan classes of shares.

THE PRIME LIPPER EfUROPE 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.

The Prime Lipper Europe Equity Fund had another strong year in 1997,
generating a total return net of fees and expenses of 18.83% for the year ended
December 31, 1997. The Fund's performance compared favorably to the average
performance of 17.04% of all European stock funds tracked by Morningstar, Inc.
for the same twelve-month period. As with most European mutual funds, the Fund
slightly underperformed its benchmark, the Morgan Stanley Capital International
("MSCI") Europe Index which posted a total return of 22.40% for the period. U.S.
dollar-based performance was strong for the year despite a continued
strengthening of the dollar against most European currencies. For example, the
German mark lost approximately 14% over the twelve-month period.

The European equity markets were strong throughout most of 1997, fueled by
factors such as ongoing economic recovery, a general improvement in corporate
earnings, and low inflation rates across the region. Investors also benefited
from a growing realization that the economic and monetary union (EMU) will go
ahead as planned on January 1, 1999. Corporate restructurings and merger and
acquisition activity dramatically picked up across Europe during the
year--driven by a trend towards cross-border consolidation and the need for many
European companies to improve competitive positioning--both on a Pan-European
and global basis. We believe the results of these initiatives will benefit
investors for several years to come.

European stock prices did come under pressure twice during 1997. In August,
European investors grew concerned over both a decline occuring in the U.S.
equity markets, as well as the potential for an increase in German interest
rates in response to the dramatic appreciation of the U.S. dollar versus the
German mark. This led to a temporary decline in the European equity markets of
over 5.5% in August, a setback which was quickly recovered in the month of
September. In October, the European markets declined, along with the rest of the
world's markets--in reaction to the Asian economic and financial crisis. The
markets were quick to recover, however, as investors refocused on Europe's
economic recovery and continued strong earnings growth.

The Prime Lipper Europe Equity Fund's 1997 performance was primarily due to
stock selection as opposed to sector or country allocation, or due to currency
hedging. Over the course of the year, the Fund's investments were highly
diversified across twelve western European countries, representing approximately
25 industries, and between 67 and 80 individual securities.

During 1997, we continued to position the Fund to benefit from the positive
changes occurring throughout Europe, including EMU and the integration of the
region by focusing on companies with high growth prospects in a

<PAGE>

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.

To date, the Fund has focused on select European companies such as banks
and pharmaceuticals which we believe are positioned to successfully compete on
both a regional and global basis by offering advanced and innovative products
and services. 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. Several securities were also sold during the year
where our analysis pointed to either a potential weakness in earnings growth,
and/or the price of a security had already discounted the anticipated earnings
growth.

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 30% of the portfolio's assets. In 1997, the
Fund was relatively neutral with respect to this allocation--with the exception
of the 3rd Quarter when we reduced our exposure to German mark related countries
due to concerns about an anticipated increase in interest rates. Given our
outlook for 1998 of continued economic growth across the region, we do not
anticipate any significant over or underweighting of any country relative to our
normal allocation at this time.

The outlook for Europe in 1998 is very positive as the equity markets are
expected to benefit from improvements in corporate earnings growth--fueled by
continued economic recovery, ongoing corporate restructuring and merger
activity, and a relatively benign inflation and interest rate environment. As in
the United States, the impact of the Asian crisis will not be fully discounted
in European equity market valuations until the effects on corporate earnings
become more apparent. Whereas this uncertainty may add some volatility to the
markets, we believe the impact should be outweighed by the positive changes
occurring throughout the region.

We believe the prospects for The Prime Lipper Europe Equity Fund in 1998
are excellent. The Fund is well-positioned in strong growth stocks which should
benefit from both the advancing economic cycle and Europe's progress toward
political and economic unity.

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

Sincerely,

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

<PAGE>

THE PRIME LIPPER EUROPE EQUITY FUND PERFORMANCE

AVERAGE ANNUAL TOTAL RETURN*
FOR PERIODS ENDED DECEMBER 31, 1997

1 YEAR 5 YEAR SINCE INCEPTION
------ ------ ---------------
PREMIER SHARES 18.83% 15.88% 12.59%
RETAIL SHARES 18.49% 15.79% 12.51%
GROUP RETIREMENT PLAN SHARES 18.60% 15.79% 12.52%

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 REPRESENTATION OF MOUNTAIN CHART]

Prime Lipper Europe Equity Fund Premier Shares MSCI Europe Index

+ 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. Also shown is the predecessor partnership's performance
for the five year average annualized period and the performance of the Fund as a
registered investment company for the period from April 1, 1996 through December
31, 1997. As a registered investment company under the Investment Company Act of
1940, ("the Act"), the Fund is subject to certain restrictions under the Act and
the Internal Revenue Code (the "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.

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 directly in an unmanaged index.

<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997

SHARES VALUE+
------ ------
COMMON AND PREFERRED STOCKS (96.9%)
BELGIUM (1.9%)
Credit Communal Preferred de Belique-DEXIA .... 12,000 $ 1,611,292
-----------
FINLAND (1.1%)
Oyj Nokia AB, Preferred ....................... 12,720 903,950
-----------
FRANCE (10.5%)
Carrefour Supermarche SA ...................... 2,200 1,148,271
Grand Qptical Photoservice .................... 21,800 897,221
Promodes SA ................................... 3,300 1,369,698
Sanofi S.A .................................... 10,030 1,117,038
Scor S.A ...................................... 20,500 980,701
Sidel SA ...................................... 17,000 1,127,493
Societe Technip S.A ........................... 10,450 1,103,017
Total S.A., B shares .......................... 10,520 1,145,379
-----------
8,888,818
-----------
GERMANY (14.6%)
Allianz Holding AG ............................ 7,300 1,883,766
* BHW Holding AG ................................ 88,000 1,443,746
Bayer AG ...................................... 42,000 1,559,146
Bayerische Motoren Werke AG ................... 1,550 1,159,418
Dresdner Bank AG .............................. 33,500 1,523,998
Mannesmann AG ................................. 3,100 1,556,810
Muenchener Rueckversicherungs-Gesellschaft AG.. 4,300 1,635,727
VEBA AG ....................................... 23,570 1,605,764
-----------
12,368,375
-----------
IRELAND (1.4%)
Bank of Ireland ............................... 76,720 1,159,094
-----------
ITALY (6.8%)
ENI S.p.A ..................................... 144,190 817,978
Edison S.p.A .................................. 99,590 602,705
Italgas S.p.A ................................. 198,720 820,484
Parmalat Finanziaria S.p.A .................... 538,612 770,730
Societa Assicuratrice Industriale S.p.A ....... 82,060 914,330
Telecom Italia Mobile S.p.A ................... 210,080 970,167
Telecom Italia S.p.A .......................... 143,730 918,610
-----------
5,815,004
-----------
NETHERLANDS (8.6%)
Aegon N.V ..................................... 12,400 1,104,030
* Baan Company, N.V ............................. 31,600 1,034,992
Getronics N.V ................................. 26,000 828,491
ING Groep NV., Certificate Shares ............. 26,212 1,104,180
Koninkliijke Ahold NV ......................... 37,460 977,474
VNU-Verenigde Nederlandse Uitgeversbedrijven... 40,000 1,128,595
Wolters Kluwer NV ............................. 8,600 1,111,005
-----------
7,288,767
-----------

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

<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997

SHARES VALUE+
------ ------
SPAIN (4.2%)
Banco Santander SA ............................. 22,000 $ 734,680
Corporacion Mapfre, Registered shares .......... 23,800 630,836
Centros Comerciales Pryca S.A .................. 34,000 506,364
Endesa S.A ..................................... 25,500 452,549
Gas Natural SDG ................................ 10,800 559,769
Sol Melia, S.A ................................. 16,500 660,346
-----------
3,544,544
-----------
SWEDEN (4.1%)
Astra AIB, Class B ............................. 80,520 1,354,753
Ericsson LM, Class B ........................... 26,500 996,931
Sandvik AB, Class B ............................ 38,500 1,101,442
-----------
3,453,126
-----------
SWITZERLAND (13.1%)
Adecco S.A., Bearer ............................ 3,700 1,074,284
Julius Baer Holding AG, Bearer ................. 700 1,300,562
Nestle S.A., Registered ........................ 1,050 1,575,792
Novartis AG, Registered ........................ 950 1,543,603
Roche Holding AG, DRC .......................... 145 1,441,948
Schweizerische Bankgesellschaft (UBS), Bearer... 1,500 2,171,946
Zurich Versicherungsgesellschaft, Registered ... 4,250 2,027,972
-----------
11,136,107
-----------
UNITED KINGDOM (30.6%)
Abbey National plc ............................. 91,620 1,644,713
Boots plc ...................................... 105,975 1,528,377
British Telecom plc ............................ 194,000 1,527,421
Cadbury Schweppes plc .......................... 146,639 1,480,264
Carlton Communications plc ..................... 160,000 1,237,351
Compass Group plc .............................. 117,000 1,441,925
HSBC Holdings plc .............................. 39,500 1,013,904
Lloyds TSB Group plc ........................... 122,323 1,584,010
Marks & Spencer plc ............................ 145,000 1,429,124
Medeva plc ..................................... 341,000 908,959
Misys plc ...................................... 52,000 1,574,332
SEMA Group plc ................................. 63,000 1,534,183
Siebe plc ...................................... 76,000 1,494,364
SmithKline Beecham plc ......................... 150,000 1,537,639
Smiths Industries plc .......................... 98,000 1,367,404
The Sage Group plc ............................. 113,000 1,548,811
Vodafone Group plc ............................. 224,000 1,618,034
Zeneca Group plc ............................... 44,000 1,547,149
-----------
26,017,964
-----------
TOTAL INVESTMENTS (96.9%) (COST $68,087,087) ...... 82,187,041
NET OTHER ASSETS AND LIABILITIES (3.1%) ........... 2,677,784
-----------
NET ASSETS (100%) ................................. $84,864,825
===========
- ---------

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

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

<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997

FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:

Under the terms of foreign currency exchange contracts open at December
31,1997, the Fund is obligated to deliver or is to receive foreign currency in
exchange for U.S. dollars or foreign currency as indicated below:

NET
CURRENCY TO SETTLEMENT UNREALIZED
DELIVER VALUE DATE IN EXCHANGE FOR VALUE GAIN (LOSS)
----------- -------- ---------- ------------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
USD 190,960 $190,960 01/02/98 ESP 28,915,156 $189,707 $(1,253)
USD 112,791 112,791 01/05/98 ITL 198,297,000 112,156 (635)
-------- -------- -------
$303,751 $301,863 $(1,888)
======== ======== =======
--------
ESP Spanish Peseta
ITL Italian Lira
USD U.S. Dollar

</TABLE>

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

<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1997

SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
(UNAUDITED)

PERCENT OF
NET
INDUSTRY ASSETS VALUE
-------- ---------- -----

Automobiles .......................... 1.4% $ 1,159,418
Banking .............................. 16.7 14,187,945
Broadcast & Publishing ............... 4.1 3,476,950
Business & Public Services ........... 9.7 8,208,527
Chemicals ............................ 1.8 1,559,146
Data Processing ...................... 1.0 828,491
Electrical/Electronics ............... 1.2 996,931
Electrical/ Components/Instruments.... 1.1 903,950
Energy Sources ....................... 2.3 1,963,357
Food & Household Products ............ 4.5 3,826,785
Health & Personal Care ............... 11.1 9,451,089
Insurance ............................ 12.1 10,281,543
Leisure & Tourism .................... 0.8 660,346
Machinery & Engineering .............. 6.1 5,154,725
Merchandising ........................ 8.2 6,959,308
Multi-Industry ....................... 1.8 1,494,364
Recreation & Other Consumer Goods 1.0 897,221
Steel & Metals ....................... 1.3 1,101,442
Telecommunications ................... 5.9 5,034,232
Utilities--Electric/Gas .............. 4.8 4,041,271
----- -----------
Total Investments .................... 96.9 82,187,041
Net Other Assets and Liabilities ..... 3.1 2,677,784
----- -----------
Net Assets ........................... 100.0% $84,864,825
===== ===========

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

7
<PAGE>
<TABLE>

PRIME LIPPER EUROPE EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<CAPTION>

<S> <C>
ASSETS:
Investments, at value (Cost $68,087,087) (Note A) ........................ $82,187,041
Cash ..................................................................... 2,818,318
Interest Receivable ...................................................... 32,070
Dividends Receivable ..................................................... 185,622
Foreign Withholding Tax Reclaim Receivable ............................... 39,893
Deferred Organization Costs (Note A) ..................................... 61,065
Prepaid Assets ........................................................... 7,366
-----------
TOTAL ASSETS .......................................................... 85,331,375
-----------
LIABILITIES:
Payable for Investments Purchased ........................................ 301,863
Custodian Fees Payable ................................................... 9,818
Investment Advisory Fees Payable (Note B) ................................ 78,440
Administrative Fees Payable (Note C) ..................................... 15,340
Directors' Fees Payable (Note D) ......................................... 3,944
Distribution Fees Payable - Retail Shares (Note E) ....................... 2,927
Shareholder Servicing Fees Payable - Group Retirement Plan Shares
(Note E) ............................................................... 1,351
Unrealized Depreciation on Foreign Currency Contracts .................... 1,888
Other Liabilities ........................................................ 50,979
-----------
TOTAL LIABILITIES ..................................................... 466,550
-----------
NET ASSETS ................................................................ $84,864,825
===========

NET ASSETS CONSIST OF:
Paid in Captial .......................................................... $67,540,515
Distributions in Excess of Net Investment Income ......................... (33,584)
Accumulated Net Realized Gain ............................................ 3,258,014
Unrealized Appreciation on Investments and Foreign Currency
Translations ............................................................ 14,099,880
-----------
$84,864,825
===========
PREMIER SHARES:
Net Assets ............................................................... $82,787,543
Shares Issued and Outstanding ($.001 par value) (Authorized
3,333,333,333) .......................................................... 7,053,900
Net Asset Value, Offering and Redemption Price Per Share ................. $ 11.74
===========
RETAIL SHARES:

Net Assets ............................................................... $ 1,136,683
Shares Issued and Outstanding ($.001 par value) (Authorized
3,333,333,333) .......................................................... 96,887
Net Asset Value, Offering and Redemption Price Per Share ................. $ 11.73
===========
GROUP RETIREMENT PLAN SHARES:

Net Assets ............................................................... $ 940,599
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) 80,224
Net Asset Value, Offering and Redemption Price Per Share ................. $ 11.72
===========
</TABLE>

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

<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997

INVESTMENT INCOME
Dividends ....................................................... $ 1,597,770
Interest ........................................................ 138,158
Less: Foreign Taxes Withheld .................................... (195,272)
-----------
Total Income ................................................. 1,540,656
-----------
EXPENSES
Investment Advisory Fees (Note B) .............................. 837,255
Administrative Fees (Note C) .................................... 170,709
Directors' Fees (Note D) ........................................ 14,010
Distribution Fees - Retail Shares (Note E) ...................... 2,356
Shareholder Servicing Fees - Group Retirement Plan Shares
(Note E) ....................................................... 1,158
Custodian Fees .................................................. 74,123
Professional Fees ............................................... 44,487
Registration and Filing Fees .................................... 20,907
Amortization of Organization Costs (Note A) .................... 18,569
Other Expenses .................................................. 32,285
-----------
Total Expenses ............................................... 1,215,859
-----------
NET INVESTMENT INCOME ........................................ 324,797
-----------
NET REALIZED GAIN (LOSS) FROM:
Investments sold ................................................ 12,913,494
Foreign Currency Transactions ................................... (190,715)
-----------
TOTAL NET REALIZED GAIN (LOSS) ................................... 12,722,779
-----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments ..................................................... 268,120
Foreign Currency Translations ................................... (4,567)
-----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ............... 263,553
-----------
TOTAL REALIZED GAIN AND NET CHANGE IN
UNREALIZED APPRECIATION/DEPRECIATION ............................ 12,986,332
===========
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ....................................... $13,311,129
===========

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

9
<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 1, 1996*
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS:
Net Investment Income ................................................... $ 324,797 $ 217,605
Net Realized Gain ....................................................... 12,722,779 2,536,039
Net Change in Unrealized
Appreciation/Depreciation .............................................. 263,553 6,248,392
----------- -----------
Net Increase in Net Assets Resulting from Operations ................. 13,311,129 9,002,036
----------- -----------
DISTRIBUTIONS:
PREMIER SHARES:
From net investment income .............................................. (142,928) (112,430)
In excess of net investment income ...................................... (33,407) (8,968)
From net realized gains ................................................. (9,927,607) (2,105,589)
RETAIL SHARES:
From net investment income .............................................. (62) (583)
In excess of net investment income ...................................... (15) --
From net realized gains ................................................. (136,371) (24,560)
GROUP RETIREMENT PLAN SHARES:
From net investment income .............................................. (693) (180)
In excess of net investment income ...................................... (162) --
From net realized gains ................................................. (109,302) (6,483)
----------- -----------
Total Distributions .................................................. (10,350,547) (2,258,793)
----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTES G AND H):
PREMIER SHARES:
Issued--Regular ......................................................... 16,358,781 11,734,044
--Distributions Reinvested ........................................... 10,081,098 2,231,361
--Contribution from Partnerships ..................................... -- 47,208,423
Redeemed ................................................................ (9,510,532) (4,901,018)
----------- -----------
Net Increase in Premier Shares Transactions .......................... 16,929,347 56,272,810
----------- -----------
RETAIL SHARES:
Issued--Regular ......................................................... 367,267 533,316
--Distributions Reinvested ........................................... 136,448 20,769
Redeemed ................................................................ (12,548) --
----------- -----------
Net Increase in Retail Shares Transactions ........................... 491,167 554,085
----------- -----------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ......................................................... 957,709 168,832
--Distributions Reinvested ........................................... 110,157 6,664
Redeemed ................................................................ (329,771) --
----------- -----------
Net Increase in Group Retirement Plan Shares Transactions ............ 738,095 175,496
----------- -----------
Net Increase in Net Assets From Capital Share Transactions ............... 18,158,609 57,002,391
----------- -----------
TOTAL INCREASE ........................................................ 21,119,191 63,745,634
----------- -----------
NET ASSETS:
Beginning of Period ..................................................... 63,745,634 --
----------- -----------
End of Period (A) ........................................................ $84,864,825 $63,745,634
=========== ===========
(A) Includes (distributions in excess of) net investment
income $ (33,584) $ (8,968)
=========== ===========

</TABLE>
- ----------
* Commencement of Operations.

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

10
<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
GROUP GROUP
PREMIER PREMIER RETAIL RETAIL RETIREMENT RETIREMENT
SHARES SHARES SHARES SHARES PLAN SHARES PLAN SHARES
------------ ------------ ------------ ------------ ------------ ------------
APRIL 1, APRIL 11, APRIL 12,
YEAR ENDED 1996** TO YEAR ENDED 1996*** TO YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996 1997 1996
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .. $11.25 $10.00 $11.25 $9.93 $11.24 $9.92
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income(1) ............. 0.05 0.04 0.02 (0.01) 0.03 (0.02)
Net Realized and Unrealized Gain
on Investments ...................... 2.06 1.62 2.05 1.73 2.05 1.74
------ ------ ------ ------ ------ ------
Total From Investment Operations .. 2.11 1.66 2.07 1.72 2.08 1.72
------ ------ ------ ------ ------ ------
DISTRIBUTIONS:
Net Investment Income ................ (0.03) (0.02) -- (0.01) (0.01) (0.01)
In Excess of Net Investment Income ... (0.00)+ -- (0.00)+ -- (0.00)+ --
Net Realized Gain .................... (1.59) (0.39) (1.59) (0.39) (1.59) (0.39)
------ ------ ------ ------ ------ ------
Total Distributions .............. (1.62) (0.41) (1.59) (0.40) (1.60) (0.40)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ........ $11.74 $11.25 $11.73 $11.25 $11.72 $11.24
====== ====== ====== ====== ====== ======
TOTAL RETURN (2) ...................... 18.83% 16.68% 18.49% 17.37% 18.60% 17.40%
====== ====== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ..... $82,787 $62,942 $1,137 $609 $941 $195
Ratios After Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ........ 1.59% 1.60%* 1.84% 1.85%* 1.84% 1.85%*
Net Investment Income to Average
Net Assets ......................... 0.43% 0.53%* 0.16% (0.13)%* 0.34% (0.43)%*
Ratios Before Expense Waiver and/or
Reimbursement.
Expenses to Average Net Assets ...... 1.59% 1.78%* 1.84% 2.07%* 1.84% 2.04%*
Net Investment Income to Average
Net Assets ......................... 0.43% 0.35%* 0.16% (0.35)%* 0.34% (0.62)%*
Portfolio Turnover Rate ............... 71% 34% 71% 34% 71% 34%
Broker Commission Rate ................ $0.0571 $0.0746 $0.0571 $0.0746 $0.0571 $0.0746
</TABLE>
- ----------
* Annualized
** Commencement of Fund Operations
*** Initial offering of shares by the Fund

+ Amount is less than $0.01 per share.

(1) The effect to net investment income per share of voluntarily waived fees
and reimbursed expenses were:
PERIOD ENDED
DECEMBER 31, 1996
-----------------
Premier Shares ........................... $0.01
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 periods shown. Total returns for periods of
less than one year are not annualized.

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

11
<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
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, 1997 the Company was
comprised of three diversified portfolios: Lipper High Income Bond Fund, Lipper
U.S. Equity Fund, and Prime Lipper Europe Equity Fund. These financial
statements pertain to Prime Lipper Europe Equity Fund only. The financial
statements of the remaining Funds are presented separately. The Company offers
the shares of each Fund in three classes: Premier Shares, Retail Shares and
Group Retirement Plan Shares. Prime Lipper Europe Equity Fund (the "Fund") was
funded on April 1, 1996 with a contribution of securities to the Fund from a
corresponding limited partnership (see Note G).

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.

2. FEDERAL INCOME TAXES: It is the 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 Fund may be subject to
taxes imposed by countries in which it invests. Such taxes are generally based
on income earned or repatriated 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, 1997 to December 31, 1997 the
Fund incurred and elected to defer until January 1, 1998 for U.S. Federal income
tax purposes net currency losses of approximately $35,274.

At December 31, 1997 the cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:

NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
----------- ------------ -------------- ------------
$68,131,582 $14,994,369 $(938,910) $14,055,459

3. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and
records of the Fund 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 Fund are presented at the foreign exchange rates and
market values at the close of the period, the Fund does 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 Fund does 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.

<PAGE>
PRIME LIPPER EUROPE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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 Fund's 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 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 Fund intends to distribute
substantially all of its net investment income annually. Net realized capital
gains, if any, will be distributed at least annually by the Fund. All
distributions are recorded on ex-dividend date.

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

7. OTHER: Securities 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. Expenses of the Company, which are not directly
attributable to a Fund, are allocated among the Funds based on their relative
net assets. Income, expenses (other than class specific expenses) and realized
and unrealized gains or losses are allocated to each class of shares based upon
their relative net assets.

B. ADVISORY SERVICES: Prime Lipper Asset Management (the "Adviser") serves
as the investment adviser to the Fund. Under the terms the Investment Advisory
Agreement (the "Agreement"), the Adviser provides investment advisory services
for a fee calculated at an annual rate of 1.10% of the Fund's average daily net
assets. From time to time, the Adviser may voluntarily waive, for a period of
time, all or a portion of the fee to which it is entitled under its

13
<PAGE>
PRIME LIPPER EUROPE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Agreement with the Fund. Until further notice, the Adviser has agreed to
voluntarily waive fees and reimburse expenses to the extent necessary to
maintain an annual operating expense ratio to net assets of not more than the
following:

GROUP
PREMIER SHARES RETAIL SHARES RETIREMENT PLAN SHARES
-------------- ------------- ----------------------
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 Fund is
subject to a minimum annual fee of $70,000 per year. Under a separate agreement,
Chase also acts as the Company's custodian for the Fund's assets.

E. DISTRIBUTION SERVICES: Lipper & Company, L.P., an affiliate of the Adviser,
serves as the Company's distributor (the "Distributor"). The Distributor is
entitled to receive an annual distribution fee payable from the net assets of
the 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 shareholder servicing
agreements with respect to the Fund's Group Retirement Plan Shares. Under such
servicing agreements, each servicing agent will be entitled to receive from the
net assets of the 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.

PURCHASES SALES
--------- -----
$58,073,162 $51,581,022

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

G. LIMITED PARTNERSHIP TRANSFERS: The Fund was formed as a successor
investment vehicle for a limited partnership (the "Partnership") for which the
Adviser acted as general partner and investment adviser since inception. On
April 1, 1996, the Fund exchanged Premier Shares for portfolio securities of the
Partnership (the "Transfer"). Premier Shares issued by the Fund in the Transfer
were issued at the net asset value of Premier Shares prior to the Transfer.
Premier Shares received in the Transfer have been distributed to the
Partnership's limited partners who elected to participate in the Transfer.
Securities valued at $50,208,413 at the date of Transfer with unrealized
appreciation of $7,587,935 were contributed to the Fund on a tax free basis. To
the extent that the Fund acquired securities in the 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
subsequently acquire shares of the Fund.

14
<PAGE>

PRIME LIPPER EUROPE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

H. OTHER: Capital share transactions for the Fund, by class of shares, were as
follows:

YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---- ----
PREMIER SHARES (1):
Issued--Regular ................................... 1,398,901 1,142,688
--Distributions Reinvested ...................... 857,040 201,933
--Contribution from Partnerships ................ -- 4,720,842
Redeemed .......................................... (796,803) (470,701
--------- ---------
Net Increase (Decrease) ........................... 1,459,138 5,594,762
--------- ---------
RETAIL SHARES (2):
Issued--Regular ................................... 32,120 52,290
--Distributions Reinvested ...................... 11,602 1,879
Redeemed .......................................... (1,004) --
--------- ---------
Net Increase (Decrease) ........................... 42,718 54,169
--------- ---------
GROUP RETIREMENT PLAN SHARES (3):
Issued--Regular ................................... 80,068 16,711
--Distributions Reinvested ...................... 9,385 604
Redeemed .......................................... (26,544) --
--------- ---------
Net Increase (Decrease) ........................... 62,909 17,315
--------- ---------
- ----------
1. Initial offering of Premier Shares commenced on April 1, 1996.
2. Initial offering of Retail Shares commenced on April 11, 1996.
3. Initial offering of Group Retirement Plan Shares commenced on April 12, 1996.

I. OTHER: At December 31, 1997, the percentage of total shares outstanding held
by record shareholders owning 10% or greater of the aggregate total shares for
the Fund was as follows:

NO. OF %
SHAREHOLDERS OWNERSHIP
------------ ---------
1 10.87%

15
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of Prime Lipper Europe Equity Funds:

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio 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 Prime Lipper Europe Equity Fund
(one of the Funds constituting The Lipper Funds, Inc., hereafter referred to as
the "Fund") at December 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for the year then ended and for the
period April 1, 1996 (commencement of operations) through December 31, 1997 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, 1997 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1998

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

FEDERAL INCOME TAX INFORMATION

(UNAUDITED)

Prime Lipper Europe Equity Fund hereby designates $2,856,200 as 28% and
$6,853,331 as 20% long-term capital gain dividends for the purpose of the
dividend paid deduction on the Fund's Federal income tax return.

Foreign taxes paid during the year ended December 31, 1997, amounting to
$195,272 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, 1997, gross income derived from sources within
foreign countries amounted to $1,735,928 for Prime Lipper Europe Equity Fund.

<PAGE>

BOARD OF DIRECTORS KENNETH LIPPER
Director, President and Chairman

STANLEY BREZENOFF
Director

MARTIN MALTZ
Director

IRWIN RUSSELL
Director

INVESTMENT ADVISER Prime Lipper Asset Management
101 Park Avenue, 6th floor
New York, NY 10178
(212) 883-6333

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

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

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

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