CAPITAL PRESERVATION FUND INC, N-30D, 1996-05-24

CAPITAL PRESERVATION FUND INC
N-30D, 1996-05-24

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BENHAM U.S. TREASURY
AND GOVERNMENT
MONEY MARKET FUNDS

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

Annual Report * March 31, 1996

[picture of U.S. currency]

Capital Preservation Fund
Capital Preservation Fund II
Government Agency Fund

[company logo] The Benham Group
Part of the Twentieth Century Family of Mutual Funds

<PAGE>

CONTENTS

U.S. ECONOMIC REVIEW................................. 1

MARKET SUMMARY....................................... 2

CAPITAL PRESERVATION FUND
Performance Information.............................. 3
Portfolio Statistics & Composition................... 4
Management Discussion................................ 5
Financial Highlights................................. 16
Financial Statements and Notes....................... 19
Schedule of Investments.............................. 26

CAPITAL PRESERVATION FUND II
Performance Information.............................. 6
Portfolio Statistics & Composition................... 7
Management Discussion................................ 8
Financial Highlights................................. 17
Financial Statements and Notes....................... 19
Schedule of Investments.............................. 27

BENHAM GOVERNMENT AGENCY FUND
Performance Information.............................. 9
Portfolio Statistics & Composition................... 10
Management Discussion................................ 11
Financial Highlights................................. 18
Financial Statements and Notes....................... 19
Schedule of Investments.............................. 29

INVESTMENT FUNDAMENTALS
Money Market Instruments............................. 12
Other Definitions.................................... 14

U.S. ECONOMIC REVIEW

JAMES M. BENHAM [photo of James
Chairman, Benham Funds M. Benham]

Slow economic growth and low inflation characterized the U.S. economy in 1995,
leading to expectations for similar economic performance in 1996. The U.S.
economy grew at a 2% annual rate in 1995, the weakest yearly performance since
the 1991 recession. U.S. inflation was just 2.5% in 1995, the lowest annual rate
since 1986.

The Federal Reserve's (the Fed's) success in slowing the economy and inhibiting
inflation by raising short-term interest rates from February 1994 to February
1995 eventually led to a new interest rate strategy. The Fed reduced the federal
funds rate target from 6.00% to 5.75% in July 1995, then lowered it twice
more--to 5.50% in December 1995 and to 5.25% in January 1996. Slowing corporate
and government spending, declining auto sales and housing activity, and
poorer-than-expected holiday season retail sales seemed to indicate lower
interest rates in 1996 and a possible recession.

[bar graph on left side of page. graph data described below]

Federal budget battles, which led to two government shutdowns, furthered the
cause of economic weakness. The shutdowns also delayed key economic reports,
causing confusion in the financial markets during the first quarter of 1996.
Amid the confusion and slow growth/low inflation expectations, the February
payroll employment report, showing the strongest job creation in 12 years,
exploded like a time bomb (see the graph above). It dashed hopes that the Fed
would cut interest rates at its policy meeting in March, triggering a bond
sell-off and higher interest rates.

The March payroll employment report and the government's estimate of first-
quarter U.S. economic growth were also unexpectedly strong. The strength of
these reports seems to indicate that the economy is picking up momentum, with no
immediate need for the Fed to reduce interest rates. Other signs of a stronger
economy include higher auto sales and factory orders, rising consumer confidence
and strong housing starts. But the economy still doesn't feel particularly
robust--layoffs are at historically high levels, wages are stagnant, capital
expenditures are slowing, and personal bankruptcies and loan delinquencies are
higher. Overall, we believe the evidence still suggests moderate economic growth
in 1996, with both growth and inflation around 3%.

[graph data]
U.S. Nonfarm Payroll Employment
(seasonally adjusted, in thousands)

Three-Month Moving Average Monthly Change
J 292 186
F 232 313
M 226 179
A 167 8
M 42 -62
J 82 299
J 88 28
A 197 263
S 128 94
O 142 68
N 125 212
D 142 145
J 70 -146
F 210 631
M 221 178
A 270 2
Source: Bloomberg Financial Markets

MARKET SUMMARY
GOVERNMENT MONEY MARKET SECURITIES

The weak economy, low inflation and declining interest rate expectations that
Jim Benham described on page 1 caused U.S. money market rates and yields to fall
during the fiscal year ended March 31, 1996 (see the graph below). From April
1995 to March 1996, money market rates and yields fell from the 6% level to the
5% level, reversing some of the rate gains that occurred in 1994 when inflation
expectations and the Fed pushed interest rates higher. The falling yields were
balanced by the fact that inflation, the great eroder of money market returns,
never climbed higher than 3% during the period. That meant that "real" money
market returns (reported returns minus the inflation rate) stayed above 2%.

[line graph on right side of page. graph data described below]

The money market yield curve (the yield curve* for securities with maturities of
one year or less) inverted* during the fiscal year. Expectations for lower
interest rates were so pronounced at times during the second half of 1995 and
the first five weeks of 1996 that yields for one-month securities were higher
than for six- to 12-month securities. The yield curve inverted as demand for
six- to 12-month securities exceeded the demand for one-month issues as
investors tried to lock in higher yields. At the curve's steepest inversion, the
market was pricing in a Fed interest rate reduction of one-half of a percentage
point, or nearly 50 basis points.*

Interest rate expectations suddenly reversed in March 1996 upon the release of
the surprisingly strong February payroll employment report (see page 1). As a
result, the money market yield curve reverted to a "normal" slope with lower
yields at the short end and higher yields at the long end. Instead of a rate
reduction, the market began pricing in an interest rate increase of
approximately 25 basis points. We believe the market overreacted to the February
and March payroll employment reports--we don't think the level of economic
activity indicated by the reports is sustainable. While we think it's true that
recent economic reports have ruled out near-term interest rate cuts by the Fed,
we don't believe there will be a sudden inflation increase or that the Fed is on
the verge of raising interest rates. We think it's more likely that the Fed will
hold a steady interest rate course for a while to see which turn the economy
takes.

* defined on page 14

[graph data]

U.S. MONEY MARKET RATES
Weekly, 4/95-3/96
3-Mo. T-Bill Yield Fed Funds Rate
4/3/95 5.76% 6.06%
4/10/95 5.7 6.2
4/17/95 5.56 5.98
4/24/95 5.66 6.07
5/1/95 5.74 5.99
5/8/95 5.63 6.05
5/15/95 5.71 6
5/22/95 5.72 6.02
5/29/95 5.64 5.99
6/5/95 5.48 6.02
6/12/95 5.57 6.03
6/19/95 5.46 6.02
6/26/95 5.35 6
7/3/95 5.53 5.95
7/10/95 5.4 6.21
7/17/95 5.46 5.81
7/24/95 5.47 5.72
7/31/95 5.44 5.75
8/7/95 5.41 5.83
8/14/95 5.42 5.73
8/21/95 5.43 5.74
8/28/95 5.34 5.7
9/4/95 5.3 5.71
9/11/95 5.3 5.77
9/18/95 5.25 5.73
9/25/95 5.14 5.78
10/2/95 5.34 5.8
10/9/95 5.31 6
10/16/95 5.32 5.72
10/23/95 5.22 5.71
10/30/95 5.29 5.76
11/6/95 5.36 5.76
11/13/95 5.43 5.71
11/20/95 5.34 5.74
11/27/95 5.32 5.81
12/4/95 5.29 5.91
12/11/95 5.3 5.75
12/18/95 5.15 5.73
12/25/95 4.91 5.9
1/1/96 4.91 5.48
1/8/96 5.03 5.35
1/15/96 5.02 5.53
1/22/96 4.99 5.61
1/29/96 5.01 5.44
2/5/96 4.88 5.53
2/12/96 4.8 5.21
2/19/96 4.78 5.09
2/26/96 4.86 5.17
3/4/96 4.89 5.31
3/11/96 4.95 5.57
3/18/96 5.02 5.24
3/25/96 4.99 5.36
Source: Bloomberg Financial Markets

CAPITAL PRESERVATION FUND
YIELD AND TOTAL RETURN SUMMARY
For Periods Ended March 31, 1996

NET ASSET 7-DAY 7-DAY AVERAGE ANNUAL TOTAL RETURNS
VALUE CURRENT EFFECTIVE --------------------------------------
(4/1/95-3/31/96) YIELD YIELD 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------
$1.00 4.64% 4.74% 5.21% 4.05% 4.03% 5.44%

The Fund commenced operations on October 13, 1972.

PLEASE NOTE: Yields and total returns are based on historical Fund performance
and do not guarantee future results. The Fund's yields and total returns will
vary. The U.S. government neither insures nor guarantees investments in the
Fund. The Fund is managed to maintain a stable $1.00 share price, but, as with
all money market funds, there is no assurance that the Fund will be able to do
so.

PERFORMANCE DEFINITIONS

The 7-DAY CURRENT YIELD is calculated based on the income generated by an
investment in the Fund over a seven-day period and is expressed as an annual
percentage rate. The 7-DAY EFFECTIVE YIELD is calculated similarly, although
this figure is slightly higher than the Fund's 7-Day Current Yield because of
the effects of compounding. The 7-Day Effective Yield assumes that income earned
from the Fund's investments is reinvested and generating additional income.

TOTAL RETURN figures show the overall dollar or percentage change in the value
of a hypothetical investment in the Fund and assume that all of the Fund's
distributions are reinvested. AVERAGE ANNUAL TOTAL RETURNS illustrate the
annually compounded returns that would have produced the Fund's cumulative total
returns if the Fund's performance had been constant over the entire period.
Average annual total returns smooth out variations in a fund's return; they are
not the same as year-by-year results. For fiscal year-by-year total returns,
please refer to the Fund's "Financial Highlights" on page 16.

DIVIDENDS: All income dividends paid by the Fund during the fiscal year ended
March 31, 1996, came from net income on direct investments in U.S. Treasury
securities. Interest income from U.S. Treasury securities is not subject to
state and local taxes in many states.

LIPPER PERFORMANCE COMPARISON

Lipper Analytical Services (Lipper) is an independent mutual fund ranking
service located in Summit, NJ. Rankings are based on average annual total
returns for the periods ended 3/31/96 for the funds in Lipper's "U.S. Treasury
Money Market Funds" category.

1 YEAR 3 YEARS 5 YEARS 10 YEARS

The Fund: 5.21% 4.05% 4.03% 5.44%
Category Average: 5.14% 3.97% 3.98% 5.40%
The Fund`s Ranking: 31 out of 91 18 out of 70 14 out of 39 7 out of 15

Total returns are based on historical performance and do not guarantee future
results.

CAPITAL PRESERVATION FUND
KEY PORTFOLIO STATISTICS

3/31/96 9/30/95

Market Value: $2,884,311,605 $2,961,660,384
Number of Issues: 24 25
Average Maturity: 47 days 54 days
7-Day Current Yield: 4.64% 5.20%

For definitions of these terms, see pages 3 and 14.

PORTFOLIO COMPOSITION BY SECURITY TYPE
[pie charts]

3/31/96
Treasury Bills: 71.3%
Treasury Notes: 28.7%

9/30/95
Treasury Bills: 81.8%
Treasury Notes: 15.7%
STRIPS: 2.5%

For definitions of these security types, see pages 12-13.

PORTFOLIO COMPOSITION BY MATURITY
[pie charts]

3/31/96 9/30/95
1-30 days: 38.1% 1-30 days: 33.3%
31-60 days: 28.2% 31-60 days: 39.0%
61-90 days: 17.3% 61-90 days: 9.2%
91-180 days: 13.3% 91-180 days: 18.5%
181-397 days: 3.1%

The Fund's dollar-weighted average portfolio maturity will not exceed 60 days.
The Fund generally maintains an average maturity between 30 and 60 days, with 45
days considered a "neutral" position.

The composition of the Fund's portfolio may change over time.

CAPITAL PRESERVATION FUND
MANAGEMENT DISCUSSION
with Brian Howell, Portfolio Manager

NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT
FUNDAMENTALS SECTION (PAGES 12-14).

Q: How did the Fund perform?

A: The Fund continued to perform above average compared to its peers. For
the one-year period ended March 31, 1996, the Fund's total return was
5.21%, compared to the 5.14% average total return for the 91 funds in
Lipper's "U.S. Treasury Money Market Funds" category over the same
period (see the Lipper Performance Comparison on page 3). We believe
the Fund outperformed the Lipper average because of our security
selection and the Fund's relatively low expense cap.

Q: The Fund's holdings in Treasury notes increased from 15.7% on September
30, 1995, to 28.7% by March 31, 1996. Why?

A: We bought more Treasury notes in January and February when they were
relatively inexpensive compared to Treasury bills. During the majority
of the period the yields of the two securities were only three to five
basis points* apart. We purchased more Treasury notes when note prices
dipped and their yields moved 9-12 basis points higher than Treasury
bill yields. The additional notes helped to increase the Fund's yield.

Q: Looking ahead, what are your plans for the Fund over the next six
months?

A: Given the somewhat uncertain economic outlook and the possibility that
the Fed may hold steady on interest rates, we expect to keep the Fund's
average maturity* neutral, around 45 days. We plan to stay on that
track unless economic conditions change significantly. For now, the
money market seems to be in a holding pattern, waiting for more
definitive economic news.

CAPITAL PRESERVATION FUND II
YIELD AND TOTAL RETURN SUMMARY
For Periods Ended March 31, 1996

The Fund commenced operations on May 16, 1980.

PERFORMANCE DEFINITIONS

LIPPER PERFORMANCE COMPARISON

1 YEAR 3 YEARS 5 YEARS 10 YEARS

The Fund: 5.15% 3.90% 3.80% 5.39%
Category Average: 5.14% 3.97% 3.98% 5.40%
The Fund`s Ranking: 43 out of 91 45 out of 70 33 out of 39 8 out of 15

Total returns are based on historical performance and do not guarantee future
results.

CAPITAL PRESERVATION FUND II
KEY PORTFOLIO STATISTICS

3/31/96 9/30/95

Market Value: $244,000,000 $251,079,465
Number of Issues: 13 13
Average Maturity: 3 days* 3 days*
7-Day Current Yield: 4.62% 5.20%

For definitions of these terms, see pages 6 and 14.

PORTFOLIO COMPOSITION BY SECURITY TYPE
[pie charts]

3/31/96

Repos: 100%

9/30/95

Repos: 100%

Repos (repurchase agreements) are defined on page 13.

PORTFOLIO COMPOSITION BY MATURITY
[pie charts]

3/31/96 9/30/95
3 days: 100%* 3 days: 100%*

*The Fund invested primarily in repurchase agreements with one-day maturities
(overnight repos) during the six-month periods ended 3/31/96 and 9/30/95.
However, the average maturities were skewed because these periods ended on
non-business days. The securities purchased at the end of each period did not
mature until the following Mondays.

The composition of the Fund's portfolio may change over time.

CAPITAL PRESERVATION FUND II
MANAGEMENT DISCUSSION
with Denise Tabacco, Associate Portfolio Manager

NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT
FUNDAMENTALS SECTION (PAGES 12-14).

Q: How did the Fund perform?

A: The Fund's performance was slightly better than that of its peer group.
For the one-year period ended March 31, 1996, the Fund's total return
was 5.15%, one basis point* higher than the 5.14% average total return
for the 91 funds in Lipper's "U.S. Treasury Money Market Funds"
category over the same period (see Lipper Performance Comparison on
page 6).

We believe the Fund essentially matched the category average over the
past year because the Fund's limited average maturity* (typically one
day) allowed it to respond rapidly to changing rates during the period.
To maintain its one-day maturity, the Fund invested primarily in
overnight repos.*

Q: Did you change the Fund's investment strategy at all during the fiscal
year?

A: No. The Fund continued to invest primarily in overnight repos
collateralized by U.S. Treasury securities.

Q: Looking ahead, what are your plans for the Fund over the next six
months?

A: Given the somewhat uncertain economic outlook and the possibility that
the Fed may hold steady on interest rates, we plan to continue to
invest the Fund's assets in overnight repos unless other limited
maturity securities become more attractively priced. We plan to stay on
that track unless economic conditions change significantly.

GOVERNMENT AGENCY FUND
YIELD AND TOTAL RETURN SUMMARY
For Periods Ended March 31, 1996

NET ASSET 7-DAY 7-DAY AVERAGE ANNUAL TOTAL RETURNS
VALUE CURRENT EFFECTIVE ---------------------------------------
(4/1/95-3/31/96) YIELD YIELD 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND
---------------------------------------
$1.00 4.73% 4.84% 5.35% 4.17% 4.17% 4.98%

The Fund commenced operations on December 5, 1989.

PERFORMANCE DEFINITIONS

DIVIDENDS: All income dividends paid by the Fund during the fiscal year ended
March 31, 1996, came from net income on direct investments in U.S. Treasury and
agency securities. Interest income from U.S. Treasury and agency securities is
not subject to state and local taxes in many states.

LIPPER PERFORMANCE COMPARISON

1 YEAR 3 YEARS 5 YEARS LIFE OF FUND+

The Fund: 5.35% 4.17% 4.17% 4.95%
Category Average: 5.15% 4.00% 3.98% 4.63%
The Fund`s Ranking: 28 out of 110 22 out of 90 13 out of 68 4 out of 58

+ from December 31, 1989, through March 31, 1996

Total returns are based on historical performance and do not guarantee future
results.

GOVERNMENT AGENCY FUND
KEY PORTFOLIO STATISTICS

3/31/96 9/30/95

Market Value: $499,687,813 $490,429,623
Number of Issues: 49 52
Average Maturity: 44 days 52 days
7-Day Current Yield: 4.73% 5.28%

For definitions of these terms, see pages 9 and 14.

PORTFOLIO COMPOSITION BY SECURITY TYPE
[pie charts]

3/31/96
Government Agency Discount Notes: 78.6%
Floating-Rate Agency Notes: 13.9%
Government Agency Notes: 6.6
Treasury Securities: 0.9%

9/30/95
Government Agency Discount Notes: 78.0%
Floating-Rate Agency Notes: 19.3%
Government Agency Notes: 2.7%

For definitions of these security types, see pages 12-13.

PORTFOLIO COMPOSITION BY MATURITY
[pie charts]

3/31/96 9/30/95
1-30 days: 56.1% 1-30 days: 40.0%
31-60 days: 15.2% 31-60 days: 28.5%
61-90 days: 12.7% 61-90 days: 16.8%
91-180 days: 12.7% 91-180 days: 14.7%
181-397 days: 3.3%

The Fund's dollar-weighted average portfolio maturity will not exceed 60 days.
The Fund generally maintains an average maturity between 30 and 60 days, with 45
days considered a "neutral" position.

The composition of the Fund's portfolio may change over time.

GOVERNMENT AGENCY FUND
MANAGEMENT DISCUSSION
with Brian Howell, Portfolio Manager

NOTE: THE TERMS MARKED WITH AN ASTERISK (*) ARE DEFINED IN THE INVESTMENT
FUNDAMENTALS SECTION (PAGES 12-14).

Q: How did the Fund perform?

A: The Fund continued to perform well compared with its peer group. For
the one-year period ended March 31, 1996, the Fund's total return was
5.35%, 20 basis points* higher than the 5.15% average total return for
the 110 funds in Lipper's "U.S. Government Money Market Funds" category
over the same period (see Lipper Performance Comparison on page 9).

Q: How did you respond to the economic and market conditions described on
pages 1 and 2? What investment strategies did you use from October 1995
through March 1996?

A: We kept the Fund's average maturity* near neutral (45 days). Agency
discount notes* remained the Fund's primary investment security. Agency
discount notes are more liquid than agency notes,* and the yields
between these securities were about the same. Agency notes remained in
limited supply, which put downward pressure on their yields. We
typically add agency notes to the Fund's portfolio when they offer a
reasonable yield advantage over agency discount notes.

Q: Looking ahead, what are your plans for the Fund over the next six
months?

A: Given the somewhat uncertain economic outlook and the possibility that
the Fed may hold steady on interest rates, we expect to keep the Fund's
average maturity neutral, around 45 days. We plan to stay on that track
unless economic conditions change significantly. For now, the money
market seems to be in a holding pattern, waiting for more definitive
economic news.

We may slightly increase the amount of floating rate agency notes* in
the Fund's portfolio if we find any available at attractive prices.
These securities offer relatively attractive yields in a neutral
interest rate environment or when rates increase.

INVESTMENT FUNDAMENTALS
MONEY MARKET INSTRUMENTS

THE MONEY MARKET

The "money market" is a highly liquid, multi-trillion-dollar worldwide financial
market that matches supply from corporations, banks and governments that have
short-term cash or borrowing needs with demand from investors who want to buy
short-term, low-risk, interest-bearing instruments.

On the supply side, corporate, financial and fiscal entities sometimes have more
current obligations to meet than cash on hand, and they need to raise money.
They are therefore willing to sell short-term IOUs to investors in exchange for
cash. For example, corporations issue short-term securities called commercial
paper to raise cash to cover current expenses that are incurred before
anticipated revenues.

On the demand side, investors want a place to "park" their money in the short
term where it can earn interest, retain value and be readily available for other
opportunities or expense payments. Finance officers at corporations, banks,
government offices and securities firms saw how they could satisfy both sides by
issuing certain types of debt securities.

Most money market securities are issued at a discount and pay full value at
maturity (13 months or less). The difference between the purchase value and the
maturity value is the imputed interest.

COMMON U.S. GOVERNMENT MONEY MARKET SECURITIES

Floating-Rate Agency Notes (FRANs)--see the "Derivatives" section on page 13.

Government Agency Discount Notes--short-term debt securities issued by U.S.
government agencies (such as the Federal Farm Credit Bank, the Federal Home Loan
Bank and the Federal National Mortgage Association). Some agency discount notes
are backed by the full faith and credit of the U.S. government, while most are
guaranteed only by the issuing agency. These notes are issued at a discount and
achieve full value at maturity (typically one year or less).

Government Agency Notes--intermediate-term debt securities issued by U.S.
government agencies (such as the Federal Farm Credit Bank, the Federal Home Loan
Bank and the Federal National Mortgage Association). Some agency notes are
backed by the full faith and credit of the U.S. government, while most are
guaranteed only by the issuing agency. These notes are issued with maturities
ranging from three months to 30 years. Benham Government Agency Fund typically
buys agency notes with remaining terms of 180 days or less.

INVESTMENT FUNDAMENTALS
MONEY MARKET INSTRUMENTS
(Continued from the previous page)

Repurchase Agreements (Repos)--short-term debt agreements in which a fund buys a
security at one price and simultaneously agrees to sell it back to the seller at
a slightly higher price on a specified date (usually within seven days). Capital
Preservation Fund II typically invests in repos backed by U.S. Treasury
securities.

STRIPS--zero-coupon securities (zeros) issued by the U.S. Treasury and backed by
the direct "full faith and credit" pledge of the U.S. government. Unlike
ordinary Treasury securities, which pay interest periodically, zeros pay no
interest. Instead, these securities are issued at a deep discount and then
redeemed for their full face value at maturity. Capital Preservation Fund
typically buys STRIPS with remaining maturities of 180 days or less.

Treasury bills (T-bills)--short-term debt securities issued by the U.S. Treasury
and backed by the direct "full faith and credit" pledge of the U.S. government.
T-bills are issued with maturities ranging from three months to one year.
Capital Preservation Fund typically buys T-bills with remaining maturities of 90
days or less.

Treasury notes (T-notes)--intermediate-term debt securities issued by the U.S.
Treasury and backed by the direct "full faith and credit" pledge of the U.S.
government. T-notes are issued with maturities ranging from 2 to 30 years.
Capital Preservation Fund typically buys T-notes with remaining maturities of
180 days or less.

DERIVATIVES

Capital Preservation Fund and Capital Preservation Fund II do not own any
derivatives. Benham Government Agency Fund is permitted to invest a portion of
its portfolio in floating-rate agency notes (FRANs), which are considered
derivatives.

FRANs are debt securities issued by U.S. government agencies, and they have
interest rates that change when a designated base rate changes. The base rate is
often the federal funds rate, the 90-day Treasury bill rate or the London
Interbank Offered Rate (LIBOR). FRANs are considered derivatives because they
"derive" their interest rates from their designated base rates. However, FRANs
are not "risky" derivatives--their behavior is similar to that of their
designated base rates. The SEC has recognized this similarity and does not
consider FRANs to be inappropriate investments for money market funds.

INVESTMENT FUNDAMENTALS
OTHER DEFINITIONS

INVESTMENT TERMS

Basis Points--a basis point equals one one-hundredth of a percentage point (or
0.01%). Therefore, 100 basis points equals one percentage point (or 1%).

Yield Curve--a graphic representation of the relationship between maturity and
yield for fixed-income securities. Yield curve graphs plot lengthening
maturities along the horizontal axis and rising yields along the vertical axis.
Most "normal" yield curves start in the lower left corner of the graph and rise
to the upper right corner, indicating that yields rise as maturities lengthen.
This upward sloping yield curve illustrates a normal risk/return
relationship--more return (yield) for more risk (a longer maturity). Conversely,
a "flat" yield curve (one that shows short-term securities having almost the
same yields as long-term securities) or an "inverted" yield curve (one that
shows short-term securities having higher yields than long-term securities)
provide little or no extra return for taking on more risk.

PORTFOLIO STATISTICS

Market Value--the market value of a fund's investments on a given date.

Number of Issues--the number of different securities issuances held by a fund on
a given date.

Average Maturity--a weighted average of all security maturities in a fund's
portfolio (see also below).

AVERAGE MATURITY

Average maturity measures the interest rate sensitivity and interest rate
exposure of a portfolio. It reflects the average amount of time that will pass
until a portfolio receives its principal payments from matured securities. The
longer a portfolio's average maturity is, the more interest rate exposure and
interest rate sensitivity it has. For example, a portfolio with a 90-day average
maturity will take much longer to reinvest its maturing securities than a
portfolio with a 30-day average maturity. Portfolios with longer average
maturities generally pay higher yields to compensate for the greater interest
rate exposure. To help ensure the share price stability of money market funds,
the SEC mandates that a money market fund's average maturity cannot exceed 90
days.

Average maturity is also an important strategic tool. Reducing a fund's average
maturity as interest rates rise allows the portfolio manager to more quickly
reinvest matured assets in higher-yielding securities. Conversely, lengthening a
fund's average maturity as interest rates fall allows the portfolio manager to
"lock in" higher yields.

INDEPENDENT AUDITORS' REPORT

The Shareholders and Board of Directors
Capital Preservation Fund, Inc.
Capital Preservation Fund II, Inc.

The Shareholders and Board of Trustees
Benham Government Income Trust:

We have audited the accompanying statements of assets and liabilities, including
the schedules of investment securities, of Capital Preservation Fund, Inc.,
Capital Preservation Fund II, Inc., and Benham Government Agency Fund (one of
the series comprising Benham Government Income Trust) (the Funds) as of March
31, 1996, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1996, by correspondence with the custodians and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Capital Preservation Fund, Inc., Capital Preservation Fund II, Inc., and Benham
Government Agency Fund (one of the series comprising Benham Government Income
Trust) as of March 31, 1996, the results of their operations, the changes in
their net assets and the financial highlights for the periods indicated above,
in conformity with generally accepted accounting principles.

/s/KPMG Peat Marwick LLP
San Francisco, California
May 3, 1996

<TABLE>
<CAPTION>
CAPITAL PRESERVATION FUND, INC.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)

1996 1995 1994 1993+ 1992 1991 1990 1989 1988 1987
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD.................... $1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Income From Investment
Operations
Net Investment Income....... .0521 .0424 .0259 .0134 .0382 .0603 .0750 .0800 .0608 .0531

Less Distributions
Dividends from Net
Investment Income......... (.0521) (.0424) (.0259) (.0134) (.0382) (.0603) (.0750) (.0800) (.0608) (.0531)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE AT END OF
PERIOD........................ $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
===== ==== ==== ==== ==== ==== ==== ==== ==== ====
TOTAL RETURN*................. 5.21% 4.31% 2.63% 1.35% 3.88% 6.27% 7.77% 8.27% 6.30% 5.48%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands)..........$3,077,558 2,883,350 2,786,614 2,943,242 3,045,501 3,375,505 3,098,997 2,736,531 2,187,096 1,793,056
Ratio of Expenses to Average
Daily Net Assets.......... .51% .50% .51% .50%** .51% .52% .56% .57% .59% .63%
Ratio of Net Investment Income to
Average Daily Net Assets.. 5.07% 4.24% 2.59% 2.68%** 3.82% 6.03% 7.50% 8.00% 6.08% 5.31%
- ---------------

+ The fiscal year-end for Capital Preservation Fund was changed from September 30 to March 31 beginning with the period ended
March 31, 1993. This column represents a six-month period.
* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.
** Annualized.
</TABLE>
See the accompanying notes to financial statements.

<TABLE>
<CAPTION>
CAPITAL PRESERVATION FUND II, INC.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)

1996 1995 1994 1993+ 1992 1991 1990 1989 1988 1987
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD..................... $1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Income From Investment
Operations
Net Investment Income........ .0515 .0406 .0237 .0120 .0341 .0591 .0764 .0834 .0626 .0553

Less Distributions
Dividends from Net
Investment Income.......... (.0515) (.0406) (.0237) (.0120) (.0341) (.0591) (.0764) (.0834) (.0626) (.0553)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE AT END OF
PERIOD......................... $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
===== ==== ==== ==== ==== ==== ==== ==== ==== ====
TOTAL RETURN*.................. 5.15% 4.17% 2.40% 1.21% 3.42% 6.07% 7.91% 8.64% 6.46% 5.68%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands )...........$245,576 262,440 283,487 313,855 339,729 474,888 617,885 707,716 537,653 465,023
Ratio of Expenses to Average Daily
Net Assets................. .76% .75% .75% .75%** .74% .70% .69% .71% .73% .73%
Ratio of Net Investment Income to
Average Daily Net Assets... 5.03% 4.06% 2.37% 2.40%** 3.41% 5.91% 7.64% 8.34% 6.26% 5.53%
- ---------------

+ The fiscal year-end for Capital Preservation Fund II was changed from September 30 to March 31 beginning with the
period ended March 31, 1993. This column represents a six-month period.
* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.
** Annualized.
</TABLE>
See the accompanying notes to financial statements.

<TABLE>
<CAPTION>
BENHAM GOVERNMENT AGENCY FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED MARCH 31 (EXCEPT AS NOTED)

1996 1995 1994 1993 1992 1991 1990+
-------- -------- -------- -------- -------- -------- --------
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD................ $1.00 1.00 1.00 1.00 1.00 1.00 1.00
Income From Investment Operations
Net Investment Income............................... .0535 .0435 .0265 .0304 .0517 .0742 .0264

Less Distributions
Dividends from Net Investment Income................ (.0535) (.0435) (.0265) (.0304) (.0517) (.0742) (.0264)
----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE AT END OF PERIOD...................... $1.00 1.00 1.00 1.00 1.00 1.00 1.00
===== ==== ==== ==== ==== ==== ====
TOTAL RETURN*......................................... 5.35% 4.47% 2.69% 3.07% 5.29% 7.97% 2.65%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands)............ $503,328 461,803 561,766 646,006 906,368 1,073,730 61,768
Ratio of Expenses to Average Daily Net Assets......... .51% .50% .50% .50% .30% 0% 0%
Ratio of Net Investment Income to Average
Daily Net Assets.................................. 5.20% 4.35% 2.65% 3.04% 5.17% 7.42% 8.25%**

- ---------------
+ From December 5, 1989 (commencement of operations), through March 31, 1990.
* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.
**Annualized.
</TABLE>
See the accompanying notes to financial statements.

<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 1996

CAPITAL CAPITAL BENHAM
PRESERVATION PRESERVATION GOVERNMENT
FUND FUND II AGENCY FUND
------- ------- -------
ASSETS
<S> <C> <C> <C>
Investment securities (cost of $2,884,311,605, $244,000,000 and
$499,687,813, respectively).................................................... $2,884,311,605 244,000,000 499,687,813
Cash.............................................................................. 9,610,331 1,045,097 794,089
Receivable for securities matured................................................. 504,060,755 0 0
Interest receivable............................................................... 18,127,770 112,091 1,038,504
Receivable for fund shares sold................................................... 12,953,039 675,424 2,309,973
Prepaid expenses and other assets................................................. 98,393 6,174 14,418
------------- ------------- ------------
Total assets.................................................................... 3,429,161,893 245,838,786 503,844,797
------------- ------------- ------------
LIABILITIES
Payable for fund shares redeemed.................................................. 8,031,384 6,782 102,800
Payable for securities purchased.................................................. 340,832,044 0 0
Dividends payable................................................................. 1,303,784 103,947 198,737
Payable to affiliates (Note 2).................................................... 1,290,611 150,151 198,521
Accrued expenses and other liabilities............................................ 145,573 1,728 16,456
------------- ------------- ------------
Total liabilities............................................................... 351,603,396 262,608 516,514
------------- ------------- ------------

NET ASSETS, EQUIVALENT TO $1.00 PER SHARE........................................... $3,077,558,497 245,576,178 503,328,283
============= ============= ============
Outstanding shares (Note 3)......................................................... 3,077,558,497 245,576,178 503,328,283
============= ============= ============
Net asset value, offering and redemption price per share............................ $1.00 1.00 1.00
===== ==== ====
- -------------------
See the accompanying notes to financial statements.
</TABLE>

<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1996

CAPITAL CAPITAL BENHAM
PRESERVATION PRESERVATION GOVERNMENT
FUND FUND II AGENCY FUND
------- ------- -------
<S> <C> <C> <C>
Investment income........................................ $166,672,795 14,609,187 28,047,501
----------- ----------- -----------
Expenses (Note 2):
Investment advisory fees .............................. 8,039,420 1,161,666 1,371,475
Transfer agency fees .................................. 2,536,792 311,969 591,421
Administrative fees ................................... 2,896,754 244,651 475,745
Printing and postage .................................. 693,064 68,178 144,889
Custodian fees ........................................ 409,662 62,115 65,494
Auditing and legal fees ............................... 49,754 20,056 23,151
Registration and filing fees .......................... 137,238 26,157 33,425
Directors' fees and expenses .......................... 73,013 14,869 12,075
Other operating expenses .............................. 290,959 27,833 52,870
------------- ------------- -------------
Total expenses ...................................... 15,126,656 1,937,494 2,770,545
------------- ------------- -------------
Amount waived (Note 2) .................................. 0 (8,733) (267,261)
Custodian earnings credits (Note 4) ..................... (301,539) (32,076) (43,904)
------------- ------------- -------------
Net Expenses .......................................... 14,825,117 1,896,685 2,459,380
------------- ------------- -------------
Net investment income ............................... $ 151,847,678 12,712,502 25,588,121
=========== =========== ===========

- -------------------
See the accompanying notes to financial statements.
</TABLE>

<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995

CAPITAL CAPITAL BENHAM GOVERNMENT
PRESERVATION FUND PRESERVATION FUND II AGENCY FUND
------------------ ------------------ ------------------
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- --------
FROM INVESTMENT ACTIVITIES:
<S> <C> <C> <C> <C> <C> <C>
Net investment income $151,847,678 119,479,687 12,712,502 11,129,988 25,588,121 21,099,696
Dividends paid or payable to shareholders..... (151,847,678) (119,479,687) (12,712,502) (11,129,988) (25,588,121) (21,099,696)
-------------- ------------- ------------ ------------ ------------ ------------
Change in net assets derived from
investment activities...................... 0 0 0 0 0 0
-------------- ------------- ------------ ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sales of shares................. 3,051,788,845 2,558,519,051 171,364,900 202,421,818 527,427,754 652,415,506
Net asset value of dividends reinvested....... 144,805,698 113,713,677 12,161,767 10,700,190 24,618,517 20,202,136
Cost of shares redeemed....................... (3,002,386,181)(2,575,496,283)(200,390,890) (234,168,675)(510,520,815)(772,580,324)
-------------- ------------- ------------ ------------ ------------ ------------
Change in net assets derived from
capital share transactions.................. 194,208,362 96,736,445 (16,864,223) (21,046,667) 41,525,456 (99,962,682)
-------------- ------------- ------------ ------------ ------------ ------------
Net increase (decrease) in net assets..... 194,208,362 96,736,445 (16,864,223) (21,046,667) 41,525,456 (99,962,682)

NET ASSETS:
Beginning of year............................. 2,883,350,135 2,786,613,690 262,440,401 283,487,068 461,802,827 561,765,509
------------- -------------- ------------ ------------ ------------ ------------
End of year................................... $3,077,558,497 2,883,350,135 245,576,178 262,440,401 503,328,283 461,802,827
============= ============== ============ ============ ============ ============

- -------------------
See the accompanying notes to financial statements.
</TABLE>

NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996

(1) SIGNIFICANT ACCOUNTING POLICIES

Capital Preservation Fund, Inc. (CPF), Capital Preservation Fund II, Inc. (CPF
II) and Benham Government Agency Fund (BGAF) (the Funds) are open-end,
diversified management investment companies registered under the Investment
Company Act of 1940. BGAF is one of the six funds composing Benham Government
Income Trust (BGIT). CPF invests exclusively in short-term U.S. Treasury
securities. CPF II invests primarily in repurchase agreements collateralized by
U.S. government securities. BGAF invests exclusively in obligations of the U.S.
government and its agencies and instrumentalities. Significant accounting
policies followed by the Funds are summarized below.

VALUATION OF INVESTMENT SECURITIES -- Securities are valued at amortized cost,
which approximates current market value. Repurchase agreements are valued at
cost and are collateralized by U.S. government securities whose market value
plus accrued interest exceed the carrying value of the repurchase agreements.
Such collateral is maintained by the Fund's custodian. Securities transactions
are recorded on the date the order to buy or sell is executed.

FORWARD COMMITMENTS -- Periodically, CPF and BGAF enter into purchase or sale
transactions on a forward commitment basis. In these transactions, CPF and BGAF
sell a security and at the same time make a commitment to purchase the same
security at a future date and specified price. Conversely, these Funds may
purchase a security and at the same time make a commitment to sell the same
security at a future date at a specified price. These types of transactions are
executed simultaneously in what are known as forward commitment or "roll"
transactions. These Funds take possession of any security they purchase in these
transactions.

INCOME TAXES -- Each Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code. By complying with the
provisions of Subchapter M, each Fund will not be subject to federal or state
income or franchise taxes to the extent that it distributes its net investment
income and net realized capital gains to shareholders. Accordingly, no provision
for income taxes has been made.

The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes due to differences in the recognition of income and
expense items for financial statement and tax purposes.

SHARE VALUATION -- Each Fund's net asset value per share is computed by dividing
the value of its total assets, less liabilities, by the total number of shares
outstanding at the beginning of each business day. It is the Funds' policy to
maintain a constant net asset value of $1.00 per share, although there is no
guarantee they will be able to do so.

INVESTMENT INCOME, DIVIDENDS AND OTHER DISTRIBUTIONS -- Income and expenses are
accrued daily. Discounts and premiums on securities purchased are amortized on a
straight-line basis over the life of the securities. Dividends to the
shareholders are declared and credited daily. Shareholders may elect to receive
distributions in cash or to reinvest them in additional shares. Cash dividends
are distributed on the last business day of the month.

USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increase and decrease in net assets from
operations during the period. Actual results could differ from those estimates.

(2) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

Benham Management Corporation (BMC) is a wholly owned subsidiary of Twentieth
Century Companies, Inc. (TCC). BMC's former parent company, Benham Management
International, Inc., merged into TCC on June 1, 1995. CPF and CPF II pay BMC a
monthly investment advisory fee, which is calculated by applying the Fund's
average daily net assets to the following annualized fee schedule. BGAF pays BMC
a monthly advisory fee based on its pro rata share of the dollar amount derived
from applying BGIT's average daily net assets to the following annualized fee
schedule.

.50% of the first $100 million
.45% of the next $100 million
.40% of the next $100 million
.35% of the next $100 million
.30% of the next $100 million
.25% of the next $1 billion
.24% of the next $1 billion
.23% of the next $1 billion
.22% of the next $1 billion
.21% of the next $1 billion
.20% of the next $1 billion
.19% of average daily net assets over $6.5 billion

BMC provides the Funds with all investment advice. Twentieth Century Services,
Inc. pays all compensation of Fund officers and directors who are officers or
directors of TCC or any of its subsidiaries. In addition, promotion and
distribution expenses are paid by BMC.

CPF, CPF II and BGIT have Administrative Services and Transfer Agency Agreements
with Benham Financial Services, Inc. (BFS), a wholly owned subsidiary of TCC.
Under the agreement, BFS provides substantially all administrative and transfer
agency services necessary to operate each Fund. Fees for these services are
based on transaction volume, number of accounts and average net assets of all
funds in The Benham Group.

The Funds have an additional agreement with BMC pursuant to which BMC
established a contractual expense guarantee that limits each Fund's expenses
(excluding extraordinary expenses such as brokerage commissions and taxes on an
annualized basis and the impact of custodian earnings credits) to .54% for CPF,
.75% for CPF II, and .50% for BGAF of average daily net assets. The agreement
provides that BMC may recover amounts (representing expenses in excess of the
Fund's expense guarantee rate) absorbed during the preceding 11 months if, and
to the extent that, for any given month, the Fund's expenses are less than the
expense guarantee rate in effect at that time. The expense guarantee rate is
renewed annually in June.

The payables to affiliates as of March 31, 1996, based on the above agreements,
were as follows:

CAPITAL CAPITAL BENHAM
PRESERVATION PRESERVATION GOVERNMENT
FUND FUND II AGENCY FUND
------------- ------------- -------------

Investment Advisor............. $ 698,054 88,173 83,398
Administrative Services........ 250,831 19,865 41,154
Transfer Agent................. 341,726 42,113 73,969
---------- ------- -------
$ 1,290,611 150,151 198,521
========== ======= =======

As of March 31, 1996, certain other funds managed by BMC (the variable-rate
Funds) owned shares of CPF, with a total value of $17,287,326. The terms of such
transactions were identical to those of nonrelated entities except that, to
avoid duplicative investment advisory and administrative fees, the variable-rate
funds do not pay BMC or BFS investment advisory and administrative fees for
assets invested in shares of CPF.

CPF, CPF II and BGIT have distribution agreements with Benham Distributors, Inc.
(BDI), which is responsible for promoting sales and distributing the Funds'
shares. BDI is a wholly owned subsidiary of TCC.

(3) CAPITAL STOCK

CPF and CPF II are each authorized to issue ten billion (10,000,000,000) shares
of common stock, which may be issued in two or more series. Of the ten billion
shares, five billion each (5,000,000,000) are designated "Series A Common
Stock." The remaining five billion shares may be designated and classified as
additional series from time to time at the discretion of the respective boards
of directors. BGAF is authorized to issue an unlimited number of shares of
beneficial interest.

(4) EXPENSE OFFSET ARRANGEMENTS

Each Fund's Statement of Operations reflects custodian earnings credits. These
amounts are used to offset the custody fees payable by the Funds to the
custodian bank. The credits are earned when the Fund maintains a balance of
uninvested cash at the custodian bank. Beginning with the year ending March 31,
1996, the ratios of expenses to average daily net assets shown in the Financial
Highlights are calculated as if these credits had not been earned.

<TABLE>
<CAPTION>
CAPITAL PRESERVATION FUND, INC.
SCHEDULE OF INVESTMENT SECURITIES
MARCH 31, 1996
PERCENT OF
RATE** MATURITY FACE AMOUNT VALUE NET ASSETS
------ ------ -------- -------- -------
<S> <C> <C> <C> <C> <C>
U.S. Treasury bills ................................................... 5.02% 04/04/96 $289,000,000 288,880,791 9.39%
U.S. Treasury bills ................................................... 5.34 04/10/96 50,000,000 49,934,250 1.62
U.S. Treasury bills ................................................... 5.07 04/11/96 155,000,000 154,785,125 5.03
U.S. Treasury bills ................................................... 5.05 04/18/96 262,200,000 261,585,054 8.50
U.S. Treasury bills ................................................... 5.22 04/25/96 138,000,000 137,528,080 4.47
U.S. Treasury bills ................................................... 5.03 05/02/96 285,500,000 284,286,445 9.24
U.S. Treasury bills ................................................... 5.05 05/09/96 183,000,000 182,043,350 5.91
U.S. Treasury bills ................................................... 4.89 05/16/96 238,000,000 236,573,519 7.69
U.S. Treasury bills ................................................... 4.89 05/23/96 46,000,000 45,681,666 1.48
U.S. Treasury bills ................................................... 4.99 05/30/96 8,000,000 7,936,018 .26
U.S. Treasury bills ................................................... 5.01 06/06/96 172,000,000 170,454,433 5.54
U.S. Treasury bills ................................................... 5.17 06/13/96 55,000,000 54,437,241 1.77
U.S. Treasury bills ................................................... 5.15 06/27/96 175,000,000 172,879,676 5.62
U.S. Treasury bills ................................................... 4.93 08/01/96 10,000,000 9,838,011 .32
------------ ------------ ------
Total (cost $2,056,843,659*).......................................................... 2,066,700,000 2,056,843,659 66.84
------------ ------------ ------
U.S. Treasury notes ................................................... 9.375 04/15/96 84,169,000 84,291,534 2.74
U.S. Treasury notes ................................................... 5.500 04/30/96 49,900,000 49,921,729 1.62
U.S. Treasury notes ................................................... 7.375 05/15/96 70,000,000 70,165,559 2.28
U.S. Treasury notes ................................................... 5.875 05/31/96 175,325,000 175,510,689 5.70
U.S. Treasury notes ................................................... 7.625 05/31/96 125,000,000 125,456,601 4.07
U.S. Treasury notes ................................................... 7.875 07/31/96 25,000,000 25,233,612 .82
U.S. Treasury notes ................................................... 6.250 08/31/96 50,000,000 50,158,203 1.63
U.S. Treasury notes ................................................... 7.250 08/31/96 150,000,000 151,128,222 4.91
U.S. Treasury notes ................................................... 6.500 09/30/96 70,000,000 70,397,402 2.29
U.S. Treasury notes ................................................... 7.000 09/30/96 25,000,000 25,204,395 .82
------------ ------------ ------
Total (cost $827,467,946*)............................................................ 824,394,000 827,467,946 26.88
------------ ------------ ------
TOTAL INVESTMENT SECURITIES (COST $2,884,311,605*).......................................... $2,891,094,000 2,884,311,605 93.72%
============ ------------ ------
Other assets and liabilities................................................................ 193,246,892 6.28
------------ ------
Net assets.................................................................................. 3,077,558,497 100.00%
============ ======
- -------------------
* Cost for financial reporting and federal income tax purposes is the same.
** The rates for U.S. Treasury bills are the yields to maturity as of March 31, 1996. The rate for U.S. Treasury notes is the
stated coupon rate.
See the accompanying notes to financial statements.
</TABLE>

<TABLE>
<CAPTION>
CAPITAL PRESERVATION FUND II, INC.
SCHEDULE OF INVESTMENT SECURITIES
MARCH 31, 1996

REPURCHASE AGREEMENTS:
PERCENT OF
ISSUER COLLATERAL RATE MATURITY+ VALUE NET ASSETS
- ----------------- ----------------------------------------------------- ---- -------- ----- ----------
<S> <C> <C> <C> <C> <C>
Aubrey Lanston Securities... Due in the amount of $12,005,400 (collateralized by 5.40% 04/01/96 $ 12,000,000 4.89%
$12,515,000 in U.S. Treasury notes, 4.750%, due 08/31/98)

Bank of America Securities.. Due in the amount of $12,005,300 (collateralized by 5.30 04/01/96 12,000,000 4.89
$12,290,000 in U.S. Treasury bills, due 04/18/96)

Bank of Tokyo Securities.... Due in the amount of $12,005,700 (collateralized by 5.70 04/01/96 12,000,000 4.89
$12,565,000 in U.S. Treasury notes, 5.875%, due 02/15/04)

Bankers Trust Securities.... Due in the amount of $12,005,150 (collateralized by 5.15 04/01/96 12,000,000 4.89
$12,020,000 in U.S. Treasury notes, 6.000%, due 12/31/97)

Daiwa Securities............ Due in the amount of $12,005,700 (collateralized by 5.70 04/01/96 12,000,000 4.89
$12,560,000 in U.S. Treasury bills, due 09/26/96)

HSBC Securities Inc......... Due in the amount of $12,005,400 (collateralized by 5.40 04/01/96 12,000,000 4.89
$11,710,000 in U.S. Treasury notes, 6.750%, due 04/30/00)

Goldman Sachs Company....... Due in the amount of $12,005,300 (collateralized by 5.30 04/01/96 12,000,000 4.89
$12,140,000 in U.S. Treasury notes, 4.375%, due 11/15/96)

JP Morgan Securities, Inc... Due in the amount of $12,005,375 (collateralized by 5.375 04/01/96 12,000,000 4.89
$12,287,000 in U.S. Treasury bills, due 04/18/96)

Nikko Securities............ Due in the amount of $12,005,350 (collateralized by 5.35 04/01/96 12,000,000 4.89
$11,446,000 in U.S. Treasury notes, 7.250%, due 05/15/16)

Nomura Securities........... Due in the amount of $60,027,250 (collateralized by 5.45 04/01/96 60,000,000 24.42
$62,200,000 in GNMA-ARM, 5.500%, due 10/20/25)
</TABLE>

<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENT SECURITIES - CAPITAL PRESERVATION FUND II, INC. (Continued)
====================================================================================================================================
PERCENT OF
ISSUER COLLATERAL RATE MATURITY+ VALUE NET ASSETS
- ----------------- ----------------------------------------------------- ---- -------- ----- ----------
<S> <C> <C> <C> <C> <C>
Sanwa Securities............ Due in the amount of $60,028,750 (collateralized by 5.75% 04/01/96 $60,000,000 24.42%
$61,800,000 in U.S. Treasury bills, due 06/06/96)

SBC Government Securities,
Inc......................... Due in the amount of $12,005,700 (collateralized by 5.70 04/01/96 12,000,000 4.89
$9,686,000 in U.S. Treasury notes, 10.000%, due 05/15/10)

State Street Bank & Trust Co.Due in the amount of $4,001,716 (collateralized by 5.15 04/01/96 4,000,000 1.62
$3,935,000 in U.S. Treasury notes, 6.500%, due 09/30/96) ----------- ------

TOTAL INVESTMENT SECURITIES (COST $244,000,000*)...................................................... 244,000,000 99.36%
----------- ------
Other assets less liabilities......................................................................... 1,576,178 .64
----------- ------
Net assets............................................................................................ $245,576,178 100.00%
=========== ======

- -------------------
+ All repurchase agreements were entered into on March 29, 1996.
* Cost for financial reporting and federal income tax purposes is the same.
</TABLE>
See the accompanying notes to financial statements.

<TABLE>
<CAPTION>
BENHAM GOVERNMENT AGENCY FUND
SCHEDULE OF INVESTMENT SECURITIES
MARCH 31, 1996

FACE PERCENT OF
RATE** MATURITY AMOUNT VALUE NET ASSETS
------ -------- ------ ----- ----------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES
<S> <C> <C> <C> <C> <C>
Federal Farm Credit Bank................................................... 5.34% 04/01/96 $15,000,000 15,000,000 2.98%
Federal Farm Credit Bank................................................... 5.34 04/04/96 4,000,000 3,998,303 0.80
Federal Farm Credit Bank................................................... 5.30 04/11/96 1,265,000 1,263,148 0.25
Federal Farm Credit Bank................................................... 5.30 04/15/96 4,800,000 4,790,013 0.95
Federal Farm Credit Bank................................................... 5.30 04/17/96 10,000,000 9,976,711 1.98
Federal Farm Credit Bank................................................... 5.30 04/19/96 6,000,000 5,984,640 1.19
Federal Farm Credit Bank................................................... 5.30 04/29/96 1,000,000 995,933 0.20
Federal Farm Credit Bank................................................... 5.30 05/10/96 900,000 894,911 0.18
Federal Farm Credit Bank................................................... 5.30 05/14/96 14,000,000 13,913,021 2.76
Federal Farm Credit Bank................................................... 5.30 05/15/96 15,350,000 15,252,442 3.03
Federal Farm Credit Bank................................................... 5.30 05/16/96 5,000,000 4,968,375 0.99
Federal Farm Credit Bank................................................... 5.30 05/20/96 2,000,000 1,985,817 0.39
Federal Farm Credit Bank................................................... 5.30 06/07/96 11,000,000 10,894,978 2.16
Federal Farm Credit Bank................................................... 5.30 09/16/96 5,000,000 4,880,767 0.97
Federal Farm Credit Bank................................................... 5.21 09/25/96 9,000,000 8,771,228 1.74
Federal Home Loan Bank..................................................... 5.42 04/03/96 12,500,000 12,496,339 2.48
Federal Home Loan Bank..................................................... 5.40 05/06/96 20,000,000 19,903,556 3.96
Federal Home Loan Bank..................................................... 5.40 05/08/96 10,000,000 9,949,022 1.98
Federal Home Loan Bank..................................................... 5.40 05/09/96 5,000,000 4,972,133 0.99
Federal Home Loan Bank..................................................... 5.40 05/28/96 17,000,000 16,864,910 3.35
Federal Home Loan Bank..................................................... 5.40 05/29/96 20,000,000 19,837,922 3.94
Federal Home Loan Bank..................................................... 5.18 07/08/96 10,000,000 9,863,889 1.96
Federal Home Loan Bank..................................................... 5.18 07/09/96 6,000,000 5,919,645 1.18
Federal Home Loan Bank..................................................... 5.18 07/10/96 9,000,000 8,875,000 1.76
Federal Home Loan Bank..................................................... 5.18 07/11/96 5,000,000 4,928,879 0.98
Federal Home Loan Bank..................................................... 5.16 08/02/96 20,000,000 19,661,750 3.91
Tennessee Valley Authority................................................. 5.25 04/03/96 15,000,000 14,995,617 2.98
Tennessee Valley Authority................................................. 5.25 04/08/96 10,000,000 9,989,791 1.99
Tennessee Valley Authority................................................. 5.25 04/10/96 41,240,000 41,186,381 8.18
Tennessee Valley Authority................................................. 5.25 04/11/96 10,000,000 9,985,472 1.98
</TABLE>

<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENT SECURITIES - BENHAM GOVERNMENT AGENCY FUND (Continued)
====================================================================================================================================
FACE PERCENT OF
RATE** MATURITY AMOUNT VALUE NET ASSETS
------ -------- ------ ----- ----------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES (CONTINUED)
<S> <C> <C> <C> <C> <C>
Tennessee Valley Authority................................................. 5.24% 04/16/96 $ 14,000,000 13,969,675 2.78%
Tennessee Valley Authority................................................. 5.24 04/18/96 10,000,000 9,975,964 1.98
Tennessee Valley Authority................................................. 5.24 04/19/96 10,000,000 9,973,750 1.98
Tennessee Valley Authority................................................. 5.24 04/22/96 10,000,000 9,969,258 1.98
Tennessee Valley Authority................................................. 5.24 04/24/96 1,000,000 996,754 0.20
Tennessee Valley Authority................................................. 5.24 04/25/96 17,000,000 16,941,066 3.37
Tennessee Valley Authority................................................. 5.23 05/03/96 2,000,000 1,990,827 0.40
Tennessee Valley Authority................................................. 5.22 05/28/96 16,000,000 15,869,787 3.15
----------- ---------- -----
Total (cost $392,687,674*)................................................................. 395,055,000 392,687,674 78.03
----------- ---------- -----

U.S. GOVERNMENT AGENCY NOTES
Federal Farm Credit Bank................................................... 5.32 04/01/96 19,000,000 19,000,000 3.77
Federal Farm Credit Bank................................................... 5.60 11/01/96 5,000,000 4,996,619 .99
Federal Home Loan Bank..................................................... 6.13 08/05/96 5,975,000 5,990,750 1.19
Federal Home Loan Bank..................................................... 7.10 10/25/96 2,500,000 2,523,026 .50
----------- ---------- -----
Total (cost $32,510,395*).................................................................. 32,475,000 32,510,395 6.45
----------- ---------- -----

U.S. GOVERNMENT AGENCY FLOATING-RATE NOTES***
Student Loan Marketing Association, resets weekly off the 3-Month T-Bill
rate plus .22% with no caps, final maturity 04/11/96.................... 5.34 04/02/96 5,000,000 4,999,856 .99
Student Loan Marketing Association, resets weekly off the 3-Month T-Bill rate
plus .25% with no caps, final maturity 05/09/96......................... 5.37 04/02/96 5,000,000 4,999,817 .99
Student Loan Marketing Association, resets weekly off the 3-Month T-Bill
rate plus .15% with no caps, final maturity 08/09/96.................... 5.27 04/02/96 25,000,000 24,997,291 4.97
Federal Farm Credit Bank, resets monthly off the 1-Month LIBOR minus
20% with no caps, final maturity 03/17/97............................... 5.11 04/17/96 25,000,000 24,971,911 4.96
Federal Home Loan Bank, resets monthly off the 1-Month LIBOR minus
16% with no caps, final maturity 03/27/97............................... 5.25 04/27/96 10,000,000 9,992,312 1.99
----------- ---------- -----
Total (cost $69,961,187*)................................................................ 70,000,000 69,961,187 13.90
----------- ---------- -----
</TABLE>

U.S. TREASURY NOTES
U.S. Treasury notes........................................................ 7.88 07/31/96 3,500,000 3,532,755 .70
----------- ---------- -----
Total (cost $3,532,755*)................................................................. 3,500,000 3,532,755 .70
----------- ---------- -----
TOTAL INVESTMENT SECURITIES (COST $499,687,813*)............................................... $502,030,000 499,687,813 99.28%
=========== ---------- -----

Other assets less liabilities.................................................................. 3,640,470 .72
---------- -----
Net assets..................................................................................... $503,328,283 100.00%
========== =====
- -------------------
* Cost for financial reporting and federal income tax purposes is the same.
** The rates for U.S. government agency discount notes and U.S. Treasury bills is the yield to maturity as of March 31, 1996.
The rates for U.S. government agency notes and U.S. Treasury notes are the stated coupon rates. The rates for the
floating-rate notes are the reset rates as of March 31, 1996.
***These floating-rate notes do not have caps. A cap is a predetermined rate that a fixed-income security's coupon will never
exceed, regardless of where the coupon formula resets. A cap limits the investor's coupon payments, regardless of how interest
rates rise. In volatile interest rate environments, caps can cause and amplify price instability for fixed-income securities.
Therefore, it has always been the policy of the Fund not to purchase floating-rate notes with caps.
+ The maturity for U.S. government agency floating-rate notes is the next interest reset date.

See the accompanying notes to financial statements.
</TABLE>

DIRECTORS/TRUSTEES

James M. Benham
Albert A. Eisenstat
Ronald J. Gilson
Myron S. Scholes
Kenneth E. Scott
Ezra Solomon
Isaac Stein
James E. Stowers, III
Jeanne D. Wohlers

OFFICERS

James M. Benham
Chairman of the Board

Maryanne Roepke
Treasurer and Chief Financial Officer

Douglas A. Paul
Vice President, Secretary
and General Counsel

Ann N. McCoid
Controller

[company logo] The Benham Group
Part of the Twentieth Century Family of Mutual Funds

1665 Charleston Road
Mountain View, CA 94043

1-800-321-8321

Not authorized for distribution unless preceded or
accompanied by a current fund prospectus

Benham Distributors, Inc. 5/96 Q060