PIPER FUNDS INC, N-30D, 1996-11-08

PIPER FUNDS INC
N-30D, 1996-11-08

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<PAGE>
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GOVERNMENT INCOME FUND
--------------------------
INTERMEDIATE BOND FUND
--------------------------
ADJUSTABLE RATE MORTGAGE
--------------------------
SECURITIES FUND

[LOGO] INCOME
FUNDS

<PAGE>

- --------------------------------------------------
CONTENTS
- --------------------------------------------------

GOVERNMENT INCOME FUND
- --------------------------------------------------
Letter to Shareholders . . . . . . . . . . . . . 2
Financial Statements and Notes . . . . . . . . .10
Investments in Securities. . . . . . . . . . . .23
Independent Auditors' Report . . . . . . . . . .27
Federal Tax Information . . . . . . . . . . . .28
Shareholder Services . . . . . . . . . . . . . .31
Glossary . . . . . . . . . . . . . . . . . . . .32

INTERMEDIATE BOND FUND
- --------------------------------------------------
Letter to Shareholders . . . . . . . . . . . . . 4
Financial Statements and Notes . . . . . . . . .10
Investments in Securities. . . . . . . . . . . .24
Independent Auditors' Report . . . . . . . . . .27
Federal Tax Information . . . . . . . . . . . .28
Shareholder Update . . . . . . . . . . . . . . .29
Shareholder Services . . . . . . . . . . . . . .31
Glossary . . . . . . . . . . . . . . . . . . . .32

ADJUSTABLE RATE MORTGAGE
SECURITIES FUND
- --------------------------------------------------
Letter to Shareholders . . . . . . . . . . . . . 7
Financial Statements and Notes . . . . . . . . .10
Investments in Securities. . . . . . . . . . . .25
Independent Auditors' Report . . . . . . . . . .27
Federal Tax Information . . . . . . . . . . . .28
Shareholder Update . . . . . . . . . . . . . . .29
Shareholder Services . . . . . . . . . . . . . .31
Glossary . . . . . . . . . . . . . . . . . . . .32

This report is intended for shareholders of
Government Income Fund, Intermediate Bond
Fund and Adjustable Rate Mortgage
Securities Fund, but may also be used as
sales literature if preceded or accompanied
by a prospectus. The prospectus gives details
about the charges, investment results, risks
and operating policies of the funds.

*An investment in a money market fund is
neither insured nor guaranteed by the U.S.
government, and there can be no assurance
that the fund will be able to maintain a stable
net asset value of $1 per share.

[LOGO]

INTERNATIONAL GROWTH FUNDS
- -------------------------------
Emerging Markets Growth Fund
Pacific-European Growth Fund

U.S. GROWTH FUNDS
- -------------------------------
Small Company Growth Fund
Emerging Growth Fund
Growth Fund

GROWTH AND INCOME FUNDS
- -------------------------------
Growth and Income Fund
Balanced Fund

INCOME FUNDS
- -------------------------------
Government Income Fund
Intermediate Bond Fund
Adjustable Rate Mortgage Securities Fund

Many traditional investment strategies rely on the steady, dependable investment
income generated by debt obligations of corporations and government entities.

TAX-EXEMPT INCOME FUNDS
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National Tax-Exempt Fund
Minnesota Tax-Exempt Fund

CASH MANAGEMENT FUNDS*
- -------------------------------
Money Market Fund
Tax-Exempt Money Market Fund
U.S. Government Money Market Fund
Institutional Money Market Fund

Piper Funds provide you with the flexibility to help you pursue your lifelong
goals. Among our funds, we offer a spectrum of investment objectives and
convenient shareholder services to meet the varied needs of today's investors.

Contact your Piper Jaffray Investment Executive for more information about the
Piper Funds, including prospectuses, or call Mutual Fund Services at 1 800 866-
7778.

<PAGE>

[PHOTO]

WILLIAM H. ELLIS

President

Piper Capital Management
- -----------------------------

PRESIDENT'S LETTER
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Oct. 29, 1996
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DEAR SHAREHOLDERS:

Check out the best sellers' list at your local bookstore. You'll notice a number
of books about companies that have gone through dramatic changes in recent
years. Surprising? Not really. Every company experiences change periodically.
And we're no exception. At Piper Capital Management, we've recently made
significant changes to enhance our ability to achieve consistent, competitive
performance and provide a higher level of quality service.
We've restructured our fund family to offer you a broader range of mutual
funds - from small company to emerging markets. We've renamed certain funds so
it's easier to identify how they invest. Take a look at the names, and you'll
see what I mean.
We've upgraded our toll-free telephone system so you spend less time
listening to voice response and more time receiving information you can put to
use. When calling our toll-free number, you'll now have the option to listen to
our portfolio managers talk about their current investment strategies and market
outlook. Find out the many ways to reach us, including our toll-free number, on
the back page of this report.
Take a close look at the annual report in your hand. You'll see that the
format is simpler and more inviting. The report has less jargon and is easier to
read. We've even added a glossary of terms at the back of the book to help you
better understand commonly used financial terms. Whenever you see this symbol
****, it indicates a term that is defined in the glossary. In addition, we've
developed more literature that clearly spells out each fund's investment process
with succinct content that you can easily grasp. Flip to the back page for more
information on how to order literature.
You'll hear the word "team" more often when we talk about our portfolio
managers. We've reorganized our investment management group so managers interact
more frequently, sharing their best ideas to improve the investment capabilities
of Piper Capital.
There is one thing that hasn't changed at Piper Capital, and that's the
value we place on your Investment Executive. He or she plays an integral part in
helping you build your wealth. Rely on your Piper Jaffray Investment Executive
to give you the support and guidance that you need in working toward your
financial goals.
The recent changes we have made represent a new way of doing business at
Piper Capital - an approach we believe will enable us to establish an
unparalleled reputation for prudent investing and high-quality service.
That said, we look forward to serving your future financial needs and
exceeding your expectations in every way we can.

Thank you for your investment.

Sincerely,

/s/ William H. Ellis

William H. Ellis

**** [In the printed version of the document this symbol appears as a graduation
cap.]
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1 1996 Annual Report-Income Funds
<PAGE>

[PHOTO]

BRUCE SALVOG

shares responsibility for the

management of Government

Income Fund. He has 26

years of financial experience.
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GOVERNMENT INCOME FUND
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Oct. 29, 1996
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DEAR SHAREHOLDERS:

FOR THE 12-MONTH PERIOD ENDED SEPT. 30, 1996, GOVERNMENT INCOME FUND RECORDED A
TOTAL RETURN OF 4.99%,* WITH ALL DISTRIBUTIONS REINVESTED, BUT NOT INCLUDING ITS
SALES CHARGE. Over the same one-year period, the Lipper U.S. Mortgage Funds
Average+ had a total return of 4.59%, and the Merrill Lynch 5-10 Year Treasury
Index** had a total return of 3.77%.

WE ARE PLEASED WITH THE FUND'S FAVORABLE PERFORMANCE, WHICH WE BELIEVE CAN BE
ATTRIBUTED TO SEVERAL FACTORS. As interest rates were rising during the first
quarter of the year, the fund had a defensive effective duration **** posture
compared to its benchmark, which means the duration was shorter, and the fund
was somewhat less sensitive to interest rate changes. That, along with a
carefully timed move to a neutral duration **** position at the end of the first
quarter, contributed to the fund's positive performance. This cautious stance
helped preserve the fund's capital as rising interest rates caused bond prices
to fall.

ANOTHER REASON THE FUND OUTPERFORMED THE BENCHMARK WAS THAT IT EMPHASIZED
MORTGAGE-BACKED SECURITIES DURING THE WHOLE REPORTING PERIOD AND FOCUSED ON THE
LONG-TERM INCOME GENERATING POTENTIAL OF THE FUND. Mortgage-backed securities,
which make up the largest portion of the fund's portfolio, outperformed
corporate and U.S. Treasury bonds during the year. They were able to generate
better income levels than other sectors, and they also had better price
performance. This is because mortgage securities generally perform well compared
to other fixed income securities when interest rates are stable or

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FUND PERFORMANCE THROUGH SEPT. 30, 1996*
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GROWTH OF $10,000 INVESTED SINCE INCEPTION

3/87 9,600 10,000 10,000

6/87 9,517 9,757 9,826

9/87 8,997 9,371 9,539

12/87 9,640 9,978 10,077

3/88 9,985 10,366 10,451

6/88 10,106 10,451 10,580

9/88 10,268 10,646 10,783

12/88 10,328 10,659 10,816

3/89 10,419 10,771 10,898

6/89 10,882 11,739 11,640

9/89 10,937 11,827 11,754

12/89 11,347 12,288 12,177

3/90 11,178 12,105 12,127

6/90 11,589 12,518 12,533

9/90 11,724 12,632 12,716

12/90 12,335 13,385 13,312

3/91 12,676 13,648 13,641

6/91 12,823 13,819 13,865

9/91 13,777 14,733 14,614

12/91 14,678 15,680 15,300

3/92 14,067 15,256 15,117

6/92 14,873 15,990 15,709

9/92 15,370 16,985 16,236

12/92 15,319 16,864 16,267

3/93 15,965 17,825 16,817

6/93 16,452 18,407 17,180

9/93 16,933 19,027 17,446

12/93 16,858 18,884 17,464

3/94 15,961 18,140 16,921

6/94 15,387 17,901 16,589

9/94 15,370 17,965 16,648

12/94 15,324 17,978 16,645

3/95 16,321 18,965 17,422

6/95 17,319 20,408 18,295

9/95 17,660 20,774 18,632

12/95 18,368 21,846 19,282

3/96 18,036 21,203 19,048

6/96 18,186 21,191 19,098

9/96 18,541 21,557 19,435

- ---------------------- ----------------------- --------------------
Government Income Fund, Merrill Lynch 5-10 Year Lipper U.S. Mortgage
reflects the fund's 4% Treasury Index** Fund Average+
sales charge

** An unmanaged index, that includes no expenses or transaction charges, of all
U.S. Treasury bonds that have maturities of five to 10 years.

+ The average total return of similar funds as characterized by Lipper
Analytical Services.

AVERAGE ANNUALIZED TOTAL RETURNS
Includes 4% maximum sales charge.

One Year . . . . . . . . . . . . . . . 0.79%
Five Years . . . . . . . . . . . . . . . 5.25%
Since Inception (3/16/87). . . . . . . . 6.68%

During some periods, the fund's adviser waived or paid certain fund expenses
and/or the fund's distributor voluntarily limited certain fund 12b-1 fees.
Otherwise, the average annual total returns would have been 0.67% one year,
5.06% five years and 6.44% since inception.

* Past performance does not guarantee future results. Please remember, you could
lose money with this investment. Neither safety of principal nor stability of
income is guaranteed. The return and principal value of your investment will
fluctuate so that fund shares, when sold, may be worth more or less than their
original cost.

All fund and benchmark performance figures include reinvested distributions.

<PAGE>

DAVID STEELE

shares responsibility for the

management of Government

Income Fund. He has 17

years of financial experience.
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GOVERNMENT INCOME FUND (CONTINUED)
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increasing (as was the case during this reporting period), since homeowners are
less likely to refinance mortgage loans in those environments. As a result of
prior interest rate declines, prices of mortgage-backed securities were
historically inexpensive at the end of 1995. We believe they've moved from being
cheap to having relatively fair values today, as interest rates have stabilized.

OVER THE YEAR, THE FUND MAINTAINED A 5% TO 10% POSITION IN THE DOLLAR ROLL
PROGRAM.**** This program allows the fund to generate fee income by committing
to pay for securities in the future at today's prices. These commitments also
increase the number of assets exposed to interest rate riskv and, therefore,
increase the volatility of the fund's net asset value. The dollar roll program
was not as attractive this year as it has been in many previous years, since
rising interest rates kept homeowners from refinancing their mortgages in great
numbers during the year.

LOOKING AHEAD, WE EXPECT MODERATE ECONOMIC GROWTH WITH NO SERIOUS OR SUSTAINABLE
INCREASE IN INFLATION AND AN INTEREST RATE ENVIRONMENT THAT IS SOMEWHAT LESS
VOLATILE. We believe this environment should be conducive to good performance by
mortgage securities. While they are now not as undervaluedv as they have been
over the past year, we believe they still represent fair value in the
environment we anticipate, in comparison to other fixed income securities. With
this outlook in mind, we do not anticipate making any major shifts in the fund's
composition. We are also refraining from assuming a more aggressive effective
duration, due to the possibility that the Federal Reserve may raise short-term
interest rates, and the fact that cash flows into bond funds this year have
slowed considerably. We will continue to monitor the portfolio and make changes
as appropriate.

As always, we appreciate your investment in Government Income Fund, and we look
forward to helping you reach your financial goals in the coming year.

Sincerely,

/s/ Bruce Salvog /s/ David Steele

Bruce Salvog David Steele
Portfolio Manager Portfolio Manager

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PORTFOLIO COMPOSITION
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As a percentage of total assets on Sept. 30, 1996.

U.S. Agency Inverse
Floater Securities 1%

U.S. Agency Inverse
Interest-Only Securities 1%

U.S. Treasury Securities 10%

U.S. Agency Fixed Rate
Mortgage-Backed
Securities 72%

U.S. Agency
Z-Bond Securities 8%

U.S. Agency
Debentures 3%

U.S. Agency
CMOs - Fixed 4%

Other Assets 1%

[PIE GRAPH]

WORTH BRUNTJEN

shares responsibility for the

management of Intermediate

Bond Fund. He has 29 years

of financial experience.
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INTERMEDIATE BOND FUND
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Oct. 29, 1996
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DEAR SHAREHOLDERS:

At a special meeting held Sept. 12, shareholders of Institutional Government
Income Portfolio approved a change in investment policy, which brought along
with it several other changes, including a new name - Intermediate Bond Fund.
While the fund's objective **** stayed the same, its policies have changed to
provide more flexibility in meeting its objective. Shareholders voted to
eliminate the requirement that the fund invest only in U.S. government and
government agency securities and repurchase agreements. The fund is now
permitted to invest in a broad range of debt securities, including U.S.
government securities (including mortgage securities), corporate fixed income
securities, privately issued mortgage securities, asset-backed securities and
U.S. dollar-denominated Yankee bonds. **** In addition, the fund reopened to new
investors with a $250 minimum investment and changed its benchmark **** from the
Salomon Brothers Mortgage Index to the Lehman Brothers Intermediate Aggregate
Index.

FOR THE YEAR ENDED SEPT. 30, 1996, THE FUND RECORDED A 5.68%* TOTAL RETURN, WITH
ALL DISTRIBUTIONS REINVESTED BUT NOT INCLUDING SALES CHARGES. This figure
reflects performance for the former Institutional Government Income Portfolio,
as the policy changes were not implemented until near the period

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FUND PERFORMANCE THROUGH SEPT. 30, 1996*
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GROWTH OF $10,000 INVESTED SINCE INCEPTION

7/88 9800 10000 10000 10000

9/88 9958 10260 10217 10217.3

12/88 9982 10290 10263 10253.3

3/89 10027 10407 10378 10328

6/89 10735 11217 11107 11038.1

9/89 10847 11393 11259 11149.5

12/89 11296 11851 11663 11556.6

3/90 11292 11860 11657 11513.6

6/90 11713 12307 12056 11902

9/90 11965 12514 12254 12082

12/90 12478 13140 12796 12646

3/91 12963 13514 13144 12965.5

6/91 13195 13789 13385 13182.2

9/91 13974 14553 14063 13896.7

12/91 14687 15196 14720 14556

3/92 14762 15115 14593 14392

6/92 15426 15726 15173 14959.1

9/92 16447 16190 15757 15490

12/92 16480 16316 15765 15514.6

3/93 17968 16794 16329 16076.8

6/93 18588 17150 16662 16430.2

9/93 19250 17306 16957 16695.7

12/93 19053 17464 17032 16700.1

3/94 17447 17097 16673 16151.6

6/94 14172 17005 16576 15688.9

9/94 14120 17139 16715 15737.6

12/94 13652 17215 16728 15705.6

3/95 14511 18122 17511 16453.5

6/95 15855 19060 18397 17311.1

9/95 16400 19445 18730 17638

12/95 17010 20101 19375 18252.6

3/96 16934 20026 19241 18049

6/96 17013 20160 19376 18100.8

9/96 17332 20580 19740 18423

- ---------------- ----------------- ----------------- ------------
Intermediate Bond Lehman Brothers Salomon Brothers Lipper U.S.
Fund, reflects the Intermediate Mortgage Index+ Mortgate Funds
fund's 2% sales Aggregate Index** Average++
charge

** An unmanaged index, that includes no expenses or transaction charges,
consisting of one- to 10-year government and corporate securities and all of the
mortgage- and asset-backed securities in the Lehman Brothers Aggregate Index.

+ An unmanaged index, that includes no expenses or transaction charges, of
mortgage securities which have an average life of one year or more, are rated
BBB- or higher by Standard and Poor's or Baa3 or higher by Moody's and have a
principal amount of at least $1 billion.

++ The average total return of similar funds as characterized by Lipper
Analytical Services.

AVERAGE ANNUALIZED TOTAL RETURNS
Includes 2% maximum sales charge.

One Year . . . . . . . . . . . . . . . 3.57%
Five Years . . . . . . . . . . . . . . . 3.97%
Since Inception (7/11/88). . . . . . . . 6.91%

All fund and benchmark performance figures include reinvested distributions.

<PAGE>

BRUCE SALVOG

shares responsibility for the

management of Intermediate

Bond Fund. He has 26 years

of financial experience.
- -------------------------------

INTERMEDIATE BOND FUND (continued)
- --------------------------------------------------------------------------------

end. In comparison, the Lipper U.S. Mortgage Funds Average++ had a total return
of 4.59%, and the Salomon Brothers Mortgage Index+ had a total return of 5.86%
for the same period. The fund's new benchmark, the Lehman Brothers Intermediate
Aggregate Index,** had a total return of 5.39% for the period.

WE ATTRIBUTE THE FUND'S PERFORMANCE PRIMARILY TO ITS MODERATELY DEFENSIVE
POSTURE IN THE LATTER PART OF 1995 AND THE EARLY PART OF 1996. The reporting
period began with concerns of a slowdown in economic activity that caused
interest rates to fall and bond prices to increase. During that time, we
anticipated interest rates would soon be under upward pressure, so we reduced
the fund's effective duration **** to a more defensive level in order to
preserve capital. This proved to be the right decision, as the economy showed
stronger-than-expected growth in 1996, resulting in rising interest rates. After
interest rates had risen substantially, we extended the fund's duration to a
more neutral position. This allowed the fund to achieve a somewhat higher level
of income than it would have under the more defensive posture.

BY THE END OF 1995, WE HAD LIQUIDATED THE MORE VOLATILE SECURITIES FROM THE
PORTFOLIO, IN ORDER TO PRESERVE CAPITAL IN A CHALLENGING MARKET ENVIRONMENT.
These included all the fund's inverse interest-only **** securities and inverse
floaters. **** (Intermediate Bond Fund's new investment policy does not permit
investments in these types of securities.) We replaced these with mortgage pass-
through **** securities issued by government agencies like Fannie Mae, Freddie
Mac or Ginnie Mae. **** We emphasized discount priced mortgage securities and
seasoned mortgage securities purchased at premium prices , in contrast to
current coupon issues. This combination provides more value than current coupon
issues, which are more likely to experience prepayments if rates fall or price
declines if rates rise. The seasoned premiums are expected to provide a higher
coupon, while the discounted securities should provide support to the fund's net
asset value when interest rates decline. The end result should be greater
predictability of cash flows. (****The following terms can also be found in the
glossary in the back of this report: discount, seasoned and current coupon.)

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PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
As a percentage of total assets on Sept. 30, 1996.

U.S. Agency Fixed
Rate Mortgage-Backed
Securities 75%

Short-Term 18%

Other Assets 2%

Corporate Bonds 5%

[PIE GRAPH]

<PAGE>

DAVID STEELE

shares responsibility for the

management of Intermediate

Bond Fund. He has 17

years of financial experience.
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INTERMEDIATE BOND FUND (continued)
- --------------------------------------------------------------------------------

THE FUND IS NOW PAYING OUT WHAT IT EARNS IN MONTHLY DIVIDENDS. Institutional
Government Income Portfolio still had a dividend reserve of approximately $0.04
as of Sept. 11, 1996. On Sept. 12, we declared that income as a dividend to
avoid paying excise taxes on that amount at the end of the year. Going forward,
Intermediate Bond Fund is substantially distributing all of its income each year
and does not intend to accumulate any further dividend reserves.

WE HAVE BEGUN REPOSITIONING THE PORTFOLIO TO REFLECT THE FUND'S NEW INVESTMENT
POLICIES, AS THE MARKET PROVIDES US WITH OPPORTUNITIES. We expect economic
growth will slow from the pace of the second quarter, but it will continue to be
positive and healthy. This should provide an environment that will be beneficial
for this fund and fixed income securities in general. We are now investing in a
broader array of securities that should provide more consistent returns,
including corporate fixed income securities, asset-backed securities and Yankee
bonds.**** We've reduced our commitment to mortgage securities and have made the
fund more reflective of the broad investment grade fixed income market. We
expect the restructuring will be complete by the end of 1996; however, we will
continue to monitor and alter the portfolio after that time to ensure that it is
positioned appropriately for changing market conditions.

WE ARE PLEASED TO BE REPORTING TO YOU FOR THE FIRST TIME AS A PORTFOLIO
MANAGEMENT TEAM. Our group combines many years of financial experience, and we
feel Intermediate Bond Fund is best managed through the contributions and ideas
each of us brings. We are excited about the opportunities the fund's new
policies provide, and we are committed to providing you with quality service as
you work to achieve your financial goals. Thank you for your investment in
Intermediate Bond Fund.

Sincerely,

/s/ Worth Bruntjen

Worth Bruntjen
Portfolio Manager

/s/ Bruce Salvog

Bruce Salvog
Portfolio Manager

/s/ David M. Steele

David Steele
Portfolio Manager

[PHOTO]

TOM MCGLINCH, CFA

shares responsibility for the

management of Adjustable

Rate Mortgage Securities

Fund. He has 15 years of

financial experience.
- -------------------------------

ADJUSTABLE RATE MORTGAGE SECURITIES FUND
- --------------------------------------------------------------------------------

Oct. 29, 1996
- --------------------------------------------------------------------------------

DEAR SHAREHOLDERS:

FOR THE YEAR ENDED SEPT. 30, 1996, ADJUSTABLE RATE MORTGAGE SECURITIES FUND
RECORDED A 6.57%* total return. This figure assumes distributions were
reinvested and does not include sales charges. We are pleased with the fund's
performance, which compares favorably to the Lipper Adjustable Rate Mortgage
Funds Average's+ total return of 4.31%, and the fund's benchmark, the Lehman
Brothers Adjustable Rate Mortgage Index,** which had a total return of 6.50% for
the same period. A leading contributor to the fund's performance was our
strategy of emphasizing the income characteristics of the fund and focusing on
higher coupon, adjustable rate mortgage securities with coupon**** rates
adjusted to be close to current rates.

EVEN THOUGH INTEREST RATES ARE HIGHER THAN THEY WERE A YEAR AGO, THE FUND'S NET
ASSET VALUE HAS EXPERIENCED LITTLE VOLATILITY, AND HAS RISEN FOR THE YEAR TO
$8.06 ON SEPT. 30. This compares to a net asset value price of $8 in January.
Due to the fund's emphasis on income, we were able to preserve capital in the
early part of 1996 as interest rates rose. We reinvested in fixed rate
securities at higher yields.

THE ECONOMY OF THE PAST YEAR WAS MIXED, BEGINNING WITH WEAK GROWTH AND LOW
INTEREST RATES, LEADING TO STRONGER GROWTH AND HIGHER RATES. Adjustable rate
mortgages, as a class, did well compared to other bonds during this time period,
primarily due to their higher level of coupon income. They also have shorter
effective durations,**** which means they are less sensitive to changes in
interest rates. We

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Fund Performance Through Sept. 30, 1996*
- --------------------------------------------------------------------------------

Growth of $10,000 Invested Since Inception

1/92 $9850.0 $10000.0 $10000.0
3/92 $9756.0 $9918.0 $10060.0
6/92 $10139.0 $10221.0 $10256.7
9/92 $10443.0 $10410.0 $10374.4
12/92 $10365.0 $10437.0 $10444.9
3/93 $10736.0 $10685.0 $10579.0
6/93 $10944.0 $10888.0 $10696.7
9/93 $11098.0 $11003.0 $10796.6
12/93 $11206.0 $11062.0 $10827.8
3/94 $10845.0 $11013.0 $10818.0
6/94 $10675.0 $10970.0 $10757.7
9/94 $10662.0 $11046.0 $10779.3
12/94 $10472.0 $11064.0 $10632.1
3/95 $10940.0 $11528.0 $10838.6
6/95 $11177.0 $11888.0 $11038.5
9/95 $11357.0 $12089.0 $11173.9
12/95 $11577.0 $12361.0 $11313.8
3/96 $11746.0 $12497.0 $11422.0
6/96 $11883.0 $12638.0 $11567.5
9/96 $12103.0 $12875.0 $11743.4

- ------------------------ -------------------------- ----------------------
Adjustable Rate Mortgage Lehman Brothers Adjustable Lipper Adjustable Rate
Securities Fund, reflects Rate Mortgage Index** Mortgage Funds Average+
the fund's 1.5% sales
charge

** An unmanaged index, that includes no expenses or transaction charges, of all
U.S. agency adjustable rate mortgage securities.

+ The average total return of similar funds as characterized by Lipper
Analytical Services.

AVERAGE ANNUALIZED TOTAL RETURNS
Includes 1.5% maximum sales charge.

One Year . . . . . . . . . . . . . . . 4.97%
Three Years. . . . . . . . . . . . . . . 2.41%
Since Inception (1/30/92). . . . . . . . 4.17%

During some periods, the fund's adviser waived or paid certain fund expenses
and/or the fund's distributor voluntarily limited certain fund 12b-1 fees.
Otherwise, the average annual total returns would have been 4.84% one year,
2.37% three years and 4.14% since inception.

All fund performance figures reflect the 1.5% sales charge as if it was applied
since the fund's inception. Results through Sept. 1, 1995, reflect historical
net asset value performance of American Adjustable Rate Term Trust-1998, the
fund's predecessor for financial reporting purposes. All fund and benchmark
performance figures include reinvested distributions.

WAN-CHONG KUNG, CFA

shares responsibility for the

management of Adjustable

Rate Mortgage Securities

Fund. She has four years of

financial experience.
- -------------------------------

ADJUSTABLE RATE MORTGAGE SECURITIES FUND (continued)
- --------------------------------------------------------------------------------
continue to hold higher coupon securities, with the expectation that the
market's trading range will persist in the near term, with total returns largely
influenced by income rather than price appreciation.

THROUGHOUT THE REPORTING PERIOD, WE SLIGHTLY INCREASED THE FUND'S POSITION IN
U.S. AGENCY FIXED RATE MORTGAGE-BACKED SECURITIES, SUCH AS FANNIE MAES**** OR
GINNIE MAES.**** The fund now has a 17% position in these securities, which
is up from about 2% at the beginning of the year. We took this action
following the rise in rates, to add a stream of income we believed would add
value over a longer period of time. Securities we added included seasoned****
premium mortgage pass-throughs**** and some discount priced balloon
pass-through securities. The result was to increase the fund's sensitivity to
changing market conditions, which will allow the fund to experience an
increase in its net asset value if interest rates fall. However, in a rising
interest rate environment, the fund will experience a decrease in net asset
value.

THE FUND CONTINUED TO MEET REDEMPTION REQUESTS WITHOUT DISRUPTING ITS NET ASSET
VALUE OR INCOME. Redemptions began a year ago after the group of American
Adjustable Rate Term Trusts merged to form Adjustable Rate Mortgage Securities
Fund. In managing redemption requests, we attempted to keep our exposure to
market sectors consistent with our outlook. In the process, we reduced the
fund's privately-issued adjustable rate mortgage securities that had relatively
low yields.

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

PORTFOLIO COMPOSITION
- --------------------------------------------------------------------------------
As a percentage of total assets on Sept. 30, 1996.

U.S. Agency Fixed Rate
Mortgage-Backed
Securities 17%

U.S. Agency Adjustable
Rate Mortgage-Backed
Securities 60%

U.S. Agency Floating
Rate Securities 6%

Private Floating
Rate Securities 13%

Other Assets 1%

Short-Term 3%

[PIE GRAPH]

**** [In the printed version of the document this symbol appears as a graduation
cap.]

- --------------------------------------------------------------------------------
8 1996 Annual Report - Income Funds
<PAGE>

ADJUSTABLE RATE MORTGAGE SECURITIES FUND (continued)
- --------------------------------------------------------------------------------

THE ECONOMY'S GROWTH HAS SHOWN SIGNS OF MODERATION RECENTLY, BUT IT IS UNLIKELY
TO SLIP INTO RECESSION. As we move toward the end of the year, we expect the
Federal Reserve to maintain a stable policy affecting short-term interest rates,
which will continue to benefit mortgage securities - especially adjustable rate
mortgage securities. Our current positions in the fund are consistent with that
outlook, and our focus will continue to be on improving the level and
predictability of dividend income to shareholders.

AT A SPECIAL SHAREHOLDERS' MEETING ON SEPT. 16, THIS FUND ACQUIRED THE ASSETS OF
A SIMILAR PIPER FUND, INSTITUTIONAL GOVERNMENT ADJUSTABLE PORTFOLIO.
Shareholders shouldn't notice any changes as a result of the acquisition and the
fund's policies, objectives and strategies have remained the same.

Thank you for investing in Adjustable Rate Mortgage Securities Fund. We remain
committed to providing you with top-quality investment management and service.

Sincerely,

/s/ Tomo McGlinch

Tom McGlinch
Portfolio Manager

/s/ Wan-Chong Kung

Wan-Chong Kung
Portfolio Manager

- --------------------------------------------------------------------------------
9 1996 Annual Report - Income Funds

<PAGE>
Financial Statements
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
..................................................................

<TABLE>
<CAPTION>
ADJUSTABLE RATE MORTGAGE
SECURITIES FUND
GOVERNMENT INTERMEDIATE -------------------------------
INCOME FUND BOND FUND
9/30/96 9/30/96 9/30/96 8/31/96
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including repurchase agreements of $256,000, $25,003,000,
$8,632,000 and $6,621,000, respectively) ................. $ 93,664,953 $ 138,935,744 $ 262,870,408 $ 270,018,143
Cash in bank on demand deposit ............................. 48,207 2,770,678 100,533 108,508
Receivable for fund shares sold ............................ 4,713 3,695 13,184 13,772
Other assets ............................................... 3,916 6,808 11,359 --
Mortgage security paydowns receivable ...................... -- -- 624,266 555,944
Accrued interest receivable ................................ 632,389 743,893 1,687,217 1,759,649
Variation margin receivable ................................ 9,375 -- -- --
------------- -------------- -------------- --------------
Total assets ............................................. 94,363,553 142,460,818 265,306,967 272,456,016
------------- -------------- -------------- --------------

LIABILITIES:
Dividends payable to shareholders .......................... 458,850 1,403,509 1,244,072 1,377,705
Payable for investment securities purchased on a when-issued
basis (note 2) ........................................... 9,830,469 -- -- --
Payable for investment securities purchased ................ -- 4,311,628 -- --
Payable for fund shares redeemed ........................... 189,505 850,476 1,119,106 932,349
Accrued investment management fee .......................... 34,677 33,692 77,300 83,176
Accrued distribution fee ................................... 21,477 23,675 32,843 114,369
Other accrued expenses ..................................... -- -- 278 --
------------- -------------- -------------- --------------
Total liabilities ........................................ 10,534,978 6,622,980 2,473,599 2,507,599
------------- -------------- -------------- --------------
Net assets applicable to outstanding capital stock ......... $ 83,828,575 $ 135,837,838 $ 262,833,368 $ 269,948,417
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------

REPRESENTED BY:
Capital stock - authorized 10 billion shares for each fund
of $0.01 par value; outstanding, 9,495,487, 18,104,026,
32,616,678 and 33,601,759 shares, respectively .......... $ 94,955 $ 181,040 $ 326,167 $ 336,018
Additional paid-in capital ................................. 99,860,095 413,204,280 410,401,470 416,529,411
Undistributed (Distributions in excess of) net investment
income ................................................... 1,809 (125,223) -- --
Accumulated net realized loss on investments ............... (16,827,010) (276,491,719) (146,563,685) (144,718,749)
Unrealized appreciation (depreciation) of investments ...... 698,726 (930,540) (1,330,584) (2,198,263)
------------- -------------- -------------- --------------

Total - representing net assets applicable to outstanding
capital stock .......................................... $ 83,828,575 $ 135,837,838 $ 262,833,368 $ 269,948,417
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
Net asset value per share of outstanding capital stock ..... $ 8.83 $ 7.50 $ 8.06 $ 8.03
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
* Investments in securities at identified cost ............. $ 92,877,164 $ 139,866,284 $ 264,200,992 $ 272,216,406
------------- -------------- -------------- --------------
------------- -------------- -------------- --------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

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

10 1996 Annual Report - Income Funds
<PAGE>
Financial Statements (continued)
- --------------------------------------------------------------------------------

STATEMENTS OF OPERATIONS
..................................................................

<TABLE>
<CAPTION>
ADJUSTABLE RATE MORTGAGE
SECURITIES FUND
GOVERNMENT INTERMEDIATE --------------------------
INCOME FUND BOND FUND
YEAR ENDED YEAR ENDED MONTH ENDED YEAR ENDED
9/30/96 9/30/96 9/30/96 8/31/96
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
INCOME:
Interest ................................................... $7,165,542 $17,473,718 $1,451,544 $27,294,322
Fee income (note 2) ........................................ 184,752 -- -- --
----------- ------------ ----------- ------------
Total investment income .................................. 7,350,294 17,473,718 1,451,544 27,294,322
----------- ------------ ----------- ------------

EXPENSES (NOTE 5):
Investment management fee .................................. 474,589 634,796 76,672 1,487,059
Distribution and servicing fees ............................ 472,568 709,638 32,843 638,422
Custodian and accounting fees .............................. 83,519 163,659 26,316 252,721
Transfer agent and dividend disbursing agent fees .......... 81,650 83,357 28,210 586,463
Registration fees .......................................... 17,237 29,195 13,195 159,300
Reports to shareholders .................................... 27,859 37,557 -- 23,041
Directors' fees ............................................ 2,790 2,790 -- 32,766
Audit and legal fees ....................................... 36,666 47,436 1,643 55,624
Federal excise taxes (note 2) .............................. 1,809 197,646 -- --
Other expenses ............................................. 17,948 42,736 500 50,693
----------- ------------ ----------- ------------
Total expenses ........................................... 1,216,635 1,948,810 179,379 3,286,089
Less expenses waived by the adviser ........................ -- -- -- (689,028)
Less expenses waived by the distributor .................... (179,892) (234,293) -- --
----------- ------------ ----------- ------------

Net expenses before expenses paid indirectly ............. 1,036,743 1,714,517 179,379 2,597,061
Less expenses paid indirectly .............................. (661) (2,839) (57) (9,649)
----------- ------------ ----------- ------------

Total net expenses ....................................... 1,036,082 1,711,678 179,322 2,587,412
----------- ------------ ----------- ------------

Net investment income .................................... 6,314,212 15,762,040 1,272,222 24,706,910
----------- ------------ ----------- ------------

NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain (loss) on investments (note 3) ........... 116,816 (12,736,864) (68,233) (2,674,311)
Net realized loss on closed futures contracts . (31,400) -- -- --
----------- ------------ ----------- ------------

Net realized gain (loss) on investments .................. 85,416 (12,736,864) (68,233) (2,674,311)
Net change in unrealized appreciation or depreciation of
investments .............................................. (1,752,271) 10,497,685 867,679 6,114,992
----------- ------------ ----------- ------------

Net gain (loss) on investments ........................... (1,666,855) (2,239,179) 799,446 3,440,681
----------- ------------ ----------- ------------

Net increase in net assets resulting from operations ..... $4,647,357 $13,522,861 $2,071,668 $28,147,591
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

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

11 1996 Annual Report - Income Funds
<PAGE>
Financial Statements (continued)
- --------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS
..................................................................
<TABLE>
<CAPTION>
GOVERNMENT INCOME FUND INTERMEDIATE BOND FUND
------------------------------ -------------------------------
Year Ended Year Ended Year Ended Year Ended
9/30/96 9/30/95 9/30/96 9/30/95
-------------- ------------- -------------- --------------

<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 6,314,212 $ 8,108,201 $ 15,762,040 $ 31,383,950
Net realized gain (loss) on investments .................... 85,416 (2,705,287) (12,736,864) (135,311,109)
Net change in unrealized appreciation or depreciation of
investments .............................................. (1,752,271) 10,672,394 10,497,685 153,372,835
-------------- ------------- -------------- --------------

Net increase in net assets resulting from operations ..... 4,647,357 16,075,308 13,522,861 49,445,676
-------------- ------------- -------------- --------------

DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (6,318,402) (8,513,085) (34,266,074) (51,996,924)
-------------- ------------- -------------- --------------

CAPITAL SHARE TRANSACTIONS (NOTE 4):
Proceeds from sales (note 5) ............................... 7,312,999 16,092,604 6,934,686 24,931,594
Proceeds from issuance of shares for reinvestment of
distributions ............................................ 6,312,741 5,730,718 37,022,030 40,478,651
Merger of BDJ, CDJ and EDJ into ARMS Fund (note 8) ......... -- -- -- --
Merger of Institutional Government Adjustable Portfolio into
ARMS Fund (note 8) ....................................... -- -- -- --
Payments for shares redeemed ............................... (33,990,246) (49,494,075) (206,000,282) (308,593,733)
Payments for retirement of 488,000 shares .................. -- -- -- --
Payments for tender of 9,135,819 shares .................... -- -- -- --
-------------- ------------- -------------- --------------
Decrease in net assets from capital share transactions ... (20,364,506) (27,670,753) (162,043,566) (243,183,488)
-------------- ------------- -------------- --------------
Total decrease in net assets ............................. (22,035,551) (20,108,530) (182,786,779) (245,734,736)

Net assets at beginning of period .......................... 105,864,126 125,972,656 318,624,617 564,359,353
-------------- ------------- -------------- --------------

Net assets at end of period ................................ $ 83,828,575 $ 105,864,126 $ 135,837,838 $ 318,624,617
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------

Undistributed (Distributions in excess of) net investment
income ................................................... $ 1,809 $ 4,190 $ (125,223) $ 17,447,004
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------

*REPRESENTS THE HISTORICAL FINANCIAL RESULTS OF AMERICAN ADJUSTABLE RATE TERM TRUST 1998. SEE NOTE 1 TO THE FINANCIAL
STATEMENTS.

<CAPTION>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND
----------------------------------------------
Month Ended Year Ended Year Ended
9/30/96 8/31/96 8/31/95*
------------- -------------- -------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 1,272,222 $ 24,706,910 $ 23,499,426
Net realized gain (loss) on investments .................... (68,233) (2,674,311) (20,761,474)
Net change in unrealized appreciation or depreciation of
investments .............................................. 867,679 6,114,992 17,558,315
------------- -------------- -------------
Net increase in net assets resulting from operations ..... 2,071,668 28,147,591 20,296,267
------------- -------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (1,272,222) (24,649,898) (27,746,007)
------------- -------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Proceeds from sales (note 5) ............................... 115,577 2,964,814 --
Proceeds from issuance of shares for reinvestment of
distributions ............................................ 747,173 13,155,273 --
Merger of BDJ, CDJ and EDJ into ARMS Fund (note 8) ......... -- 801,742,686 --
Merger of Institutional Government Adjustable Portfolio into
ARMS Fund (note 8) ....................................... 4,661,948 -- --
Payments for shares redeemed ............................... (13,439,193) (960,718,174) --
Payments for retirement of 488,000 shares .................. -- -- (3,579,372)
Payments for tender of 9,135,819 shares .................... -- -- (79,726,515)
------------- -------------- -------------
Decrease in net assets from capital share transactions ... (7,914,495) (142,855,401) (83,305,887)
------------- -------------- -------------
Total decrease in net assets ............................. (7,115,049) (139,357,708) (90,755,627)
Net assets at beginning of period .......................... 269,948,417 409,306,125 500,061,752
------------- -------------- -------------
Net assets at end of period ................................ $ 262,833,368 $ 269,948,417 $ 409,306,125
------------- -------------- -------------
------------- -------------- -------------
Undistributed (Distributions in excess of) net investment
income ................................................... $ -- $ -- $ --
------------- -------------- -------------
------------- -------------- -------------
*REPRESENTS THE HISTORICAL FINANCIAL RESULTS OF AMERICAN ADJ
STATEMENTS.
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

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

12 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements
- --------------------------------------------------

(1) ORGANIZATION
................................................................................
Piper Funds Inc. (Piper Funds) and Piper Funds Inc.-II
(Piper Funds II) are each registered under the Investment
Company Act of 1940 (as amended) as single, open-end
management investment companies. Piper Funds currently has
12 series, including Government Income Fund and
Intermediate Bond Fund (formerly Institutional Government
Income Portfolio), each of which is classified as a
diversified series. Piper Funds II currently has one
series, Adjustable Rate Mortgage Securities Fund (ARMS
fund), which is classified as a diversified series.

On September 1, 1995, American Adjustable Rate Term Trust
1996 (BDJ), American Adjustable Rate Term Trust 1997
(CDJ), American Adjustable Rate Term Trust 1998 (DDJ) and
American Adjustable Rate Term Trust 1999 (EDJ) merged into
the ARMS fund. American Adjustable Rate Term Trust 1998
(DDJ) (a closed-end fund) is considered the surviving
entity for financial reporting purposes. In addition, on
September 16, 1996, the net assets of Piper Institutional
Funds Inc. -- Institutional Government Adjustable
Portfolio (PIFAX) were merged into ARMS Fund.

The articles of incorporation of Piper Funds and Piper
Funds II permit the boards of directors to create
additional series in the future.

The investments of Government Income Fund, Intermediate
Bond Fund and Adjustable Rate Mortgage Securities Fund
(the funds) are as follows:

Government Income Fund invests primarily in securities
issued or guaranteed as to payment of principal and
interest by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities.
The fund may also invest in mortgage-related securities
issued by private entities. The fund's investments in
mortgage-related securities may include certain derivative
mortgage securities.

Intermediate Bond Fund invests primarily in a broad range
of investment-quality debt securities.

Adjustable Rate Mortgage Securities Fund invests primarily
in adjustable rate mortgage securities.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
................................................................................
INVESTMENTS IN SECURITIES
The values of certain fixed income securities are provided
by an independent pricing service. Fixed income securities
for which prices are not available from an independent
pricing service but where an active market exists are
valued using market quotations obtained from one or more
dealers that make markets in the securities.

Occasionally, events affecting the value of such
securities may occur between the time valuations are
determined and the close of the Exchange. If events
materially affecting the value of such securities occur,
if the funds' management determines for any other reason
that valuations provided by the pricing service are
inaccurate or when market quotations are not readily
available, securities will be valued at their fair value
according to procedures decided upon in good faith by the
Board of Directors. Short-term securities with maturities
of 60 days or less are valued at amortized cost, which
approximates market value.

Exchange-traded options are valued at the last sales price
on the exchange prior to the time when assets are valued.
If no sales were reported that day, the options will be
valued at the mean between the current closing bid and
asked prices. Over-the-counter options are valued using
market quotations

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

13 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
obtained from independent dealers that make markets in the
securities. Financial futures are valued at the last
settlement price established each day by the board of
trade or exchange on which they are traded. Such
valuations are determined using independent pricing
services or prices quoted by independent brokers.

Securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and
losses are calculated on the identified-cost basis.
Interest income, including amortization of bond discount
and premium computed on a level-yield basis, is accrued
daily.

OPTIONS TRANSACTIONS
For hedging purposes, Government Income Fund and
Adjustable Rate Mortgage Securities Fund may buy and sell
put and call options, write covered call options on
portfolio securities and write cash-secured puts. The risk
in writing a call option is that the funds give up the
opportunity of profit if the market price of the security
increases. The risk in writing a put option is that the
funds may incur a loss if the market price of the security
decreases and the option is exercised. The risk in buying
an option is that the funds pay a premium whether or not
the option is exercised. The funds also have the
additional risk of not being able to enter into a closing
transaction if a liquid secondary market does not exist.

Option contracts are valued daily and unrealized
appreciation or depreciation is recorded. The funds will
realize a gain or loss upon expiration or closing of the
option transaction. When an option is exercised, the
proceeds on the sale of a written call option, the
purchase cost of a written put option, or the cost of a
security for purchased put and call options is adjusted by
the amount of premium received or paid.

FUTURES TRANSACTIONS
In order to gain exposure to or protect from changes in
the market, Government Income Fund and Adjustable Rate
Mortgage Securities Fund may buy and sell financial
futures contracts and related options. Risks of entering
into futures contracts and related options include the
possibility that there may be an illiquid market and that
a change in the value of the contract or option may not
correlate with changes in the value of the underlying
securities.

Upon entering into a futures contract, the funds are
required to deposit either cash or securities in an amount
(initial margin) equal to a certain percentage of the
contract value. Subsequent payments (variation margin) are
made or received by the funds each day. The variation
margin payments are equal to the daily changes in the
contract value and are recorded as unrealized gains and
losses. The funds recognize a realized gain or loss when
the contract is closed or expires.

At September 30, 1996, Government Income Fund had
outstanding 50 interest rate sales contracts on 30 year
U.S. Treasury notes, expiring in December 1996, with an
unrealized loss of $89,063. The market value and par value
of the open contracts were $5,364,063 and $5,275,000
respectively. Securities with a market value of $2,447,237
were pledged as collateral to cover initial margin
deposits on these contracts. Adjustable Rate Mortgage
Securities Fund had no open futures contracts at September
30, 1996.

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

14 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------

SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been
purchased by the funds on a forward-commitment or
when-issued basis can take place a month or more after the
transaction date. During this period, such securities do
not earn interest, are subject to market fluctuation and
may increase or decrease in value prior to their delivery.
Each fund maintains, in segregated accounts with the
custodian, assets with a market value equal to the amount
of its purchase commitments. The purchase of securities on
a when-issued or forward-commitment basis may increase the
volatility of each fund's net asset value if the funds
make such purchases while remaining substantially fully
invested. As of September 30, 1996, Government Income Fund
had entered into when-issued or forward commitments of
$9,830,469.

In connection with their ability to purchase securities on
a when-issued or forward-commitment basis, Government
Income Fund and Intermediate Bond Fund may enter into
mortgage "dollar rolls" in which the funds sell securities
for delivery in the current month and simultaneously
contract with the same counterparty to repurchase similar
(same type, coupon and maturity) but not identical
securities on a specified future date. As an inducement to
"roll over" their purchase commitments, the funds receive
negotiated fees. For the year ended September 30, 1996,
such fees earned by Government Income Fund amounted to
$184,752.

FEDERAL TAXES
Each fund is treated separately for federal income tax
purposes. Each fund intends to comply with the
requirements of the Internal Revenue Code applicable to
regulated investment companies and not be subject to
federal income tax. Therefore, no income tax provision is
required. However, Government Income Fund and Intermediate
Bond Fund incurred federal excise taxes of $1,809, or
$0.00 per share and $197,646, or $0.01 per share, on
income retained during the 1995 excise tax year.
Generally, on a calendar-year basis, the funds will
distribute substantially all of their taxable net
investment income and realized gains, if any, to avoid the
payment of any federal excise taxes.

Net investment income and net realized gains (losses) may
differ for financial statement and tax purposes primarily
because of losses deferred due to "straddle" transactions,
the timing of recognition of income on certain
collateralized mortgage-backed securities and the
non-deductibility of excise tax payments made.

The character of distributions made during the year from
net investment income or net realized gains may differ
from its ultimate characterization for federal income tax
purposes. In addition, due to the timing of dividend
distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or
realized gains (losses) were recorded by the funds.
Distributions which exceed the net investment income or
net realized gains for financial statement purposes are
presented as an "excess distribution" in the statements of
changes in net assets and the financial highlights.

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

15 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------

On the statements of assets and liabilities, as a result
of permanent book-to-tax differences, reclassification
adjustments have been made as follows:

<TABLE>
<CAPTION>
GOVERNMENT ADJUSTABLE RATE MORTGAGE
INCOME INTERMEDIATE SECURITIES FUND
FUND BOND FUND --------------------------
9/30/96 9/30/96 9/30/96 8/31/96
-------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Increase (Decrease) in undistributed net
investment income ......................... $ 1,809 $ 931,807 $ -- $ (57,012)
Increase (Decrease) in accumulated net
realized loss on investments .............. $ -- $1,478,152 $ (1,549,102) --
Increase (Decrease) in additional
paid in capital ........................... $(1,809) $ 546,345 $ (1,549,102) $ 57,012
</TABLE>

DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders from net investment income
are declared daily and paid monthly. Net realized gains
distributions, if any, will be made at least annually.
Distributions are payable in cash or reinvested in
additional shares.

REPURCHASE AGREEMENTS
For repurchase agreements entered into with certain
broker-dealers, the funds, along with other affiliated
registered investment companies, may transfer uninvested
cash balances to a joint trading account, the daily
aggregate of which is invested in repurchase agreements
secured by U.S. government or agency obligations.
Securities pledged as collateral for all individual and
joint repurchase agreements are held by the funds'
custodian bank until maturity of the repurchase agreement.
Provisions for all agreements ensure that the daily market
value of the collateral is in excess of the repurchase
amount, including accrued interest, to protect the funds
in the event of a default.

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 in the financial statements. Actual
results may differ from these estimates.

(3) INVESTMENT SECURITY TRANSACTIONS
................................................................................
Cost of purchases and proceeds from sales of securities,
other than temporary investments in short-term securities,
for the year ended September 30, 1996, for Government
Income Fund and Intermediate Bond Fund, and for the month
ended September 30, 1996, and the year ended August 31,
1996, for Adjustable Rate Mortgage Securities Fund were as
follows:

<TABLE>
<CAPTION>
ADJUSTABLE RATE MORTGAGE
GOVERNMENT INTERMEDIATE SECURITIES FUND
INCOME FUND BOND FUND ------------------------------
9/30/96 9/30/96 9/30/96 8/31/96
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Purchases ................................... $ 33,990,344 $ 203,081,656 $ 4,482,412 $ 199,506,041
Proceeds from sales ......................... $ 58,959,391 $ 390,416,191 $ 14,440,593 $ 956,968,356
</TABLE>

For the periods referenced above, no brokerage commissions
were paid to Piper Jaffray Inc., an affiliated broker.

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

16 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------

(4) CAPITAL SHARE
TRANSACTIONS
................................................................................
Transactions in shares of each fund for the years ended
September 30, 1996, and 1995, for Government Income Fund
and Intermediate Bond Fund, and the month ended September
30, 1996, and the year ended August 31, 1996, for
Adjustable Rate Mortgage Securities Fund were as follows:

<TABLE>
<CAPTION>
ADJUSTABLE
RATE
MORTGAGE
GOVERNMENT INTERMEDIATE SECURITIES
INCOME FUND BOND FUND FUND
9/30/96 9/30/96 9/30/96
----------- ------------ -------------
<S> <C> <C> <C>
Sold ........................................ 822,655 884,830 14,416
Issued for reinvested distributions ......... 706,427 4,706,970 93,048
Redeemed .................................... (3,808,707) (26,737,969) (1,672,368)
Shares issued in connection, with merger of
PIFAX (note 8) ............................ -- -- 579,823
----------- ------------ -------------
Decrease .................................. (2,279,625) (21,146,169) (985,081)
----------- ------------ -------------
----------- ------------ -------------
</TABLE>

<TABLE>
<CAPTION>
9/30/95 9/30/95 8/31/96
------------ ------------- ----------------
<S> <C> <C> <C>
Sold ........................................ 1,896,575 3,262,247 370,239
Issued for reinvested distributions ......... 670,492 5,175,622 1,637,616
Redeemed .................................... (5,760,853) (39,887,016) (119,875,424)
Shares issued in connection with the merger
of BDJ, CDJ, DDJ and EDJ (note 8) ......... -- -- 104,403,211
------------ ------------- ----------------
Decrease .................................. (3,193,786) (31,449,147) (13,464,358)
------------ ------------- ----------------
------------ ------------- ----------------
</TABLE>

(5) EXPENSES
................................................................................
Piper Funds and Piper Funds II have entered into
investment management agreements with Piper Capital
Management Incorporated (Piper Capital) under which Piper
Capital manages each fund's assets and furnishes related
office facilities, equipment, research and personnel. The
agreements require each fund to pay Piper Capital a
monthly fee based on average daily net assets. The fees
for each fund are as follows: Government Income Fund, an
annual rate of 0.50% of the first $250 million in net
assets and decreasing percentages thereafter to 0.40% of
net assets in excess of $500 million; Intermediate Bond
Fund, an annual rate of 0.30% of the first $100 million in
net assets, 0.25% of the next $150 million and 0.20% of
net assets in excess of $250 million; Adjustable Rate
Mortgage Securities Fund, an annual rate of 0.35% on the
first $500 million in net assets and 0.30% of net assets
in excess of $500 million.

Each fund also pays Piper Jaffray Inc. (Piper Jaffray),
the funds' distributor, a quarterly fee for providing
shareholder services and distribution-related services.
The fee for Government Income Fund is limited to an annual
rate of 0.50% of average daily net assets and includes
0.25% payable as a servicing fee and 0.25% payable as a
distribution fee. Intermediate Bond Fund's fee is limited
to an annual rate of 0.30% of average daily net assets and
includes 0.25% payable as a servicing fee and 0.05%
payable as a distribution fee. The fee is limited to an
annual rate of average daily net assets 0.15% for
Adjustable Rate Mortgage Securities Fund, all of which
represents a servicing fee. For the year ended September
30, 1996, Piper Jaffray voluntarily agreed to limit the
total distribution and servicing fees to an annual rate of
0.32% and 0.20% of average daily net assets for Government
Income Fund and Intermediate Bond Fund, respectively.

Piper Funds and Piper Funds II have also entered into
shareholder account servicing agreements under which Piper
Jaffray and Piper Trust Company perform various transfer
and dividend disbursing agent services for accounts held
at the respective company. The fees, which are paid
monthly to Piper Jaffray and Piper Trust Company for
providing these services, are equal to an annual rate of
$7.50 per

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

17 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
active shareholder account and $1.60 per closed account.
For the year ended September 30, 1996, for Government
Income Fund and Intermediate Bond Fund, and for the month
ended September 30, 1996 and the year ended August 31,
1996, for Adjustable Rate Mortgage Securities Fund, Piper
Jaffray and Piper Trust received the following amounts in
connection with the shareholder account servicing
agreements:

<TABLE>
<CAPTION>
ADJUSTABLE RATE
GOVERNMENT INTERMEDIATE MORTGAGE SECURITIES
INCOME BOND FUND
FUND FUND --------------------
9/30/96 9/30/96 9/30/96 8/31/96
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Piper Jaffray ............................... $51,052 $31,433 $7,365 $86,239
Piper Trust ................................. 6,955 2,939 -- --
-------- -------- ------- --------
$58,007 $34,372 $7,365 $86,239
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>

In addition to the investment management, distribution and
shareholder account servicing fees, each fund is
responsible for paying most other operating expenses
including: outside directors' fees and expenses; custodian
fees; registration fees; printing and shareholder reports;
transfer agent fees and expenses; legal, auditing and
accounting services; insurance; interest; taxes and other
miscellaneous expenses.

Expenses paid indirectly represent a reduction of
custodian fees for earnings on cash balances maintained by
the funds.

Sales charges received by Piper Jaffray for distributing
the funds' shares for the year ended September 30, 1996,
for Government Income Fund and Intermediate Bond Fund and
the month ended September 30, 1996 and the year ended
August 31, 1996, for Adjustable Rate Mortgage Securities
Fund were $42,651, $12,517, $0 and $9,280, respectively.

(6) CAPITAL LOSS CARRYOVER
................................................................................
For federal income tax purposes, the following funds had
capital loss carryovers at September 30, 1996, and August
31, 1996, which, if not offset by subsequent capital
gains, will expire as noted. It is unlikely the board of
directors will authorize a distribution of any net
realized capital gains until the available capital loss
carryovers have been offset or expired. Due to limits on
utilization of the capital loss carryovers which
Adjustable Rate Mortgage Securities Fund acquired in the
mergers described in note 8, the utilization of these
capital loss carryovers in subsequent years is limited to
$69,945,971 per year.

<TABLE>
<CAPTION>
ADJUSTABLE RATE MORTGAGE
GOVERNMENT INTERMEDIATE SECURITIES FUND
INCOME FUND BOND FUND -------------------------------
9/30/96 9/30/96 9/30/96 8/31/96
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Capital Loss Carryover ...................... $ 16,784,819 $ 276,491,719 $ 146,563,691 $ 144,718,755
Expiration Dates ............................ 2002-2004 2003-2004 1997-2004 1997-2003
</TABLE>

(7) PENDING LITIGATION
................................................................................
On October 20, 1994, a complaint was filed by Herman D.
Gordon in the U.S. District Court for the District of
Minnesota against DDJ, EDJ, Piper Jaffray Companies Inc.
(Piper Companies), Piper Capital Management Incorporated
(Piper Capital), Piper Jaffray Inc. (Piper Jaffray) and
certain associated individuals. A second complaint was
filed on April 14, 1995, in the same court by Frank Donio,
I.R.A., and other plaintiffs against BDJ, CDJ, DDJ and
EDJ, Piper Companies, Piper Capital, Piper Jaffray and
certain associated individuals. Plaintiffs in both actions
filed a Consolidated

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

18 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Amended Class Action Complaint on May 23, 1995, alleging
violations of certain federal and state securities laws.
Piper Companies and Piper Capital have agreed to indemnify
Piper Funds Inc. II Adjustable Rate Mortgage Securities
Fund (as successor by merger to BDJ, CDJ, DDJ and EDJ)
against any expenses or losses incurred in connection with
such complaint. On August 23, 1996, the Court granted
final approval to the parties' agreement to settle all
outstanding claims of the purported class action. The
Effective Date of the Settlement Agreement was September
23, 1996. The Settlement Agreement provides for $14
million in principal payments consisting of $500,000 which
was paid by Piper Jaffray Companies Inc. and Piper Capital
Management Incorporated upon the Court's preliminary
approval, $1.5 million which was paid upon the Effective
Date of the Settlement Agreement, and payments of $3
million on each anniversary of the Effective Date for the
next four years, with accrued interest payments of up to
$1.8 million.

(8) MERGERS
................................................................................
As described in note 1 to the financial statements, on
September 1, 1995, the net assets of BDJ, CDJ, DDJ and EDJ
were combined in a tax-free merger to form ARMS Fund. In
addition, on September 16, 1996, the net assets of PIFAX
were acquired by ARMS Fund via a tax-free merger. The
following table presents the shares of ARMS Fund issued in
exchange for the net assets of each of the merged funds
and the composition of such net assets as of the merger
dates.

<TABLE>
<CAPTION>
MERGER OF
MERGER BDJ, CDJ, DDJ
OF PIFAX AND EDJ
9/16/96 9/1/95
------------- ---------------
<S> <C> <C>
Shares issued in connection with the
mergers* .................................. 579,823 104,403,211
------------- ---------------
------------- ---------------

Net assets immediately after the mergers .... $ 269,963,724 $1,211,749,182
------------- ---------------
------------- ---------------
Composition of net assets merged into ARMS
Fund**
Capital stock ............................. $ 7,987,753 $ 900,831,012
Accumulated net realized loss on
investments ............................. (3,325,805) (94,949,571)
Unrealized depreciation of investments .... -- (4,138,755)
------------- ---------------
Total net assets merged ................... $ 4,661,948 $ 801,742,686
------------- ---------------
------------- ---------------
</TABLE>

* SHARES ISSUED ARE DETERMINED BY THE RATIO OF EACH MERGED FUND'S NET ASSET
VALUE TO ARMS FUND'S NET ASSET VALUE ON THE DATES OF THE MERGERS. SHARES
ARE BASED ON A NET ASSET VALUE OF ARMS FUND OF $8.00 PER SHARE FOR THE
MERGER ON SEPTEMBER 1, 1995, AND $8.04 PER SHARE FOR THE MERGER ON
SEPTEMBER 16, 1996.
** DDJ IS CONSIDERED THE SURVIVOR OF THE SEPTEMBER 1, 1995, MERGER FOR
FINANCIAL REPORTING PURPOSES. THEREFORE, THE NET ASSETS MERGED ON 9/1/95
ARE THOSE OF BDJ, CDJ AND EDJ, WHICH ARE CONSIDERED TO HAVE MERGED INTO
ARMS FUND.

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

19 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------

(9) FINANCIAL HIGHLIGHTS
................................................................................
Per-share data for a share of capital stock outstanding
throughout each period and selected information for each
period are as follows:

GOVERNMENT INCOME FUND

<TABLE>
<CAPTION>
Fiscal year ended September 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........ $ 8.99 $ 8.42 $ 10.01 $ 9.86 $ 9.69
------- ------- ------- ------- -------
Operations:
Net investment income ..................... 0.60 0.60 0.69 0.80 0.90
Net realized and unrealized gains (losses)
on investments .......................... (0.16) 0.60 (1.58) 0.15 0.17
------- ------- ------- ------- -------
Total from operations ................... 0.44 1.20 (0.89) 0.95 1.07
------- ------- ------- ------- -------
Distributions to shareholders:
From net investment income ................ (0.60) (0.63) (0.68) (0.80) (0.90)
From net realized gains on investments .... -- -- (0.02) -- --
------- ------- ------- ------- -------
Total distributions to shareholders ..... (0.60) (0.63) (0.70) (0.80) (0.90)
------- ------- ------- ------- -------
Net asset value, end of period .............. $ 8.83 $ 8.99 $ 8.42 $ 10.01 $ 9.86
------- ------- ------- ------- -------
------- ------- ------- ------- -------
SELECTED INFORMATION
Total return(a) ............................. 4.99% 14.87% (9.26)% 10.06% 11.57%
Net assets at end of period (in millions) ... $ 84 $ 106 $ 126 $ 160 $ 124
Ratio of expenses to average daily net
assets(b) ................................. 1.09% 1.11% 1.05% 1.09% 1.11%
Ratio of net investment income to average
daily net assets(b) ....................... 6.66% 7.02% 7.43% 8.10% 9.15%
Portfolio turnover rate (excluding short-term
securities) ............................... 32% 87% 121% 191% 118%
</TABLE>

(A) TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD,
ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT A SALES
CHARGE.
(B) DURING THE YEARS REFLECTED ABOVE, THE DISTRIBUTOR VOLUNTARILY WAIVED FEES.
HAD THE MAXIMUM DISTRIBUTION FEE BEEN IN EFFECT, THE RATIOS OF EXPENSES AND
NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS
FOLLOWS: 1.28%/6.47%, 1.29%/6.84%, 1.24%/7.24%, 1.27%/7.92% AND 1.29%/8.97%
IN THE FISCAL YEAR ENDED 1996, 1995, 1994, 1993 AND 1992, RESPECTIVELY.
BEGINNING IN FISCAL 1995, THE EXPENSE RATIOS REFLECT THE EFFECT OF GROSS
EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT
BEEN ADJUSTED.

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

20 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------

INTERMEDIATE BOND FUND

<TABLE>
<CAPTION>
Fiscal year ended September 30,
--------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........ $ 8.12 $ 7.98 $ 12.22 $ 11.51 $ 10.71
------- ------- -------- ------- -------
Operations:
Net investment income ..................... 0.53(a) 0.88 0.90 1.29 1.07
Net realized and unrealized gains (losses)
on investments .......................... (0.11) 0.31 (3.96) 0.56 0.73
------- ------- -------- ------- -------
Total from operations ................... 0.42 1.19 (3.06) 1.85 1.80
------- ------- -------- ------- -------
Distributions to shareholders:
From net investment income ................ (1.04) (1.05) (0.95) (0.90) (0.91)
From net realized gains on investments .... -- -- (0.23) (0.24) (0.09)
------- ------- -------- ------- -------
Total distributions to shareholders ..... (1.04) (1.05) (1.18) (1.14) (1.00)
------- ------- -------- ------- -------
Net asset value, end of period .............. $ 7.50 $ 8.12 $ 7.98 $ 12.22 $ 11.51
------- ------- -------- ------- -------
------- ------- -------- ------- -------
SELECTED INFORMATION
Total return(b) ............................. 5.68% 16.15% (26.65)% 17.04% 17.70%
Net assets at end of period (in millions) ... $ 136 $ 319 $ 564 $ 792 $ 470
Ratio of expenses to average daily net
assets(c)(d) .............................. 0.72% 0.97% 0.78% 0.70% 0.65%
Ratio of net investment income to average
daily net assets(c) ....................... 6.65% 8.02% 9.33% 12.51% 11.01%
Portfolio turnover rate (excluding short-term
securities) ............................... 89% 136% 169% 109% 64%
</TABLE>

(A) BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
(B) TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE DURING THE PERIOD,
ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT A SALES
CHARGE.
(C) DURING THE YEARS REFLECTED ABOVE, THE DISTRIBUTOR VOLUNTARILY WAIVED FEES.
HAD THE MAXIMUM DISTRIBUTION FEE BEEN IN EFFECT, THE RATIOS OF EXPENSES AND
NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN AS
FOLLOWS: 0.82%/6.55%, 1.07%/7.92%, 0.85%/9.26%, 0.77%/12.44%, AND
0.72%/10.94% IN THE FISCAL YEAR ENDED 1996, 1995, 1994, 1993, AND 1992,
RESPECTIVELY. BEGINNING IN FISCAL 1995, THE EXPENSE RATIOS REFLECT THE
EFFECT OF GROSS EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE
RATIOS HAVE NOT BEEN ADJUSTED.
(D) INCLUDES FEDERAL EXCISE TAXES OF 0.08%, 0.37%, 0.23%, 0.09% AND 0.02% FOR
THE FISCAL YEAR ENDED 1996, 1995, 1994, 1993 AND 1992, RESPECTIVELY.

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

21 1996 Annual Report - Income Funds
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------

ADJUSTABLE RATE MORTGAGE SECURITIES FUND

<TABLE>
<CAPTION>
Month Year Year Year Year Period
Ended Ended Ended Ended Ended Ended
9/30/96 8/31/96 8/31/95 8/31/94 8/31/93 8/31/92(b)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA (A)
Net asset value, beginning of period . $ 8.03 $ 7.99 $ 8.10 $ 8.88 $ 8.95 $ 8.80
------- ------- ------- ------- ------- -------
Operations:
Net investment income ..................... 0.04 0.49 0.47 0.55 0.63 0.40
Net realized and unrealized gains (losses)
on investments .......................... 0.03 0.01 (0.05) (0.82) (0.09) 0.07
------- ------- ------- ------- ------- -------
Total from operations ................... 0.07 0.50 0.42 (0.27) 0.54 0.47
------- ------- ------- ------- ------- -------
Distributions to shareholders:
From net investment income ................ (0.04) (0.46) (0.53) (0.51) (0.61) (0.32)
------- ------- ------- ------- ------- -------
Net asset value, end of period .............. $ 8.06 $ 8.03 $ 7.99 $ 8.10 $ 8.88 $ 8.95
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
SELECTED INFORMATION (A)
Total return (c) ............................ 0.85% 6.40% 5.43% (3.18%) 6.24% 5.49%
Net assets at end of period (in millions) ... $ 263 $ 270 $ 409 $ 500 $ 551 $ 555
Ratio of expenses to average daily net assets
(d) ....................................... 0.82%(f) 0.60% 0.63% 0.60% 0.58% 0.58%(f)
Ratio of net investment income to average
daily net assets (d) ...................... 5.82%(f) 5.74% 5.62% 6.39% 7.25% 7.70%(f)
Portfolio turnover rate (excluding short-term
securities) ............................... 2% 51% 36% 39% 39% 41%
Amount of borrowings outstanding at end of
period (in millions) (e) .................. $ -- $ -- $ -- $ 145 $ 145 $ 145
Average amount of borrowings outstanding
during the period (in millions) (e) ....... $ -- $ -- $ 57 $ 145 $ 149 $ 90
Average number of shares outstanding during
the period (in millions) (e) .............. -- -- 53 62 62 52
Average per-share amount of borrowings
outstanding during the period (e) ......... $ -- $ -- $ 1.09 $ 2.34 $ 2.41 $ 1.67
</TABLE>

(A) ON SEPTEMBER 1, 1995 FOUR CLOSED-END FUNDS, AMERICAN ADJUSTABLE RATE TERM
TRUST 1996, AMERICAN ADJUSTABLE RATE TERM TRUST 1997, AMERICAN ADJUSTABLE
RATE TERM TRUST 1998 (DDJ) AND AMERICAN ADJUSTABLE RATE TERM TRUST 1999
WERE COMBINED TO CREATE THE FUND. DDJ IS CONSIDERED THE SURVIVING ENTITY
FOR FINANCIAL REPORTING PURPOSES. THE FINANCIAL HIGHLIGHTS PRESENTED FOR
THE PERIODS PRIOR TO SEPTEMBER 1, 1995 ARE THOSE OF DDJ. THE PER-SHARE
HISTORICAL INFORMATION FOR SUCH PERIODS HAS BEEN ADJUSTED TO REFLECT THE
IMPACT OF ADDITIONAL SHARES CREATED RESULTING FROM THE DIFFERENCE IN THE
NET ASSET VALUE PER SHARE OF DDJ AT THE TIME OF THE MERGER ($8.71) AND THE
INITIAL NET ASSET VALUE PER SHARE OF THE FUND ($8.00).
(B) COMMENCEMENT OF OPERATIONS OF AMERICAN ADJUSTABLE RATE TERM TRUST 1998 WAS
JANUARY 30, 1992.
(C) TOTAL RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE, ASSUMES
REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT A SALES CHARGE.
(D) VARIOUS FEES AND EXPENSES OF THE FUND WERE VOLUNTARILY WAIVED OR ABSORBED
BY THE ADVISER DURING THE YEAR ENDING 8/31/96. HAD THE FUND PAID ALL
EXPENSES, THE RATIOS OF EXPENSES AND NET INVESTMENT INCOME TO AVERAGE DAILY
NET ASSETS WOULD HAVE BEEN 0.76%/5.58%, RESPECTIVELY. BEGINNING IN THE YEAR
ENDED 8/31/96, THE EXPENSE RATIOS REFLECT THE EFFECT OF GROSS EXPENSES PAID
INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED.
(E) DDJ WAS A CLOSED-END MANAGEMENT INVESTMENT COMPANY AND WAS PERMITTED TO
ENTER INTO BORROWINGS FOR OTHER THAN TEMPORARY OR EMERGENCY PURPOSES.
ADJUSTABLE RATE MORTGAGE SECURITIES FUND MAY BORROW ONLY FOR TEMPORARY OR
EMERGENCY PURPOSES.
(F) ADJUSTED TO AN ANNUAL BASIS.

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

22 1996 Annual Report - Income Funds
<PAGE>
Investments in Securities
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
GOVERNMENT INCOME FUND September 30, 1996
.....................................................................................

Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)

U.S. GOVERNMENT AND AGENCY SECURITIES (111.4%):
U.S. AGENCY DEBENTURES (3.4%):
5.80%, FNMA, 12/10/03 ............................. $2,000,000 $ 1,888,980
6.63%, FNMA, 3/21/06 .............................. 1,000,000 975,320
-----------
2,864,300
-----------

U.S. AGENCY MORTGAGE-BACKED SECURITIES (C) (97.1%):
FIXED RATE (85.8%):
7.50%, FHLMC, 11/1/09 ............................. 1,606,604 1,622,156
7.50%, FHLMC, 10/1/09 ............................. 2,405,900 2,425,412
7.50%, FHLMC, 12/1/09 ............................. 3,203,417 3,229,397
7.00%, FHLMC, 11/1/25 ............................. 2,890,864 2,800,496
7.50%, FHLMC, 10/16/25 ............................ 5,000,000(b) 4,948,350
11.00%, FNMA, 10/1/20 ............................. 1,577,645 1,760,037
7.00%, FNMA, 12/1/07 .............................. 9,279,593 9,244,701
6.50%, FNMA, 8/1/23 ............................... 7,410,935 7,005,557
6.00%, FNMA, 10/1/23 .............................. 906,170 833,096
8.00%, FNMA, 8/1/24 ............................... 2,108,345 2,130,187
9.00%, FNMA, 7/1/24 ............................... 848,454 886,889
8.00%, FNMA, 12/1/24 .............................. 2,691,744 2,717,450
8.00%, FNMA, 11/1/24 .............................. 3,341,833 3,376,454
10.00%, FNMA, 10/1/17 ............................. 822,072 893,996
6.50%, FNMA, 9/1/25 ............................... 4,891,826 4,604,383
7.00%, FNMA, 1/1/08 ............................... 5,000,000(b) 4,945,250
10.00%, FNMA, Series 1989-15, Class D, 9/25/18 .... 256,884 265,677
6.50%, FNMA, Series 1996-23, Class G, 7/25/26 ..... 4,250,000 3,720,743
7.00%, GNMA, 7/15/23 .............................. 3,420,945 3,314,007
7.00%, GNMA, 3/15/09 .............................. 1,562,399 1,550,666
9.00%, GNMA, 10/15/24 ............................. 705,042 740,506
7.00%, GNMA, 2/15/09 .............................. 1,740,391 1,733,307
7.00%, GNMA, 3/15/09 .............................. 2,083,021 2,067,378
10.00%, GNMA, 1/15/10 ............................. 1,369,229 1,496,293
9.00%, GNMA, 8/15/25 .............................. 3,418,174 3,590,108
-----------
71,902,496
-----------

INVERSE FLOATER (1.6%):
4.00%, FHLMC, Series 1419, Class G, LIBOR,
11/15/97 ........................................ 1,389,498 1,352,759
-----------

INVERSE INTEREST-ONLY (0.9%):
21.43%, FHLMC G, Series 12, Class AB, LIBOR,
12/25/08 ........................................ -- 795,346
-----------

Z-BOND (8.8%):
8.34%, FHLMC, Series 1339, Class PZ, 7/15/22 ...... 2,806,726 2,795,387
7.61%, FHLMC, Series 1677, Class Z, 7/15/23 ....... 3,661,928 3,390,946
8.01%, FHLMC, Series 1694, Class Z, 3/15/24 ....... 619,526 491,210
7.60%, FNMA, Series 1993-160, Class ZA, 9/25/23 ... 860,982 684,059
-----------
7,361,602
-----------
</TABLE>

<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>

U.S. GOVERNMENT SECURITIES (10.9%):
7.25%, U.S. Treasury Bond, 5/15/16 ................ $2,000,000(d) $ 2,043,980
8.13%, U.S. Treasury Bond, 8/15/19 ................ 1,000,000(d) 1,118,650
5.75%, U.S. Treasury Note, 8/15/03 ................ 3,000,000 2,861,430
7.25%, U.S. Treasury Note, 5/15/04 ................ 3,000,000 3,108,390
-----------
9,132,450
-----------

Total U.S. Government and Agency Securities
(cost: $92,621,164) .......................... 93,408,953
-----------

SHORT-TERM SECURITIES (0.3%):
Repurchase agreement with Goldman Sachs, acquired
on 9/30/96, interest of $41, 5.80%, 10/1/96
(cost: $256,000) ................................ 256,000(e) 256,000
-----------

Total Investments in Securities
(cost: $92,877,164) (f) ...................... $93,664,953
-----------
-----------
</TABLE>

<TABLE>
<S> <C>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) ON SEPTEMBER 30, 1996, THE TOTAL COST OF INVESTMENTS PURCHASED ON A WHEN-
ISSUED BASIS WAS $9,830,469.
(C) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
LIBOR - LONDON INTERBANK OFFERED RATE
INVERSE FLOATER - REPRESENTS SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH A DECLINE (INCREASE) IN THE SPECIFIED INDEX.
THE INTEREST RATE PAID BY THE INVERSE FLOATER WILL GENERALLY CHANGE
AT A MULTIPLE OF ANY CHANGE IN THE INDEX. INTEREST RATES DISCLOSED
ARE IN EFFECT ON SEPTEMBER 30, 1996.
INVERSE INTEREST-ONLY - REPRESENTS SECURITIES THAT ENTITLE HOLDERS TO
RECEIVE ONLY INTEREST PAYMENTS ON THE UNDERLYING MORTGAGES. INTEREST
IS PAID AT A RATE THAT INCREASES (DECREASES) WITH A DECREASE
(INCREASE) IN THE SPECIFIED INDEX. THE YIELD TO MATURITY OF AN
INVERSE INTEREST-ONLY IS EXTREMELY SENSITIVE TO THE RATE OF PRINCIPAL
PAYMENTS ON THE UNDERLYING MORTGAGE ASSETS. A RAPID (SLOW) RATE OF
PRINCIPAL REPAYMENTS MAY HAVE AN ADVERSE (POSITIVE) EFFECT ON YIELD
TO MATURITY. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS BASED
UPON THE CURRENT COST BASIS AND ESTIMATED TIMING AND AMOUNT OF FUTURE
CASH FLOWS.
Z-BOND - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATE DISCLOSED REPRESENTS CURRENT YIELD
BASED UPON THE COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
(D) THESE ISSUES ARE PARTIALLY PLEDGED AS INITIAL MARGIN DEPOSITS ON OPEN
INTEREST RATE FUTURES SALES CONTRACTS. SEE NOTE 2 TO THE FINANCIAL
STATEMENTS.
(E) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(F) ON SEPTEMBER 30, 1996, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $93,150,986. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES, INCLUDING OPEN
FUTURES CONTRACTS, BASED ON THIS COST WERE AS FOLLOWS:
</TABLE>

<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 1,463,644
GROSS UNREALIZED DEPRECIATION ...... (1,038,740)
-----------
NET UNREALIZED APPRECIATION ...... $ 424,904
-----------
-----------
</TABLE>

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

23 1996 Annual Report - Income Funds
<PAGE>
Investments in Securities
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INTERMEDIATE BOND FUND September 30, 1996
.....................................................................................

U.S. GOVERNMENT AND AGENCY SECURITIES (78.5%):
U.S. AGENCY FIXED RATE MORTGAGE-BACKED SECURITIES (78.5%):
7.00%, FHLMC, 9/1/01 .............................. $2,500,000 $ 2,511,700
7.00%, FHLMC, 9/1/25 .............................. 4,718,006 4,570,521
7.50%, FHLMC, 10/1/25 ............................. 2,762,630 2,737,573
7.00%, FHLMC, 10/1/25 ............................. 4,924,134 4,770,205
7.00%, FHLMC, 4/1/26 .............................. 5,051,233 4,887,017
6.50%, FHLMC, 5/1/26 .............................. 2,589,330 2,436,379
6.50%, FHLMC, 5/1/26 .............................. 2,554,254 2,407,359
6.00%, FHLMC, 3/1/11 .............................. 4,983,838 4,731,457
6.50%, FHLMC, 1/1/26 .............................. 2,544,799 2,394,477
7.00%, FHLMC, 3/1/26 .............................. 5,017,339 4,854,226
7.00%, FHLMC, 5/1/26 .............................. 3,525,255 3,410,649
7.00%, FHLMC, 9/1/10 .............................. 4,671,382 4,633,357
10.00%, FNMA, 11/1/18 ............................. 2,993,961 3,254,016
7.00%, FNMA, 10/1/25 .............................. 2,490,603 2,408,064
7.00%, FNMA, 10/1/10 .............................. 3,348,740 3,318,367
7.00%, FNMA, 5/1/26 ............................... 2,539,919 2,452,572
7.00%, FNMA, 9/1/25 ............................... 4,851,908 4,691,115
7.00%, FNMA, 10/1/25 .............................. 4,610,967 4,458,159
6.50%, FNMA, 4/1/26 ............................... 2,534,777 2,381,879
9.50%, FNMA, 6/1/21 ............................... 3,103,097 3,324,162
7.00%, FNMA, 9/1/03 ............................... 2,500,000 2,496,850
9.00%, GNMA, 5/20/25 .............................. 5,430,244 5,669,446
8.00%, GNMA, 7/20/25 .............................. 4,447,034 4,467,846
8.50%, GNMA, 7/20/25 .............................. 5,400,410 5,525,213
8.00%, GNMA, 8/20/25 .............................. 5,511,910 5,537,706
7.50%, GNMA, 10/15/25 ............................. 2,265,953 2,242,976
9.00%, GNMA, 8/15/21 .............................. 5,769,582 6,095,506
6.50%, GNMA, 10/15/10 ............................. 4,094,627 3,990,786
-----------
106,659,583
-----------

Total U.S. Government and Agency Securities
(cost: $107,629,614) ......................... 106,659,583
-----------
</TABLE>

<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ---------- -----------
<S> <C> <C>

CORPORATE BONDS (5.4%):
Ford Motor Credit Co., 7.00%, 9/25/01 ............. $3,000,000 $ 3,008,820
General Motors Acceptance Corp., 8.50%, 1/1/03 .... 1,500,000 1,600,320
Hydro-Quebec, 9.40%, 2/1/21 ....................... 2,300,000 2,664,021
-----------

Total Corporate Bonds
(cost: $7,233,670) ........................... 7,273,161
-----------

SHORT-TERM SECURITIES (18.4%):
Repurchase agreement with Goldman Sachs, acquired
on 9/30/96, interest of $4,028, 5.80%, 10/1/96
(cost: $25,003,000) ............................. 25,003,000(b) 25,003,000
-----------

Total Investments in Securities
(cost: $139,866,284) (c) ..................... $138,935,744
-----------
-----------
</TABLE>

<TABLE>
<S> <C>
NOTES TO INVESTMENTS IN SECURITIES:
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(C) ON SEPTEMBER 30, 1996, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $139,866,284. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS
COST WERE AS FOLLOWS:
</TABLE>

<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 224,224
GROSS UNREALIZED DEPRECIATION ...... (1,154,764)
-----------
NET UNREALIZED DEPRECIATION ...... $ (930,540)
-----------
-----------
</TABLE>

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

24 1996 Annual Report - Income Funds
<PAGE>
Investments in Securities
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND September 30, 1996
.........................................................................................

Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ------------ -------------
<S> <C> <C>
(PERCENTAGES OF EACH INVESTMENT CATEGORY RELATE TO TOTAL NET ASSETS)

U.S. GOVERNMENT AND AGENCY SECURITIES (83.8%):
U.S. GOVERNMENT SECURITIES (0.2%):
6.38%, U.S. Treasury Note, 1/15/99 $ 450,000 $ 452,219
6.00%, U.S. Treasury Note, 11/30/97 ............... 15,000 15,024
-------------
467,243
-------------

U.S. AGENCY MORTGAGE-BACKED SECURITIES (B) (83.6%):
FIXED RATE (17.1%):
5.50%, FHLMC, 4/1/03 .............................. 2,470,769 2,346,440
5.50%, FHLMC, 4/1/03 .............................. 1,867,934 1,773,939
5.50%, FHLMC, 4/1/03 .............................. 2,624,942 2,492,855
5.50%, FHLMC, 4/1/03 .............................. 1,555,251 1,476,991
5.50%, FHLMC, 4/1/03 .............................. 1,947,554 1,849,553
6.50%, FNMA, 3/1/03 ............................... 4,919,422 4,837,907
10.00%, FNMA, 12/1/21 ............................. 1,855,883 2,017,678
7.00%, FNMA, 4/1/03 ............................... 4,052,797 4,047,690
6.50%, FNMA, 3/1/03 ............................... 9,531,164 9,373,234
7.00%, FNMA, 3/1/03 ............................... 3,901,654 3,896,738
7.00%, FNMA, 4/1/03 ............................... 4,042,761 4,037,667
9.00%, GNMA, 5/15/16 .............................. 1,026,429 1,079,988
10.00%, GNMA, 2/15/25 ............................. 2,455,924 2,686,903
9.00%, GNMA, 4/15/21 .............................. 2,892,749 3,065,388
-------------
44,982,971
-------------

ADJUSTABLE AND FLOATING RATE (66.5%):
7.70%, FHLMC, 2/1/22 .............................. 12,561,733 13,071,237
7.50%, FHLMC, 11/1/16 ............................. 7,901,834 8,123,638
7.25%, FHLMC, 1/1/17 .............................. 876,919 898,377
7.68%, FHLMC, 6/1/18 .............................. 1,622,844 1,682,337
6.94%, FHLMC, 1/1/21 .............................. 4,640,024 4,726,421
7.25%, FHLMC, 8/1/20 .............................. 8,613,860 8,876,841
5.93%, FHLMC, Series 1693, Class FA, Treasury,
3/15/09 ......................................... 8,973,361 8,712,057
7.09%, FNMA, 11/1/17 .............................. 8,216,517 8,383,969
7.31%, FNMA, 1/1/20 ............................... 1,687,671 1,751,009
7.54%, FNMA, 2/1/22 ............................... 1,398,898 1,453,706
7.18%, FNMA, 3/1/28 ............................... 5,736,413 5,793,318
7.32%, FNMA, 10/1/25 .............................. 7,029,897 7,081,215
5.32%, FNMA, Series 1993-116, Class FA, COFI,
7/25/22 ......................................... 8,359,061 8,166,886
7.00%, GNMA, 7/20/22 .............................. 6,903,205 6,985,698
7.25%, GNMA, 7/20/22 .............................. 9,672,801 9,792,841
7.13%, GNMA, 5/20/23 .............................. 8,831,516 8,916,387
7.25%, GNMA, 9/20/23 .............................. 6,987,920 7,065,905
7.13%, GNMA, 6/20/24 .............................. 8,500,212 8,590,654
6.50%, GNMA, 9/20/25 .............................. 13,793,410 14,000,312
6.00%, GNMA, 8/20/25 .............................. 10,837,029 10,975,851
6.00%, GNMA, 9/20/25 .............................. 15,577,697 15,776,314
6.50%, GNMA, 11/20/25 ............................. 1,655,595 1,675,976
7.00%, GNMA, 8/20/21 .............................. 6,279,065 6,361,949
</TABLE>

<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ------------ -------------
<S> <C> <C>
7.00%, GNMA, 10/20/21 ............................. $ 6,019,471 $ 6,090,140
-------------
174,953,038
-------------

Total U.S. Government and Agency Securities
(cost: $220,881,893) ......................... 220,403,252
-------------

PRIVATE MORTGAGE-BACKED SECURITIES (B) (12.9%):
FLOATING RATE (12.9%):
7.36%, Capstead Mortgage Securities Corporation,
Series 1993-2H, Class A1, Treasury, 9/25/23 ..... 11,010,627 11,082,890
7.14%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, LIBOR, 6/18/07 .............. 13,000,000 13,048,749
7.81%, Resolution Trust Corporation, Series 1991-8,
Class A1, Treasury, 12/25/20 .................... 9,659,748 9,703,517
-------------

Total Private Mortgage-Backed Securities
(cost: $34,687,099) .......................... 33,835,156
-------------

SHORT-TERM SECURITIES (3.3%):
Repurchase agreement with Goldman Sachs, acquired
on 9/30/96, interest of $1,391, 5.80%, 10/1/96
(cost: $8,632,000) .............................. 8,632,000(c) 8,632,000
-------------

Total Investments in Securities
(cost: $264,200,992) (d) ..................... $ 262,870,408
-------------
-------------
</TABLE>

<TABLE>
<S> <C>
NOTES TO INVESTMENTS IN SECURITIES
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
LIBOR - LONDON INTERBANK OFFERED RATE
COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S
11TH DISTRICT
ADJUSTABLE RATE - REPRESENTS PASS-THROUGH MORTGAGE SECURITIES
COLLATERALIZED BY MORTGAGES WITH INTEREST RATES THAT ARE ADJUSTED
FROM TIME TO TIME IN ACCORDANCE WITH PREDETERMINED INTEREST RATE
INDEXES. INTEREST RATES DISCLOSED ARE IN EFFECT ON SEPTEMBER 30,
1996.
FLOATING RATE - REPRESENTS COLLATERALIZED MORTGAGE OBLIGATIONS OR
MULTI-CLASS PASS-THROUGH SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN THE SPECIFIED
INDEX. INTEREST RATES DISCLOSED ARE IN EFFECT ON SEPTEMBER 30, 1996.
(C) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(D) ON SEPTEMBER 30, 1996, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $264,200,992. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS
COST WERE AS FOLLOWS:
</TABLE>

<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 571,978
GROSS UNREALIZED DEPRECIATION ...... (1,902,562)
------------
NET UNREALIZED DEPRECIATION ...... $ (1,330,584)
------------
------------
</TABLE>

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

25 1996 Annual Report - Income Funds
<PAGE>
Investments in Securities
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ADJUSTABLE RATE MORTGAGE SECURITIES FUND August 31, 1996
.........................................................................................

U.S. GOVERNMENT AND AGENCY SECURITIES (80.5%):
U.S. AGENCY MORTGAGE-BACKED SECURITIES (B) (80.5%):
FIXED RATE (16.6%):
5.50%, FHLMC, 4/1/03 .............................. $ 2,473,388 $ 2,327,285
5.50%, FHLMC, 4/1/03 .............................. 1,870,131 1,759,662
5.50%, FHLMC, 4/1/03 .............................. 2,628,185 2,472,938
5.50%, FHLMC, 4/1/03 .............................. 1,556,962 1,464,992
5.50%, FHLMC, 4/1/03 .............................. 1,950,985 1,835,740
6.50%, FNMA, 3/1/03 ............................... 4,935,117 4,813,220
10.00%, FNMA, 12/1/21 ............................. 1,860,492 2,020,364
7.00%, FNMA, 4/1/03 ............................... 4,056,701 4,019,907
6.50%, FNMA, 3/1/03 ............................... 9,544,772 9,309,016
7.00%, FNMA, 3/1/03 ............................... 3,958,491 3,922,588
7.00%, FNMA, 4/1/03 ............................... 4,049,438 4,012,710
9.00%, GNMA, 5/15/16 .............................. 1,028,144 1,078,893
10.00%, GNMA, 2/15/25 ............................. 2,509,382 2,740,696
9.00%, GNMA, 4/15/21 .............................. 2,929,233 3,095,789
-------------
44,873,800
-------------

ADJUSTABLE AND FLOATING RATE (63.9%):
7.69%, FHLMC, 2/1/22 .............................. 12,711,735 13,170,375
7.50%, FHLMC, 11/1/16 ............................. 8,018,830 8,201,660
7.67%, FHLMC, 6/1/18 .............................. 1,631,380 1,684,612
6.94%, FHLMC, 1/1/21 .............................. 4,734,788 4,825,222
7.24%, FHLMC, 8/1/20 .............................. 8,854,306 9,080,445
6.15%, FHLMC, Series 1693, Class FA, Treasury,
3/15/09 ......................................... 9,051,637 8,779,183
7.09%, FNMA, 11/1/17 .............................. 8,294,010 8,431,856
7.31%, FNMA, 1/1/20 ............................... 1,691,676 1,748,009
7.18%, FNMA, 3/1/28 ............................... 5,750,719 5,759,518
7.32%, FNMA, 10/1/25 .............................. 7,098,381 7,076,376
5.31%, FNMA, Series 1993-116, Class FA, COFI,
7/25/22 ......................................... 8,532,504 8,340,267
7.00%, GNMA, 7/20/22 .............................. 6,991,280 7,081,957
7.25%, GNMA, 7/20/22 .............................. 9,789,287 9,922,617
7.13%, GNMA, 5/20/23 .............................. 8,935,277 9,026,059
7.25%, GNMA, 9/20/23 .............................. 7,084,153 7,171,996
7.13%, GNMA, 6/20/24 .............................. 8,602,215 8,698,645
6.50%, GNMA, 9/20/25 .............................. 13,868,677 14,102,226
6.00%, GNMA, 8/20/25 .............................. 10,890,706 10,983,059
6.00%, GNMA, 9/20/25 .............................. 15,652,520 15,785,410
7.00%, GNMA, 8/20/21 .............................. 6,362,001 6,452,342
7.00%, GNMA, 10/20/21 ............................. 6,093,815 6,174,192
-------------
172,496,026
-------------

Total U.S. Government and Agency Securities
(cost: $218,535,023) ......................... 217,369,826
-------------
</TABLE>

<TABLE>
<CAPTION>
Principal Market
Description of Security Amount Value (a)
- --------------------------------------------------------- ------------ -------------
<S> <C> <C>

PRIVATE MORTGAGE-BACKED SECURITIES (B) (17.1%):
FLOATING RATE (17.1%):
7.40%, Capstead Mortgage Securities Corporation,
Series 1993-2H, Class A1, Treasury, 9/25/23 ..... $ 11,367,488 $ 11,442,093
7.20%, Donaldson, Lufkin and Jenrette, Series
1992-MF3, Class A3, LIBOR, 6/18/07 .............. 13,000,000 13,042,654
7.80%, Resolution Trust Corporation, Series 1991-8,
Class A1, Treasury, 12/25/20 .................... 9,807,791 9,832,320
6.80%, Sears Mortgage Securities, Series 1991-K,
Class A1, LIBOR, 9/25/21 ........................ 11,655,608 11,710,250
-------------

Total Private Mortgage-Backed Securities
(cost: $47,060,383) .......................... 46,027,317
-------------

SHORT-TERM SECURITIES (2.5%):
Repurchase agreement with Goldman Sachs, acquired
on 8/30/96, accrued interest of $3,884, 5.28%,
9/3/96
(cost: $6,621,000) .............................. 6,621,000(c) 6,621,000
-------------

Total Investments in Securities
(cost: $272,216,406) (d) ..................... $ 270,018,143
-------------
-------------
</TABLE>

<TABLE>
<S> <C>
NOTES TO INVESTMENTS IN SECURITIES
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
LIBOR - LONDON INTERBANK OFFERED RATE
COFI (11TH DISTRICT) - COST OF FUNDS INDEX OF THE FEDERAL RESERVE'S
11TH DISTRICT
ADJUSTABLE RATE - REPRESENTS PASS-THROUGH MORTGAGE SECURITIES
COLLATERALIZED BY MORTGAGES WITH INTEREST RATES THAT ARE ADJUSTED
FROM TIME TO TIME IN ACCORDANCE WITH PREDETERMINED INTEREST RATE
INDEXES. INTEREST RATES DISCLOSED ARE IN EFFECT ON SEPTEMBER 30,
1996.
FLOATING RATE - REPRESENTS COLLATERALIZED MORTGAGE OBLIGATIONS OR
MULTI-CLASS PASS-THROUGH SECURITIES THAT PAY INTEREST AT RATES THAT
INCREASE (DECREASE) WITH AN INCREASE (DECREASE) IN THE SPECIFIED
INDEX. INTEREST RATES DISCLOSED ARE IN EFFECT ON SEPTEMBER 30, 1996.
(C) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(D) ON AUGUST 31, 1996, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $272,216,406. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES BASED ON THIS
COST WERE AS FOLLOWS:
</TABLE>

<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 245,223
GROSS UNREALIZED DEPRECIATION ...... (2,443,486)
------------
NET UNREALIZED DEPRECIATION ...... $ (2,198,263)
------------
------------
</TABLE>

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

26 1996 Annual Report - Income Funds
<PAGE>
Independent Auditors' Report
- --------------------------------------------------

THE BOARD OF DIRECTORS AND SHAREHOLDERS
PIPER FUNDS INC.:

We have audited the accompanying statements of assets and
liabilities, including the schedules of investments in
securities, of Government Income Fund and Intermediate
Bond Fund (funds within Piper Funds Inc.) as of September
30, 1996, and Adjustable Rate Mortgage Securities Fund (a
fund within Piper Funds Inc.-II) as of September 30, 1996
and August 31, 1996, and the related statements of
operations for the year ended September 30, 1996 for
Government Income Fund and Intermediate Bond Fund and the
month ended September 30, 1996 for Adjustable Rate
Mortgage Securities Fund and the year ended August 31,
1996 for Adjustable Rate Mortgage Securities Fund, the
statements of changes in net assets for each of the years
in the two-year period ended September 30, 1996 for
Government Income Fund and Intermediate Bond Fund and the
month ended September 30, 1996 for Adjustable Rate
Mortgage Securities Fund and each of the years in the
two-year period ended August 31, 1996 for Adjustable Rate
Mortgage Securities Fund, and the financial highlights
presented in note 9 to the financial statements. These
financial statements and the financial highlights are the
responsibility of the funds' management. Our
responsibility is to express an opinion on these financial
statements and the 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 audit to obtain reasonable
assurance about whether the financial statements and the
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. Investment securities held in custody are
confirmed to us by the custodian. As to securities
purchased but not received, we request confirmations from
brokers and, where replies are not received, we carry out
other appropriate auditing procedures. 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 the financial
highlights referred to above present fairly, in all
material respects, the financial position of Government
Income Fund and Intermediate Bond Fund as of September 30,
1996, and Adjustable Rate Mortgage Securities Fund as of
September 30, 1996 and August 31, 1996, and the results of
their operations, the changes in their net assets and the
financial highlights for the periods stated in the first
paragraph above, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 18, 1996

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

27 1996 Annual Report - Income Funds
<PAGE>
Federal Income Tax Information
- --------------------------------------------------

The following per-share information describes the federal
tax treatment of distributions made during the fiscal
year. Distributions for the calendar year will be reported
to you on Form 1099-DIV. Please consult a tax adviser on
how to report these distributions at the state and local
levels.

INCOME DISTRIBUTIONS (TAXABLE AS ORDINARY DIVIDENDS, NONE
QUALIFYING FOR DEDUCTION BY CORPORATIONS)

<TABLE>
<CAPTION>
GOVERNMENT INTERMEDIATE
INCOME BOND
PAYABLE DATE FUND FUND
- --------------------------------------------- -------- --------
<S> <C> <C>
October 2, 1995 ............................. $0.0457 $0.1350
November 1, 1995 ............................ 0.0485 0.1650
December 1, 1995 ............................ 0.0505 0.1650
January 2, 1996 ............................. 0.0491 0.1650
February 1, 1996 ............................ 0.0487 0.0650
March 1, 1996 ............................... 0.0487 0.0650
April 1, 1996 ............................... 0.0485 0.0650
May 1, 1996 ................................. 0.0503 0.0650
June 3, 1996 ................................ 0.0512 0.0650
July 1, 1996 ................................ 0.0504 0.0650
August 1, 1996 .............................. 0.0515 0.0406
September 3, 1996 ........................... 0.0496 0.0416
-------- --------
Total ..................................... $0.5927 $1.1022
-------- --------
-------- --------
</TABLE>

<TABLE>
<CAPTION>
ADJUSTABLE
RATE
MORTGAGE
SECURITIES
PAYABLE DATE FUND
- --------------------------------------------- --------
<S> <C>
October 2, 1995 ............................. $0.0342
November 1, 1995 ............................ 0.0369
December 1, 1995 ............................ 0.0388
January 2, 1996 ............................. 0.0393
February 1, 1996 ............................ 0.0386
March 1, 1996 ............................... 0.0403
April 1, 1996 ............................... 0.0377
May 1, 1996 ................................. 0.0378
June 3, 1996 ................................ 0.0380
July 1, 1996 ................................ 0.0377
August 1, 1996 .............................. 0.0389
--------
Total as of August 31, 1996 ............... 0.4182
September 3, 1996 ........................... 0.0405
--------
Total distributions ....................... $0.4587
--------
--------
</TABLE>

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28 1996 Annual Report - Income Funds
<PAGE>
Shareholder Update
- --------------------------------------------------

INTERMEDIATE BOND FUND (FORMERLY INSTITUTIONAL GOVERNMENT
INCOME PORTFOLIO)
At a special meeting of shareholders held on September 12,
1996, shareholders of Intermediate Bond Fund (the fund)
approved the discontinuance of a fundamental policy
requiring the fund to invest only in securities issued or
guaranteed as to payment of principal and interest by the
U.S. government or its agencies or instrumentalities and
repurchase agreements fully secured by such securities. In
connection with the discontinuance of this policy, the
fund's investment policies were revised to permit
investments in a broad range of investment quality debt
securities and its name was changed from Institutional
Government Income Portfolio to Intermediate Bond Fund. The
following votes were cast regarding this matter:
10,271,277 shares voted "for", 1,166,053 shares voted
"against" and 723,286 abstentions.

ADJUSTABLE RATE MORTGAGE SECURITIES FUND
At a special meeting of shareholders held on September 16,
1996, shareholders of Piper Institutional Funds,
Inc.--Institutional Government Adjustable Portfolio
approved the merger of all its net assets into Piper Funds
Inc., II--Adjustable Rate Mortgage Securities Fund. The
following votes were cast regarding this matter: 273,523
shares voted "for", 0 shares voted "against" and 203,455
abstentions.

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29 1996 Annual Report - Income Funds
<PAGE>
Directors and Officers
- --------------------------------------------------

DIRECTORS
David T. Bennett, CHAIRMAN, HIGHLAND HOMES, INC., USL
PRODUCTS, INC., KIEFER BUILT, INC., OF COUNSEL, GRAY,
PLANT, MOOTY, MOOTY & BENNETT, P.A.
Jaye F. Dyer, PRESIDENT, DYER MANAGEMENT COMPANY
William H. Ellis, PRESIDENT, PIPER JAFFRAY COMPANIES INC.,
PIPER CAPITAL MANAGEMENT INCORPORATED
Karol D. Emmerich, PRESIDENT, THE PARACLETE GROUP
Luella G. Goldberg, DIRECTOR, TCF FINANCIAL, RELIASTAR
FINANCIAL CORP., HORMEL FOODS CORP.
David A. Hughey, RETIRED EXECUTIVE VICE PRESIDENT AND
CHIEF ADMINISTRATIVE OFFICER OF DEAN WITTER INTERCAPITAL
INC. AND DEAN WITTER TRUST CO.
George Latimer, CHIEF EXECUTIVE OFFICER, NATIONAL EQUITY
FUNDS

OFFICERS
William H. Ellis, CHAIRMAN OF THE BOARD
Paul A. Dow, PRESIDENT
Robert H. Nelson, VICE PRESIDENT AND TREASURER
Susan Sharp Miley, SECRETARY

INVESTMENT ADVISER
Piper Capital Management Incorporated
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804

DISTRIBUTOR
Piper Jaffray Inc.
222 SOUTH NINTH STREET, MINNEAPOLIS, MN 55402-3804

CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
127 WEST 10TH STREET, KANSAS CITY, MO 64105-1716

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 NORWEST CENTER, MINNEAPOLIS, MN 55402

LEGAL COUNSEL
Dorsey & Whitney LLP
220 SOUTH SIXTH STREET, MINNEAPOLIS, MN 55402

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30 1996 Annual Report - Income Funds
<PAGE>

SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
As a shareholder in Piper Funds, you have access to a full range of services and
benefits.

Check your prospectus for details about services and any limitations that might
apply to your fund.
- --------------------------------------------------------------------------------

LOW MINIMUM INVESTMENTS
You can open a Piper mutual fund account with a minimum investment of $250.

QUANTITY DISCOUNTS
If your initial investment exceeds a specified amount, if an investment combined
with the value of your existing Piper shares exceeds a specified amount, or if
your investments combined during a 13-month period exceed a specified amount,
you can reduce or even eliminate the front-end sales charge.

WAIVER OF SALES CHARGES
Money market funds carry no sales charges.* Sales charges on other Piper funds
are waived on purchases of $500,000 or more. However, a contingent deferred
sales charge may be imposed. See your prospectus for details.

AUTOMATIC REINVESTMENT OF DIVIDENDS
For maximum growth of your assets, you can reinvest dividends and capital gains
automatically in additional shares of your fund without a sales charge.

CROSS-REINVESTMENT OF DISTRIBUTIONS
Diversify your holdings by reinvesting dividends and capital gains from one
Piper fund to another.

CASH DISTRIBUTIONS
If you prefer, take your dividends and/or capital gains in cash.

AUTOMATIC MONTHLY INVESTMENT PROGRAM
You may automatically transfer $25 or more each month from any Piper money
market fund* into many other Piper funds.

AUTOMATIC MONTHLY MONEY TRANSFER PROGRAM
If you are starting a savings discipline or seeking a convenient way to invest,
you can transfer a minimum of $100 automatically from your bank, savings and
loan or other financial institution into many of the Piper funds.

EXCHANGE PRIVILEGES
Revise your investment plan without incurring a sales charge by moving assets
from one Piper fund to another with the same fee structure. See your prospectus
for restrictions involving exchanges between funds with different sales charges.

REINVESTMENT PRIVILEGES
If you buy a fund with a sales charge and later redeem your shares, you may
reinvest all or part of the proceeds in shares of that fund or another Piper
fund within 30 days and pay no additional sales charge, subject to each fund's
minimum investment requirements.

SYSTEMATIC WITHDRAWAL PLAN
If your account has a value of $5,000 or more, you can elect to receive periodic
payments of $100 or more, at no cost, excluding money market funds.

ACCOUNT STATEMENTS
Whenever you add to or withdraw money from your account, you'll receive a
monthly statement from Piper Jaffray. Accounts with no activity receive a
quarterly statement instead. Periodic dividend and capital gain distributions,
if any, also appear on your statement.

CONFIRMATION OF TRANSACTIONS
You receive a confirmation statement following every transaction, except in the
money market funds. All transactions are reflected on your account statement.

$50 MILLION SHAREHOLDER PROTECTION
If you have a Piper Jaffray PRIME or PAT Plus account, you are protected up to
$50 million in the unlikely event that Piper Jaffray were to fail financially.
All other Piper Jaffray accounts are protected up to $25 million. This
protection does not cover market loss.

* AN INVESTMENT IN A PIPER MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE
TO MAINTAIN A STABLE NET ASSET VALUE OF $1 PER SHARE.

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31 1996 Annual Report - Income Funds
<PAGE>

GLOSSARY OF TERMS ****
- --------------------------------------------------------------------------------

BENCHMARK
A benchmark is an established basis of comparison for an investment's
performance. Benchmarks may be an unmanaged market index or a group of similar
investments.

COUPON
Coupon is the interest rate on a bond that the issuer promises to pay to the
holder until the bond matures or resets its rate. It is expressed as an annual
percentage of face value.

CURRENT COUPON ISSUES
This is a bond with a coupon (or interest rate) within half a percentage point
of current market rates.

DEFENSIVE EFFECTIVE DURATION
(see Effective Duration)

DISCOUNT
Bonds selling at prices below their redemption values are called discount bonds.

DOLLAR ROLL PROGRAM
The dollar roll program allows a fund to generate fee income by committing to
pay for securities in the future at today's prices. These commitments also
increase the amount of assets exposed to market and interest rate risk, and
therefore, may increase a fund's net asset value volatility.

EFFECTIVE DURATION
Effective duration estimates how much the value of a security is expected to
change with a given change in interest rates. Longer effective durations
indicate more sensitivity to changes in interest rates. For example, if interest
rates were to increase by 1%, the market value of a bond with an effective
duration of five years would decrease by about 5%, with all other factors being
constant. It is important to remember that effective duration is based on
certain assumptions and has several limitations. It is most effective as a
measure when interest rate changes are small, rapid and occur equally across all
the different points of the yield curve. In addition, effective duration is
difficult to calculate precisely for bonds with prepayment options, such as
mortgage-backed securities.

If a fund has an AGGRESSIVE EFFECTIVE DURATION, it means its managers have set a
longer duration posture in comparison to the fund's benchmark. A fund with a
long effective duration is more sensitive to changing interest rates.

If a fund has a DEFENSIVE EFFECTIVE DURATION, it means its managers have set a
shorter duration posture in comparison to the fund's benchmark, to make the fund
less sensitive to changing interest rates.

If a fund has a NEUTRAL EFFECTIVE DURATION, the duration is approximately the
same as its benchmark.

FANNIE MAE (OR FNMA, OR FEDERAL NATIONAL MORTGAGE ASSOCIATION)
Fannie Mae is a publicly owned, government-sponsored corporation chartered in
1938 to purchase mortgages from lenders and resell them to investors. The agency
mostly packages mortgages backed by the Federal Housing Administration, but also
sells some non-governmentally backed mortgages.

GINNIE MAE (OR GNMA, OR GOVERNMENT NATIONAL MORTGAGE ASSOCIATION)
Ginnie Mae is a government-owned corporation, which is an agency of the U.S.
Department of Housing and Urban Development. Ginnie Mae guarantees, with the
full faith and credit of the U.S. government, full and timely payment of all
monthly principal and interest payments on the mortgage-backed pass-through
securities of registered holders. The securities, which are issued by private
firms, such as mortgage bankers and savings institutions, and typically marketed
through security broker-dealers, represent pools of residential mortgages
insured or guaranteed by the Federal Housing Administration (FHA), the Farmer's
Home Administration (FmHA), or the Veterans Administration(VA).

INTEREST-ONLY SECURITIES (IOs)
In pooled mortgage securities, interest-only refers to securities that receive
interest from underlying mortgages. They sell at a discount, and their cash flow
declines with time. IOs increase in value when interest rates rise and decline
when interest rates fall.

**** [In the printed version of the document this symbol appears as a graduation
cap.]

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32 1996 Annual Report - Income Funds
<PAGE>

GLOSSARY OF TERMS ****
- --------------------------------------------------------------------------------

INTEREST RATE RISK
Interest rate risk is the risk that after an investor purchases a bond, interest
rates will rise and the price of the bond will go down.

INVERSE FLOATERS
Inverse floaters are bonds whose coupon payments move inversely to a designated
index. However, like most other fixed income securities, the price of inverse
floaters will decrease as interest rates increase. Inverse floaters generally
exhibit greater price volatility than the majority of mortgage pass-through
securities. Coupon rates on inverse floaters typically change at a multiple of
the changes in the relevant index rate.

INVERSE INTEREST-ONLY SECURITIES
In pooled mortgage securities, inverse interest-only securities receive interest
from underlying mortgages. Unlike regular IOs,their values decrease when
interest rates rise, and increase when interest rates fall.

MORTGAGE PASS-THROUGHS
Pass-throughs are pooled mortgages, repackaged as shares, for investors. These
securities provide for the pass-through to investors of their pro-rata share of
monthly payments (including any prepayments ) made by the individual borrowers
on the mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans.

NEUTRAL EFFECTIVE DURATION
(see Effective Duration)

OBJECTIVE
A fund's objective is stated in its prospectus. It is the goal (although it is
not guaranteed) that a mutual fund pursues. Examples of an investment objective
might be long-term capital appreciation or current income.

SEASONED
For mortgage-backed securities, a seasoned issue is one that has already gone
through a refinancing cycle and, therefore, is less likely to prepay principal
at an accelerated rate if refinancings pick up again.

UNDERVALUED
An undervalued security is a security selling at a price lower than what
analysts believe it is worth.

YANKEE BOND
A Yankee bond is a dollar-denominated bond issued in the United States by a
foreign bank or corporation. They are issued in the United States when market
conditions are more favorable than in domestic markets overseas.

FOR MORE INFORMATION
- --------------------------------------------------------------------------------

BY PHONE [GRAPHIC]
- --------------------------------------------------------------------------------
1 800 866-7778

FOR GENERAL INFORMATION
press 5, our Mutual Fund Services representatives are ready to answer your
questions.

TO LISTEN TO MONTHLY FUND UPDATES
press 3, press 1, then press:

17 for Government Income Fund
18 for Intermediate Bond Fund
19 for Adjustable Rate Mortgage Securities Fund

TO ORDER LITERATURE
press 5, ask a service representative to mail you additional literature,
including a Quarterly Update. You can also request to be put on a mailing list
to receive this information automatically each quarter.

BY MAIL [GRAPHIC]
- --------------------------------------------------------------------------------
Piper Capital Management
Attn: Mutual Fund Services
222 South Ninth Street
Minneapolis, MN 55402-3804

In an effort to reduce costs to our shareholders, we have implemented a process
to reduce duplicate mailings of the funds' shareholder reports. This
householding process should allow us to mail one report to each address where
one or more registered shareholders with the same last name reside. If you would
like to have additional reports mailed to your address, please call our Mutual
Fund Services area at 1 800 866-7778, or mail a request to us.

ON-LINE [GRAPHIC]
- --------------------------------------------------------------------------------
http://www.piperjaffray.com/
money_management/

**** [In the printed version of the document this symbol appears as a graduation
cap.]

33
<PAGE>

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[LOGO] PIPER FUNDS 222 South Ninth Street
Minneapolis, MN 55402-3804

PIPER JAFFRAY INC., FUND DISTRIBUTOR AND NASD MEMBER.