PIPER FUNDS INC, 485APOS, 1996-07-15

PIPER FUNDS INC
485APOS, 1996-07-15

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<PAGE>

1933 Act Registration No. 33-10261
1940 Act Registration No. 811-4905

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1996

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Registration No. 33-10261)
Pre-Effective Amendment No. _______
Post-Effective Amendment No. __28__
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
(Registration No. 811-4905)
Amendment No. __28__
(Check appropriate box or boxes)

PIPER FUNDS INC.
----------------
(Exact Name of Registrant as Specified in Charter)

Piper Jaffray Tower, 222 South 9th Street, Minneapolis, MN 55402
----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (6l2) 342-6384
--------------
Paul A. Dow
Piper Capital Management Incorporated
Piper Jaffray Tower
222 South 9th Street, Minneapolis, Minnesota 55402
--------------------------------------------------
(Name and Address of Agent for Service)

Copy to:
Kathleen L. Prudhomme
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402

immediately upon filing pursuant to paragraph (b) of rule 485
- -------
on (specify date) pursuant to paragraph (b) of rule 485
- -------
75 days after filing pursuant to paragraph (a) of rule 485, unless
- ------- effectiveness is accelerated by the staff of the Securities and
Exchange Commission
X on September 13, 1996 pursuant to paragraph (a) of rule 485
- -------

The Registrant has registered an indefinite number of its common
shares pursuant to Regulation 270.24f-2 under the Investment Company Act of
1940. A Rule 24f-2 Notice for the fiscal year ended September 30, 1995 was
filed on or about November 28, 1995.

<PAGE>

PIPER FUNDS INC.

Registration Statement on Form N-1A

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

CROSS REFERENCE SHEET
Pursuant to Rule 481(a)

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

ITEM NO. PROSPECTUS HEADING
-------- ------------------

1. Cover Page. . . . . . . . . . . Cover Page

2. Synopsis. . . . . . . . . . . . Introduction; Fund Expenses

3. Financial Highlights. . . . . . Financial Highlights

4. General Description of
Registrant. . . . . . . . . . Introduction; Investment Objectives and
Policies; Special Investment Methods;
Characteristics and Risks of Securities
and Special Investment Methods

5. Management of the Fund. . . . . Management

6. Capital Stock and Other
Securities. . . . . . . . . . General Information; Introduction;
Dividends and Distributions; Tax Status

7. Purchase of Securities
Being Offered . . . . . . . . Distribution of Fund Shares; How to
Purchase Shares; Reducing Your Sales
Charge; Special Purchase Plans;
Valuation of Shares; Shareholder
Services

8. Redemption or Repurchase. . . . How to Redeem Shares; Shareholder
Services

9. Pending Legal Proceedings . . . General Information

STATEMENT OF ADDITIONAL INFORMATION
HEADING
-----------------------------------

10. Cover Page. . . . . . . . . . . Cover Page

11. Table of Contents . . . . . . . Cover Page

12. General Information
and History. . . . . . . . . General Information; Pending Litigation

13. Investment Objectives
and Policies. . . . . . . . . Investment Objectives, Policies and
Restrictions

<PAGE>

14. Management of the Fund. . . . . Directors and Executive Officers

15. Control Persons and Principal
Holders of Securities . . . . Capital Stock and Ownership of Shares

16. Investment Advisory and
Other Services. . . . . . . . Investment Advisory and Other Services

17. Brokerage Allocation. . . . . . Portfolio Transactions and Allocation of
Brokerage

18. Capital Stock and Other
Securities. . . . . . . . . . Capital Stock and Ownership of Shares

19. Purchase, Redemption and
Pricing of Securities
Being Purchased . . . . . . . Net Asset Value and Public Offering
Price; Performance Comparisons; Purchase
of Shares; Redemption of Shares

20. Tax Status. . . . . . . . . . . Taxation

21. Underwriters. . . . . . . . . . Investment Advisory and Other Services;
Portfolio Transactions and Allocation of
Brokerage

22. Calculations of
Performance Data. . . . . . . Performance Comparisons

23. Financial Statements. . . . . . Financial Statements

<PAGE>

Prospectus Dated September , 1996

PIPER FUNDS INC.
Piper Jaffray Tower
222 South Ninth Street, Minneapolis, Minnesota 55402-3804
(800) 866-7778 (toll free)

Growth Fund, Emerging Growth Fund, Small Company Growth Fund, Growth and
Income Fund and Balanced Fund (the "Funds") are series of Piper Funds Inc. (the
"Company"), an open-end mutual fund whose shares are currently offered in twelve
series. Each Fund has its own investment objectives and policies designed to
meet different investment goals.

GROWTH FUND has a primary investment objective of long-term capital
appreciation with secondary objectives of current income and conservation of
principal. The Fund invests primarily in a diversified portfolio of common
stocks or securities convertible into or carrying rights to buy common stocks.

EMERGING GROWTH FUND has an investment objective of long-term capital
appreciation. The Fund invests primarily in common stocks of emerging growth
companies believed by the Adviser to possess superior growth potential, with an
emphasis on companies headquartered or maintaining offices or manufacturing
facilities in states in which the Distributor maintains offices.

SMALL COMPANY GROWTH FUND has an investment objective of long-term capital
appreciation. The Fund invests primarily in common stocks of
small-capitalization companies believed by the Adviser to possess superior
growth potential.

GROWTH AND INCOME FUND has investment objectives of both current income and
long-term growth of capital and income. The Fund invests in a broadly
diversified portfolio of securities, with an emphasis on securities of large,
established companies that have a history of dividend payments and that the
Adviser believes are undervalued.

BALANCED FUND has investment objectives of both current income and long-term
capital appreciation consistent with conservation of principal. The Fund invests
primarily in common stocks and fixed-income securities with emphasis on
income-producing securities that appear to have some potential for capital
appreciation.

Each Fund may invest in illiquid securities which will involve greater risk
than investments in other securities and may increase Fund expenses. See
"Special Investment Methods."

This Prospectus concisely describes the information about the Funds that you
ought to know before investing. Please read it carefully before investing and
retain it for future reference.

A Statement of Additional Information about the Funds dated September ,
1996, is available free of charge. Write to the Funds at Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, Minnesota 55402-3804 or telephone (800)
866-7778 (toll free). The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated in its entirety
by reference in this Prospectus.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
INTRODUCTION

Growth Fund, Emerging Growth Fund, Small Company Growth Fund (formerly
Equity Strategy Fund) Growth and Income Fund, and Balanced Fund (sometimes
referred to herein as a "Fund" or, collectively, as the "Funds") are series of
Piper Funds Inc. (the "Company"). The Company is an open-end management
investment company organized under the laws of the State of Minnesota in 1986,
the shares of which are currently offered in twelve series. Each Fund has a
different investment objective and is designed to meet different investment
needs and each Fund is classified as a diversified fund.

The Investment Adviser

The Company is managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. Each Fund
pays the Adviser a fee for managing its investment portfolio. Fees for each Fund
are paid at an annual rate of .75% on net assets up to $100 million and are
scaled downward as assets increase in size. These fees are higher than fees paid
by most other investment companies. See "Management--Investment Adviser."

The Distributor

Piper Jaffray Inc. ("Piper Jaffray"), a wholly owned subsidiary of Piper
Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor of
the Funds' shares.

Offering Price

Shares of the Funds are offered to the public at the next determined net
asset value after receipt of an order by a shareholder's Piper Jaffray
Investment Executive or other broker-dealer, plus a maximum sales charge of 4%
of the offering price (4.17% of the net asset value) on purchases of less than
$100,000. The sales charge is reduced on a graduated scale on purchases of
$100,000 or more. In connection with purchases of $500,000 or more, there is no
initial sales charge; however, a 1% contingent deferred sales charge will be
imposed in the event of a redemption transaction occurring within 24 months
following such a purchase. See "How to Purchase Shares--Public Offering Price."

Minimum Initial and Subsequent Investments

The minimum initial investment for each Fund is $250. There is no minimum
for subsequent investments. See "How to Purchase Shares--Minimum Investments."

Exchanges

You may exchange your shares for shares of any other mutual fund managed by
the Adviser which is eligible for sale in your state of residence. All exchanges
are subject to the minimum investment requirements and other applicable terms
set forth in the prospectus of the fund whose shares you acquire. You may make
four exchanges per year without payment of a service charge. Thereafter, there
is a $5 service charge for each exchange. See "Shareholder Services--Exchange
Privilege."

Redemption Price

Shares of any Fund may be redeemed at any time at their net asset value next
determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer. A contingent deferred sales charge
will be imposed upon the redemption of certain shares initially purchased
without a sales charge. See "How to Redeem Shares--Contingent Deferred Sales
Charge." Each Fund reserves the right, upon 30 days' written notice, to redeem
an account in any Fund if the net asset value of the shares falls below $200.
See "How to Redeem Shares--Involuntary Redemption."

2
<PAGE>
Certain Risk Factors to Consider

An investment in any of the Funds is subject to certain risks, as set forth
in detail under "Investment Objectives and Policies" and "Special Investment
Methods." As with other mutual funds, there can be no assurance that any Fund
will achieve its objective. Each of the Funds is subject to market risk (the
risk that a security will be worth less when it is sold than when it was bought
due to any number of factors, including reduced demand or loss of investor
confidence in the market) and/or interest-rate risk (the risk that rising
interest rates will make bonds issued at lower interest rates worth less). As a
result, the value of each Fund's shares will vary. Some or all of the Funds, to
the extent set forth under "Investment Objectives and Policies" and "Special
Investment Methods," may engage in the following investment practices: the use
of repurchase agreements, the lending of portfolio securities, borrowing from
banks, entering into options transactions on securities in which the Funds may
invest and on stock indexes, the use of stock index futures contracts and
interest rate futures contracts, entering into options on futures contracts, the
use of short sales, and the purchase or sale of securities on a "when-issued" or
forward commitment basis, including the use of mortgage dollar rolls. These
techniques may increase the volatility of a Fund's net asset value. Balanced
Fund and Growth and Income Fund may purchase mortgage-related securities,
including derivative mortgage securities. In addition to interest rate risk,
mortgage-related securities are subject to prepayment risk. Recent market
experience has shown that certain derivative mortgage securities may be
extremely sensitive to changes in interest rates and in prepayment rates on the
underlying mortgage assets and, as a result, the prices of such securities may
be highly volatile. All of these transactions involve certain special risks, as
set forth under "Investment Objectives and Policies" and "Special Investment
Methods."

Shareholder Inquiries

Any questions or communications regarding a shareholder account should be
directed to your Piper Jaffray Investment Executive or, in the case of shares
held through another broker-dealer, to IFTC at (800) 874-6205. General inquiries
regarding the Funds should be directed to the Funds at the telephone number set
forth on the cover page of this Prospectus.

3
<PAGE>
FUND EXPENSES

<TABLE>
<CAPTION>
Emerging Growth and
Growth Growth Small Company Income Balanced
Fund Fund Growth Fund Fund Fund
------------ ------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..... 4.00% 4.00% 4.00% 4.00% 4.00%
Exchange Fee * $ 0 0 0 0 0
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees........................... .71% .70% .75% .75% .75%
Rule 12b-1 Fees (after voluntary
limitation) **.......................... .32% .32% .32% .32% .32%
Other Expenses (after voluntary expense
reimbursement) **....................... .24% .22% .25% .25% .25%
--- --- --- --- ---
Total Fund Operating Expenses (after
voluntary limitations and expense
reimbursements)......................... 1.27% 1.24% 1.32% 1.32% 1.32%
<FN>
- ------------------------
* There is a $5.00 fee for each exchange in excess of four exchanges per
year. See "How to Purchase Shares--Exchange Privilege."

** See the discussion below for an explanation of voluntary Rule 12b-1 fee
limitations and expense reimbursements.
</TABLE>

Example

You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:

<TABLE>
<CAPTION>
Emerging Small Growth and
Growth Growth Company Income Balanced
Fund Fund Growth Fund Fund Fund
----------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1 Year ............... $ 52 52 53 53 53
3 Years .............. $ 79 78 80 80 80
5 Years .............. $ 107 106 109 109 109
10 Years .............. $ 187 185 193 193 193
</TABLE>

The purpose of the above Fund Expenses table is to assist you in
understanding the various costs and expenses that investors in the Funds will
bear directly or indirectly. The Example contained in the table should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown.

The information set forth in the table is based on actual expenses
(including expenses paid through expense offset arrangements) incurred by the
Funds during the fiscal year ended September 30, 1995. The expenses for all
Funds reflect a voluntary limitation by the Distributor of the fee payable to it
under each Fund's Rule 12b-1 Plan to .32% of each Fund's average daily net
assets. In addition, the Adviser reimbursed

4
<PAGE>

Growth and Income Fund, Small Company Growth Fund and Balanced Fund for the
amount by which total Fund operating expenses (excluding expenses paid through
expense offset arrangements) for fiscal 1995 exceeded 1.32% of average daily net
assets. Absent any Rule 12b-1 fee limitations or expense reimbursements, Total
Fund Operating Expenses for the fiscal year ended September 30, 1995, as a
percentage of average daily net assets, would have been 1.45% for Growth Fund,
1.42% for Emerging Growth Fund, 1.63% for Small Company Growth Fund, 1.60% for
Growth and Income Fund and 1.65% for Balanced Fund. The voluntary Rule 12b-1 fee
limitations for each Fund and the expense reimbursements for Small Company
Growth Fund, Growth and Income Fund and Balanced Fund reflected in the Fund
Expenses table may be discontinued at any time after the fiscal 1996 year end.
The Adviser may or may not assume additional expenses of the Funds from time to
time, in its discretion, while retaining the ability to be reimbursed by the
Funds for expenses assumed during a fiscal year prior to the end of such year.
The foregoing policy will have the effect of lowering a Fund's overall expense
ratio and increasing yield to investors when such amounts are assumed or the
inverse when such amounts are reimbursed.

As a result of each Fund's annual payment of its Rule 12b-1 fee, a portion
of which is considered an asset-based sales charge, long-term shareholders of a
Fund may pay more than the economic equivalent of the maximum 6.25% front end
sales charge permitted under the rules of the National Association of Securities
Dealers, Inc. For additional information, including a more complete explanation
of management and Rule 12b-1 fees, see "Management--Investment Adviser" and
"Distribution of Fund Shares."

5
<PAGE>
FINANCIAL HIGHLIGHTS

The following financial highlights show certain per share data and selected
information for a share of capital stock outstanding during the indicated
periods for each Fund. This information, except for information for the six
months ended 3/31/96, has been audited by KPMG Peat Marwick LLP, independent
auditors, and should be read in conjunction with the financial statements of
each Fund contained in its annual report. Annual and semiannual reports of each
Fund are available without charge by contacting the Funds at 800-866-7778 (toll
free). In addition to financial statements, the annual reports contain further
information about the performance of the Funds.

Growth Fund

<TABLE>
<CAPTION>
Period Period
Six months from from
ended Fiscal year ended September 30, 11/1/88 Year 3/16/87*
3/31/96 --------------------------------------------------- to Ended to
(Unaudited) 1995 1994 1993 1992 1991 1990 9/30/89 10/31/88 10/31/87
----------- ------ ------ ------ ------ ------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period............... $20.40 18.90 19.30 17.06 16.86 11.69 12.46 9.60 8.61 10.00
----------- ------ ------ ------ ------ ------ ------ ------- -------- --------
Operations:
Net investment income... 0.03 0.08 0.08 0.12 0.17 0.19 0.20 0.17 0.19 0.10
Net realized and
unrealized gains
(losses) on
investments........... 2.48 3.60 (0.37) 2.24 0.76 5.18 (0.78) 2.86 0.98 (1.40)
----------- ------ ------ ------ ------ ------ ------ ------- -------- --------
Total from
operations........ 2.51 3.68 (0.29) 2.36 0.93 5.37 (0.58) 3.03 1.17 (1.30)
----------- ------ ------ ------ ------ ------ ------ ------- -------- --------
Distributions from net
investment income....... (0.04) (0.08) (0.11) (0.12) (0.16) (0.20) (0.19) (0.17) (0.18) (0.09)
Distributions from net
realized gains.......... (2.34) (2.10) -- -- (0.57) -- -- -- -- --
----------- ------ ------ ------ ------ ------ ------ ------- -------- --------
Total
distributions..... (2.38) (2.18) (0.11) (0.12) (0.73) (0.20) (0.19) (0.17) (0.18) (0.09)
----------- ------ ------ ------ ------ ------ ------ ------- -------- --------
Net asset value, end of
period.................. $20.53 20.40 18.90 19.30 17.06 16.86 11.69 12.46 9.60 8.61
----------- ------ ------ ------ ------ ------ ------ ------- -------- --------
----------- ------ ------ ------ ------ ------ ------ ------- -------- --------
Total return (%)+......... 13.27 20.60 (1.51) 13.85 5.76 46.23 (4.81) 31.90 13.79 (13.16)
Net assets end of period
(in millions)........... $ 181 172 195 252 200 107 47 37 19 18
Ratio of expenses to
average daily net assets
(%)++................... 1.25** 1.27 1.23 1.26 1.29 1.32 1.31 1.30** 1.30 1.00**
Ratio of net investment
income to average daily
net assets (%)++........ 0.31** 0.40 0.43 0.66 1.04 1.25 1.57 1.75** 2.06 1.84**
Portfolio turnover rate
(excluding short-term
securities) (%)......... 8 80 11 45 36 36 37 48 52 32
</TABLE>

- --------------------------
*Commencement of operations.

**Adjusted to an annual basis.

+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.

++During the periods reflected above, the Advisor and Distributor voluntarily
waived fees and expenses. Had the Fund paid all expenses and had the maximum
Rule 12b-1 fee been in effect, the ratios of expenses and net investment
income to average daily net assets would have been: 1.44%/0.12% in the six
months ended 3/31/96, 1.45%/0.22% in fiscal 1995, 1.42%/0.24% in fiscal 1994,
1.44%/0.48% in fiscal 1993, 1.47%/0.86% in fiscal 1992, 1.55%/1.02% in fiscal
1991, 1.64%/1.24% in fiscal 1990, 1.89%/1.16% in fiscal 1989, 1.96%/1.40% in
fiscal 1988 and 2.29%/0.55% in fiscal 1987. Beginning in fiscal 1995, the
expense ratio reflects the effect of gross expenses paid indirectly by the
Fund. Prior period expense ratios have not been adjusted.

6
<PAGE>
Emerging Growth Fund

<TABLE>
<CAPTION>
Six months
ended Fiscal year ended September 30,
3/31/96 ----------------------------------------------------
(Unaudited) 1995 1994 1993 1992 1991 1990*
----------- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....................... $12.97 9.63 9.87 7.21 6.93 4.30 5.00
----------- ------ ------ ------ ------ ------ -------
Operations:
Net investment income (loss)............................. (0.02) (0.06) (0.04) (0.03) -- 0.01 0.01
Net realized and unrealized gains (losses) on
investments............................................ 1.30 3.40 (0.20) 2.69 0.32 2.64 (0.71)
----------- ------ ------ ------ ------ ------ -------
Total from operations................................ 1.28 3.34 (0.24) 2.66 0.32 2.65 (0.70)
----------- ------ ------ ------ ------ ------ -------
Distributions from net investment income................... -- -- -- -- -- (0.02) --
Distributions from net realized gains...................... (1.24) -- -- -- (0.04) -- --
----------- ------ ------ ------ ------ ------ -------
Total distributions.................................. (1.24) -- -- -- (0.04) (0.02) --
----------- ------ ------ ------ ------ ------ -------
Net asset value, end of period............................. $13.01 12.97 9.63 9.87 7.21 6.93 4.30
----------- ------ ------ ------ ------ ------ -------
----------- ------ ------ ------ ------ ------ -------
Total return (%)+.......................................... 10.61 34.68 (2.38) 36.92 4.55 61.80 (14.01)

Net asset, end of period (in millions)..................... $ 277 253 224 191 110 56 21
Ratio of expenses to average daily net assets (%)++........ 1.21** 1.24 1.24 1.29 1.30 1.30 1.30**
Ratio of net investment income to average daily net assets
(%)++.................................................... (0.26)** (0.51) (0.38) (0.34) (0.14) 0.11 0.71**
Portfolio turnover rate (excluding short-term securities)
(%)...................................................... 29 33 31 30 21 27 6
</TABLE>

- ------------------------
*Period from 4/23/90 (commencement of operations) to 9/30/90.

**Adjusted to an annual basis.

+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.

++During the periods reflected above, the Adviser and the Distributor
voluntarily waived fees and expenses. Had the Fund paid all expenses and had
the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net
investment income to average daily net assets would have been: 1.40%/(0.45%)
in the six months ended 3/31/96, 1.42%/(0.69%) in fiscal 1995, 1.44%/(0.58%)
in fiscal 1994, 1.49%/(0.54%) in fiscal 1993, 1.56%/ (0.40%) in fiscal 1992,
1.70%/(0.29%) in fiscal 1991 and 1.95%/0.06% in fiscal 1990. Beginning in
fiscal 1995, the expense ratio reflects the effect of gross expenses paid
indirectly by the Fund. Prior period expense ratios have not been adjusted.

7
<PAGE>

Small Company Growth Fund*

<TABLE>
<CAPTION>
Period
Six months from
ended Fiscal year ended September 30, Period from Year 3/16/87**
3/31/96 ----------------------------------------- 11/1/88 to Ended to
(Unaudited) 1995 1994 1993 1992 1991 1990 9/30/89 10/31/88 10/31/87
----------- ------ ----- ----- ----- ----- ----- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period............... $19.46 17.17 16.84 13.57 12.82 9.17 10.05 8.07 7.90 10.00
----------- ------ ----- ----- ----- ----- ----- ----------- -------- ----------
Operations:
Net investment
income+++............. -- 0.11 0.07 0.03 0.08 0.07 0.10 0.38 0.09 0.08
Net realized and
unrealized gains
(losses) on
investments........... 0.89 2.27 0.29 3.30 0.71 3.65 (0.74) 1.85 0.19 (2.11)
----------- ------ ----- ----- ----- ----- ----- ----------- -------- ----------
Total from
operations........ 0.89 2.38 0.36 3.33 0.79 3.72 (0.64) 2.23 0.28 (2.03)
----------- ------ ----- ----- ----- ----- ----- ----------- -------- ----------
Distributions from net
investment income....... (0.07) (0.09) (0.03) (0.06) (0.04) (0.07) (0.24) (0.25) (0.11) 0.07
Distributions from net
realized gains on
investments ............ (1.58) -- -- -- -- -- -- -- -- --
----------- ------ ----- ----- ----- ----- ----- ----------- -------- ----------
Total distributions to
shareholders............ (1.65) -- -- -- -- -- -- -- -- --
----------- ------ ----- ----- ----- ----- ----- ----------- -------- ----------
Net asset value, end of
period.................. $18.70 19.46 17.17 16.84 13.57 12.82 9.17 10.05 8.07 7.90
----------- ------ ----- ----- ----- ----- ----- ----------- -------- ----------
----------- ------ ----- ----- ----- ----- ----- ----------- -------- ----------
Total return (%)+......... 4.76 13.88 2.12 24.56 6.18 40.71 (6.61) 27.86 3.47 (20.48)

Net assets end of period
(in millions)........... $ 42 48 78 84 9 9 8 13 19 28
Ratio of expenses to
average daily net assets
(%)++................... 1.34*** 1.40 1.32 1.28 1.47 1.32 1.49 1.30*** 1.52 1.02***
Ratio of net investment
income to average daily
net assets (%)++........ -- *** 0.43 0.37 0.50 0.56 0.61 1.03 3.95*** 1.13 1.51***
Portfolio turnover rate
(excluding short-term
securities) (%)......... 50 182 177 154 420 507 514 375 202 200
</TABLE>

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

*On September 12, 1996, shareholders of Small Company Growth Fund approved a
change in the Fund's investment objective from high total investment return
consistent with prudent investment risk to long-term capital appreciation. In
connection with this change in investment objective, the Fund's investment
policies were revised and the Fund's name was changed from Equity Strategy
Fund to Small Company Growth Fund.

**Commencement of operations.

***Adjusted to an annual basis.

+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.

++During the periods reflected above, the Adviser and Distributor voluntarily
waived fees and expenses. Had the Fund paid all expenses and had the maximum
Rule 12b-1 fee been in effect, the ratios of expenses and net investment
income to average daily net assets would have been: 1.74%/(0.40%) in the six
months ended 3/31/96, 1.63%/0.20% in fiscal 1995, 1.54%/0.15% in fiscal 1994,
1.86%/(0.08%) in fiscal 1993, 2.49%/(0.46%) in fiscal 1992, 2.39%/(0.46%) in
fiscal 1991, 2.55%/(0.03%) in fiscal 1990, 2.23%/3.02% in fiscal 1989,
2.20%/0.45% in fiscal 1988 and 2.24%/0.29% in fiscal 1987. Beginning in
fiscal 1995, the expense ratio reflects the effect of gross expenses paid
indirectly by the Fund. Prior period expense ratios have not been adjusted.

+++For the years ended September 30, 1992, and October 31, 1988, gross expenses
included $0.02 per share of income tax expense.

8
<PAGE>
Growth and Income Fund

<TABLE>
<CAPTION>
Six months
ended Fiscal year ended September 30,
3/31/96 ------------------------------------------
(Unaudited) 1995 1994 1993 1992*
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.................................. $ 12.93 10.27 10.30 10.01 10.00
----------- --------- --------- --------- ---------
Operations:
Net investment income............................................... 0.15 0.19 0.24 0.24 0.03
Net realized and unrealized gains (losses) on investments........... 1.57 2.70 0.02 0.29 (0.02)
----------- --------- --------- --------- ---------
Total from operations........................................... 1.72 2.89 0.26 0.53 0.01
----------- --------- --------- --------- ---------
Distributions from net investment income.............................. (0.13) (0.19) (0.24) (0.24) --
Distributions from net realized gains................................. (0.18) (0.04) (0.05) -- --
----------- --------- --------- --------- ---------
Total distributions............................................. (0.31) (0.23) (0.29) (0.24) --
----------- --------- --------- --------- ---------
Net asset value, end of period........................................ $ 14.34 12.93 10.27 10.30 10.01
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
Total return (%)+..................................................... 13.46 28.81 2.53 5.41 0.10

Net assets, end of period (in millions)............................... $ 85 73 73 96 52
Ratio of expenses to average daily net assets (%)++................... 1.30** 1.32 1.29 1.32 1.28**
Ratio of net investment income to average daily net assets (%)++...... 1.32** 1.93 2.26 2.51 3.00**
Portfolio turnover rate (excluding short-term securities) (%)......... 20 14 20 26 1
</TABLE>

- ------------------------
*Period from 7/21/92 (commencement of operations) to 9/30/92.

**Adjusted to an annual basis.

+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.

++During the periods reflected above, the Adviser and the Distributor
voluntarily waived fees and expenses. Had the Fund paid all expenses and had
the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net
investment income to average daily net assets would have been: 1.57%/1.05% for
the six months ended 3/31/96, 1.60%/1.65% in fiscal 1995, 1.62%/1.93% in
fiscal 1994, 1.58%/2.25% in fiscal 1993 and 2.06%/2.22% in fiscal 1992.
Beginning in fiscal 1995, the expense ratio reflects the effect of gross
expenses paid indirectly by the Fund. Prior period expense ratios have not
been adjusted.

9
<PAGE>
Balanced Fund

<TABLE>
<CAPTION>
Six months
ended Fiscal year ended September 30, Period from
3/31/96 ---------------------------------------------------------------- 11/1/88 to
(Unaudited) 1995 1994 1993 1992 1991 1990 9/30/89
----------- --------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 13.74 11.81 12.23 11.88 10.77 8.87 10.00 9.19
----------- --------- --------- --------- --------- --------- --------- ------
Operations:
Net investment income....... 0.23 0.47 0.38 0.34 0.38 0.43 0.42 0.44
Net realized and unrealized
gains (losses) on
investments............... 0.72 1.93 (0.26) 0.65 1.17 1.89 (1.14) 0.83
----------- --------- --------- --------- --------- --------- --------- ------
Total from operations... 0.95 2.40 0.12 0.99 1.55 2.32 (0.72) 1.27
----------- --------- --------- --------- --------- --------- --------- ------
Distributions from net
investment income........... (0.22) (0.35) (0.37) (0.34) (0.39) (0.42) (0.41) (0.46)
Distributions from net
realized gains.............. (0.55) (0.12) (0.17) (0.30) (0.05) -- -- --
----------- --------- --------- --------- --------- --------- --------- ------
Total distributions..... (0.77) (0.47) (0.54) (0.64) (0.44) (0.42) (0.41) (0.46)
----------- --------- --------- --------- --------- --------- --------- ------
Net asset value, end of
period...................... $ 13.92 13.74 11.81 12.23 11.88 10.77 8.87 10.00
----------- --------- --------- --------- --------- --------- --------- ------
----------- --------- --------- --------- --------- --------- --------- ------
Total return (%)+............. 7.22 21.78 1.00 8.51 14.75 26.61 (7.42) 14.20

Net assets end of period (in
millions)................... $ 47 44 46 57 28 15 14 16
Ratio of expenses to average
daily net assets (%)++...... 1.31** 1.32 1.32 1.32 1.32 1.32 1.31 1.30**
Ratio of net investment income
to average daily net assets
(%)++....................... 3.08** 3.54 3.03 3.13 3.57 4.15 4.32 5.15**
Portfolio turnover rate
(excluding short-term
securities) (%)............. 33 39 62 41 58 44 105 95

Period from
Year Ended 3/16/87* to
10/31/88 10/31/87
----------- -----------
<S> <C> <C>
Net asset value, beginning of
period...................... 8.97 10.00
----------- -----------
Operations:
Net investment income....... 0.51 0.28
Net realized and unrealized
gains (losses) on
investments............... 0.22 (1.09)
----------- -----------
Total from operations... 0.73 (0.81)
----------- -----------
Distributions from net
investment income........... (0.51) (0.22)
Distributions from net
realized gains.............. -- --
----------- -----------
Total distributions..... (0.51) (0.22)
----------- -----------
Net asset value, end of
period...................... 9.19 8.97
----------- -----------
----------- -----------
Total return (%)+............. 8.53 (8.24)
Net assets end of period (in
millions)................... 13 13
Ratio of expenses to average
daily net assets (%)++...... 1.30 .99**
Ratio of net investment income
to average daily net assets
(%)++....................... 5.58 5.46**
Portfolio turnover rate
(excluding short-term
securities) (%)............. 73 95
</TABLE>

- ------------------------------
*Commencement of operations.

**Adjusted to an annual basis.

+Total return is based on the change in net asset value during the periods,
assumes reinvestment of all distributions and does not reflect a sales charge.

++During the periods reflected above, the Adviser and the Distributor
voluntarily waived fees and expenses. Had the Fund paid all expenses and had
the maximum Rule 12b-1 fee been in effect, the ratios of expenses and net
investment income to average daily net assets would have been: 1.69%/2.70% for
the six months ended 3/31/96, 1.65%/3.21% in fiscal 1995, 1.60%/2.75% in
fiscal 1994, 1.62%/2.83% in fiscal 1993, 1.77%/3.12% in fiscal 1992,
1.98%/3.49% in fiscal 1991, 1.96%/3.67% in fiscal 1990, 2.29%/4.16% in fiscal
1989, 2.09%/4.79% in fiscal 1988 and 1.96%/4.09% in fiscal 1987. Beginning in
fiscal 1995, the expense ratio reflects the effect of gross expenses paid
indirectly by the Fund. Prior period expense ratios have not been adjusted.

10
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES

The investment objectives listed below cannot be changed without shareholder
approval. The investment policies and techniques employed in pursuit of the
Funds' objectives may be changed without shareholder approval, unless otherwise
noted.

Because of the risks associated with common stock and bond investments, the
Funds are intended to be long-term investment vehicles and are not designed to
provide investors with a means of speculating on short-term market movements.
Investors should be willing to accept the risk of the potential for sudden,
sometimes substantial declines in market value. No assurance can be given that
the Funds will achieve their objectives or that shareholders will be protected
from the risk of loss that is inherent in equity and bond market investing.

Growth Fund

INVESTMENT OBJECTIVES. Growth Fund's primary investment objective is
long-term capital appreciation with secondary objectives of current income and
conservation of principal.

INVESTMENT POLICIES AND TECHNIQUES. Growth Fund will maintain a carefully
selected portfolio of securities broadly diversified among industries and
companies. The Fund will invest at least 60% of its total assets in securities
of large companies with market capitalizations of over $500 million offering, in
the opinion of the Adviser, long-term earnings growth, a cyclical earnings
rebound or above-average dividend yield when compared to the S&P 500. Emphasis
will be placed on common stocks of companies which the Adviser believes are well
managed with strong business fundamentals and which are trading at a discount to
the present value of their projected future earnings. Growth Fund may also
invest up to 40% of its total assets in securities of companies with market
capitalizations of $500 million or less, some of which may be considered
speculative in nature, which the Adviser believes could generate high levels of
future revenue and earnings growth and where, in the Adviser's opinion, the
investment opportunity is not fully reflected in the price of the securities.

Growth Fund will invest under normal market conditions not less than 90% of
its total assets in common stocks or securities convertible into or that carry
the right to buy common stocks and in repurchase agreements. See "Special
Investment Methods--Repurchase Agreements." Under unusual circumstances, as a
defensive measure, Growth Fund may retain cash or invest part or all of its
assets in short-term money market securities deemed by the Adviser to be
consistent with a temporary defensive posture. In addition, normally a small
portion of the Fund's assets will be held in short-term money market securities
and cash to pay redemption requests and Fund expenses. Investments in short-term
money market securities may include obligations of the U.S. Government and its
agencies and instrumentalities, time deposits, bank certificates of deposit,
bankers' acceptances, high-grade commercial paper and other money market
instruments. See "Investment Objectives, Policies and Restrictions" in the
Statement of Additional Information.

Growth Fund may write covered put and call options on the securities in
which it may invest, purchase put and call options with respect to such
securities, and enter into closing purchase and sale transactions with respect
thereto. Growth Fund may also purchase and write put and call options on stock
indexes listed on national securities exchanges. See "Special Investment
Methods--Options Transactions." In addition, solely for the purpose of hedging
against changes in the value of its portfolio securities due to anticipated
changes in the market, Growth Fund may enter into stock index futures contracts,
purchase and write put or call options on such contracts, and close such
contracts and options. See "Special Investment Methods--Futures

11
<PAGE>
Contracts and Options on Futures Contracts" and "--Risks of Transactions in
Futures Contracts and Options on Futures Contracts."

INVESTMENT RISKS. As a mutual fund investing primarily in common stocks,
Growth Fund is subject to market risk, i.e., the possibility that stock prices
in general will decline over short or even extended periods. The stock market
tends to be cyclical, with periods when stock prices generally rise and periods
when stock prices generally decline. The investment techniques used by the Fund
also pose certain risks. See "Special Investment Methods."

Emerging Growth Fund

INVESTMENT OBJECTIVE. Emerging Growth Fund's investment objective is
long-term capital appreciation. Dividend and interest income from portfolio
securities, if any, is incidental to the Fund's objective.

INVESTMENT POLICIES AND TECHNIQUES. Emerging Growth Fund seeks to achieve
its objective by investing primarily (i.e., at least 65% of its assets under
normal market conditions) in common stocks of emerging growth companies which
the Adviser believes possess superior growth potential. A company will be
considered an emerging growth company if, at the time of purchase, it has a
market capitalization within the range of market capitalizations for those
companies included in the S&P MidCap 400 Index (currently $168 million to $8.4
billion). Emerging Growth Fund also intends to invest at least 65% of its assets
in common stocks of companies headquartered or maintaining offices or
manufacturing facilities in states in which the Distributor maintains offices.
This will allow the Fund to draw on the Distributor's local expertise and
research capabilities. The Distributor currently maintains offices in Arizona,
California, Colorado, Idaho, Illinois, Iowa, Kansas, Minnesota, Missouri,
Montana, Nebraska, New Jersey, New York, North Dakota, Oregon, South Dakota,
Utah, Washington, Wisconsin and Wyoming; however, these states may change from
time to time.

In the Adviser's view, there are four broad phases of corporate growth. The
first phase of corporate growth occurs during the infancy of a company.
Investing in a company during this phase involves the potential for rapid growth
but also involves high risk. During the second phase of a company's growth,
sometimes referred to as the emerging growth phase, there is often a period of
swift development during which growth occurs at a rate generally not equaled by
more mature companies. Investing in a company during this phase of its growth
may still involve substantial risk. There next occurs a third phase of
established growth in which growth is generally less dramatic because of
competitive forces, regulations and internal bureaucracy. This is followed by a
fourth phase of maturity, when the growth pattern of a company begins to roughly
reflect the increase in gross national product. The Adviser intends to focus on
companies positioned in the second phase of growth. Of course, the actual growth
of a company is not necessarily consistent with this pattern and cannot be
foreseen. Consequently, it may be difficult to determine the phase in which a
company is currently situated.

The following illustration represents the Adviser's conception of the four
growth phases of a successful business. This graph is presented for illustrative
purposes only, and does not represent the actual growth of a typical company. In
addition, there is no necessary correlation between the business growth of a
company and the market value of its stock. This illustration should not be
considered a representation of the performance of the common stocks in which the
Fund invests.

12
<PAGE>

[LOGO]

Under normal circumstances, the Fund will be fully invested in common
stocks, except that a small portion of the Fund's assets will be held in
short-term money market securities and cash to pay redemption requests and Fund
expenses. Under unusual circumstances, as a defensive measure, Emerging Growth
Fund may retain cash or invest part or all of its assets in short-term money
market securities deemed by the Adviser to be consistent with a temporary
defensive posture. Investments in short-term money market securities may include
obligations of the U.S. Government and its agencies and instrumentalities, time
deposits, bank certificates of deposit, bankers' acceptances, high-grade
commercial paper and other money market instruments. See "Investment Objectives,
Policies and Restrictions" in the Statement of Additional Information. Emerging
Growth Fund may also enter into repurchase agreements. See "Special Investment
Methods-- Repurchase Agreements."

INVESTMENT RISKS. As a mutual fund investing primarily in common stocks,
Emerging Growth Fund is subject to market risk, i.e., the possibility that stock
prices in general will decline over short or even extended periods. The stock
market tends to be cyclical, with periods when stock prices generally rise and
periods when stock prices generally decline. In addition, companies in which the
Fund invests also may involve certain special risks. Emerging growth companies
may have limited product lines, markets or financial resources, and they may be
dependent on a limited management group. The securities of emerging growth
companies may have limited market stability and may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general. Thus, shares of Emerging Growth Fund will
probably be subject to greater fluctuation in value than shares of a more
conservative equity fund and an investment in the Fund should not be considered
a total investment plan. In addition, Emerging Growth Fund may be less
diversified by industry and company than other funds with a similar investment
objective and no geographic limitation.

Small Company Growth Fund

On September 12, 1996, shareholders of Small Company Growth Fund approved a
change in the Fund's investment objective from high total investment return
consistent with prudent investment risk to long-term capital appreciation. In
connection with this change in investment objective, the Fund's investment
policies were revised and the Fund's name was changed from Equity Strategy Fund
to Small Company Growth Fund.

INVESTMENT OBJECTIVE. Small Company Growth Fund's investment objective is
long-term capital appreciation.

INVESTMENT POLICIES AND TECHNIQUES. Small Company Growth Fund seeks to
achieve its objective by investing primarily (at least 65% of its assets under
normal market conditions) in common stocks of small-capitalization companies
which the Adviser believes possess superior growth potential. A company will be
considered a small-capitalization company if, at the time of purchase, it has a
market capitalization within

13
<PAGE>

the range of market capitalizations for those companies included in the S&P
SmallCap 600 Index (currently $45 million to $2.7 billion).

Small-capitalization companies are generally positioned in the first phase
of corporate growth, or early in the second phase. For a description of the
different phases of corporate growth, see "Emerging Growth Fund--Investment
Policies and Techniques" above. While the Adviser believes that
small-capitalization companies can provide greater growth potential than larger,
more mature firms, investing in the securities of small-capitalization companies
may involve greater risks and portfolio price volatility. See "Investment Risks"
below.

Under normal circumstances, the Fund will be fully invested in common
stocks, except that a small portion of the Fund's assets will be held in
short-term money market securities and cash to pay redemption requests and Fund
expenses. Under unusual circumstances, as a defensive measure, Small Company
Growth Fund may retain cash or invest part or all of its assets in short-term
money market securities deemed by the Adviser to be consistent with a temporary
defensive posture. Investments in short-term money market securities may include
obligations of the U.S. Government and its agencies and instrumentalities, time
deposits, bank certificates of deposit, bankers' acceptances, high-grade
commercial paper and other money market instruments. See "Investment Objectives,
Policies and Restrictions" in the Statement of Additional Information. Small
Company Growth Fund may also enter into repurchase agreements. See "Special
Investment Methods--Repurchase Agreements."

INVESTMENT RISKS. As a mutual fund investing primarily in common stocks,
Small Company Growth Fund is subject to market risk, i.e., the possibility that
stock prices in general will decline over short or even extended periods. The
stock market tends to be cyclical, with periods when stock prices generally rise
and periods when stock prices generally decline. In addition, companies in which
the Fund will invest are typically in the first phase of their growth cycle,
which occurs during the infancy of a company. Investing in such companies
involves certain special risks. While small-capitalization companies generally
have potential for rapid growth, they often involve higher risks because they
lack the management experience, financial resources, product diversification and
competitive strengths of larger companies. In addition, in many instances, the
frequency and volume of their trading is substantially less than is typical of
larger companies. Therefore, the securities of smaller companies may be subject
to wider price fluctuations. The spreads between the bid and asked prices of the
securities of these companies are typically larger than the spreads for more
actively traded securities. When making large sales, the Fund may have to sell
portfolio holdings at a discount from quoted prices or may have to make a series
of small sales over an extended period of time due to the trading volume of
smaller company securities. The values of the shares of small-capitalization
companies may move independently of the values of larger capitalization
companies or of general stock market indices such as the Dow Jones Industrial
Average or the Standard & Poor's 500 Stock Index. Shares of Small Company Growth
Fund will probably be subject to greater fluctuations in value than shares of a
more conservative equity fund and an investment in the Fund should not be
considered a total investment plan.

Growth and Income Fund

INVESTMENT OBJECTIVES. Growth and Income Fund's investment objectives are
to provide current income and long-term growth of capital and income.

INVESTMENT POLICIES AND TECHNIQUES. Growth and Income Fund will pursue its
investment objectives by investing in a broadly diversified portfolio of
securities, with an emphasis on securities of large, established companies that
have a history of dividend payments and that the Adviser believes are
undervalued. Companies will be selected on the basis of the Adviser's assessment
of their prospects for long-term growth in

14
<PAGE>
dividends and earnings. Additional factors which the Adviser will consider
include the stability of a company's earnings as well as the sensitivity of that
company's particular industry to fluctuations in major economic variables, such
as interest rates and industrial production.

Under normal market conditions, Growth and Income Fund will invest
principally in common stocks and securities convertible into common stocks.
However, the Fund may also invest in debt securities, including U.S. Government
securities (securities issued or guaranteed as to payment of principal and
interest by the U.S. Government or its agencies or instrumentalities) and
nonconvertible preferred stocks. Investments in long-term debt securities,
including debt securities convertible into common stock, will be limited to U.S.
Government securities and those securities rated at the time of purchase within
the four highest investment grades assigned by Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A or Baa) or Standard & Poor's Ratings Services ("Standard
& Poor's") (AAA, AA, A, or BBB), or to unrated securities judged by the Adviser
at the time of purchase to be of comparable quality. Debt securities rated Baa
and BBB have speculative characteristics; changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds. In the
event a security held in Growth and Income Fund's portfolio is downgraded to a
rating below Baa or BBB, the Fund will sell such security as promptly as
practicable. For an explanation of Moody's and Standard & Poor's ratings, see
Appendix A to the Statement of Additional Information. U.S. Government
securities in which the Fund may invest include direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, notes and bonds, and obligations of U.S.
Government agencies or instrumentalities. Obligations of U.S. Government
agencies or instrumentalities are backed in a variety of ways by the U.S.
Government or its agencies or instrumentalities. Some of these obligations, such
as Government National Mortgage Association mortgage-backed securities, are
backed by the full faith and credit of the U.S. Treasury. Others, such as
obligations of the Federal Home Loan Banks, are backed by the right of the
issuer to borrow from the Treasury. Still others, such as those issued by the
Federal National Mortgage Association, are backed by the discretionary authority
of the U.S. Government to purchase certain obligations of the agency or
instrumentality. Finally, obligations of other agencies or instrumentalities are
backed only by the credit of the agency or instrumentality issuing the
obligations. See "Investment Objectives and Policies--U.S. Government
Securities" in the Statement of Additional Information.

Under unusual circumstances, as a defensive measure, Growth and Income Fund
may retain cash or invest part or all of its assets in short-term money market
securities deemed by the Adviser to be consistent with a temporary defensive
posture. In addition, normally a small portion of the Fund's assets will be held
in short-term money market securities and cash to pay redemption requests and
Fund expenses. Investments in short-term money market securities may include
obligations of the U.S. Government and its agencies and instrumentalities, time
deposits, bank certificates of deposit, bankers' acceptances, high-grade
commercial paper and other money market instruments. See "Investment Objectives,
Policies and Restrictions" in the Statement of Additional Information. Growth
and Income Fund may also enter into repurchase agreements. See "Special
Investment Methods--Repurchase Agreements."

Growth and Income Fund may write covered put and call options on the
securities in which it may invest, purchase put and call options with respect to
such securities, and enter into closing purchase and sale transactions with
respect thereto. Growth and Income Fund may also purchase and write put and call
options on stock indexes listed on national securities exchanges. See "Special
Investment Methods--Options Transactions." In addition, solely for the purpose
of hedging against changes in the value of its portfolio securities due to
anticipated changes in the market, Growth and Income Fund may enter into stock
index futures contracts and interest rate futures contracts, purchase and write
put or call options on such contracts,

15
<PAGE>
and close such contracts and options. See "Special Investment Methods--Futures
Contracts and Options on Futures Contracts" and "--Risks of Transactions in
Futures Contracts and Options on Futures Contracts."

Growth and Income Fund may purchase or sell securities on a "when-issued" or
"forward commitment" basis and may enter into mortgage "dollar rolls." The use
of these techniques could result in increased volatility of the Fund's net asset
value. See "Special Investment Methods--When-Issued Securities."

INVESTMENT RISKS. As a mutual fund investing primarily in common stocks,
Growth and Income Fund is subject to market risk, i.e., the possibility that
stock prices in general will decline over short or even extended periods. The
stock market tends to be cyclical, with periods when stock prices generally rise
and periods when stock prices generally decline.

Because Growth and Income Fund also may invest in debt securities, the Fund
may be subject to interest rate risk as well. Bond prices generally vary
inversely with changes in the level of interest rates so that when interest
rates rise, the prices of bonds fall; conversely, when interest rates fall, bond
prices rise. Investments in debt securities may also subject the Fund to credit
risk. Credit risk, also know as default risk, is the possibility that a bond
issuer will fail to make timely payments of interest or principal. As discussed
above, the Fund's investments in long-term debt securities are limited to U.S.
Government securities and securities which, at the time of purchase, are rated
investment grade or are judged by the Adviser to be of comparable quality. The
investment techniques used by the Fund also pose certain risks. See "Special
Investment Methods."

Balanced Fund

INVESTMENT OBJECTIVES. Balanced Fund has investment objectives of both
current income and long-term capital appreciation consistent with conservation
of principal.

INVESTMENT POLICIES AND TECHNIQUES. It is intended that the assets of
Balanced Fund will be invested on the basis of combined considerations of risk,
income, capital appreciation and protection of capital value. The Fund may
invest in any type or class of securities, including money market securities,
fixed-income securities, such as bonds, debentures, preferred stocks and U.S.
Government securities (securities issued or guaranteed as to payment of
principal and interest by the U.S. Government or its agencies or
instrumentalities), senior securities convertible into common stocks and common
stocks. The Fund may invest up to 25% of its total assets in foreign securities.
See "Special Investment Methods--Foreign Securities." Balanced Fund may also
enter into repurchase agreements. See "Special Investment Methods--Repurchase
Agreements." The mix of securities in the Fund's portfolio will be determined on
the basis of existing and anticipated market conditions. Consequently, the
relative percentages of each type of security in the portfolio may be expected
to fluctuate. At least 35% of the Fund's total assets, however, must be invested
in fixed-income securities. To pay redemption requests and Fund expenses,
normally a small portion of the Fund's assets will be held in short-term money
market securities and cash.

Investments in long-term debt securities will be limited to U.S. Government
securities and to those securities rated at the time of purchase within the four
highest investment grades assigned by Moody's (Aaa, Aa, A or Baa) or Standard &
Poor's (AAA, AA, A or BBB) or unrated securities judged by the Adviser at the
time of purchase to be of comparable quality. Debt securities rated Baa and BBB
have speculative characteristics; changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. In the event a
security held in Balanced Fund's portfolio is downgraded to a rating below Baa
or BBB, the Fund will sell such security as promptly as practicable. For an
explanation of Moody's and Standard & Poor's ratings, see Appendix A to the
Statement of Additional Information. Not more than 20% of the long-term debt
securities held at any one time by Balanced Fund will be unrated. U.S.
Government securities in which the Fund may invest include

16
<PAGE>
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds, and obligations of U.S. Government agencies or instrumentalities.
Obligations of U.S. Government agencies or instrumentalities are backed in a
variety of ways by the U.S. Government or its agencies or instrumentalities.
Some of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Others, such as obligations of the Federal Home Loan Banks, are backed
by the right of the issuer to borrow from the Treasury. Still others, such as
those issued by the Federal National Mortgage Association, are backed by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality. Finally, obligations of other agencies or
instrumentalities are backed only by the credit of the agency or instrumentality
issuing the obligations. The Fund may invest in mortgage-related U.S. Government
securities, including derivative mortgage securities. Recent market experience
has shown that certain derivative mortgage securities may be extremely sensitive
to changes in interest rates and in prepayment rates on the underlying mortgage
assets and, as a result, may be highly volatile. However, Balanced Fund will not
invest more than 5% of its net assets, in the aggregate, in the following types
of derivative mortgage securities: inverse floaters, interest only, principal
only, inverse interest only and Z tranches of collateralized mortgage
obligations, and stripped mortgage-backed securities. See "Investment Objectives
and Policies--U.S. Government Securities" in the Statement of Additional
Information. Investments in short-term money market securities may include
obligations of the U.S. Government and its agencies and instrumentalities, time
deposits, bank certificates of deposit, bankers' acceptances, high-grade
commercial paper and other money market instruments. See "Investment Objectives,
Policies and Restrictions" in the Statement of Additional Information.

Balanced Fund may write covered put and call options on the securities in
which it may invest, purchase put and call options with respect to such
securities, and enter into closing purchase and sale transactions with respect
thereto. Balanced Fund may also purchase and write put and call options on stock
indexes listed on national securities exchanges. See "Special Investment
Methods--Options Transactions." In addition, solely for the purpose of hedging
against changes in the value of its portfolio securities due to anticipated
changes in the market and in interest rates, Balanced Fund may enter into stock
index futures contracts and interest rate futures contracts, purchase and write
put or call options on such contracts, and close such contracts and options. See
"Special Investment Methods--Futures Contracts and Options on Futures Contracts"
and "--Risks of Transactions in Futures Contracts and Options on Futures
Contracts."

Balanced Fund may purchase or securities on a "when-issued" or "forward
commitment" basis and may enter into mortgage "dollar rolls." The use of these
techniques could result in increased volatility of the Fund's net asset value.
See "Special Investment Methods--When-Issued Securities."

EFFECTIVE DURATION. In managing the fixed income portion of Balanced Fund's
portfolio, the Adviser will attempt to maintain an average effective duration of
3 to 6 1/2 years. Effective duration estimates the interest rate risk (price
volatility) of a security, I.E., how much the value of the security is expected
to change with a given change in interest rates. The longer a security's
effective duration, the more sensitive its price is 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.

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securities. Conversely, if rates increase, prepayments may decrease to a greater
extent than assumed, extending the effective duration of such securities. For
these reasons, the effective durations of funds which invest a significant
portion of their assets in mortgage-backed securities can be greatly affected by
changes in interest rates.

INVESTMENT RISKS. The Fund may invest in any type or class of securities,
including money market securities, fixed-income securities and common stocks. As
a result, investors in the Fund will be exposed to the market risks of both
common stocks and bonds. Stock market risk is the possibility that stock prices
in general will decline over short or even extended periods. The stock market
tends to be cyclical, with periods when stock prices generally rise and periods
when stock prices generally decline. Bond market risk is the potential for
fluctuations in the market value of bonds. Bond prices vary inversely with
changes in the level of interest rates. When interest rates rise, the prices of
bonds fall; conversely, when interest rates fall, bond prices rise.

To the extent the Fund invests in mortgage-related securities, the Fund will
also be subject to prepayment risk. Prepayment risk results because, as interest
rates fall, homeowners are more likely to refinance their home mortgages. When
home mortgages are refinanced, the principal on mortgage-related securities held
by the Fund is "prepaid" earlier than expected. The Fund must then reinvest the
unanticipated principal payments, just at a time when interest rates on new
mortgage investments are falling. Prepayment risk has two important effects on
the Fund:

- When interest rates fall and additional mortgage prepayments must be
reinvested at lower interest rates, the income of the Fund will be
reduced.

- When interest rates fall, prices on mortgage-backed securities may not
rise as much as comparable Treasury bonds because bond market investors
may anticipate an increase in mortgage prepayments and a likely decline in
income.

Balanced Fund's investments in mortgage-related securities also subject the
Fund to extension risk. Extension risk is the possibility that rising interest
rates may cause prepayments to occur at a slower than expected rate. This
particular risk may effectively change a security which was considered short- or
intermediate-duration at the time of purchase into a long-duration security.
Long-duration securities generally fluctuate more widely in response to changes
in interest rates than short- or intermediate-duration securities.

Investments in debt securities may also subject the Fund to credit risk.
Credit risk, also known as default risk, is the possibility that a bond issuer
will fail to make timely payments of interest or principal. As discussed above,
the Fund's investments in long-term debt securities are limited to U.S.
Government securities and securities which, at the time of purchase, are rated
investment grade or are judged by the Adviser to be of comparable quality. The
investment techniques used by the Fund and the Fund's ability to invest up to
25% of its total assets in foreign securities also pose certain risks. See
"Special Investment Methods."

Investors should also be aware that the investment results of the Fund
depend upon the Adviser's ability to anticipate correctly the relative
performance and risks of stocks, bonds and money market instruments. The Fund's
investment results would suffer, for example, if only a small portion of the
Fund's assets were invested in stocks during a significant market advance, or if
a major portion of its assets were invested in stocks during a market decline.
Similarly, the Fund's performance could deteriorate if the Fund were
substantially invested in bonds at a time when interest rates moved adversely.

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SPECIAL INVESTMENT METHODS

Repurchase Agreements

Each Fund may enter into repurchase agreements with respect to securities
issued or guaranteed as to payment of principal and interest by the U.S.
Government or its agencies or instrumentalities. A repurchase agreement involves
the purchase by a Fund of securities with the condition that after a stated
period of time the original seller (a member bank of the Federal Reserve System
or a recognized securities dealer) will buy back the same securities
("collateral") at a predetermined price or yield. Repurchase agreements involve
certain risks not associated with direct investments in securities. In the event
the original seller defaults on its obligation to repurchase, as a result of its
bankruptcy or otherwise, the Fund will seek to sell the collateral, which action
could involve costs or delays. In such case, the Fund's ability to dispose of
the collateral to recover such investment may be restricted or delayed. While
collateral will at all times be maintained in an amount equal to the repurchase
price under the agreement (including accrued interest due thereunder), to the
extent proceeds from the sale of collateral were less than the repurchase price,
a Fund would suffer a loss.
Repurchase agreements maturing in more than seven days are considered illiquid
and subject to each Fund's restriction on investing in illiquid securities.

Lending of Portfolio Securities

In order to generate additional income, each Fund may lend portfolio
securities up to one-third of the value of its total assets to broker-dealers,
banks or other financial borrowers of securities. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
Funds will only enter into loan arrangements with broker-dealers, banks or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Company's Board of Directors and will receive collateral in
the form of cash, U.S. Government securities or other high-grade debt
obligations equal to at least 100% of the value of the securities loaned. The
value of the collateral and of the securities loaned will be marked to market on
a daily basis. During the time portfolio securities are on loan, the borrower
pays the Fund an amount equivalent to any dividends or interest paid on the
securities and the Fund may invest the cash collateral and earn additional
income or may receive an agreed upon amount of interest income from the
borrower. However, the amounts received by the Fund may be reduced by finders'
fees paid to broker-dealers and related expenses.

Borrowing

Each Fund may borrow money from banks for temporary or emergency purposes in
an amount up to 10% of the value of the Fund's total assets. Interest paid by a
Fund on borrowed funds would decrease the net earnings of that Fund. None of the
Funds will purchase portfolio securities while outstanding borrowings (other
than reverse repurchase agreements) exceed 5% of the value of the Fund's total
assets. Each Fund may mortgage, pledge or hypothecate its assets in an amount
not exceeding 10% of the value of its total assets to secure temporary or
emergency borrowing. The policies set forth in this paragraph are fundamental
and may not be changed without the approval of a majority of a Fund's shares.

Options Transactions

Growth Fund, Growth and Income Fund and Balanced Fund may write and purchase
put and call options on securities and on stock indexes listed on national
securities exchanges. Emerging Growth Fund and Small Company Growth Fund will
not write or purchase put or call options.

WRITING COVERED OPTIONS. Growth Fund, Growth and Income Fund and Balanced
Fund may write (i.e., sell) covered put and call options with respect to the
securities in which they may invest. By writing a call

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option, a Fund becomes obligated during the term of the option to deliver the
securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, a Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by any Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of such Fund.

The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Funds receive premiums from writing call or put
options, which they retain whether or not the options are exercised. By writing
a call option, a Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option a Fund might
become obligated to purchase the underlying security for more than its current
market price upon exercise.

For each Fund, the aggregate value of the securities or other collateral
underlying the calls and obligations underlying the puts written by a Fund,
determined as of the date the options are sold, will not exceed 25% of the net
assets of such Fund.

PURCHASING OPTIONS. Growth Fund, Growth and Income Fund and Balanced Fund
may purchase put options, solely for hedging purposes, in order to protect
portfolio holdings in an underlying security against a substantial decline in
the market value of such holdings ("protective puts"). Such protection is
provided during the life of the put because a Fund may sell the underlying
security at the put exercise price, regardless of a decline in the underlying
security's market price. Any loss to a Fund is limited to the premium paid for,
and transaction costs paid in connection with, the put plus the initial excess,
if any, of the market price of the underlying security over the exercise price.
However, if the market price of such security increases, the profit a Fund
realizes on the sale of the security will be reduced by the premium paid for the
put option less any amount for which the put is sold.

Such Funds may also purchase call options solely for the purpose of hedging
against an increase in prices of securities that the Funds ultimately want to
buy. Such protection is provided during the life of the call option because the
Fund may buy the underlying security at the call exercise price regardless of
any increase in the underlying security's market price. In order for a call
option to be profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and transaction
costs. By using call options in this manner, a Fund will reduce any profit it
might have realized had it bought the underlying security at the time it
purchased the call option by the premium paid for the call option and by
transaction costs.

The Funds may purchase and write only exchange-traded put and call options.

STOCK INDEX OPTION TRADING. Growth Fund, Growth and Income Fund and
Balanced Fund may purchase and write put and call options on stock indexes
listed on national securities exchanges. Stock index options will be purchased
for the purpose of hedging against changes in the value of a Fund's portfolio
securities due to anticipated changes in the market. Stock index options will be
written for hedging purposes and to realize income from the premiums received on
the sale of such options. Options on stock indexes are similar to options on
stock except that, rather than the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option. The
writer of the option is obligated to make delivery of this amount. The value of
a stock index fluctuates with changes in the market values of the stocks
included in the index. The index may include stocks representative of the entire
market, such as the

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S&P 500, or may include only stocks in a particular industry or market segment,
such as the AMEX Oil and Gas Index. The effectiveness of purchasing or writing
stock index options as a hedging technique depends upon the extent to which
price movements in a Fund's portfolio correlate with price movements of the
stock index selected.

For further information concerning the characteristics and risks of options
transactions, see "Investment Objectives, Policies and Restrictions--Options" in
the Statement of Additional Information.

Futures Contracts and Options on Futures Contracts

Growth Fund, Growth and Income Fund and Balanced Fund may purchase and sell
stock index futures contracts. Balanced Fund and Growth and Income Fund also may
purchase and sell interest rate futures contracts. Emerging Growth Fund and
Small Company Growth Fund will not enter into futures contracts or options on
futures contracts. The futures contracts in which Growth Fund, Growth and Income
Fund and Balanced Fund may invest have been developed by and are traded on
national commodity exchanges. Stock index futures contracts may be based upon
broad-based stock indexes such as the S&P 500 or upon narrow-based stock
indexes. A buyer entering into a stock index futures contract will, on a
specified future date, pay or receive a final cash payment equal to the
difference between the actual value of the stock index on the last day of the
contract and the value of the stock index established by the contract. An
interest rate futures contract is an agreement to purchase or sell an agreed
amount of debt securities at a set price for delivery on a future date.

The purpose of the acquisition or sale of a futures contract by a Fund is to
hedge against fluctuations in the value of its portfolio without actually buying
or selling securities. For example, if a Fund owns long-term U.S. Government
securities and interest rates are expected to increase, the Fund might sell
futures contracts. If interest rates did increase, the value of the U.S.
Government securities in the Fund's portfolio would decline, but the value of
the Fund's futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. If, on the other hand, the Fund held cash reserves and
short-term investments pending anticipated investment in long-term obligations
and interest rates were expected to decline, the Fund might purchase futures
contracts for U.S. Government securities. Since the behavior of such contracts
would generally be similar to that of long-term securities, the Fund could take
advantage of the anticipated rise in the value of long-term securities without
actually buying them until the market had stabilized. At that time, the Fund
could accept delivery under the futures contracts or the futures contracts could
be liquidated and the Fund's reserves could then be used to buy long-term
securities in the cash market. The Funds will engage in such transactions only
for hedging purposes, on either an asset-based or a liability-based basis, in
each case in accordance with the rules and regulations of the Commodity Futures
Trading Commission. See Appendix B and Appendix C to the Statement of Additional
Information.

Growth Fund, Growth and Income Fund and Balanced Fund may purchase and sell
put and call options on futures contracts and enter into closing transactions
with respect to such options to terminate existing positions. The Funds may use
such options on futures contracts in connection with their hedging strategies in
lieu of purchasing and writing options directly on the underlying securities or
purchasing and selling the underlying futures contracts.

There are risks in using futures contracts and options on futures contracts
as hedging devices. The primary risks associated with the use of futures
contracts and options thereon are (a) the prices of futures contracts and
options may not correlate perfectly with the market value of the securities
subject to the hedge and (b) the possible lack of a liquid secondary market for
a futures contract and the resulting inability to close a futures position prior
to its maturity date. With respect to stock index futures contracts, the risk of

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<PAGE>
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the securities included in the applicable stock index. The Adviser
will attempt to reduce this risk, to the extent possible, by entering into
futures contracts on indexes whose movements it believes will have a significant
correlation with movements in the value of the Fund's portfolio securities
sought to be hedged. The risk that a Fund will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market.

Additional information with respect to interest rate and stock index futures
contracts, together with information regarding options on such contracts, is set
forth in Appendix B and Appendix C, respectively, to the Statement of Additional
Information.

When-Issued Securities

Balanced Fund and Growth and Income Fund may purchase securities on a
"when-issued" basis and may purchase or sell securities on a "forward
commitment" basis. When such transactions are negotiated, the price is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. The Funds will not accrue income with respect to
when-issued or forward commitment securities prior to their stated delivery
date. Pending delivery of the securities, each Fund maintains in a segregated
account cash or liquid high-grade debt obligations in an amount sufficient to
meet its purchase commitments.

The purchase of securities on a when-issued or forward commitment basis
exposes the Funds to risk because the securities may decrease in value prior to
their delivery. Purchasing securities on a when-issued or forward commitment
basis involves the additional risk that the return available in the market when
the delivery takes place will be higher than that obtained in the transaction
itself. A Fund's purchase of securities on a when-issued or forward commitment
basis while remaining substantially fully invested increases the amount of the
Fund's assets that are subject to market risk to an amount that is greater than
the Fund's net asset value, which could result in increased volatility of the
price of the Fund's shares. For additional information concerning when-issued
and forward commitment transactions, see "Investment Objectives, Policies and
Restrictions" in the Statement of Additional Information.

Mortgage Dollar Rolls

In connection with their ability to purchase securities on a when-issued or
forward commitment basis, Balanced Fund and Growth and Income Fund may enter
into mortgage "dollar rolls" in which a Fund sells securities for delivery in
the current month and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund gives up the right to receive principal and
interest paid on the securities sold. However, the Fund would benefit to the
extent of any difference between the price received for the securities sold and
the lower forward price for the future purchase plus any fee income received.
Unless such benefits exceed the income, capital appreciation and gain or loss
due to mortgage prepayments that would have been realized on the securities sold
as part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what such performance would
have been without the use of mortgage dollar rolls. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
high-grade debt securities in an amount equal to the forward purchase price. The
benefits derived from the use of mortgage dollar rolls may depend upon the
Adviser's ability to predict correctly mortgage prepayments and interest rates.
There is no assurance that mortgage dollar rolls can be successfully employed.
In addition, the use of mortgage dollar rolls by a Fund while remaining
substantially fully invested increases the amount of the Fund's assets that are
subject to market risk to an amount that is greater than the Fund's net asset
value, which could result in increased volatility of the price of the Fund's
shares.

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For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions: one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.

No more than one-third of a Fund's total assets may be committed to the
purchase of securities on a when-issued or forward commitment basis, including
mortgage dollar roll purchases.

Illiquid Securities

As a nonfundamental investment restriction that may be changed at any time
without shareholder approval, no Fund will invest more than 15% of its net
assets in illiquid securities. A security is considered illiquid if it cannot be
sold in the ordinary course of business within seven days at approximately the
price at which it is valued. Illiquid securities may offer a higher yield than
securities which are more readily marketable, but they may not always be
marketable on advantageous terms.

The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. A Fund may be restricted in its
ability to sell such securities at a time when the Adviser deems it advisable to
do so. In addition, in order to meet redemption requests, a Fund may have to
sell other assets, rather than such illiquid securities, at a time which is not
advantageous.

"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of 1933
(the "1933 Act"). Such securities generally have been considered illiquid, since
they may be resold only subject to statutory restrictions and delays or if
registered under the 1933 Act. In 1990, however, the Securities and Exchange
Commission adopted Rule 144A under the 1933 Act, which provides a safe harbor
exemption from the registration requirements of the 1933 Act for resales of
restricted securities to "qualified institutional buyers," as defined in the
rule. The result of this rule has been the development of a more liquid and
efficient institutional resale market for restricted securities. Thus,
restricted securities are no longer necessarily illiquid. The Funds may
therefore invest in Rule 144A securities and treat them as liquid when they have
been determined to be liquid by the Board of Directors of the Company or by the
Adviser subject to the oversight of and pursuant to procedures adopted by the
Board of Directors. See "Investment Objectives, Policies and
Restrictions--Illiquid Securities" in the Statement of Additional Information.
Similar determinations may be made with respect to commercial paper issued in
reliance on the so-called "private placement" exemption from registration under
Section 4(2) of the 1933 Act and with respect to IO, PO and inverse floating
classes of mortgage-backed securities issued by the U.S. Government or its
agencies and instrumentalities.

Foreign Securities

As nonfundamental investment objectives which may be changed at any time
without shareholder approval, Balanced Fund may invest up to 25% of its total
assets in foreign securities and each of the other Funds may invest up to 5% of
its total assets in such securities. The value of foreign securities investments
may be affected by changes in currency rates or exchange control regulations,
changes in governmental administration or economic or monetary policy (in this
country or abroad) or changed circumstances in dealings between nations. Costs
may be incurred in connection with conversions between various currencies.
Moreover, there may be less publicly available information about foreign issuers
than about domestic issuers, and foreign issuers may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of domestic issuers. Securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers and
foreign brokerage commissions are generally higher than in the United States.
Foreign securities markets may also be less liquid, more volatile and less
subject to government supervision than in the United States. Investments in
foreign countries could be

23
<PAGE>
affected by other factors not present in the United States, including
expropriation, confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.

In addition, as a result of their investments in foreign securities, the
Funds may receive interest or dividend payments, or the proceeds of the sale or
redemption of such securities, in the foreign currencies in which such
securities are denominated. Under certain circumstances, such as where the
Adviser believes that the applicable exchange rate is unfavorable at the time
the currencies are received or the Adviser anticipates, for any other reason,
that the exchange rate will improve, the Funds may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the Funds
to take advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Funds to risk of loss if exchange rates move in a
direction adverse to a Fund's position. Such losses could reduce any profits or
increase any losses sustained by the Funds from the sale or redemption of
securities, and could reduce the dollar value of interest or dividend payments
received.

Portfolio Turnover

While it is not the policy of any of the Funds to trade actively for
short-term profits, each Fund will dispose of securities without regard to the
time they have been held when such action appears advisable to the Adviser. In
the case of each Fund, frequent changes may result in higher brokerage and other
costs for the Fund. The method of calculating portfolio turnover rate is set
forth in the Statement of Additional Information under "Investment Objectives,
Policies and Restrictions--Portfolio Turnover." Portfolio turnover rates for the
Funds are set forth in "Financial Highlights."

Investment Restrictions

Each Fund has adopted certain fundamental and nonfundamental investment
restrictions in addition to those set forth above. As a fundamental investment
restriction which may not be changed without shareholder approval, no Fund will
invest 25% or more of its total assets in any one industry. (This restriction
does not apply to securities of the U.S. Government or its agencies and
instrumentalities and repurchase agreements relating thereto. As to utility
companies, gas, electric, telephone, telegraph, satellite and microwave
communications companies are considered as separate industries.) In addition, as
a nonfundamental investment restriction which may be changed at any time without
shareholder approval, no Fund will invest more than 5% of its total assets in
the securities of issuers which, with their predecessors, have a record of less
than three years' continuous operation. A list of each Fund's fundamental and
nonfundamental investment restrictions is set forth in the Statement of
Additional Information.

Except for each Fund's policy regarding borrowing, if a percentage
restriction set forth under "Investment Objectives and Policies" or under
"Special Investment Methods" is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from changes in values or assets
will not constitute a violation of such restriction.

MANAGEMENT

Board of Directors

The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.

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Investment Adviser

Piper Capital Management Incorporated (the "Adviser") has been retained
under an Investment Advisory and Management Agreement with the Company to act as
the Funds' investment adviser subject to the authority of the Board of
Directors.

In addition to acting as the investment adviser for the other series of the
Company, the Adviser also serves as investment adviser to a number of other
open-end and closed-end investment companies and to various other concerns,
including pension and profit-sharing funds, corporate funds and individuals. As
of , 1996, the Adviser rendered investment advice regarding
approximately $ billion of assets. The Adviser is a wholly owned subsidiary of
Piper Jaffray Companies Inc., a publicly held corporation which is engaged
through its subsidiaries in various aspects of the financial services industry.
The address of the Adviser is Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402-3804.

The Adviser furnishes each Fund with investment advice and supervises the
management and investment programs of the Funds. The Adviser furnishes at its
own expense all necessary administrative services, office space, equipment and
clerical personnel for servicing the investments of the Funds. The Adviser also
provides investment advisory facilities and executive and supervisory personnel
for managing the investments and effecting the portfolio transactions of the
Funds. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated with the Adviser.

Under the Investment Advisory and Management Agreement, each Fund pays the
Adviser monthly fees at an annual rate of .75% on average daily net assets up to
$100 million. These fees are higher than fees paid by most other investment
companies. The fees are scaled downward as net assets increase in size to as low
as .50% on net assets of over $500 million.

Portfolio Management

Beginning December 9, 1994, Steven B. Markusen assumed primary
responsibility for the day-to-day management of the Growth Fund's portfolio. Mr.
Markusen has been a Senior Vice President of the Adviser since December 1993.
Prior to that, he served as a Senior Vice President of Investment Advisers,
Inc., in Minneapolis, Minnesota, where he was responsible for managing
institutional equity and balanced portfolios and the IAI Growth Fund. In
addition, he was responsible for a group which managed $2.5 billion in large
capitalization growth equity assets. Before joining Investment Advisers, Inc. in
1989, Mr. Markusen was a Vice President with INVESCO Funds, where he managed
three equity funds for five years. He is a Chartered Financial Analyst ("CFA")
and has 12 years of financial experience.

Sandra K. Shrewsbury has been primarily responsible for the day-to-day
management of the Emerging Growth Fund's portfolio since 1993. Ms. Shrewsbury
has been a Senior Vice President of the Adviser since September 1993, prior to
which she had been a Managing Director of the Distributor since 1992 and a Vice
President of the Distributor since 1990. She is a CFA and has 13 years of
financial experience. Ms. Shrewsbury has also assumed primary responsibility for
the day-to-day management of the Small Company Growth Fund's portfolio,
effective as of the date of this Prospectus.

Paul A. Dow has been primarily responsible for the day-to-day management of
the Growth and Income Fund's portfolio since the Fund's inception in 1992. Mr.
Dow has shared that primary responsibility with John K. Schonberg since May 31,
1996. Mr. Dow has been a Senior Vice President of the Adviser since February
1989 and Chief Investment Officer of the Adviser since December 1989. He is a
CFA and has 22 years of financial experience. Mr. Schonberg has been a portfolio
manager for the Adviser since 1989, prior to which he had been a research
analyst for the Distributor since 1987. Mr. Schonberg has eight years of
financial experience.

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<PAGE>

Bruce D. Salvog and David M. Steele have been primarily responsible for the
day-to-day management of the fixed income portion of Balanced Fund's portfolio
since 1992. Mr. Salvog has been a Senior Vice President of the Adviser since
1992. He has an AB from Harvard University and 26 years of financial experience.
Mr. Steele has been a Senior Vice President of the Adviser since 1992. He has an
MBA from the University of Southern California and 16 years of financial
experience. Paul A. Dow has been primarily responsible for the day-to-day
management of the equity portion of Balanced Fund's portfolio since 1989. He has
shared that primary responsibility with John K. Schonberg since October 1995.
Mr. Dow and Mr. Schonberg are also portfolio managers for Growth and Income Fund
and their experience is discussed above.

Transfer Agent, Dividend Disbursing Agent and Custodian

Investors Fiduciary Trust Company ("IFTC"), 127 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Funds'
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Funds.

The Company has entered into Shareholder Account Servicing Agreements with
the Distributor and Piper Trust Company, an affiliate of the Distributor and the
Adviser. Under these agreements, the Distributor and Piper Trust Company provide
transfer agent and dividend disbursing agent services for certain shareholder
accounts. For more information, see "Investment Advisory and Other
Services--Transfer Agent and Dividend Disbursing Agent" in the Statement of
Additional Information.

Portfolio Transactions and Brokerage Commissions

The Adviser selects brokers and futures commission merchants to use for the
Funds' portfolio transactions. In making its selection, the Adviser may consider
a number of factors, which are more fully discussed in the Statement of
Additional Information, including, but not limited to, research services, the
reasonableness of commissions and quality of services and execution. A broker's
sales of shares of any series of the Company may also be considered a factor if
the Adviser is satisfied that a Fund would receive from that broker the most
favorable price and execution then available for a transaction. Portfolio
transactions for the Funds may be effected through the Distributor on a
securities exchange in compliance with Section 17(e) of the Investment Company
Act of 1940, as amended (the "1940 Act"). For more information, see "Portfolio
Transactions and Allocation of Brokerage" in the Statement of Additional
Information.

DISTRIBUTION OF FUND SHARES

Piper Jaffray acts as the principal distributor of the Funds' shares. The
Company has adopted a Distribution Plan (the "Plan") as required by Rule 12b-1
under the 1940 Act. Under the Plan, the Distributor is paid a total fee in
connection with the servicing of each Fund's shareholder accounts and in
connection with distribution related services provided with respect to each
Fund. This fee is calculated and paid monthly at an annual rate equal to .50% of
the average daily net assets of each Fund.

A portion of the total fee equal to .25% of each Fund's average daily net
assets is categorized as a distribution fee intended to compensate the
Distributor for its expenses incurred in connection with the sale of Fund
shares. The remaining portion of the fee, equal to .25% of each Fund's average
daily net assets, is categorized as a servicing fee intended to compensate the
Distributor for ongoing servicing and/or maintenance of shareholder accounts.
The Distributor has voluntarily agreed to limit the total fee payable under the
Plan to .32% of each Fund's average daily net assets. This limitation may be
revised or terminated at any time after fiscal 1996 year end. Payments made
under the Plan are not tied exclusively to expenses actually incurred by the
Distributor and may exceed such expenses. The Adviser and the Distributor, out
of their own assets, may pay for certain expenses incurred in connection with
the distribution of shares of the Funds. In

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particular, the Adviser may make payments out of its own assets to Piper Jaffray
Investment Executives and other broker dealers in connection with their sales of
shares of the Funds. See "How to Purchase Shares-- Purchase Price." Further
information regarding the Plan is contained in the Statement of Additional
Information.

The Distributor uses all or a portion of its Rule 12b-1 fee to make payments
to Investment Executives of the Distributor and broker-dealers which have
entered into sales agreements with the Distributor. If shares of a Fund are sold
by a representative of a broker-dealer other than the Distributor, the
broker-dealer is paid .30% of the average daily net assets of the Fund
attributable to shares sold by the broker-dealer's representative. If shares of
a Fund are sold by an Investment Executive of the Distributor, compensation is
paid to the Investment Executive in the manner set forth in a written agreement,
in an amount not to exceed .30% of the average daily net assets of the Fund
attributable to shares sold by the Investment Executive.

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SHAREHOLDER GUIDE TO INVESTING

HOW TO PURCHASE SHARES

General

The Funds' shares may be purchased at the public offering price from the
Distributor and from other broker-dealers who have sales agreements with the
Distributor. The address of the Distributor is that of the Funds. The
Distributor reserves the right to reject any purchase order. You should be aware
that, because the Funds do not issue stock certificates, Fund shares must be
kept in an account with the Distributor or with IFTC. All investments must be
arranged through your Piper Jaffray Investment Executive or other broker-dealer.

Purchase Price

You may purchase shares of the Funds at the net asset value per share next
calculated after receipt of your order by your Piper Jaffray Investment
Executive or other broker-dealer, plus a front-end sales charge as follows:

<TABLE>
<CAPTION>
Sales Charge Sales Charge
as a Percentage of as a Percentage of
Amount of Transaction at Offering Price Offering Price Net Asset Value
- --------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
Less than $100,000....................................... 4.00% 4.17%
$100,000 but less than $250,000.......................... 3.25% 3.36%
$250,000 but less than $500,000.......................... 2.50% 2.56%
$500,000 and over........................................ 0.00% 0.00%
</TABLE>

This table sets forth total sales charges or underwriting commissions. The
Distributor may reallow up to the entire sales charge to broker-dealers in
connection with their sales of shares. These broker-dealers may, by virtue of
such reallowance, be deemed to be "underwriters" under the 1933 Act.

The Distributor will make certain payments to its Investment Executives and
to other broker-dealers in connection with their sales of Fund shares. See
"Distribution of Fund Shares" above. In addition, the Distributor or the
Adviser, at their own expense, provide promotional incentives to Investment
Executives of the Distributor and to broker-dealers who have sales agreements
with the Distributor in connection with sales of shares of the Funds, other
series of the Company and other mutual funds for which the Adviser acts as
investment adviser. In some instances, these incentives may be made available
only to certain Investment Executives or broker-dealers who have sold or may
sell significant amounts of such shares. The incentives may include payment for
travel expenses, including lodging at luxury resorts, incurred in connection
with sales seminars.

Purchases of $500,000 or More

If you make a purchase of $500,000 or more (including purchases made under a
Letter of Intent), a 1% contingent deferred sales charge will be assessed in the
event you redeem shares within 24 months following the purchase. This sales
charge will be paid to the Distributor. For more information, please refer to
the Contingent Deferred Sales Charge section of "How To Redeem Shares." The
Distributor currently pays its Investment Executives and other broker-dealers
fees in connection with these purchases as follows:

<TABLE>
<CAPTION>
Fee as a Percentage
Amount of Transaction of Offering Price
- --------------------------------------------------------------------------- --------------------
<S> <C>
First $1,000,000........................................................... 1.00%
Next $2,000,000............................................................ 0.75%
Next $2,000,000............................................................ 0.50%
Next $5,000,000............................................................ 0.25%
Above $10,000,000.......................................................... 0.15%
</TABLE>

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SHAREHOLDER GUIDE TO INVESTING

Piper Jaffray Investment Executives and other broker-dealers generally will
not receive a fee in connection with purchases on which the contingent deferred
sales charge is waived. However, the Distributor, in its discretion, may pay a
fee out of its own assets to its Investment Executives and other broker-dealers
in connection with purchases by employee benefit plans on which no sales charge
is imposed. Please see the Special Purchase Plans section of "Reducing Your
Sales Charge."

Minimum Investments

A minimum initial investment of $250 is required. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum.

REDUCING YOUR SALES CHARGE

You may qualify for a reduced sales charge through one or more of several
plans. You must notify your Piper Jaffray Investment Executive or broker-dealer
at the time of purchase to take advantage of these plans.

Aggregation
Front-end or initial sales charges may be reduced or eliminated by
aggregating your purchase with purchases of certain related personal accounts.
In addition, purchases made by members of certain organized groups will be
aggregated for purposes of determining sales charges. Sales charges are
calculated by adding the dollar amount of your current purchase to the higher of
the cost or current value of shares of any Piper fund sold with a sales charge
that are currently held by you and your related accounts or by other members of
your group.

QUALIFIED GROUPS. You may group purchases in the following personal
accounts together:

- Your individual account.

- Your spouse's account.

- Your children's accounts (if they are under the age of 21).

- Your employee benefit plan accounts if they are exclusively for your
benefit. This includes accounts such as IRAs, individual 403(b) plans or
single-participant Keogh-type plans.

- A single trust estate or single fiduciary account if you are the trustee
or fiduciary.

Additionally, purchases made by members of any organized group meeting the
requirements listed below may be aggregated for purposes of determining sales
charges:

- The group has been in existence for more than six months.

- It is not organized for the purpose of buying redeemable securities of a
registered investment company.

- Purchases must be made through a central administration, or through a
single dealer, or by other means that result in economy of sales effort or
expense.

An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.

Right of Accumulation

Sales charges for purchases of Fund shares into Piper Jaffray accounts will
be automatically calculated taking into account the dollar amount of any new
purchases along with the higher of current value or cost of shares previously
purchased in any other mutual fund managed by the Adviser that was sold with a
sales charge. For other broker-dealer accounts, you should notify your
Investment Executive at the time of purchase of additional Piper fund shares you
may own.

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SHAREHOLDER GUIDE TO INVESTING

Letter of Intent

Your sales charge may be reduced by signing a non-binding Letter of Intent.
This Letter of Intent will state your intention to invest $100,000 or more in
any of the mutual funds managed by the Adviser that are sold with a sales charge
over a 13-month period, beginning not earlier than 90 days prior to the date you
sign the Letter. You will pay the lower sales charge applicable to the total
amount you plan to invest over the 13-month period. Part of your shares will be
held in escrow to cover additional sales charges that may be due if you do not
invest the planned amount. Please see "Purchase of Shares" in the Statement of
Additional Information for more details. You can contact your Piper Jaffray
Investment Executive or other broker-dealer for an application.

SPECIAL PURCHASE PLANS

For more information on any of the following special purchase plans, contact
your Piper Jaffray Investment Executive or other broker-dealer.

Purchases by Piper Jaffray Companies Inc., Its Subsidiaries and Associated
Persons

Piper Jaffray Companies Inc. and its subsidiaries may buy shares of the
Funds without incurring a sales charge. The following persons associated with
such entities also may buy Fund shares without paying a sales charge:

- Officers, directors and partners.

- Employees and retirees.

- Sales representatives.

- Spouses or children under the age of 21 of any of the above.

- Any trust, pension, profit-sharing or other benefit plan for any of the
above.

Purchases by Broker-Dealers

Employees of broker-dealers who have entered into sales agreements with the
Distributor, and spouses and children under the age of 21 of such employees, may
buy shares of the Funds without incurring a sales charge.

Purchases by Other Individuals Without a Sales Charge

The following other individuals and entities also may buy Fund shares
without paying a sales charge:
- Clients of the Adviser buying shares of the Funds in their advisory
accounts.

- Discretionary accounts at Piper Trust Company and participants in
investment companies exempt from registration under the 1940 Act that are
managed by the Adviser.

- Trust companies and bank trust departments using funds over which they
exercise exclusive discretionary investment authority and which are held
in a fiduciary, agency, advisory, custodial or similar capacity.

- Investors purchasing shares through a Piper Jaffray Investment Executive
if the purchase of such shares is funded by the proceeds from the sale of
shares of any non-money market open-end mutual fund. This privilege is
available for 30 days after the sale.

Purchases by Employee Benefit Plans and Tax-Sheltered Annuities

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SHAREHOLDER GUIDE TO INVESTING
a money market fund) during any calendar quarter, any other employee
benefit plan of such employer that is a qualified plan under Section
401(a) of the Code also may purchase shares of the Funds during such
quarter without incurring a sales charge.

- Custodial accounts under Section 403(b) of the Code (known as
tax-sheltered annuities) also may buy shares of the Funds without
incurring a sales charge.

HOW TO REDEEM SHARES

Normal Redemption

You may redeem all or a portion of your shares on any day that a Fund values
its shares. (Please refer to "Valuation of Shares" below for more information.)
Your shares will be redeemed at the net asset value next calculated after the
receipt of your instructions in good form by your Piper Jaffray Investment
Executive or other broker-dealer as explained below.

PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray Investment Executive with an oral request to redeem your shares.

OTHER BROKER-DEALER ACCOUNTS. To redeem your shares, you may either contact
your broker-dealer with an oral request or send a written request directly to
the Funds' transfer agent, IFTC. This request should contain: the dollar amount
or number of shares to be redeemed, your Fund account number and either a social
security or tax identification number (as applicable). You should sign your
request in exactly the same way the account is registered. If there is more than
one owner of the shares, all owners must sign. A signature guarantee is required
for redemptions over $25,000. Please contact IFTC or refer to "Redemption of
Shares" in the Statement of Additional Information for more details.

Contingent Deferred Sales Charge

If you invest $500,000 or more and, as a result, pay no front-end sales
charge, you may incur a contingent deferred sales charge if you redeem within 24
months. This charge will be equal to 1% of the lesser of the net asset value of
the shares at the time of purchase or at the time of redemption. This charge
does not apply to amounts representing an increase in the value of Fund shares
due to capital appreciation or to shares acquired through reinvestment of
dividend or capital gain distributions. In determining whether a contingent
deferred sales charge is payable, shares that are not subject to any deferred
sales charge will be redeemed first, and other shares will then be redeemed in
the order purchased.

LETTER OF INTENT. In the case of a Letter of Intent, the 24-month period
begins on the date the Letter of Intent is completed.

SPECIAL PURCHASE PLANS. If you purchased your shares through one of the
plans described above under "Special Purchase Plans," the contingent deferred
sales charge will be waived. In addition, the contingent deferred sales charge
will be waived in the event of:

- The death or disability (as defined in Section 72(m)(7) of the Code) of
the shareholder. (This waiver will be applied to shares held at the time
of death or the initial determination of disability of either an
individual shareholder or one who owns the shares as a joint tenant with
the right of survivorship or as a tenant in common.)

- A lump sum distribution from an employee benefit plan qualified under
Section 401(a) of the Code, an individual retirement account under Section
408(a) of the Code or a simplified employee pension plan under Section
408(k) of the Code.

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SHAREHOLDER GUIDE TO INVESTING

- Systematic withdrawals from any such plan or account if the shareholder is
at least 59 1/2 years old.

- A tax-free return of the excess contribution to an individual retirement
account under Section 408(a) of the Code.

- Involuntary redemptions effected pursuant to the right to liquidate
shareholder accounts having an aggregate net asset value of less than
$200.

EXCHANGES. If you exchange your shares, no contingent deferred sales charge
will be imposed. However, the charge will apply if you subsequently redeem the
new shares within 24 months of the original purchase.

REINSTATEMENT PRIVILEGE. If you elect to use the Reinstatement Privilege
(please see "Shareholder Services" below), any contingent deferred sales charge
you paid will be credited to your account (proportional to the amount
reinvested). Please see "Redemption of Shares" in the Statement of Additional
Information for more details.

Payment of Redemption Proceeds

After your shares have been redeemed, the cash proceeds will normally be
sent to you or your broker-dealer within three business days. In no event will
payment be made more than seven days after receipt of your order in good form.
However, payment may be postponed or the right of redemption suspended for more
than seven days under unusual circumstances, such as when trading is not taking
place on the New York Stock Exchange. Payment of redemption proceeds may also be
delayed if the shares to be redeemed were purchased by a check drawn on a bank
which is not a member of the Federal Reserve System, until such checks have
cleared the banking system (normally up to 15 days from the purchase date).

Involuntary Redemption
Each Fund reserves the right to redeem your account at any time the net
asset value of the account falls below $200 as the result of a redemption or
exchange request. You will be notified in writing prior to any such redemption
and will be allowed 30 days to make additional investments before the redemption
is processed.

SHAREHOLDER SERVICES

Automatic Monthly Investment Program

You may arrange to make additional automated purchases of shares of the
Funds or certain other mutual funds managed by the Adviser. You can
automatically transfer $100 or more per month from your bank, savings and loan
or other financial institution to purchase additional shares. In addition, if
you hold your shares in a Piper Jaffray account you may arrange to make such
additional purchases by having $25 or more automatically transferred each month
from any of the money market fund series of the Company. You should contact your
Piper Jaffray Investment Executive or IFTC to obtain authorization forms or for
additional information.

Reinstatement Privilege

If you have redeemed shares of a Fund, you may be eligible to reinvest in
shares of any fund managed by the Adviser without payment of an additional sales
charge. The reinvestment request must be made within 30 days of the redemption.
This privilege is subject to the eligibility of share purchases in your state as
well as the minimum investment requirements and any other applicable terms in
the prospectus of the fund being acquired.

Exchange Privilege
If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, your broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment Executive,
your broker-dealer or IFTC.

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SHAREHOLDER GUIDE TO INVESTING

You may exchange your shares for shares of any other mutual fund managed by
the Adviser. All exchanges are subject to the eligibility of share purchases in
your state as well as the minimum investment requirements and any other
applicable terms in the prospectus of the fund being acquired. Exchanges are
made on the basis of the net asset values of the funds involved, except that
investors exchanging into a fund which has a higher sales charge must pay the
difference.

You may make four exchanges per year without payment of a service charge.
Thereafter, you will pay a $5 service charge for each exchange. The Company
reserves the right to change or discontinue the exchange privilege, or any
aspect of the privilege, upon 60 days' written notice.

Telephone Transaction Privileges

PIPER JAFFRAY INC. ACCOUNTS. If you hold your shares in a Piper Jaffray
account, you may telephone your Investment Executive to execute any transaction
or to apply for many shareholder services. In some cases, you may be required to
complete a written application.

OTHER BROKER-DEALER ACCOUNTS. If you hold your shares in an account with
your broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form. Please contact your
broker-dealer or IFTC (800-874-6205) for an application or for more details. The
Funds will employ reasonable procedures to confirm that a telephonic request is
genuine, including requiring that payment be made only to the address of record
or the bank account designated on the Account Application and Services Form and
requiring certain means of telephonic identification. A Fund employing such
procedures will not be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. If a Fund does not employ
such procedures, it may be liable for any losses due to unauthorized or
fraudulent telephone transactions. It may be difficult to reach the Funds by
telephone during periods when market or economic conditions lead to an unusually
large volume of telephone requests. If you cannot reach the Funds by telephone,
you should contact your broker-dealer or issue written instructions to IFTC at
the address set forth herein. See "Management--Transfer Agent, Dividend
Disbursing Agent and Custodian." The Funds reserve the right to suspend or
terminate their telephone services at any time without notice.

Directed Dividends

You may direct income dividends and capital gains distributions to be
invested in any other mutual fund managed by the Adviser (other than a money
market fund) that is offered in your state. This investment will be made at net
asset value. It will not be subject to a minimum investment amount except that
you must hold shares in such fund (including the shares being acquired with the
dividend or distribution) with a value at least equal to such fund's minimum
initial investment amount.

Systematic Withdrawal Plan

If your account has a value of $5,000 or more, you may establish a
Systematic Withdrawal Plan for any of the Funds. This plan will allow you to
receive regular periodic payments by redeeming as many shares from your account
as necessary. As with other redemptions, a redemption to make a withdrawal is a
sale for federal income tax purposes. Payments made under a Systematic
Withdrawal Plan cannot be considered as actual yield or income since part of the
payments may be a return of capital.

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SHAREHOLDER GUIDE TO INVESTING

A request to establish a Systematic Withdrawal Plan must be submitted in
writing to your Piper Jaffray Investment Executive or other broker-dealer. There
are no service charges for maintenance; the minimum amount that you may withdraw
each period is $100. You will be required to have any income dividends and any
capital gains distributions reinvested. You may choose to have withdrawals made
monthly, quarterly or semiannually. Please contact your Piper Jaffray Investment
Executive, other broker-dealer or IFTC for more information.

You should be aware that additional investments in an account that has an
active Systematic Withdrawal Plan may be inadvisable due to sales charges and
tax liabilities. Please refer to "Redemption of Shares" in the Statement of
Additional Information for additional details.

Account Protection

If you purchased your shares of any of the Funds through a Piper Jaffray
Investment Executive, you may choose from several account options. Your
investments in any of the Funds held in a Piper Jaffray account (except for
non-"PAT" accounts) would be protected up to $25 million. Investments held in
non-"PAT" Piper Jaffray accounts are protected up to $2.5 million. In each case,
the Securities Investor Protection Corporation ("SPIC") provides $500,000 of
protection; the additional coverage is provided by The Aetna Casualty & Surety
Company. This protection does not cover any declines in the net asset value of
Fund shares.

Confirmation of Transactions and Reporting of Other Information

Each time there is a transaction involving your Fund shares, such as a
purchase, redemption or dividend reinvestment, you will receive a confirmation
statement describing that activity. This information will be provided to you
from either Piper Jaffray, your broker-dealer or IFTC. In addition, you will
receive various IRS forms after the first of each year detailing important tax
information and each Fund is required to supply annual and semiannual reports
that list securities held by the Fund and include the current financial
statements of the Fund.

HOUSEHOLDING. If you have multiple accounts with Piper Jaffray, you may
receive some of the above information in combined mailings. This will not only
help to reduce Fund expenses, it will help the environment by saving paper.
Please contact your Piper Jaffray Investment Executive for more information.

DIVIDENDS AND DISTRIBUTIONS

Dividends from net investment income, if any, will be paid quarterly by
Growth Fund, Growth and Income Fund and Balanced Fund and annually by Emerging
Growth Fund and Small Company Growth Fund. Net realized capital gains, if any,
will be distributed at least once annually by each Fund.

BUYING A DIVIDEND. On the ex-dividend date for a distribution, a Fund's
share price is reduced by the amount of the distribution. If you buy shares just
before the ex-dividend date ("buying a dividend"), you will pay the full price
for the shares and then receive a portion of the price back as a taxable
distribution.

DISTRIBUTION OPTIONS. All net investment income dividends and net realized
capital gains distributions for a Fund generally will be payable in additional
shares of that Fund at net asset value ("Reinvestment Option"). If you wish to
receive your distributions in cash, you must notify your Piper Jaffray
Investment Executive or other broker-dealer. You may elect either to receive
income dividends in cash and capital gains distributions in additional shares of
the Fund at net asset value ("Split Option"), or to receive both income
dividends and capital gains distributions in cash ("Cash Option"). You may also
direct income dividends and capital gains distributions to be invested in
another mutual fund managed by the Adviser. See "Shareholder Services--Directed
Dividends" above. The taxable status of income dividends and/or net capital
gains distributions is not affected by whether they are reinvested or paid in
cash.

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VALUATION OF SHARES

The Funds compute their net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business. The calculation is made as of
the regular close of the Exchange (currently 4:00 p.m. New York time) after the
Funds have declared any applicable dividends.

The net asset value per share for each of the Funds is determined by
dividing the value of the securities owned by the Fund plus any cash and other
assets (including interest accrued and dividends declared but not collected)
less all liabilities by the number of Fund shares outstanding. For the purposes
of determining the aggregate net assets of the Funds, cash and receivables will
be valued at their face amounts. Interest will be recorded as accrued and
dividends will be recorded on the ex-dividend date. Securities traded on a
national securities exchange or on the Nasdaq National Market System are valued
at the last reported sale price that day. Securities traded on a national
securities exchange or on the Nasdaq National Market System for which there were
no sales on that day and securities traded on other over-the-counter markets for
which market quotations are readily available are valued at the mean between the
bid and asked prices. If a Fund should have an open short position as to a
security, the valuation of the contract will be at the average of the bid and
asked prices. Portfolio securities underlying actively traded options will be
valued at their market price as determined above. The current market value of
any exchange-traded option held or written by a Fund is its last sales price on
the exchange prior to the time when assets are valued. Lacking any sales that
day, the options will be valued at the mean between the current closing bid and
asked prices. Financial futures are valued at the settlement price established
each day by the board of trade or exchange on which they are traded.

The value of certain fixed-income securities will be provided by an
independent pricing service, which determines these valuations at a time earlier
than the close of the Exchange. Pricing services consider such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations.
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 during such period, or
if the Company's management determines for any other reason that valuations
provided by the pricing service are inaccurate, such securities will be valued
at their fair value according to procedures decided upon in good faith by the
Board of Directors. In addition, any securities or other assets of a Fund for
which market prices are not readily available will be valued at their fair value
in accordance with such procedures.

TAX STATUS

Distributions by a Fund are generally taxable to the shareholders, whether
received in cash or additional shares of the Fund (or shares of another mutual
fund managed by the Adviser). Under the Code, corporate shareholders generally
may deduct 70% of distributions from a Fund attributable to dividends paid by
domestic corporations. Distributions of net capital gains (designated as
"capital gain dividends") are taxable

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<PAGE>
to shareholders as long-term capital gains, regardless of the length of time the
shareholder has held the shares of the Fund.

A shareholder will recognize a capital gain or loss upon the sale or
exchange of shares in a Fund if, as is normally the case, the shares are capital
assets in the shareholder's hands. This capital gain or loss will be long-term
if the shares have been held for more than one year.

The foregoing relates to federal income taxation as in effect as of the date
of this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Funds, see "Taxation" in the
Statement of Additional Information. Before investing in any of the Funds, you
should check the consequences of your local and state tax laws.

PERFORMANCE COMPARISONS

Advertisements and other sales literature for each Fund may refer to the
Fund's "average annual total return" and "cumulative total return." In addition,
Growth and Income Fund and Balanced Fund may provide yield calculations in
advertisements and other sales literature. When a Fund advertises its yield, it
will also advertise its total return as required by the rules of the Securities
and Exchange Commission. All such yield and total return quotations are based
upon historical earnings and are not intended to indicate future performance.
The return on and principal value of an investment in any of the Funds will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.

Yield calculations will be based upon a 30-day period stated in the
advertisement and will be calculated by dividing the net investment income per
share (as defined under Securities and Exchange Commission rules and
regulations) earned during the advertised period by the offering price per share
(including the maximum sales charge) on the last day of the period. The result
will then be "annualized" using a formula that provides for semi-annual
compounding of income.

Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to a Fund from the redeemable value of such payment at the end of
the advertised period, dividing such difference by $1,000 and multiplying the
quotient by 100. In calculating average annual and cumulative total return, the
maximum sales charge is deducted from the hypothetical investment and all
dividends and distributions are assumed to be reinvested. Such total return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge, and which thus will
be higher.

Comparative performance information also may be used from time to time in
advertising the Funds' shares. For example, advertisements may compare the
Funds' performance to that of various unmanaged market indices, or may include
performance data from Lipper Analytical Services, Inc., Morningstar, Inc. or
other entities or organizations which track the performance of investment
companies.

For additional information regarding comparative performance information and
the calculation of yield, average annual total return and cumulative total
return, see "Performance Comparisons" in the Statement of Additional
Information.

GENERAL INFORMATION

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as follows: Growth Fund, Emerging Growth Fund, Small Company Growth Fund
(formerly Equity Strategy Fund), Growth and Income Fund, Balanced Fund,
Government Income Fund, Intermediate Bond Fund (formerly Institutional
Government Income Portfolio), National Tax-Exempt Fund and Minnesota Tax-Exempt
Fund, each of which has ten billion authorized shares, and Money Market Fund,
Tax-Exempt Money Market Fund and U.S. Government Money Market Fund, each of
which has one hundred billion authorized shares.

The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. In addition, the Board of Directors may, without
shareholder approval, create and issue one or more additional classes of shares
within each Fund, as well as within any series of the Company created in the
future. See "Capital Stock and Ownership of Shares" in the Statement of
Additional Information.

All shares, when issued, will be fully paid and nonassessable and will be
redeemable. All shares have equal voting rights. They can be issued as full or
fractional shares. A fractional share has pro-rata the same kind of rights and
privileges as a full share. The shares possess no preemptive or conversion
rights.

Each share of a series has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the series'
shares. On some issues, such as the election of directors, all shares of the
Company vote together as one series. On an issue affecting only a particular
series, the shares of the affected series vote separately. Cumulative voting is
not authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and, in such event, the holders of the remaining shares will be
unable to elect any directors.

The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Company. In
addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions and for all amendments to
investment advisory contracts and Rule 12b-1 distribution plans. The 1940 Act
also provides that Directors of the Company may be removed by action of the
record holders of two-thirds or more of the outstanding shares of the Company.
The Directors are required to call a meeting of shareholders for the purpose of
voting upon the question of removal of any Director when so requested in writing
by the record holders of at least 10% of the Company's outstanding shares.

Pending Legal Proceedings

Complaints have been brought against the Adviser and the Distributor
relating to another series of the Company and to other investment companies for
which the Adviser acts or has acted as investment adviser or subadviser. These
lawsuits do not involve the Funds. A number of complaints have been brought in
federal and state court against the Institutional Government Income Portfolio
("PJIGX") series of the Company (such series has been renamed Intermediate Bond
Fund), the Adviser, the Distributor, and certain individuals affiliated or
formerly affiliated with the Adviser and the Distributor. In addition,
complaints have been filed in state and federal court relating to a number of
closed-end investment companies managed by the Adviser and two open-end
investment companies for which the Adviser has acted as sub-adviser. The
complaints,

37
<PAGE>

which ask for rescission of plaintiff shareholders' purchases or compensatory
damages, plus interest, costs and expenses, generally allege, among other
things, certain violations of federal and/or state securities laws, including
the making of materially misleading statements in prospectuses concerning
investment policies and risks. See "Pending Litigation" in the Statement of
Additional Information.

On February 13, 1996, a Settlement Agreement became effective for the
consolidated class action lawsuit, titled In Re: PIPER FUNDS INC. INSTITUTIONAL
GOVERNMENT INCOME PORTFOLIO LITIGATION. The Amended Consolidated Class Action
Complaint was filed on October 5, 1994, in the United States District Court,
District of Minnesota, against PJIGX, the Adviser, the Distributor, William H.
Ellis and Edward J. Kohler, and had alleged the making of materially misleading
statements in the prospectus, common law negligent misrepresentation and breach
of fiduciary duty. The Settlement Agreement will provide approximately $67.5
million, together with interest earned, less certain disbursements and attorney
fees, to class members in payments scheduled over approximately three years.
Such payments will be made by Piper Jaffray Companies Inc. and the Adviser and
will not be an obligation of the Company. A number of lawsuits and arbitrations
brought by some of the investors who requested exclusion from the settlement
class remain pending.

The Adviser and the Distributor to not believe that the PJIGX settlement or
any outstanding complaint or action in arbitration will have a material adverse
effect on their ability to perform under their agreements with the Company or a
material adverse effect on the Funds, and they intend to defend such lawsuits
and actions vigorously.

No dealer, sales representative or other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus (and/or in the Statement of Additional Information referred to
on the cover page of this Prospectus,), and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Funds or Piper Jaffray Inc. This Prospectus does not constitute an offer or
solicitation by anyone in any state in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation.

38
<PAGE>
PIPER FUNDS INC.

INVESTMENT ADVISER
Piper Capital Management Incorporated

DISTRIBUTOR
Piper Jaffray Inc.

CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP

LEGAL COUNSEL

Dorsey & Whitney LLP

Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
Introduction......................... 2
Fund Expenses........................ 4
Financial Highlights................. 6
Investment Objectives and Policies... 11
Special Investment Methods........... 19
Management........................... 24
Distribution of Fund Shares.......... 26
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares............. 28
Reducing Your Sales Charge......... 29
Special Purchase Plans............. 30
How to Redeem Shares............... 31
Shareholder Services............... 32
Dividends and Distributions........ 34
Valuation of Shares.................. 35
Tax Status........................... 35
Performance Comparisons.............. 36
General Information.................. 36
</TABLE>

XGF/XTR-05

[LOGO]
<PAGE>
Prospectus Dated September , 1996

PIPER FUNDS INC.
GOVERNMENT INCOME FUND
INTERMEDIATE BOND FUND
Piper Jaffray Tower
222 South Ninth Street, Minneapolis, Minnesota 55402-3804
(800) 866-7778 (toll free)

Government Income Fund and Intermediate Bond Fund are series of Piper Funds
Inc. (the "Company"), an open-end mutual fund whose shares are currently offered
in twelve series. Each Fund is classified as a diversified mutual fund.

GOVERNMENT INCOME FUND has an investment objective of high current income to
the extent consistent with preservation of capital. The Fund will invest
primarily in securities which are issued or guaranteed as to payment of
principal and interest by the U.S. Government or its agencies or
instrumentalities. The Fund invests a significant portion of its assets in
mortgage-related U.S. Government securities, which may include derivative
mortgage securities. The Fund will limit its aggregate investments in inverse
floating, interest only and principal only derivative mortgage securities to 10%
of net assets.

INTERMEDIATE BOND FUND has an investment objective of a high level of
current income consistent with preservation of capital. The Fund seeks to
achieve its objective by investing primarily in a broad range of investment
quality debt securities.

Investments in the Funds may involve additional risks. The Funds may engage
in short-term trading in attempting to achieve their investment objectives,
which will increase transaction costs. In addition, Government Income Fund may
enter into reverse repurchase agreements as a means of borrowing for investment
purposes. Government Income Fund invests a significant portion of its assets in
mortgage-related U.S. Government securities, including derivative mortgage
securities. Government Fund may invest in illiquid securities which will involve
greater risk than investments in other securities and may increase Fund
expenses. See "Characteristics and Risks of Securities and Special Investment
Methods" for a discussion of the risks of each of these techniques. The market
values of the securities in which the Funds invest will fluctuate with changing
interest rates, as will each Fund's net asset value.

This Prospectus concisely describes the information about the Funds that you
ought to know before investing. Please read it carefully before investing and
retain it for future reference.

A Statement of Additional Information about the Funds dated September ,
1996 is available free of charge. Write to the Funds at Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402-3804 or telephone (800)
866-7778 (toll free). The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated in its entirety
by reference in this Prospectus.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
INTRODUCTION

Government Income Fund ("Government Fund") and Intermediate Bond Fund ("Bond
Fund") (formerly Institutional Government Income Portfolio) (sometimes referred
to herein as a "Fund" or, collectively, as the "Funds") are series of Piper
Funds Inc. (the "Company"), an open-end management investment company organized
under the laws of the State of Minnesota in 1986, the shares of which are
currently issued in twelve separate series. Each Fund has different investment
objective, as described on the cover page of this Prospectus, and is designed to
meet different investment needs. The Funds are classified as diversified mutual
funds.

The Investment Adviser

The Company is managed by Piper Capital Management Incorporated (the
"Adviser"), a wholly owned subsidiary of Piper Jaffray Companies Inc. Each Fund
pays the Adviser a fee for managing its investment portfolio. The fees for
Government Fund and Bond Fund are paid at annual rates of .50% and .30%,
respectively, of average daily net assets. The fees for Government Fund and Bond
Fund are scaled downward as assets increase in size above $250 million and $100
million, respectively. See "Management--Investment Adviser."

The Distributor

Piper Jaffray Inc. ("Piper Jaffray"), a wholly owned subsidiary of Piper
Jaffray Companies Inc. and an affiliate of the Adviser, serves as Distributor of
the Funds' shares.

Offering Price

Shares of the Funds are offered to the public at the next determined net
asset value after receipt of an order by a shareholder's Piper Jaffray
Investment Executive or other broker-dealer, plus a maximum sales charge of 4%
of the offering price (4.17% of the net asset value) for Government Fund and 2%
of the offering price (2.04% of the net asset value) for Bond Fund, in each case
on purchases of less than $100,000. The sales charge is reduced on a graduated
scale on purchases of $100,000 or more. In connection with purchases of $500,000
or more, there is no initial sales charge; however, a contingent deferred sales
charge of 1% for Government Fund and % for Bond Fund will be imposed in the
event of a redemption transaction occurring within 24 months following such a
purchase. See "How to Purchase Shares--Public Offering Price."

Minimum Initial and Subsequent Investments

The minimum initial investment for each Fund is $250. There is no minimum
for subsequent investments. See "How to Purchase Shares--Minimum Investments."

Exchanges

You may exchange your shares for shares of any other mutual fund managed by
the Adviser which is eligible for sale in your state of residence. All exchanges
are subject to the minimum investment requirements and other applicable terms
set forth in the prospectus of the fund whose shares you acquire. Exchanges are
made on the basis of the net asset values of the funds involved, except that
investors exchanging into a fund which has a higher sales charge must pay the
difference. You may make four exchanges per year without payment of a service
charge. Thereafter, there is a $5 service charge for each exchange. See
"Shareholder Services--Exchange Privilege."

Redemption Price

Shares of either Fund may be redeemed at any time at their net asset value
next determined after a redemption request is received by your Piper Jaffray
Investment Executive or other broker-dealer. A

2
<PAGE>
contingent deferred sales charge will be imposed upon the redemption of certain
shares initially purchased without a sales charge. See "How to Redeem
Shares--Contingent Deferred Sales Charge." Each Fund reserves the right, upon 30
days' written notice, to redeem an account if the net asset value of the shares
falls below $200. See "How to Redeem Shares--Involuntary Redemption."

Certain Risk Factors to Consider

An investment in either Fund is subject to certain risks, as set forth in
detail under "Investment Objectives and Policies" and "Characteristics and Risks
of Securities and Special Investment Methods." As with other mutual funds, there
can be no assurance that either Fund will achieve its objective. Each of the
Funds is subject to interest-rate risk (the risk that rising interest rates will
make bonds issued at lower interest rates worth less). As a result, the value of
each Fund's shares will vary. Each Fund is also subject to credit risk (the risk
that a bond issuer will fail to make timely payments of interest or principal)
to the extent it invests in non-U.S. Government securities. Each of the Funds
may engage in the following investment practices: the use of repurchase
agreements, borrowing from banks and the purchase or sale of securities on a
"when-issued" or forward commitment basis, including the use of mortgage dollar
rolls. In addition, Government Fund may enter into reverse repurchase
agreements, lend its portfolio securities, engage in options transactions on the
securities in which it may invest and enter into interest rate futures contracts
and options on futures contracts. All of these techniques may increase the
volatility of a Fund's net asset value. Government Fund may engage in
over-the-counter ("OTC") options transactions. The staff of the Securities and
Exchange Commission has taken the position that purchased OTC options and the
assets used as "cover" for written OTC options are illiquid securities (with an
exception for a certain percentage of such options in limited circumstances).
See "Characteristics and Risks of Securities and Special Investment Methods--
Options Transactions." The Funds may engage in short-term trading in attempting
to achieve their investment objectives, which will increase transaction costs.
The Funds may purchase mortgage-related securities which, in addition to
interest rate risk, are subject to prepayment risk. The Funds' investments in
mortgage-related securities include derivative mortgage securities. Recent
market experience has shown that certain derivative mortgage securities may be
extremely sensitive to changes in interest rates and in prepayment rates on the
underlying mortgage assets and, as a result, the prices of such securities may
be highly volatile. All of these transactions involve certain special risks, as
set forth under "Investment Objectives and Policies" and "Characteristics and
Risks of Securities and Special Investment Methods."

Shareholder Inquiries

3
<PAGE>
FUND EXPENSES

<TABLE>
<CAPTION>
Government Intermediate
Income Bond
Fund Fund
---------- ------------------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...... 4.00% 2.00%
Exchange Fee (1)........................... $0 $0
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............................ .50% .25%
Rule 12b-1 Fees (after voluntary
limitation) (2).......................... .32% .20%
Other Expenses............................. .29% .27%(3)
--- ---
Total Fund Operating Expenses (after
voluntary limitations)................... 1.11% .72%
</TABLE>

- ------------------------
(1) There is a $5.00 fee for each exchange in excess of four exchanges per year.
See "How to Purchase Shares--Exchange Privilege."
(2) See the discussion below for an explanation of voluntary Rule 12b-1 fee
limitations and expense reimbursements.
(3) Includes federal excise tax payments equal to .12% of Bond Fund's average
daily net assets.

Example

You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:

<TABLE>
<CAPTION>
Government Intermediate
Income Bond
Fund Fund
---------- ------------------
<S> <C> <C>
1 Year...................................... $ 51 $ 27
3 Years..................................... $ 74 $ 43
5 Years..................................... $ 99 $ 59
10 Years..................................... $170 $108
</TABLE>

The information in the table for Government Fund is based on actual expenses
incurred by the Fund during the fiscal year ended September 30, 1995. The
information set forth above for Bond Fund is based on actual expenses incurred
by the Fund during the fiscal year ended September 30, 1995, except that Other
Expenses have been adjusted to reflect lower excise tax payments by the Fund in
fiscal 1996 as compared to fiscal 1995. The Funds have adopted a Rule 12b-1 Plan
under which Government Fund and Bond Fund pay the Distributor fees equal, on an
annual basis, to .50% and .30%, respectively, of each such Fund's average daily
net assets in connection with the servicing of Fund shareholder accounts and the
provision of distribution related services to the Funds. The Distributor has
voluntarily limited the fee payable by Government Fund and Bond Fund to annual
rates of .32% and .20%, respectively, of average daily net assets. These

4
<PAGE>
voluntary Rule 12b-1 fee limitations may be revised or terminated at any time
after the fiscal 1996 year end. The Adviser may or may not assume additional
expenses of the Funds from time to time, in its discretion, while retaining the
ability to be reimbursed by the Funds for expenses assumed during a fiscal year
prior to the end of such year. The foregoing policy will have the effect of
lowering a Fund's overall expense ratio and increasing yield to investors when
such amounts are assumed or the inverse when such amounts are reimbursed.

Absent the voluntary Rule 12b-1 fee limitation, Total Fund Operating
Expenses for the fiscal year ended September 30, 1995 would have been 1.29% of
average daily net assets for Government Fund. Actual Total Fund Operating
Expenses for Bond Fund for the fiscal year ended September 30, 1995, including
federal excise tax payments, were .97% of average daily net assets. Absent
voluntary Rule 12b-1 fee limitations, Bond Fund's Total Fund Operating Expenses
for fiscal 1995 would have been 1.07% of average daily net assets.

As a result of Government Fund's annual payment of its Rule 12b-1 fee, a
portion of which is considered an asset-based sales charge, long-term
shareholders of Government Fund may pay more than the economic equivalent of the
maximum 6.25% front end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc. For additional information, including a
more complete explanation of management and Rule 12b-1 fees, see
"Management--Investment Adviser" and "Distribution of Fund Shares."

5
<PAGE>
FINANCIAL HIGHLIGHTS

Government Income Fund
<TABLE>
<CAPTION>
Six months
ended Fiscal year ended September 30, Period from
3/31/96 -------------------------------------------------------- 11/1/88 to
(Unaudited) 1995 1994 1993 1992 1991 1990 9/30/89
----------- -------- -------- -------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 8.99 8.42 10.01 9.86 9.69 9.02 9.18 9.50
----------- -------- -------- -------- -------- ------- ------- -----
Operations:
Net investment income.................... 0.29 0.60 0.69 0.80 0.90 0.84 0.81 0.76
Net realized and unrealized gains
(losses) on investments................ (0.10) 0.60 (1.58) 0.15 0.17 0.67 (0.16) (0.32)
----------- -------- -------- -------- -------- ------- ------- -----
Total from operations................ 0.19 1.20 (0.89) 0.95 1.07 1.51 0.65 0.44
----------- -------- -------- -------- -------- ------- ------- -----
Distributions from net investment income... (0.29) (0.63) (0.68) (0.80) (0.90) (0.84) (0.81) (0.76)
Distributions from net realized
gains.................................... -- -- (0.02) -- -- -- -- --
----------- -------- -------- -------- -------- ------- ------- -----
Total distributions.................. (0.29) (0.63) (0.70) (0.80) (0.90) (0.84) (0.81) (0.76)
----------- -------- -------- -------- -------- ------- ------- -----
Net asset value, end of period............. $ 8.89 8.99 8.42 10.01 9.86 9.69 9.02 9.18
----------- -------- -------- -------- -------- ------- ------- -----
----------- -------- -------- -------- -------- ------- ------- -----
Total return (c)........................... 2.14% 14.87% (9.26%) 10.06% 11.57% 17.51% 7.31% 4.78%
Net assets, end of period
(in millions)............................ $ 94 106 126 160 124 76 73 85
Ratio of expenses to average daily net
assets (d)............................... 1.08%(b) 1.11% 1.05% 1.09% 1.11% 1.18% 1.08% 1.15%(b)
Ratio of net investment income to average
daily net assets (d)..................... 6.45%(b) 7.02% 7.43% 8.10% 9.15% 9.00% 8.87% 8.81%(b)
Portfolio turnover rate (excluding
short-term securities)................... 24% 87% 121% 191% 118% 110% 202% 149%

<CAPTION>
Period
from
Year 3/16/87(a)
Ended to
10/31/88 10/31/87
-------- ---------
<S> <C> <C>
Net asset value, beginning of period....... 9.40 10.00
-------- ---------
Operations:
Net investment income.................... 0.82 0.45
Net realized and unrealized gains
(losses) on investments................ 0.10 (0.60)
-------- ---------
Total from operations................ 0.92 (0.15)
-------- ---------
Distributions from net investment income... (0.82) (0.45)
Distributions from net realized
gains.................................... -- --
-------- ---------
Total distributions.................. (0.82) (0.45)
-------- ---------
Net asset value, end of period............. 9.50 9.40
-------- ---------
-------- ---------
Total return (c)........................... 10.18% 1.41%
Net assets, end of period
(in millions)............................ 62 75
Ratio of expenses to average daily net
assets (d)............................... 1.23% .70%(b)
Ratio of net investment income to average
daily net assets (d)..................... 8.68% 8.07%(b)
Portfolio turnover rate (excluding
short-term securities)................... 217% 281%
</TABLE>

- ------------------------------
(a) Commencement of operations.
(b) Adjusted to an annual basis.
(c) 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.
(d) The ratio of expenses to average net assets excludes interest expense which
has been presented net of the related interest income in the financial
statements. During the periods reflected above, the Fund's Rule 12b-1 fee
was voluntarily limited by the Distributor. Had the maximum Rule 12b-1 fee
of .50% been in effect, the ratios of expenses and net investment income to
average daily net assets would have been: 1.27%/6.26% in the six months
ended 3/31/96, 1.29%/6.84% in fiscal 1995, 1.24%/7.24% in fiscal 1994,
1.27%/7.92% in fiscal 1993, 1.29%/8.97% in fiscal 1992, 1.36%/8.82% in
fiscal 1991, 1.27%/8.68% in fiscal 1990, 1.35%/8.61% in fiscal 1989,
1.43%/8.48% in fiscal 1988 and 1.48%/7.29% in fiscal 1987. Beginning in
fiscal 1995, the expense ratio reflects the effect of gross expenses paid
indirectly by the Fund. Prior period expense ratios have not been adjusted.

6
<PAGE>
Intermediate Bond Fund*
<TABLE>
<CAPTION>
Six months
ended Fiscal year ended September 30, 11/1/88
3/31/96 -------------------------------------------------------- to
(Unaudited) 1995 1994 1993 1992 1991 1990 9/30/89
----------- -------- -------- -------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 8.12 7.98 12.22 11.51 10.71 10.02 9.96 10.08
----------- -------- -------- -------- -------- ------- ------- -----------
Operations:
Net investment income.................... 0.28(b) 0.88 0.90 1.29 1.07 0.94 0.91 0.82
Net realized and unrealized gains
(losses) on investments................ (0.03) 0.31 (3.96) 0.56 0.73 0.67 0.08 (0.12)
----------- -------- -------- -------- -------- ------- ------- -----------
Total from operations................ 0.25 1.19 (3.06) 1.85 1.80 1.61 0.99 0.70
----------- -------- -------- -------- -------- ------- ------- -----------
Distributions:
From net investment income............... (0.69) (1.05) (0.95) (0.90) (0.91) (0.90) (0.90) (0.81)
From net realized gains.................. -- -- (0.23) (0.24) (0.09) (0.02) (0.03) (0.01)
----------- -------- -------- -------- -------- ------- ------- -----------
Total distributions.................. (0.69) (1.05) (1.18) (1.14) (1.00) (0.92) (0.93) (0.82)
----------- -------- -------- -------- -------- ------- ------- -----------
Net asset value, end of period............. $ 7.68 8.12 7.98 12.22 11.51 10.71 10.02 9.96
----------- -------- -------- -------- -------- ------- ------- -----------
----------- -------- -------- -------- -------- ------- ------- -----------
Total return (d)........................... 3.25% 16.15% (26.65%) 17.04% 17.70% 16.80% 10.30% 7.38%
Net assets, end of period (in millions).... $ 239 319 564 792 470 132 36 28
Ratio of expenses to average daily net
assets (e)(f)............................ 0.76%(c) 0.97% 0.78% 0.70% 0.65% 0.75% 0.78% 0.85%(c)
Ratio of net investment income to average
daily net assets (e)..................... 6.83%(c) 8.02% 9.33% 12.51% 11.01% 9.29% 9.00% 9.03%(c)
Portfolio turnover rate (excluding short-
term securities)......................... 49% 136% 169% 109% 64% 29% 76% 23%

7/11/88(a)
to
10/31/88
--------
<S> <C>
Net asset value, beginning of period....... 10.00
--------
Operations:
Net investment income.................... 0.21
Net realized and unrealized gains
(losses) on investments................ 0.08
--------
Total from operations................ 0.29
--------
Distributions:
From net investment income............... (0.21)
From net realized gains.................. --
--------
Total distributions.................. (0.21)
--------
Net asset value, end of period............. 10.08
--------
--------
Total return (d)........................... 3.09%
Net assets, end of period (in millions).... 18
Ratio of expenses to average daily net
assets (e)(f)............................ 0.75%(c)
Ratio of net investment income to average
daily net assets (e)..................... 7.91%(c)
Portfolio turnover rate (excluding short-
term securities)......................... 14%
</TABLE>

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

*On September 12, 1996, shareholders of Intermediate Bond 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
the Fund's name was changed from Institutional Government Income Portfolio to
Intermediate Bond Fund.
(a) Commencement of operations.
(b) Based on average shares outstanding during the period.
(c) Adjusted to an annual basis.
(d) 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.
(e) During the years reflected above, the Fund's Rule 12b-1 fee was voluntarily
limited. In addition, the adviser waived various fees and expenses during
fiscal periods 1990, 1989 and 1988. Had the maximum Rule 12b-1 fee been in
effect and had the Fund paid all fees and expenses, the ratios of expenses
and net investment income to average daily net assets would have been:
0.86%/6.73% in the six months ended 3/31/96, 1.07%/7.92% in fiscal 1995,
0.85%/9.26% in fiscal 1994, 0.77%/12.44% in fiscal 1993, 0.72%/10.94% in
fiscal 1992 0.82%/9.22% in fiscal 1991, 0.91%/8.87% in fiscal 1990,
1.40%/8.48% in fiscal 1989 and 1.53%/7.13% in fiscal 1988. Beginning in
fiscal 1995, the expense ratio reflects the effect of gross expenses paid
indirectly by the Fund. Prior period expense ratios have not been adjusted.
(f) Includes federal excise taxes of 0.07%, 0.37%, 0.23%, 0.09% and 0.02% for
the six months ended 3/31/96 and the fiscal years ended 9/30/95, 9/30/94,
9/30/93 and 9/30/92, respectively.

INVESTMENT OBJECTIVES AND POLICIES

Because of the risks associated with bond investments, the Funds are
intended to be long-term investment vehicles and are not designed to provide
investors with a means of speculating on short-term market movements. Investors
should be willing to accept the risk of the potential for sudden, sometimes
substantial declines in market value. No assurance can be given that the Funds
will achieve their objectives or that shareholders will be protected from the
risk of loss that is inherent in bond market investing.

7
<PAGE>
Government Income Fund

INVESTMENT OBJECTIVE. Government Income Fund ("Government Fund") has an
investment objective of high current income to the extent consistent with
preservation of capital.

INVESTMENT POLICIES AND TECHNIQUES. Government Fund invests primarily in
securities which are issued or guaranteed as to payment of principal and
interest by the U.S. Government or its agencies or instrumentalities ("U.S.
Government Securities"). The Fund invests a significant portion of its assets in
mortgage-related U.S. Government Securities. The Fund may also invest up to 10%
of its total assets in mortgage-related securities issued by private entities.
The Fund's investments in mortgage-related securities may include derivative
mortgage securities; however, the Fund will limit its aggregate investments in
inverse floating, interest only and principal only derivative mortgage
securities (discussed below under "Characteristics and Risks of Securities and
Special Investment Methods") to 10% of net assets. Recent market experience has
shown that certain derivative mortgage securities may be extremely sensitive to
changes in interest rates and in prepayment rates on the underlying mortgage
assets and, as a result, the prices of such securities may be highly volatile.
In addition, the Fund may invest in repurchase agreements and enter into reverse
repurchase agreements with respect to U.S. Government Securities. See
"Characteristics and Risk of Securities and Special Investment
Methods--Repurchase Agreements" and "--Reverse Repurchase Agreements." Under
normal circumstances, the Fund will invest at least 65% of the value of its
total assets in U.S. Government Securities, which amount does not include
mortgage-related securities issued by private entities. The Fund may also invest
in cash and short-term money market securities and, for temporary defensive
purposes, may invest more than 35% of its total assets in such securities.
Investments in short-term money market securities may include U.S. Government
securities, time deposits, bank certificates of deposit, bankers' acceptances,
high-grade commercial paper and other money market instruments. See "Investment
Objectives, Policies and Restrictions--Short-Term Money Market Securities" in
the Statement of Additional Information.

Government Fund may write covered put and call options on U.S. Government
Securities, purchase such put and call options, and enter into closing purchase
and sale transactions with respect thereto. See "Characteristics and Risk of
Securities and Special Investment Methods--Options Transactions." For the
purpose of hedging against changes in the value of the Fund's portfolio
securities due to fluctuations in interest rates, Government Fund may enter into
interest rate futures contracts, purchase and write put or call options on such
contracts, and close such contracts and options. See "Characteristics and Risks
of Securities and Special Investment Methods--Futures Contracts and Options on
Futures Contracts" and "--Risks of Transactions in Futures Contracts and Options
on Futures Contracts." Government Fund also may lend portfolio securities up to
one-third of the value of its total assets. See "Characteristics and Risks of
Securities and Special Investment Methods--Lending of Portfolio Securities."

Government Fund may purchase or sell securities offered on a "when-issued"
or "forward commitment" basis and, in connection therewith, may enter into
mortgage "dollar rolls." The Fund may also enter into reverse repurchase
agreements. The use of these techniques could result in increased volatility of
the Fund's net asset value. See "Characteristics and Risks of Securities and
Special Investment Methods--When-Issued Securities," "--Mortgage Dollar Rolls"
and "--Reverse Repurchase Agreements."

The Adviser will attempt to maintain an average effective duration of 4 to
7 1/2 years for Government Fund's portfolio. Effective duration estimates the
interest rate risk of a security. See "Characteristics and Risks of Securities
and Special Investment Methods--Effective Duration."

INVESTMENT RISKS. Government Fund is subject to interest rate risk, which
is the potential for a decline in bond prices due to rising interest rates. In
general, bond prices vary inversely with interest rates. When interest rates
rise, bond prices generally fall. Conversely, when interest rates fall, bond
prices generally rise.

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Interest rate risk applies to U.S. Government Securities as well as other bonds.
U.S. Government Securities are guaranteed only as to the payment of interest and
principal. The current market prices for such securities are not guaranteed and
will fluctuate. The Fund also is subject to a certain amount of credit risk.
Credit risk, also known as default risk, is the possibility that a bond issuer
will fail to make timely payments of interest or principal. Up to 35% of the
Fund's total assets may be invested in securities which are not issued or
guaranteed as to the payment of principal and interest by the U.S. Government or
its agencies or instrumentalities.

Government Fund invests a significant portion of its assets in
mortgage-related securities. As a result, the Fund is subject to prepayment
risk. Prepayment risk results because, as interest rates fall, homeowners are
more likely to refinance their home mortgages. When home mortgages are
refinanced, the principal on mortgage-related securities held by the Fund is
"prepaid" earlier than expected. The Fund must then reinvest the unanticipated
principal payments at a time when interest rates on new mortgage investments are
falling. Prepayment risk has two important effects on the Fund:

- When interest rates fall and additional mortgage prepayments must be
reinvested at lower interest rates, the income of the Fund will be
reduced.

Government Fund's investments in mortgage-related securities also subject
the Fund to extension risk. Extension risk is the possibility that rising
interest rates may cause prepayments to occur at a slower than expected rate.
This particular risk may effectively change a security which was considered
short- or intermediate-duration at the time of purchase into a long-duration
security. Long-duration securities generally fluctuate more widely in response
to changes in interest rates than short- or intermediate-duration securities.

The Fund's investments in mortgage-related securities include derivative
mortgage securities such as collateralized mortgage obligations and stripped
mortgage-backed securities which may involve risks in addition to those found in
other mortgage-related securities. Recent market experience has shown that
certain derivative mortgage securities may be highly sensitive to changes in
interest and prepayment rates and, as a result, the prices of such securities
may be highly volatile. In addition, recent market experience has shown that
during periods of rising interest rates, the market for certain derivative
mortgage securities may become more unstable and such securities may become more
difficult to sell as market makers choose not to repurchase such securities or
offer prices, based on current market conditions, which are unacceptable to the
Fund. The investment techniques used by the Fund also pose certain risks. See
"Characteristics and Risks of Securities and Special Investment Methods."

Intermediate Bond Fund

On September 12, 1996, shareholders of Bond 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 the Fund's name was changed from
Institutional Government Income Portfolio to Intermediate Bond Fund.

INVESTMENT OBJECTIVE. Intermediate Bond Fund ("Bond Fund") has an
investment objective of a high level of current income consistent with
preservation of capital.

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INVESTMENT POLICIES AND TECHNIQUES. Bond Fund will seek to realize its
objective by investing in a diversified portfolio of debt securities. Under
normal circumstances, the Fund will invest at least 65% of its total assets in
the following debt securities, and generally expects to have at least 90% of its
total assets invested therein: U.S. Government Securities (including
mortgage-related securities), corporate fixed-income securities (excluding, for
purposes of the 65% requirement, preferred or preference stock) and other
fixed-income securities, including privately issued mortgage-backed securities,
asset-backed securities, U.S. dollar-denominated Yankee bonds and short-term
fixed-income securities. In addition, Bond Fund may invest in repurchase
agreements with respect to U.S. Government Securities. See "Characteristics and
Risks of Securities and Special Investment Methods--Repurchase Agreements." The
Fund's investments in short-term fixed-income securities may include time
deposits, bank certificates of deposit, bankers' acceptances, high-grade
commercial paper and other money market instruments. See "Investment Objectives,
Policies and Restrictions--Short-Term Money Market Securities" in the Statement
of Additional Information.

The Fund's investments in mortgage-related securities may include certain
tranches of collateralized mortgage obligations. The Fund, however, will not
invest in any inverse floating, interest only, principal only or inverse
interest only tranches of collateralized mortgage obligations or in any stripped
mortgage-backed securities.

Bond Fund will invest only in securities rated investment grade (securities
rated Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or
better by Standard & Poor's Corporation ("Standard & Poor's")) or, in the case
of unrated securities, judged to be of comparable quality by the Adviser. If a
credit rating agency lowers the rating of a portfolio security held by Bond Fund
to below investment grade, the Fund may retain the portfolio security if the
Adviser deems it in the best interest of the Fund's shareholders, provided that
in no event will more than 5% of the Fund's net assets be invested in fixed-
income securities rated lower than investment grade. Securities rated Baa are
considered by Moody's as medium-grade obligations which lack outstanding
investment characteristics and in fact have speculative characteristics as well,
while securities rated BBB are regarded by Standard & Poor's as having an
adequate capacity to pay principal and interest. Bond Fund may be more dependent
on the Adviser's investment analysis with respect to securities for which a
comparable quality determination is made than is the case with respect to rated
securities. See Appendix A to the Statement of Additional Information for a
description of Moody's and Standard & Poor's ratings applicable to fixed income
securities.

Bond Fund may purchase or sell securities offered on a "when-issued" or
"forward commitment" basis in an amount up to 25% of the value of its total
assets. In connection therewith, Bond Fund may enter into mortgage "dollar
rolls." See "Characteristics and Risks of Securities and Special Investment
Methods-- When-Issued Securities" and "--Mortgage Dollar Rolls." Bond Fund will
not lend its portfolio securities, purchase or sell options on securities or
enter into futures contracts or options thereon.

The Adviser will attempt to maintain an average effective duration of to
years for Bond Fund's portfolio. Effective duration estimates the interest
rate risk of a security. See "Characteristics and Risks of Securities and
Special Investment Methods--Effective Duration."

INVESTMENT RISKS. Bond Fund is subject to interest rate risk, which is the
potential for a decline in bond prices due to rising interest rates. In general,
bond prices vary inversely with interest rates. When interest rates rise, bond
prices generally fall. Conversely, when interest rates fall, bond prices
generally rise. Interest rate risk applies to U.S. Government Securities as well
as other bonds. U.S. Government Securities are guaranteed only as to the payment
of interest and principal. The current market prices for such securities are not
guaranteed and will fluctuate. Bond Fund is subject to prepayment risk and
extension risk to the extent it invests in mortgage-related securities. See
"Government Income Fund--Investment Risks" above.

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Bond Fund also is subject to credit risk. Credit risk, also known as default
risk, is the possibility that a bond issuer will fail to make timely payments of
interest or principal. The investment techniques used by Bond Fund also pose
certain risks. See "Characteristics and Risks of Securities and Special
Investment Methods."

CHARACTERISTICS AND RISKS OF SECURITIES
AND SPECIAL INVESTMENT METHODS

The following describes in greater detail the different types of securities
and investment techniques used by one or both Funds. Additional information
about the Funds' investments and investment practices may be found in the
Statement of Additional Information.

General

The different types of securities in which the Funds invest all have
attendant risks of varying degrees. Because each Fund seeks a different
investment objective and has different investment policies, each is subject to
varying degrees of financial, market and credit risks. Therefore, investors
should carefully consider the investment objective, investment policies and
potential risks of either Fund before investing. Certain types of investments
and investment techniques that may be used by one or both of the Funds are
described in greater detail, including the risks of each, in this section.

U.S. Government Securities

Each Fund may invest in U.S. Government Securities. Such securities are
issued or guaranteed as to payment of principal and interest by the U.S.
Government or its agencies or instrumentalities. The current market prices for
such securities are not guaranteed and will fluctuate. The Funds may invest in
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds, and in obligations of U.S. Government agencies or instrumentalities,
including, but not limited to, Federal Home Loan Banks, the Farmers Home
Administration, Federal Farm Credit Banks, the Federal National Mortgage
Association, the Government National Mortgage Association, the Federal Home Loan
Mortgage Corporation, the Financing Corporation and the Student Loan Marketing
Association.

Obligations of U.S. Government agencies or instrumentalities are backed in a
variety of ways by the U.S. Government or its agencies or instrumentalities.
Some of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Others, such as obligations of the Federal Home Loan Banks, are backed
by the right of the issuer to borrow from the Treasury. Still others, such as
those issued by the Federal National Mortgage Association, are backed by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality. Finally, obligations of other agencies or
instrumentalities are backed only by the credit of the agency or instrumentality
issuing the obligations.

U.S. Government Securities include securities that have no coupons, or have
been stripped of their unmatured interest coupons, individual interest coupons
from such securities that trade separately, and evidences of receipt of such
securities. Such securities may pay no cash income, and are purchased at a deep
discount from their value at maturity. Because interest on zero coupon
securities is not distributed on a current basis but is, in effect, compounded,
zero coupon securities tend to be subject to greater market risk than
interest-paying securities of similar maturities. The Funds may also invest in
custodial receipts issued in connection with so called trademark zero coupon
securities, such as CATs and TIGRs. Since such securities are not issued by the
U.S. Treasury, however, they are not considered U.S. Government Securities for

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<PAGE>
purposes of the Funds' investment policies, although the underlying bond
represented by such receipt is a debt obligation of the U.S. Treasury. Other
zero coupon Treasury securities (STRIPs and CUBEs) are direct obligations of the
U.S. Government and therefore are considered U.S. Government Securities for
purposes of the Funds' investment policies.

Mortgage-Related Securities

Each Fund may invest in U.S. Government mortgage-related securities and in
mortgage-related securities issued by private entities. Mortgage-related
securities are securities that, directly or indirectly, represent participations
in, or are secured by and payable from, loans secured by real property.
Mortgage-related securities, as the term is used in this Prospectus, include
guaranteed mortgage pass-through securities, private mortgage pass-through
securities, adjustable rate mortgage securities and derivative mortgage
securities such as collateralized mortgage obligations and stripped
mortgage-backed securities. Mortgage-related securities fall into three
categories: (a) those issued or guaranteed by the United States Government or
one of its agencies or instrumentalities, such as Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC"); (b) those issued by non-governmental
issuers that represent interests in, or are collateralized by, mortgage-related
securities issued or guaranteed by the United States Government or one of its
agencies or instrumentalities; and (c) those issued by non-governmental issuers
that represent an interest in, or are collateralized by, whole mortgage loans or
mortgage-related securities without a government guarantee but usually with
over-collateralization or some other form of private credit enhancement.
Non-governmental issuers referred to in (b) and (c) above include originators of
and investors in mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Securities in categories (b) and (c) are not
considered U.S. Government Securities for purposes of this Prospectus.

(a) GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The government guaranteed
mortgage pass-through securities in which each Fund may invest include
certificates issued or guaranteed by GNMA, FNMA and FHLMC, which represent
interests in underlying residential mortgage loans. These mortgage pass-through
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 pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to certificate holders.
GNMA and FNMA guarantee timely distributions of scheduled principal. FHLMC
generally guarantees only ultimate collection of principal of the underlying
mortgage loans. For a further description of these securities, see "Investment
Objectives, Policies and Restrictions--Mortgage-Related Securities" in the
Statement of Additional Information.

(b) PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage
pass-through securities ("Private Pass-Throughs") are structured similarly to
GNMA, FNMA and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. These securities usually are backed by a
pool of conventional fixed rate or adjustable loans. Since Private Pass-Throughs
typically are not guaranteed by an entity having the credit status of GNMA, FNMA
or FHLMC, such securities generally are structured with one or more types of
credit enhancement. See "Investment Objectives, Policies and
Restrictions--Mortgage-Related Securities" in the Statement of Additional
Information.

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<PAGE>
(c) ADJUSTABLE RATE MORTGAGE SECURITIES. Each Fund may also invest in
adjustable rate mortgage securities ("ARMS"). ARMS are pass-through mortgage
securities collateralized by mortgages with interest rates that are adjusted
from time to time. The adjustments usually are determined in accordance with a
predetermined interest rate index and may be subject to certain limits. While
the values of ARMS, like other debt securities, generally vary inversely with
changes in market interest rates (increasing in value during periods of
declining interest rates and decreasing in value during periods of increasing
interest rates), the values of ARMS should generally be more resistant to price
swings than other debt securities because the interest rates of ARMS move with
market interest rates. The adjustable rate feature of ARMS will not, however,
eliminate fluctuations in the prices of ARMS, particularly during periods of
extreme fluctuations in interest rates. ARMS typically have caps which limit the
maximum amount by which the interest rate may be increased or decreased at
periodic intervals or over the life of the loan. To the extent that interest
rates increase in excess of the caps, ARMS can be expected to behave more like
traditional debt securities and to decline in value to a greater extent than
would be the case in the absence of such caps. Also, since many adjustable rate
mortgages only reset on an annual basis, it can be expected that the prices of
ARMS will fluctuate to the extent that changes in prevailing interest rates are
not immediately reflected in the interest rates payable on the underlying
adjustable rate mortgages.

(d) COLLATERALIZED MORTGAGE OBLIGATIONS. Each Fund may invest, within the
limits discussed below, in CMOs (collateralized mortgage obligations and
multiclass pass-through securities unless the context otherwise indicates),
which are derivative mortgage securities. Collateralized mortgage obligations
are debt instruments issued by special purpose entities which are secured by
pools of mortgage loans or other mortgage-related securities. Multi-class
pass-through securities are equity interests in a trust composed of mortgage
loans or other mortgage-related securities. Payments of principal and interest
on underlying collateral provide the funds to pay debt service on the
collateralized mortgage obligation or make scheduled distributions on the
multi-class pass-through security. CMOs may be issued by agencies or
instrumentalities of the U.S. Government or by private organizations.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, often referred to as a "tranche," is issued at a specific
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.

The principal and interest on the underlying mortgages may be allocated
among the several tranches of a CMO in many ways. For example, certain tranches
may have variable or floating interest rates and others may be stripped
securities which provide only the principal or interest feature of the
underlying security. See "Stripped Mortgage-Backed Securities," below.
Generally, the purpose of the allocation of the cash flow of a CMO to the
various tranches is to obtain a more predictable cash flow to certain of the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on mortgage-related securities. As part of the
process of creating more predictable cash flows on most of the tranches of a
CMO, one or more tranches generally must be created that absorb most of the
volatility in the cash flows on the underlying mortgage loans. The yields on
these tranches, which may include inverse floaters, interest only and principal
only tranches and Z tranches, discussed below, are generally higher than
prevailing market yields on mortgage-related securities with similar maturities.
As a result of the uncertainty of the cash flows of these tranches, the market
prices of and yield on these tranches generally may be more volatile.

An inverse floater is a CMO tranche with a coupon rate that moves inversely
to a designated index, such as LIBOR (London Inter-Bank Offered Rate) or COFI
(Cost of Funds Index). Like most other fixed-income

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<PAGE>
securities, the value of inverse floaters will decrease as interest rates
increase. Inverse floaters, however, may exhibit greater price volatility than
the majority of mortgage pass-through securities or CMOs. Coupon rates on
inverse floaters typically change at a multiple of the changes in the relevant
index rate. Thus, any rise in the index rate (as a consequence of an increase in
interest rates) causes a correspondingly greater drop in the coupon rate of an
inverse floater while any drop in the index rate causes a correspondingly
greater increase in the coupon of an inverse floater. Some inverse floaters also
exhibit extreme sensitivity to changes in prepayments.

Z tranches of CMOs defer interest and principal payments until one or more
other classes of the CMO have been paid in full. Interest accrues on the Z
tranche, being added to principal, and is compounded through the accretion
period. After the other classes have been paid in full, interest payments begin
and continue through maturity. Z tranches have characteristics similar to zero
coupon bonds. Like a zero coupon bond, during its accretion period a Z tranche
has the advantage of eliminating the risk of reinvesting interest payments at
lower rates during a period of declining market interest rates. At the same
time, however, and also like a zero coupon bond, the market value of a Z tranche
can be expected to fluctuate more widely with changes in market interest rates
than would the market value of a tranche which pays interest currently. In
addition, changes in prepayment rates on the underlying mortgage loans will
affect the accretion period of a Z tranche, and therefore also are likely to
influence its market value.

Bond Fund will not invest in "inverse floaters," interest only and principal
only tranches or inverse interest only tranches. Government Fund may invest in
any CMO tranche, but will limit its aggregate investments in inverse floaters
and interest only and principal only tranches of CMOs (or classes of SMBS, as
described in more detail below) to 10% of the Fund's net assets.

(e) STRIPPED MORTGAGE-BACKED SECURITIES. Government Fund may invest in
stripped mortgage-backed securities ("SMBS"), which are derivative multi-class
mortgage securities. Bond Fund may not invest in SMBS. SMBS may be issued by
agencies or instrumentalities of the United States Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks and special
purpose subsidiaries of the foregoing.

There are generally two classes of SMBS, one of which (the interest only or
"IO" class) entitles the holders thereof to receive distributions consisting
solely or primarily of all or a portion of the interest on the underlying pool
of mortgage loans or mortgage-related securities ("Mortgage Assets") and the
other of which (the principal only or "PO" class) entitles the holders thereof
to receive distributions consisting solely or primarily of all or a portion of
the principal of the underlying pool of Mortgage Assets. The cash flows and
yields on IO and PO classes are extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying Mortgage Assets. For
example, a rapid or slow rate of principal payments may have a material adverse
effect on the yield to maturity of IOs or POs, respectively. If the underlying
Mortgage Assets experience greater than anticipated prepayments of principal, an
IO investor may incur substantial losses. Conversely, if the underlying Mortgage
Assets experience slower than anticipated prepayments of principal, the yield on
a PO class will be affected more severely than would be the case with a
traditional mortgage-related security. Government Fund will limit its aggregate
investments in IO and PO classes and inverse floaters to 10% of the Fund's net
assets.

Corporate Fixed-Income Securities

Bond Fund may invest in corporate fixed-income securities, which include
corporate bonds, debentures, notes and other similar corporate debt instruments.
Fixed-income securities may be acquired with warrants attached. Corporate
income-producing securities may also include forms of preferred or preference
stock,

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<PAGE>
although such securities are not considered debt securities for purposes of the
requirement that Bond Fund invest at least 65% of its total assets in debt
securities.

Bond Fund's investments in corporate fixed-income securities may also
include zero coupon, pay-in-kind and delayed interest securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Pay-in-kind securities pay interest through the issuance
to the holders of additional securities. Delayed interest securities are
securities that remain zero coupon securities until a predetermined date at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Because interest on zero coupon, pay-in-kind and delayed
interest securities is not paid on a current basis, the values of securities of
this type are subject to greater fluctuations than are the value of securities
that distribute income regularly and may be more speculative than such
securities. Accordingly, the values of these securities may be highly volatile
as interest rates rise or fall. In addition, Bond Fund's investments in zero
coupon, pay-in-kind and delayed interest securities will result in special tax
consequences. Although zero coupon securities do not make interest payments, for
tax purposes a portion of the difference between a zero coupon security's
maturity value and its purchase price is taxable income of the Fund each year.

Asset-Backed Securities

Bond Fund may invest in asset-backed securities. Such securities represent
the application of the securitization techniques used to develop
mortgage-related securities to a broad range of other assets. Through the use of
trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, are being
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in a pay-through structure similar to the CMO
structure.

In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. As with mortgage-related securities, asset-backed securities are
often backed by a pool of assets representing obligations of a number of
different parties and use various credit enhancement techniques.

Generally, asset-backed securities involve many of the risks associated with
mortgage-related securities; however, asset-backed securities involve certain
risks that are not posed by mortgage-related securities, resulting mainly from
the fact that asset-backed securities do not usually contain the complete
benefit of a security interest in the related collateral. For example, credit
card receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, including the
bankruptcy laws, some of which may reduce the ability to obtain full payment. In
the case of automobile receivables, due to various legal and economic factors,
proceeds for repossessed collateral may not always be sufficient to support
payments on these securities.

Yankee Bonds

Bond Fund may invest in Yankee bonds, which are dollar denominated
fixed-income securities of foreign-domiciled issuers that are publicly traded in
the United States. The prominant issuers of Yankee bonds are supranational
agencies and Canadian provinces (including provincial utilities). Supranational
organizations are entities designated or supported by a government or government
entity to promote economic development, and include, among others, the Asian
Development Bank, the European Coal and Steel Community, the European Economic
Community and the World Bank. These organizations do not have taxing authority
and are dependent upon their members for payments of interest and principal.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable

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<PAGE>
capital" contributed by members at the entity's call), reserves and net income.
Foreign corporations may also issue Yankee bonds. Investments in Yankee bonds
may involve risks not typically associated with investments in domestic issuers.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect the Fund's investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment position. Bond Fund will invest only in
Yankee bonds that meet the Fund's maturity limits and quality standards.

Effective Duration

Effective duration estimates the interest rate risk (price volatility) of a
security, I.E., how much the value of the security is expected to change with a
given change in interest rates. The longer a security's effective duration, the
more sensitive its price is 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 understand that, while a valuable measure, effective
duration is based on certain assumptions and has several limitations. It is most
useful as a measure of interest rate risk 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, because the calculation
requires assumptions about prepayment rates. For example, when interest rates go
down, homeowners may prepay their mortgages at a higher rate than assumed in the
initial effective duration calculation, thereby shortening the effective
duration of the Fund's mortgage-backed securities. Conversely, if rates
increase, prepayments may decrease to a greater extent than assumed, extending
the effective duration of such securities. For these reasons, the effective
durations of funds which invest a significant portion of their assets in
mortgage-backed securities can be greatly affected by changes in interest rates.

Repurchase Agreements

Each Fund may enter into repurchase agreements with respect to U.S.
Government Securities. A repurchase agreement involves the purchase by a Fund of
securities with the condition that after a stated period of time the original
seller (a member bank of the Federal Reserve System or a recognized securities
dealer) will buy back the same securities ("collateral") at a predetermined
price or yield. Repurchase agreements involve certain risks not associated with
direct investments in securities. In the event the original seller defaults on
its obligation to repurchase, as a result of its bankruptcy or otherwise, the
Fund will seek to sell the collateral, which action could involve costs or
delays. In such case, the Fund's ability to dispose of the collateral to recover
such investment may be restricted or delayed. While collateral will at all times
be maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Fund would suffer a
loss. Repurchase agreements maturing in more than seven days are considered
illiquid and subject to each Fund's restriction on investing in illiquid
securities.

Reverse Repurchase Agreements

Government Fund may engage in "reverse repurchase agreements" with banks and
securities dealers. Bond Fund may not enter into such agreements. Reverse
repurchase agreements are ordinary repurchase agreements in which the Fund is
the seller of, rather than the investor in, securities and agrees to repurchase
them at an agreed upon time and price. Use of a reverse repurchase agreement may
be preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs.

16
<PAGE>
Because certain of the incidents of ownership of the security are retained by
the Fund, reverse repurchase agreements are considered a form of borrowing by
the Fund from the buyer, collateralized by the security. At the time the Fund
enters into a reverse repurchase agreement, cash, U.S. Government securities or
other liquid high-grade debt obligations having a value sufficient to make
payments for the securities to be repurchased will be segregated, and will be
maintained throughout the period of the obligation. Reverse repurchase
agreements will be used as a means of borrowing for investment purposes. This
speculative technique is referred to as leveraging. Leveraging may exaggerate
the effect on net asset value of any increase or decrease in the market value of
the Fund's portfolio. Money borrowed for leveraging will be subject to interest
costs which may or may not be recovered by income from or appreciation of the
securities purchased. No more than 25% of the total assets of Government Fund
will be subject to reverse repurchase agreements.

To attempt to minimize the risk to principal associated with leverage,
Government Fund will enter into reverse repurchase agreements only if such
agreements have terms of one year or less, and only if the Fund is able to
invest the proceeds in securities which the Adviser believes have limited
volatility and a higher interest rate than that payable on the reverse
repurchase agreements. The Adviser believes that such limited use of leverage
will facilitate Government Fund's ability to provide high current income without
adversely affecting the Fund's ability to preserve capital.

Lending of Portfolio Securities

In order to generate additional income, Government Fund may lend portfolio
securities up to one-third of the value of its total assets to broker-dealers,
banks or other financial borrowers of securities. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
Fund will only enter into loan arrangements with broker-dealers, banks or other
institutions which the Adviser has determined are creditworthy under guidelines
established by the Company's Board of Directors and will receive collateral in
the form of cash, U.S. Government securities or other high-grade debt
obligations equal to at least 100% of the value of the securities loaned. The
value of the collateral and of the securities loaned will be marked to market on
a daily basis. During the time portfolio securities are on loan, the borrower
pays the Fund an amount equivalent to any dividends or interest paid on the
securities and the Fund may invest the cash collateral and earn additional
income or may receive an agreed upon amount of interest income from the
borrower. However, the amounts received by the Fund may be reduced by finders'
fees paid to broker-dealers and related expenses.

Borrowing

Government Fund and Bond Fund may borrow money from banks for temporary or
emergency purposes in amounts up to 10% and 5%, respectively, of the value of
the Fund's total assets. Interest paid by a Fund on borrowed funds would
decrease the net earnings of that Fund. Government Fund will not purchase
portfolio securities while outstanding borrowings (other than reverse repurchase
agreements) exceed 5% of the value of the Fund's total assets. Each Fund may
mortgage, pledge or hypothecate its assets in an amount not exceeding 10% of the
value of its total assets to secure temporary or emergency borrowing. The
policies set forth in this paragraph are fundamental and may not be changed
without the approval of a majority of a Fund's shares.

Options Transactions

WRITING COVERED OPTIONS. Government Fund may write (i.e., sell) covered put
and call options with respect to the securities in which it may invest. By
writing a call option, the Fund becomes obligated during the term of the option
to deliver the securities underlying the option upon payment of the exercise
price if

17
<PAGE>
the option is exercised. By writing a put option, the Fund becomes obligated
during the term of the option to purchase the securities underlying the option
at the exercise price if the option is exercised. With respect to put options
written by Government Fund, there will have been a predetermination that
acquisition of the underlying security is in accordance with the investment
objective of the Fund.

The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Government Fund receives premiums from writing call
or put options, which it retains whether or not the options are exercised. By
writing a call option, the Fund might lose the potential for gain on the
underlying security while the option is open, and by writing a put option the
Fund might become obligated to purchase the underlying security for more than
its current market price upon exercise.

The aggregate value of the securities or other collateral underlying the
puts written by Government Fund, determined as of the date the options are sold,
will not exceed 50% of net assets of the Fund. Government Fund may write covered
call options without limit.

PURCHASING OPTIONS. Government Fund may purchase put options, solely for
hedging purposes, in order to protect portfolio holdings in an underlying
security against a substantial decline in the market value of such holdings
("protective puts"). Such protection is provided during the life of the put
because the Fund may sell the underlying security at the put exercise price,
regardless of a decline in the underlying security's market price. Any loss to
the Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put is sold.

Government Fund may also purchase call options solely for the purpose of
hedging against an increase in prices of securities that the Fund ultimately
wants to buy. Such protection is provided during the life of the call option
because the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, Government Fund will
reduce any profit it might have realized had it bought the underlying security
at the time it purchased the call option by the premium paid for the call option
and by transaction costs.

In addition to exchange-traded put and call options, Government Fund may
also purchase and write over-the-counter ("OTC") put and call options in
negotiated transactions with the writers of the options since options on many of
the portfolio securities held by the Fund are not traded on an exchange.
Government Fund will purchase OTC options only from investment dealers and other
financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Adviser.

OTC options are two-party contracts with price and terms negotiated between
buyer and seller. In contrast, exchange-traded options are third-party contracts
with standardized strike prices and expiration dates, and are purchased from a
clearing corporation. Exchange-traded options have a continuous liquid market
while OTC options may not. The staff of the Securities and Exchange Commission
(the "SEC") has taken the position that purchased OTC options and the assets
used to "cover" written OTC options are illiquid securities; however, the entire
amount of assets used to cover OTC options written by the Fund will not be
treated as illiquid in certain circumstances, as set forth in the Statement of
Additional Information. Government Fund will treat OTC options, to the extent
set forth in the Statement of Additional Information, as subject to the Fund's
limitation on illiquid securities.

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For further information concerning the characteristics and risks of options
transactions, see "Investment Objectives, Policies and Restrictions--Options" in
the Statement of Additional Information.

Futures Contracts and Options on Futures Contracts

Government Fund may purchase and sell interest rate futures contracts on
national commodity exchanges. An interest rate futures contract is an agreement
to purchase or sell an agreed amount of debt securities at a set price for
delivery on a future date.

The purpose of the acquisition or sale of a futures contract by Government
Fund is to hedge against fluctuations in the value of its portfolio without
actually buying or selling securities. For example, if the Fund owns long-term
U.S. Government Securities and interest rates are expected to increase, the Fund
might sell futures contracts. If interest rates did increase, the value of the
U.S. Government Securities in the Fund's portfolio would decline, but the value
of the Fund's futures contracts would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. If, on the other hand, the Fund held cash reserves and
short-term investments pending anticipated investment in long-term obligations
and interest rates were expected to decline, the Fund might purchase futures
contracts for U.S. Government Securities. Since the behavior of such contracts
would generally be similar to that of long-term securities, the Fund could take
advantage of the anticipated rise in the value of long-term securities without
actually buying them until the market had stabilized. At that time, the Fund
could accept delivery under the futures contracts or the futures contracts could
be liquidated and the Fund's reserves could then be used to buy long-term
securities in the cash market. Government Fund will engage in such transactions
only for hedging purposes, on either an asset-based or a liability-based basis,
in each case in accordance with the rules and regulations of the Commodity
Futures Trading Commission. See Appendix B to the Statement of Additional
Information.

Government Fund may purchase and sell put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate existing positions. The Fund may use such options on futures contracts
in connection with its hedging strategies in lieu of purchasing and writing
options directly on the underlying securities or purchasing and selling the
underlying futures contracts.

There are risks in using futures contracts and options on futures contracts
as hedging devices. The primary risks associated with the use of futures
contracts and options thereon are (a) the prices of futures contracts and
options may not correlate perfectly with the market value of the securities
subject to the hedge and (b) the possible lack of a liquid secondary market for
a futures contract and the resulting inability to close a futures position prior
to its maturity date. The risk that a Fund will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market.

Additional information with respect to interest rate futures contracts,
together with information regarding options on such contracts, is set forth in
Appendix B to the Statement of Additional Information.

When-Issued Securities

Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. When such transactions are
negotiated, the price is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date. The Funds will not
accrue income with respect to when-issued or forward commitment securities prior
to their stated delivery date. Pending delivery of the securities, each Fund
maintains in a segregated account cash or liquid high-grade debt obligations in
an amount sufficient to meet its purchase commitments. To the extent Bond Fund
enters into such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objective and policies and
not for the purpose of investment leverage.

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The purchase of securities on a when-issued or forward commitment basis
exposes the Funds to risk because the securities may decrease in value prior to
their delivery. Purchasing securities on a when-issued or forward commitment
basis involves the additional risk that the return available in the market when
the delivery takes place will be higher than that obtained in the transaction
itself. A Fund's purchase of securities on a when-issued or forward commitment
basis while remaining substantially fully invested increases the amount of the
Fund's assets that are subject to market risk to an amount that is greater than
the Fund's net asset value, which could result in increased volatility of the
price of the Fund's shares. For additional information concerning when-issued
and forward commitment transactions, see "Investment Objectives, Policies and
Restrictions" in the Statement of Additional Information.

Mortgage Dollar Rolls

In connection with their ability to purchase securities on a when-issued or
forward commitment basis, each Fund may enter into mortgage "dollar rolls" in
which a Fund sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund gives up the right to receive principal and interest paid on the
securities sold. However, the Fund would benefit to the extent of any difference
between the price received for the securities sold and the lower forward price
for the future purchase plus any fee income received. Unless such benefits
exceed the income, capital appreciation and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of the
mortgage dollar roll, the use of this technique will diminish the investment
performance of the Fund compared with what such performance would have been
without the use of mortgage dollar rolls. Each Fund will hold and maintain in a
segregated account until the settlement date cash or liquid high-grade debt
securities in an amount equal to the forward purchase price. Bond Fund will hold
only cash or cash equivalent securities in such account. The benefits derived
from the use of mortgage dollar rolls may depend upon the Adviser's ability to
predict correctly mortgage prepayments and interest rates. There is no assurance
that mortgage dollar rolls can be successfully employed. In addition, the use of
mortgage dollar rolls by a Fund while remaining substantially fully invested
increases the amount of the Fund's assets that are subject to market risk to an
amount that is greater than the Fund's net asset value, which could result in
increased volatility of the price of the Fund's shares.

For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions: one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.

No more than one-third of Government Fund's and 25% of Bond Fund's total
assets may be committed to the purchase of securities on a when-issued or
forward commitment basis, including mortgage dollar roll purchases.

Illiquid Securities

As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, Government Fund will not invest more than 15% of
its net assets in illiquid securities and Bond Fund will not invest in such
securities. A security is considered illiquid if it cannot be sold in the
ordinary course of business within seven days at approximately the price at
which it is valued. Illiquid securities may offer a higher yield than securities
which are more readily marketable, but they may not always be marketable on
advantageous terms.

20
<PAGE>
securities at a time when the Adviser deems it advisable to do so. In addition,
in order to meet redemption requests, Government Fund may have to sell other
assets, rather than such illiquid securities, at a time which is not
advantageous.

Portfolio Turnover

The Funds may engage in short-term trading in attempting to achieve their
investment objectives and will actively use trading to benefit from yield
disparities among different issues of securities or otherwise to achieve their
investment objectives and policies. Since the Funds engage in short-term
trading, they pay greater brokerage commission costs or other transaction costs.
High portfolio turnover also may increase short-term capital gains, which are
taxable as ordinary income when distributed to shareholders.

The method of calculating portfolio turnover rate is set forth in the
Statement of Additional Information under "Investment Objectives, Policies and
Restrictions--Portfolio Turnover." The portfolio turnover rate for each Fund is
set forth in "Financial Highlights."

Investment Restrictions

Each Fund has adopted certain fundamental and nonfundamental investment
restrictions in addition to those set forth above. As a fundamental investment
restriction which may not be changed without shareholder approval, neither Fund
will invest 25% or more of its total assets in any one industry. (This
restriction does not apply to securities of the U.S. Government or its agencies
and instrumentalities and repurchase agreements relating thereto. As to utility
companies, gas, electric, telephone, telegraph, satellite and microwave
communications companies are considered as separate industries.) In addition, as
nonfundamental investment restrictions which may be changed at any time without
shareholder approval, neither Fund will invest more than 5% of its total assets
in the securities of issuers which, with their predecessors, have a record of
less than three years' continuous operation, Government Fund will not invest
more than 5% of its net assets in foreign securities and Bond Fund will not
invest in foreign securities, provided that it may invest in U.S.
dollar-denominated Yankee bonds. A list of each Fund's fundamental and
nonfundamental investment restrictions is set forth in the Statement of
Additional Information.

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MANAGEMENT

Board of Directors

The Company's Board of Directors has the primary responsibility for
overseeing the overall management of the Company and electing its officers.

Investment Adviser

In addition to acting as the investment adviser for the other series of the
Company, the Adviser also serves as investment adviser to a number of other
open-end and closed-end investment companies and to various other concerns,
including pension and profit sharing funds, corporate funds and individuals. As
of , 1996, the Adviser rendered investment advice regarding
approximately $ billion of assets. The Adviser is a wholly owned subsidiary of
Piper Jaffray Companies Inc., a publicly held corporation which is engaged
through its subsidiaries in various aspects of the financial services industry.
The address of the Adviser is Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402-3804.

Under the Investment Advisory and Management Agreement, the Funds pay the
Adviser monthly fees. The fee for Government Fund is paid at an annual rate of
.50% on average daily net assets up to $250 million, .45% on net assets of over
$250 million and up to $500 million, and .40% on net assets of over $500
million. The fee for Bond Fund is paid at an annual rate of .30% on average
daily net assets up to $100 million, .25% on average daily net assets of over
$100 and up to $250 million and .20% on average daily net assets in excess of
$250 million.

Portfolio Management

Bruce D. Salvog and David M. Steele have been primarily responsible for the
day-to-day management of Government Fund's portfolio since March 1995. Mr.
Salvog, Mr. Steele and Worth Bruntjen share primary responsibility for the
day-to-day management of Bond Fund's portfolio. Mr. Bruntjen has been primarily
responsible for Bond Fund's management since the Fund's inception in 1988, and
was joined by Mr. Salvog and Mr. Steele in September 1996. Mr. Salvog has been a
Senior Vice President of the Adviser since 1992 and was a Portfolio Manager at
Kennedy Associates, Inc. in Seattle from 1984 to 1992. He has an AB from Harvard
University and 25 years of financial experience. Mr. Steele has been a Senior
Vice President of the Adviser since 1992 and was a portfolio manager at Kennedy
Associates, Inc. in Seattle from 1987 to 1992. He has an MBA from the University
of Southern California and 16 years of financial experience. Mr. Bruntjen is a
Senior Vice President of the Adviser and a fixed income manager for a variety of
client portfolios including foundations, pensions and profit-sharing plans. Mr.
Bruntjen has 28 years of financial experience.

Transfer Agent, Dividend Disbursing Agent and Custodian

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The Company has entered into Shareholder Account Servicing Agreements with
the Distributor and Piper Trust Company, an affiliate of the Distributor and the
Adviser. Under these agreements the Distributor and Piper Trust Company provide
transfer agent and dividend disbursing agent services for certain shareholder
accounts. For more information, see "Investment Advisory and Other
Services--Transfer Agent and Dividend Disbursing Agent" in the Statement of
Additional Information.

Portfolio Transactions and Brokerage Commissions

DISTRIBUTION OF FUND SHARES

A portion of each Fund's total fee equal to .25% of Government Fund's and
.05% of Bond Fund's average daily net assets is categorized as a distribution
fee intended to compensate the Distributor for its expenses incurred in
connection with the sale of Fund shares. The remaining portion of the fee, equal
to .25% of each Fund's average daily net assets, is categorized as a servicing
fee intended to compensate the Distributor for ongoing servicing and/or
maintenance of shareholder accounts. The Distributor has voluntarily agreed to
limit the total fees payable by Government Fund and Bond Fund under the Plan to
.32% and .20%, respectively, of such Fund's average daily net assets. This
limitation may be revised or terminated at any time after fiscal 1996 year end.
Payments made under the Plan are not tied exclusively to expenses actually
incurred by the Distributor and may exceed such expenses. The Adviser and the
Distributor, out of their own assets, may pay for certain expenses incurred in
connection with the distribution of shares of the Funds. In particular, the
Adviser may make payments out of its own assets to Piper Jaffray Investment
Executives and other broker dealers in connection with their sales of shares of
the Funds. See "How to Purchase Shares--Purchase Price." Further information
regarding the Plan is contained in the Statement of Additional Information.

The Distributor uses all or a portion of its Rule 12b-1 fee to make payments
to Investment Executives of the Distributor and broker-dealers which have
entered into sales agreements with the Distributor. If shares of a Fund are sold
by a representative of a broker-dealer other than the Distributor, the
broker-dealer is paid .30% of the average daily net assets of Government Fund or
.20% of the average daily net assets of Bond Fund attributable to shares sold by
the broker-dealer's representative. If shares of a Fund are sold by an
Investment Executive of the Distributor, compensation is paid to the Investment
Executive in the manner set forth in a written agreement, in an amount not to
exceed .30% of the average daily net assets of Government Fund or .20% of the
average daily net assets of Bond Fund attributable to shares sold by the
Investment Executive.

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SHAREHOLDER GUIDE TO INVESTING

HOW TO PURCHASE SHARES

General

Individuals who received cash proceeds from settlement of the Amended
Consolidated Class Action Complaint discussed on page 35 may invest those
proceeds in shares of Bond Fund at net asset value without payment of a sales
charge and without any minimum investment requirement through December 31, 1996.

Purchase Price

<TABLE>
<CAPTION>
Government Fund Bond Fund
---------------------------------------- ----------------------------------------
Sales Charge Sales Charge Sales Charge Sales Charge
as a Percentage of as a Percentage of as a Percentage of as a Percentage of
Amount of Transaction at Offering Price Offering Price Net Asset Value Offering Price Net Asset Value
- ---------------------------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Less than $100,000...................... 4.00% 4.17% 2.00% 2.04%
$100,000 but less than $250,000......... 3.25% 3.36% % %
$250,000 but less than $500,000......... 2.50% 2.56% % %
$500,000 and over....................... 0.00% 0.00% 0.00% 0.00%
</TABLE>

Purchases of $500,000 or More

If you make a purchase of $500,000 or more (including purchases made under a
Letter of Intent), a contingent deferred sales charge will be assessed in the
event you redeem shares within 24 months following the purchase. This sales
charge of 1% in the case of Government Fund and % in the case of Bond Fund
will be paid to the Distributor. For more information, please refer to the
Contingent Deferred Sales Charge

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SHAREHOLDER GUIDE TO INVESTING
section of "How To Redeem Shares." The Distributor currently pays its Investment
Executives and other broker-dealers fees in connection with these purchases as
follows:

<TABLE>
<CAPTION>
Fee as a Percentage
of Offering Price
----------------------------------
Amount of Transaction Government Fund Bond Fund
- --------------------------------------------------------------- ------------------- -------------
<S> <C> <C>
First $1,000,000............................................... 1.00 % %
Next $2,000,000................................................ 0.75 % %
Next $2,000,000................................................ 0.50 % %
Next $5,000,000................................................ 0.25 % %
Above $10,000,000.............................................. 0.15 % %
</TABLE>

Minimum Investments

A minimum initial investment of $250 is required. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum.

REDUCING YOUR SALES CHARGE

Aggregation

Front-end or initial sales charges may be reduced or eliminated by
aggregating your purchase with purchases of certain related personal accounts.
In addition, purchases made by members of certain organized groups will be
aggregated for purposes of determining sales charges. Sales charges are
calculated by adding the dollar amount of your current purchase to the higher of
the cost or current value of shares of any Piper fund sold with a sales charge
that are currently held by you and your related accounts or by other members of
your group.

QUALIFIED GROUPS. You may group purchases in the following personal
accounts together:

- Your individual account.

- Your spouse's account.

- Your children's accounts (if they are under the age of 21).

- Your employee benefit plan accounts if they are exclusively for your
benefit. This includes accounts such as IRAs, individual 403(b) plans or
single-participant Keogh-type plans.

- A single trust estate or single fiduciary account if you are the trustee
or fiduciary.

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SHAREHOLDER GUIDE TO INVESTING

Additionally, purchases made by members of any organized group meeting the
requirements listed below may be aggregated for purposes of determining sales
charges:

- The group has been in existence for more than six months.

- It is not organized for the purpose of buying redeemable securities of a
registered investment company.

- Purchases must be made through a central administration, or through a
single dealer, or by other means that result in economy of sales effort or
expense.

Right of Accumulation

Letter of Intent

SPECIAL PURCHASE PLANS

For more information on any of the following special purchase plans, contact
your Piper Jaffray Investment Executive or other broker-dealer.

Purchases by Piper Jaffray Companies Inc., Its Subsidiaries and Associated
Persons

- Officers, directors and partners.

- Employees and retirees.

- Sales representatives.

- Spouses or children under the age of 21 of any of the above.

- Any trust, pension, profit-sharing or other benefit plan for any of the
above.

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SHAREHOLDER GUIDE TO INVESTING

Purchases by Broker-Dealers

Purchases by Other Individuals Without a Sales Charge

The following other individuals and entities may also buy Fund shares
without paying a sales charge:

- Clients of the Adviser buying shares of the Funds in their advisory
accounts.

- Discretionary accounts at Piper Trust Company and participants in
investment companies exempt from registration under the 1940 Act that are
managed by the Adviser.

Purchases by Employee Benefit Plans and Tax-Sheltered Annuities

- Shares of the Funds will be sold at net asset value, without a sales
charge, to employee benefit plans containing an actively maintained
qualified cash or deferred arrangement under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code") (a "401(k) Plan").
In the event a 401(k) Plan of an employer has purchased shares in the
Funds or any other series of the Company (other than a money market fund)
during any calendar quarter, any other employee benefit plan of such
employer that is a qualified plan under Section 401(a) of the Code also
may purchase shares of the Funds during such quarter without incurring a
sales charge.

- Custodial accounts under Section 403(b) of the Code (known as
tax-sheltered annuities) also may buy shares of the Funds without
incurring a sales charge.

HOW TO REDEEM SHARES

Normal Redemption

PIPER JAFFRAY INC. ACCOUNTS. To redeem your shares, please contact your
Piper Jaffray Investment Executive with an oral request to redeem your shares.

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SHAREHOLDER GUIDE TO INVESTING
guarantee is required for redemptions over $25,000. Please contact IFTC or refer
to "Redemption of Shares" in the Statement of Additional Information for more
details.

Contingent Deferred Sales Charge

If you invest $500,000 or more and, as a result, pay no front-end sales
charge, you may incur a contingent deferred sales charge if you redeem within 24
months. This charge will be equal to 1%, in the case of Government Fund, or %,
in the case of Bond Fund, of the lesser of the net asset value of the shares at
the time of purchase or at the time of redemption. This charge does not apply to
amounts representing an increase in the value of Fund shares due to capital
appreciation or to shares acquired through reinvestment of dividend or capital
gain distributions. In determining whether a contingent deferred sales charge is
payable, shares that are not subject to any deferred sales charge will be
redeemed first, and other shares will then be redeemed in the order purchased.

LETTER OF INTENT. In the case of a Letter of Intent, the 24-month period
begins on the date the Letter of Intent is completed.

- Systematic withdrawals from any such plan or account if the shareholder is
at least 59 1/2 years old.

- A tax-free return of the excess contribution to an individual retirement
account under Section 408(a) of the Code.

- Involuntary redemptions effected pursuant to the right to liquidate
shareholder accounts having an aggregate net asset value of less than
$200.

Payment of Redemption Proceeds

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SHAREHOLDER GUIDE TO INVESTING
more than seven days under unusual circumstances, such as when trading is not
taking place on the New York Stock Exchange. Payment of redemption proceeds may
also be delayed if the shares to be redeemed were purchased by a check drawn on
a bank which is not a member of the Federal Reserve System, until such checks
have cleared the banking system (normally up to 15 days from the purchase date).

Involuntary Redemption

Each Fund reserves the right to redeem your account at any time the net
asset value of the account falls below $200 as the result of a redemption or
exchange request. You will be notified in writing prior to any such redemption
and will be allowed 30 days to make additional investments before the redemption
is processed.

SHAREHOLDER SERVICES

Automatic Monthly Investment Program

Reinstatement Privilege

If you have redeemed shares of either Fund, you may be eligible to reinvest
in shares of any fund managed by the Adviser without payment of an additional
sales charge. The reinvestment request must be made within 30 days of the
redemption. This privilege is subject to the eligibility of share purchases in
your state as well as the minimum investment requirements and any other
applicable terms in the prospectus of the fund being acquired.

Exchange Privilege

If your investment goals change, you may prefer a fund with a different
objective. If you are considering an exchange into another mutual fund managed
by the Adviser, you should carefully read the appropriate prospectus for
additional information about that fund. A prospectus may be obtained through
your Piper Jaffray Investment Executive, your broker-dealer or the Distributor.
To exchange your shares, please contact your Piper Jaffray Investment Executive,
your broker-dealer or IFTC.

You may exchange your shares for shares of any other mutual fund managed by
the Adviser that is open to new investors. All exchanges are subject to the
eligibility of share purchases in your state as well as the minimum investment
requirements and any other applicable terms in the prospectus of the fund being
acquired. Exchanges are made on the basis of the net asset values of the funds
involved, except that investors exchanging into a fund which has a higher sales
charge must pay the difference.

Telephone Transaction Privileges

29
<PAGE>
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SHAREHOLDER GUIDE TO INVESTING

Directed Dividends

Systematic Withdrawal Plan

If your account has a value of $5,000 or more, you may establish a
Systematic Withdrawal Plan for either of the Funds. This plan will allow you to
receive regular periodic payments by redeeming as many shares from your account
as necessary. As with other redemptions, a redemption to make a withdrawal is a
sale for federal income tax purposes. Payments made under a Systematic
Withdrawal Plan cannot be considered as actual yield or income since part of the
payments may be a return of capital.

Account Protection

If you purchased your shares of either of the Funds through a Piper Jaffray
Investment Executive, you may choose from several account options. Your
investments in any of the Funds held in a Piper Jaffray account (except for
non-"PAT" accounts) would be protected up to $25 million. Investments held in
non-"PAT" Piper Jaffray accounts are protected up to $2.5 million. In each case,
the Securities Investor Protection Corporation ("SIPC") provides $500,000 of
protection; the additional coverage is provided by The Aetna Casualty & Surety
Company. This protection does not cover any declines in the net asset value of
Fund shares.

30
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SHAREHOLDER GUIDE TO INVESTING

Confirmation of Transactions and Reporting of Other Information

DIVIDENDS AND DISTRIBUTIONS

The net investment income of each Fund will be declared as dividends daily
and will be paid monthly. Net realized capital gains, if any, will be
distributed at least once annually. Each daily dividend is payable to Fund
shareholders of record at the time of its declaration. "Shareholders of record"
includes holders of shares purchased for which payment has been received by the
Distributor or IFTC, as appropriate, and excludes holders of shares redeemed on
that day. Shares redeemed will earn dividends through the day prior to
settlement of the redemption.

Each Fund may at times pay out less than the entire amount of net investment
income earned in any particular period in order to permit the Fund to maintain a
more stable level of distributions. Any such amount retained by a Fund would be
available to stabilize future distributions. As a result, the distributions paid
by either Fund for any particular period may be more or less than the amount of
net investment income earned by that Fund during such period.

CAPITAL LOSS CARRYOVER. For federal income tax purposes, Government Fund
and Bond Fund had capital loss carryovers at September 30, 1995 of $16,870,235
and $262,276,703, respectively. Such capital loss carryovers, if not offset by
subsequent capital gains, will expire September 30, 2003 for Government Fund and
September 30, 2003 and 2004 for Bond Fund. It is unlikely that the Board of
Directors will authorize a distribution of any net realized capital gains for a
Fund until such Fund's available capital loss carryover has been offset or has
expired.

31
<PAGE>
VALUATION OF SHARES

The net asset value per share for each Fund is determined by dividing the
value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected) less all
liabilities by the number of Fund shares outstanding. For the purposes of
determining the aggregate net assets of the Funds, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued.

The value of certain fixed-income securities will be provided by an
independent pricing service, which determines these valuations at a time earlier
than the close of the Exchange. Pricing services consider such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations. Fixed
income securities for which prices are not available from an independent pricing
service but where an active market exists will be 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 during such period, or
if the Company's management determines for any other reason that valuations
provided by the pricing service are inaccurate, such securities will be valued
at their fair value according to procedures decided upon in good faith by the
Company's Board of Directors. In addition, any securities or other assets of a
Fund for which market prices are not readily available will be valued at their
fair value in accordance with such procedures.

TAX STATUS

Each Fund is treated as a separate corporation for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code").
Therefore, each Fund is treated separately in determining whether it qualifies
as a regulated investment company under the Code and for purposes of determining
the net ordinary income (or loss), net realized capital gains (or losses) and
distributions necessary to relieve such Fund of any federal income tax
liability. Each Fund qualified as a regulated investment company during its last
taxable year and each Fund intends to so qualify during the current taxable
year. If so qualified, a Fund will not be liable for federal income taxes to the
extent it distributes its taxable income to shareholders. Each Fund will,
however, be subject to a nondeductible excise tax equal to 4% of the excess, if
any, of the amount required to be distributed pursuant to the Code for each
calendar year over the amount actually distributed. In order to avoid imposition
of this excise tax, a Fund generally must declare dividends by the end of a
calendar year representing 98% of the Fund's ordinary income for the calendar
year and 98% of its capital gain net income (both long-term and short-term
capital gains) for the 12-month period ending October 31 of the calendar year.
Bond Fund retained income subject to the 4% excise tax for the 1995, 1994, 1993
and 1992 excise tax years. Bond Fund intends hereafter to distribute sufficient
amounts to avoid payment of the excise tax.

Distributions by a Fund are generally taxable to the shareholders, whether
received in cash or additional shares of the Fund (or shares of another mutual
fund managed by the Adviser). Distributions of net capital gains (designated as
"capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has held the shares of
the Fund.

32
<PAGE>
A shareholder will recognize a capital gain or loss upon the sale or
exchange of shares in a Fund if, as is normally the case, the shares are capital
assets in the shareholder's hands. This capital gain or loss will be long-term
if the shares have been held for more than one year.

The foregoing relates to federal income taxation as in effect as of the date
of this Prospectus. For a more detailed discussion of the federal income tax
consequences of investing in shares of the Funds, see "Taxation" in the
Statement of Additional Information. Before investing in either of the Funds,
you should check the consequences of your local and state tax laws.

PERFORMANCE COMPARISONS

Advertisements and other sales literature for Bond Fund and Government Fund
may refer to a Fund's "average annual total return" and "cumulative total
return." In addition, each Fund may provide yield calculations in advertisements
and other sales literature. When a Fund advertises its yield, it will also
advertise its total return as required by the rules of the Securities and
Exchange Commission. All such yield and total return quotations are based upon
historical earnings and are not intended to indicate future performance. The
return on and principal value of an investment in any of the Funds will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.

GENERAL INFORMATION

The Company, which was organized under the laws of State of Minnesota in
1986, is authorized to issue a total of 10 trillion shares of common stock, with
a par value of $.01 per share. Three hundred and ninety billion of these shares
have been authorized by the Board of Directors to be issued in twelve separate
series, as follows: Growth Fund, Emerging Growth Fund, Small Company Growth Fund
(formerly Equity Strategy Fund), Growth and Income Fund, Balanced Fund,
Government Income Fund, Intermediate Bond Fund

33
<PAGE>
(formerly Institutional Government Income Portfolio), National Tax-Exempt Fund
and Minnesota Tax-Exempt Fund, each of which has ten billion authorized shares,
and Money Market Fund, Tax-Exempt Money Market Fund and U.S. Government Money
Market Fund, each of which has one hundred billion authorized shares.

The Bylaws of the Company provide that shareholder meetings be held only
with such frequency as required under Minnesota law. Minnesota corporation law
requires only that the Board of Directors convene shareholder meetings when it
deems appropriate. In addition, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. Within 30
days after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Company. In
addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions, for all amendments to
investment advisory contracts and for certain amendments to Rule 12b-1
distribution plans. The 1940 Act also provides that Directors of the Company may
be removed by action of the record holders of two-thirds or more of the
outstanding shares of the Company. The Directors are required to call a meeting
of shareholders for the purpose of voting upon the question of removal of any
Director when so requested in writing by the record holders of at least 10% of
the Company's outstanding shares.

Pending Legal Proceedings

Complaints have been brought against the Adviser and the Distributor
relating to Intermediate Bond Fund and to other investment companies for which
the Adviser acts or has acted as investment adviser or subadviser. These
lawsuits do not involve Goverment Fund. A number of complaints have been brought
in federal and state court against the Institutional Government Income Portfolio
("PJIGX") (now named Intermediate Bond Fund), the Adviser, the Distributor, and
certain individuals affiliated or formerly affiliated with the Adviser and the
Distributor. In addition, complaints have been filed in state and federal court
relating to a number of closed-end investment companies managed by the Adviser
and two open-end investment companies for which the Adviser has acted as
sub-adviser. The complaints, which ask for rescission of plaintiff shareholders'
purchases or compensatory damages, plus interest, costs and expenses, generally
allege, among other things, certain violations of federal and/or state
securities laws, including the

34
<PAGE>
making of materially misleading statements in prospectuses concerning investment
policies and risks. See "Pending Litigation" in the Statement of Additional
Information.

No dealer, sales representative or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus (and/or in the Statement of Additional Information referred to on the
cover page of this Prospectus,), and, if given or made, such information or
representations must not be relied upon as having been authorized by the Funds
or Piper Jaffray Inc. This Prospectus does not constitute an offer or
solicitation by anyone in any state in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation.

35
<PAGE>
PIPER FUNDS INC.

INVESTMENT ADVISER
Piper Capital Management Incorporated

DISTRIBUTOR
Piper Jaffray Inc.

CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP

LEGAL COUNSEL
Dorsey & Whitney LLP

Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
Introduction......................... 2
Fund Expenses........................ 4
Financial Highlights................. 6
Investment Objectives and Policies... 7
Characteristics and Risks of
Securities and Special Investment
Methods............................. 11
Management........................... 22
Distribution of Fund Shares.......... 23
SHAREHOLDER GUIDE TO INVESTING
How to Purchase Shares............. 24
Reducing Your Sales Charge......... 25
Special Purchase Plans............. 26
How to Redeem Shares............... 27
Shareholder Services............... 29
Dividends and Distributions........ 31
Valuation of Shares.................. 32
Tax Status........................... 32
Performance Comparisons.............. 33
General Information.................. 33
</TABLE>

XIF-05

[LOGO]
PIPER
INCOME
FUNDS
PROSPECTUS

GOVERNMENT
INCOME FUND

INTERMEDIATE
BOND FUND

SEPTEMBER , 1995
<PAGE>

PART B

GROWTH FUND
GROWTH AND INCOME FUND
EMERGING GROWTH FUND
SMALL COMPANY GROWTH FUND
BALANCED FUND
GOVERNMENT INCOME FUND
INTERMEDIATE BOND FUND

Series of Piper Funds Inc.

STATEMENT OF ADDITIONAL INFORMATION

September 13, 1996

Table of Contents
Page
----

Investment Objectives, Policies and Restrictions . . . . . . . . 2
Directors and Executive Officers . . . . . . . . . . . . . . . . 16
Investment Advisory and Other Services . . . . . . . . . . . . . 23
Portfolio Transactions and Allocation of Brokerage . . . . . . . 31
Capital Stock and Ownership of Shares. . . . . . . . . . . . . . 34
Net Asset Value and Public Offering Price. . . . . . . . . . . . 34
Performance Comparisons. . . . . . . . . . . . . . . . . . . . . 36
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . 39
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . 40
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 43
General Information. . . . . . . . . . . . . . . . . . . . . . . 44
Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . 45
Appendix A - Corporate Bond, Preferred Stock and
Commercial Paper Ratings . . . . . . . . . . . . . . . . . . . A-1
Appendix B - Interest Rate Futures Contracts
and Related Options. . . . . . . . . . . . . . . . . . . . . . B-1
Appendix C - Stock Index Futures Contracts
and Related Options. . . . . . . . . . . . . . . . . . . . . . C-1
Appendix D - Industry Sectors. . . . . . . . . . . . . . . . . . D-1

This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to two Prospectuses each dated
September 13, 1996, one of which relates to Growth Fund, Emerging Growth
Fund, Small Company Growth Fund (formerly Equity Strategy Fund), Growth and
Income Fund, and Balanced Fund, and the other relates to Government Income
Fund and Intermediate Bond Fund (formerly Institutional Government Income
Portfolio). This Statement of Additional Information should be read in
conjunction with each applicable Prospectus. Copies of these Prospectuses
may be obtained from the Funds at Piper Jaffray Tower, 222 South Ninth
Street, Minneapolis, Minnesota 55402-3804.

<PAGE>

INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

The shares of Piper Funds Inc. (the "Company") are currently
offered in twelve series. This Statement of Additional Information relates
to seven of these series: Growth Fund, Emerging Growth Fund, Small Company
Growth Fund (formerly Equity Strategy Fund), Growth and Income Fund, Balanced
Fund, Government Income Fund and Intermediate Bond Fund (formerly
Institutional Government Income Portfolio) (sometimes referred to herein as a
"Fund" or, collectively, as the "Funds"). The investment objectives and
policies of the Funds are set forth in the Funds' respective Prospectuses.
Certain additional investment information is set forth below.

REPURCHASE AGREEMENTS

Each Fund may invest in repurchase agreements. The Funds'
custodian will hold the securities underlying any repurchase agreement or
such securities will be part of the Federal Reserve Book Entry System. The
market value of the collateral underlying the repurchase agreement will be
determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the respective Fund will promptly receive
additional collateral (so the total collateral is an amount at least equal to
the repurchase price plus accrued interest).

The Funds have received from the Securities and Exchange Commission
an exemptive order permitting the Funds, along with the other series of the
Company, closed-end and other open-end investment companies currently managed
by Piper Capital Management Incorporated (the "Adviser"), and all future
series of the Company and all future investment companies advised by the
Adviser or its affiliates, to deposit uninvested cash balances into a large
single joint account to be used to enter into one or more large repurchase
agreements.

WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES

Government Income Fund, Intermediate Bond Fund, Balanced Fund and
Growth and Income Fund may purchase securities offered on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" basis.
When a Fund purchases securities on a when-issued or forward commitment
basis, it will maintain in a segregated account with its custodian cash or
liquid high-grade debt obligations having an aggregate value equal to the
amount of such purchase commitments until payment is made; such Fund will
likewise segregate securities it sells on a forward commitment basis.

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<PAGE>

SHORT-TERM MONEY MARKET SECURITIES

As set forth in the Funds' respective Prospectuses, each Fund may
invest in short-term money market securities including obligations of the
U.S. Government and its agencies and instrumentalities, bank certificates of
deposit, bankers' acceptances, high-grade commercial paper and other money
market instruments.

Securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities include Treasury securities, which differ only
in their interest rates, maturities and times of issuance. Treasury Bills
have initial maturities of one year or less; Treasury Notes have initial
maturities of one to ten years; and Treasury Bonds generally have initial
maturities of greater than ten years. Some obligations issued or guaranteed
by U.S. Government agencies and instrumentalities, for example Government
National Mortgage Association pass-through certificates, are supported by the
full faith and credit of the U.S. Treasury; others, such as those of the
Federal Home Loan Banks, by the right of the issuer to borrow from the
Treasury; others, such as those issued by the Federal National Mortgage
Association, by discretionary authority of the U.S. Government to purchase
certain obligations of the agency or instrumentality; and others, such as
those issued by the Student Loan Marketing Association, only by the credit of
the agency or instrumentality. While the U.S. Government provides financial
support to such U.S. Government-sponsored agencies or instrumentalities, no
assurance can be given that it will always do so, since it is not so
obligated by law. Securities issued or guaranteed by the U.S. Government or
its agencies or instrumentalities that mature within 397 days are considered
money market securities for purposes of the Funds' investment policies.

Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits are not transferable and are therefore illiquid prior to their
maturity. No Fund will invest more than 15% of its net assets in time
deposits and other illiquid securities. (Intermediate Bond Fund may not
invest in illiquid securities.) See "Investment Restrictions." Certificates
of deposit are certificates evidencing the obligation of a bank to repay
funds deposited with it for a specified period of time. Bankers' acceptances
are credit instruments evidencing the obligation of a bank to pay a draft
drawn on it by a customer. These instruments reflect the obligation both of
the bank and of the drawer to pay the full amount of the instrument upon
maturity.

Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs. The commercial paper purchased by
the Funds will consist only of direct obligations which, at the time of their
purchase, are (a) rated Prime-1 or Prime-2 by Moody's Investors Service, Inc.
or A-1 or A-2 by Standard & Poor's Ratings Services, (b) issued by companies
having an outstanding unsecured debt issue currently rated at least Aa by
Moody's Investors Service, Inc. or at least AA by Standard & Poor's Ratings
Services, or (c) if unrated, determined by

-3-

<PAGE>

the Adviser to be of comparable quality to those rated obligations which may
be purchased by the Funds.

Money market instruments in which the Funds may invest also include
non-convertible corporate debt securities (for example, bonds and debentures)
with no more than 397 days remaining to maturity, provided such obligations
are rated Aa or better by Moody's Investors Service, Inc. or AA or better by
Standard & Poor's Ratings Services.

MORTGAGE-RELATED SECURITIES

PASS-THROUGH SECURITIES -- The investments of Government Income
Fund, Intermediate Bond Fund, Balanced Fund and Growth and Income Fund in
mortgage-related securities include government guaranteed pass-through
securities. These obligations are described below.

(1) GNMA CERTIFICATES. Certificates of the Government National
Mortgage Association ("GNMA Certificates") are mortgage-backed securities
which evidence an ownership interest in a pool of mortgage loans. GNMA
Certificates differ from bonds in that principal is paid back monthly by the
borrower over the term of the loan rather than returned in a lump sum at
maturity. GNMA Certificates that Government Income Fund purchases are the
"modified pass-through" type. "Modified pass-through" GNMA Certificates
entitle the holder to receive a share of all interest and principal payments
paid and owed on the mortgage pool, net of fees paid to the "issuer" and
GNMA, regardless of whether the mortgagor actually makes the payment.

GNMA GUARANTEE -- The National Housing Act authorizes GNMA to
guarantee the timely payment of principal and interest on securities backed
by a pool of mortgages insured by the Federal Housing Administration ("FHA")
or the Farmers' Home Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and
credit of the United States. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.

Life of GNMA Certificates -- The average life of a GNMA Certificate
is likely to be substantially less than the original maturity of the mortgage
pools underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures will usually result in the return of the greater part
of principal investment long before the maturity of the mortgages in the
pool. Foreclosures impose no risk to principal investment because of the
GNMA guarantee.

As prepayment rates of individual mortgage pools vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA indicate that
the average life of single-family dwelling mortgages with 25- to 30-year
maturities, the type of

-4-

<PAGE>

mortgages backing the vast majority of GNMA Certificates, is approximately 12
years. Therefore, it is customary to treat GNMA Certificates as 30-year
mortgage-backed securities which prepay fully in the twelfth year.

Yield Characteristics of GNMA Certificates -- The coupon rate of
interest on GNMA Certificates is lower than the interest rate paid on the
VA-guaranteed or FHA-insured mortgages underlying the Certificates by the
amount of the fees paid to GNMA and the issuer.

The coupon rate by itself, however, does not indicate the yield
which will be earned on GNMA Certificates. First, Certificates may be issued
at a premium or discount, rather than at par, and, after issuance,
Certificates may trade in the secondary market at a premium or discount.
Second, interest is earned monthly, rather than semiannually as with
traditional bonds; monthly compounding raises the effective yield earned.
Finally, the actual yield of a GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying it. For example, if
the higher yielding mortgages from the pool are prepaid, the yield on the
remaining pool will be reduced.

(2) FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 through enactment of Title III of the Emergency
Home Finance Act of 1970. Its purpose is to promote development of a
nationwide secondary market in conventional residential mortgages.

FHLMC issues two types of mortgage pass-through securities,
mortgage participation certificates ("PCs") and guaranteed mortgage
certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC
represents a pro rata share of all interest and principal payments made and
owed on the underlying pool. FHLMC guarantees timely payment of interest on
PCs and the full return of principal. Like GNMA Certificates, PCs are
assumed to be prepaid fully in their twelfth year.

GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semiannually and return principal
once a year in guaranteed minimum payments. The expected average life of
these securities is approximately ten years.

(3) FNMA SECURITIES. The Federal National Mortgage Association
was established in 1938 to create a secondary market in mortgages insured by
the FHA.

FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each
FNMA Certificate represents a pro rata share of all interest and principal
payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest on FNMA Certificates and the full return of principal.
Like GNMA Certificates, FNMA Certificates are assumed to be prepaid fully in
their twelfth year.

-5-

<PAGE>

CREDIT SUPPORT -- To lessen the effect of failures by obligors on
underlying mortgages to make payments, mortgage-related securities may contain
elements of credit support. Such credit support falls into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the pass-through of payments
due on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default enhances the likelihood of ultimate
payment of the obligations on at least a portion of the assets in the pool.
Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination
of such approaches. The Funds will not pay any additional fees for such
credit support, although the existence of credit support may increase the
price of a security.

The ratings of securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the enhancement
provider. The ratings of such securities could be subject to reduction in
the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.

Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over-collateralization" (where
the scheduled payments on, or the principal amount of, the underlying assets
exceed those required to make payment on the securities and pay any servicing
or other fees). The degree of credit support provided for each issue is
generally based on historical information with respect to the level of credit
risk associated with the underlying assets. Other information which may be
considered includes demographic factors, loan underwriting practices and
general market and economic conditions. Delinquency or loss in excess of
that which is anticipated could adversely affect the return on an investment
in such a security.

OPTIONS

As set forth in the Funds' respective Prospectuses, each Fund other
than Emerging Growth Fund, Small Company Growth Fund and Intermediate Bond
Fund may write covered options and purchase options on securities. The
principal reason for writing call or put options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone.

-6-

<PAGE>

The Funds receive premiums from writing call or put options, which they
retain whether or not the option is exercised. The Funds will write only
"covered" options. This means that so long as a Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option (or comparable securities satisfying the cover requirements of
securities exchanges). A Fund will be considered "covered" with respect to a
put option it writes if, so long as it is obligated as the writer of a put
option, it deposits and maintains with its custodian cash, U.S. Government
Securities or other liquid high-grade debt obligations having a value equal
to or greater than the exercise price of the option.

A Fund may wish to protect certain portfolio securities against a
decline in market value at a time when no put options on those particular
securities are available for purchase. That Fund may therefore purchase a
put option on securities other than those it wishes to protect even though it
does not hold such other securities in its portfolio. While the Funds will
only purchase put options on securities where, in the opinion of the Adviser,
changes in the value of the put option should generally offset changes in the
value of the securities to be hedged, the correlation will be less than in
transactions in which the Funds purchase put options on underlying securities
they own.

The writing by the Funds of options on securities will be subject
to limitations established by each of the registered securities exchanges on
which such options are traded. Such limitations govern the maximum number of
options in each class which may be written by a single investor or group of
investors acting in concert, regardless of whether the options are written on
the same or different securities exchanges or are held or written on one or
more accounts or through one or more brokers. Thus, the number of options
which a Fund may write may be affected by options written by the other Funds
and by other investment companies managed by and other investment advisory
clients of the Adviser. An exchange may order the liquidation of positions
found to be in excess of these limits, and it may impose certain other
sanctions.

OVER-THE-COUNTER OPTIONS. Government Income Fund may purchase and
write over-the-counter ("OTC") put and call options in negotiated
transactions. The staff of the Securities and Exchange Commission has
previously taken the position that the value of purchased OTC options and the
assets used as "cover" for written OTC options are illiquid securities and,
as such, are to be included in the calculation of a Fund's 15% limitation on
illiquid securities. However, the staff has eased its position somewhat in
certain limited circumstances. Government Income Fund will attempt to enter
into contracts with certain dealers with which it writes OTC options. Each
such contract will provide that the Fund has the absolute right to repurchase
the options it writes at any time at a repurchase price which represents the
fair market value, as determined in good faith through negotiation between
the parties, but which in no event will exceed a price determined pursuant to
a formula contained in the contract. Although the specific details of such
formula may vary among contracts, the formula will generally be based upon a
multiple of the

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<PAGE>

premium received by the Fund for writing the option, plus the amount, if any,
of the option's intrinsic value. The formula will also include a factor to
account for the difference between the price of the security and the strike
price of the option if the option is written out-of-the-money. With respect
to each OTC option for which such a contract is entered into, the Fund will
count as illiquid only the initial formula price minus the option's intrinsic
value.

The Fund will enter into such contracts only with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New
York. Moreover, such primary dealers will be subject to the same standards
as are imposed upon dealers with which the Fund enters into repurchase
agreements.

STOCK INDEX OPTIONS -- GENERAL. Growth Fund, Growth and Income
Fund and Balanced Fund may purchase and write put and call options on stock
indexes listed on national securities exchanges. Stock index options are
purchased for the purpose of hedging against changes in the value of a Fund's
portfolio securities due to anticipated changes in the market. Stock index
options are written for hedging purposes and to realize income from the
premiums received on the sale of such options.

Options on stock indexes are similar to options on stock except
that, rather than the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the stock
index upon which the option is based is greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option. This
amount of cash is equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the "multiplier"). The writer of the option is
obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements are in cash and gain or loss
depends upon price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.

Some stock indexes include stocks that are not limited to any
particular industry or segment of the market (a "broadly based stock market
index"). Currently, options are traded on the following broadly based stock
market indexes: the S&P 100 Index and the S&P 500 Index (traded on the
Chicago Board Options Exchange); the Major Market Index and the AMEX Market
Value Index (traded on the American Stock Exchange); the NYSE Composite
Index; and the National OTC Index (traded on the Philadelphia Stock
Exchange). Indexes may also be based upon a designated industry or group of
industries (an "industry" or "market segment index"). Options are currently
traded on the following industry or market segment indexes: the Oil and Gas
Index, the Computer Technology Index and the Transportation Index (traded on
the American Stock Exchange); the Gold/Silver Index (traded on the
Philadelphia Stock Exchange); and the Technology Index (traded on the Pacific
Coast Stock Exchange).

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<PAGE>

The multiplier for an index option performs a function similar to
the unit of trading for a stock option. It determines the total dollar value
per contract of each point in the difference between the exercise price of an
option and the current level of the underlying index. A multiplier of 100
means that a one-point difference will yield $100. Options on different
indexes may have different multipliers.

Except as described below, Growth Fund, Growth and Income Fund and
Balanced Fund will write call options on indexes only if on such date a Fund
holds a portfolio of stocks at least equal to the value of the index times
the multiplier times the number of contracts. When a Fund writes a call
option on a broadly based stock market index, the Fund will segregate or put
into escrow with its custodian or pledge to a broker as collateral for the
option, cash, high grade liquid debt securities or "qualified securities"
with a market value determined on a daily basis of not less than 100% of the
current index value times the multiplier times the number of contracts.

If a Fund has written an option on an industry or market segment
index, it will segregate, escrow or pledge at least five "qualified
securities," all of which are stocks of issuers in such industry or market
segment, with a market value at the time the option is written of not less
than 100% of the current index value times the multiplier times the number of
contracts. Such stocks will include stocks which represent at least 50% of
the weighting of the industry or market segment index and will represent at
least 50% of the Fund's holdings in that industry or market segment. No
individual security will represent more than 25% of the amount so segregated,
pledged or escrowed in the case of industry or market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated, pledged or escrowed falls below 100% of the current
index value times the multiplier times the number of contracts, the Fund will
segregate, pledge or escrow an amount in cash, Treasury bills, other high
grade short-term obligations or "qualified securities" equal in value to the
difference. In addition, when a Fund writes a call on an index which is
in-the-money at the time the call is written, the Fund will segregate with
its custodian or pledge to the broker short-term debt obligations equal in
value to the amount by which the call is in-the-money times the multiplier
times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event the market value of the qualified securities
falls below 100% of the current index value times the multiplier times the
number of contracts. A "qualified security" is an equity security which is
listed on a national securities exchange or listed on the National
Association of Securities Dealers Automated Quotation System against which
the Fund has not written a stock call option.

A Fund may write a put on a stock index only if it is "secured." A
put is "secured" if the Fund maintains cash, U.S. Government securities or
other high grade liquid debt securities with a value equal to the exercise
price in a segregated

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<PAGE>

account with the Custodian or holds a put on the same underlying index at an
equal or greater exercise price. The aggregate value of the obligations
underlying puts written by a Fund will not exceed 50% of its net assets.

Growth Fund, Growth and Income Fund and Balanced Fund are not
subject to any limitations with respect to the percentage of total assets
that may be hedged. Accordingly, a Fund will not be prohibited from
purchasing or writing stock index options to hedge against changes in the
value of its entire portfolio.

The purchase and sale of options on stock indexes by a Fund are
subject to certain risks that are not present with options on securities.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, whether a Fund will
realize a gain or loss on the purchase or sale of an option on an index
depends upon movements in the level of stock prices in the stock market
generally or in an industry or market segment rather than movements in the
price of a particular stock. Accordingly, successful use by the Funds of
options on indexes is subject to the Adviser's ability to correctly predict
movements in the direction of the stock market generally or of a particular
industry. This requires different skills and techniques than predicting
changes in the price of individual stocks. In the event the Adviser is
unsuccessful in predicting the movements of an index, the Funds could be in a
worse position than had no hedge been attempted.

Index prices may be distorted if trading of certain stocks included
in the index is interrupted. Trading in index options also may be
interrupted in certain circumstances, such as if trading were halted in a
substantial number of stocks included in the index. If this occurred, a Fund
would not be able to close out options which it had purchased or written and,
if restrictions on exercise were imposed, might be unable to exercise an
option it holds, which could result in substantial losses to the Fund.
However, it is the Funds' policy to purchase or write options only on indexes
which include a sufficient number of stocks so that the likelihood of a
trading halt in the index is minimized.

Trading in index options commenced in April 1983 with the S&P 100
option (formerly called the "CBOE 100"). Since that time a number of
additional index option contracts have been introduced, including options on
industry indexes. Although the markets for certain index option contracts
have developed rapidly, the markets for other index options are still
relatively illiquid The ability to establish and close out positions on
such options will be subject to the development and maintenance of a liquid
secondary market. It is not certain that the market will develop in all
index option contracts. The Funds will not purchase or sell any index option
contracts unless and until, in the Adviser's opinion, the market for such
options has developed sufficiently that such risk in connection with such
transactions is no greater than such risk in connection with options on
stocks.

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<PAGE>

SPECIAL RISKS OF WRITING CALLS ON STOCK INDEXES. Because exercises of
index options are settled in cash, a call writer cannot determine the amount of
its settlement obligations in advance and, unlike call writing on specific
stocks, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities. However, the
Funds will write call options on indexes only under the circumstances described
above.

Price movements in a Fund's portfolio probably will not correlate
perfectly with movements in the level of the index and, therefore, each Fund
bears the risk that the price of the securities held by such Fund may not
increase as much as the index. In such event, the Fund would bear a loss on the
call which is not completely offset by movements in the price of such Fund's
portfolio. It is also possible that the index may rise when the Fund's
portfolio of stocks does not rise. If this occurred, the Fund would experience
a loss on the call which is not offset by an increase in the value of its
portfolio and might also experience a loss in its portfolio. However, because
the value of a diversified portfolio will, over time, tend to move in the same
direction as the market, movements in the value of a Fund in the opposite
direction as the market would be likely to occur for only a short period or to a
small degree.

Unless a Fund has other liquid assets which are sufficient to satisfy
the exercise of a call, the Fund would be required to liquidate portfolio
securities in order to satisfy the exercise. Because an exercise must be
settled within hours after receiving the notice of exercise, if a Fund fails to
anticipate an exercise it may have to borrow from a bank pending settlement of
the sale of securities in its portfolio and would incur interest charges
thereon.

When a Fund has written a call, there is also a risk that the market
may decline between the time the Fund has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of
exercise, and the time the Fund is able to sell stocks in its portfolio. As
with stock options, a Fund will not learn that an index option has been
exercised until the day following the exercise date, but, unlike a call on stock
where the Fund would be able to deliver the underlying securities in settlement,
the Fund may have to sell part of its stock portfolio in order to make
settlement in cash, and the price of such stocks might decline before they can
be sold.

SPECIAL RISKS OF PURCHASING PUTS AND CALLS ON STOCK INDEXES. If a
Fund holds an index option and exercises it before final determination of the
closing index value for that day, it runs the risk that the level of the
underlying index may change before closing. If such a change causes the
exercise option to fall out-of-the-money, i.e., the exercise price of the option
rises above the closing index value, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(multiplied by the applicable multiplier) to the assigned writer. While a Fund
may be able to minimize this risk by withholding exercise instructions until
just before the daily cutoff time or by selling rather than exercising

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<PAGE>

an option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely because the cutoff times for index
options may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.

ILLIQUID SECURITIES

As set forth in the respective Funds' Prospectuses, the Funds may
invest in Rule 144A securities, commercial paper issued pursuant to Rule 4(2)
under the Securities Act of 1933, and interest-only and principal-only classes
of Mortgage-Backed Securities issued by the U.S. Government or its agencies or
instrumentalities, and treat such securities as liquid when they have been
determined to be liquid by the Board of Directors of the Company or by the
Adviser subject to the oversight of and pursuant to procedures adopted by the
Board of Directors. Under these procedures, factors taken into account in
determining the liquidity of a security include (a) the frequency of trades and
quotes for the security; (b) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (c) dealer
undertakings to make a market in the security; and (d) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). With respect to Rule 144A securities, investing in such securities
could have the effect of increasing the level of Fund illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities.

PORTFOLIO TURNOVER

Portfolio turnover is the ratio of the lesser of annual purchases or
sales of portfolio securities to the average monthly value of portfolio
securities, not including securities maturing in less than 12 months. A 100%
portfolio turnover rate would occur, for example, if the lesser of the value of
purchases or sales of portfolio securities for a particular year were equal to
the average monthly value of the portfolio securities owned during such year.
For purposes of calculating portfolio turnover, the maturity of investment
purchases and sales related to dollar roll transactions is considered to be less
than 12 months. See "Special Investment Methods--When Issued Securities" in the
Prospectus.

Intermediate Bond Fund's portfolio turnover rate for the fiscal year
ended September 30, 1995 was 136%, compared to 169% for fiscal 1994 and less
than 100% in prior years. The increase in portfolio turnover in fiscal 1994 was
primarily a result of significant sales of portfolio securities in connection
with meeting cash needs for shareholder redemptions during that fiscal year.

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<PAGE>

DIVERSIFICATION

Each Fund intends to operate as a "diversified" management investment
company, as defined in the Investment Company Act of 1940 (the"1940 Act"), which
means that at least 75% of its assets must be represented by cash and cash items
(including receivables), U.S. Government securities, securities of other
investment companies, and other securities for the purposes of this calculation
limited in respect of any one issuer to an amount not greater in value than 5%
of the value of total assets of each Fund and to not more than 10% of the
outstanding voting securities of such issuer.

INVESTMENT RESTRICTIONS

In addition to the investment objectives and policies set forth in the
Prospectus, each Fund is subject to certain fundamental and nonfundamental
investment restrictions, as set forth below. Fundamental investment
restrictions may not be changed without the vote of a majority of a Fund's
outstanding shares. "Majority," as used in the Prospectus and in this Statement
of Additional Information, means the lesser of (a) 67% of a Fund's outstanding
shares present at a meeting of the holders if more than 50% of the outstanding
shares are present in person or by proxy or (b) more than 50% of a Fund's
outstanding shares.

With respect to Growth Fund, Emerging Growth Fund, Small Company
Growth Fund, Growth and Income Fund, Balanced Fund and Government Income Fund,
as fundamental investment restrictions, no Fund will:

1. Invest 25% or more of the value of its total assets in the
securities of issuers conducting their principal business activities in any one
industry. This restriction does not apply to securities of the U.S. Government
or its agencies and instrumentalities and repurchase agreements relating
thereto. The various types of utilities companies, such as gas, electric,
telephone, telegraph, satellite and microwave communications companies, are
considered as separate industries.

2. Issue any senior securities, as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), other than as set forth in restriction
#3 below and except to the extent that using options and futures contracts or
purchasing or selling securities on a when-issued or forward commitment basis
may be deemed to constitute issuing a senior security.

3. Borrow money (provided that Government Income Fund may enter into
reverse repurchase agreements) except from banks for temporary or emergency
purposes. The amount of such borrowing may not exceed 10% of the value of the
Fund's total assets. With respect to each of the Funds, interest paid on
borrowed funds will decrease the net earnings of the Fund. None of the Funds
will purchase portfolio securities while outstanding borrowing exceeds 5% of the
value of the Fund's total assets. None of the Funds will borrow money for
leverage purposes

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<PAGE>

(provided that Government Income Fund may enter into reverse repurchase
agreements for such purposes).

4. Mortgage, pledge or hypothecate its assets except in an amount not
exceeding 10% of the value of its total assets to secure temporary or emergency
borrowing. For purposes of this policy, collateral arrangements for margin
deposits on futures contracts or with respect to the writing of options are not
deemed to be a pledge of assets.

5. Purchase or sell commodities or commodity futures contracts,
except that the Funds may enter into financial futures contracts and engage in
related options transactions.

6. Purchase or sell real estate or real estate mortgage loans, except
that the Funds may invest in securities secured by real estate or interests
therein or issued by companies that invest in real estate or interests therein.
Growth and Income Fund will not invest in real estate limited partnerships.

7. Act as an underwriter of securities of other issuers, except
insofar as each Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.

With respect to Intermediate Bond Fund, as fundamental investment
restrictions, the Fund will not:

1. Issue any senior securities, as defined in the 1940 Act.

2. Borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 5% of the value of its total assets.

3. Mortgage, pledge or hypothecate its assets, except in an amount
not exceeding 10% of the value of its total assets to secure temporary or
emergency borrowing.

4. Act as an underwriter of securities of other issuers, except
insofar as the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.

5. Purchase or sell real estate or real estate mortgage loans, except
that the Fund may invest in securities secured by real estate or interests
therein.

6. Purchase or sell commodities or commodity futures contracts.

7. Invest 25% or more of the value of its total assets in the
securities of issuers conducting their principal business activities in any one
industry. This restriction

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<PAGE>

does not apply to securities of the U.S. Government or its agencies or
instrumentalities and repurchase agreements relating thereto.

8. Make loans to other persons, provided that the Fund may enter into
repurchase agreements. The purchase of a portion of an issue of publicly
distributed bonds, debentures, or other debt securities will not be considered
the making of a loan.

9. Loan its portfolio securities.

As nonfundamental investment restrictions that may be changed at any
time without shareholder approval, no Fund will:

1. Invest in warrants.

2. Invest more than 5% of the value of its total assets in the
securities of any issuers which, with their predecessors, have a record of less
than three years' continuous operation. (Securities of such issuers will not be
deemed to fall within this limitation if they are guaranteed by an entity in
continuous operation for more than three years. The value of all securities
issued or guaranteed by such guarantor and owned by a Fund shall not exceed 10%
of the value of the total assets of such Fund.)

3. Make short sales of securities.

4. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and except that
the Funds may make margin deposits in connection with futures contracts.

5. Write, purchase or sell puts, calls or combinations thereof,
except that Growth Fund, Growth and Income Fund and Balanced Fund may purchase
or write put and call options on stock indexes listed on national securities
exchanges, and Growth Fund, Growth and Income Fund, Balanced Fund and Government
Income Fund may write put and call options with respect to the securities in
which they may invest, may purchase put and call options, and may engage in
financial futures contracts and related options transactions.

6. Purchase or retain the securities of any issuer if, to the Fund's
knowledge, those officers or directors of the Company or its affiliates or of
its investment adviser who individually own beneficially more than 0.5% of the
outstanding securities of such issuer, together own more than 5% of such
outstanding securities.

7. Invest for the purpose of exercising control or management.

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<PAGE>

8. Purchase or sell oil, gas or other mineral leases, rights or
royalty contracts, except that the Funds may purchase or sell securities of
companies investing in the foregoing.

9. Purchase the securities of other investment companies except as
part of a merger, consolidation or acquisition of assets.

10. Invest in real estate limited partnerships (but see fundamental
restriction #6 relating to Growth and Income Fund).

11. Invest more than 5% (25% for Balanced Fund) of total assets in
the securities of foreign issuers, provided that Intermediate Bond Fund will
not invest in the securities of foreign issuers other than U.S.
dollar-denominated Yankee bonds.

12. Invest more than 15% of net assets in illiquid securities, except
that Intermediate Bond Fund will not invest in illiquid securities.

Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets, shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and such excess results therefrom.

DIRECTORS AND EXECUTIVE OFFICERS

The names, addresses and principal occupations during the past five
years of the directors and executive officers of the Company are given below.
The officers and directors of the Company also serve as officers and directors
of various closed- and open-end investment companies managed by the Adviser.

Name and Address Position with the Company
---------------- -------------------------

William H. Ellis* Chairman of the Board of Directors
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

David T. Bennett Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402

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<PAGE>

Name and Address Position with the Company
---------------- -------------------------

Jaye F. Dyer Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402

Karol D. Emmerich Director
7302 Claredon Drive
Edina, Minnesota 55439

Luella G. Goldberg Director
7019 Tupa Drive
Edina, Minnesota 55435

George Latimer Director
754 Linwood Avenue
St. Paul, MN 55105

Paul A. Dow President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Worth Bruntjen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Richard W. Filippone Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Marijo A. Goldstein Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Steven V. Markusen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

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<PAGE>

Name and Address Position with the Company
---------------- -------------------------

Robert H. Nelson Senior Vice President
Piper Jaffray Tower and Treasurer
222 South Ninth Street
Minneapolis, Minnesota 55402

Nancy S. Olsen Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Ronald R. Reuss Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Bruce D. Salvog Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Sandra K. Shrewsbury Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

David M. Steele Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Douglas J. White Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Amy K. Johnson Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Molly J. Destro Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

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<PAGE>

Name and Address Position with the Company
---------------- -------------------------

Edward P. Nicoski Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Paul D. Pearson Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Marcy K. Winson Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Susan S. Miley Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

- ---------------------
* Directors of the Company who are interested persons (as that term is
defined by the 1940 Act) of Piper Capital Management Incorporated and
the Funds.

William H. Ellis is President of Piper Jaffray Companies Inc.;
Director and Chairman of the Board of Piper Capital Management Incorporated
("the Adviser") and has been President of the Adviser since 1994; Director of
Piper Jaffray Inc.

David T. Bennett is of counsel to the law firm of Gray, Plant, Mooty,
Mooty & Bennett, P.A., located in Minneapolis, Minnesota. Mr. Bennett is
chairman of a group of privately held companies and serves on the board of
directors of a number of nonprofit organizations.

Jaye F. Dyer has been President of Dyer Management Company, a private
management company, since 1991. Prior thereto, he was President and Chief
Executive Officer of Dyco Petroleum Corporation, a Minneapolis based oil and
natural gas development company he founded, from 1971 to 1989, and Chairman of
the Board until December 31, 1990. Mr. Dyer serves on the board of directors of
Northwestern National Life Insurance Company, The ReliaStar Financial Corp. (the
holding company of Northwestern National Life Insurance Company) and various
privately held and nonprofit corporations.

Karol D. Emmerich has been President of The Paraclete Group, a
consultant to nonprofit organizations, since 1993. Prior thereto, she had been
Vice President, Chief Accounting Officer and Treasurer of Dayton Hudson
Corporation from 1980 to

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<PAGE>

1993. Ms. Emmerich is an Executive Fellow at the University of St. Thomas
Graduate School of Business and serves on the board of directors of a number
of privately held and nonprofit organizations.

Luella G. Goldberg serves on the board of directors of Northwestern
National Life Insurance Company (since 1976), The ReliaStar Financial Corp.
(since 1989), TCF Bank Savings fsb (since 1985), TCF Financial Corporation
(since 1988) and Hormel Foods Corp. (since 1993). Ms. Goldberg also serves as a
Trustee of Wellesley College, and as a director of a number of other
organizations, including the University of Minnesota Foundation and the
Minnesota Orchestral Association. Ms. Goldberg was Chairman of the Board of
Trustees of Wellesley College from 1985 to 1993 and acting President from July
1, 1993 to October 1, 1993.

George Latimer has been Chief Executive Officer of National Equity
Fund, Chicago, Illinois, since November 1995. Prior thereto, he was Director,
Special Actions Office, Office of the Secretary, Department of Housing and Urban
Development since 1993, prior to that he had been Dean of Hamline Law School,
Saint Paul, Minnesota from 1990 to 1993. Mr. Latimer also serves on the board
of directors of Digital Biometrics, Inc. and Payless Cashways, Inc.

Paul A. Dow is Chief Investment Officer and a Senior Vice President of
the Adviser.

Worth Bruntjen is a Senior Vice President of the Adviser.

Richard W. Filippone is a Senior Vice President of the Adviser.

Marijo A. Goldstein has been a Senior Vice President of the Adviser
since 1993, prior to which she was a Vice President of the Adviser from 1991 to
1993.

Steven V. Markusen has been a Senior Vice President of the Adviser
since 1993, prior to which had been a senior vice president of Investment
Advisers, Inc., in Minneapolis, Minnesota from 1989 to 1993.

Robert H. Nelson has been a Senior Vice President of the Adviser since
1993, prior to which he had been a Vice President of the Adviser from 1991 to
1993.

Nancy S. Olsen is a Senior Vice President of the Adviser.

Ronald R. Reuss is a Senior Vice President of the Adviser.

Bruce D. Salvog has been a Senior Vice President of the Adviser since
1992, prior to which he had been a portfolio manager at Kennedy & Associates in
Seattle, Washington from 1984 to 1992.

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<PAGE>

Sandra K. Shrewsbury has been a Senior Vice President of the Adviser
since 1993, prior to which she had been a Managing Director of Piper Jaffray
since 1992 and a Vice President of Piper Jaffray since 1990.

David M. Steele has been a Senior Vice President of the Adviser since
1992, prior to which he had been a portfolio manager at Kennedy & Associates in
Seattle, Washington from 1987 to 1992.

Douglas J. White is a Senior Vice President of the Adviser.

Molly J. Destro has been a Vice President of the Adviser since 1994,
prior to which she had been an Accounting Manager for the Adviser from 1993 to
1994 and mutual fund accountant for the Adviser from 1991 to 1993.

Amy K. Johnson has been a Vice President of the Adviser since 1994,
prior to which she had been an Accounting Manager for the Adviser from 1993 to
1994 and mutual fund accountant for the Adviser from 1991 to 1993.

Edward P. Nicoski is a Vice President of the Adviser and a Managing
Director of the Distributor.

Paul D. Pearson has been a Vice President of the Adviser since 1995,
prior to which he had been an Accounting Manager for the Adviser from 1994 to
1995 and Director of Fund Operations at Norwest Bank, Minneapolis, Minnesota
from 1992 to 1994.

Marcy K. Winson has been a Vice President of the Adviser since
November 1993, prior to which she was an Assistant Vice President of the Adviser
since March 1993 and an educator from 1990 to 1992.

Susan S. Miley has been a Senior Vice President and the General
Counsel of the Adviser since 1995; prior thereto, she was counsel for American
Express Financial Advisors, Minneapolis, Minnesota from 1994 to 1995 and an
attorney at Simpson, Thacher & Bartlett, New York, New York from 1984 to 1992.

Ms. Goldberg, Ms. Emmerich and Mr. Dyer are members of the Company's
Audit Committee. Ms. Goldberg acts as the chairperson of such committee. The
Audit Committee oversees the Funds' financial reporting process, reviews audit
results and recommends annually to the Company a firm of independent certified
public accountants.

The functions to be performed by the Audit Committee are to recommend
annually to the Board a firm of independent certified public accountants to
audit the books and records of the Funds for the ensuing year; to monitor that
firm's performance; to review with the firm the scope and results of each audit
and determine the need, if any, to extend audit procedures; to confer with the
firm and

-21-

<PAGE>

representatives of the Funds on matters concerning the Funds' financial
statements and reports including the appropriateness of its accounting
practices and of its financial controls and procedures; to evaluate the
independence of the firm; to review procedures to safeguard portfolio
securities; to review the purchase by the Funds from the firm of non-audit
services; to review all fees paid to the firm; and to facilitate
communications between the firm and the Funds' officers and Directors.

The Board of Directors also has a Committee of the Independent
Directors, consisting of Mr. Bennett, who serves as chairperson, Messrs. Dyer,
and Latimer, Ms. Emmerich and Ms. Goldberg, and a Derivatives Committee
consisting of Ms. Emmerich, who serves as chairperson, Ms. Goldberg and Mr.
Dyer.

The functions of the Committee of the Independent Directors are: (a)
recommendation to the full Board of approval of any management, advisory,
sub-advisory and/or administration agreements; (b) recommendation to the full
Board of approval of any underwriting and/or distribution agreements; (c) review
of the fidelity bond and premium allocation; (d) review of errors and omissions
and any other joint insurance policies and premium allocation; (e) review of,
and monitoring of compliance with, procedures adopted pursuant to certain rules
promulgated under the 1940 Act; and (f) such other duties as the independent
directors shall, from time to time, conclude are necessary or appropriate to
carry out their duties under the 1940 Act. The functions of the Derivatives
Committee are: (a) to oversee practices, policies and procedures of the Adviser
in connection with the use of derivatives; (b) to receive periodic reports from
management and independent accountants; and (c) to report periodically to the
Committee of the Independent Directors and the Board of Directors.

The directors of the Company who are officers or employees of the
Adviser or any of its affiliates receive no remuneration from the Company.
Each of the other directors receives fees that are allocated among the series of
the Company on the basis of the total assets of each series. Each director
receives from the Company and Piper Institutional Funds Inc., collectively, an
annual retainer of $1,000, plus a fee of $250 for each regular quarterly Board
of Directors meeting attended. (The per-meeting fee is based on the total
assets of the Company and Piper Institutional Funds Inc. and will increase to
$500 per meeting in the event total assets exceed $200 million, with continuing
increases to as high as $1,500 per meeting in the event total assets reach $5
billion or more. In addition, members of the Audit Committee not affiliated
with the Adviser receive $1,000 for each Audit Committee meeting attended
($2,000 with respect to the chairperson of the Committee), with such fee being
allocated among all open-end and closed-end investment companies managed by the
Adviser. Members of the Committee of the Independent Directors and the
Derivatives Committee currently receive no additional compensation. Directors
are also reimbursed for expenses incurred in connection with attending meetings.

The following table sets forth the aggregate compensation received by
each director from the Company during the fiscal year ended September 30, 1995,
as well

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<PAGE>

as the total compensation received by each director from the Company and all
other registered investment companies managed by the Adviser or affiliates of
the Adviser during the calendar year ended December 31, 1995. Directors who
are officers or employees of the Adviser or any of its affiliates did not
receive any such compensation and are not included in the table.

<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Benefits Compensation
Compensation Accrued as Part Upon from Fund
Director from the Company of Fund Expenses Retirement Complex*
- -------- ---------------- ---------------- ---------- --------
<S> <C> <C> <C> <C>
David T. Bennett $7,400 None None $61,700
Jaye F. Dyer $7,995 None None $67,700
Karol D. Emmerich $7,995 None None $67,700
Luella G. Goldberg $8,590 None None $70,700
George Latimer $7,400 None None $64,700

</TABLE>
- ----------------
* Currently consists of 20 registered investment companies managed by the
Adviser or an affiliate of the Adviser, including the Company. During the 1995
calendar year, the Fund Complex consisted of up to 27 such investment companies,
several of which were merged or consolidated during the year. Each director
included in the table, other than Mr. Bennett, serves on the board of each such
registered investment company. Mr. Bennett serves on the board of 19 such
companies.

INVESTMENT ADVISORY AND OTHER SERVICES

The investment adviser for the Funds is Piper Capital Management
Incorporated (the "Adviser"). Its affiliate, Piper Jaffray Inc. (the
"Distributor"), acts as the Funds' distributor. Each acts as such pursuant to a
written agreement which is periodically approved by the directors or the
shareholders of the Funds. The address of both the Adviser and the Distributor
is Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota
55402-3804.

CONTROL OF THE ADVISER AND THE DISTRIBUTOR

The Adviser and the Distributor are both wholly owned subsidiaries of
Piper Jaffray Companies Inc., a publicly held corporation which is engaged
through its subsidiaries in various aspects of the financial services industry.

INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT

The Adviser acts as the investment adviser of the Funds under an
Investment Advisory and Management Agreement which has been approved by the
Board of Directors (including a majority of the directors who are not parties to
the agreement, or interested persons of any such party, other than as directors
of the Funds) and the shareholders of the Funds.

-23-

<PAGE>

The Investment Advisory and Management Agreement will terminate
automatically in the event of its assignment. In addition, the agreement is
terminable at any time, without penalty, by the Board of Directors of the
Company or by vote of a majority of the Company's outstanding voting securities
on not more than 60 days' written notice to the Adviser, and by the Adviser on
60 days' written notice to the Company. The agreement may be terminated with
respect to a particular Fund at any time by a vote of the holders of a majority
of the outstanding voting securities of such Fund, upon 60 days' written notice
to the Adviser. Unless sooner terminated, the agreement shall continue in
effect for more than two years after its execution only so long as such
continuance is specifically approved at least annually by either the Board of
Directors or by a vote of a majority of the outstanding voting securities of the
Company, provided that in either event such continuance is also approved by a
vote of a majority of the directors who are not parties to such agreement, or
interested persons of such parties, cast in person at a meeting called for the
purpose of voting on such approval. If a majority of the outstanding voting
securities of any of the Funds approves the agreement, the agreement shall
continue in effect with respect to such approving Fund whether or not the
shareholders of any other Fund approve the agreement.

Pursuant to the Investment Advisory and Management Agreement, the
Funds pay the Adviser monthly advisory fees equal on an annual basis to a
certain percentage of each Fund's average net assets as set forth in the
following table. Fees paid by Growth Fund, Emerging Growth Fund, Small Company
Growth Fund, Growth and Income Fund and Balanced Fund are higher than fees paid
by most other investment companies.

Annual Advisory Fee
Average Net Asset Values as Percentage of
of the Fund Average Net Assets
------------------------ ------------------
Growth Fund, On the first $100,000,000 .75%
Emerging Growth On the next $200,000,000 .65%
Fund, Small Company On the next $200,000,000 .55%
Growth Fund, Growth On average assets of over
and Income Fund and $500,000,000 .50%
Balanced Fund

Government On the first $250,000,000 .50%
Income Fund On the next $250,000,000 .45%
On average assets of over
$500,000,000 .40%

Intermediate Bond Fund On the first $100,000,000 .30%
On the next $150,000,000 .25%
On average assets of over
$250,000,000 .20%

-24-

<PAGE>

The table below sets forth the advisory fees paid by each Fund for the
periods indicated.

<TABLE>
<CAPTION>
Advisory fees Advisory fees Advisory fees
for the fiscal for the fiscal for the fiscal
year ended year ended year ended
Fund September 30, 1993 September 30, 1994 September 30, 1995
- ---- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Fund $1,602,957 $1,551,840 1,232,856
Emerging Growth Fund 1,069,899 1,489,006 1,525,105
Small Company Growth Fund 141,165 630,178 463,332
Growth and Income Fund 701,821 635,999 512,370
Balanced Fund 323,255 404,219 324,086
Government Income Fund 717,626 734,950 576,359
Intermediate Bond Fund 1,388,121 1,645,922 959,379

</TABLE>

The Adviser intends, although not required under the Investment
Advisory and Management Agreement, to reimburse Small Company Growth Fund and
Balanced Fund for the amount, if any, by which the total operating and
management expenses of such Fund (including the Adviser's compensation and
amounts paid pursuant to the Company's Rule 12b-1 plan, but excluding interest,
taxes, dividends paid on short positions, brokerage fees and commissions, and
extraordinary expenses) for the fiscal year ending September 30, 1996, exceed
1.32% of average net assets. This arrangement may be modified or discontinued
at any time after fiscal year end, at the Adviser's discretion. In the event of
discontinuance of this arrangement, the Company will still be subject to the
laws of certain states, which require that if a mutual fund's expenses
(including advisory fees but excluding interest, taxes, brokerage commissions
and extraordinary expenses) exceed certain percentages of average net assets,
the fund must be reimbursed for such excess expenses. The Investment Advisory
and Management Agreement provides that the Adviser must make any expense
reimbursements to the Funds required under state law. The laws of California
provide that aggregate annual expenses of a mutual fund shall not normally
exceed 2-1/2% of the first $30 million of the average net assets, 2% of the next
$70 million of the average net assets and 1-1/2% of the remaining average net
assets. Such expenses include the Adviser's compensation, but exclude interest,
taxes, brokerage fees and commissions, extraordinary expenses and amounts paid
under the Company's Rule 12b-1 plan. The Adviser does not believe that the laws
of any other state in which the Funds' shares may be offered for sale contain
expense reimbursement requirements.

Under the Investment Advisory and Management Agreement, the Adviser
provides each Fund with advice and assistance in the selection and disposition
of that Fund's investments. All investment decisions are subject to review by
the Board of Directors of the Company. The Adviser is obligated to pay the
salaries and fees of any affiliates of the Adviser serving as officers or
directors of the Funds.

-25-

<PAGE>

The same security may be suitable for more than one of the Funds
and/or for other series of the Company or other funds or private accounts
managed by the Adviser or its affiliates. If and when two or more funds or
accounts simultaneously purchase or sell the same security, the transactions
will be allocated as to price and amount in accordance with arrangements
equitable to each fund or account. The simultaneous purchase or sale of the
same securities by more than one of the Funds or by any of the Funds and other
series of the Company or other funds or accounts may have a detrimental effect
on a Fund, as this may affect the price paid or received by that Fund or the
size of the position obtainable or able to be sold by that Fund.

EXPENSES

The expenses of each Fund are deducted from their income before
dividends are paid. These expenses include, but are not limited to,
organizational costs, fees paid to the Adviser, fees and expenses of officers
and directors who are not affiliated with the Adviser, taxes, interest, legal
fees, transfer agent, dividend disbursing agent and custodian fees, audit fees,
brokerage fees and commissions, fees and expenses of registering and qualifying
the Funds and their shares for distribution under federal and state securities
laws, expenses of preparing prospectuses and statements of additional
information and of printing and distributing prospectuses and statements of
additional information annually to existing shareholders, the expenses of
reports to shareholders, shareholders' meetings and proxy solicitations,
distribution expenses pursuant to the Rule 12b-1 plan, and other expenses which
are not expressly assumed by the Adviser under the Investment Advisory and
Management Agreement. Any general expenses of the Company that are not readily
identifiable as belonging to a particular series of the Company will be
allocated among the series based upon the relative net assets of the series at
the time such expenses were incurred.

DISTRIBUTION PLAN

Rule 12b-1(b) under the 1940 Act provides that any payments made by
the Funds in connection with financing the distribution of their shares may only
be made pursuant to a written plan describing all aspects of the proposed
financing of distribution, and also requires that all agreements with any person
relating to the implementation of the plan must be in writing. Because some of
the payments described below to be made by the Funds are distribution expenses
within the meaning of Rule 12b-1, the Company has entered into an Underwriting
and Distribution Agreement with the Distributor pursuant to a Distribution Plan
adopted in accordance with such Rule.

Rule 12b-1(b)(1) requires that such plan be approved by a majority of
a Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and of the directors who are not interested persons of the Company and
who have no direct or indirect interest in the operation of the plan or in the
agreements related to the

-26-

<PAGE>

plan, cast in person at a meeting called for the purpose of voting on such
plan or agreement. Rule 12b-1(b)(3) requires that the plan or agreement
provide, in substance:

(a) that it shall continue in effect for a period of more
than one year from the date of its execution or adoption only so
long as such continuance is specifically approved at least
annually in the manner described in paragraph (b)(2) of Rule 12b-1;

(b) that any person authorized to direct the disposition of
moneys paid or payable by the Company pursuant to the plan or any
related agreement shall provide to the Company's Board of
Directors, and the directors shall review, at least quarterly, a
written report of the amounts so expended and the purposes for
which such expenditures were made; and

(c) in the case of a plan, that it may be terminated at any
time by a vote of a majority of the members of the Board of
Directors of the Company who are not interested persons of the
Company and who have no direct or indirect financial interest in
the operation of the plan or in any agreements related to the plan
or by a vote of a majority of the outstanding voting securities of
a Fund.

Rule 12b-1(b)(4) requires that such a plan may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments of the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1.

Rule 12b-1(c) provides that the Company may rely upon Rule 12b-1(b)
only if the selection and nomination of the Company's disinterested directors
are committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Company may implement or continue a plan pursuant to Rule
12b-1(b) only if the directors who vote to approve such implementation or
continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the Investment Company Act of 1940, that there is a reasonable likelihood
that the plan will benefit the Company and its shareholders. The Board of
Directors has concluded that there is a reasonable likelihood that the
Distribution Plan will benefit the Company and its shareholders.

Pursuant to the provisions of the Distribution Plan, each Fund other
than Intermediate Bond Fund pays a fee to the Distributor at a monthly rate of
1/12 of .50% of such Fund's average daily net assets in connection with
servicing of the Fund's shareholder accounts and in connection with
distribution-related services provided with respect to the Funds. Intermediate
Bond Fund's monthly fee under the Distribution Plan is paid at a monthly rate of
1/12 of .30% of such Fund's average daily net assets. A portion of each Fund's
total fee (to be determined from time to

-27-

<PAGE>

time by the Board of Directors) may be paid as a distribution fee and will be
used by the Distributor to cover expenses that are primarily intended to
result in, or that are primarily attributable to, the sale of shares of such
Fund ("Distribution Expenses"), and the remaining portion of the fee may be
paid as a shareholder servicing fee and will be used by the Distributor to
provide compensation for ongoing servicing and/or maintenance of shareholder
accounts with respect to such Fund ("Shareholder Servicing Costs").
Distribution Expenses under the Plan include, but are not limited to, initial
and ongoing sales compensation (in addition to sales charges) paid to
Investment Executives of the Distributor and to other broker-dealers;
expenses incurred in the printing of prospectuses, statements of additional
information and reports used for sales purposes; expenses of preparation and
distribution of sales literature; expenses of advertising of any type; an
allocation of the Distributor's overhead; and payments to and expenses of
persons who provide support services in connection with the distribution of
Fund shares. Shareholder Servicing Costs include all expenses of the
Distributor incurred in connection with providing administrative or
accounting services to shareholders, including, but not limited to, an
allocation of the Distributor's overhead and payments made to persons,
including employees of the Distributor, who respond to inquiries of
shareholders of the Funds regarding their ownership of shares or their
accounts with the Funds, or who provide other administrative or accounting
services not otherwise required to be provided by the Funds' Adviser or
transfer agent.

The table below sets forth the distribution fees paid by each Fund for
the periods indicated.

<TABLE>
<CAPTION>
Distribution fees Distribution fees Distribution fees
for the fiscal for the fiscal for the fiscal
year ended year ended year ended
Fund September 30, 1993 September 30, 1994 September 30, 1995
- ---- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Fund $ 751,481 $ 701,411 552,509
Emerging Growth Fund 447,651 641,080 692,842
Small Company Growth Fund 61,172 265,322 196,463
Growth and Income Fund 299,443 244,091 216,333
Balanced Fund 140,077 161,688 137,063
Government Income Fund 466,457 461,794 365,759
Intermediate Bond Fund 1,364,766 1,553,536 781,067

</TABLE>

For the fiscal year ended September 30, 1993, the Distributor
voluntarily limited amounts payable under the Distribution Plan to .23% of
average daily net assets for Intermediate Bond Fund, .30% of average daily net
assets for the Emerging Growth Fund and .32% for each of the other Funds. The
Distributor voluntarily limited the amounts payable under the Distribution Plan
to an annual rate of .21%, .31%, .30%, .29%, .32%, .30% and .31% of average
daily net assets for Intermediate Bond Fund, Growth Fund, Emerging Growth Fund,
Growth and Income Fund, Small Company Growth Fund, Balanced Fund and Government
Income Fund, respectively, for the fiscal year ended September 30, 1994. The
Distributor voluntarily limited the amounts payable under the Distribution Plan
to an annual

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<PAGE>

rate of .20% of average daily net assets for Intermediate Bond Fund and .32%
of average daily net assets for each of the other Funds for fiscal 1995 and
has voluntarily agreed to the same limitations for fiscal 1996. The
Distributor may terminate its voluntary fee limitation at any time in its
discretion.

Distribution fees for the fiscal year ended September 30, 1995, were
used by the Distributor as follows:

<TABLE>
<CAPTION>
Growth Emerging Small Company Growth and Balanced Government Intermediate
Fund Growth Fund Growth Fund Income Fund Fund Income Fund Bond Fund
---- ----------- ----------- ----------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Advertising $ -0- $-0- $ -0- $ -0- $-0- $ -0- $ -0-
Printing and mailing
of prospectuses to
other than current
shareholders 34,532 43,303 12,279 13,521 8,566 22,860 -0-
Compensation to
underwriters (trail
fees to investment
executives) 517,977 649,539 184,184 202,812 128,497 342,899 781,067
Compensation to
dealers -0- -0- -0- -0- -0- -0- -0-
Compensation to
sales personnel -0- -0- -0- -0- -0- -0- -0-
Interest, carrying or
other financing charge -0- -0- -0- -0- -0- -0- -0-
Other (specify) -0- -0- -0- -0- -0- -0- -0-
-------- -------- -------- -------- -------- -------- --------
Total $552,509 $692,842 $216,333 $196,463 $137,063 $365,759 $781,067

</TABLE>

UNDERWRITING AND DISTRIBUTION AGREEMENT

Pursuant to the Underwriting and Distribution Agreement, the
Distributor has agreed to act as the principal underwriter for the Funds in the
sale and distribution to the public of shares of the Funds, either through
dealers or otherwise. The Distributor has agreed to offer such shares for sale
at all times when such shares are available for sale and may lawfully be offered
for sale and sold. As compensation for its services, in addition to receiving
its distribution fees pursuant to the Distribution Plan discussed above, the
Distributor receives the sales load on sales of Fund shares set forth in the
Prospectus. The following table sets forth the aggregate dollar amount of
underwriting commissions paid by each of the Funds for the periods indicated and
the amount of such commissions retained by the Distributor. The Distributor
waived the payment of commissions for purchases of Growth and Income Fund shares
for the period from July 27, 1992 (commencement of operations) through October
30, 1992.

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<PAGE>

Total Underwriting Commissions Underwriting Commissions Retained by Distributor
------------------------------------------------------- -------------------------------------------------------
Fiscal year ended Fiscal year ended Fiscal year ended Fiscal year ended Fiscal year ended Fiscal year ended
Sept.30, 1993 Sept. 30, 1994 Sept. 30, 1995 Sept. 30, 1993 Sept. 30, 1994 Sept. 30, 1995
------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Growth Fund $629,626 $208,621 $133,585 $365,000 $121,000 $77,479
Emerging
Growth Fund 703,563 594,112 288,665 408,000 345,000 167,426
Small Company
Growth Fund 48,745 124,400 39,339 28,000 72,000 22,817
Growth and
Income Fund 302,763 * 126,666 67,532 176,000 73,000 39,169
Balanced Fund 303,657 47,145 42,214 176,000 27,000 24,484
Government
Income Fund 1,254,145 439,716 111,536 727,000 255,000 64,691
Intermediate
Bond Fund 1,838,990 1,340,277 43,458 1,066,614 777,361 25,206

</TABLE>

- -------------
* From October 1, 1992 through October 31, 1992, the Distributor
voluntarily waived the sales charge for Growth and Income Fund.

For the same periods, in addition to retaining the underwriting
commissions set forth above, the Distributor received brokerage commissions from
each Fund as set forth below.

Brokerage Commissions Paid to Distributor
-----------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, 1993 September 30, 1994 September 30, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Fund $2,042 $6,366 $ 0
Emerging Growth Fund 2,508 1,200 15,314
Small Company Growth Fund 48,814 118,194 125,638
Growth and Income Fund 0 0 0
Balanced Fund 0 0 0
Government Income Fund 58,718 41,650 1,700
Intermediate Bond Fund 0 0 0

</TABLE>

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Investors Fiduciary Trust Company ("IFTC"), the transfer agent for the
Company, maintains certain omnibus shareholder accounts for each of the Funds.
Each such omnibus account represents the accounts of a number of individual
shareholders of a Fund. The Company has entered into Shareholder Account
Servicing Agreements with the Distributor and Piper Trust Company ("Piper
Trust"), pursuant to which the Distributor and Piper Trust provide certain
transfer agent and dividend disbursing agent services for the underlying
individual shareholder accounts held at the respective companies. Pursuant to
such Agreements, the Distributor and Piper Trust have agreed to perform the
usual and ordinary services of transfer agent and dividend disbursing agent not
performed by IFTC with respect to the underlying individual shareholder
accounts, including, without limitation, the following: maintaining all
shareholder accounts, preparing shareholder meeting lists, mailing shareholder
reports and prospectuses, tracking shareholder accounts for blue sky and Rule
l2b-1 purposes, withholding taxes on nonresident alien and foreign corporation
accounts, preparing and mailing checks for disbursement of income dividends and
capital gains distributions, preparing and

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<PAGE>

filing U.S. Treasury Department Form 1099 for all shareholders, preparing and
mailing confirmation forms to shareholders and dealers with respect to all
purchases, exchanges and liquidations of series shares and other transactions
in shareholder accounts for which confirmations are required, recording
reinvestments of dividends and distributions in series shares, recording
redemptions of series shares, and preparing and mailing checks for payments
upon redemption and for disbursements to withdrawal plan holders. As
compensation for such services, the Distributor and Piper Trust are paid
annual fees of $6.00 per active shareholder account (defined as an account
that has a balance of shares) by each Fund (except $7.50 by Government Income
Fund and Intermediate Bond Fund) and $1.60 per closed account (defined as an
account that does not have a balance of shares but has had activity within
the past 12 months) by each Fund. Such fees are payable on a monthly basis
at a rate of 1/12 of the annual per-account charge. Such fees cover all
services listed above, with the exception of preparing shareholder meeting
lists and mailing shareholder reports and prospectuses. These services,
along with proxy processing (if applicable) and other special service
requests, are billable as performed at a mutually agreed upon fee in addition
to the annual fee noted above, provided that such mutually agreed upon fee
shall be fair and reasonable in light of the usual and customary charges made
by others for services of the same nature and quality. During the fiscal
year ended September 30, 1995, Growth Fund paid $65,796, Growth and Income
Fund paid $31,041, Emerging Growth Fund paid $87,841, Small Company Growth
Fund paid $36,395, Balanced Fund paid $13,436, Government Income Fund paid
$47,536, and Intermediate Bond Fund paid $30,800 to the Distributor under its
Shareholder Account Servicing Agreement. Piper Trust's Shareholder Account
Servicing Agreement was not in effect during the fiscal year ended September
30, 1995.

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE

The Adviser is responsible for decisions to buy and sell securities
for the Funds, the selection of broker-dealers to effect the transactions and
the negotiation of brokerage commissions, if any. In placing orders for
securities transactions, the primary criterion for the selection of a
broker-dealer is the ability of the broker-dealer, in the opinion of the
Adviser, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission and considering the state of the
market at the time.

When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research or services to the Adviser. Such
research or services include advice, both directly and in writing, as to the
value of securities; the advisability of investing in, purchasing or selling
securities; and the availability of securities, or purchasers or sellers of
securities; as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. This allows the Adviser to supplement its own investment research
activities and enables the Adviser to obtain the views and information of
individuals and research staffs of many

-31-

<PAGE>

different securities firms prior to making investment decisions for the
Funds. To the extent portfolio transactions are effected with broker-dealers
who furnish research services to the Adviser, the Adviser receives a benefit,
not capable of evaluation in dollar amounts, without providing any direct
monetary benefit to the Funds from these transactions. The Adviser believes
that most research services obtained by it generally benefit several or all
of the investment companies and private accounts which it manages, as opposed
to solely benefiting one specific managed fund or account. Normally,
research services obtained through managed funds or accounts investing in
common stocks would primarily benefit the managed funds or accounts which
invest in common stock; similarly, services obtained from transactions in
fixed-income securities would normally be of greater benefit to the managed
funds or accounts which invest in debt securities. The Funds will not
purchase at a higher price or sell at a lower price in connection with
transactions effected with a director, acting as principal, who furnishes
research services to the Adviser than would be the case if no weight were
given by the Adviser to the dealer's furnishing of such services.

The Adviser has not entered into any formal or informal agreements
with any broker-dealers, nor does it maintain any "formula" which must be
followed in connection with the placement of the Funds' portfolio transactions
in exchange for research services provided the Adviser, except as noted below.
However, the Adviser does maintain an informal list of broker-dealers, which is
used from time to time as a general guide in the placement of the Funds'
business, in order to encourage certain broker-dealers to provide the Adviser
with research services which the Adviser anticipates will be useful to it.
Because the list is merely a general guide, which is to be used only after the
primary criterion for the selection of broker-dealers (discussed above) has been
met, substantial deviations from the list are permissible and may be expected to
occur. The Adviser will authorize the Funds to pay an amount of commission for
effecting a securities transaction in excess of the amount of commission another
broker-dealer would have charged only if the Adviser determines in good faith
that such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or the Adviser's overall responsibilities
with respect to the accounts as to which it exercises investment discretion.
Generally, the Funds pay higher than the lowest commission rates available.

Portfolio transactions for the Funds, including transactions in
futures contracts and options thereon, may be effected through the Distributor.
In determining the commissions to be paid to the Distributor in connection with
transactions effected on a securities exchange, it is the policy of the Funds
that such commissions will, in the judgment of the Adviser, subject to review by
the Board of Directors, be both (a) at least as favorable as those which would
be charged by other qualified brokers or futures commission merchants in
connection with comparable transactions involving similar securities or similar
futures contracts or options on futures contracts being purchased or sold on an
exchange during a comparable

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<PAGE>

period of time, and (b) at least as favorable as commissions
contemporaneously charged by the Distributor on comparable transactions for
its most favored comparable unaffiliated customers. While the Funds do not
deem it practicable and in their best interest to solicit competitive bids
for commission rates on each transaction, consideration will regularly be
given to posted commission rates as well as to other information concerning
the level of commissions charged on comparable transactions by other
qualified brokers and futures commission merchants.

The Funds paid the following brokerage commissions for the periods
indicated:

<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 30, 1993 September 30, 1994 September 30, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Growth Fund $279,166 $131,716 $451,281
Emerging Growth Fund 144,996 158,195 193,809
Small Company Growth Fund 101,014 305,429 325,156
Growth and Income Fund 130,270 82,472 38,430
Balanced Fund 43,829 34,191 16,115
Government Income Fund 105,453 65,620 15,300
Intermediate Bond Fund 3,400 24,022 11,833

</TABLE>

The following table sets forth additional information with respect to
brokerage commissions paid by each Fund during the fiscal year ended September
30, 1995:

<TABLE>
<CAPTION>
% of Fund's aggregate
dollar amount of
transactions involving
% of Fund's payment of
Brokerage total brokerage commissions which
Total brokerage commissions paid commissions paid was effected through
commissions paid to Distributor to Distributor the Distributor
---------------- ---------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Growth Fund $451,281 $ -0- -0- -0-
Emerging Growth Fund 193,809 15,314 7.9 7.6
Small Company Growth Fund 325,156 125,638 38.6 45.0
Growth and Income Fund 38,430 -0- -0- -0-
Balanced Fund 16,115 -0- -0- -0-
Government Income Fund 15,300 1,700 11.1 11.1
Intermediate Bond Fund * 11,833 -0- -0- -0-

</TABLE>

From time to time the Funds may acquire the securities of their
regular brokers or dealers or parent companies of such brokers or dealers.
Growth Fund did not hold any such securities at fiscal year end and did not
purchase any such securities during fiscal 1995. Emerging Growth Fund held
$4,393,125 of securities issued by A.G. Edwards at fiscal year end. During the
1995 fiscal year, Emerging Growth Fund purchased securities issued by A.G.
Edwards. Growth and Income Fund held $421,500 of securities issued by
Bankers Trust and $1,323,112 issued by J.P. Morgan at fiscal year end. During
the 1995 fiscal year, Growth and Income Fund did not purchase any other such
securities. Small Company Growth Fund held $1,065,000 of securities issued A.G.
Edwards, $541,625 of securities issued by J. P. Morgan and $961,250 of
securities issued by Morgan Stanley. During the 1995 fiscal

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<PAGE>

year, Small Company Growth Fund purchased securities issued by A.G. Edwards,
J.P. Morgan and Morgan Stanley. Balanced Fund held $590,064 of securities
issued by Lehman Brothers and $990,810 of securities issued by Federal Home
Loan Mortgage Corporation. During the 1995 fiscal year, Balanced Fund
purchased securities issued by Federal Home Loan Mortgage Corporation.
Government Income Fund and Intermediate Bond Fund did not hold any such
securities at fiscal year end and did not purchase any such securities during
fiscal 1995.

OPTION TRADING LIMITS

The writing by the Funds of options on securities will be subject to
limitations established by each of the registered securities exchanges on which
such options are traded. Such limitations govern the maximum number of options
in each class which may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written on the same or
different securities exchanges or are held or written in one or more accounts or
through one or more brokers. Thus, the number of options which one Fund may
write may be affected by options written by the other Funds and other series of
the Company and by other investment advisory clients of the Adviser. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.

CAPITAL STOCK AND OWNERSHIP OF SHARES

Each Fund's shares of common stock have a par value of $.01 per share,
and have equal rights to share in dividends and assets. The shares possess no
preemptive or conversion rights. Cumulative voting is not authorized. This
means that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and in such
event the holders of the remaining shares will be unable to elect any directors.

As of August __, 1996, no shareholder was known by the Funds to own
beneficially 5% or more of the outstanding shares of any of the Funds. The
directors and officers of all the Funds as a group owned less than 1% of the
outstanding shares of each Fund as of such date.

NET ASSET VALUE AND PUBLIC OFFERING PRICE

The method for determining the public offering price of Fund shares is
summarized in the Prospectus in the text following the headings "How to Purchase
Shares--Public Offering Price" and "Valuation of Shares." The net asset value of
each Fund's shares is determined on each day on which the New York Stock
Exchange is open, provided that the net asset value need not be determined on
days when no Fund shares are tendered for redemption and no order for Fund
shares is received. The New York Stock Exchange is not open for business on the
following holidays (or on the nearest Monday or Friday if the holiday falls on a
weekend):

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<PAGE>

New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4th, Labor
Day, Thanksgiving and Christmas.

The portfolio securities in which each Fund invests fluctuate in
value, and hence the net asset value per share of each Fund also fluctuates. On
September 30, 1995, the net asset value per share for each Fund was
calculated as follows:

GROWTH FUND

NET ASSETS ($172,485,282) = Net Asset Value Per Share
- ------------------------------ ($20.40)
Shares Outstanding (8,454,317)

EMERGING GROWTH FUND

NET ASSETS ($252,632,020) = Net Asset Value Per Share
- ------------------------------ ($25.94)
Shares Outstanding (9,738,623)

SMALL COMPANY GROWTH FUND

NET ASSETS ($48,421,278) = Net Asset Value Per Share
- ------------------------------ ($19.46)
Shares Outstanding (2,487,738)

GROWTH AND INCOME FUND

Net Assets ($73,430,985) = Net Asset Value Per Share
- ------------------------------ ($12.93)
Shares Outstanding (5,678,187)

BALANCED FUND

NET ASSETS ($43,991,628) = Net Asset Value Per Share
- ------------------------------ ($13.74)
Shares Outstanding (3,202,512)

GOVERNMENT INCOME FUND

NET ASSETS ($105,864,126) = Net Asset Value Per Share
- ------------------------------ ($8.99)
Shares Outstanding (11,775,112)

INTERMEDIATE BOND FUND

NET ASSETS ($318,624,617) = Net Asset Value Per Share
- ------------------------------ ($8.12)
Shares Outstanding (39,250,195)

For each Fund other than Intermediate Bond Fund a sales charge of
4.17% of the net asset value (in the case of sales of less than $100,000) will
be added to the net asset value per share to determine the public offering price
per share. The sales

-35-

<PAGE>

charge for Intermediate Bond Fund is 2.04% of the net asset value (in the
case of sales of less than $100,000).

PERFORMANCE COMPARISONS

Advertisements and other sales literature for the Funds may refer to
"average annual total return," "cumulative total return" and "yield."

Average annual total return figures are computed by finding the
average annual compounded rates of return over the periods indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:

P(1+T)n = ERV

Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV =ending redeemable value at the end of the
period of a hypothetical $1,000 payment
made at the beginning of such period.

This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gains distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.

The following table sets forth the average annual total returns for
each Fund for one year, five years and since inception for the period ending
September 30, 1995:

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<PAGE>

Average Annual Total Returns
----------------------------
1 Year 5 Years Since Inception
------ ------- ---------------
Government Income Fund 10.27% 7.65% 6.88%*
Balanced Fund 16.91% 13.25% 8.19%*
Growth and Income Fund 23.66% N/A 9.59%**
Growth Fund 15.78% 14.95% 11.27%*
Emerging Growth Fund 29.30% 23.91% 18.46%***
Small Company Growth Fund 9.32% 15.71% 8.71%*
Intermediate Bond Fund+ 3.82% 6.08% 7.09%****

* Inception date: 3/16/87
** Inception date: 7/27/92
*** Inception date: 4/23/90
**** Inception date: 7/11/88.
+ Total return calculations deduct the current maximum sales charge of
2%. The maximum sales charge prior to September 13, 1996 was 1.5%.

The Adviser has waived or paid certain expenses of some of the Funds,
thereby increasing total return and yield. These expenses may or may not waived
or paid in the future in the Adviser's discretion. Absent any voluntary expense
payments or waivers, the average annual total returns for one year, five years
and since inception for the period ending September 30, 1995 would have been:

Average Annual Total Returns
----------------------------
(absent voluntary expense waivers)
1 Year 5 Years Since Inception
------ ------- ---------------
Balanced Fund 16.74% 13.05% 7.88%*
Growth and Income Fund 23.56% N/A 9.46%**
Small Company Growth Fund 9.32% 15.37% 8.37%*

* Inception date: 3/16/87
** Inception date: 7/27/92

Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:

CTR = (ERV-P) 100
-----
P

Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment
made at the beginning of such period; and
P = initial payment of $1,000.

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<PAGE>

This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus and includes all recurring fees, such as investment advisory
and management fees, charged to all shareholder accounts.

The following table sets forth the cumulative total returns for each
Fund from inception to September 30, 1995:

<TABLE>
<CAPTION>
Cumulative Total Returns
Cumulative (absent voluntary
Total Returns expense waivers)
------------- -------------------------
<S> <C> <C>
Government Income Fund* 76.60% +
Balanced Fund* 95.98% 95.67%
Growth and Income Fund** 33.79% 33.66%
Growth Fund* 149.10% +
Emerging Growth Fund*** 151.38% +
Small Company Growth Fund* 104.15% 103.81%
Intermediate Bond Fund**** 64.00% 61.17%

</TABLE>

* Inception date: 3/16/87
** Inception date: 7/27/92
*** Inception date: 4/23/90
**** Inception date: 7/11/88. Total return calculations deduct
the current maximum sales charge of 2%. The maximum sales
charge prior to September 13, 1996 was 1.5%.
+ There were no voluntary expense waivers or payments by the
Adviser during this period.

Balanced Fund, Government Income Fund, Intermediate Bond Fund and
Growth and Income Fund may issue yield quotations. Yield is computed by
dividing the net investment income per share (as defined under Securities and
Exchange Commission rules and regulations) earned during the computation period
by the maximum offering price per share on the last day of the period, according
to the following formula:

YIELD = 2[(a-b + 1)6 - 1]
---
cd

Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends; and
d = the maximum offering price per share on the
last day of the period.

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<PAGE>

For the 30-day period ended September 30, 1995, Balanced Fund,
Government Income Fund, Growth and Income Fund and Intermediate Bond Fund had
yields of 1.33%, 5.99%, 0.38% and ___%, respectively. (The yield for
Intermediate Bond Fund has been restated to reflect the Fund's current 2%
maximum sales charge. The maximum sales charge on September 30, 1995 was 1.5%.)

In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the Funds'
shares, including data from Lipper Analytical Services, Inc. ("Lipper"),
Morningstar, other industry publications and other entities or organizations
which track the performance of investment companies. Performance information
for the Funds also may be compared to various unmanaged indices, such as the
Lehman Brothers Government Mortgage-Backed Securities Index, the Merrill Lynch
1-5 Year Government/Corporate Index, the S&P 500 Index, the S&P MidCap 400
Index, the S&P SmallCap 600 Index, the Nasdaq Composite Index, Wilshire 5000
Index, Russell 2000 Index and Value Line Index. Unmanaged indices do not
reflect deductions for administrative and management costs and expenses.

The performance of Growth Fund, Emerging Growth Fund, Small Company
Growth Fund, Growth and Income Fund and Balanced Fund may be compared,
respectively to the performance of Growth Funds, MidCap Funds, Small Company
Growth Funds, Growth and Income Funds and Balanced Funds as reported by Lipper.
The performance of Intermediate Bond Fund may be compared to the performance of
the Lehman Intermediate Aggregate Index. The performance of Government Fund
may be compared to the performance of U.S. Government Funds, as reported by
Lipper and the Lehman Brothers Government Mortgage-Backed Securities Index.

PURCHASE OF SHARES

An investor may qualify for a reduced sales charge immediately by
signing a nonbinding Letter of Intent stating the investor's intention to invest
within a 13-month period, beginning not earlier than 90 days prior to the date
of execution of the Letter, a specified amount which, if made at one time, would
qualify for a reduced sales charge. Reinvested dividends will be treated as
purchases of additional shares. Any redemptions made during the term of the
Letter of Intent will be subtracted from the amount of purchases in determining
whether the Letter of Intent has been completed. During the term of a Letter of
Intent, IFTC will hold shares representing 5% of the amount that the investor
intends to invest during the 13-month period in escrow for payment of a higher
sales charge if the full amount indicated in the Letter of Intent is not
purchased. Dividends on the escrowed shares will be paid to the shareholder.
The escrowed shares will be released when the full amount indicated has been
purchased. If the full indicated amount is not purchased within the 13-month
period, the investor will be required to pay, either in cash or by liquidating
escrowed shares, an amount equal to the difference in the dollar amount

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<PAGE>

of sales charge actually paid and the amount of sales charge the investor
would have paid on his or her aggregate purchases if the total of such
purchases had been made at a single time.

REDEMPTION OF SHARES

GENERAL

Redemption of shares, or payment, may be suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekend or
holiday closings, (b) when trading on said Exchange is restricted, (c) when an
emergency exists, as a result of which disposal by the Funds of securities owned
by them is not reasonably practicable, or it is not reasonably practicable for
the Funds fairly to determine the value of their net assets, or (d) during any
other period when the Securities and Exchange Commission, by order, so permits,
provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist.

Shareholders who purchased shares through a broker-dealer other
than the Distributor may also redeem such shares by written request to IFTC
at the address set forth in the Prospectus. To be considered in proper form,
written requests for redemption should indicate the dollar amount or number
of shares to be redeemed, refer to the shareholder's Fund account number, and
give either a social security or tax identification number. The request
should be signed in exactly the same way the account is registered. If there
is more than one owner of the shares, all owners must sign. If shares to be
redeemed have a value of $10,000 or more or redemption proceeds are to be
paid to someone other than the shareholder at the shareholder's address of
record, the signature(s) must be guaranteed by an "eligible guarantor
institution," which includes a commercial bank that is a member of the
Federal Deposit Insurance Corporation, a trust company, a member firm of a
domestic stock exchange, a savings association or a credit union that is
authorized by its charter to provide a signature guarantee. IFTC may reject
redemption instructions if the guarantor is neither a member of nor a
participant in a signature guarantee program. Signature guarantees by
notaries public are not acceptable. The purpose of a signature guarantee is
to protect shareholders against the possibility of fraud. Further
documentation will be requested from corporations, administrators, executors,
personal representatives, trustees and custodians. Redemption requests given
by facsimile will not be accepted. Unless other instructions are given in
proper form, a check for the proceeds of the redemption will be sent to the
shareholder's address of record.

REINSTATEMENT PRIVILEGE

A shareholder who has redeemed shares of a Fund may reinvest all or
part of the redemption proceeds in shares of any Fund within 30 days without
payment of an additional sales charge. The Distributor will refund to any
shareholder a pro rata

-40-
<PAGE>

amount of any contingent deferred sales charge paid by such shareholder in
connection with a redemption of Fund shares if and to the extent that the
redemption proceeds are reinvested within 30 days of such redemption in any
mutual fund managed by the Adviser. Such refund will be based upon the ratio
of the net asset value of shares purchased in the reinvestment to the net
asset value of shares redeemed. Reinvestments will be allowed at net asset
value without the payment of a front-end sales charge, irrespective of the
amounts of the reinvestment, but shall be subject to the same pro rata
contingent deferred sales charge that was applicable to the earlier
investment; however, the period during which the contingent deferred sales
charge shall apply on the newly issued shares shall be the period applicable
to the redeemed shares extended by the number of days between the redemption
and the reinvestment dates (inclusive).

SYSTEMATIC WITHDRAWAL PLAN

To establish a Systematic Withdrawal Plan for any Fund and receive
regular periodic payments, an account must have a value of $5,000 or more. A
request to establish a Systematic Withdrawal Plan must be submitted in writing
to an investor's Piper Jaffray Investment Executive or other broker-dealer.
There are no service charges for maintenance; the minimum amount that may be
withdrawn each period is $100. (This is merely the minimum amount allowed and
should not be interpreted as a recommended amount.) The holder of a Systematic
Withdrawal Plan will have any income dividends and any capital gains
distributions reinvested in full and fractional shares at net asset value. To
provide funds for payment, the appropriate Fund will redeem as many full and
fractional shares as necessary at the redemption price, which is net asset
value. Redemption of shares may reduce or possibly exhaust the shares in your
account, particularly in the event of a market decline. As with other
redemptions, a redemption to make a withdrawal payment is a sale for federal
income tax purposes. Payments made pursuant to a Systematic Withdrawal Plan
cannot be considered as actual yield or income since part of such payments may
be a return of capital.

The maintenance of a Systematic Withdrawal Plan for a Fund concurrent
with purchases of additional shares of that Fund would be disadvantageous
because of the sales commission involved in the additional purchases. A
confirmation of each transaction showing the sources of the payment and the
share and cash balance remaining in the account will be sent. The plan may be
terminated on written notice by the shareholder or the appropriate Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account or upon the death or incapacity of the shareholder. The amount and
schedule of withdrawal payments may be changed or suspended by giving written
notice to your Piper Jaffray Investment Executive or other broker-dealer at
least seven business days prior to the end of the month preceding a scheduled
payment.

-41-

<PAGE>

TAXATION

Each Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company a Fund must, among
other things, receive at least 90% of its gross income each year from dividends,
interest, gains from the sale or other disposition of securities and certain
other types of income, including income from options and futures contracts.

The Code also forbids a regulated investment company from earning 30%
or more of its gross income from the sale or other disposition of securities
held less than three months. This restriction may limit the extent to which a
Fund may purchase futures contracts and options. To the extent the Funds engage
in short-term trading and enter into futures and options transactions, the
likelihood of violating this 30% requirement is increased.

The Code requires a regulated investment company to diversify its
holdings. The Internal Revenue Service has not made its position clear
regarding the treatment of futures contracts and options for purposes of the
diversification test, and the extent to which a Fund can buy or sell futures
contracts and options may be limited by this requirement.

If for any taxable year one of the Funds does not qualify as a
regulated investment company, all of its taxable income will be subject to tax
at regular corporate rates without any deduction for distributions to
shareholders, and such distributions will be taxable to the Fund's shareholders
as ordinary dividends to the extent of the Fund's current or accumulated
earnings and profits.

Each Fund will be subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the amount required to be distributed pursuant to the
Code for each calendar year over the amount actually distributed. No amount of
such excess, however, will be subject to the excise tax to the extent it is
subject to the corporate-level income tax. In order to avoid the imposition of
this excise tax, each Fund generally must declare dividends by the end of a
calendar year representing 98% of the Fund's ordinary income for the calendar
year and 98% of its capital gain net income (both long-term and short-term
capital gains) for the 12-month period ending October 31 of the calendar year.

Gain or loss on futures contracts and options is taken into account
when realized by entering into a closing transaction or by exercise. In
addition, with respect to many types of futures contracts and options held at
the end of a Fund's taxable year, unrealized gain or loss on such contracts is
taken into account at the then current fair market value thereof under a special
"marked-to-market, 60/40 system," and such gain or loss is recognized for tax
purposes. The gain or loss from such futures contracts and options (including
premiums on certain options that expire unexercised) is treated as 60% long-term
and 40% short-term capital gain or

-42-

<PAGE>

loss, regardless of their holding period. The amount of any capital gain or
loss actually realized by a Fund in a subsequent sale or other disposition of
such futures contracts will be adjusted to reflect any capital gain or loss
taken into account by the Fund in a prior year as a result of the
constructive sale under the "marked-to-market, 60/40 system." Notwithstanding
the rules described above, with respect to certain futures contracts, a Fund
may make an election that will have the effect of exempting all or a part of
those identified futures contracts from being treated for federal income tax
purposes as sold on the last business day of the Fund's taxable year. All or
part of any loss realized by the Fund on any closing of a futures contract
may be deferred until all of the Fund's offsetting positions with respect to
the futures contract are closed.

Ordinarily, distributions and redemption proceeds earned by a Fund
shareholder are not subject to withholding of federal income tax. However, 31%
of a Fund shareholder's distributions and redemption proceeds must be withheld
if a Fund shareholder fails to supply the Fund or its agent with such
shareholder's taxpayer identification number or if a Fund shareholder who is
otherwise exempt from withholding fails to properly document such shareholder's
status as an exempt recipient.

Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
In addition, if a shareholder disposes of shares within 90 days of acquiring
such shares and purchases other shares of the Company or of another mutual fund
managed by the Adviser at a reduced sales charge, the shareholder's tax basis
for determining gain or loss on the shares which are disposed of is reduced by
the lesser of the amount of the sales charge that was paid when the shares
disposed of were acquired or the amount by which the sales charge for the new
shares is reduced. If a shareholder's tax basis is so reduced, the amount of
the reduction is treated as part of the tax basis of the new shares.

Additionally, distributions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
consequences discussed above.

FINANCIAL STATEMENTS

The audited financial statements and supplementary schedules for the
Funds as of September 30, 1995, have been incorporated by reference into this
Statement of Additional Information from the Funds' annual reports to
shareholders in reliance on the report of KPMG Peat Marwick LLP, 4200 Norwest
Center, Minneapolis, Minnesota 55402, independent auditors of the Funds, given
on the authority of such firm as experts in accounting and auditing. The
unaudited financial statements and supplementary schedules for the Funds as of
March 31, 1996 have been incorporated

-43-

<PAGE>

by reference into this Statement of Additional Information from the Funds'
semiannual reports to shareholders.

GENERAL INFORMATION

The Board of Directors may, without shareholder approval, create and
issue one or more additional classes of shares within each Fund, as well as
within any series of the Company created in the future. All classes of shares
in a Fund would be identical except that each class of shares would be available
through a different distribution channel and certain classes might incur
different expenses for the provision of distribution services or the provision
of shareholder services or administration assistance by institutions. Shares of
each class would share equally in the gross income of a series, but any
variation in expenses would be charged separately against the income of the
particular class incurring such expenses. This would result in variations in
net investment income accrued and dividends paid by and in the net asset value
of the different classes of a series. This ability to create multiple classes
of shares within each series of the Company will allow the Company in the future
the flexibility to better tailor its methods of marketing, administering and
distributing shares of the Funds to the needs of particular investors and to
allocate expenses related to such marketing, administration and distribution
methods to the particular classes of shareholders of the Fund incurring such
expenses.

On an issue affecting only a particular series, the shares of the
affected series vote separately. An example of such an issue would be a
fundamental investment restriction pertaining to only one series. In voting on
the Investment Advisory and Management Agreement (the "Agreement"), approval of
the Agreement by the shareholders of a particular series would make the
Agreement effective as to that series whether or not it had been approved by the
shareholders of the other series.

The assets received by the Company for the issue or sale of shares of
each series, and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are allocated to such series, and constitute
the underlying assets of such series. The underlying assets of each series are
required to be segregated on the books of account, and are to be charged with
the expenses in respect to such series and with a share of the general expenses
of the Company. Any general expenses of the Company not readily identifiable as
belonging to a particular series shall be allocated among the series based upon
the relative net assets of the series at the time such expenses were accrued.

Minnesota has enacted legislation which authorizes corporations to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of the fiduciary duty of "care"
(the duty to act with the care an ordinarily prudent person in a like position
would exercise under similar circumstances). Minnesota law does not, however,
permit a corporation to eliminate or limit the liability of a director (a) for
any breach of the director's duty of

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<PAGE>

"loyalty" to the corporation or its shareholders (the duty to act in good
faith and in a manner reasonably believed to be in the best interest of the
corporation), (b) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (c) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation
of Minnesota law or for violation of certain provisions of Minnesota
securities laws, or (d) for any transaction from which the director derived
an improper personal benefit. Minnesota law does not permit elimination or
limitation of a director's liability under the 1933 Act or the Securities
Exchange Act of 1934, and the 1940 Act prohibits elimination or limitation of
a director's liability for acts involving willful malfeasance, bad faith,
gross negligence or reckless disregard of the duties of a director. The
Articles of Incorporation of the Company limit the liability of directors to
the fullest extent permitted by Minnesota law and the 1940 Act.

PENDING LITIGATION

Complaints have been brought in federal and state court relating to
one open-end and twelve closed-end investment companies managed by the Adviser
and to two open-end funds for which the Adviser has acted as sub-adviser. On
February 13, 1996, a Settlement Agreement became effective for the consolidated
class action lawsuit, titled IN RE: PIPER FUNDS INC. INSTITUTIONAL GOVERNMENT
INCOME PORTFOLIO LITIGATION. The Amended Consolidated Class Action Complaint
was filed on October 5, 1994, in the United States District Court, District of
Minnesota, against Institutional Government Income Portfolio (a series of the
Company), the Adviser, the Distributor, William H. Ellis and Edward J. Kohler,
and had alleged the making of materially misleading statements in the
prospectus, common law negligent misrepresentation and breach of fiduciary
duty. The Settlement Agreement will provide approximately $67.5 million,
together with interest earned, less certain disbursements and attorney fees,
to class members in payments scheduled over approximately three years. Such
payments will be made by Piper Jaffray Companies Inc. and the Adviser and
will not be an obligation of the Company.

Four additional complaints relating to Institutional Government Income
Portfolio, which were brought by some of the investors who requested exclusion
from the settlement class and are based on claims similar to those asserted in
the consolidated Class Action complaint, remain pending. The first additional
complaint was filed against the Company, the Adviser, the Distributor and Piper
Jaffray Companies Inc. on September 30, 1994 in the United States District
Court, District of Colorado. Plaintiffs in the complaint are Gary Pashel and
Gregg S. Hayutin, Trustees of the Mae Pashel Trust; Mae Pashel, individually;
Gary Pashel and Michael H. Feinstein, Trustees of the Robert Hayutin Insurance
Trust; and Dennis E. Hayutin, Gregg S. Hayutin and Gary Pashel, Trustees of the
Marie Ellen Hayutin Trust. The second pending complaint was brought on April
11, 1995, and filed in the Minnesota State District Court, Hennepin County.
This action was removed to United States District Court, District of Minnesota.
The plaintiff, Frank R. Berman, Trustee of Frank R. Berman Professional CP
Pension Plan Trust, sued

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<PAGE>

individually and not on behalf of any putative class. Defendants are the
Distributor, the Company, Morton Silverman and Worth Bruntjen. A third
pending complaint relating to Institutional Government Income Portfolio was
filed on June 22, 1995 in the Montana Thirteenth Judicial District Court,
Yellowstone County by Beverly Muth against the Distributor and Teresa L.
Darnielle. In addition to the above complaints, a number of actions have
been commenced in arbitration by some of individual investors who requested
exclusion from the settlement class in the IN RE: PIPER FUNDS INC. action. A
fourth pending complaint was brought on May 13, 1996 and filed in Minnesota
State District Court, Hennepin County. The plaintiff, the City of Mound,
sued individually against defendants Piper Jaffray Companies Inc., the
Adviser, the Company, Institutional Government Income Portfolio, Worth
Bruntjen, William H. Ellis, Edward J. Kohler, Bennett E. Marks and John and
Jane Does 1 - 10.

A complaint was filed by Herman D. Gordon on October 20, 1994, in the
United States District Court, District of Minnesota, against American Adjustable
Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.--1999, the
Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey
Griffin, Charles N. Hayssen and Edward J. Kohler. A second complaint was filed
by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in the United
States District Court, District of Minnesota, against American Adjustable Rate
Term Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.-
- -1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and certain
associated individuals. Plaintiffs in both actions filed a Consolidated Amended
Class Action Complaint on May 23, 1995 and by Order dated June 8, 1995, the
Court consolidated the two putative class actions. The consolidated amended
complaint, which purports to be a class action, alleges certain violations of
federal and state securities laws, breach of fiduciary duty and negligent
misrepresentation. The parties have reached an agreement-in-principle to settle
all outstanding claims of the purported class action. If approved by the Court
and a sufficiently large percentage of the class, a settlement agreement
consistent with the terms of the agreement-in-principle would provide $14
million in principal payments consisting of $500,000 payable upon execution of
the settlement agreement, $1.5 million payable upon final approval by the Court,
and payments of $3 million on each anniversary of the final court approval for
the next four years, with accrued interest payments of up to $1.8 million.

Two additional complaints relating to the American Adjustable Rate
Term Trusts, which are based on claims similar to those asserted in the
Gordon/Donio Consolidated Complaint, remain pending. The first of these
additional complaints was filed against the Distributor on August 11, 1995 in
Washington State District Court, King County, by plaintiff Ernest Volinn. The
second complaint was filed against the Distributor on November 1, 1995 in the
United States District Court, District of Idaho, by plaintiff Ewing Company
Profit Sharing Plan. In addition to the

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<PAGE>

above complaints, a number of actions have been commenced in arbitration by
individual investors in the American Adjustable Rate Term Trusts.

A complaint was filed by Gary E. Nelson on June 28, 1995 in the United
States District Court for the Western District of Washington at Seattle against
American Strategic Income Portfolio Inc. -- II ("BSP"), the Adviser, the
Distributor, Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen,
Michael Jansen, William H. Ellis and Edward J. Kohler. A second complaint was
filed by the same individual in the same court on July 12, 1995 against American
Opportunity Income Fund Inc. ("OIF"), the Adviser, the Distributor, Piper
Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael Jansen,
William H. Ellis and Edward J. Kohler. On September 7, 1995, Christian
Fellowship Foundation Peace United Church of Christ, Gary E. Nelson and Lloyd
Schmidt filed an amended complaint purporting to be a class action in the United
States District Court for the District of Washington. The complaint was filed
against American Government Income Portfolio, Inc. ("AAF"), American
Government Income Fund Inc. ("AGF"), American Government Term Trust, Inc.,
American Strategic Income Portfolio Inc. ("ASP"), American Strategic Income
Portfolio Inc. -- II, American Strategic Income Portfolio Inc. -- III
("CSP"), American Opportunity Income Fund Inc., American Select Portfolio
Inc., Piper Jaffray Companies Inc., the Distributor, the Adviser and certain
associated individuals. By Order filed October 5, 1995, the complaints were
consolidated. Plaintiffs filed a second amended complaint on February 5,
1996 and a third amended complaint on June 4, 1996. The third amended third
complaint alleges generally that the prospectus and financial statements of
each investment company were false and misleading. Specific violations of
various federal securities laws are alleged with respect to each investment
company. The complaint also alleges that the defendants violated the
Racketeer Influenced and Corrupt Organizations Act, the Washington State
Securities Act and the Washington Consumer Protection Act. The named
plaintiffs and defendants have reached an agreement-in-principle on a
proposed settlement. If approved by the Court, a settlement agreement
consistent with the terms of the agreement-in-principle would provide $15.5
million to class members in payments by Piper Jaffray Companies Inc. and the
Adviser over the next four years. The settlement also includes an agreement
that each of OIF, AAF, and AGF would offer to repurchase up to 25% of their
outstanding shares from current shareholders at net asset value. If the
discounts between net asset value and market price of these funds do not
decrease to 5% or less within approximately two years after the effective
date of the settlement, the fund boards may submit shareholder proposals to
convert these funds to an open-end format. Finally, the agreement stipulates
that each of ASP, BSP, CSP and SLA would offer to repurchase up to 10% of
their outstanding shares from current shareholders at net asset value.

Three additional complaints are pending which involve the funds named
as defendants in the Nelson/Christian Fellowship Consolidated Action and are
based on claims similar to that action. The first additional complaint was
filed against the Distributor and Richard Tallent in Montana State District
Court, Silver Bow County

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<PAGE>

on November 1, 1995 by plaintiff John Darlington. The second complaint was
filed against the Distributor and Richard Tallent on April 11, 1996 in
Montana State District Court, Silver Bow County by plaintiff Kenneth
Schneider. The third complaint was filed against the Distributor and Richard
Tallent on April 11, 1996 in Montana State District Court, Silver Bow County
by plaintiff Margaret Nagel. In addition to the above complaints, a number
of arbitrations have been commenced by individual investors in the funds
named as defendants in the Nelson/Christian Fellowship Consolidated Action.

Complaints have also been filed relating to two open-end funds for
which the Adviser has acted as sub-adviser, Managers Intermediate Mortgage Fund
and Managers Short Government Fund. A complaint was filed on September 26, 1994
in the United States District Court, District of Connecticut, by Florence R.
Hosea, Bobby W. Hosea, Getrud B. Dale and Peter M. Dale, Andrew Poffel and Diane
Poffel as tenants by the Entireties, Myrone Sarone, Donna M. DiPalo, Bernard B.
Geltner and Gail Geltner and Paul Delman. The complaint was filed against The
Managers Funds, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, an individual associated with the Adviser, Evaluation Associates,
Inc. and Managers Intermediate Mortgage Fund. The complaint, which is a
putative class action, alleges certain violations of federal securities laws,
including the making of false and misleading statements in the prospectus, and
alleges negligent misrepresentation, breach of fiduciary duty and common law
fraud. A similar complaint was filed as a putative class action in the same
court on November 4, 1994. The complaint was filed by Karen E. Kopelman against
The Managers Fund, The Managers Funds, L.P., Robert P. Watson, the Adviser, the
Distributor, Worth Bruntjen, Evaluation Associates, Inc. and Managers
Intermediate Mortgage Fund. The two putative class actions were consolidated by
court order on December 13, 1994. Plaintiffs filed an Amended and Restated
Complaint on July 19, 1995. A complaint relating to the Managers Short
Government Fund was filed on November 18, 1994 in the United States District
Court, District of Minnesota. The complaint was filed by Robert Fleck as a
putative class action against The Managers Funds, The Managers Funds, L.P., the
Adviser, the Distributor, Worth Bruntjen, Evaluation Associates, Inc., Robert P.
Watson, John E. Rosati, William M. Graulty, Madeline H. McWhinney, Steven J.
Pasggioli, Thomas R. Schneeweis and Managers Short Government Fund, F/K/A/
Managers Short Government Income Fund. The complaint alleges certain violations
of federal securities laws, including the making of false and misleading
statements in the prospectus, and negligent misrepresentation. A third
complaint relating to both the Managers Intermediate Mortgage Fund and the
Managers Short Government Fund was filed on October 26, 1995 in Connecticut
State Superior Court, Stamford/Norwalk District. The complaint was filed by
First Commercial Trust Company, N.A. against the Managers Funds, Managers Short
Government Fund, Managers Intermediate Mortgage Fund, Managers Short and
Intermediate Bond Fund, The Managers Funds, L.P., EAIMC Holdings Corporation,
Evaluation Associates Holding Corporation, EAI Partners, L.P., Evaluation
Associates, Inc., Robert P. Watson, William W. Graulty, Madeline H. McWhinney,
Steven J. Paggioli, Thomas R. Schneeweis, William J. Crerend, the

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<PAGE>

Adviser, Piper Jaffray Companies Inc., Worth Bruntjen, Standish, Ayer & Wood,
Inc., TCW Funds Managements, Inc., and TCW Management Company. The complaint
alleges claims under Connecticut common law and violation of the Connecticut
Securities Act and the Connecticut Unfair and Deceptive Trade Practices Act.

The Adviser and Distributor do not believe that the settlements described above,
or any of the above lawsuits and arbitrations, will have a material adverse
effect upon their ability to perform under their agreements with the Company,
and they intend to defend the remaining lawsuits vigorously.

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<PAGE>

APPENDIX A
CORPORATE BOND, PREFERRED STOCK AND
COMMERCIAL PAPER RATINGS

COMMERCIAL PAPER RATINGS

STANDARD & POOR'S RATINGS SERVICES. Commercial paper ratings are
graded into four categories, ranging from "A" for the highest quality
obligations to "D" for the lowest. Issues assigned the A rating are regarded as
having the greatest capacity for timely payment. Issues in this category are
further refined with designation 1, 2 and 3 to indicate the relative degree of
safety. The "A-1" designation indicates that the degree of safety regarding
timely payment is very strong. Those issues determined to possess overwhelming
safety characteristics will be denoted with a plus sign designation.

MOODY'S INVESTORS SERVICE, INC. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:

Prime-1 Superior capacity for repayment of short-term
promissory obligations

Prime-2 Strong capacity for repayment of short-term
promissory obligations

Prime-3 Acceptable capacity for repayment of
short-term promissory obligations

CORPORATE BOND RATINGS

STANDARD & POOR'S RATINGS SERVICES. Standard & Poor's ratings for
corporate bonds have the following definitions:

Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.

Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in a small
degree.

A-1
<PAGE>

Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.

Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

MOODY'S INVESTORS SERVICE, INC. Moody's ratings for corporate bonds
include the following:

Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.

Bonds which are rated "A" possess many favorable attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.

Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.

PREFERRED STOCK RATING

STANDARD & POOR'S RATINGS SERVICES. Standard & Poor's ratings for
preferred stock have the following definitions:

A-2
<PAGE>

An issue rated "AAA" has the highest rating that may be assigned by
Standard & Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.

A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."

An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.

An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.

MOODY'S INVESTORS SERVICE, INC. Moody's ratings for preferred stock
include the following:

An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.

An issue which is rated "aa" is considered a high grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.

An issue which is rate "a" is considered to be an upper medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.

An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.

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<PAGE>

APPENDIX B
INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS

INTEREST RATE FUTURES CONTRACTS

Government Income Fund, Balanced Fund and Growth and Income Fund may
purchase and sell interest rate futures contracts and options thereon. An
interest rate futures contract creates an obligation on the part of the seller
(the "short") to deliver, and an offsetting obligation on the part of the
purchaser (the "long") to accept delivery of, the type of financial instrument
called for in the contract in a specified delivery month for a stated price. A
majority of transactions in interest rate futures contracts, however, do not
result in the actual delivery of the underlying instrument, but are settled
through liquidation, i.e., by entering into an offsetting transaction. The
interest rate futures contracts to be traded by the Funds are traded only on
commodity exchanges--known as "contract markets"--approved for such trading by
the Commodity Futures Trading Commission and must be executed through a futures
commission merchant or brokerage firm which is a member of the relevant contract
market. These contract markets, through their clearing corporations, guarantee
that the contracts will be performed. Presently, futures contracts are based
upon such debt securities as long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, three-month U.S. Treasury bills and bank certificates of deposit.
In addition, futures contracts are traded in the Moody's Investment Grade
Corporate Bond Index and the Long Term Corporate Bond Index.

Although most futures contracts by their terms call for actual
delivery or acceptance of commodities or securities, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery. Closing out a short position is effected by purchasing a futures
contract for the same aggregate amount of the specific type of financial
instrument or commodity and the same delivery month. If the price of the
initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
trader realizes a loss. Similarly, the closing out of a long position is
effected by the purchaser entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the purchaser realizes a gain
and, if the purchase price exceeds the offsetting sale price, the purchaser
realizes a loss.

The purchase or sale of a futures contract differs from the purchase
or sale of a security in that no price or premium is paid or received. Instead,
an amount of cash or securities acceptable to the Adviser and the relevant
contract market, which varies but is generally about 5% of the contract amount,
must be deposited with the custodian in the name of the broker. This amount is
known as "initial margin," and represents a "good faith" deposit assuring the
performance of both the purchaser and the seller under the futures contract.
Subsequent payments to and from the broker, known as "variation margin," are
required to be made on a daily

B-1
<PAGE>

basis as the price of the futures contract fluctuates, making the long or
short positions in the futures contract more or less valuable, a process
known as "marking to the market." Prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required
to be paid to or released by the broker, and the purchaser realizes a loss or
gain. In addition, a commission is paid on each completed purchase and sale
transaction.

The purpose of the acquisition or sale of a futures contract by a
Fund, as the holder of long-term fixed-income securities, is to hedge against
fluctuations in rates on such securities without actually buying or selling
long-term fixed-income securities. For example, if a Fund owns long-term bonds
and interest rates are expected to increase, the Fund might sell futures
contracts. Such a sale would have much the same effect as selling some of the
long-term bonds in the Fund's portfolio. If interest rates increase as
anticipated by the Adviser, the value of certain long-term securities in the
portfolio would decline, but the value of the Fund's futures contracts would
increase at approximately the same rate, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. Of course, since
the value of the securities in the Fund's portfolio will far exceed the value of
the futures contracts sold by the Fund, an increase in the value of the futures
contracts could only mitigate--but not totally offset--the decline in the value
of the portfolio.

Similarly, when it is expected that interest rates may decline,
futures contracts could be purchased to hedge against a Fund's anticipated
purchases of long-term fixed-income securities, such as bonds, at higher
prices. Since the rate of fluctuation in the value of futures contracts
should be similar to that of long-term bonds, the Fund could take advantage
of the anticipated rise in the value of long-term bonds without actually
buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund's cash could then be used to buy
long-term bonds on the cash market. The Fund could accomplish similar
results by selling bonds with long maturities and investing in bonds with
short maturities when interest rates are expected to increase or by buying
bonds with long maturities and selling bonds with short maturities when
interest rates are expected to decline. However, in circumstances when the
market for bonds may not be as liquid as that for futures contracts, the
ability to invest in such contracts could enable the Fund to react more
quickly to anticipated changes in market conditions or interest rates.

OPTIONS ON INTEREST RATE FUTURES CONTRACTS

The Funds may purchase and sell put and call options on interest rate
futures contracts which are traded on a United States exchange or board of trade
as a hedge against changes in interest rates, and will enter into closing
transactions with respect to such options to terminate existing positions. An
interest rate futures contract provides for the future sale by one party and the
purchase by the other party of a

B-2
<PAGE>

certain amount of a specific financial instrument (debt security) at a
specified price, date, time and place. An option on an interest rate futures
contract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a position
in an interest rate futures contract at a specified exercise price at any
time prior to the expiration date of the option. Options on interest rate
futures contracts are similar to options on securities, which give the
purchaser the right, in return for the premium paid, to purchase or sell
securities. A call option gives the purchaser of such option the right to
buy, and obliges its writer to sell, a specified underlying futures contract
at a specified exercise price at any time prior to the expiration date of the
option. A purchaser of a put option has the right to sell, and the writer
has the obligation to buy, such contract at the exercise price during the
option period. Upon exercise of an option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's future
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case
of a put, the exercise price of the option on the futures contract. If an
option is exercised on the last trading day prior to the expiration date of
the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing price of
the interest rate futures contract on the expiration date. A Fund will pay a
premium for purchasing options on interest rate futures contracts. Because
the value of the option is fixed at the point of sale, there are no daily
cash payments to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net asset value of the Fund. In connection with the writing
of options on interest rate futures contracts, a Fund will make initial
margin deposits and make or receive maintenance margin payments that reflect
changes in the market value of such options. Premiums received from the
writing of an option are included in initial margin deposits.

PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. A Fund will purchase
put options on interest rate futures contracts if the Adviser anticipates a rise
in interest rates. Because the value of an interest rate futures contract moves
inversely in relation to changes in interest rates, a put option on such a
contract becomes more valuable as interest rates rise. By purchasing put
options on interest rate futures contracts at a time when the Adviser expects
interest rates to rise, a Fund will seek to realize a profit to offset the loss
in value of its portfolio securities.

PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. A Fund will purchase
call options on interest rate futures contracts if the Adviser anticipates a
decline in interest rates. The purchase of a call option on an interest rate
futures contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. Because the value of an interest rate futures
contract moves inversely in relation to changes to interest rates, a call option
on such a contract becomes more valuable as interest rates decline. A Fund will
purchase a call option on an interest rate futures contract to hedge against a
decline in interest rates in a market advance

B-3
<PAGE>

when the Fund is holding cash. The Fund can take advantage of the anticipated
rise in the value of long-term securities without actually buying them until
the market is stabilized. At that time, the options can be liquidated and
the Fund's cash can be used to buy long-term securities.

WRITING CALL OPTIONS ON FUTURES CONTRACTS. A Fund will write call
options on interest rate futures contracts if the Adviser anticipates a rise in
interest rates. As interest rates rise, a call option on such a contract
becomes less valuable. If the futures contract price at expiration of the
option is below the exercise price, the option will not be exercised and the
Fund will retain the full amount of the option premium. Such amount provides a
partial hedge against any decline that may have occurred in the Fund's portfolio
securities.

WRITING PUT OPTIONS ON FUTURES CONTRACTS. A Fund will write put
options on interest rate futures contracts if the Adviser anticipates a decline
in interest rates. As interest rates decline, a put option on an interest rate
futures contract becomes less valuable. If the futures contract price at
expiration of the option has risen due to declining interest rates and is above
the exercise price, the option will not be exercised and the Fund will retain
the full amount of the option premium. Such amount can then be used by the Fund
to buy long-term securities when the market has stabilized.

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several
risks in using futures contracts as hedging devices. One risk arises because
the prices of futures contracts may not correlate perfectly with movements in
the underlying fixed-income security due to certain market distortions. First,
all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than making additional variation margin
payments, investors may close the contracts through offsetting transactions
which could distort the normal relationship between the security and the futures
market. Second, the margin requirements in the futures market are lower than
margin requirements in the securities market, and as a result the futures market
may attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in securities and
movements in the prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a very
short period. Another risk arises because of imperfect correlation between
movements in the value of the futures contracts and movements in the value of
securities subject to the hedge.

Successful use of futures contracts by a Fund is subject to the
ability of the Adviser to predict correctly movements in the direction of
interest rates. If a Fund has hedged against the possibility of an increase in
interest rates adversely affecting

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<PAGE>

the value of fixed-income securities held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the
increased value of its security which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the decline in interest
rates. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.

LIQUIDITY OF FUTURES CONTRACTS. A Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would
be to reduce or eliminate the hedge position held by the Fund. A Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.

Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts.
Although the Funds intend to enter into futures contracts only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a liquid secondary market will exist for any particular
contract at any particular time.

In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in the futures contract and thus provide an offset to
losses on a futures contract.

RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on futures
contracts also involves additional risk. Compared to the purchase or sale of
futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to a Fund because the maximum amount at risk is the
premium paid

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<PAGE>

for the options (plus transactions costs). The writing of a call option on a
futures contract generates a premium which may partially offset a decline in
the value of the Fund's portfolio assets. By writing a call option, a Fund
becomes obligated to sell a futures contract, which may have a value higher
than the exercise price. Conversely, the writing of a put option on a
futures contract generates a premium, but the Fund becomes obligated to
purchase a futures contract, which may have a value lower than the exercise
price. Thus, the loss incurred by a Fund in writing options on futures
contracts may exceed the amount of the premium received.

The effective use of options strategies is dependent, among other
things, on a Fund's ability to terminate options positions at a time when the
Adviser deems it desirable to do so. Although the Funds will enter into option
positions only if the Adviser believes that a liquid secondary market exists for
such options, there is no assurance that the Funds will be able to effect
closing transactions at any particular time or at an acceptable price. The
Funds' transactions involving options on futures contracts will be conducted
only on recognized exchanges. Each Fund's purchase or sale of put or call
options on futures contracts will be based upon predictions as to anticipated
interest rates by the Adviser, which could prove to be inaccurate. Even if
the expectations of the Adviser are correct, there may be an imperfect
correlation between the change in the value of the options and of the Fund's
portfolio securities.

REGULATORY MATTERS

To the extent required to comply with applicable Securities and
Exchange Commission releases and staff positions, when entering into futures
contracts, the Fund will maintain, in a segregated account, cash or liquid
high-grade debt securities equal to the value of such contracts.

The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity on the exchanges pursuant to the Commodity
Exchange Act, as amended. The CFTC requires the registration of "commodity pool
operators," defined as any person engaged in a business which is of the nature
of an Company, syndicate or a similar form of enterprise, and who, in connection
therewith, solicits, accepts or receives from others, funds, securities or
property for the purpose of trading in any commodity for future delivery on or
subject to the rules of any contract market. The CFTC has adopted Rule 4.5,
which provides an exclusion from the definition of commodity pool operator for
any registered investment company which meets the requirements of the Rule.
Rule 4.5 requires, among other things, that an investment company wishing to
avoid commodity pool operator status use futures and options positions only (a)
for "bona fide hedging purposes" (as defined in CFTC regulations) or (b) for
other purposes so long as aggregate initial margins and premiums required in
connection with non-hedging positions do not exceed 5% of the liquidation value
of the investment company's portfolio. Any investment company wishing to claim
the exclusion provided in Rule 4.5 must file a notice of eligibility with both
the CFTC and the

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<PAGE>

National Futures Association. Before engaging in transactions involving
interest rate futures contracts, the Funds will file such notices and meet
the requirements of Rule 4.5, or such other requirements as the CFTC or its
staff may from time to time issue, in order to render registration as a
commodity pool operator unnecessary.

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<PAGE>

APPENDIX C
STOCK INDEX FUTURES CONTRACTS AND RELATED OPTIONS

STOCK INDEX FUTURES CONTRACTS

Growth Fund, Growth and Income Fund and Balanced Fund may purchase and
sell stock index futures contracts, options thereon and options on stock
indexes. Stock index futures contracts are commodity contracts listed on
commodity exchanges. They presently include contracts on the Standard & Poor's
500 Stock Index (the "S&P 500 Index") and such other broad stock market indexes
as the New York Stock Exchange Composite Stock Index and the Value Line
Composite Stock Index, as well as narrower "sub-indexes" such as the S&P 100
Energy Stock Index and the New York Stock Exchange Utilities Stock Index. A
stock index assigns relative values to common stocks included in the index and
the index fluctuates with the value of the common stocks so included. A futures
contract is a legal agreement between a buyer or seller and the clearing house
of a futures exchange in which the parties agree to make a cash settlement on a
specified future date in an amount determined by the stock index on the last
trading day of the contract. The amount is a specified dollar amount (usually
$100 or $500) times the difference between the index value on the last trading
day and the value on the day the contract was struck.

For example, the S&P 500 Index consists of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The S&P 500 Index
assigns relative weightings to the common stocks included in the Index, and the
Index fluctuates with changes in the market values of those common stocks. In
the case of S&P 500 Index futures contracts, the specified multiple is $500.
Thus, if the value of the S&P 500 Index were 150, the value of one contract
would be $75,000 (150 x $500). Unlike other futures contracts, a stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract with the settlement amount being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract. For example (excluding any transaction costs), if a
Fund enters into one futures contract to buy the S&P 500 Index at a specified
future date at a contract value of 150 and the S&P 500 Index is at 154 on that
future date, the Fund will gain $500 x (154-150) or $2,000. If a Fund enters
into one futures contract to sell the S&P 500 Index at a specified future date
at a contract value of 150 and the S&P 500 Index is at 152 on that future date,
the Fund will lose $500 x (152-150) or $1,000.

Unlike the purchase or sale of an equity security, no price would be
paid or received by a Fund upon entering into stock index futures contracts.
Upon entering into a contract, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount of
cash or U.S. Treasury bills equal to a portion of the contract value. This
amount is known as "initial margin." The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve borrowing funds by a Fund to finance
the transactions. Rather, the initial

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margin is in the nature of a performance bond or good faith deposit on the
contract that is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied.

Subsequent payments, called "variation margin," to and from the broker
would be made on a daily basis as the price of the underlying stock index
fluctuates, making the long and short positions in the contract more or less
valuable, a process known as "marking to the market." For example, when a Fund
enters into a contract in which it benefits from a rise in the value of an index
and the price of the underlying stock index has risen, the Fund will receive
from the broker a variation margin payment equal to that increase in value.
Conversely, if the price of the underlying stock index declines, the Fund would
be required to make a variation margin payment to the broker equal to the
decline in value.

The Funds intend to use stock index futures contracts and related
options for hedging and not for speculation. Hedging permits a Fund to gain
rapid exposure to or protect itself from changes in the market. For example, a
Fund may find itself with a high cash position at the beginning of a market
rally. Conventional procedures of purchasing a number of individual issues
entail the lapse of time and the possibility of missing a significant market
movement. By using futures contracts, the Fund can obtain immediate exposure to
the market and benefit from the beginning stages of a rally. The buying program
can then proceed, and once it is completed (or as it proceeds), the contracts
can be closed. Conversely, in the early stages of a market decline, market
exposure can be promptly offset by entering into stock index futures contracts
to sell units of an index and individual stocks can be sold over a longer period
under cover of the resulting short contract position.

The Funds may enter into contracts with respect to any stock
index or sub-index. To hedge a Fund's portfolio successfully, however, the Fund
must enter into contracts with respect to indexes or sub-indexes whose movements
will have a significant correlation with movements in the prices of the Fund's
portfolio securities.

OPTIONS ON STOCK INDEX FUTURES CONTRACTS

The Funds may purchase and sell put and call options on stock index
futures contracts which are traded on a United States exchange or board of trade
as a hedge against changes in the market, and will enter into closing
transactions with respect to such options to terminate existing positions. An
option on a stock index futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a stock index futures
contract at a specified exercise price at any time prior to the expiration date
of the option. A call option gives the purchaser of such option the right to
buy, and it obliges its writer to sell, a specified underlying futures contract
at a specified exercise price at any time prior to the expiration date of the
option. A purchaser of a put option has the right to sell, and the writer has
the obligation to buy, such contract at the exercise price during the option
period. Upon exercise of an option, the delivery of the futures position by the
writer of the option

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<PAGE>

to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's future margin account, which represents
the amount by which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of
the option on the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will
be made entirely in cash equal to the difference between the exercise price
of the option and the closing price of the stock index futures contract on
the expiration date. A Fund will pay a premium for purchasing options on
stock index futures contracts. Because the value of the option is fixed at
the point of sale, there are no daily cash payments to reflect changes in the
value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of the
Fund. In connection with the writing of options on stock index futures
contracts, a Fund will make initial margin deposits and make or receive
maintenance margin payments that reflect changes in the market value of such
options. Premiums received from the writing of an option are included in
initial margin deposits.

PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. A Fund will purchase
put options on futures contracts if the Adviser anticipates a market decline. A
put option on a stock index futures contract becomes more valuable as the market
declines. By purchasing put options on stock index futures contracts at a time
when the Adviser expects the market to decline, a Fund will seek to realize a
profit to offset the loss in value of its portfolio securities.

PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. A Fund will purchase
call options on stock index futures contracts if the Adviser anticipates a
market rally. The purchase of a call option on a stock index futures contract
represents a means of obtaining temporary exposure to market appreciation at
limited risk. A call option on such a contract becomes more valuable as the
market appreciates. A Fund will purchase a call option on a stock index futures
contract to hedge against a market advance when the Fund is holding cash. The
Fund can take advantage of the anticipated rise in the value of equity
securities without actually buying them until the market is stabilized. At that
time, the options can be liquidated and the Fund's cash can be used to buy
portfolio securities.

WRITING CALL OPTIONS ON FUTURES CONTRACTS. A Fund will write call
options on stock index futures contracts if the Adviser anticipates a market
decline. As the market declines, a call option on such a contract becomes less
valuable. If the futures contract price at expiration of the option is below
the exercise price, the option will not be exercised and the Fund will retain
the full amount of the option premium. Such amount provides a partial hedge
against any decline that may have occurred in the Fund's portfolio securities.

WRITING PUT OPTIONS ON FUTURES CONTRACTS. A Fund will write put
options on stock index futures contracts if the Adviser anticipates a market
rally. As the market appreciates, a put option on a stock index futures
contract becomes less valuable. If the futures contract price at expiration of
the option has risen due to market

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<PAGE>

appreciation and is above the exercise price, the option will not be
exercised and the Fund will retain the full amount of the option premium.
Such amount can then be used by the Fund to buy portfolio securities when the
market has stabilized.

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several
risks in using stock index futures contracts as hedging devices. One risk
arises because the prices of futures contracts may not correlate perfectly with
movements in the underlying stock index due to certain market distortions.
First, all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than making additional variation margin
payments, investors may close the contracts through offsetting transactions
which could distort the normal relationship between the index and the futures
market. Second, the margin requirements in the futures market are lower than
margin requirements in the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions.
Because of possible price distortion in the futures market and because of
imperfect correlation between movements in stock indexes or securities and
movements in the prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a very
short period.

Another risk arises because of imperfect correlation between movements
in the value of the stock index futures contracts and movements in the value of
securities subject to the hedge. The risk of imperfect correlation increases as
the composition of a Fund's portfolio diverges from the securities included in
the applicable stock index. It is possible that a Fund might sell stock index
futures contracts to hedge its portfolio against decline in the market, only to
have the market advance and the value of securities held in the Fund's portfolio
decline. If this occurred, the Fund would lose money on the contracts and also
experience a decline in the value of its portfolio securities. While this could
occur, the Adviser believes that over time the value of an equity fund's
portfolio will tend to move in the same direction as the market indexes. In an
attempt to reduce this risk, the Adviser will enter into futures contracts on
indexes whose movements it believes will have a significant correlation with
movements in the value of the Fund's portfolio securities.

Successful use of futures contracts by a Fund is subject to the
ability of the Adviser to predict correctly movements in the direction of the
market. If a Fund has hedged against the possibility of a decline in the value
of the stocks held in its portfolio and stock prices increase instead, the Fund
will lose part or all of the benefit of the increased value of its security
which it has hedged because it will have to sell securities to meet daily
variation margin requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.

C-4
<PAGE>

In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in the futures contract and thus provide an offset to
losses on the futures contract.

RISKS OF OPTIONS ON FUTURES CONTRACTS. The use of options on stock
index futures contracts also involves additional risk. Compared to the purchase
or sale of futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transactions costs). The writing
of a call option on a futures contract generates a premium which may partially
offset a decline in the value of the Fund's portfolio assets. By writing a call
option, the Fund becomes obligated to sell a futures contract, which may have a
value higher than the exercise price. Conversely, the writing of a put option
on a futures contract generates a premium, but the Fund becomes obligated to
purchase a futures contract, which may have a value lower than the exercise
price. Thus, the loss incurred by the Fund in writing options on futures
contracts may exceed the amount of the premium received.

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<PAGE>

A Fund's purchase or sale of put or call options on futures contracts
will be based upon predictions as to anticipated market trends by the Adviser,
which could prove to be inaccurate. Even if the expectations of the Adviser are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.

REGULATORY MATTERS

The Commodity Futures Trading Commission (the "CFTC"), a federal
agency, regulates trading activity on the exchanges pursuant to the Commodity
Exchange Act, as amended. The CFTC requires the registration of "commodity pool
operators," defined as any person engaged in a business which is of the nature
of an investment trust, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others, funds,
securities or property for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market. The CFTC has
adopted Rule 4.5, which provides an exclusion from the definition of commodity
pool operator for any registered investment company which meets the requirements
of the Rule. Rule 4.5 requires, among other things, that an investment company
wishing to avoid commodity pool operator status use futures and options
positions only (a) for "bona fide hedging purposes" (as defined in CFTC
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the investment company's portfolio. Any investment
company wishing to claim the exclusion provided in Rule 4.5 must file a notice
of eligibility with both the CFTC and the National Futures Association. Before
engaging in transactions involving interest rate futures contracts, the Funds
will file such notices and meet the requirements of Rule 4.5, or such other
requirements as the CFTC or its staff may from time to time issue, in order to
render registration as a commodity pool operator unnecessary.

C-6

<PAGE>

PART C

OTHER INFORMATION

Growth Fund, Emerging Growth Fund, Growth and Income Fund,
Small Company Growth Fund, Balanced Fund, Government
Income Fund and Intermediate Bond Fund

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial statements are incorporated by reference to the
Registrant's Annual Reports filed with the Commission on
November 24, 1995.

(b) Exhibits:

1.1 Restated Articles of Incorporation dated November 23,
1993 *
1.2 Certificate of Designation of Series M Common Shares *
2.1 Bylaws *
2.2 Amendment to Bylaws dated July 6, 1995 *
2.3 Amendment to Bylaws dated November ___, 1995 *
5.1 Investment Advisory and Management Agreement dated
February 19, 1987 *
5.2 Supplement to Investment Advisory and Management
Agreement dated April 4, 1988 *
5.3 Supplement to Investment Advisory and Management
Agreement dated March 16, 1990 *
5.4 Supplement to Investment Advisory and Management
Agreement dated July 21, 1992 *
5.5 Supplement to Investment Advisory and Management
Agreement dated April 10, 1995 *
6 Amended Underwriting and Distribution Agreement *
9.1 Shareholder Account Servicing Agreement between Piper
Funds Inc. and Piper Trust Company *
9.2 Shareholder Account Servicing Agreement between Piper
Funds Inc. and Piper Jaffray Inc. *
10 Opinion and Consent of Dorsey & Whitney P.L.L.P. dated
April 7, 1995 *
11 Consent of KPMG Peat Marwick LLP *
13 Letter of Investment Intent dated April 6, 1995 *
15.1 Amended and Restated Plan of Distribution *
15.2 Supplement to Distribution Plan dated April 10, 1995 *
17.1 Power of Attorney dated November 27, 1995*
------------------
* Incorporated by reference to Post-Effecitve Amendment No.
27 to the Registrant's Registration Statement on Form N-1A filed with the
Commission on November 27, 1995.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

<PAGE>

No person is directly or indirectly controlled by or under
common control with the Registrant.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES

As of August ____, 1996: Number of
Title of Class Record Holders
-------------- --------------

Growth Fund Common Shares
Emerging Growth Fund Common Shares
Growth and Income Fund Common Shares
Small Company Growth Fund Common Shares
Balanced Fund Common Shares
Government Income Fund Common Shares
Intermediate Bond Fund Common Shares

ITEM 27. INDEMNIFICATION

The Articles of Incorporation and Bylaws of the Registrant
provide that the Registrant shall indemnify such persons for such expenses
and liabilities, in such manner and under such circumstances, to the full
extent permitted by Section 302A.521, Minnesota Statutes, as now enacted or
hereafter amended, provided that no such indemnification may be made if it
would be in violation of Section 17(h) of the Investment Company Act of 1940,
as now enacted or hereafter amended. Section 302A.521 of the Minnesota
Statutes, as now enacted, provides that a corporation shall indemnify a
person made or threatened to be made a party to a proceeding of the person
against judgments, penalties, fines, settlements, and reasonable expenses,
including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding if, with respect to the acts or omissions of
the person complained of in the proceeding, the person has not been
indemnified by another organization for the same judgments, penalties, fines,
settlements, and reasonable expenses incurred by the person in connection
with the proceeding with respect to the same acts or omissions; acted in good
faith, received no improper personal benefit and the Minnesota Statutes
dealing with directors' conflicts of interest, if applicable, have been
satisfied; in the case of a criminal proceeding, had no reasonable cause to
believe that the conduct was unlawful; and reasonably believed that the
conduct was in the best interests of the corporation or, in certain
circumstances, reasonably believed that the conduct was not opposed to the
best interests of the corporation.

Insofar as the indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any

<PAGE>

action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Information on the business of the Adviser is described in the
section of the Prospectus, incorporated by reference in this Registration
Statement, entitled "Management--Investment Adviser."

The officers and directors of the Adviser and their titles are
as follow:

Name Title
---- -----

William H. Ellis President, Director and Chairman of
the Board
Charles N. Hayssen Director
Bruce C. Huber Director
David E. Rosedahl Director
Momchilo Vucenich Director
Paul A. Dow Senior Vice President and
Chief Investment Officer
Susan S. Miley Senior Vice President and
General Counsel
Worth Bruntjen Senior Vice President
Michael C. Derck Senior Vice President
Richard W. Filippone Senior Vice President
John J. Gibas Senior Vice President
Marijo A. Goldstein Senior Vice President
Mark R. Grotte Senior Vice President
Jerry F. Gudmundson Senior Vice President
Robert C. Hannah Senior Vice President
Lynne Harrington Senior Vice President
Lisa A. Kenyon Senior Vice President
Mark S. Lee Senior Vice President
Thomas S. McGlinch Senior Vice President
Curt D. McLeod Senior Vice President
Steven V. Markusen Senior Vice President
Paula Meyer Senior Vice President
Robert H. Nelson Senior Vice President
Gary Norstrem Senior Vice President
Nancy S. Olsen Senior Vice President
Ronald R. Reuss Senior Vice President
Maxine D. Rossini Senior Vice President
Bruce D. Salvog Senior Vice President
John K. Schonberg Senior Vice President

<PAGE>

Sandra K. Shrewsbury Senior Vice President
David M. Steele Senior Vice President
J. Bradley Stone Senior Vice President
Robert H. Weidenhammer Senior Vice President
John G. Wenker Senior Vice President
Douglas J. White Senior Vice President
Cynthia K. Castle Vice President
Richard Daly Vice President
Molly Destro Vice President
Julie Deutz Vice President
Joan L. Harrod Vice President
Newby Herrod Vice President
Amy K. Johnson Vice President
Russell J. Kappenman Vice President
Kimberly F. Kaul Vice President
John D. Kightlinger Vice President
Wan-Chong Kung Vice President
Steven Meyer Vice President
Thomas Moore Vice President
Edward P. Nicoski Vice President
Paul D. Pearson Vice President
Eric L. Siedband Vice President
Catherine M. Stienstra Vice President
Shaista Tajamal Vice President
Bonnie L. Theis Vice President
Michael Wallace Vice President
Jane K. Welter Vice President
Marcy K. Winson Vice President
Fong P. Woo Vice President

Principal occupations of Messrs. Ellis, Dow, Bruntjen, Filippone,
Markusen, Nelson, Nicoski, Pearson, Reuss, Salvog, Steele and White and Ms.
Destro, Ms. Goldstein, Ms. Johnson, Ms. Miley, Ms. Olsen, Ms. Shrewsbury and
Ms. Winson are set forth in the Statement of Additional Information under the
heading "Directors and Officers." MR. HAYSSEN is a Director of the Adviser
and has been Chief Information Officer of Piper Jaffray Companies Inc. since
January 1996, prior to which he was a Managing Director of Piper Jaffray Inc.
("Piper Jaffray") from 1986 to 1995, a Managing Director of Piper Jaffray
Companies Inc. from 1987 to 1995, Chief Financial Officer of Piper Jaffray
from 1988 to 1995, Chief Financial Officer of the Adviser from 1989 to 1995
and Chief Operating Officer of the Adviser from 1994 to 1995. MR. HUBER has
been a Director of the Adviser since October 1985 and a Managing Director of
Piper Jaffray since November 1986. MR. ROSEDAHL is a Director and Secretary
of the Adviser and Managing Director, Secretary and General Counsel for Piper
Jaffray and Managing Director and General Counsel for Piper Jaffray Companies
Inc. MR. VUCENICH has been a Director of the Adviser since December 1994 and
a Managing Director of Piper Jaffray Inc. since 1993.

MR. DERCK has been a Vice President of the Adviser since November
1992, prior to which he had been a manager of Advisory Accounts Services with
the

<PAGE>

Adviser since April 1992 and, before that, an Assistant Vice President at
First Trust since 1976. MR. GIBAS has been a Senior Vice President of the
Adviser since November 1992, prior to which he had been a Vice President of
the Adviser from 1987 to 1992. MR. GROTTE has been a Senior Vice President
of the Adviser since November 1992, prior to which he had been a Vice
President of the Adviser from 1988 to 1992. MR. GUDMUNDSON has been a Senior
Vice President of the Adviser since August 1995, prior to which he was an
Executive Vice President at Resource Capital Advisers from 1991 to May 1995.
MR. HANNAH has been a Senior Vice President of the Adviser since May 1995,
prior to which he was manager of Craig and Associates in Seattle, Washington
from September 1993 to November 1994, and prior thereto, he was manager of
Exvere in Seattle from January 1993 to August 1993 and a registered
representative at Geneva in Irvine, California from January 1991 to December
1992. MS. HARRINGTON has been a Senior Vice President of the Adviser since
March 1995, prior to which she was a Managing Director at Piper Jaffray Inc.
in the Public Finance Department. MS. KENYON has been a Senior Vice
President of the Adviser since January 1992, prior to which she had been a
financial adviser for a private family in Los Angeles. MR. LEE has been a
Senior Vice President of the Adviser since November 1995, prior to which he
had been a Vice President of the Adviser since 1990. MR. MCGLINCH has been a
Senior Vice President of the Adviser since November 1995, prior to which he
had been a Vice President of the Adviser since November 1992 and, prior
thereto, he had been a specialty products trader at FBS Investment Services
from January 1990 to January 1992. MR. MCLEOD has been a Senior Vice
President of the Adviser since November 1995, prior to which he had been an
analyst at the Adviser since 1988. MS. MEYER has been a Senior Vice
President of the Adviser since December 1994, prior to which she had been a
Vice President of Secura Insurance, Appleton, Wisconsin from 1988 to 1994.
MR. NORSTREM has been a Senior Vice President of the Adviser since 1993,
prior to which he was Treasurer of the City of Saint Paul, Minnesota for
twenty-eight years. MS. ROSSINI has been a Senior Vice President of the
Adviser since September 1993, prior to which she had been a managing Director
of the Distributor since November 1989. MR. SCHONBERG has been a Senior Vice
President of the Adviser since November 1995, prior to which he was a Vice
President of the Adviser from November 1992 to November 1995 and a portfolio
manager for the Adviser since July 1989. MR. STONE has been a Senior Vice
President of the Adviser since November 1995, prior to which he had been a
Vice President of the Adviser since 1991-. MR. WEIDENHAMMER has been a
Senior Vice President of the Adviser since November 1991, prior to which he
had been a Vice President of the Adviser from 1987 to 1991. MR. WENKER has
been a Senior Vice President of the Adviser since October 1993, prior to
which he had been a Managing Director of Piper Jaffray from 1992 to 1993, and
prior thereto, the Director of Revitalization Resources of the Minneapolis
Community Development Agency from 1990 to 1992.

MS. CASTLE has been a Vice President of the Adviser since November
1994, prior to which she was a client service associate of the Adviser since
1990. MR. DALY has been a Vice President of the Adviser since 1992, prior to
which he was an Assistant Vice President of the Piper Jaffray since 1990 and
a broker with Piper Jaffray from 1987 to 1992. MS. DUETZ has been a Vice
President of the Adviser since September 1995, prior to which she was an
Assistant Vice President at Daiwa Bank, Ltd. from November 1992 to September
1995 and a manager of financial reporting at

<PAGE>

The Churchill Companies from September 1991 to October 1992. MS. HARROD has
been a Vice President of the Adviser since November 1992 and has been a
trader for the Adviser since October 1989. MR. HERROD has been a Vice
President of the Adviser since 1992, prior to which he was a Vice President
of Capital Markets at Washington Square Capital Management from 1987 to 1992.
MR. KAPPENMAN has been a Vice President of the Adviser since 1991. MS. KAUL
has been a Vice President and Director of Corporate Communications of the
Adviser since November 1991, prior to which she was Copy Director and
Assistant Vice President in the advertising department of Piper Jaffray since
1986. MR. KIGHTLINGER has been a Vice President of the Adviser since 1991,
prior to which he had been a department head and portfolio manager for TCF
Bank Savings. MS. KUNG has been a Vice President of the Adviser since May
1993, prior to which she had been a Senior Consultant at Cytrol Inc. from
1989 to December 1992. MR. MEYER has been a Vice President of the Adviser
since November 1994 and manager of Systems Integration for the Adviser since
1991. MR. MOORE has been a Vice President of the Adviser since 1992, prior
to which he was a Portfolio Manager at Alpine Capital Management from 1990 to
1992 and a broker at Hanifen Capital Management from 1990 to 1992. MR.
SIEDBAND has been a Vice President of the Adviser since 1992. MS. STIENSTRA
has been a Vice President of the Adviser since November 1995 and a municipal
bond trader of the Adviser since June 1995, prior to which she was an
assistant analyst of the Adviser from 1991 to 1994. MR. STONE has been a
Vice President of the Adviser since November 1991 and a fixed-income analyst
of the Adviser since March 1990. MS. TAJAMAL has been a Vice President of the
Adviser since November 1995 and a portfolio manager of the Adviser since
1993, prior to which she was a money market analyst of the Adviser from 1990
to 1993. MS. THEIS has been a Vice President of the Adviser since November
1992, prior to which she had been an Assistant Vice President of the Adviser
since 1989. MR. WALLACE has been a Vice President of the Adviser since
November 1995, prior to which he was an Assistant Vice President of the
Adviser since November 1994 and prior to that he was an Equity Analyst at the
Adviser from June 1993 to November 1994. MS. WELTER has been a Vice
President of the Adviser since November 1994, prior to which she was a client
service associate of the Adviser since 1993 and a mutual fund accountant with
the Adviser from 1990 to 1993. MR. WOO has been a Vice President of the
Adviser since November 1994, prior to which he was a municipal credit analyst
of the Adviser since 1992 and prior to that he was a credit specialist at a
commercial trading firm from 1991 to 1992.

ITEM 29. PRINCIPAL UNDERWRITERS

(a) Piper Jaffray Inc. acts as principal underwriter for the
Registrant and also for three other open-end investment companies, Piper
Institutional Funds Inc., the shares of which are currently offered in two
series, Piper Funds Inc. -- II, the shares of which are currently offered in
one series and Piper Global Funds Inc., the shares of which are currently
offered in two series. Piper Jaffray has acted as principal underwriter in
connection with the initial public offering of shares of 23 closed-end
investment companies.

(b) The name, positions and offices with Piper Jaffray Inc., and
positions and offices with the Registrant of each director and officer of
Piper Jaffray Inc. are as follow:

<PAGE>

Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
<S> <C> <C>

Addison L. Piper Chairman of the Board of None
Directors and Chief Executive
Officer

Ralph W. Burnet Member of the Board None
of Directors

William H. Ellis Member of the Board None
of Directors

John L. McElroy, Jr. Member of the Board None
of Directors

Kathy Halbreich Member of the Board None
of Directors

Robert S. Slifka Member of the Board None
of Directors

David Stanley Member of the Board None
of Directors

James J. Bellus Managing Director None

AnnDrea M. Benson Managing Director None

Lloyd K. Benson Managing Director None

Gary J. Blauer Managing Director None

Karen M. Bohn Managing Director None

Sean K. Boyea Managing Director None

Ronald O. Braun Managing Director None

Paul E. Brodsky Managing Director None

Jay A. Brunkhorst Managing Director None

Kenneth S. Cameranesi Managing Director None

Stephen M. Carnes Managing Director None

Joseph V. Caruso Managing Director None

</TABLE>

<PAGE>

Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
<S> <C> <C>

Antonio J. Cecin Managing Director None

Joyce E. Chaney Managing Director None

Kenneth P. Clark Managing Director None

Linda A. Clark Managing Director None

Stephen B. Clark Managing Director None

David P. Crosby Managing Director None

Mark A. Curran Managing Director None

George S. Dahlman Managing Director None

Michael D. Deede Managing Director None

Jack C. Dillingham Managing Director None

Mark T. Donahoe Managing Director None

Darci L. Doneff Managing Director None

Philip S. Dow Managing Director None

Andrew S. Duff Managing Director None

Michael D. Duffy Managing Director None

Andrew W. Dunleavy Managing Director None

Richard A. Edstrom Managing Director None

Fred R. Eoff, Jr. Managing Director None

Richard D. Estenson Managing Director None

Francis E. Fairman IV Managing Director None

John R. Farrish Managing Director None

G. Richard Ferguson Managing Director None

Paul Ferry Managing Director None

</TABLE>

<PAGE>

Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
<S> <C> <C>

Mark E. Fisler Managing Director None

Michael W. Follett Managing Director None

Daniel P. Gallaher Managing Director None

Peter M. Gill Managing Director None

Kevin D. Grahek Managing Director None

Paul D. Grangaard Managing Director None

Daniel J. Hagen Managing Director None

James S. Harrington Managing Director None

Charles N. Hayssen Managing Director None

William P. Henderson Managing Director None

Allan F. Hickok Managing Director None

Richard L. Hines Managing Director None

David B. Holden Managing Director None

Charles E. Howell Managing Director None

Bruce C. Huber Managing Director None

Elizabeth A. Huey Managing Director None

John R. Jacobs Managing Director None

Earl L. Johnson Managing Director None

Richard L. Johnson Managing Director None

Nicholas P. Karos Managing Director None

Paul P. Karos Managing Director None

Richard G. Kiss Managing Director None

Gordon E. Knudsvig Managing Director None

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
<S> <C> <C>

Jerome P. Kohl Managing Director None

Eric W. Larson Managing Director None

Dan L. Lastavich Managing Director None

Robert J. Magnuson Managing Director None

James M. Manire Jr. Managing Director None

Robert E. Mapes Managing Director None

Peter T. Mavroulis Managing Director None

Michael P. McMahon Managing Director None

G. Teerry McNellis Managing Director None

Thomas A. Medlin Managing Director None

Darryl L. Meyers Managing Director None

Joseph E. Meyers Managing Director None

John V. Miller Managing Director None

Dennis V. Mitchell Managing Director None

Susan D. Musselman Managing Director None

Edward P. Nicoski Managing Director None

Barry J. Nordstrand Managing Director None

Benjamin S. Oehler Managing Director None

Brooks G. O'Neil Managing Director None

John P. O'Neill Managing Director None

John Otterlei Managing Director None

Robin C. Pfister Managing Director None

Laurence S. Podobinski Managing Director None

</TABLE>

<PAGE>

Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
<S> <C> <C>

Steven J. Proeschel Managing Director None

Rex W. Ramsay Managing Director None

Brian J. Ranallo Managing Director None

Roger W. Redmond Managing Director None

Robert P. Rinek Managing Director None

Jim M. Roane Managing Director None

Deborah K. Roesler Managing Director None

Russ E. Rogers Managing Director None

David E. Rosedahl Managing Director, General None
Counsel and Secretary

D. Harrison Royce Managing Director None

Terry D. Sandven Managing Director None

Thomas P. Schnettler Managing Director None

Steven R. Schroll Managing Director None

Joyce Nelson Schuette Managing Director None

Lawrence M. Schwartz, Jr. Managing Director None

Morton D. Silverman Managing Director None

Linda E. Singer Managing Director None

David P. Sirianni Managing Director None

Arch C. Smith Managing Director None

Robert L. Sonnek Managing Director None

Sandra G. Sponem Managing Director None

Thomas E. Stanberry Managing Director None

DeLos V. Steenson Managing Director None

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
---- --------------------- ---------------------
<S> <C> <C>

D. Greg Sundberg Managing Director None

Robert D. Swerdling Managing Director None

William H. Teeter Managing Director None

Ann C. Tillotson Managing Director None

Marie Uhrich Managing Director None

Momchilo Vucenich Managing Director None

Darrell L. Westby Managing Director None

David R. Westcott Managing Director None

Douglas R. Whitaker Managing Director None

James H. Wilford Managing Director None

Stephen W. Woodard Managing Director None

Mark Wren Managing Director None

Saul Yaari Managing Director None

</TABLE>

The principal business address of each of the individuals listed above is
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota
55402-3804.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

The physical possession of the accounts, books, and other
documents required to be maintained by Section 31(a) of the Investment
Company Act of 1940 and Rules 3la-1 to 3la-3 promulgated thereunder is
maintained by the Registrant at Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota 55402-3804, except that the physical possession of
certain accounts, books and other documents related to the custody of
securities may be maintained by it custodian, Investors Fiduciary Trust
Company, 127 West Tenth Street, Kansas City, Missouri 64105. Investors
Fiduciary Trust Company may also maintain documents for each Fund in its
capacity as Transfer and Dividend Disbursing Agent.

ITEM 31. MANAGEMENT SERVICES

Not applicable.

ITEM 32. UNDERTAKINGS

(a) Not applicable.

<PAGE>

(b) Not applicable.

(c) Each recipient of a prospectus of any series of the
Registrant may request the latest Annual Report and such Annual Report will
be furnished by the Registrant without charge.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis and State
of Minnesota on the 12th day of July 1996.

PIPER FUNDS INC.
(Registrant)

By /s/ Paul A. Dow
------------------------------
Paul A. Dow
President

Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:

/s/ Paul A. Dow President (principal July 12, 1996
- -------------------------------- executive officer)
Paul A. Dow

/s/ Robert H. Nelson Treasurer (principal July 12, 1996
- -------------------------------- financial and
Robert H. Nelson accounting officer)

David T. Bennett* Director

Jaye F. Dyer* Director

William H. Ellis* Director

Karol D. Emmerich* Director

Luella G. Goldberg* Director

George Latimer* Director

*By /s/ William H. Ellis July 12, 1996
----------------------------
William H. Ellis
Attorney-in-Fact