HYPERION 1997 TERM TRUST INC, N-30D, 1996-07-26

HYPERION 1997 TERM TRUST INC
N-30D, 1996-07-26

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HYPERION 1997 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR

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DEAR SHAREHOLDER: July 18, 1996

We welcome this opportunity to provide you with information about Hyperion 1997
Term Trust, Inc. (the 'Trust') for its annual period ended May 31, 1996 and to
share our outlook for the Trust's current fiscal year. The Trust's shares are
traded on the New York Stock Exchange under the symbol 'HTA'.

MARKET ENVIRONMENT

Since our last report, interest rates have moved in a volatile fashion. Year-end
expectations of further Federal Reserve easing were realized with a 25 basis
point reduction in the Federal Funds rate to 5.25% in January. However, a
dramatic shift in market psychology occurred. Led by strong auto and housing
markets, economic growth for 1996 is stronger than anticipated. With stronger
economic growth, interest rates increased on fears of surging inflation and a
projected shift in the future course of monetary policy towards higher interest
rates. Although economic growth has been higher than anticipated by the Federal
Reserve, inflationary pressures have yet to surface in the economy. Nonetheless,
interest rate volatility has been high.

The dramatic change in yields between November 30, 1995, February 13, 1996 and
May 31, 1996 is outlined below.

<TABLE>
<CAPTION>
11/30/95 2/13/96 5/31/96
-------- -------- --------
<S> <C> <C> <C>
Fed Funds.................... 5.75% 5.25% 5.25%
1-Year Treasury Bill......... 5.35% 4.78% 5.74%
2-Year Treasury Note......... 5.35% 4.79% 6.24%
5-Year Treasury Note......... 5.52% 5.13% 6.63%
10-Year Treasury Note........ 5.75% 5.58% 6.85%
</TABLE>

PORTFOLIO STRATEGY AND PERFORMANCE

Our investment outlook as stated in our last report was cautiously optimistic,
expecting a much more stable and constructive interest rate environment.
Unfortunately, the rise in interest rates and the subsequent decline in market
prices of fixed income securities resulted in a decline in the Trust's net asset
value ('NAV').

The composition of the Trust's assets has continued to change over the last few
months. The allocation to U.S. Government Agency pass-through certificates was

lowered by 15% in favor of U.S. Treasury obligations and asset-backed securities
('ABS') which have fixed maturity dates. The ongoing strategy of the Trust will
be to continue to target the maturities of securities in the Trust to its
scheduled termination date of November 30, 1997. By maintaining this investment
strategy, the portfolio's duration (duration measures a bond portfolio's price
sensitivity to interest-rate changes) will continue to be reduced as the
scheduled termination date of November 30, 1997 approaches. This reduction
should serve to minimize the impact of interest rate volatility on the Trust,
but will most likely result in lower dividends to the Trust's shareholders in
the future.

On June 14, 1996, the Trust announced that in light of the current market
environment, and its scheduled termination date of November 30, 1997, the
Trust's investment advisor had determined that the amount of portfolio risk
required during the remaining term of the Trust to attain the $10.00 per share
terminal date objective would be inappropriate for the Trust and its
shareholders. Accordingly, it is unlikely that

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HYPERION 1997 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONTINUED)

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the Trust will achieve its objective to return $10.00 per share by its scheduled
termination date.

Based upon the reduced profile of the Trust's investment activities, on July 16,
1996, the Advisor voluntarily agreed to reduce its investment advisory fee by
sixty percent, from 50 basis points (.50%) per annum to 20 basis points (.20%)
per annum, an effective 30 basis point reduction per annum. Also, on that date,
the Board of Directors authorized the Trust to purchase and retire up to 25% of
its outstanding shares, or approximately 15.1 million of the Trust's shares, in
the open market. In accordance with the Board's resolution and applicable
regulatory requirements, shares will be repurchased at levels below the current
NAV, inclusive of transaction costs. By doing so, the Trust attempts to capture
the price difference between the market price and the Trust's current NAV. This
program is designed to attempt to reduce the discount on the Trust's shares
between its stock market price and NAV. These actions should further benefit
shareholders.

The Trust's portfolio is composed of mortgage-backed pass-throughs and
Collateralized Mortgage Obligations with low coupons, United States Treasury
obligations, municipal securities, and ABS.

The chart on the following page shows the allocation of the Trust's holdings by
asset category on May 31, 1996.

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HYPERION 1997 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONCLUDED)

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HYPERION 1997 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS AS OF MAY 31, 1996*

[CHART]

U.S. Government Agency Pass-Through Certificates 26.7%
U.S. Treasury Obligations 26.5%
Asset Backed Securities 13.9%
Collateralized Mortgage Obligations 13.9%
Municipal Zero Coupon Securities 13.2%
U.S. Government Agency Collateralized Mortgage Obligations 4.4%
U.S. Government Agency Stripped Mortgage-Backed Securities 1.3%
Repurchase Agreement 0.1%

* As a percentage of total investments.

CONCLUSION

We appreciate the opportunity to serve your investment needs and we thank you
for your continued support. As always, we welcome your questions and comments
and encourage you to contact our Shareholder Services Representatives at
1-800-HYPERION.

Sincerely,

/s/ KENNETH C. WEISS
KENNETH C. WEISS
Chairman,
Hyperion 1997 Term Trust, Inc.
President and Chief Executive Officer,
Hyperion Capital Management, Inc.

/s/ LOUIS C. LUCIDO
LOUIS C. LUCIDO
President,
Hyperion 1997 Term Trust, Inc.
Managing Director and Chief Operating Officer,
Hyperion Capital Management, Inc.

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HYPERION 1997 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS

<TABLE>
<CAPTION>
May 31, 1996
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS--80.2%
U.S. GOVERNMENT AGENCY
PASS-THROUGH CERTIFICATES--36.4%
Federal Home Loan Mortgage Corporation 6.50% 09/01/08-01/01/24 $ 38,651@ $ 36,405,069
7.00 11/01/99 9,082 9,036,144
8.00 08/01/24 3,508 3,523,091
------------
48,964,304
------------
Federal National Mortgage Association 6.00 01/01/01 11,916 11,439,084
6.50 07/01/02-09/01/10 29,745 28,591,403
7.00 01/01/99-04/01/26 39,774 38,753,256
8.00 05/01/25-08/01/25 24,724 24,816,667
10.00 02/01/25 664 724,499
------------
104,324,909
------------
Government National Mortgage Association 8.00 08/15/24 6,202 6,238,641
------------
TOTAL U.S. GOVERNMENT AGENCY
PASS-THROUGH CERTIFICATES
(Cost - $161,808,343) 159,527,854
------------
U.S. GOVERNMENT AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS (REMICS)--6.1%
Federal Home Loan Mortgage Corporation
Series 1416, Class PE, PAC 6.00 02/15/16 10,800 10,499,328
Series 1482, Class F 6.50 05/15/19 11,199 10,681,056
------------
21,180,384
------------
Federal National Mortgage Association
Series 1993-247, Class AB 5.75 01/25/23 5,656 5,345,541
------------
TOTAL U.S. GOVERNMENT AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS (REMICS)
(Cost - $25,947,090) 26,525,925
------------

U.S. GOVERNMENT AGENCY STRIPPED
MORTGAGE-BACKED SECURITY--1.7%
INTEREST-ONLY SECURITY:
Federal National Mortgage Association
Series 1993-M2, Class B, WAC, REMIC
(Cost-- $11,977,794) 2.57+ 07/25/03 92,806 7,569,270
------------
U.S. TREASURY OBLIGATIONS--36.0%
U.S. Treasury Bills 4.92 08/08/96 5,844 5,790,352
------------
U.S. Treasury Notes 5.13 02/28/98 9,150@ 8,981,274
6.38 05/15/99 6,250@ 6,234,375
7.38 11/15/97 121,000@ 122,966,250
7.75 12/31/99 13,500@ 13,993,594
------------
152,175,493
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost - $156,562,283) 157,965,845
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost - $356,295,510) 351,588,894
------------
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</TABLE>

4
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HYPERION 1997 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)

TOTAL ASSET-BACKED SECURITIES
(Cost - $82,280,214) 82,732,661
------------
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COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)--18.9%
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C3, Class A1 6.79+ 12/26/25 9,767 9,499,912
Prudential Home Mortgage Securities Co., Inc.
Series 1992-42, Class A7 7.00 01/25/08 41,375 39,300,871
Residential Funding Mortgage Securities I
Series 1994-MZ1, Class A1 6.47 01/28/24 29,783 28,256,726
Series 1996-S7, Class A12 7.00 03/25/26 6,091 5,594,216
------------
33,850,942
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)
(Cost - $84,556,339) 82,651,725
------------
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MUNICIPAL ZERO COUPON SECURITIES--18.0%
ARIZONA
Maricopa County Arizona, School District #4
FGIC (a) 07/01/98 5,200 4,714,892
Maricopa County Arizona, School District #41
FGIC (a) 07/01/98 6,000 5,440,260
Maricopa County Arizona, School District #97
FGIC (a) 07/01/98 4,185 3,794,581
------------
13,949,733
------------
FLORIDA
Hillsborough County Florida, Utility
Series A, Revenue Bond, MBIA (a) 08/01/98-08/01/99 17,190 14,956,817
------------
ILLINOIS
Metropolitan Pier & Exposition Authority
Revenue Bond, AMBAC (a) 12/15/97-06/15/98 11,500 10,635,160
------------
KANSAS
Kansas City Kansas, Utility System
Revenue Bond, AMBAC (a) 09/01/98 8,185 7,387,945
------------
</TABLE>

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HYPERION 1997 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONCLUDED)

<TABLE>
<CAPTION>
May 31, 1996
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL ZERO COUPON SECURITIES (CONCLUDED)
KENTUCKY
Owensboro Kentucky, Electric Light & Power
Series B, Revenue Bond, AMBAC (a) 01/01/98 $ 1,000 $ 928,250
------------
NEW JERSEY
New Jersey, Wastewater Treatment Trust
Series A, Revenue Bond (a) 09/01/97 7,305 6,925,870
------------
TEXAS
Austin Texas
FGIC (a) 09/01/98 7,845 7,057,676
Austin Texas, Utility System
Series A, Revenue Bond, MBIA (a) 05/15/98 1,750 1,596,298
Dallas Texas, Independent School District
PSFG (a) 08/15/97 12,400 11,771,692
Denton Texas, Independent School District
PSFG (a) 02/15/98 3,960 3,654,801
------------
24,080,467
------------
TOTAL MUNICIPAL ZERO COUPON SECURITIES
(Cost - $77,895,824) 78,864,242
------------
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REPURCHASE AGREEMENT--0.1%
Dated 5/31/96, with State Street Bank and Trust Company, 4.90%,
due 6/3/96; proceeds: $613,250; collateralized by $625,000
U.S Treasury Note, 6.25%, due 8/31/00, value: $628,418
(Cost - $613,000)
613 613,000
------------
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TOTAL INVESTMENTS--136.1%
(Cost - $601,640,887) $596,450,522

LIABILITIES IN EXCESS OF OTHER ASSETS--(36.1%) (158,247,658)
------------

NET ASSETS--100.0% $438,202,864
------------
------------
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</TABLE>

<TABLE>
<S> <C>
@ Portion or entire principal amount delivered as collateral for reverse repurchase agreements. (Note 5)
REMIC Real Estate Mortgage Investment Conduit
PAC Planned Amortization Class--security principal payments are within a predetermined range.
WAC Weighted Average Coupon
+ Variable Rate Security--coupon rate is rate in effect as of May 31, 1996.
FGIC Financial Guaranty Insurance Company
(a) Zero Coupon Bonds
MBIA Municipal Bond Insurance Association
AMBAC American Municipal Bond Assurance Corporation
PSFG Permanent School Fund Guaranteed
</TABLE>

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See notes to financial statements.

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HYPERION 1997 TERM TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1996

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<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $601,640,887) (Note 2).............. $596,450,522
Cash............................................................ 113,560
Receivable for investments sold................................. 33,018,754
Interest receivable............................................. 3,768,774
Prepaid expenses................................................ 147,193
Deferred organization expenses (Note 2)......................... 24,724
------------
Total assets.................................................. 633,523,527
------------

LIABILITIES:
Reverse repurchase agreements (Note 5).......................... 194,898,000
Investment advisory fee payable (Note 3)........................ 193,008
Accrued expenses................................................ 109,886
Interest payable (Note 5)....................................... 65,915
Administration fee payable (Note 3)............................. 53,854
Contingencies (Notes 8 and 9)................................... --
------------
Total liabilities............................................. 195,320,663
------------
NET ASSETS (equivalent to $7.24 per share based on 60,555,227
shares outstanding) $438,202,864

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

COMPOSITION OF NET ASSETS:
Capital stock, at par (Note 6).................................. $ 605,552
Additional paid-in capital (Note 2)............................. 573,777,495
Undistributed net investment income (Note 2).................... 10,756,323
Accumulated net realized losses................................. (141,746,141)
Net unrealized depreciation..................................... (5,190,365)
------------
Net assets applicable to capital stock outstanding.............. $438,202,864
------------
------------
</TABLE>

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See notes to financial statements.

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HYPERION 1997 TERM TRUST, INC.
STATEMENT OF OPERATIONS
For the Year Ended May 31, 1996

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<TABLE>
<S> <C>
INVESTMENT INCOME (Note 2):
Interest...................................................... $ 47,671,136
------------
EXPENSES:
Investment advisory fees (Note 3)............................. 2,398,452
Administration fees (Note 3).................................. 663,368
Legal......................................................... 480,430
Insurance..................................................... 477,078
Custodian..................................................... 109,819
Reports to shareholders....................................... 61,073
Audit and tax services........................................ 61,049
Registration.................................................. 49,930
Directors' fees............................................... 43,873
Transfer agency............................................... 40,324
Amortization of organization expenses (Note 2)................ 17,470
Miscellaneous................................................. 120,207
------------
Total operating expenses................................... 4,523,073
Interest expense (Note 5)................................ 11,435,927
------------
Total expenses............................................. 15,959,000
------------

Net investment income......................................... 31,712,136
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS,
SHORT SALES, FUTURES AND OPTION TRANSACTIONS (Note 2):
Net realized gains (losses) on:
Investment transactions....................................... (9,373,930)
Short sales transactions...................................... 1,384,257
Futures transactions.......................................... (43,222,839)
Written option transactions................................... 194,187
------------
(51,018,325)
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................... (18,388,588)
Futures transactions.......................................... 4,748,154
------------
(13,640,434)
------------
Net realized and unrealized losses on investments, short sales,
futures and option transactions............................... (64,658,759)
------------
Net decrease in net assets resulting from operations............ $(32,946,623)
------------
------------
</TABLE>

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See notes to financial statements.

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HYPERION 1997 TERM TRUST, INC.

<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year For the Year
Ended Ended
May 31, 1996 May 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS:
Net investment income......................... $ 31,712,136 $ 37,668,242
Net realized gains (losses) on investments,
short sales, futures and written option
transactions............................... (51,018,325) 402,244
Net change in unrealized appreciation
(depreciation) on investments and futures
transactions............................... (13,640,434) 6,082,810

------------ ------------
Net increase (decrease) in net assets
resulting from operations.................. (32,946,623) 44,153,296
------------ ------------
DIVIDENDS TO SHAREHOLDERS (Note 2):
Net investment income......................... (29,139,632) (35,073,708)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Cost of Trust shares repurchased and
retired.................................... -- (93,016)
------------ ------------
Total increase (decrease) in net assets.... (62,086,255) 8,986,572
NET ASSETS:
Beginning of year............................... 500,289,119 491,302,547
------------ ------------
End of year (including undistributed net
investment income of $10,756,323 and
$8,152,571, respectively)..................... $438,202,864 $500,289,119
------------ ------------
------------ ------------
</TABLE>

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See notes to financial statements.

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HYPERION 1997 TERM TRUST, INC.
STATEMENT OF CASH FLOWS
For the Year Ended May 31, 1996

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<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
Cash flows provided by operating activities:
Interest received (excluding accretion of $3,487,186)..... $ 46,992,065
Interest expense paid..................................... (11,432,465)
Operating expenses paid................................... (4,402,365)
Purchase of short-term portfolio investments, including
options, net........................................... (10,630,037)
Purchase of long-term portfolio investments and short
covers................................................. (2,639,586,142)
Proceeds from disposition of long-term portfolio
investments, short sales and principal paydowns........ 2,710,905,980
Net cash used for futures transactions.................... (38,437,947)
---------------
Net cash provided by operating activities................. 53,409,089
---------------

Cash flows used for financing activities:
Net cash used for reverse repurchase agreements........... (24,156,250)
Cash dividends paid....................................... (29,139,632)
---------------
Net cash used for financing activities.................... (53,295,882)
---------------
Net increase in cash........................................ 113,207
Cash at beginning of year................................... 353
---------------
Cash at end of year......................................... $ 113,560
---------------
---------------
RECONCILIATION OF NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations........ ($ 32,946,623)
---------------
Decrease in investments................................... 114,317,017
Decrease in net unrealized appreciation................... 13,640,434
Decrease in interest receivable........................... 2,048,967
Increase in other assets.................................. (25,704,583)
Decrease in accrued expenses and other liabilities........ (17,946,123)
---------------
Total adjustments...................................... 86,355,712
---------------
Net cash provided by operating activities................... $ 53,409,089
---------------
---------------
Supplemental information:
Excise taxes paid......................................... $ 31,248
---------------
---------------
</TABLE>

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See notes to financial statements.

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HYPERION 1997 TERM TRUST, INC.

<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS

For the Period
For the Year For the Year For the Year November 2, 1992*
Ended Ended Ended through
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:

Net asset value, beginning of the period................ $ 8.26 $ 8.11 $ 9.05 $ 9.48**
------------ ------------ ------------ ------------------
Net investment income................................... 0.52 0.62 0.65 0.43
Net realized and unrealized gains (losses) on
investments, short sales, futures and written option
transactions.......................................... (1.06) 0.11 (0.96) (0.51)
------------ ------------ ------------ ------------------
Net increase (decrease) in net asset value resulting
from operations....................................... (0.54) 0.73 (0.31) (0.08)
------------ ------------ ------------ ------------------
Dividends from net investment income.................... (0.48) (0.58) (0.63) (0.35)
------------ ------------ ------------ ------------------
Net asset value, end of period.......................... $ 7.24 $ 8.26 $ 8.11 $ 9.05
------------ ------------ ------------ ------------------
------------ ------------ ------------ ------------------
Market price, end of period............................. $ 6.875 $ 8.00 $ 7.375 $ 9.50
------------ ------------ ------------ ------------------
------------ ------------ ------------ ------------------
TOTAL INVESTMENT RETURN+................................ (8.31)% 16.98% (16.22)% (3.59)%(1)
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTARY DATA:
Net assets, end of period (000s)...................... $438,203 $500,289 $491,303 $548,268
Total operating expenses.............................. 0.95% 0.86% 0.76% 0.79%(2)
Interest expense...................................... 2.39% 2.31% 1.41% 1.57%(2)
Net investment income................................. 6.63% 7.71% 7.61% 7.99%(2)
Portfolio turnover rate............................... 382% 518% 580% 207%
</TABLE>

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

** Net of offering costs of $0.02.

+ Total investment return is computed based upon the New York Stock Exchange
market price of the Trust's shares and excludes the effects of sales loads or
brokerage commissions.

(1) Not annualized.

(2) Annualized.

See notes to financial statements.

<PAGE>

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HYPERION 1997 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1996

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1. THE TRUST:

Hyperion 1997 Term Trust, Inc. (the 'Trust'), which was incorporated under the
laws of the State of Maryland on July 29, 1992, is registered under the
Investment Company Act of 1940 (the '1940 Act') as a diversified, closed-end
management investment company. The Trust had no transactions until October 20,
1992, when it sold 10,527 shares of common stock for $100,007 to Hyperion
Capital Management, Inc. (the 'Advisor'). The Trust expects to distribute
substantially all of its net assets on or shortly before November 30, 1997 and
thereafter to terminate. The distribution and termination may require
shareholder approval. The Trust's investment objectives were to provide a high
level of current income consistent with investing only in securities of the
highest credit quality and to return at least $10.00 per share (the initial
public offering price per share) to investors on or shortly before November 30,
1997. The Trust pursues these investment objectives by investing in a portfolio
primarily of mortgage-backed securities ('MBS') issued or guaranteed by the U.S.
Government or one of its agencies or rated AAA by a nationally recognized rating
agency (e.g., Standard & Poor's Corporation or Moody's Investors Service, Inc.).
No assurance can be given that the Trust's investment objectives will be
achieved.

2. SIGNIFICANT ACCOUNTING POLICIES:

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Valuation of Investments--Where market quotations are readily available,
portfolio securities are valued based upon the current bid price for long
positions, and the current ask price for short positions. The Trust values
mortgage-backed securities ('MBS') and other debt securities for which market
quotations are not readily available at their fair value as determined in good
faith, utilizing procedures approved by the Board of Directors of the Trust, on
the basis of information provided by dealers in such securities. Some of the
general factors which may be considered in determining fair value include the
fundamental analytic data relating to the investment and an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Determination of fair value involves subjective judgment, as the actual
market value of a particular security can be established only by negotiations
between the parties in a sales transaction. Debt securities having a remaining
maturity of sixty days or less when purchased and debt securities originally

purchased with maturities in excess of sixty days but which currently have
maturities of sixty days or less are valued at amortized cost.

At May 31, 1996, 2.69% of the investments in securities held by the Trust were
valued on the basis of bid prices provided by one principal market maker. These
prices may differ from the value that would have been used had a broader market
for these securities existed.

The ability of issuers of debt securities held by the Trust to meet their
obligations may be affected by economic developments in a specific industry or
region. The values of MBS can be significantly affected by changes in interest
rates.

Financial Futures Contracts--A futures contract is an agreement between two
parties to buy and sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by 'marking-to-market' on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Trust records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Trust's basis in the contract.

The Trust invests in financial futures contracts to adjust the portfolio for
fluctuations in value caused by changes in prevailing market interest rates.
Should interest rates move unexpectedly, the Trust may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets. The Trust is at risk that it may not be able to close out a
transaction because of an illiquid secondary market.

Options Written or Purchased--The Trust may write or purchase options as a
method of hedging potential declines in similar underlying securities. When the
Trust writes or purchases an option, an amount equal to the premium received or
paid by the Trust is recorded as a liability or an asset and is subsequently
adjusted to the current market value of the option written or purchased.
Premiums received or paid from writing or purchasing options which expire
unexercised are

<PAGE>

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HYPERION 1997 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1996

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treated by the Trust on the expiration date as realized gains or losses. The
difference between the premium and the amount paid or received on effecting a
closing purchase or sale transaction, including brokerage commissions, is also
treated as a realized gain or loss. If an option is exercised, the premium paid
or received is added to the proceeds from the sale or cost of the purchase in
determining whether the Trust has realized a gain or a loss on the transaction.

The Trust, as writer of an option, may have no control over whether the
underlying securities may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the security
underlying the written option.

The Trust purchases or writes options to hedge against adverse market movements
or fluctuations in value caused by changes in interest rates. The Trust bears
the risk in purchasing an option, to the extent of the premium paid, that it
will expire without being exercised. If this occurs, the option expires
worthless and the premium paid for the option is recognized as a loss. The risk
associated with writing call options is that the Trust may forego the
opportunity for a profit if the market value of the underlying position
increases and the option is exercised. The Trust will only write options on
positions held in its portfolio. The risk in writing a put option is that the
Trust may incur a loss if the market value of the underlying position decreases
and the option is exercised. In addition, the Trust bears the risk of not being
able to enter into a closing transaction for written options as a result of an
illiquid market.

Short Sales--The Trust may make short sales of securities as a method of hedging
potential declines in similar securities owned. When the Trust makes a short
sale, it must borrow the security sold short and deliver it to the broker-dealer
through which it made the short sale as collateral for its obligation to deliver
the security upon conclusion of the sale. The Trust may have to pay a fee to
borrow the particular securities and may be obligated to pay over any payments
received on such borrowed securities. A gain, limited to the price at which the
Trust sold the security short, or a loss, unlimited as to dollar amount, will be
recognized upon the termination of a short sale if the market price is greater
or less than the proceeds originally received.

Securities Transactions and Investment Income--Securities transactions are
recorded on the trade date. Realized gains and losses from securities
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. Discounts and premiums on zero-coupon securities
are amortized using the effective yield to maturity method.

Taxes--It is the Trust's intention to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders. Therefore, no
federal income or excise tax provision is required.

Dividends and Distributions--The Trust declares and pays dividends monthly from
net investment income. Distributions of realized capital gains in excess of
capital loss carryforwards are distributed at least annually. Dividends and
distributions are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences, which

could be temporary or permanent in nature, may result in reclassification of
distributions; however, net investment income, net realized gains and net assets
are not affected.

To reflect reclassification arising from permanent book/tax differences for the
year ended May 31, 1996, $31,248 was reclassified from additional paid-in
capital to undistributed net investment income.

Deferred Organization Expenses--A total of $72,575 was incurred in connection
with the organization of the Trust. These costs have been deferred and are being
amortized ratably over a period of sixty months from the date the Trust
commenced investment operations.

Cash Flow Information--The Trust invests in securities and distributes dividends
and distributions which are paid in cash or are reinvested at the discretion of
shareholders. These activities are reported in the Statement of Changes in Net
Assets and additional information on cash receipts and cash payments is
presented in the Statement of Cash Flows. Cash, as used in the Statement of Cash
Flows, is defined as 'Cash' in the Statement of Assets and Liabilities, and does
not include short-term investments.

Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and accreting discounts and amortizing
premiums on debt obligations.

Repurchase Agreements--The Trust, through its custodian, receives delivery of
the underlying collateral, the market value of which at the time of purchase is
required to be in an amount at least equal to the resale price, including
accrued interest. The Advisor is responsible for determining that the value of
these underlying securities is sufficient at all times. If the seller defaults
and the value of the collateral declines or if bankruptcy proceedings commence
with respect to the seller of the security, realization of the collateral by the
Trust may be delayed or limited.

<PAGE>

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

HYPERION 1997 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1996

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

3. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS:

The Trust has entered into an Investment Advisory Agreement with the Advisor.
The Advisor is responsible for the management of the Trust's portfolio and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Trust. For such services, the Trust
pays a monthly fee at an annual rate of 0.50% of the Trust's average weekly net
assets. For the year ended May 31, 1996, the Advisor earned $2,398,452 in

Investment Advisory Fees.

The Trust has entered into an Administration Agreement with Hyperion Capital
Management, Inc. (the 'Administrator'). The Administrator performs
administrative services necessary for the operation of the Trust, including
maintaining certain books and records of the Trust, and preparing reports and
other documents required by federal, state, and other applicable laws and
regulations, and provides the Trust with administrative office facilities. For
these services, the Trust pays to the Administrator a monthly fee at an annual
rate of 0.17% of the first $100 million of the Trust's average weekly net
assets, 0.145% of the next $150 million and 0.12% of any amounts above $250
million. For the year ended May 31, 1996, the Administrator earned $663,368 in
Administration Fees.

The Administrator entered into a Sub-Administration Agreement with Prudential
Mutual Fund Management, Inc. ('PMF') (the 'Sub-Administrator'), an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America, to whom
the Administrator delegated certain of its administrative responsibilities. For
these services, the Administrator paid out of its own assets the fee paid to the
Sub-Administrator computed at the rate of 0.12% per annum of the first $100
million of the Trust's average weekly net assets, 0.10% of the next $150 million
and 0.08% of any amounts above $250 million. For the year ended May 31, 1996,
the Sub-Administrator earned $232,228 in Sub-Administration Fees.

On September 22, 1995, the Administrator notified PMF that it was terminating
its Sub-Administration Agreement with PMF effective November 30, 1995. The
Administrator has assumed all responsibilities previously performed by PMF.

Certain officers and/or directors of the Trust are officers and/or directors of
the Advisor.

4. PURCHASES AND SALES OF INVESTMENTS:

Purchases and sales of investments, excluding short-term securities, for the
year ended May 31, 1996 aggregated $2,582,392,916 and $2,665,328,509,
respectively.

The federal income tax basis of the Trust's investments at May 31, 1996 was
$601,640,887 and, accordingly, net unrealized depreciation for federal income
tax purposes was $5,190,365 (gross unrealized appreciation--$4,866,910, gross
unrealized depreciation--$10,057,275). At May 31, 1996, the Trust had capital
losses of $141,746,141, of which $87,384,493 expires in 2002, $8,086,789 expires
in 2003 and $46,274,859 expires in 2004, available to offset any future capital
gains. However, if the Trust terminates as expected in 1997, the capital loss
carryforward must be utilized by 1997 in order for shareholders to realize a
benefit.

5. BORROWINGS:

The Trust may enter into reverse repurchase agreements and dollar roll
agreements with the same parties with whom it may enter into repurchase
agreements. A dollar roll agreement is identical to a reverse repurchase
agreement except for the fact that substantially identical securities may be
repurchased. Under a reverse repurchase agreement or a dollar roll agreement,

the Trust sells securities and agrees to repurchase them, or substantially
similar securities in the case of a dollar roll agreement, at a mutually agreed
upon date and price. Under the 1940 Act, reverse repurchase agreements and
dollar roll agreements will be regarded as a form of borrowing by the Trust
unless, at the time it enters into a reverse repurchase agreement or a dollar
roll agreement, it establishes and maintains a segregated account with its
custodian containing securities from its portfolio having a value not less than
the repurchase price (including accrued interest). The Trust has established and
maintained such an account for each of its reverse repurchase agreements and
dollar roll agreements. Reverse repurchase agreements and dollar roll agreements
involve the risk that the market value of the securities retained in lieu of
sale by the Trust may decline below the price of the securities the Trust has
sold but is obligated to repurchase. In the event the buyer of securities under
a reverse repurchase agreement or a dollar roll agreement files for bankruptcy
or becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the Trust's obligation to
repurchase the securities, and the Trust's use of the proceeds of the reverse
repurchase agreement or the dollar roll agreement may effectively be restricted
pending such decision.

<PAGE>

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

HYPERION 1997 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1996

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

At May 31, 1996, the Trust had the following reverse repurchase agreements
outstanding:

<TABLE>
<CAPTION>
MATURITY IN
ZERO TO 30 DAYS
---------------
<S> <C>
Maturity Amount..................... $ 195,098,071
---------------
Market Value of Assets Sold Under
Agreements........................ $ 195,356,410
---------------
Weighted Average Interest Rate...... 5.30%
---------------
</TABLE>

The average daily balance of reverse repurchase agreements outstanding during
the year ended May 31, 1996, was approximately $199,640,455 at a weighted
average interest rate of 5.73%. The maximum amount of reverse repurchase
agreements outstanding at any time during the year was $233,386,463 as of March

7, 1996, which was 32.9% of total assets.

6. CAPITAL STOCK:

There are 100 million shares of $0.01 par value common stock authorized. Of the
60,555,227 shares outstanding at May 31, 1996, the Advisor owned 10,527 shares.

The Trust is continuing its stock repurchase program, whereby an amount of up to
15% of the total outstanding common stock, or approximately 9.1 million shares,
are authorized for repurchase. The purchase price may not exceed the
then-current net asset value.

During the year ended May 31, 1996, the Trust did not repurchase any shares of
its outstanding common stock. During the year ended May 31, 1995, the Trust
repurchased a total of 13,000 shares of its outstanding common stock at a cost
of $93,016 and an average discount of approximately 11.7% from its net asset
value. All shares repurchased have been retired.

7. FINANCIAL INSTRUMENTS:

The Trust regularly trades in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing exposure
to various market risks. These financial instruments include written options and
futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes.

The notional or contractual amounts of these instruments represent the
investment the Trust has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.

Written option activity for the year ended May 31, 1996 was as follows:

<TABLE>
<CAPTION>
WRITTEN CALL NUMBER OF
OPTION TRANSACTIONS CONTRACTS PREMIUMS
- ---------------------------- --------- ----------
<S> <C> <C>
Outstanding,
beginning of period -- $ --
Options written........... (1,647) (2,044,770)
Options closed............ 1,570 1,100,603
Options assigned.......... 75 843,750
Options expired........... 2 100,417
--------- ----------
Outstanding, end of period.. -- $ --
--------- ----------
--------- ----------
</TABLE>

8. LITIGATION:

During the months of October and November 1993, purported class action lawsuits
were instituted against the Trust and its directors, officers and underwriters
by certain shareholders of the Trust in the United States District Court,
Southern District of New York. The plaintiffs in those actions generally alleged
that the defendants made inadequate and misleading disclosure in the
registration statement and prospectus for the Trust, in particular, as such
disclosure relates to the nature and risks of 'interest-only mortgage strip
securities' and the Trust's investments in those instruments. A Pre-Trial Order
of Consolidation dated December 27, 1993 consolidated these actions under the
consolidated caption In re: Hyperion Securities Litigation Master File No.
93-CIV-7179 (MBM). Pursuant to the terms of the Order of Consolidation, one
consolidated amended complaint was served upon the Trust and the other
defendants which superseded all other complaints previously filed. The Advisor
was added as a defendant in that complaint. On April 8, 1994, the defendants
moved to dismiss the consolidated complaint. Pursuant to an order dated October
3, 1994, the Court stayed all discovery in the Action except for certain limited
document discovery. In November 1994, while the motion to dismiss was still
pending, plaintiffs filed a second consolidated amended complaint. The
allegations in the second consolidated amended complaint relate to the accuracy
of the defendants' representations to investors about the Trust's investment
objectives, and level and adequacy of the disclosure in the Prospectus for the
Trust used in connection with its initial public offering. Defendants moved to
dismiss the second consolidated amended complaint in December 1994. Judge
Michael B. Mukasey issued an opinion and order dated July 12, 1995 dismissing
the second consolidated amended complaint without leave to replead (granted 93
CIV 7179; July 18, 1995). The plaintiffs filed a motion to reargue on July 27,
1995 and Judge Mukasey denied the motion to reargue on September 6, 1995.
Plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals on

<PAGE>

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

HYPERION 1997 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1996

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

August 17, 1995. The appeal has been fully briefed and oral argument of the
appeal took place on March 27, 1996. A decision on the appeal is expected to be
issued in the summer of 1996.

The Trust, its directors, certain of its officers and underwriters and the
Advisor have been named as defendants in Moelis v. Hyperion 1997, et al., a
purported class action originally filed on May 6, 1994 and amended shortly
thereafter. The claims in the Moelis complaint allege, inter alia, that the
prospectus and several post-issuance reports and public statements were
misleading by not disclosing (i) all of the risks involved in the Trust's
investments in certain mortgage-backed securities including 'interest-only
strips', and (ii) that the Trust had invested in U.S. Treasury Note commodity
futures contracts in violation of the Trust's investment objectives. Plaintiff

agreed that the defendants need not respond to any of the claims in the Moelis
complaint pending the Court's disposition of the motion to dismiss In re:
Hyperion Securities Litigation. Subsequent to the court's dismissal of the
second consolidated amended complaint In re: Hyperion Securities Litigation,
plaintiff sought leave to file a second amended complaint. Leave to do so was
granted orally by the Court on October 23, 1995, but the second amended
complaint has not yet been served.

Pursuant to the Underwriting Agreement between the Trust and its underwriters,
the Trust and the Advisor have jointly and severally agreed to indemnify the
underwriters for their liabilities, losses and costs directly related to certain
contents of the prospectus and registration statement of the Trust. The
underwriters have provided notification to the Trust and the Advisor that they
intend to exercise their rights of indemnification in the event that they are
subject to liabilities, costs or losses that are covered by the indemnity. In
addition, pursuant to the Advisory Agreement between the Trust and the Advisor,
the Advisor is indemnified for all of its liabilities, losses and costs in
connection with any matter involving the Trust, except for actions relating to
the gross negligence, willful malfeasance or fraud of the Advisor. In addition,
the Trust's Articles of Incorporation provide for the indemnification of its
Directors. The Trust's Directors and Advisor have also notified the Trust of
their intention to seek indemnification. The Trust has incurred litigation
expenses for the twelve month period ended May 31, 1996 to the indemnified
parties noted above, based upon amounts which are deemed reimbursable in
accordance with the indemnification provisions. Pursuant to these
indemnification provisions, the Trust reimbursed $474,591 of litigation expenses
to the Advisor during the year ended May 31, 1996. This amount was previously
advanced by the Advisor on behalf of the Trust, its directors, certain of its
officers and underwriters. The Trust has included these amounts in legal fees.
The ultimate outcome of this litigation is not presently determinable.

9. SUBSEQUENT EVENTS:

On June 14, 1996, the Trust announced that in light of the current market
environment, and the Trust's scheduled termination date of November 30, 1997,
the Trust's Investment Advisor had determined that the amount of portfolio risk
required during the remaining term of the Trust to attain the $10.00 per share
terminal date objective would, in its view, be inappropriate for the Trust and
its shareholders. Accordingly, it is unlikely that the Trust will achieve its
objective to return $10.00 per share by the expected termination date. The
Investment Advisor intends to continue to reduce the portfolio's duration as its
scheduled termination date of November 30, 1997 approaches.

The Trust's Board of Directors declared the following regular monthly dividends:

<TABLE>
<CAPTION>
DIVIDEND RECORD PAYABLE
PER SHARE DATE DATE
- ---------------- ---------------- ----------------
<S> <C> <C>
$.03958 06/17/96 06/27/96
$.03958 07/22/96 07/31/96
</TABLE>

The Trust, certain of its directors, and the Advisor have been named as
defendants in Karpus v. Hyperion Capital Management, Inc., et al., a purported
class action brought on behalf of the Trust's shareholders that was filed in the
United States District Court for the Southern District of New York on June 21,
1996 (File No. 96-CIV-4671). The Karpus complaint alleges that the Trust failed
to adhere to a fundamental policy set forth in its registration statement by
failing to continue to gradually reduce the duration of the Trust portfolio
beginning in mid-1995. The complaint claims that this failure was reckless
behavior on the part of the defendants. The complaint claims that these actions
constitute a violation of the Investment Company Act of 1940, as amended, and
are also breaches of fiduciary duty and trust. The complaint seeks unspecified
monetary damages, an accounting and other relief. The defendants believe that
the claims are without merit, and intend to defend the claims vigorously.
Whether or not the plaintiff prevails, however, the Trust may be obligated to
indemnify and advance litigation expenses to one or more of the defendants under
the terms and conditions of various indemnity provisions of the Trust's Advisory
Agreement and its Articles of Incorporation, and the amounts of such
indemnification and expenses could be material. The ultimate outcome of this
litigation is not presently determinable.

<PAGE>

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

HYPERION 1997 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
May 31, 1996

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

On July 16, 1996, the Trust announced the following actions aimed at increasing
shareholder value. Specifically, the Board of Directors authorized the Trust to
purchase and retire up to 25% of its outstanding shares, or approximately 15.1
million of the Trust's shares in the open market. In accordance with the
Board's resolution and applicable regulatory requirements, shares will be
repurchased at levels below the current NAV, inclusive of transaction costs. By
doing so, the Trust's NAV attempts to capture the price difference between the
market price and the Trust's current NAV. This program is designed to attempt
to reduce the discount on the Trust's shares between its stock market price and
NAV. Given the Trust's short remaining time to its expected termination date of
November 30, 1997, the Advisor will increase the Trust's investments in
fixed-maturity securities that will mature on or about the Trust's termination
date. This should limit the Trust's exposure to NAV volatility during its
remaining life caused by interest rate movements, while allowing the Trust to
accrete in value to its expected termination. In light of the reduced profile
of the Trust's investment activities, the Advisor has agreed immediately to
reduce its investment advisory fee from 50 basis points (.50%) per annum to 20
basis points (.20%) per annum, an effective 30 basis points reduction per
annum. As the Trust prepares to enter into its final year of existence, and as
set forth in its prospectus, the Trust will experience a decline in its
distributable income and, accordingly, effective in August 1996 the Trust's

monthly dividend will be reduced from an annualized rate of 4.75% to 4% (based
on initial public offering price of $10 per share), or from $.03958 per share
to $.03333 per share each month.

<PAGE>

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

REPORT OF INDEPENDENT ACCOUNTANTS

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

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
HYPERION 1997 TERM TRUST, INC.:

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of cash
flows and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of Hyperion 1997 Term Trust,
Inc. (the 'Trust') at May 31, 1996, the results of its operations and its cash
flows for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for the three years
in the period then ended and for the period November 2, 1992 (commencement of
operations) through May 31, 1993, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at May 31, 1996 by correspondence with the custodian
and brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for the
opinion expressed above.

As described in Note 8 and Note 9 to the financial statements, the Trust is one
of several defendants in litigation. The ultimate outcome of the litigation
cannot be determined at present. No provision for any liability that may result
upon resolution of the matter has been made in the accompanying financial
statements.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
July 18, 1996

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

TAX INFORMATION (UNAUDITED)

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

We are required by Subchapter M of the Internal Revenue Code of 1986, as

amended, to advise you within 60 days of the Trust's fiscal year end (May 31,
1996) as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that all distributions
paid during the fiscal year were derived from net investment income and are
taxable as ordinary income. In addition, 34.77% of the Trust's distributions
during the fiscal year ended May 31, 1996 were earned from U.S. Treasury
obligations. None of the Trust's distributions qualify for the dividends
received deduction available to corporate shareholders.

A notification sent to shareholders with respect to calendar 1995, which
reflected the amounts to be used by calendar year taxpayers on their federal,
state and local income tax returns, was made in conjunction with Form 1099 DIV
and was mailed in January 1996. Because the Trust's fiscal year is not the
calendar year, another notification will be sent with respect to calendar year
1996. The second notification, which will reflect the amounts to be used by
calendar year taxpayers on their federal, state and local income tax returns,
will be made in conjunction with Form 1099 DIV and will be mailed in January
1997. Shareholders are advised to consult their own tax advisors with respect to
the tax consequences of their investment in the Trust.
- --------------------------------------------------------------------------------

<PAGE>

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

HYPERION 1997 TERM TRUST, INC.
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)

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

<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS
(LOSSES) ON
INVESTMENTS, SHORT NET INCREASE
SALES, (DECREASE) IN NET
NET INVESTMENT FUTURES AND WRITTEN ASSETS RESULTING FROM
INCOME OPTION TRANSACTIONS OPERATIONS
TOTAL ---------------------- ----------------------- -----------------------
QUARTERLY PERIOD INCOME AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
November 2, 1992*
to November 30,
1992................. $ 2,584,661 $ 2,159,309 $0.04 $ 1,146,808 $ 0.02 $ 3,306,117 $ 0.06
December 1, 1992
to February 28,
1993................. 14,779,207 11,246,030 0.19 (15,734,330) (0.26) (4,488,300) (0.07)
March 1, 1993
to May 31, 1993...... 15,992,379 12,345,333 0.20 (16,386,657) (0.27) (4,041,324) (0.07)
June 1, 1993
to August 31, 1993... 14,588,765 11,384,530 0.19 (11,342,823) (0.19) 41,707 (0.00)
September 1, 1993
to November 30,
1993................. 10,820,856 8,232,873 0.14 (24,209,878) (0.40) (15,977,005) (0.26)
December 1, 1993
to February 28,
1994................. 10,140,455 9,877,648 0.16 (7,298,603) (0.12) 2,579,045 0.04
March 1, 1994
to May 31, 1994...... 15,014,110 9,888,181 0.16 (14,937,318) (0.25) (5,049,137) (0.09)
June 1, 1994
to August 31, 1994... 12,394,336 9,144,393 0.15 (637,576) (0.01) 8,506,817 0.14
September 1, 1994
to November 30,
1994................. 14,165,751 10,682,955 0.18 (10,524,270) (0.18) 158,685 0.00
December 1, 1994
to February 28,
1995................. 13,167,352 9,172,057 0.15 8,349,257 0.14 17,521,314 0.29
March 1, 1995
to May 31, 1995...... 13,431,319 8,668,837 0.14 9,297,643 0.16 17,966,480 0.30
June 1, 1995
to August 31, 1995... 12,853,355 8,557,537 0.14 (8,569,766) (0.14) (12,229) 0.00
September 1, 1995

to November 30,
1995................. 12,020,041 8,106,647 0.13 (13,910,970) (0.23) (5,804,323) (0.10)
December 1, 1995
to February 29,
1996................. 11,731,996 7,886,509 0.13 (15,932,505) (0.26) (8,045,996) (0.13)
March 1, 1996
to May 31, 1996...... 11,065,744 7,161,443 0.12 (26,245,518) (0.43) (19,084,075) (0.31)

DIVIDENDS AND
DISTRIBUTIONS SHARE PRICE
--------------------- ------------
QUARTERLY PERIOD AMOUNT PER SHARE HIGH LOW
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
November 2, 1992*
to November 30,
1992................. $ -- $ -- $10 1/8 $10
December 1, 1992
to February 28,
1993................. 10,600,781 0.175 10 1/8 9 1/2
March 1, 1993
to May 31, 1993...... 10,600,781 0.175 10 1/8 9 1/2
June 1, 1993
to August 31, 1993... 10,600,780 0.175 9 1/2 9 1/4
September 1, 1993
to November 30,
1993................. 9,594,648 0.158 8 3/4 8
December 1, 1993
to February 28,
1994................. 9,091,549 0.149 8 1/8 7 3/4
March 1, 1994
to May 31, 1994...... 9,087,328 0.150 7 3/4 7 3/8
June 1, 1994
to August 31, 1994... 9,085,234 0.150 8 7 3/8
September 1, 1994
to November 30,
1994................. 9,084,555 0.150 7 7/8 7
December 1, 1994
to February 28,
1995................. 8,578,218 0.140 7 1/2 7
March 1, 1995
to May 31, 1995...... 8,325,701 0.140 8 7 3/8
June 1, 1995
to August 31, 1995... 7,568,798 0.125 8 1/8 7 1/2
September 1, 1995
to November 30,
1995................. 7,190,273 0.119 7 3/4 7 1/8
December 1, 1995
to February 29,
1996................. 7,190,289 0.119 7 5/8 7 1/8
March 1, 1996
to May 31, 1996...... 7,190,272 0.119 7 3/8 6 3/4

</TABLE>

* Commencement of Investment Operations

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

INVESTMENT ADVISOR AND ADMINISTRATOR

HYPERION CAPITAL MANAGEMENT, INC.
520 Madison Avenue
New York, New York 10022
FOR GENERAL INFORMATION ABOUT THE TRUST:
(800) HYPERION

TRANSFER AGENT

BOSTON EQUISERVE L.P.
Investor Relations Department
P.O. Box 8200
Boston, Massachusetts 02266-8200
FOR SHAREHOLDER SERVICES:
(800) 426-5523

CUSTODIAN

STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02116

INDEPENDENT ACCOUNTANTS

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036

LEGAL COUNSEL

GIBSON, DUNN & CRUTCHER LLP
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036

Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that periodically the Trust may purchase its shares in the
open market at prevailing market prices.

<PAGE>

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

DIVIDEND REINVESTMENT PLAN

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

A Dividend Reinvestment Plan (the 'Plan') is available to shareholders of the
Trust pursuant to which they may elect to have all dividends and distributions
of capital gains automatically reinvested by State Street Bank and Trust Company
(the 'Plan Agent') in Trust shares. Shareholders who do not participate in the
Plan will receive all distributions in cash paid by check mailed directly to the
shareholder of record (or if the Shares are held in street or other nominee
name, then to the nominee) by the Trust's Custodian, as Dividend Disbursing
Agent.

The Plan Agent serves as agent for the shareholders in administering the Plan.
After the Trust declares a dividend or determines to make a capital gain
distribution, payable in cash, the participants in the Plan will receive the
equivalent amount in Trust shares valued at the market price determined as of
the time of purchase (generally, the payment date of the dividend or
distribution). The Plan Agent will, as agent for the participants, use the
amount otherwise payable as a dividend to participants to buy shares in the open
market, on the New York Stock Exchange or elsewhere, for the participants'
accounts. If, before the Plan Agent has completed its purchases, the market
price increases, the average per share purchase price paid by the Plan Agent may
exceed the market price of the shares at the time the dividend or other
distribution was declared. Share purchases under the Plan may have the effect of
increasing demand for the Trust's shares in the secondary market.

There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below. The
Plan Agent's fees for handling the reinvestment of dividends and distributions
are paid by the Trust. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of dividends and distributions.

The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable on such dividends or
distributions.

Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent. When a participant withdraws from the Plan or upon termination of
the Plan by the Trust, certificates for whole shares credited to his or her
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.

A brochure describing the Plan is available from the Plan Agent, State Street
Bank and Trust Company, by calling 1-800-426-5523.

If you wish to participate in the Plan and your shares are held in your name,
you may simply complete and mail the enrollment form in the brochure. If your
shares are held in the name of your brokerage firm, bank or other nominee, you

should ask them whether or how you can participate in the Plan. Shareholders
whose shares are held in the name of a brokerage firm, bank or other nominee and
are participating in the Plan may not be able to continue participating in the
Plan if they transfer their shares to a different brokerage firm, bank or other
nominee, since such shareholders may participate only if permitted by the
brokerage firm, bank or other nominee to which their shares are transferred.

<PAGE>

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OFFICERS & DIRECTORS

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Kenneth C. Weiss
Chairman

Lewis S. Ranieri
Director

Garth Marston*
Director

Rodman L. Drake*
Director

Leo M. Walsh, Jr.*
Director

Harry E. Petersen, Jr.*
Director

Patricia A. Sloan
Director & Secretary
Louis C. Lucido
President

Clifford E. Lai
Senior Vice President

Joseph W. Sullivan
Treasurer

* Audit Committee Members

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HYPERION
Capital Management, Inc.

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This Report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Trust shares.

HYPERION 1997 TERM TRUST, INC.
520 Madison Avenue
New York, NY 10022

H Y P E R I O N
1997

ANNUAL REPORT

MAY 31, 1996

[ARTWORK]