HIGHLANDER INCOME FUND INC, N-30D, 1997-04-21

HIGHLANDER INCOME FUND INC
N-30D, 1997-04-21

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<PAGE>

Highlander Income Fund - 1997 Annual Report

1997 Annual Report

Highlander
Income
Fund

HLA

[LOGO]

<PAGE>

CONTENTS

President's Letter..................1
Letter to Shareholders..............3
Financial Statements and Notes......7
Investments in Securities..........18
Independent Auditors' Report.......32
Federal Tax Information............33
Shareholder Update.................34
Directors and Officers.............38
Glossary...........................41

[LOGO]

HIGHLANDER INCOME FUND

FUND OBJECTIVE
High current income. As with other investment
companies, there can be no assurance this fund
will achieve its objective.

PRIMARY INVESTMENTS
A combination of high-grade, mortgage-backed
securities and lower-rated, fixed income
securities, which include securities commonly
referred to as "junk bonds." Each of these asset
classes must comprise at least 30%, and no more
than 70%, of the portfolio. The mortgage-backed
securities may include certain derivative
mortgage-backed securities, such as inverse
floating rate securities and Z-bonds. High-yield, or
junk bond, securities generally involve greater
price volatility and risks to principal and income
(credit risk) than securities in the higher-rated
categories.

<PAGE>

[PHOTO]

WILLIAM H. ELLIS
President
Piper Capital
Management

PRESIDENT'S LETTER

April 11, 1997

DEAR SHAREHOLDERS:

Check out the best sellers' list at your local bookstore. You'll notice a
number of books about companies that have gone through dramatic changes in
recent years. Surprising? Not really. Every company experiences change
periodically. And we're no exception. At Piper Capital Management, we've made
significant changes to enhance our ability to achieve consistent, competitive
performance and provide a higher level of quality service.
We've upgraded our toll-free telephone system so you spend less time
listening to voice response and more time receiving information you can put to
use. Also, when calling our toll-free number, you now have the option to listen
to our portfolio managers talk about their current investment strategies. Find
out the many ways to reach us on the back page of this report.
Take a close look at the annual report in your hand. We've made our
portfolio managers' commentaries simpler and more inviting, and added a glossary
of terms at the back to help you understand commonly used financial terms.
Whenever you see this symbol (***), it indicates a term defined in the glossary.
You'll hear the word "team" more often when we talk about our portfolio
managers. We've enhanced our approach, allowing managers to interact more
frequently and share their best ideas to improve the investment capabilities of
Piper Capital.
The recent changes we have made represent a new way of doing business at
Piper Capital -- an approach we believe will enable us to establish an
unparalleled reputation for prudent investing and high-quality service.
That said, we look forward to serving your future financial needs and
exceeding your expectations in every way we can. Thank you for your investment.

Sincerely,

/s/ William H. Ellis
William H. Ellis

1997 Annual Report 1 Highlander Income Fund

<PAGE>

AVERAGE ANNUALIZED TOTAL RETURNS

Based on net asset value for the period ending February 28, 1997.

[GRAPH]

SINCE INCEPTION
ONE YEAR (3/31/94)
-------- ---------------

<S> <C> <C>
HIGHLANDER INCOME FUND....... 10.63% 10.06%

Lehman Brothers U.S. Mortgage
Index/High-Yield Single B
Securities Index *.......... 10.16% 10.00%

</TABLE>

Average annualized total return figures are through February 28, 1997, and are
based on the change in net asset value (NAV). They reflect the reinvestment of
all distributions but do not reflect sales charges. NAV-based performance is
used to measure investment management results.

Average annualized total return figures based on the change in market price for
the one-year and since inception periods ended February 28, 1997, were 10.80%
and 4.00% respectively. These figures also assume reinvested distributions and
do not reflect sales charges.

PLEASE REMEMBER, YOU COULD LOSE MONEY WITH THIS INVESTMENT. NEITHER SAFETY OF
PRINCIPAL NOR STABILITY OF INCOME IS GUARANTEED. PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS. The investment return and principal value of an
investment will fluctuate so that fund shares, when sold, may be worth more or
less than their original cost.

* This blended index is comprised of 50% Lehman Brothers U.S. Mortgage Index and
50% Lehman Brothers High-Yield Single B Securities Index, which had individual
one-year returns of 6.58% and 13.84% and since inception returns of 8.03% and
11.97%, respectively.

The Lehman Brothers U.S. Mortgage Index is comprised of U.S. government agency
mortgage-backed securities with five to 30 years to maturity. The Lehman
Brothers High-Yield Single B Securities Index is comprised of fixed rate, public
non-convertible issues that are rated B by Moody's Investor Service. Developed
by Lehman Brothers, the indexes are unmanaged, reflect the reinvestment of all
distributions and do not include any fees or expenses.

The since inception numbers for the Lehman blended index are calculated from the
month end following the fund's inception through February 28, 1997.

1997 Annual Report 2 Highlander Income Fund

<PAGE>

[PHOTO]

TOM MCGLINCH,
CFA, PIPER CAPITAL
MANAGEMENT,
shares responsibility
for the management
of Highlander
Income Fund. He
has 16 years of
financial experience.

PORTFOLIO MANAGERS' LETTER

April 11, 1997

DEAR SHAREHOLDERS:

HIGHLANDER INCOME FUND HAD A NET ASSET VALUE TOTAL RETURN OF 10.63% FOR THE YEAR
ENDED FEBRUARY 28, 1997. In comparison, the fund's benchmark, a 50%/50% blend of
the Lehman Brothers U.S. Mortgage Index and the Lehman Brothers High-Yield
Single B Securities Index, had a return of 10.16%. The fund's total return based
on market price was 10.80%.* During the year, the fund's monthly distribution to
shareholders was 9.4 cents per share.

WE ARE PLEASED WITH THE FUND'S PERFORMANCE, WHICH WE ATTRIBUTE TO STRONG RETURNS
IN THE HIGH-YIELD PORTION OF THE FUND ALONG WITH A STABLE EFFECTIVE DURATION.
(***) This fund combines lower-rated, high-yield securities and high-grade,
mortgage-backed securities in its

* All returns include reinvested distributions, but not sales charges. Past
performance does not guarantee future results. The investment return and
principal value of an investment will fluctuate so that fund shares, when sold,
may be worth more or less than their original cost.

PORTFOLIO COMPOSITION

As a percentage of total assets on February 28, 1997.

[GRAPH]

Other Assets 4% B 38%

U.S. Agency BB 6%
Mortgage-Backed
Z-Bond Securities 6% CCC 1%

U.S. Agency Fixed Rate D 1%
Mortgage-Backed
Securities 39% Non-Rated 5%

High-Yield Securities 51%

Mortgage-Backed Securities 45%

Other Assets 4%

1997 Annual Report 3 Highlander Income Fund

<PAGE>

[PHOTO]

WAN-CHONG KUNG,
CFA, PIPER CAPITAL
MANAGEMENT,
shares responsibility
for the management
of Highlander
Income Fund. She
has five years of
financial experience.

PORTFOLIO MANAGERS' LETTER (CONTINUED)

portfolio in an effort to create stability during changing economic
environments. During this fiscal year, the high-yield market enjoyed good
performance in response to a steadily growing economy, a robust stock market
and a strong demand for high-yield securities. The types of industries that
did especially well for this fund included cable, broadcasting and
telecommunications.

MERGER AND ACQUISITION ACTIVITY IN THE HIGH-YIELD MARKET HELPED THE FUND DURING
THE YEAR. The fund owned bonds of several companies that were acquired by larger
companies, which resulted in an upgrade in credit quality and benefited the
fund. Because the high-yield portion of the fund focuses on lower-rated
securities, in most cases we sold these upgraded quality bonds at a profit and
reinvested the proceeds back into high-yield securities.

GAINS IN THE HIGH-YIELD SECTOR CAUSED THE FUND'S ALLOCATION, WHICH USUALLY IS AN
APPROXIMATE 50-50 SPLIT BETWEEN HIGH-YIELD AND MORTGAGE SECURITIES, TO SHIFT
TOWARD HIGH-YIELD SECURITIES. In January, we took action to bring the fund back
closer to its 50-50 allocation by selling some of its high-yield holdings. We
continue to monitor and rebalance the fund's holdings as necessary. In addition,
we modestly upgraded the quality of the lower-rated portion of the portfolio
toward the end of the fiscal year by purchasing high-yield bonds of higher
quality. This action was a reflection of the fact that high-yield bonds had done
well, and that yield spreads(***) had narrowed. Our expectation is that this
should help position the fund to continue its positive performance if spreads
start to widen.

1997 Annual Report 4 Highlander Income Fund

<PAGE>

[PHOTO]

MARK DURBIANO,
CFA, FEDERATED
ADVISERS, shares
responsibility for the
management of
Highlander Income
Fund. He has 15
years of financial
experience.

PORTFOLIO MANAGERS' LETTER (CONTINUED)

THE MORTGAGE-BACKED PORTION OF THE FUND WAS OVERWEIGHTED IN 15-YEAR AND BALLOON
PASS-THROUGH SECURITIES*** AND UNDERWEIGHTED IN 30-YEAR PASS-THROUGHS THROUGHOUT
THE YEAR, IN COMPARISON TO THE FUND'S MORTGAGE BENCHMARK. Balloon and 15-year
mortgages tend to perform better than 30-year mortgages during times of rising
interest rates (which was the case during this fiscal year). At the same time,
they have more predictable prepayment rates during times of declining interest
rates. In addition, fewer 15-year securities were originated during the year,
which helped maintain the value of existing securities and worked in favor of
the fund.

WE'VE CONTINUED INVESTING IN A COMBINATION OF DISCOUNT-PRICED MORTGAGE
SECURITIES AND SEASONED(***) HIGHER-COUPON MORTGAGE SECURITIES. We believe this
combination of securities helps reduce the fund's exposure to prepayments. The
discounted securities have low coupon(***) rates, which makes prepayment
unlikely, while the seasoned, higher-coupon securities have survived a few
business cycles and therefore are not expected to prepay aggressively, even if
interest rates decline.

WE REMAIN OPTIMISTIC ABOUT THE OUTLOOK FOR HIGH-YIELD SECURITIES IN THE COMING
MONTHS, AND WE BELIEVE THE FUND IS POSITIONED APPROPRIATELY IN BOTH PORTIONS OF
THE PORTFOLIO. We feel that economic growth will continue to be moderate, that
inflation will remain under control and that interest rates should stay
relatively stable. This should provide a good environment for high-yield
securities. However, we encourage shareholders to approach the coming months
with realistic expectations. We believe the yield spread between high-yield
bonds and Treasury securities is at its narrowest point for this economic cycle,
and it's uncertain whether the relative total return advantage of high-yield
bonds over high-quality bonds will be as great as it was in the past 12 months.

1997 Annual Report 5 Highlander Income Fund

<PAGE>

PORTFOLIO MANAGERS' LETTER (CONTINUED)

As always, we appreciate your investment in Highlander Income Fund. We are
committed to the fund's continued success, and we look forward to helping you
reach your financial goals in the coming year.

Sincerely,

/s/ Mark E. Durbiano
Mark E. Durbiano
Co-manager

/s/ Tom McGlinch
Tom McGlinch
Co-manager

/s/ Wan-Chong Kung
Wan-Chong Kung
Co-manager

1997 Annual Report 6 Highlander Income Fund

<PAGE>
Financial Statements

- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES February 28, 1997
..................................................................

<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2) ........ $32,038,100
Cash in bank on demand deposit ............................. 35,502
Receivable for investment securities sold .................. 160,064
Accrued interest receivable ................................ 411,791
-----------------
Total assets ............................................. 32,645,457
-----------------

LIABILITIES:
Payable for investment securities purchased on a when-issued
basis (note 2) ........................................... 4,010,000
Payable for investment securities purchased ................ 131,418
Accrued investment management fee .......................... 13,013
Accrued administrative fee ................................. 4,338
Variation margin payable (note 2) .......................... 1,875
Other accrued expenses ..................................... 18,018
-----------------
Total liabilities ........................................ 4,178,662
-----------------
Net assets applicable to outstanding capital stock ......... $28,466,795
-----------------
-----------------

REPRESENTED BY:
Capital stock - authorized 200 million shares of $0.01 par
value; outstanding, 1,989,467 shares ..................... $ 19,895
Additional paid-in capital ................................. 27,687,450
Undistributed net investment income ........................ 39,834
Accumulated net realized loss on investments ............... (376,120)
Unrealized appreciation of investments (note 2) ............ 1,095,736
-----------------

Total - representing net assets applicable to outstanding
capital stock .......................................... $28,466,795
-----------------
-----------------

Net asset value per share of outstanding capital stock ..... $ 14.31
-----------------
-----------------

* Investments in securities at identified cost ............. $30,987,739
-----------------
-----------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

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1997 Annual Report 7 Highlander Income Fund
<PAGE>
Financial Statements (continued)
- ---------------------------------------------------------------------

STATEMENT OF OPERATIONS For the Year Ended February 28, 1997
..................................................................

<TABLE>
<S> <C>
INCOME:
Interest ................................................... $ 2,565,675
Fee income (note 2) ........................................ 104,379
-----------------

Total investment income .................................. 2,670,054
-----------------

EXPENSES (NOTE 3):
Investment management fee .................................. 165,598
Administrative fee ......................................... 55,199
Custodian and accounting fees .............................. 61,291
Transfer agent fees ........................................ 3,881
Reports to shareholders .................................... 42,955
Directors' fees ............................................ 8,582
Audit and legal fees ....................................... 38,852
Other expenses ............................................. 11,196
-----------------
Total expenses ........................................... 387,554
Less expenses paid indirectly .............................. (1,453)
-----------------

Total net expenses ....................................... 386,101
-----------------

Net investment income .................................... 2,283,953
-----------------

NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain on investments (note 4) .................. 126,996
Net realized loss on closed futures contracts .............. (186,930)
-----------------

Net realized loss on investments ......................... (59,934)
Net change in unrealized appreciation or depreciation of
investments .............................................. 588,913
-----------------

Net gain on investments .................................. 528,979
-----------------

Net increase in net assets resulting from operations ..... $ 2,812,932
-----------------
-----------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

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1997 Annual Report 8 Highlander Income Fund
<PAGE>
Financial Statements (continued)
- ---------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS
..................................................................

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
2/28/97 2/29/96
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 2,283,953 $ 2,367,210
Net realized gain (loss) on investments .................... (59,934) 447,190
Net change in unrealized appreciation or depreciation of
investments .............................................. 588,913 1,205,735
----------------- -----------------

Net increase in net assets resulting from operations ..... 2,812,932 4,020,135
----------------- -----------------

DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (2,244,119) (2,367,210)
In excess of net investment income ......................... -- (3,049)
Tax return of capital ...................................... -- (26,682)
----------------- -----------------
Total distributions ...................................... (2,244,119) (2,396,941)
----------------- -----------------

CAPITAL SHARE TRANSACTIONS:
Payments for retirement of 17,200 shares (note 6) .......... -- (211,735)
----------------- -----------------
Total increase in net assets ............................. 568,813 1,411,459

Net assets at beginning of year ............................ 27,897,982 26,486,523
----------------- -----------------

Net assets at end of year .................................. $28,466,795 $27,897,982
----------------- -----------------
----------------- -----------------

Undistributed net investment income ........................ $ 39,834 $ --
----------------- -----------------
----------------- -----------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

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1997 Annual Report 9 Highlander Income Fund
<PAGE>
Notes to Financial Statements
- ----------------------------------------

(1) ORGANIZATION
................................
Highlander Income Fund Inc. (the fund) is registered under the
Investment Company Act of 1940 (as amended) as a diversified,
closed-end management investment company. The fund invests
primarily in a combination of high-grade, mortgage-backed
securities and lower-rated fixed income securities, which include
securities commonly referred to as "junk bonds". The mortgage-
backed securities may include certain derivative securities such
as inverse floating rate securities and Z-bonds. Fund shares are
listed on the American Stock Exchange under the symbol HLA.

(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
................................
INVESTMENTS IN SECURITIES
The values 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 New York Stock Exchange.
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 New York Stock Exchange. If events materially affecting the
value of such securities occur, if the fund's management
determines for any other reason that valuations provided by the
pricing service or dealer are inaccurate or when market
quotations are not readily available, securities will be valued
at their fair value according to procedures decided upon in good
faith by the board of directors. Short-term securities with
maturities of 60 days or less are valued at amortized cost, which
approximates market value.

Financial futures are valued at the last settlement price
established each day by the board of trade or exchange on which
they are traded. Such valuations are determined using independent
pricing services or prices quoted by independent brokers.

Securities transactions are accounted for on the date the
securities are purchased or sold. Realized gains and losses are
calculated on

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1997 Annual Report 10 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
the identified-cost basis. Interest income, including
amortization of bond discount and premium computed on a
level-yield basis, is accrued daily.

HIGH-YIELD DEBT SECURITIES
Although the fund has a diversified portfolio, the fund has 58.8%
of total net assets invested in non-investment grade (high-yield)
and comparable quality unrated high-yield securities. Investments
in high-yield securities are accompanied by a greater degree of
credit risk and tend to be more sensitive to economic conditions
than investments in higher rated securities. The risk of loss due
to default by the issuer may be significantly greater for the
holders of high-yield securities because such securities are
generally unsecured and are often subordinated to other creditors
of the issuer. The fund held one security, representing 0.4% of
total net assets, which was in default at February 28, 1997.

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

The fund will realize a gain or loss upon expiration or closing
of the option transaction. When an option is exercised, the
proceeds on the sale of a written call option, the purchase cost
of a written put option, or the cost of a security for purchased
put and call options is adjusted by the amount of premium
received or paid.

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1997 Annual Report 11 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------

FUTURES TRANSACTIONS
For hedging purposes, the fund may buy and sell financial futures
contracts and related options. Risks of entering into futures
contracts and related options include the possibility that there
may be an illiquid market and that a change in the value of the
contract or option may not correlate with changes in the value of
the underlying securities.

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

At February 28, 1997, the fund had outstanding 12 interest rate
futures sales contracts on 30 year U.S. Treasury bonds expiring
in March 1997 with a net unrealized gain of $45,375. The market
value and par value of the open contracts were $1,330,875 and
$1,200,000, respectively. Securities with a market value of
$65,039 were pledged as collateral to cover initial margin
deposits on these contracts.

SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities that have been purchased by
the fund on a when-issued or forward-commitment basis can take
place a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to
market fluctuation and may increase or decrease in value prior to
their delivery. The fund segregates, with its custodian, assets
with a market value equal to the amount of its purchase
commitments. The purchase of securities on a when-issued or
forward-commitment basis may increase the volatility of the
fund's net asset value if the fund makes such purchases while
remaining

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1997 Annual Report 12 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
substantially fully invested. As of February 28, 1997, the fund
had entered into outstanding when-issued or forward commitments
of $4,010,000.

In connection with its ability to purchase securities on a when-
issued or forward-commitment basis, the fund may enter into
mortgage "dollar rolls" in which the fund sells securities
purchased on a forward commitment basis and simultaneously
contracts with a counterparty to repurchase similar (same type,
coupon and maturity) but not identical securities on a specified
future date. As an inducement to "roll over" its purchase
commitments, the fund receives negotiated fees. For the year
ended February 28, 1997, such fees earned by the fund amounted to
$104,379.

FEDERAL TAXES
The fund intends to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and not
be subject to federal income tax. Therefore, no income tax
provision is required. The fund also intends to distribute its
taxable net investment income and realized gains, if any, to
avoid the payment of any federal excise taxes.

Net investment income and net realized gains (losses) may differ
for financial statement and tax purposes primarily because of the
"mark-to-market" of certain investments for tax purposes and
losses deferred due to "straddle" transactions. The character of
distributions made during the year from net investment income or
net realized gains may differ from its ultimate characterization
for federal income tax purposes.

Distributions which exceed the net investment income or net
realized gains for financial statement purposes are presented as
an "excess distribution" in the statements of changes in net
assets and the financial highlights. Distributions that exceed
the net investment income or net realized gains recorded on a tax
basis are presented as a "tax return of capital" in the
statements of changes in net assets and the financial highlights.
In addition, due to the

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1997 Annual Report 13 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
timing of dividend distributions, the fiscal year in which
amounts are distributed may differ from the year that the income
or realized gains (losses) were recorded by the fund.

DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income are made monthly and
realized capital gains, if any, will be distributed at least
annually. These distributions are recorded as of the close of
business on the ex-dividend date. Such distributions are payable
in cash or, pursuant to the fund's dividend reinvestment plan,
reinvested in additional shares of the fund's capital stock.
Under the plan, fund shares will be purchased in the open market
unless the market price plus commissions exceeds the net asset
value by 10% or more. If, at the close of business on the
dividend payment date, the shares purchased in the open market
are insufficient to satisfy the dividend reinvestment
requirement, the fund will issue new shares at a discount of up
to 5% from the current market price.

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

USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to

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1997 Annual Report 14 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------
make estimates and assumptions that affect the reported amounts
in the financial statements. Actual results could differ from
these estimates.

(3) EXPENSES
................................
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the adviser and the
administrator):

The investment management agreement provides the adviser with a
monthly management fee equal to an annualized rate of 0.60% of
the fund's average weekly net assets. For its fee, the adviser
provides investment advice and conducts the management and
investment activity of the fund. Federated Advisers has been
retained by the adviser as a subadviser and is paid a monthly fee
by the adviser equal to 50% of the investment management fee.

The administration agreement provides the administrator with a
monthly fee equal to an annualized rate of 0.20%. For its fee,
the administrator provides reporting, regulatory and
record-keeping services for the fund.

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

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

(4) INVESTMENT
SECURITY
TRANSACTIONS
................................
Cost of purchases and proceeds from sales of securities, other
than temporary investments in short-term securities, for the year
ended February 28, 1997, aggregated $25,764,864 and $27,988,424,
respectively.

For the year ended February 28, 1997, no brokerage commissions
were paid to Piper Jaffray Inc., an affiliated broker.

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1997 Annual Report 15 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------

(5) CAPITAL LOSS
CARRYOVER
................................
For federal income tax purposes, the fund had capital loss
carryovers of $285,796 as of February 28, 1997, which, if not
offset by subsequent capital gains, will expire in 2003. It is
unlikely the board of directors will authorize a distribution of
any net realized capital gains until the available capital loss
carryover has been offset or expires.

(6) RETIREMENT OF
FUND SHARES
................................
The fund's board of directors voted to discontinue the share
repurchase program effective February 6, 1996. Pursuant to the
plan, the fund has cumulatively repurchased and retired 17,200
shares as of February 28, 1997, which represents 0.9% of the
shares originally issued.

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1997 Annual Report 16 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
- ---------------------------------------------------------------------

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

HIGHLANDER INCOME FUND

<TABLE>
<CAPTION>
Period
Year Year Ended
Ended Ended 2/28/95
2/28/97 2/29/96 (d)
------- ------- --------
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ........ $14.02 $13.20 $ 13.95
------- ------- --------
Operations:
Net investment income ..................... 1.15 1.19 1.13
Net realized and unrealized gains (losses)
on investments .......................... 0.27 0.83 (0.73)
------- ------- --------
Total from operations ................... 1.42 2.02 0.40
------- ------- --------
Distributions to shareholders:
From net investment income ................ (1.13) (1.19) (1.14)
In excess of net investment income ........ -- -- (0.01)
Tax return of capital ..................... -- (0.01) --
------- ------- --------
Total distributions to shareholders ..... (1.13) (1.20) (1.15)
------- ------- --------
Net asset value, end of period .............. $14.31 $14.02 $ 13.20
------- ------- --------
------- ------- --------
Market value, end of period ................. $12.75 $12.63 $ 12.00
------- ------- --------
------- ------- --------
SELECTED INFORMATION
Total return, net asset value (a) ........... 10.63% 15.84% 3.23%
Total return, market value (b) .............. 10.80% 15.91% (12.69)%
Net assets at end of period (in millions) ... $ 28 $ 28 $ 26
Ratio of expenses to average weekly net
assets (c) ................................ 1.40% 1.44% 1.18%(e)
Ratio of net investment income to average
weekly net assets ......................... 8.25% 8.63% 9.37%(e)
Portfolio turnover rate (excluding short-term
securities) ............................... 79% 90% 69%
</TABLE>

(A) BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE.
(B) BASED ON THE CHANGE IN MARKET PRICE OF A SHARE DURING THE PERIOD AND
ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE
FUND'S DIVIDEND REINVESTMENT PLAN.
(C) BEGINNING IN FISCAL 1996, THE EXPENSE RATIOS REFLECT THE EFFECT OF GROSS
EXPENSES PAID INDIRECTLY BY THE FUND. PRIOR PERIOD EXPENSE RATIO HAS NOT
BEEN ADJUSTED.
(D) COMMENCEMENT OF OPERATIONS WAS MARCH 31, 1994.
(E) ADJUSTED TO AN ANNUAL BASIS.

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

1997 Annual Report 17 Highlander Income Fund
<PAGE>
Investments in Securities
- ---------------------------------------------------------------------

<TABLE>
<CAPTION>
HIGHLANDER INCOME FUND February 28, 1997
..........................................................................................

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

U.S. GOVERNMENT AND AGENCY SECURITIES (51.7%):
U.S. AGENCY MORTGAGE-BACKED SECURITIES (51.7%):
FIXED RATE (44.7%):
11.00%, FNMA, 10/1/20 ............................. $ 288,582(b) $ 325,196
9.00%, FNMA, 7/1/24 ............................... 793,809 838,214
10.00%, FNMA, 10/1/17 ............................. 455,201 496,879
9.50%, FNMA, 5/1/25 ............................... 755,208 816,093
6.50%, FNMA, 9/1/25 ............................... 725,376 691,073
8.00%, FNMA, 3/1/08 ............................... 1,111,883 1,146,630
6.00%, FNMA, 3/1/11 ............................... 956,636 918,151
6.50%, FNMA, 5/1/26 ............................... 977,320 931,102
6.00%, FNMA, 3/1/26 ............................... 996,621 922,702
6.50%, FNMA, 2/1/04 ............................... 1,485,000 1,466,438
7.00%, FNMA, 4/22/03 .............................. 2,000,000(c) 2,005,020
7.00%, FNMA, 1/1/08 ............................... 2,000,000(c) 1,993,120
9.00%, GNMA, 6/15/16 .............................. 186,187 198,697
------------
12,749,315
------------

Z-BOND (D) (7.0%):
6.50%, FHLMC, Series 1694, Class Z, 3/15/24 ....... 1,214,672 976,353
8.30%, FNMA , Series 1993-223, Class ZA,
12/25/23 ........................................ 1,222,172 1,003,000
------------
1,979,353
------------

Total U.S. Government and Agency Securities
(cost: $14,647,651) .......................... 14,728,668
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 18 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ----------- ------------
<S> <C> <C> <C>
HIGH YIELD CORPORATE BONDS (58.8%):
AEROSPACE AND DEFENSE (0.4%):
Tracor Inc., Senior Subordinated Note, 10.88%,
8/15/01 ......................................... B+ $ 100,000 $ 106,750
------------

AUTOMOTIVE (1.6%):
Aftermarket Technology, Senior Subordinated Note,
12.00%, 8/1/04 .................................. N-R 112,000 126,000
Blue Bird Body Co., Senior Subordinated Note,
10.75%, 11/15/06 ................................ B 50,000 53,750
Collins & Aikman Products, Senior Subordinated
Note, 11.50%, 4/15/06 ........................... B 150,000 169,125
Lear Seating Corp., Subordinated Note, 8.25%,
2/1/02 .......................................... BB- 100,000 101,250
------------
450,125
------------

BANKING (1.0%):
First Nationwide Escrow, Senior Subordinated Note,
10.63%, 10/1/03 ................................. N-R 150,000(e) 166,500
First Nationwide Holdings, Senior Note, 12.25%,
5/15/01 ......................................... BB- 100,000 114,500
------------
281,000
------------

BEVERAGE AND TOBACCO (0.6%):
Dr. Pepper Bottling Holdings, Senior Note, Delayed
Interest, 10.63%, 2/15/03 ....................... N-R 175,000(d) 168,875
------------

BROADCAST RADIO AND TELEVISION (4.7%):
Chancellor Radio Broadcasting Co., Senior
Subordinated Note, 12.50%, 10/1/04 .............. B- 75,000 85,125
Chancellor Radio Broadcasting Co., Senior
Subordinated Note, 9.38%, 10/1/04 ............... B- 50,000 51,562
Echostar Satellite Broadcast, Senior Discount Note,
Delayed Interest, 13.25%, 3/15/04 ............... B- 150,000(d) 121,875
Heritage Media Corp., Senior Subordinated Note,
8.75%, 2/15/06 .................................. B 200,000 197,000
Pegasus Media & Communications, Note, 12.50%,
7/1/05 .......................................... B- 100,000 110,500
SFX Broadcasting, Senior Subordinated Note, 10.75%,
5/15/06 ......................................... B- 125,000 136,094
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 19 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

BUSINESS SERVICES (1.7%):
Electronic Retailing Systems Inc., Senior Discount
Note (and Warrants), Delayed Interest, 12.90%,
2/1/04 .......................................... N-R 75,000(d) (e) 52,125
Knoll Inc., Senior Subordinated Note, 10.88%,
3/15/06 ......................................... B+ 175,000 194,250
Outsourcing Solutions, Senior Subordinated Note,
11.00%, 11/1/06 ................................. B- 100,000(e) 108,500
United Stationery Supply, Senior Subordinated Note,
12.75%, 5/1/05 .................................. B- 125,000 142,188
------------
497,063
------------

CABLE TELEVISION (6.2%):
Australis Holdings Property Ltd., Senior Discount
Note, Delayed Interest (and Warrants), 19.20%,
11/1/02 ......................................... N-R 150,000(d)(e)(i) 87,000
Bell Cablemedia Plc, Senior Discount Note, Delayed
Interest, 12.95%, 7/15/04 ....................... BB- 50,000(d)(i) 44,000
Cablevision Systems Corp., Senior Subordinated
Debenture, 9.88%, 2/15/13 ....................... B 150,000 151,875
Cablevision Systems Corp., Senior Subordinated
Debenture, 10.50%, 5/15/16 . B 50,000 52,875
Cablevision Systems Corp., Senior Subordinated
Note, 9.88%, 5/15/06 ............................ B 50,000 52,312
Charter Communications South East L.P., Senior
Note, 11.25%, 3/15/06 ........................... B 100,000 108,000
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 20 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ----------- ------------
<S> <C> <C> <C>
Comcast Corp., Senior Subordinated Debenture,
9.38%, 5/15/05 .................................. BB- $ 75,000 $ 78,938
Comcast UK Cable Partners Ltd., Senior Discount
Debenture, Delayed Interest, 11.07%, 11/15/07 ... B 125,000(d)(i) 89,688
Diamond Cable Communications Plc, Senior Discount
Note, Delayed Interest, 10.52%, 2/15/07 ......... B- 150,000(d)(e)(i) 90,375
International Cabletel Inc., Senior Note, Delayed
Interest, 10.84%, 10/15/03 ...................... N-R 250,000(d) 212,188
International Cabletel Inc., Senior Note, Delayed
Interest, 11.67%, 4/15/05 ....................... B 75,000(d) 55,875
International Cabletel Inc., Senior Note, Delayed
Interest, 11.77%, 2/1/06 ........................ B 100,000(d) 69,125
People's Choice TV Corp., Senior Discount Note (and
Warrants), Delayed Interest, 13.31%, 6/1/04 ..... CCC+ 75,000(d) 34,875
Rogers Cablesystems, Senior Note, 10.00%,
3/15/05 ......................................... BB+ 150,000(i) 162,000
Telewest Communications Plc, Senior Discount Note,
Delayed Interest, 10.84%, 10/1/07 ............... BB 500,000(d)(i) 356,875
United International Holdings Australia/Pacific,
Senior Discount Note, Delayed Interest, 13.99%,
5/15/06 ......................................... N-R 150,000(d) 81,937
Wireless One Inc., Senior Note, 13.00%,
10/15/03 ........................................ B- 50,000 46,750
------------
1,774,688
------------

CHEMICALS AND PLASTICS (3.4%):
Astor Corp., Senior Subordinated Note, 10.50%,
10/15/06 ........................................ B- 100,000(e) 105,125
Crain Industries Inc., Senior Subordinated Note,
13.50%, 8/15/05 ................................. N-R 125,000 143,125
Harris Chemical North American, Senior Note,
10.25%, 7/15/01 ................................. B+ 150,000 157,875
ISP Holdings Inc., Senior Note, 9.00%, 10/15/03 ... B+ 150,000(e) 154,875
Polymer Group, Senior Note, 12.25%, 7/15/02 B 83,000 92,130
RBX Corp., Senior Subordinated Note, 11.25%,
10/15/05 ........................................ N-R 75,000 56,625
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 21 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ----------- ------------
<S> <C> <C> <C>
Sterling Chemical Holdings, Senior Discount Note,
Delayed Interest, 12.99%, 8/15/08 ............... B+ $ 100,000(d) $ 65,750
Sterling Chemicals Inc., Senior Subordinated Note,
11.75%, 8/15/06 ................................. B+ 50,000 54,875
Uniroyal Technology Corp., Senior Note, 11.75%,
6/1/03 .......................................... B 125,000 126,563
------------
956,943
------------

COMMUNICATION (0.2%):
Dobson Communications Corp., Senior Note, 11.75%,
4/15/07 ......................................... N-R 50,000(e) 50,625
------------

CONSUMER HEALTH (1.1%):
Icon Health & Fitness Corp., Senior Discount Note,
Delayed Interest, 13.58%, 11/15/06 . CCC+ 100,000(d)(e) 55,125
Renaissance Cosmetics, Senior Note, 11.75%,
2/15/04 ......................................... B- 100,000(e) 103,625
Simmons Co., Senior Subordinated Note, 10.75%,
4/15/06 ......................................... B 150,000 160,125
------------
318,875
------------

CONSUMER NON-DURABLES (0.8%):
Curtice-Burns Foods Inc., Senior Subordinated Note,
12.25%, 2/1/05 .................................. B 75,000 81,000
Playtex Family Products Corp., Senior Subordinated
Note, 9.00%, 12/15/03 ........................... B 150,000 151,875
------------
232,875
------------

CONTAINER AND GLASS PRODUCTS (1.6%):
Owens-Illinois Inc., Senior Subordinated Note,
10.50%, 6/15/02 ................................. B+ 250,000 265,625
Packaging Resources Inc., Senior Note, 11.63%,
5/1/03 .......................................... B+ 75,000 80,156
Plastic Containers Inc., Senior Note, 10.00%,
12/15/06 ........................................ B+ 50,000(e) 52,250
U.S. Can Corp., Senior Subordinated Note, 10.13%,
10/15/06 ........................................ B 50,000(e) 53,500
------------
451,531
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 22 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ----------- ------------
<S> <C> <C> <C>
COSMETICS AND TOILETRIES (0.2%):
Revlon Consumer Products, Senior Subordinated Note,
10.50%, 2/15/03 ................................. B- $ 50,000 $ 53,500
------------

ECOLOGICAL SERVICES AND EQUIPMENT (1.1%):
Allied Waste North America, Senior Subordinated
Note, 10.25%, 12/1/06 ........................... B+ 100,000(e) 108,375
ICF Kaiser International, Senior Subordinated Note,
13.00%, 12/31/03 ................................ B- 75,000 72,000
Mid-American Waste System Inc., Senior Subordinated
Note, 12.25%, 2/15/03 ........................... D 250,000(h) 118,750
------------
299,125
------------

ELECTRICAL UTILITIES (0.6%):
El Paso Electric Co., 9.40%, 5/1/11 ............... BB- 150,000 163,028
------------

FINANCE (0.3%):
Trizec Finance Ltd., Senior Note, 10.88%,
10/15/05 ........................................ BB- 75,000(i) 83,625
------------

FOOD PRODUCTS (1.7%):
Carr-Gottstein Foods Co., Senior Subordinated Note,
12.00%, 11/15/05 ................................ B- 100,000 110,625
International Home Foods, Senior Subordinated Note,
10.38%, 11/1/06 ................................. B- 175,000(e) 182,875
Specialty Foods Aquisition, Senior Subordinated
Note, 11.25%, 8/15/03 ........................... B- 100,000 85,000
Van De Kamps Inc., Senior Subordinated Note,
12.00%, 9/15/05 ................................. B- 100,000 112,000
------------
490,500
------------

FOOD AND DRUG RETAILING (0.7%):
Ralphs Grocery Co., Senior Note, 10.45%,
6/15/04 ......................................... B 100,000 107,000
Ralphs Grocery Co., Senior Subordinated Note,
11.00%, 6/15/05 ................................. B- 75,000 80,250
------------
187,250
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 23 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ----------- ------------
<S> <C> <C> <C>
FOREST PRODUCTS (2.4%):
Container Corporation of America, Senior Note,
9.75%, 4/1/03 ................................... B+ $ 125,000 $ 132,500
Four M Corp., Senior Note, 12.00%, 6/1/06 ......... B 100,000 107,500
Repap New Brunswick, Senior Note, 10.63%,
4/15/05 ......................................... B+ 50,000(i) 49,750
Riverwood International, Senior Subordinated Note,
10.88%, 4/1/08 .................................. B- 75,000 64,125
SD Warren Co., Senior Subordinated Note, 12.00%,
12/15/04 ........................................ B+ 100,000 110,125
Stone Container Corp., Senior Note, 11.50%,
10/1/04 ......................................... B+ 150,000 158,250
Uniforet Inc., Senior Note, 11.13%, 10/15/06 B+ 75,000(e)(i) 70,500
------------
692,750
------------

HEALTH CARE SERVICES (1.7%):
Dade International Inc., Senior Subordinated Note,
11.13%, 5/1/06 .................................. B 150,000 165,750
Genesis Health Ventures, Senior Subordinated Note,
9.25%, 10/1/06 .................................. B 100,000 103,500
Tenet Healthcare Corp, Senior Subordinated Note,
10.13%, 3/1/05 .................................. B+ 200,000 221,000
------------
490,250
------------

HEAVY ELECTRICAL MACHINERY (1.1%):
Alvey Systems Inc., Senior Subordinated Note,
11.38%, 1/31/03 ................................. B- 150,000 160,500
Tokheim Corp., Senior Subordinated Note, 11.50%,
8/1/06 .......................................... N-R 150,000 163,500
------------
324,000
------------

HOTELS AND LEISURE (0.4%):
Courtyard By Marriott, Senior Note, 10.75%,
2/1/08 .......................................... B- 100,000 107,000
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 24 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ----------- ------------
<S> <C> <C> <C>
INDUSTRIAL PRODUCTS AND EQUIPMENT (3.4%):
Cabot Safety Corp., Senior Subordinated Note,
12.50%, 7/15/05 ................................. B $ 150,000 $ 165,750
Clark Material Handling Inc., Senior Note, 10.75%,
11/15/06 ........................................ B+ 100,000(e) 106,750
Coinmach Corp., Senior Note, 11.75%, 11/15/05 ..... B+ 75,000 82,969
Exide Corp., Senior Note, 10.00%, 4/15/05 ......... N-R 125,000 131,250
Fairfield Manufacturing, Senior Subordinated Note,
11.38%, 7/1/01 .................................. B- 100,000 107,250
IMO Industries Inc., Senior Subordinated Note,
11.75%, 5/1/06 .................................. B- 75,000 75,187
International Knife & Saw, Senior Subordinated
Note, 11.38%, 11/15/06 .......................... B- 100,000(e) 106,250
Mettler-Toledo Inc., Senior Subordinated Note,
9.75%, 10/1/06 .................................. B 75,000 79,125
Unifrax Investment Corp., Senior Note, 10.50%,
11/1/03 ......................................... B 100,000 104,250
------------
958,781
------------

INDUSTRIAL PROPERTY (0.6%):
Monarch Marking Systems, Senior Note, 12.50%,
7/1/03 .......................................... B+ 150,000 176,250
------------

LEISURE AND ENTERTAINMENT (3.1%):
AMF Group Inc., Senior Discount Note, Delayed
Interest, 12.27%, 3/15/06 ....................... B- 200,000(d) 143,250
AMF Group Inc., Senior Subordinated Note, 10.88%,
3/15/06 ......................................... B- 100,000 109,625
Cobblestone Golf Group, Senior Note, 11.50%,
6/1/03 .......................................... B 150,000 159,375
Premier Parks, Senior Note, 12.00%, 8/15/03 B+ 150,000 169,875
Six Flags Theme Parks Inc., Senior Subordinated
Note, Delayed Interest, 12.53%, 6/15/05 ......... B 300,000(d) 298,500
------------
880,625
------------

MACHINE TOOL MANUFACTURER (0.4%):
Primeco Inc., Senior Subordinated Note, 12.75%,
3/1/05 .......................................... B+ 100,000 115,000
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 25 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ----------- ------------
<S> <C> <C> <C>
METAL & MINING (0.7%):
Euramax International Plc, Senior Subordinated
Note, 11.25%, 10/1/06 ........................... B $ 125,000(e)(i) $ 134,530
Royal Oak Mines Inc., Senior Subordinated Note,
11.00%, 8/15/06 ................................. B- 75,000(i) 76,500
------------
211,030
------------

OIL AND GAS (2.4%):
Abraxas Petroleum Corp., Senior Note, 11.50%,
11/1/04 ......................................... B 125,000(e) 136,250
California Energy Company Inc., Senior Discount
Note, Delayed Interest, 10.70%, 1/15/04 ......... BB 250,000(d) 275,000
Falcon Drilling Company Inc., Senior Note, 9.75%,
1/15/01 ......................................... B+ 100,000 105,500
Forcenergy Inc., Senior Subordinated Note, 9.50%,
11/1/06 ......................................... B 100,000 106,250
United Meridian Corp., Senior Subordinated Note,
10.38%, 10/15/05 ................................ B 50,000 56,000
------------
679,000
------------

PRINTING AND PUBLISHING (1.1%):
Affiliated Newspaper Investments, Senior Discount
Note, Delayed Interest, 12.79%, 7/1/06 .......... B 250,000(d) 213,750
Petersen Publishing/Capital Corp., Senior
Subordinated Note, 11.13%, 11/15/06 ............. B- 100,000(e) 109,250
------------
323,000
------------

RETAIL STORES (1.3%):
Brylane LP/Brylane Capital Corp., Senior
Subordinated Note, 10.00%, 9/1/03 ............... B+ 150,000 157,125
Herff Jones Inc., Senior Subordinated Note, 11.00%,
8/15/05 ......................................... B 100,000 109,000
Hosiery Corp of America Inc., Senior Subordinated
Note, 13.75%, 8/1/02 ............................ B- 100,000 111,750
------------
377,875
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 26 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

STEEL MANUFACTURER (1.7%):
Acme Metals Inc., Senior Discount Note, Delayed
Interest, 13.19%, 8/1/04 ........................ B 75,000(d) 80,250
Bayou Steel Corp., 10.25%, 3/1/01 ................. B 50,000 49,125
Envirosource Inc., Senior Note, 9.75%, 6/15/03 .... B 100,000 98,750
GS Technologies, Senior Operating Note, 12.00%,
9/1/04 .......................................... B 250,000 265,938
------------
494,063
------------

SURFACE TRANSPORTATION (2.0%):
Gearbulk Holding Ltd., Senior Note, 11.25%,
12/1/04 ......................................... BB 125,000(i) 140,000
Statia Terminals, 11.75%, 11/15/03 ................ B 100,000(e) 107,000
Stena AB, Senior Note, 10.50%, 12/15/05 ........... BB- 100,000(i) 111,250
Trism Inc., Senior Subordinated Note, 10.75%,
12/15/00 ........................................ B 215,000 199,413
------------
557,663
------------

TELECOMMUNICATIONS AND CELLULAR (6.5%):
Advanced Micro Devices, Senior Note, 11.00%,
8/1/03 .......................................... BB- 100,000 112,375
America Communications Services, Senior Discount
Note, Delayed Interest, 13.30%, 4/1/06 .......... N-R 100,000(d) 62,250
Brooks Fiber Properties, Senior Discount Note,
Delayed Interest, 10.78%, 3/1/06 ................ N-R 250,000(d) 171,250
Brooks Fiber Properties, Senior Discount Note,
Delayed Interest, 11.59%, 11/1/06 ............... N-R 50,000(d) 32,750
Cellular Communications International Inc., Senior
Discount Note, Zero-Coupon, 12.70%, 8/15/00 ..... CCC+ 150,000(f) 109,500
Dial Call Communications Inc., Senior Discount
Note, Delayed Interest, 11.84%, 4/15/04 ......... CCC- 150,000(d) 119,250
Fonorola Inc., Senior Note, 12.50%, 8/15/02 . B+ 50,000(i) 56,500
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 27 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P
Rating Principal Market
Description of Security (g) Amount Value (a)
- --------------------------------------------------------- -------- ----------- ------------
<S> <C> <C> <C>
Intermedia Communications of Florida, Senior
Discount Note, Delayed Interest, 10.97%,
5/15/06 ......................................... B- $ 250,000(d) $ 168,750
Millicom International Cellular, Senior Discount
Note, Delayed Interest, 12.68%, 6/1/06 .......... B- 250,000(d)(i) 170,000
Paging Network, Senior Subordinated Note, 10.00%,
10/15/08 ........................................ B 100,000 99,625
Phonetel Technologies, Senior Note, 12.00%,
12/15/06 ........................................ B- 50,000 53,375
Sygnet Wireless Inc., Senior Note, 11.50%,
10/1/06 ......................................... CCC+ 100,000 106,375
Teleport Communications, Senior Discount Note,
Delayed Interest, 11.23%, 7/1/07 ................ B 150,000(d) 107,250
Teleport Communications, Senior Note, 9.88%,
7/1/06 .......................................... B 50,000 53,375
USA Mobile Communications Inc. II, Senior Note,
9.50%, 2/1/04 ................................... B- 250,000 230,000
Vanguard Cellular System, Senior Debenture, 9.38%,
4/15/06 ......................................... B+ 200,000 207,000
------------
1,859,625
------------

TEXTILES AND APPAREL (1.5%):
Pillowtex Corp., Senior Subordinated Note, 10.00%,
11/15/06 ........................................ B+ 100,000(e) 106,500
Westpoint Stevens Inc., Senior Subordinated
Debenture, 9.38%, 12/15/05 ...................... B+ 300,000 313,500
------------
420,000
------------

TRANSPORTATION (0.3%):
Lear Corp., Subordinated Note, 9.50%, 7/15/06 ..... BB- 75,000 80,530
------------

Total High Yield Corporate Bonds
(cost: $15,790,601) .......................... 16,725,382
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 28 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
Market
Description of Security Shares Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
COMMON STOCK (J) (0.2%):
RETAIL TRADE (0.1%):
Grand Union Co. ................................... 7,070 $ 25,187
Hosiery Corp of America Inc. ...................... 50 350
------------
25,537
------------

CABLE TELEVISION (0.0%):
CS Wireless Systems Inc. .......................... 27 --
Sullivan Broadcasting Holdings .................... 400 4,200
------------
4,200
------------

TECHNOLOGY (0.0%):
Pegasus Communications Corp. ...................... 225 2,644
------------

PRINTING & PUBLISHING (0.1%):
Affiliated Newspaper Investments .................. 500 30,250
------------

Total Common Stock
(cost: $111,935) ............................. 62,631
------------

PREFERRED STOCK (1.8%):
COMMERCIAL AND INDUSTRIAL SERVICES (0.4%):
PanAmSat L.P., Non-Convertible, PIK, 12.75% ....... 90(d) 110,870
------------

COMMERCIAL SERVICES (1.4%):
Chancellor Radio Broadcasting Co., Exchangeable,
12.00% .......................................... 750(e) 77,625
K - III Communications Corp., Exchangeable, PIK,
11.63% .......................................... 2,262(d)(e) 231,843
American Radio Systems Corp., Cumulative,
Exchangeable, PIK, 11.38% ....................... 750(d)(e) 78,000
------------
387,468
------------

Total Preferred Stock
(cost: $421,125) ............................. 498,338
------------

WARRANTS (J) (0.1%):
BAR Technologies, 4/1/01 .......................... 50 3,000
Cellular Communications International Inc.,
8/15/03 ......................................... 150 3,000
ICF Kaiser International, 12/31/98 ................ 120 45
Icon Health and Fitness Corp., 11/14/99 ........... 150 11,493
Nextel Communications, 4/15/99 .................... 250 5
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1997 Annual Report 29 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
Market
Description of Security Shares Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
Sterling Chemicals Holdings, 8/15/08 .............. 100 $ 3,500
Uniroyal Technology Corp., 6/1/03 ................. 1,250 1,888
Wireless One Inc., 10/19/00 ....................... 150 150
------------

Total Warrants
(cost: $16,427) .............................. 23,081
------------

Total Investments in Securities
(cost: $30,987,739) (k) ...................... $ 32,038,100
------------
------------
</TABLE>

NOTES TO INVESTMENTS IN SECURITIES
(A) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(B) THIS ISSUE IS PARTIALLY PLEDGED AS INITIAL MARGIN DEPOSITS ON OPEN INTEREST
RATE FUTURES SALES CONTRACTS (SEE NOTE 2 TO THE FINANCIAL STATEMENTS).
(C) ON FEBRUARY 28, 1997, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $4,010,000.
(D) PORTFOLIO ABBREVIATIONS AND DEFINITIONS:
Z-BOND - REPRESENTS SECURITIES THAT PAY NO INTEREST OR PRINCIPAL DURING
THEIR INITIAL ACCRUAL PERIODS, BUT ACCRUE ADDITIONAL PRINCIPAL AT
SPECIFIED RATES. INTEREST RATES DISCLOSED REPRESENT CURRENT YIELDS
BASED UPON THE COST BASIS AND ESTIMATED TIMING OF FUTURE CASH FLOWS.
DELAYED INTEREST - REPRESENTS 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. THE INTEREST RATES DISCLOSED REPRESENT YIELDS AT FEBRUARY
28, 1997, BASED UPON THE ESTIMATED TIMING AND AMOUNT OF FUTURE
INTEREST AND PRINCIPAL PAYMENTS.
PIK - PAYMENT-IN-KIND INTEREST IS GENERALLY PAID BY ISSUING ADDITIONAL
PAR OF THE SECURITY RATHER THAN PAYING CASH.
(E) SECURITIES SOLD WITHIN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM, WHICH
ARE EXEMPT FROM REGISTRATION UNDER SECTION 144A OF THE SECURITIES ACT OF
1933, AS AMENDED, MAY BE SOLD ONLY TO DEALERS IN THAT PROGRAM OR OTHER
"ACCREDITED INVESTORS." THESE INVESTMENTS ARE CONSIDERED TO BE ILLIQUID.
THE AGGREGATE VALUE OF THESE SECURITIES AT FEBRUARY 28, 1997, IS
$2,807,341, WHICH REPRESENTS 9.9% OF TOTAL NET ASSETS.
(F) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD
ON THE DATE OF PURCHASE.
(G) THE STANDARD & POOR'S RATING IS A CURRENT ASSESSMENT OF THE CREDIT
WORTHINESS OF AN ISSUER WITH RESPECT TO A SPECIFIC OBLIGATION. SECURITIES
DESIGNATED AS 'N-R' ARE NOT RATED BY STANDARD & POOR'S.
"BB" - LESS NEAR-TERM VULNERABILITY TO DEFAULT THAN OTHER SPECULATIVE
ISSUES. HOWEVER, IT FACES MAJOR ONGOING UNCERTAINTIES OR EXPOSURE TO
ADVERSE BUSINESS, FINANCIAL OR ECONOMIC CONDITIONS WHICH COULD LEAD TO
INADEQUATE CAPACITY TO MEET TIMELY INTEREST PRINCIPAL PAYMENTS.
"B" - A GREATER VULNERABILITY TO DEFAULT BUT CURRENTLY HAS THE CAPACITY
TO MEET INTEREST PAYMENTS AND PRINCIPAL REPAYMENTS. ADVERSE BUSINESS,
FINANCIAL OR ECONOMIC CONDITIONS WILL LIKELY IMPAIR CAPACITY OR
WILLINGNESS TO PAY INTEREST AND REPAY PRINCIPAL.
"CCC" - CURRENTLY IDENTIFIABLE VULNERABILITY TO DEFAULT, AND IS
DEPENDENT UPON FAVORABLE BUSINESS, FINANCIAL AND ECONOMIC CONDITIONS
TO MEET TIMELY PAYMENT OF INTEREST AND REPAYMENT OF PRINCIPAL. IN THE
EVENT OF ADVERSE BUSINESS, FINANCIAL OR ECONOMIC CONDITIONS, IT IS NOT
LIKELY TO HAVE THE CAPACITY TO PAY INTEREST AND REPAY PRINCIPAL.
"D" - PAYMENT IS IN DEFAULT. INTEREST OR PRINCIPAL PAYMENTS ARE NOT
MADE ON THE DATE DUE EVEN IF THE APPLICABLE GRACE PERIOD HAS NOT
EXPIRED.

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

1997 Annual Report 30 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------
<TABLE>
<S> <C>
THE RATINGS ABOVE MAY BE MODIFIED BY THE ADDITION OF A PLUS OR MINUS
SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR RATING CATEGORIES.
(H) SECURITY IS ILLIQUID AND IN DEFAULT WITH RESPECT TO ITS INTEREST PAYMENT.
INTEREST IS CURRENTLY NOT BEING ACCRUED. THE AGGREGATE VALUE OF THIS
SECURITY AT FEBRUARY 28, 1997, IS $118,750, WHICH REPRESENTS 0.4% OF TOTAL
NET ASSETS.
(I) SECURITIES OF FOREIGN ISSUERS ARE DENOMINATED IN U.S. DOLLARS. THE
AGGREGATE VALUE OF THESE SECURITIES AT FEBRUARY 28, 1997, IS $1,801,624,
WHICH REPRESENTS 6.3% OF TOTAL NET ASSETS.
(J) CURRENTLY NONINCOME PRODUCING.
(K) ON FEBRUARY 28, 1997, THE COST OF INVESTMENTS IN SECURITIES FOR FEDERAL
INCOME TAX PURPOSES WAS $30,987,739. THE AGGREGATE GROSS UNREALIZED
APPRECIATION AND DEPRECIATION OF INVESTMENTS IN SECURITIES, INCLUDING OPEN
FUTURES TRANSACTIONS, BASED ON THIS COST WERE AS FOLLOWS:
</TABLE>

<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 1,464,951
GROSS UNREALIZED DEPRECIATION ...... (369,215)
------------
NET UNREALIZED APPRECIATION ...... $ 1,095,736
------------
------------
</TABLE>

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

1997 Annual Report 31 Highlander Income Fund
<PAGE>
Independent Auditors' Report
- ----------------------------------------

THE BOARD OF DIRECTORS AND SHAREHOLDERS
HIGHLANDER INCOME FUND INC.:

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of Highlander Income Fund Inc. as of
February 28, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights presented in note 7 to
the financial statements. These financial statements and the financial
highlights are the responsibility of the fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and, where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
Highlander Income Fund Inc. as of February 28, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods stated in the first paragraph above, in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 4, 1997

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

1997 Annual Report 32 Highlander Income Fund
<PAGE>
Federal Income Tax Information
- ----------------------------------------

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

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

<TABLE>
<CAPTION>
PAYABLE DATE AMOUNT
- --------------------------------------------- --------
<S> <C>
March 27, 1996 .............................. $ 0.0940
April 24, 1996 .............................. 0.0940
May 29, 1996 ................................ 0.0940
June 26, 1996 ............................... 0.0940
July 24, 1996 ............................... 0.0940
August 28, 1996 ............................. 0.0940
September 25, 1996 .......................... 0.0940
October 23, 1996 ............................ 0.0940
November 27, 1996 ........................... 0.0940
December 18, 1996 ........................... 0.0940
January 10, 1997 ............................ 0.0940
February 26, 1997 ........................... 0.0940
--------
Total ................................... $ 1.1280
--------
--------
</TABLE>

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

1997 Annual Report 33 Highlander Income Fund
<PAGE>
Shareholder Update
- ----------------------------------------

ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August
20, 1996. Each matter voted upon at that meeting, as well as the
number of votes cast for, against or withheld, the number of
abstentions, and the number of broker non-votes with respect to
such matters, are set below.

(1) The fund's shareholders elected the following directors:

<TABLE>
<CAPTION>
SHARES
SHARES WITHHOLDING
VOTED AUTHORITY
"FOR" TO VOTE
---------- -------
<S> <C> <C>
David T. Bennett ............................ 1,767,234 19,925
Jaye F. Dyer ................................ 1,767,234 19,925
William H. Ellis ............................ 1,764,148 23,011
Karol D. Emmerich ........................... 1,767,634 19,525
Luella G. Goldberg .......................... 1,766,060 21,099
George Latimer .............................. 1,767,634 19,525
</TABLE>

(2) The fund's shareholders ratified the selection by a majority
of the independent members of the fund's board of directors
of KPMG Peat Marwick LLP as the independent public
accountants for the fund for the fiscal year ended February
28, 1997. The following votes were cast regarding this
matter:

<TABLE>
<CAPTION>
SHARES SHARES
VOTED VOTED BROKER
"FOR" "AGAINST" ABSTENTIONS NON-VOTES
---------- ------ ------- ----------
<S> <C> <C> <C>
1,774,445 2,080 10,634 --
</TABLE>

TERMS AND CONDITIONS OF THE DIVIDEND REINVESTMENT PLAN
As a shareholder, you may choose to participate in the Dividend
Reinvestment Plan. It's a convenient and economical way to buy
additional shares of the fund by automatically reinvesting
dividends and capital gains. The plan is administered by
Investors Fiduciary Trust Company (IFTC), the plan agent.

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

1997 Annual Report 34 Highlander Income Fund
<PAGE>
Shareholder Update (continued)
- ---------------------------------------------------------------------

ELIGIBILITY/PARTICIPATION
You may join the plan at any time. Reinvestment of distributions
will begin with the next distribution paid, provided your request
is received at least 10 days before the record date for that
distribution.

If your shares are in certificate form, you may join the plan
directly and have your distributions reinvested in additional
shares of the fund. To enroll in this plan, call IFTC at
1-800-543-1627. If your shares are registered in your brokerage
firm's name or another name, ask the holder of your shares how
you may participate.

Banks, brokers or nominees, on behalf of their beneficial owners
who wish to reinvest dividend and capital gains distributions,
may participate in the plan by informing IFTC at least 10 days
before each share's dividend and/or capital gains distribution.

PLAN ADMINISTRATION
Beginning no more than 5 business days before the dividend
payment date, IFTC will buy shares of the fund on the New York
Stock Exchange (NYSE) or elsewhere on the open market only when
the price of the fund's shares on the NYSE plus commissions is at
less than a 10% premium over the fund's most recently calculated
net asset value (NAV) per share. If, at the close of business on
the dividend payment date, the shares purchased in the open
market are insufficient to satisfy the dividend reinvestment
requirement, IFTC will accept payment of the dividend, or the
remaining portion, in authorized but unissued shares of the fund.
These shares will be issued at a per-share price equal to the
higher of (a) the NAV per share as of the close of business on
the payment date or (b) 95% of the closing market price per share
on the payment date.

By participating in the dividend reinvestment plan, you may
receive benefits not available to shareholders who elect not to
participate. For example, if the market price plus commissions of
the fund's shares is 10% or more above the NAV, you will receive

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

1997 Annual Report 35 Highlander Income Fund
<PAGE>
Shareholder Update (continued)
- ---------------------------------------------------------------------
shares at a discount of up to 5% from the current market value.
However, if the market price plus commissions is below the NAV,
you will receive distributions in shares with a NAV greater than
the value of any cash distributions you would have received.

There is no direct charge for reinvestment of dividends and
capital gains, since IFTC fees are paid for by the fund. However,
if fund shares are purchased in the open market, each participant
pays a pro rata portion of the brokerage commissions. Brokerage
charges are expected to be lower than those for individual
transactions because shares are purchased for all participants in
blocks. As long as you continue to participate in the plan,
distributions paid on the shares in your account will be
reinvested.

IFTC maintains accounts for plan participants holding shares in
certificate form and will furnish written confirmation of all
transactions, including information you need for tax records.
Reinvested shares in your account will be held by IFTC in
noncertificated form in your name.

TAX INFORMATION
Distributions invested in additional shares of the fund are
subject to income tax, just as they would be if received in cash.
When shares are issued by the fund at a discount from market
value, shareholders will be treated as having received
distributions of an amount equal to the full market value of
those shares. Shareholders, as required by the Internal Revenue
Service, will receive Form 1099 regarding the federal tax status
of the prior year's distributions.

PLAN WITHDRAWAL
If you hold your shares in certificate form, you may terminate
your participation in the plan at any time by giving written
notice to IFTC. If your shares are registered in your brokerage
firm's name, you may terminate your participation via verbal or
written

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

1997 Annual Report 36 Highlander Income Fund
<PAGE>
Shareholder Update (continued)
- ---------------------------------------------------------------------
instructions to your investment professional. Written
instructions should include your name and address as they appear
on the certificate or account.

If notice is received at least 10 days before the record date,
all future distributions will be paid directly to the shareholder
of record.

If your shares are issued in certificate form and you discontinue
your participation in the plan, you (or your nominee) will
receive an additional certificate for all full shares and a check
for any fractional shares in your account.

PLAN AMENDMENT/TERMINATION
The fund reserves the right to amend or terminate the plan.
Should the plan be amended or terminated, participants will be
notified in writing at least 90 days before the record date for
such dividend or distribution. The plan may also be amended or
terminated by IFTC with at least 90 days written notice to
participants in the plan.

Any question about the plan should be directed to your investment
professional or to Investors Fiduciary Trust Company, P.O. Box
419432, Kansas City, Missouri 64141, 1-800-543-1627.

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

1997 Annual Report 37 Highlander Income Fund
<PAGE>
Directors and Officers
- ----------------------------------------

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

OFFICERS

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

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

SUB ADVISER
Federated Advisers
FEDERATED INVESTORS TOWER, PITTSBURGH, PA 15222-3779

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

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

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

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

1997 Annual Report 38 Highlander Income Fund
<PAGE>

THIS PAGE WAS INTENTIONALLY LEFT BLANK.

1997 Annual Report 39 Highlander Income Fund

<PAGE>

THIS PAGE WAS INTENTIONALLY LEFT BLANK.

1997 Annual Report 40 Highlander Income Fund

<PAGE>

GLOSSARY OF TERMS (***)

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

EFFECTIVE DURATION
Effective duration estimates how much the value of a security is expected to
change with a given change in interest rates. Longer effective durations
indicate more sensitivity to changes in interest rates. For example, if interest
rates were to increase by 1%, the market value of a bond with an effective
duration of five years would decrease by about 5%, with all other factors being
constant. It is important to remember that effective duration calculations are
based on various assumptions and have several limitations. Effective duration is
most effective as a measure when interest rate changes are small, rapid and
occur equally across all the different points of the yield curve. In addition,
effective duration is difficult to calculate precisely for bonds with prepayment
options, such as mortgage-backed securities, and can be greatly affected by
interest rate changes. Effective duration does not estimate changes in the value
of a security caused by changes in the credit worthiness of the underlying
issuer and is not a complete measure of the risk associated with investing in
high-yield securities.

PASS-THROUGH SECURITIES
Pass-throughs are securities that represent an interest in a pool of mortgages.
These securities provide for the pass-through to investors of their pro-rata
share of monthly payments (including any prepayments) made by the individual
borrowers on the mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.

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

YIELD SPREAD
In comparing bonds, yield spread refers to the difference in yields between
bonds of different credit quality.

FOR MORE INFORMATION

By Phone

1 800 866-7778

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

TO LISTEN TO MONTHLY FUND UPDATES
press 3, press 2, then press:

37 Highlander Income Fund

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

By Mail

Piper Capital Management
Attn: Mutual Fund Services
222 South Ninth Street
Minneapolis, MN 55402-3804

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

On-Line

http://www.piperjaffray.com/

1997 Annual Report 41 Highlander Income Fund

<PAGE>

[LOGO] Bulk Rate
U.S. Postage
PAID
Permit No. 3008
Mpls., MN
PIPER CAPITAL MANAGEMENT INCORPORATED
222 SOUTH NINTH STREET
MINNEAPOLIS, MN 55402-3804

THIS DOCUMENT IS PRINTED ON PAPER MADE FROM
100% TOTAL RECOVERED FIBER, INCLUDING 15% POST-CONSUMER WASTE.

#11710 4/1997 150-97