HIGHLANDER INCOME FUND INC, N-30D, 1998-04-16

HIGHLANDER INCOME FUND INC
N-30D, 1998-04-16

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1998 Annual Report
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[LOGO]

Highlander

Income Fund

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Highlander Income Fund - 1998 Annual Report

HLA

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<PAGE>

CONTENTS

Portfolio Managers' Letter . . . . . . . . . . . . . . . . . . . . . . . . . 2

Financial Statements and Notes . . . . . . . . . . . . . . . . . . . . . . . 6

Investments in Securities. . . . . . . . . . . . . . . . . . . . . . . . . .17

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . .33

Federal Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . .34

Shareholder Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Glossary # . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

# This report includes a glossary to help you understand financial terms used in
the portfolio managers' letter. When you see this symbol, it indicates a word
that is defined in the glossary.

[LOGO]

HIGHLANDER INCOME FUND
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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 higher-rated categories.

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Average Annualized Total Returns
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Based on net asset value for the periods ended February 28, 1998.
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<TABLE>
<CAPTION>
Lehman Brothers
U.S. Mortgage
Index/High-Yield
HIGHLANDER INCOME Single B
FUND Securities Index*
----------------- ----------------
<S> <C> <C>

ONE YEAR 12.04 11.14

THREE YEAR 12.8 11.45

SINCE INCEPTION 10.56 10.29
(3/31/94)

</TABLE>

Average annualized total returns are through February 28, 1998, 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 returns based on the change in market price for the
one-year, three-year and since inception periods ended February 28, 1998, were
14.39%, 13.66% and 6.56% respectively. These returns assume reinvestment of all
distributions and reflect sales charges on those distributions described in the
fund's dividend reinvestment plan, but not on initial purchases.

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. Closed-end funds, such as this fund, often trade
at discounts to net asset value. Therefore, you may be unable to realize the
full net asset value of your shares when you sell.

* 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 9.63% and 12.65%, three-year returns of 9.19% and 13.74% and
since inception returns of 8.44% and 12.14%, 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 Investors 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
returns for the Lehman indexes are calculated from the month end following the
fund's inception through February 28, 1998.

1998 Annual Report 1 Highlander Income Portfolio
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[PHOTOGRAPH]

TOM MCGLINCH, CFA, PIPER CAPITAL MANAGEMENT,
shares responsibility for the management of Highlander Income Fund. He has 17
years of financial experience.
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Portfolio Managers' Letter
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April 15, 1998
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DEAR SHAREHOLDERS:

HIGHLANDER INCOME FUND HAD A NET ASSET VALUE TOTAL RETURN OF 12.04% FOR THE
YEAR ENDED FEBRUARY 28, 1998. This compares to an 11.14% return for the
fund's benchmark, which is a 50%/50% blend of the Lehman Brothers U.S.
Mortgage Index and the Lehman Brothers High-Yield Single B Securities
Index. The fund's total return based on market price was 14.39%.*

THE COMPONENTS THAT MAKE UP THIS FUND -- HIGH-GRADE, MORTGAGE-BACKED
SECURITIES AND LOWER-GRADE, HIGH-YIELD SECURITIES SERVED TO BALANCE EACH
OTHER DURING THE YEAR, EACH CONTRIBUTING TO THE FUND'S PERFORMANCE. The
economic uncertainty in Asia helped

* All returns assume reinvestment of all distributions and do not reflect
sales charges, except the fund's total return based on market price, which
does reflect sales charges on those distributions described in the fund's
dividend reinvestment plan, but not on initial purchases. 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.
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PORTFOLIO COMPOSITION
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AS A PERCENTAGE OF TOTAL ASSETS ON FEBRUARY 28, 1998.

[CHART]

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Short-Term/Other Assets 5%

Other Assets 3%

Short-Term 2%

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Mortgage-Backed Securities 41%

U.S. Agency
Mortgage-Backed
Z-Bond Securities 7%

U.S. Agency Fixed
Rate Mortgage-Backed
Securities 34%

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High-Yield Securities 48%

B 35%

BB 7%

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U.S. Treasury
Securities 6%

CCC 2%

Non-Rated 4%

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1998 Annual Report 2 Highlander Income Portfolio
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[PHOTOGRAPH]

WAN-CHONG KUNG, CFA, PIPER CAPITAL MANAGEMENT,
shares responsibility for the management of Highlander Income Fund. She has six
years of financial experience.
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Portfolio Managers' Letter (continued)
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boost the performance of U.S. government securities as investors sought
quality and stability. This rally in government bonds contributed to
performance in the fund's mortgage-backed portion. High-yield bonds also
delivered outstanding performance during the year. Strong economic growth,
low inflation rates, rising stock prices and falling interest rates all
combined to allow high-yield companies to deliver strong financial
performance and high-yield bond prices to increase in value. Problems in
Asia did result in some uncertainty in the high-yield market, but those
fears declined as 1998 began with continued signs of strong domestic
economic growth. Shareholders should note that high-yield securities are
more sensitive to changes in the stock market than are the higher-quality,
mortgage-backed securities in the fund.

IN ITS MORTGAGE-BACKED PORTION, THE FUND FOCUSED ON SECURITIES THAT PERFORM
BETTER DURING LOW OR FALLING INTEREST RATE ENVIRONMENTS, WHICH WERE THE
NORM FOR MUCH OF THE FUND'S FISCAL YEAR. In particular, we were pleased
with the performance of certain CMO Z-bonds#, which carry lower prepayment
risk than other mortgage-backed securities. The fund also owned more
Treasury securities than usual during the year, again to reduce prepayment
risk to the portfolio. In addition, the fund's mortgage-backed portion was
overweighted in mortgages that had coupon# rates of 6.5% and lower.

LOOKING FORWARD, WE ARE CONTINUING TO LOOK FOR WAYS TO ENHANCE THE INCOME
PRODUCED BY THE FUND'S MORTGAGE-BACKED COMPONENT. Interest rates are lower,
and mortgage yield spreads# are wider than they have been during the past
year. The fund is positioned neutrally vs. its benchmark at this time, with
respect to our expectations for the direction of interest rates.

1998 Annual Report 3 Highlander Income Portfolio
<PAGE>
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[PHOTOGRAPH]

MARK DURBIANO, CFA, FEDERATED ADVISERS, shares responsibility for the management
of Highlander Income Fund. He has 16 years of financial experience.
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Portfolio Managers' Letter (continued)
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THE HIGH-YIELD PORTION OF THE FUND BENEFITED FROM GOOD CREDIT SELECTION
DURING THE YEAR AS WELL AS POSITIVE RESULTS FROM ITS INVESTMENTS IN THE
TELECOMMUNICATIONS SECTOR. Through our credit selection, we were able to
avoid companies that experienced severe financial problems during the year.
At the same time, telecommunications companies the fund owns, such as
American Communication Services (.18% of the fund's holdings as of February
28, 1998), Nextel Communications (.75%), Intermedia Communications (.38%)
and Cellular Communications International (.40%), delivered excellent
performance.

WE REMAIN OPTIMISTIC ON THE OUTLOOK FOR HIGH-YIELD SECURITIES. We do expect
to see some slowing in the domestic economy as problems in Asian economies
filter through to the U.S. economy. We expect this to cause growth to slow
from its strong pace at the end of 1997. Given this outlook, we have
continued to emphasize a marginally higher quality posture in the fund's
high-yield portion, given the potential for widening credit spreads and
falling interest rates. Careful credit analysis will continue to be an
essential part of this fund's management.

AS YOU MAY HAVE READ, PIPER JAFFRAY COMPANIES HAS ANNOUNCED THAT IT HAS
ENTERED INTO AN AGREEMENT TO BE ACQUIRED BY U.S. BANCORP. If approved by
the company's shareholders, the acquisition will close in early May. In
connection with the proposed acquisition, this fund's board of directors
has approved a recommendation by Piper Capital Management that the fund,
along with The Americas Income Trust (another Piper

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1998 Annual Report 4 Highlander Income Portfolio
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[PHOTOGRAPH]

STEFANIE L. BACHHUBER, CFA, FEDERATED ADVISERS,
shares responsibility for the management of Highlander Income Fund. She has
eight years of financial experience.

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Portfolio Managers' Letter (continued)
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Capital-managed, closed-end fund), be moved into an open-end fund in the
First American family of funds. This newly formed fund would have a similar
investment objective. As a shareholder, you will be asked to vote on this
conversion, and you will be mailed a proxy ballot with more information in
the months prior to the fund's July annual meeting.

Thank you for your investment in Highlander Income Fund. We appreciate the
opportunity to help you manage your assets.

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

/s/ Stefanie L. Bachhuber
Stefanie L. Bachhuber
Co-manager

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1998 Annual Report 5 Highlander Income Portfolio
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Financial Statements

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STATEMENT OF ASSETS AND LIABILITIES February 28, 1998
................................................................................

<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value* (note 2)
(including a repurchase agreement of $510,000) ........... $33,022,774
Cash in bank on demand deposit ............................. 50,751
Receivable for investment securities sold .................. 364,854
Accrued interest receivable ................................ 484,313
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Total assets ............................................. 33,922,692
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LIABILITIES:
Payable for investment securities purchased on a when-issued
basis (note 2) ........................................... 4,039,375
Payable for investment securities purchased ................ 390,763
Accrued investment management fee .......................... 13,583
Accrued administrative fee ................................. 4,528
Variation margin payable (note 2) .......................... 2,813
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Total liabilities ........................................ 4,451,062
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Net assets applicable to outstanding capital stock ....... $29,471,630
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COMPOSITION OF NET ASSETS:
Capital stock and additional paid-in capital ............... $27,707,345
Undistributed net investment income ........................ 7,574
Accumulated net realized loss on investments ............... (75,437)
Unrealized appreciation of investments (note 2) ............ 1,832,148
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Total - representing net assets applicable to capital
stock .................................................. $29,471,630
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* Investments in securities at identified cost ............. $31,190,313
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NET ASSET VALUE AND MARKET PRICE:
Net assets ................................................. $29,471,630
Shares outstanding (authorized 200 million shares of $0.01
par value) ............................................... 1,989,467
Net asset value ............................................ $ 14.81
Market price ............................................... $ 13.38
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

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1998 Annual Report 6 Highlander Income Fund
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Financial Statements (continued)
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STATEMENT OF OPERATIONS For the Year Ended February 28, 1998
................................................................................

<TABLE>
<S> <C>
INCOME:
Interest ................................................... $ 2,497,245
Fee income (note 2) ........................................ 59,424
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Total investment income .................................. 2,556,669
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EXPENSES (NOTE 3):
Investment management fee .................................. 172,843
Administrative fee ......................................... 57,625
Custodian and accounting fees .............................. 44,270
Transfer agent fees ........................................ 20,183
Reports to shareholders .................................... 27,042
Directors' fees ............................................ 15,186
Audit and legal fees ....................................... 40,110
Other expenses ............................................. 15,952
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Total expenses ........................................... 393,211
Less expenses paid indirectly .......................... (654)
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Total net expenses ....................................... 392,557
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Net investment income .................................... 2,164,112
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NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gain on investments (note 4) .................. 395,380
Net realized gain on closed futures contracts .............. 6,965
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Net realized gain on investments ......................... 402,345
Net change in unrealized appreciation or depreciation of
investments .............................................. 736,412
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Net gain on investments .................................. 1,138,757
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Net increase in net assets resulting from operations ... $ 3,302,869
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</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

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1998 Annual Report 7 Highlander Income Fund
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Financial Statements (continued)
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STATEMENTS OF CHANGES IN NET ASSETS
................................................................................

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
2/28/98 2/28/97
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<S> <C> <C>
OPERATIONS:
Net investment income ...................................... $ 2,164,112 $ 2,283,953
Net realized gain (loss) on investments .................... 402,345 (59,934)
Net change in unrealized appreciation or depreciation of
investments .............................................. 736,412 588,913
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Net increase in net assets resulting from operations ..... 3,302,869 2,812,932
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DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ................................. (2,196,372) (2,244,119)
From net realized gains .................................... (101,662) --
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Total distributions ...................................... (2,298,034) (2,244,119)
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Total increase in net assets ............................. 1,004,835 568,813

Net assets at beginning of year ............................ 28,466,795 27,897,982
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Net assets at end of year .................................. $29,471,630 $28,466,795
----------------- -----------------
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Undistributed net investment income ........................ $ 7,574 $ 39,834
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</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

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1998 Annual Report 8 Highlander Income Fund
<PAGE>
Notes to Financial Statements
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(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 fund may
enter into dollar roll transactions. Fund shares are listed on
the American Stock Exchange under the symbol HLA.

(2) SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
................................
INVESTMENTS IN SECURITIES
Portfolio securities for which market quotations are readily
available are valued at current market value. If market
quotations or valuations are not readily available, or if such
quotations or valuations are believed to be inaccurate,
unreliable or not reflective of market value, portfolio
securities are valued according to procedures adopted by the
fund's board of directors in good faith at "fair value", that is,
a price that the fund might reasonably expect to receive for the
security or other asset upon its current sale.

The current market value of certain fixed income securities is
provided by an independent pricing service. Fixed income
securities for which prices are not available from an independent
pricing service but where an active market exists are valued
using market quotations obtained from one or more dealers that
make markets in the securities or from a widely-used quotation
system. Short-term securities with maturities of 60 days or less
are valued at amortized cost, which approximates market value.

Exchange-traded options are valued at the last sales price on the
exchange prior to the time when assets are valued. If no sales
were reported that day, the options will be valued at the mean
between the current closing bid and asked prices.
Over-the-counter options are valued using market quotations
obtained from broker-dealers. Financial futures are valued at the
last settlement price established each day by the board of trade
or exchange on which they are traded.

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1998 Annual Report 9 Highlander Income Fund
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Notes to Financial Statements (continued)
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Securities transactions are accounted for on the date securities
are purchased or sold. Realized gains and losses are calculated
on the identified-cost basis. Interest income, including
amortization of bond discount and premium, is recorded on an
accrual basis.

HIGH-YIELD DEBT SECURITIES
Although the fund has a diversified portfolio, the fund has 53.9%
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 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.

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, 1998, the fund had outstanding 10 interest rate
futures sales contracts on 30-year U.S. Treasury bonds expiring
in March 1998 with a net unrealized loss of $313. The market
value and par value of the open contracts at February 28, 1998,
were

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1998 Annual Report 10 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
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$1,207,812 and $1,000,000, respectively. Securities with a market
value of $51,578 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 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 substantially fully
invested. As of February 28, 1998, the fund had entered into
outstanding when-issued or forward commitments of $4,039,375.

In connection with its ability to purchase securities on a when-
issued or forward-commitment basis, the fund may enter into
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, 1998, such fees earned by the fund amounted to $59,424.

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.

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1998 Annual Report 11 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
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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. In addition, due to the timing
of dividend distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or realized
gains or 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 5% 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

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1998 Annual Report 12 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
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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
make estimates and assumptions that affect the reported amounts
in the financial statements. Actual results could differ from
these estimates.

(3) EXPENSES
................................
INVESTMENT MANAGEMENT AND ADMINISTRATIVE FEES
The fund has entered into the following agreements with Piper
Capital Management Incorporated (the advisor and the
administrator):

The investment management agreement provides the advisor 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 advisor
provides investment advice and conducts the management and
investment activity of the fund. Federated Advisers has been
retained by the advisor as a subadvisor and is paid a monthly fee
by the advisor 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.

OTHER FEES AND EXPENSES
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.

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1998 Annual Report 13 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
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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 and dollar
roll transactions, for the year ended February 28, 1998,
aggregated $14,135,491 and $14,838,297, respectively. Including
dollar rolls, such purchases and sales aggregated $32,148,928 and
$32,851,734, respectively.

(5) PENDING
ACQUISITION
................................
On December 15, 1997, Piper Jaffray Companies Inc., the parent
company of the fund's investment advisor, announced that it had
entered into an agreement to be acquired by U.S. Bancorp. It is
anticipated that this acquisition will be completed in the second
quarter of 1998, subject to regulatory approval, the approval of
Piper Jaffray Companies shareholders and the satisfaction of
customary closing conditions.

U.S. Bancorp is a multi-state bank holding company headquartered
in Minneapolis, Minnesota with a geographic service area spanning
17 states. As of September 30, 1997, U.S. Bancorp was the 15th
largest U.S. commercial bank holding company, with assets of
approximately $70 billion. U.S. Bank National Association ("U.S.
Bank"), a wholly owned subsidiary of U.S. Bancorp, currently acts
as the investment advisor to 32 mutual funds (the "First American
Funds"). As of December 31, 1997, U.S. Bank, acting through its
First American Asset Management group, managed more than $55
billion in assets, including approximately $20.5 billion in
assets of the First American Funds.

Under the Investment Company Act of 1940, as amended (the "1940
Act"), consummation of the acquisition of Piper Jaffray Companies
by U.S. Bancorp will result in the assignment and automatic
termination of the fund's investment advisory agreement

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1998 Annual Report 14 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
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with Piper Capital Management Incorporated. The 1940 Act requires
that any new investment advisory agreement for the fund be
approved by the fund's board of directors and shareholders.

(6) PROPOSED
REORGAN-
IZATION OF THE
FUND
................................
On February 19, 1998, Piper Capital Management (the advisor),
announced that it intends to recommend to the fund's board of
directors that the fund be converted to an open-end format. This
conversion would be accomplished by merging the fund into an
existing or newly formed First American Fund, subject to board
and shareholder approval, following the acquisition of the
advisor's parent company, Piper Jaffray Companies Inc., by U.S.
Bancorp.

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1998 Annual Report 15 Highlander Income Fund
<PAGE>
Notes to Financial Statements (continued)
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(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>
Year Year Year Period
Ended Ended Ended Ended
2/28/98 2/28/97 2/29/96 2/28/95(c)
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period ... $14.31 $14.02 $13.20 $13.95
-------- -------- -------- --------------
Operations:
Net investment income ................ 1.09 1.15 1.19 1.13
Net realized and unrealized gains
(losses) on investments ............ 0.57 0.27 0.83 (0.73)
-------- -------- -------- --------------
Total from operations .............. 1.66 1.42 2.02 0.40
-------- -------- -------- --------------
Distributions to shareholders:
From investment income ............... (1.11) (1.13) (1.19) (1.14)
In excess of net investment income ... -- -- -- (0.01)
From net realized gains on
investments ........................ (0.05) -- --
Tax return of capital ................ -- -- (0.01) --
-------- -------- -------- --------------
Total distributions to
shareholders ..................... (1.16) (1.13) (1.20) (1.15)
-------- -------- -------- --------------
Net asset value, end of period ......... $14.81 $14.31 $14.02 $13.20
-------- -------- -------- --------------
-------- -------- -------- --------------
Market value, end of period ............ $13.38 $12.75 $12.63 $12.00
-------- -------- -------- --------------
-------- -------- -------- --------------
SELECTED INFORMATION
Total return, net asset value (a) ...... 12.04% 10.63% 15.84% 3.23%
Total return, market value (b) ......... 14.39% 10.80% 15.91% (12.69)%
Net assets at end of period (in
millions) ............................ $ 29 $ 28 $ 28 $ 26
Ratio of expenses to average weekly net
assets ............................... 1.36% 1.40% 1.44% 1.18%(d)
Ratio of net investment income to
average weekly net assets ............ 7.51% 8.25% 8.63% 9.37%(d)
Portfolio turnover rate (excluding
short-term securities and dollar roll
transactions) ........................ 44% 79% 90% 69%
</TABLE>

(a) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET VALUE AND DOES NOT
REFLECT A SALES CHARGE.
(b) ASSUMES REINVESTMENT OF DISTRIBUTIONS AT ACTUAL PRICES PURSUANT TO THE
FUND'S DIVIDEND REINVESTMENT PLAN.
(c) COMMENCEMENT OF OPERATIONS WAS MARCH 31, 1994.
(d) ANNUALIZED.

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

1998 Annual Report 16 Highlander Income Fund
<PAGE>
Investments in Securities
- ---------------------------------------------------------------------

<TABLE>
<CAPTION>
HIGHLANDER INCOME FUND February 28, 1998
.......................................................................................

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 (52.7%):
U.S. AGENCY MORTGAGE-BACKED SECURITIES (45.9%):
FIXED RATE (37.7%):
6.00%, FHLMC, 1/26/08 ............................. $ 2,000,000(c) $ 1,992,500
11.00%, FNMA, 10/1/20 ............................. 227,340(b) 257,890
9.00%, FNMA, 7/1/24 ............................... 616,567 657,223
10.00%, FNMA, 10/1/17 ............................. 370,172 408,577
6.50%, FNMA, 9/1/25 ............................... 672,161 669,217
8.00%, FNMA, 3/1/08 ............................... 895,647 926,717
6.00%, FNMA, 3/1/11 ............................... 869,968 859,981
6.50%, FNMA, 5/1/26 ............................... 924,301 916,981
6.00%, FNMA, 3/1/26 ............................... 904,321 878,231
6.50%, FNMA, 2/1/04 ............................... 1,345,345 1,351,238
7.00%, FNMA, 1/1/08 ............................... 2,000,000(c) 2,035,000
9.00%, GNMA, 6/15/16 .............................. 152,824 164,812
------------
11,118,367
------------

Z-BOND (d) (8.2%):
6.50%, FHLMC, Series 1694, Class Z, 3/15/24 ....... 1,296,020 1,194,011
8.28%, FNMA, Series 1993-223, Class ZA,
12/25/23 ........................................ 1,304,023 1,228,703
------------
2,422,714
------------

U.S. GOVERNMENT SECURITIES (6.8%):
6.38%, U.S. Treasury Note, 3/31/01 ................ 1,150,000 1,175,668
8.75%, U.S. Treasury Note, 8/15/00 ................ 750,000 804,300
------------
1,979,968
------------

Total U.S. Government and Agency Securities
(cost: $14,964,653) .......................... 15,521,049
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 17 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ---------------- -----------
<S> <C> <C> <C>
HIGH YIELD CORPORATE BONDS (53.9%):
AUTOMOTIVE (1.3%):
Aftermarket Technology, Senior Subordinated Note,
12.00%, 8/1/04 B $ 112,000 $ 125,160
Collins & Aikman Products, Senior Subordinated
Note, 11.50%, 4/15/06 ........................... B 150,000 169,313
Lear Seating Corp., Subordinated Note, 8.25%,
2/1/02 .......................................... BB+ 100,000 102,000
-----------
396,473
-----------

BANKING (1.0%):
First Nationwide Holdings, Senior Subordinated
Note, 10.63%, 10/1/03 ........................... B 250,000 282,500
-----------

BROADCAST RADIO AND TELEVISION (3.4%):
Acme Television, Senior Discount Note, Delayed
Interest, 10.59%, 9/30/04 . B- 100,000(d)(e) 80,248
Capstar Broadcasting, Senior Subordinated Note,
9.25%, 7/1/07 ................................... B- 75,000 78,938
Chancellor Media Corp-LA, Senior Subordinated Note,
8.13%, 12/15/07 ................................. N-R 50,000 51,000
Chancellor Media Corp-LA, Senior Subordinated Note,
8.75%, 6/15/07 B 75,000 78,938
Chancellor Media Corp., Senior Subordinated Note,
9.38%, 10/1/04 B 50,000 53,250
Chancellor Media Corp., Senior Subordinated Note,
10.50%, 1/15/07 ................................. B 50,000(e) 56,000
Echostar Satellite Broadcast, Senior Discount Note,
Delayed Interest, 13.25%, 3/15/04 ............... CCC+ 100,000(d) 89,375
Fox/Liberty Networks LLC, Senior Discount Note,
Delayed Interest, 9.36%, 8/15/07 ................ B 150,000(d) 101,813
Fox/Liberty Networks LLC, Senior Note, 8.88%,
8/15/07 ......................................... B 50,000 52,000
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 18 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

BUILDER (0.2%):
American Builders, Senior Subordinated Note,
10.63%, 5/15/07 ................................. B 50,000(e) 52,250
-----------

BUILDING MATERIALS (0.2%):
American Architectural, Senior Note, 11.75%,
12/1/07 ......................................... B 50,000(e) 52,500
-----------

BUSINESS SERVICES (1.4%):
Dialog Corp PLC, Senior Subordinated Note, 11.00%,
11/15/07 ........................................ B 75,000(e)(i) 82,125
Electronic Retailing Systems International, Inc.,
Senior Discount Note (and Warrants), Delayed
Interest, 13.92%, 2/1/04 ........................ N-R 75,000(d) 49,125
Knoll Inc., Senior Subordinated Note, 10.88%,
3/15/06 ......................................... B+ 114,000 130,815
Outsourcing Solutions, Senior Subordinated Note,
11.00%, 11/1/06 ................................. B- 50,000 53,875
United Stationery Supply, Senior Subordinated Note,
12.75%, 5/1/05 B 83,000 96,280
-----------
412,220
-----------

CABLE TELEVISION (5.5%):
Cablevision Systems Corp., Senior Subordinated
Debenture, 9.88%, 2/15/13 ....................... BB- 150,000 165,749
Cablevision Systems Corp., Senior Subordinated
Note, 9.88%, 5/15/06 BB- 50,000 55,125
Charter Communications South East L.P., Senior
Note, 11.25%, 3/15/06 . B 100,000 112,750
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 19 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ---------------- -----------
<S> <C> <C> <C>
Comcast Corp., Senior Subordinated Debenture,
9.38%, 5/15/05 .................................. BB+ $ 75,000 $ 80,438
Comcast UK Cable Partners Ltd., Senior Discount
Debenture, Delayed Interest, 11.07%, 11/15/07 ... B- 125,000(d)(i) 103,125
Diamond Holdings Plc, Senior Note, 9.13%,
2/1/08 .......................................... B- 125,000(e)(i) 125,625
Diva Systems Corp., Senior Discount Note, Delayed
Interest, 11.92%, 3/1/08 ........................ N-R 75,000(d) 41,063
Frontiervision Holdings, Senior Discount Note,
Delayed Interest, 11.27%, 9/15/07 ............... B 75,000(d) 58,313
International Cabletel Inc., Senior Note, Delayed
Interest, 10.84%, 10/15/03 N-R 250,000(d) 243,750
Pegasus Communications, Senior Note, 9.63%,
10/15/05 ........................................ B- 50,000 53,000
Rogers Cablesystems, Senior Note, 10.00%,
3/15/05 ......................................... BB+ 150,000(i) 168,750
Telewest Communications Plc, Senior Discount
Debenture, Delayed Interest, 10.90%, 10/1/07 .... B+ 375,000(d)(i) 301,875
United International Holdings Australia/Pacific,
Senior Discount Note, Delayed Interest, 13.99%,
5/15/06 ......................................... B 150,000(d) 107,250
-----------
1,616,813
-----------

CHEMICALS AND PLASTICS (2.3%):
Buckeye Technologies Inc., Senior Subordinated
Note, 9.25%, 9/15/08 BB- 125,000 130,625
ISP Holdings Inc., Senior Note, 9.00%, 10/15/03 ... BB- 150,000 157,875
Polymer Group Inc., Senior Subordinated Note,
9.00%, 7/1/07 ................................... B 100,000 102,500
Polymer Group, Senior Subordinated Note, 8.75%,
3/1/08 .......................................... B 100,000(e) 100,000
Sterling Chemical Holdings, Senior Discount Note,
Delayed Interest, 12.99%, 8/15/08 ............... B+ 100,000(d) 63,500
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 20 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

CONGLOMERATE (0.3%):
Eagle-Picher Industries, Senior Subordinated Note,
9.38%, 3/1/08 ................................... B- 75,000(e) 75,750
-----------

CONSUMER HEALTH (0.7%):
Icon Health Corp., Senior Discount Note, Delayed
Interest, 13.58%, 11/15/06 ...................... N-R 100,000(d) 54,500
Simmons Co., Senior Subordinated Note, 10.75%,
4/15/06 ......................................... B 150,000 162,938
-----------
217,438
-----------

CONSUMER NON-DURABLES (0.8%):
Curtice-Burns Foods Inc., Senior Subordinated Note,
12.25%, 2/1/05 B 75,000 83,063
Playtex Family Products Corp., Senior Subordinated
Note, 9.00%, 12/15/03 ........................... B 150,000 155,250
-----------
238,313
-----------

CONTAINER AND GLASS PRODUCTS (0.2%):
Tekni-Plex Inc., Senior Subordinated Note, 9.25%,
3/1/08 .......................................... B- 50,000(e) 50,750
-----------

COSMETICS AND TOILETRIES (0.9%):
Revlon Consumer Products, Senior Subordinated Note,
10.50%, 2/15/03 ................................. N-R 50,000 52,625
Revlon Consumer Products, Senior Subordinated Note,
8.63%, 2/1/08 ................................... B- 200,000(e) 199,500
-----------
252,125
-----------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 21 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ---------------- -----------
<S> <C> <C> <C>
ECOLOGICAL SERVICES AND EQUIPMENT (0.9%):
Allied Waste Industries, Senior Discount Note,
Delayed Interest, 10.35%, 6/1/07 ................ N-R $ 200,000(d) $ 145,750
Allied Waste North American Inc., 10.25%,
12/1/06 ......................................... B+ 100,000 111,375
-----------
257,125
-----------

ELECTRICAL UTILITIES (0.6%):
El Paso Electric Co., 9.40%, 5/1/11 ............... BB+ 150,000 169,457
-----------

FINANCE (0.2%):
Trizec Finance Ltd., Senior Note, 10.88%,
10/15/05 ........................................ BB+ 50,000(i) 56,625
-----------

FOOD PRODUCTS (1.4%):
Carr-Gottstein Foods Co., Senior Subordinated Note,
12.00%, 11/15/05 ................................ B- 100,000 111,500
International Home Foods, Senior Subordinated Note,
10.38%, 11/1/06 ................................. B- 175,000 195,125
Van De Kamps Inc., Senior Subordinated Note,
12.00%, 9/15/05 ................................. B- 100,000 112,500
-----------
419,125
-----------

FOOD SERVICES (0.7%):
Ameriserve Food, Senior Subordinated Note, 10.13%,
7/15/07 ......................................... B- 200,000 217,500
-----------

FOOD AND DRUG RETAILING (0.9%):
Jitney-Jungle Stores, Senior Subordinated Note,
10.38%, 9/15/07 ................................. B- 75,000 77,250
Ralphs Grocery Co., Senior Note, 10.45%,
6/15/04 ......................................... B 175,000 200,813
-----------
278,063
-----------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 22 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ---------------- -----------
<S> <C> <C> <C>
FOREST PRODUCTS (1.7%):
Container Corporation of America, Senior Note,
9.75%, 4/1/03 ................................... B+ $ 125,000 $ 135,625
Four M Corp., Senior Note, 12.00%, 6/1/06 ......... B 100,000 106,000
SD Warren Co., Senior Subordinated Note, 12.00%,
12/15/04 ........................................ B+ 100,000 112,500
Stone Container Corp., Senior Note, 11.50%,
10/1/04 ......................................... B 150,000 160,688
-----------
514,813
-----------

HEALTH CARE SERVICES (1.8%):
Dade International Inc., Senior Subordinated Note,
11.13%, 5/1/06 B 150,000 166,875
Genesis Health Ventures, Senior Subordinated Note,
9.25%, 10/1/06 B- 75,000 78,375
Tenet Healthcare Corp, Senior Subordinated Note,
10.13%, 3/1/05 BB- 200,000 221,000
Tenet Healthcare Corp., Senior Note, 8.00%,
1/15/05 ......................................... BB+ 50,000 51,875
-----------
518,125
-----------

HEAVY ELECTRICAL MACHINERY (1.1%):
Alvey Systems Inc., Senior Subordinated Note,
11.38%, 1/31/03 ................................. B- 150,000 160,125
Tokheim Corp., Senior Subordinated Note, 11.50%,
8/1/06 .......................................... B 150,000 170,250
-----------
330,375
-----------

HOME PRODUCTS AND FURNISHINGS (0.3%):
Syratech Corp., Senior Note, 11.00%, 4/15/07 ...... B- 50,000 45,250
Werner Holdings Co. Inc., Senior Subordinated Note,
10.00%, 11/15/07 ................................ B- 50,000(e) 53,188
-----------
98,438
-----------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 23 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ---------------- -----------
<S> <C> <C> <C>
HOTELS AND LEISURE (0.4%):
Courtyard By Marriott, Senior Note, 10.75%,
2/1/08 .......................................... B- $ 100,000 $ 111,000
-----------

INDUSTRIAL PRODUCTS AND EQUIPMENT (2.7%):
Cabot Safety Corp., Senior Subordinated Note,
12.50%, 7/15/05 ................................. B 150,000 169,125
Clark Materials Handling Inc., Senior Note, 10.75%,
11/15/06 ........................................ B+ 100,000 108,750
Continental Global Group, Senior Note, 11.00%,
4/1/07 .......................................... B 50,000 54,000
Fisher Scientific Intl., Senior Subordinated Note,
9.00%, 2/1/08 ................................... B- 50,000(e) 51,125
International Knife and Saw Inc., Senior
Subordinated Note, 11.38%, 11/15/06 ............. B- 100,000 109,500
International Utility Structures, Senior
Subordinated Note, 10.75%, 2/1/08 B- 50,000(e)(i) 51,875
MMI Products Inc., Senior Subordinated Note,
11.25%, 4/15/07 ................................. B- 75,000 83,250
Oshkosh Truck Corp., Senior Subordinated Note,
8.75%, 3/1/08 ................................... B 50,000(e) 50,750
Unifrax Investment Corp., Senior Note, 10.50%,
11/1/03 ......................................... B 100,000 105,000
-----------
783,375
-----------

INDUSTRIAL PROPERTY (0.2%):
United International Holdings, Senior Discount
Note, Delayed Interest, 10.55%, 2/15/08 ......... B 100,000(d)(e) 61,000
-----------

LEISURE AND ENTERTAINMENT (3.3%):
AMF Group Inc., Senior Discount Note, Delayed
Interest, 10.25%, 3/15/06 . B- 153,000(d) 122,783
Cobblestone Golf Group, Senior Note, 11.50%,
6/1/03 .......................................... B 150,000 167,250
Premier Parks, Senior Note, 12.00%, 8/15/03 ....... B+ 150,000 166,500
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 24 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ---------------- -----------
<S> <C> <C> <C>
Six Flags Theme Parks Inc., Senior Subordinated
Note, Delayed Interest, 12.44%, 6/15/05 ......... B $ 200,000(d) $ 221,000
Viacom Inc., Subordinated Debenture, 8.00%,
7/7/06 .......................................... BB- 300,000 308,250
-----------
985,783
-----------

MACHINE TOOL MANUFACTURER (0.2%):
National Equipment, Senior Subordinated Note,
10.00%, 11/30/04 ................................ B- 50,000(e) 53,500
-----------

METAL & MINING (0.5%):
Euramax International Plc, Senior Subordinated
Note, 11.25%, 10/1/06 ........................... B 125,000(i) 136,875
-----------

OIL AND GAS (2.5%):
Abraxas Petro, Senior Note, 11.50%, 11/1/04 ....... B 125,000 131,875
California Energy Company Inc., Senior Discount
Note, Delayed Interest, 10.70%, 1/15/04 ......... BB+ 75,000(d) 81,281
Dailey International Inc., Senior Note, 9.50%,
2/15/08 ......................................... B 50,000(e) 51,000
DI Industries Inc., Senior Note, 8.88%, 7/1/07 .... B+ 50,000 52,875
Falcon Drilling Company Inc., Senior Note, 9.75%,
1/15/01 ......................................... B+ 100,000 104,000
Forcenergy Inc., Senior Subordinated Note, 9.50%,
11/1/06 ......................................... B 100,000 107,000
Pacalta Resources Ltd., Senior Note, 10.75%,
6/15/04 ......................................... B- 50,000(i) 50,500
United Meridian Corp., Senior Subordinated Note,
10.38%, 10/15/05 ................................ B 50,000 55,750
Universal Compression Inc., Senior Discount Note,
Delayed Interest, 9.68%, 2/15/08 ................ B 50,000(d)(e) 31,500
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 25 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

PRINTING AND PUBLISHING (0.8%):
Affiliated Newspaper Investments, Senior Discount
Note, Delayed Interest, 12.79%, 7/1/06 .......... B+ 200,000(d) 193,000
Hollinger International Publishing, Senior
Subordinated Note, 9.25%, 3/15/07 ............... BB- 50,000 53,750
-----------
246,750
-----------

RETAIL STORES (1.1%):
Brylane LP, Senior Subordinated Note, 10.00%,
9/1/03 .......................................... B+ 150,000 160,500
Herff Jones Inc., Senior Subordinated Note, 11.00%,
8/15/05 ......................................... B 100,000 111,500
Hosiery Corp of America Inc., Senior Subordinated
Note, 13.75%, 8/1/02 B- 50,000 55,250
-----------
327,250
-----------

STEEL MANUFACTURER (0.9%):
GS Technologies, Senior Operating Note, 12.00%,
9/1/04 .......................................... B 250,000 275,938
-----------

SURFACE TRANSPORTATION (2.2%):
Chemical Leaman Corp., Senior Note, 10.38%,
6/15/05 ......................................... B 50,000 53,499
Gearbulk Holding Ltd., Senior Note, 11.25%,
12/1/04 ......................................... BB 75,000(i) 82,406
Statia Terminals, 11.75%, 11/15/03 ................ B 100,000 106,750
Stena AB, Senior Note, 10.50%, 12/15/05 ........... BB- 150,000(i) 165,563
Stena AB, Senior Note, 8.75%, 6/15/07 ............. BB- 50,000(i) 51,938
Trism Inc., Senior Subordinated Note, 10.75%,
12/15/00 ........................................ B- 215,000 188,125
-----------
648,281
-----------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 26 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

TELECOMMUNICATIONS AND CELLULAR (9.0%):
American Communication Services Inc., Senior Note,
13.75%, 7/15/07 . N-R 50,000 60,499
Cellular Communications International Inc., Senior
Discount Note, Zero-Coupon, 13.25%, 8/15/00 ..... CCC+ 150,000(f) 129,660
Esprit Telecom Group PLC, Senior Note, 11.50%,
12/15/07 ........................................ B- 50,000(i) 54,625
Flag Limited, Senior Note, 8.25%, 1/30/08 ......... B+ 50,000(e)(i) 51,125
Hermes Europe Railtel BV, Senior Note, 11.50%,
8/15/07 ......................................... B 100,000(i) 112,500
Highwaymaster Communications Inc., Senior
Subordinated Note, 13.75%, 9/15/05 .............. N-R 50,000 52,625
Intermedia Communication, Senior Discount Note,
Delayed Interest, 8.82%, 7/15/07 ................ B 100,000(d) 73,750
Intermedia Communications of Florida, Senior
Discount Note, Delayed Interest, 10.97%,
5/15/06 ......................................... B 250,000(d) 203,750
Metronet Communications, Senior Note, 12.00%,
8/15/07 ......................................... N-R 100,000(i) 116,000
Millicom International Cellular, Senior Discount
Note, Delayed Interest, 12.66%, 6/1/06 .......... B- 175,000(d)(i) 135,188
Nextel Communications, Senior Discount Note,
Delayed Interest, 9.72%, 8/15/04 ................ CCC+ 100,000(d) 96,250
Nextel Communications, Senior Discount Note,
Delayed Interest, 9.75%, 2/15/08 ................ CCC+ 150,000(d)(e) 92,063
Nextlink Communications, Senior Note, 9.00%,
3/15/08 ......................................... B 100,000(e) 101,000
Paging Network, Senior Subordinated Note, 10.00%,
10/15/08 ........................................ B 250,000 260,625
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 27 Highlander Income Fund
<PAGE>
Investments in Securities (continued)
- ---------------------------------------------------------------------

HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
S&P Principal Market
Description of Security Rating (g) Amount Value (a)
- --------------------------------------------------------- ---------- ---------------- -----------
<S> <C> <C> <C>
Qwest Communications International., Senior
Discount Note, Delayed Interest, 8.80%,
10/15/07 ........................................ N-R $ 300,000(d)(e) $ 209,250
Rogers Cantel Inc., Senior Subordinated Note,
8.80%, 10/1/07 BB- 100,000(i) 100,250
Sygnet Wireless Inc., Senior Note, 11.50%,
10/1/06 ......................................... CCC+ 100,000 112,000
Teleport Communications Plc, Senior Discount Note,
Delayed Interest, 10.20%, 7/1/07 ................ B+ 200,000(d) 172,500
Telesystem International Wireless, Senior Discount
Note, Delayed Interest, 11.95%, 6/30/07 ......... B- 125,000(d)(e)(i) 85,000
Telesystem International Wireless, Senior Discount
Note, Delayed Interest, 10.27%, 11/1/07 ......... B- 50,000(d)(e)(i) 30,750
Teligent Inc., Senior Note, 11.50%, 12/1/07 ....... CCC 100,000 103,250
USA Mobile Communications Inc. II, Senior Note,
9.50%, 2/1/04 ................................... CCC+ 100,000 97,500
Vanguard Cellular System, Senior Debenture, 9.38%,
4/15/06 ......................................... B+ 200,000 212,000
-----------
2,662,160
-----------

TEXTILES AND APPAREL (1.8%):
Glenoit Corp., Senior Subordinated Note, 11.00%,
4/15/07 ......................................... B- 100,000(e) 109,250
Pillowtex Corp., Senior Subordinated Note, 10.00%,
11/15/06 ........................................ B+ 100,000 110,000
Westpoint Stevens Inc., Senior Subordinated
Debenture, 9.38%, 12/15/05 ...................... B+ 300,000 318,000
-----------
537,250
-----------

TRANSPORTATION (0.3%):
Lear Corp., Subordinated Note, 9.50%, 7/15/06 ..... BB+ 75,000 83,151
-----------

Total High Yield Corporate Bonds
(cost: $14,769,052) .......................... 15,874,622
-----------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 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 (H) (0.2%):
CABLE TELEVISION (0.0%):
CS Wireless Systems Inc. .......................... 27 $ --
------------

PRINTING & PUBLISHING (0.2%):
Affiliated Newspaper Investments .................. 500 55,250
------------

RETAIL TRADE (0.0%):
Hosiery Corp of America Inc. ...................... 50 250
------------

TECHNOLOGY (0.0%):
Pegasus Communications Corp. ...................... 225 4,669
Sullivan Broadcasting Holdings .................... 400 12,200
------------
16,869
------------

Total Common Stock
(cost: $3,233) ............................... 72,369
------------

PREFERRED STOCK (3.5%):
BROADCAST RADIO AND TELEVISION (1.9%):
American Radio Systems Corp., Exchangeable, PIK,
11.38% .......................................... 1,438(d) 167,527
Chancellor Media Corp., Exchangeable, PIK,
12.00% .......................................... 794(d) 95,677
Echostar Communications, Exchangeable, PIK,
12.13% .......................................... 52(d) 57,679
SFX Broadcasting Inc., Cumulative, Non-Voting,
Exchangeable, PIK, 12.63% ....................... 1,328(d) 156,040
Sinclair Capital, Cumulative, Non-Voting,
Exchangeable, 11.63% 750 82,125
------------
559,048
------------

CABLE TELEVISION (0.4%):
Pegasus Communications, Exchangeable, Cumulative,
PIK, 12.75% ..................................... 106(d) 120,204
------------

COMMERCIAL SERVICES (0.1%):
Nebco Evans Holding Co., Exchangeable, PIK,
11.25% .......................................... 250(d)(e) 25,000
------------

FINANCIAL SERVICES (0.3%):
Crown American Realty Trust, Cumulative,
Non-Voting, Exchangeable, 11.00% ................ 1,500 82,407
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 29 Highlander Income Fund
<PAGE>
HIGHLANDER INCOME FUND
(CONTINUED)

<TABLE>
<CAPTION>
Market
Description of Security Shares Value (a)
- --------------------------------------------------------- ----------- ------------
<S> <C> <C>
PRINTING AND PUBLISHING (0.6%):
Primedia Inc., Non-Convertible, Cumulative, PIK,
11.63% .......................................... 3(d) $ 308
Primedia Inc., Non-Convertible, Exchangeable,
9.20% ........................................... 1,700 176,800
------------
177,108
------------

TELECOMMUNCIATIONS AND CELLULAR (0.2%):
Nextel Communications, Exchangeable, Cumulative,
PIK, 13.00% ..................................... 52(d) 60,319
------------

Total Preferred Stock
(cost: $924,831) ............................. 1,024,086
------------

WARRANTS (H) (0.1%):
BAR Technologies, 4/1/01 .......................... 50 3,000
Cellular Communications International Inc.,
8/15/03 ......................................... 150 3,000
Electronic Retailing Systems International, Inc.,
8/15/01 ......................................... 75 2,250
Highwaymaster Communications Inc., 9/27/01 ........ 50 500
ICF Kaiser International, 12/31/98 ................ 120 30
Icon Health Corp., 11/14/99 ....................... 150 7,575
Metronet Communications, 8/15/07 .................. 100(i) 325
Nextel Communications, 4/15/99 .................... 250 368
Sterling Chemicals Holdings, 8/15/08 .............. 100 2,850
United International Holdings Australia/Pacific,
10/30/01 ........................................ 150 750
Wireless One Inc., 10/19/00 ....................... 150 --
------------

Total Warrants
(cost: $18,544) .............................. 20,648
------------

SHORT-TERM SECURITIES (1.7%):
Repurchase agreement with Goldman Sachs, acquired
on 2/27/98, interest of $241, 5.68%, 3/2/98
(cost: $510,000) ................................ 510,000(j) 510,000
------------

Total Investments in Securities
(cost: $31,190,313) (k) ...................... 33,022,774
------------
------------
</TABLE>

SEE ACCOMPANYING NOTES TO INVESTMENTS IN SECURITIES.

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

1998 Annual Report 30 Highlander Income Fund
<PAGE>

NOTES TO INVESTMENTS IN SECURITIES.
(a) SECURITIES ARE VALUED IN ACCORDANCE WITH PROCEDURES DESCRIBED IN NOTE 2 TO
THE FINANCIAL STATEMENTS.
(b) THESE ISSUES ARE PARTIALLY PLEDGED AS INITIAL MARGIN DEPOSITS ON OPEN
INTEREST RATE FUTURES SALES CONTRACTS (SEE NOTE 2 TO THE FINANCIAL
STATEMENTS).
(c) ON FEBRUARY 28, 1998, THE TOTAL COST OF INVESTMENTS PURCHASED ON A
WHEN-ISSUED BASIS WAS $4,039,375.
(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 RATE DISCLOSED REPRESENTS CURRENT YIELD
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, 1998, 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 PURCHASED AS PART OF A PRIVATE PLACEMENT WHICH HAVE NOT BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933 AND ARE CONSIDERED ILLIQUID. ON FEBRUARY 28, 1998, THE TOTAL
MARKET VALUE OF THESE INVESTMENTS WAS $2,042,374 OR 6.9% OF TOTAL NET
ASSETS. INFORMATION REGARDING THESE SECURITIES IS AS FOLLOWS:

<TABLE>
<CAPTION>
SECURITY PAR DATE ACQUIRED COST BASIS
- ----------------------------------------------------------- --------- ------------- -----------
<S> <C> <C> <C>
ACME TELEVISION............................................ $ 100,000 9/97 $ 76,439
CHANCELLOR MEDIA CORP...................................... 50,000 12/97 55,195
AMERICAN BUILDERS.......................................... 50,000 5/97 50,000
AMERICAN ARCHITECTURAL..................................... 50,000 12/97 50,000
DIAMOND HOLDINGS PLC....................................... 125,000 1/98 126,245
POLYMER GROUP.............................................. 100,000 2/98 100,000
EAGLE-PICHER INDUSTRIES.................................... 75,000 2/98 75,168
TEKNI-PLEX INC............................................. 50,000 2/98 50,000
REVLON CONSUMER PRODUCTS................................... 200,000 1/98 199,932
WERNER HOLDINGS CO. INC.................................... 50,000 11/97 50,000
DIALOG CORP. PLC........................................... 75,000 11/97 75,000
FISHER SCIENTIFIC INTERNATIONAL............................ 50,000 1/98 50,000
INTERNATIONAL UTILITY STRUCTURES........................... 50,000 1/98 50,000
OSHKOSH TRUCK CORP......................................... 50,000 2/98 50,000
UNITED INTERNATIONAL HOLDINGS.............................. 100,000 1/98 59,520
NATIONAL EQUIPMENT......................................... 50,000 11/97 49,400
DAILEY INTERNATIONAL INC................................... 50,000 2/98 50,000
UNIVERSAL COMPRESSION INC.................................. 50,000 2/98 31,011
XCL LIMITED................................................ 50,000 5/97 50,000
FLAG LIMITED............................................... 50,000 1/98 50,000
NEXTEL COMMUNICATIONS...................................... 150,000 2/98 92,706
NEXTLINK COMMUNICATIONS.................................... 100,000 2/98 99,798
QWEST COMMUNICATIONS INTERNATIONAL......................... 300,000 10/97-1/98 203,926
TELESYSTEM INTERNATIONAL WIRELESS.......................... 125,000 6/97-10/97 77,670
TELESYSTEM INTERNATIONAL WIRELESS.......................... 50,000 10/97 31,014
GLENOIT CORP............................................... 100,000 3/97-8/97 103,048
</TABLE>

(F) FOR ZERO-COUPON INVESTMENTS, THE INTEREST RATE SHOWN IS THE EFFECTIVE YIELD
ON THE DATE OF PURCHASE.

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

1998 Annual Report 31 Highlander Income Fund
<PAGE>
<TABLE>
<S> <C>
(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.
"BBB" - AN ADEQUATE CAPACITY TO PAY INTEREST AND REPAY PRINCIPAL.
WHEREAS IT NORMALLY EXHIBITS ADEQUATE PROTECTION PARAMETERS, ADVERSE
ECONOMIC CONDITIONS OR CHANGING CIRCUMSTANCES ARE MORE LIKELY TO LEAD
TO A WEAKENED CAPACITY TO PAY INTEREST AND REPAY PRINCIPAL FOR DEBT
IN THIS CATEGORY THAN IN HIGHER RATED CATEGORIES.
"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.
(H) CURRENTLY NON-INCOME PRODUCING.
(I) SECURITIES OF FOREIGN ISSUERS ARE DENOMINATED IN U.S. DOLLARS. THE
AGGREGATE VALUE OF THESE SECURITIES AT FEBRUARY 28, 1998, IS $2,063,045,
WHICH REPRESENTS 7.0% OF TOTAL NET ASSETS.
(J) REPURCHASE AGREEMENT IN A JOINT TRADING ACCOUNT WHICH IS COLLATERALIZED BY
U.S. GOVERNMENT AGENCY SECURITIES. ACCRUED INTEREST SHOWN REPRESENTS
INTEREST DUE AT MATURITY OF THE REPURCHASE AGREEMENT.
(K) ON FEBRUARY 28, 1998, THE COST OF INVESTMENTS IN SECURITIES, INCLUDING OPEN
FUTURES TRANSACTIONS, FOR FEDERAL INCOME TAX PURPOSES WAS $31,190,313. THE
AGGREGATE GROSS UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS IN
SECURITIES BASED ON THIS COST WERE AS FOLLOWS:
</TABLE>

<TABLE>
<S> <C>
GROSS UNREALIZED APPRECIATION ...... $ 1,904,754
GROSS UNREALIZED DEPRECIATION ...... (72,606)
------------
NET UNREALIZED APPRECIATION ...... $ 1,832,148
------------
------------
</TABLE>

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

1998 Annual Report 32 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, 1998, 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 ended February 28, 1998, 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, 1998, 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 3, 1998

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

1998 Annual Report 33 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 26, 1997 ......................... $0.0940
April 23, 1997 ......................... 0.0940
May 28, 1997 ........................... 0.0940
June 25, 1997 .......................... 0.0940
July 23, 1997 .......................... 0.0940
August 27, 1997 ........................ 0.0940
September 24, 1997 ..................... 0.0940
October 29, 1997 ....................... 0.0940
November 24, 1997 ...................... 0.0880
December 17, 1997 ...................... 0.0880
January 12, 1998 ....................... 0.0880
February 25, 1998 ...................... 0.0880
-------
Total .............................. $1.1040
-------
-------
</TABLE>

LONG-TERM GAINS
(TAXABLE AS CAPITAL GAIN DISTRIBUTIONS)

<TABLE>
<CAPTION>
PAYABLE DATE AMOUNT
- ---------------------------------------- -------
<S> <C>
December 17, 1997 ...................... $0.0511
-------
-------
</TABLE>

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

1998 Annual Report 34 Highlander Income Fund
<PAGE>
Shareholder Update
- --------------------------------------------------------------------------------

ANNUAL MEETING RESULTS
An annual meeting of the fund's shareholders was held on August
20, 1997. 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 forth below.

1. The fund's shareholders elected the following directors:

<TABLE>
<CAPTION>
SHARES VOTED SHARES WITHHOLDING
"FOR" AUTHORITY TO VOTE
------------ ------------------
<S> <C> <C>
David T. Bennett ....................... * *
Jaye F. Dyer ........................... 1,457,837 18,130
William H. Ellis ....................... * *
Karol D. Emmerich ...................... 1,458,069 17,898
Luella G. Goldberg ..................... 1,458,069 17,898
David A. Hughey ........................ 1,458,069 17,898
George Latimer ......................... 1,454,736 21,231
</TABLE>

* THE NAMES OF MR. BENNETT AND MR. ELLIS WERE INADVERTENTLY OMITTED FROM THE
PROXY CARDS FOR THE ANNUAL MEETING. TO ASSURE THAT THEIR TERMS OF OFFICE
CONTINUE, THE REMAINING BOARD MEMBERS HAVE ELECTED MR. BENNETT AND MR.
ELLIS TO SERVE AS DIRECTORS OF THE FUND.

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 ending February
28, 1998. The following votes were cast regarding this
matter:

<TABLE>
<CAPTION>
SHARES VOTED SHARES VOTED BROKER
"FOR" "AGAINST" ABSTENTIONS NON-VOTES
------------ ------------ ----------- ---------
<S> <C> <C> <C>
1,459,008 7,230 9,729 --
</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

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

1998 Annual Report 35 Highlander Income Fund
<PAGE>
Shareholder Update (continued)
- --------------------------------------------------------------------------------
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.

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 5% 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.

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

1998 Annual Report 36 Highlander Income Fund
<PAGE>
Shareholder Update (continued)
- --------------------------------------------------------------------------------

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 5% or more above the NAV, you will receive
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 an 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
noncertified 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

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

1998 Annual Report 37 Highlander Income Fund
<PAGE>
Shareholder Update (continued)
- --------------------------------------------------------------------------------
IFTC. If your shares are registered in your brokerage firm's
name, you may terminate your participation via verbal or written
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.

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

1998 Annual Report 38 Highlander Income Fund
<PAGE>

THIS PAGE WAS INTENTIONALLY LEFT BLANK.

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

1998 Annual Report 39 Highlander Income Portfolio
<PAGE>

Glossary of Terms #
- --------------------------------------------------------------------------------

CMO Z-BONDS
Collateralized mortgage obligations are mortgage-backed bonds that separate
mortgage pools into different maturity classes, called tranches. This is
accomplished by applying cash (payments and prepayments of principal and
interest) from mortgages in the pool in the order that the CMOs pay out.
Tranches pay different rates of interest and typically mature in two, five,
10 or 20 years. Issued by the Federal Home Loan Mortgage Corporation
(Freddie Mac) and private issuers, CMOs are usually backed by government-
guaranteed or other top-grade mortgages.

Z-bonds represent securities that pay no interest or principal during their
initial accrual periods, but accrue additional principal at specified
rates.

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

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

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

1998 Annual Report 40 Highlander Income Portfolio
<PAGE>

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, Retired 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 ADVISOR
- --------------------------------------------------------------------------------
PIPER CAPITAL MANAGEMENT INCORPORATED
222 South Ninth Street, Minneapolis, MN 55402-3804

SUBADVISOR
- --------------------------------------------------------------------------------
FEDERATED ADVISERS
Federated Investors Tower, Pittsburgh, PA 15222-3779

CUSTODIAN, ACCOUNTING AND TRANSFER AGENT
- --------------------------------------------------------------------------------
INVESTORS FIDUCIARY TRUST COMPANY
801 Pennsylvania, Kansas City, MO 64105-1307

INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
KPMGPEAT MARWICK LLP
4200 Norwest Center, Minneapolis, MN 55402

LEGAL COUNSEL
- --------------------------------------------------------------------------------
DORSEY & WHITNEY LLP
220 South Sixth Street, Minneapolis, MN 55402

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

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

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

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

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

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

In an effort to reduce costs to our shareholders, we have implemented a process
to reduce duplicate mailings of the 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 800 866-7778, or mail a request to us.

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

<PAGE>

[LOGO]

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

#11710 4/1998 087-98

STAPLES