PIPER FUNDS INC II, N-1A EL/A, 1995-08-31

PIPER FUNDS INC II
N-1A EL/A, 1995-08-31

Previous: C M LIFE VARIABLE LIFE SEPARATE ACCOUNT I, 497, 1995-08-31

Next: EQUITABLE HYPERION MORTGAGE OPPORTUNITY FUND INC, N-1A EL/A, 1995-08-31

As filed with the Securities and Exchange Commission on August 31, 1995

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Registration No. 33-60515)
Pre-Effective Amendment No. 1
Post-Effective Amendment No. __
and/or

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
(Registration No. 811-07279)
Amendment No. 1
(Check appropriate box or boxes)

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

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

Registrant's Telephone Number, Including Area Code: (800) 866-7778

Charles N. Hayssen
Piper Jaffray Tower
222 South 9th Street, Minneapolis, Minnesota 55402
(Name and Address of Agent for Service)

Copy to:

Kathleen L. Prudhomme
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, Minnesota 55402

PIPER FUNDS INC.--II

Registration Statement on Form N-1A

CROSS REFERENCE SHEET
Pursuant to Rule 481(a)

Item No. Prospectus Heading

<S> <C> <C>
1. Cover Page............................................ Cover Page

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

3. Condensed Financial Information....................... Not Applicable

4. General Description of Registrant..................... Introduction; Investment Objective, Policies and Risk Factors

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

5A. Management's Discussion of
Fund Performance...................................... Not Applicable

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

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

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

9. Pending Legal Proceedings............................. General Information

Statement of Additional
Information Heading

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

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

12. General Information and History....................... Not Applicable

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

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

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

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

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

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

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

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

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

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

23. Financial Statements.................................. Not Applicable

</TABLE>

Prospectus Dated August 31, 1995

PIPER FUNDS INC. -- II
ADJUSTABLE RATE MORTGAGE SECURITIES FUND

PIPER JAFFRAY TOWER
222 SOUTH NINTH STREET,
MINNEAPOLIS, MINNESOTA 55402-3804
(800) 866-7778 (TOLL FREE)

AN INVESTMENT IN THE FUND MAY INVOLVE CERTAIN RISKS, INCLUDING THE LOSS OF
PRINCIPAL. THE MARKET VALUE OF THE SECURITIES IN WHICH THE FUND INVESTS WILL
FLUCTUATE WITH CHANGING INTEREST RATES, AS WILL THE FUND'S NET ASSET VALUE.
THE FUND MAY INVEST IN ILLIQUID SECURITIES WHICH WILL INVOLVE GREATER RISK
THAN INVESTMENTS IN OTHER SECURITIES AND MAY INCREASE FUND EXPENSES. SEE
"INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS -- OTHER INVESTMENT
TECHNIQUES." THE FUND INVESTS A SIGNIFICANT PORTION OF ITS ASSETS IN
MORTGAGE-RELATED SECURITIES, WHICH MAY INCLUDE DERIVATIVE MORTGAGE
SECURITIES. SEE "INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS."

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

A Statement of Additional Information about the Fund dated August 31, 1995 is
available free of charge. Write to the Fund at Piper Jaffray Tower, 222 South
Ninth Street, Minneapolis, Minnesota 55402-3804 or telephone (800) 866-7778
(toll free). The Statement of Additional Information has been filed with the
Securities and Exchange Commission and is incorporated in its entirety by
reference in this Prospectus.

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

INTRODUCTION

Adjustable Rate Mortgage Securities Fund (the "Fund") is a diversified series
of Piper Funds Inc. -- II (the "Company"), an open-end management investment
company the shares of which can be offered in more than one series. The Fund
is the only series of the Company currently outstanding. The Company was
organized under the laws of the State of Minnesota on April 10, 1995. It is
anticipated that, on or about September 1, 1995, four closed-end investment
companies, American Adjustable Rate Term Trust Inc. -- 1996 ("BDJ"), American
Adjustable Rate Term Trust Inc. -- 1997 ("CDJ"), American Adjustable Rate
Term Trust Inc. -- 1998 ("DDJ") and American Adjustable Rate Term Trust Inc.
- -- 1999 ("EDJ") (collectively, the "Trusts") will merge into the Fund (the
"Merger"). Class action lawsuits have been filed in U.S. District Court
against each of the Trusts. The Company may be deemed to be a successor by
merger to the Trusts and, as such, may succeed to their liabilities,
including damages sought in such litigation. However, Piper Jaffray Companies
Inc. and Piper Capital Management Incorporated have agreed to indemnify the
Company against any losses incurred in connection with such litigation. See
"General Information -- Pending Legal Proceedings." The investment objective
of the Fund is to provide the maximum current income that is consistent with
low volatility of principal.

THE INVESTMENT ADVISER
The Fund is managed by Piper Capital Management Incorporated (the "Adviser"),
a wholly owned subsidiary of Piper Jaffray Companies Inc. The Fund pays the
Adviser a fee for managing its investment portfolio. The fee for the Fund is
paid at an annual rate of .35% on the first $500 million of average daily net
assets and .30% on average daily net assets in excess of $500 million. See
"Management -- Investment Adviser."

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

RISK FACTORS TO CONSIDER
An investment in the Fund is subject to certain risks, as set forth in detail
under "Investment Objective, Policies and Risk Factors." As with other mutual
funds, there can be no assurance that the Fund will achieve its objective.
The Fund is subject to interest rate risk (the risk that rising interest
rates will make bonds issued at lower interest rates worth less). As a
result, the value of the Fund's shares will vary. The Fund is also subject to
credit risk (the risk that a bond issuer will fail to make timely payments of
interest or principal) to the extent it invests in non-U.S. Government
securities. The Fund may engage in the following investment practices which
involve certain special risks: the use of repurchase agreements, the lending
of portfolio securities, borrowing from banks and through reverse repurchase
agreements (but only for temporary or emergency purposes in an amount up to
10% of the value of its total assets), the use of hedging techniques,
including interest rate transactions, options, futures contracts, options on
futures contracts and investments in Eurodollar instruments, and the purchase
or sale of securities on a "when-issued" or "forward commitment" basis. These
techniques may increase the volatility of the Fund's net asset value.

OFFERING PRICE
Shares of the Fund are offered to the public at the next determined net asset
value after receipt of an order by a shareholder's Piper Jaffray investment
executive or other broker-dealer plus a maximum sales charge of 1.50% of the
offering price (1.52% of the net asset value) on purchases of less than
$100,000. The sales charge is reduced on a graduated scale on purchases of
$100,000 or more. In connection with purchases of $500,000 or more, there is
no initial sales charge; however, a .20% contingent deferred sales charge
will be imposed in the event of a redemption transaction occurring within 24
months following such a purchase. See "How to Purchase Shares -- Public
Offering Price."

MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS
The minimum initial investment for the Fund is $250. There is no minimum for
subsequent investments. The Distributor, in its discretion, may waive the
minimum. See "How to Purchase Shares -- Minimum Investments."

EXCHANGES
You may exchange your Fund shares for shares of any other mutual fund managed
by the Adviser which is open to new investors and eligible for sale in your
state of residence, provided that, if you hold your Fund shares through a
broker-dealer other than the Distributor, the exchange privilege may not be
available. Exchanges will be permitted only if there is a valid sales
agreement between your broker-dealer and the Distributor for the fund into
which the exchange will be made. All exchanges are subject to the minimum
investment requirements and other applicable terms set forth in the
prospectus of the fund whose shares you acquire. Excharges are made on the
basis of the net asset values of the funds involved, except that investors
exchanging into a fund which has a higher sales charge must pay the
difference. However, exchanges of Fund shares received in the Merger will be
permitted without payment of an additional sales charge. You may make four
exchanges per year without payment of a service charge. Thereafter, there is
a $5 service charge for each exchange. See "Shareholder Services -- Exchange
Privilege."

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

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

FUND EXPENSES

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of the offering
price) 1.50%
Exchange Fee $ 0*
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fee .32%**
Rule 12b-1 Fee .15%
Other Expenses (after voluntary expense reimbursement)*** .13%
Total Fund Operating Expenses (after voluntary expense reimbursement)*** .60%
</TABLE>

* There is a $5.00 fee for each exchange in excess of four exchanges per
year. See "Shareholder Services -- Exchange Privilege."

** .35% on the first $500 million of net assets and .30% on net assets in
excess of $500 million. The .32% fee is based on estimated net assets of
the Fund as of the effective date of the Merger.

*** See the discussion below for an explanation of voluntary expense
reimbursements.

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

1 year $21 3 years $34

The purpose of the above Fund Expenses table is to assist you in
understanding the various costs and expenses that investors in the Fund will
bear directly or indirectly. THE EXAMPLE CONTAINED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN.

The Adviser intends, although not required under the Advisory Agreement, to
reimburse the Fund for the amount, if any, by which the total operating and
management expenses of the Fund (including the Adviser's compensation and
amounts paid pursuant to the Fund's Rule 12b-1 Plan, but excluding interest,
taxes, brokerage fees and commissions, and extraordinary expenses) for the
fiscal year ending August 31, 1996, exceed .60% of average net assets. The
Adviser's limitation on expenses is voluntary and may be modified or
discontinued at any time after August 31, 1996. The foregoing policy will
have the effect of lowering the Fund's overall expense ratio and increasing
yield to investors when such amounts are assumed or the inverse when such
amounts are reimbursed. It is estimated that, absent any voluntary expense
reimbursements, the Fund will have Other Expenses as a percentage of average
net assets (adjusted to an annual basis) of approximately .23% for the
fiscal year ending August 31, 1996, resulting in Total Fund Operating
Expenses of .70%. For additional information, including a more complete
explanation of management and Rule 12b-1 fees, see "Management -- Investment
Adviser" and "Distribution of Fund Shares."

INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS

The Fund's investment objective is to provide the maximum current income that
is consistent with low volatility of principal. This investment objective
cannot be changed without shareholder approval. The investment policies and
techniques employed in pursuit of the Fund's objective may be changed without
shareholder approval, unless otherwise noted. In view of the risks inherent
in all investments in securities, there is no assurance that the Fund will
achieve its objective.

The Fund seeks to achieve its investment objective by investing primarily (at
least 65% of total assets under normal market conditions) in a portfolio of
Mortgage-Backed Securities (as defined herein) having adjustable interest
rates which reset at periodic intervals ("adjustable rate mortgage
securities" or "ARMS"). ARMS include both pass-through securities
representing interests in adjustable rate mortgage loans and floating rate
collateralized mortgage obligations. The balance of the Fund's assets (up to
35% of total assets) may be invested in (a) Mortgage-Backed Securities (other
than ARMS), (b) U.S. Government Securities (including, with respect to 10% of
the Fund's net assets, U.S. Government zero-coupon securities); (c)
Asset-Backed Securities; and (d) Corporate Debt Securities (each as defined
below). At least 85% of the Fund's total assets (other than U.S. Government
Securities) must be rated, as of the date of purchase, AA or better by
Standard & Poor's Ratings Group ("Standard & Poor's"), Aa or better by
Moody's Investors Service, Inc. ("Moody's"), comparably rated by any other
nationally recognized statistical rating organization ("NRSRO") or, if
unrated, of a comparable quality as determined by the Adviser. Up to 15% of
the Fund's total assets may be invested in securities rated, as of the date
of purchase, A by Standard & Poor's or Moody's, comparably rated by any other
NRSRO or, if unrated, of comparable quality as determined by the Adviser. The
Fund may not invest in any security rated, as of the date of purchase, lower
than A by Standard & Poor's or Moody's (or below a comparable rating by any
other NRSRO) or, if unrated, of a quality lower than A as determined by the
Adviser. In the event that a security is downgraded to a rating below A or,
if unrated, is no longer of a quality comparable to a security rated A, as
determined by the Adviser, the Fund will sell such a security as promptly as
possible. For a discussion of Standard & Poor's and Moody's ratings, see
Appendix A to the Statement of Additional Information.

The Fund may engage in options and financial futures transactions which
relate to the securities in which it invests, may purchase and sell interest
rate caps and floors, may make investments in Eurodollar instruments for
hedging purposes, may purchase or sell securities on a when-issued or forward
commitment basis and may lend its portfolio securities.

For temporary defensive purposes, the Fund may invest without limitation in
cash or in high quality debt securities with remaining maturities of one year
or less. Such securities may include (a) commercial paper rated A-1+ by
Standard & Poor's, P-1 by Moody's or comparably rated by any other NRSRO; (b)
certificates of deposit, time deposits and bankers' acceptances with any bank
the unsecured commercial paper of which is rated A-1+ by Standard & Poor's,
P-1 by Moody's or comparably rated by any other NRSRO (or, in the case of the
principal bank in a bank holding company, the unsecured commercial paper of
the bank holding company); and (c) U.S. Government Securities. Time deposits
maturing in more than seven days are considered illiquid and subject to the
Fund's limitation on investments in illiquid securities. See "Other
Investment Techniques -- Illiquid Securities" below.

Certain securities in which the Fund invests and certain investment
techniques used by the Fund could be considered "derivative instruments." The
term "derivatives" has been used to identify a variety of financial
instruments; there is no discrete class of instruments that is covered by the
term. A "derivative" is commonly defined as a financial instrument whose
value is based upon, or derived from, an underlying index, reference rate
(e.g., interest rates or currency exchange rates), security, commodity, or
other asset. Securities in which the Fund invests which could be considered
derivatives include mortgage-related securities and asset-backed securities,
which derive their value from underlying pools of mortgages and assets,
respectively. In addition, interest rate caps and floors, options on
securities, futures contracts, options on futures contracts and when-issued
securities transactions are derivative contracts. These derivative securities
and contracts involve varying degrees and types of risk, as set forth below
under "Adjustable Rate Mortgage Securities," "Other Eligible Investments --
Mortgage-Backed Securities" and "-- Asset-Backed Securities," and "Other
Investment Techniques."

RISK FACTORS
The Fund is subject to certain risks which could result in volatility of
principal. As with other mutual funds, there can be no assurance that the Fund
will achieve its objective. The Fund is subject to interest rate risk, which is
the potential for a decline in bond prices due to rising interest rates. In
general, bond prices vary inversely with interest rates. When interest rates
rise, bond prices generally fall. Conversely, when interest rates fall, bond
prices generally rise. Although the ARMS in the Fund's portfolio should
generally be more resistant to price swings than other debt securities because
the interest rates of ARMS move with market interest rates, the adjustable rate
feature of ARMS will not eliminate price fluctuations. See "Adjustable Rate
Mortgage Securities -- Interest Rate Risk" below. The Fund's investments in ARMS
and other Mortgage-Backed Securities are also subject to prepayment risk. See
"Adjustable Rate Mortgage Securities -- Prepayment Risk." In addition, the Fund
is subject to credit risk to the extent it invests in non-U.S. Government
securities. Credit risk, also known as default risk, is the possibility that a
bond issuer will fail to make timely payments of interest or principal. These
and other risks of the Fund's investments are described in detail below.

The Fund also may engage in investment practices which involve certain
special risks. These practices include the use of repurchase agreements, the
lending of portfolio securities, borrowing from banks and through reverse
repurchase agreements (but only for temporary or emergency purposes in an
amount up to 10% of the value of the Fund's total assets), the use of hedging
techniques, including interest rate transactions, options, futures contracts,
options on futures contracts and investments in Eurodollar instruments, and
the purchase or sale of securities on a "when-issued" or "forward commitment"
basis. See "Other Investment Techniques" below. The use of these techniques
may increase the volatility of the Fund's net asset value.

ADJUSTABLE RATE MORTGAGE SECURITIES
Under normal market conditions, the Fund must invest at least 65% of its
total assets in adjustable rate mortgage securities or ARMS, which include
the types of securities discussed below.

U.S. Government Mortgage Pass-through Securities. ARMS include "pass-through"
securities issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities ("U.S. Government Pass-Throughs"). Pass-through
securities constituting ARMS represent ownership interests in underlying
pools of adjustable rate mortgage loans originated by private lenders. Such
securities differ from conventional debt securities, which provide for
periodic payment of interest in fixed amounts (usually semi-annually) and
principal payments at maturity or on specified call dates, in that
pass-through securities provide for monthly payments that are a pass-through
of the monthly interest and principal payments (including any prepayments)
made by the individual borrowers on the pooled mortgage loans, net of any
fees paid to the guarantor of such securities and the servicers of the
underlying mortgage loans.

The U.S. Government Pass-Throughs in which the Fund may invest are issued or
guaranteed by the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Each of GNMA, FNMA and FHLMC guarantee timely
distributions of interest to securities holders. GNMA and FNMA also guarantee
timely distribution of scheduled principal. FHLMC generally guarantees only
ultimate collection of principal on the underlying loans, which collection
may take up to one year. GNMA is a wholly owned corporate instrumentality of
the U.S. Government within the Department of Housing and Urban Development
and its guarantee is backed by the full faith and credit of the U.S.
Government. FNMA and FHLMC are federally chartered corporations and their
respective guarantees are not backed by the full faith and credit of the U.S.
Government.

The mortgages underlying ARMS issued by GNMA are fully guaranteed by the
Federal Housing Administration ("FHA") or the Veterans Administration ("VA").
The mortgages underlying ARMS issued by FNMA or FHLMC may be backed by
conventional adjustable rate mortgages not guaranteed by FHA or VA.

Private Mortgage Pass-through Securities. Private Mortgage Pass-Through
Securities ("Private Pass-Throughs") are structured similarly to the GNMA,
FNMA and FHLMC mortgage pass-through securities described above and are
issued by originators of and investors in mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks
and special purpose subsidiaries of the foregoing. Private Pass-Throughs
constituting ARMS are backed by a pool of conventional adjustable rate
mortgage loans. Since Private Pass-Throughs are not guaranteed by an entity
having the credit status of GNMA, FNMA or FHLMC, such securities generally
are structured with one or more types of credit enhancement. See "Investment
Objective, Policies and Restrictions -- Mortgage-Backed Securities -- Credit
Support" in the Statement of Additional Information.

CMOs and Multiclass Pass-through Securities. ARMS in which the Fund may
invest also include adjustable rate tranches of collateralized mortgage
obligations and multiclass pass-through securities. Collateralized mortgage
obligations are debt instruments issued by special purpose entities which are
secured by pools of mortgage loans or other Mortgage-Backed Securities.
Multiclass pass-through securities are equity interests in a trust composed
of mortgage loans or other Mortgage-Backed Securities. Payments of principal
and interest on underlying collateral provide the funds to pay debt service
on the collateralized mortgage obligation or make scheduled distributions on
the multiclass pass-through security. Collateralized mortgage obligations and
multiclass pass-through securities (collectively, "CMOs" unless the context
indicates otherwise) may be issued by agencies or instrumentalities of the
U.S. Government or by private organizations.

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

The principal and interest on the mortgages underlying a CMO may be allocated
among the CMO's tranches in many ways. See "Other Eligible Investments --
Mortgage-Backed Securities -- CMOs," below. One or more tranches of a CMO may
have coupon rates which reset periodically at a specified increment over an
index such as the London Interbank Offered Rate ("LIBOR"). These adjustable
rate tranches, known as "floating rate CMOs," are considered ARMS by the
Fund. Floating rate CMOs may be backed by fixed rate or adjustable rate
mortgages; to date, fixed rate mortgages have been more commonly utilized for
this purpose. Floating rate CMOs are typically issued with lifetime caps on
the coupon rate thereon. These caps, similar to the caps on adjustable rate
mortgages, represent a ceiling beyond which the coupon rate on a floating
rate CMO may not be increased regardless of increases in the interest rate
index to which the floating rate CMO is geared, which may cause the security
to be valued at a greater discount than if the security was not subject to a
ceiling.

How Interest Rates Are Set. The interest rates on ARMS are reset at periodic
intervals (generally one year or less) to an increment over some
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those derived from a calculated
measure such as a cost of funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year and five-year constant
maturity Treasury note rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds Index, the National Median Cost
of Funds, the one-month or three-month LIBOR, the prime rate of a specific
bank, or commercial paper rates. Some indices, such as the one-year constant
maturity Treasury note rate, closely mirror changes in market interest rate
levels. Others, such as the 11th District Home Loan Bank Cost of Funds Index
(often related to ARMS issued by FNMA), tend to lag changes in market rate
levels and tend to be somewhat less volatile. The Adviser seeks to diversify
investments in ARMS among a variety of indices and reset periods to reduce
the exposure to the risk of interest rate fluctuations. In selecting a type
of ARMS for investment, the Adviser also considers the liquidity of the
market for such ARMS.

The underlying adjustable rate mortgages which back ARMS will frequently have
caps and floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down (a) per reset or adjustment
interval and (b) over the life of the loan. Some residential adjustable rate
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization, i.e., increase in the balance of the mortgage loan. Floating
rate CMOs are generally backed by fixed rate mortgages and generally have
lifetime caps on the coupon rate thereon.

Interest Rate Risk. The values of ARMS, like other debt securities, generally
vary inversely with changes in market interest rates (increasing in value
during periods of declining interest rates and decreasing in value during
periods of increasing interest rates); however, the values of ARMS should
generally be more resistant to price swings than other debt securities
because the interest rates of ARMS move with market interest rates. The
adjustable rate feature of ARMS will not, however, eliminate fluctuations in
the prices of ARMS, particularly during periods of extreme fluctuations in
interest rates. Also, since many adjustable rate mortgages only reset on an
annual basis, it can be expected that the prices of ARMS will fluctuate to
the extent changes in prevailing interest rates are not immediately reflected
in the interest rates payable on the underlying adjustable rate mortgages.

Prepayment Risk. ARMS, like other Mortgage-Backed Securities, differ from
conventional bonds in that principal is paid back over the life of the ARMS
rather than at maturity. As a result, the holder of the ARMS receives monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing prepayments on the underlying mortgages. When
the holder reinvests the payments and any unscheduled prepayments of
principal it receives, it may receive a rate of interest which is lower than
the rate on the existing ARMS. For this reason, ARMS are less effective than
longer-term debt securities as a means of "locking in" long-term interest
rates.

ARMS, while having less risk of price decline during periods of rapidly
rising rates than other investments of comparable maturities, will have less
potential for capital appreciation due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the
extent ARMS are purchased at a premium, mortgage foreclosures and unscheduled
principal prepayments will result in a loss of some or all of the premium
paid. On the other hand, if ARMS are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal
will increase current and total returns and will accelerate the recognition
of income which, when distributed to shareholders, will be taxable as
ordinary income.

OTHER ELIGIBLE INVESTMENTS
The balance of the Fund's assets (35% of total assets) may be invested in the
following types of securities to the extent set forth below.

Mortgage-backed Securities.

* General. In addition to ARMS, the Fund may invest in other types of
Mortgage-Backed Securities. Mortgage-Backed Securities are securities which
represent interests in or are collateralized by mortgages. Such securities
are issued by GNMA, FNMA, FHLMC and by private organizations and take the
same structure as ARMS, i.e., pass-through securities and CMOs. The Fund
will not invest in inverse floating, interest-only, principal-only or Z
tranches of CMOs, in residual interests of CMOs, or in stripped
Mortgage-Backed Securities.

* CMOs. As discussed above, investments in ARMS include floating rate CMOs.
The Fund's investments in Mortgage-Backed Securities other than ARMS may
include certain other tranches of CMOs. The principal and interest on the
mortgages underlying a CMO may be allocated among the CMO's several
tranches in many ways. For example, certain tranches may have variable or
floating interest rates and others may provide only the principal or
interest feature of the underlying security. Generally, the purpose of the
allocation of the cash flow of a CMO to the various tranches is to obtain a
more predictable cash flow to certain of the individual tranches than
exists with the underlying collateral of the CMO. As a general rule, the
more predictable the cash flow is on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on mortgage-related securities. As part of the
process of creating more predictable cash flows on most of the tranches of
CMOs, one or more tranches generally must be created that absorb most of
the volatility in the cash flows on the underlying mortgage loans. As a
result of the uncertainty of the cash flows of these tranches, market
prices and yields may be more volatile than for other CMO tranches. As
noted above, the Fund will not invest in inverse floating, interest-only,
principal-only or Z tranches of CMOs, which can be among the more volatile
CMO tranches.

* Risks of Mortgage-Backed Securities. Mortgage-Backed Securities (other than
ARMS) are subject generally to the same risks as ARMS; however, such other
Mortgage-Backed Securities can be expected to be affected to a greater
extent than ARMS by fluctuating interest rates and prepayments and to have
different yield characteristics, due to the fact that fixed rate rather
than adjustable rate mortgages underlie such securities. Generally,
prepayments on fixed rate mortgages will increase during a period of
falling interest rates and decrease during a period of rising interest
rates. Accordingly, amounts available for reinvestment are likely to be
greater during a period of declining interest rates than during a period of
rising interest rates, and the yield on the securities in which such
amounts are reinvested is likely to be lower than the yield on the
securities that were prepaid or the yield that could be achieved if such
amounts were reinvested during a period of rising interest rates. If the
Fund purchases Mortgage-Backed Securities at a premium, a prepayment rate
that is faster than expected will reduce both the market value and the
yield to maturity from that which was anticipated, while a prepayment rate
that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if the Fund purchases
Mortgage-Backed Securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity and market value. Mortgage-Backed Securities may decrease in value
as a result of increases in interest rates and may benefit less than other
fixed income securities from declining interest rates because of the risk
of prepayment.

U.S. Government Securities. In addition to U.S. Government ARMS and other
U.S. Government Mortgage-Backed Securities, the Fund may invest in other
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, including up to 10% of its net assets in U.S. Government
zero-coupon securities. U.S. Government Securities include a variety of
Treasury securities, which differ in their interest rates, maturities and
times of issuance. Treasury bills have maturities of one year or less,
Treasury notes have maturities of one to ten years, and Treasury bonds
generally have maturities of greater than ten years. Some obligations issued
or guaranteed by U.S. Government agencies or instrumentalities, for example,
GNMA pass-through certificates, are supported by the full faith and credit of
the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow from the Treasury; others, such as those
issued by FNMA, by the discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; finally,
obligations of other agencies or instrumentalities are backed only by the
credit of the agency or instrumentality issuing the obligations. While the
U.S. Government provides financial support to such U.S. Government-sponsored
agencies and instrumentalities, no assurance can be given that it will always
do so since it is not so obligated by law.

* U.S. Government Zero-Coupon Securities. The Fund may invest up to 10% of
its net assets in zero-coupon securities which are issued by the U.S.
Treasury through its STRIPS program and constitute direct obligations of
the U.S. Government. Zero-coupon securities are debt obligations which do
not entitle the holder to any periodic payments of interest prior to
maturity; rather, they offer the right to receive a fixed cash payment at
maturity but without any payments before that date. As a result,
zero-coupon securities are issued and traded at a discount from
their face amounts. Through investment in zero-coupon securities, an
investor is able to in effect lock in a return of principal to the extent
such instruments are held to maturity.

* Risks of Zero-Coupon Securities. Zero-coupon securities do not entitle the
holder to any periodic payments of interest prior to maturity and therefore
are issued and trade at a discount from their face or par value. The
discount, in the absence of financial difficulties of the issuer, decreases
as the final maturity of the security approaches. Zero-coupon securities
can be sold prior to their due date in the secondary market at the then
prevailing market value, which depends primarily on the time remaining to
maturity, prevailing levels of interest rates and the perceived credit
quality of the issuer. The market prices of zero-coupon securities are more
volatile than the market prices of securities of comparable quality and
similar maturity that pay interest periodically and may respond to a
greater degree to fluctuations in interest rates than do such
non-zero-coupon securities. Although holders of zero-coupon securities do
not receive periodic payments of interest, income accretes on such
securities and is subject to the distribution requirements of the Internal
Revenue Code of 1986, as amended. Because such income may not be matched by
a corresponding cash distribution to the Fund, the Fund may be required to
borrow money or dispose of other securities to be able to make
distributions to shareholders.

Asset-Backed Securities. The Fund may invest in Asset-Backed Securities,
which are securities that directly or indirectly represent a participation in
or are secured by and payable from a pool of assets representing the
obligations of a number of different parties. The Fund will only invest in
Asset-Backed Securities rated, as of the date of purchase, AAA by Standard &
Poor's, Aaa by Moody's, comparably rated by any other NRSRO or, if unrated,
of comparable quality as determined by the Adviser.

The securitization techniques used to develop Mortgage-Backed Securities are
now being applied to a broad range of assets. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile
and credit card receivables, are being securitized in pass-through structures
similar to the mortgage pass-through structures described above or in a
pay-through structure similar to the CMO structure.

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

Asset-Backed Securities do not have the benefit of the same security interest
in the related collateral as do Mortgage-Backed Securities. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a perfected security interest in all of the
obligations backing such receivables. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities.

Corporate Debt Securities. The Fund may invest in Corporate Debt Securities,
which are debt obligations of U.S. corporations (other than ARMS or
Mortgage-Backed Securities). The values of Corporate Debt Securities
typically will fluctuate in response to general economic conditions, to
changes in interest rates and, to a greater extent than the values of ARMS or
Mortgage-Backed Securities, to business conditions affecting the specific
industries in which the issuers are engaged. Corporate Debt Securities will
typically decrease in value as a result of increases in interest rates. The
Fund may invest in certain types of Corporate Debt Securities that have been
issued with original issue discount or market discount. An investment in such
securities poses certain economic risks and may have certain adverse cash
flow consequences to the investor.

New Instruments. The Fund expects that, consistent with its investment
limitations, it will invest in those new types of ARMS, other Mortgage-Backed
Securities, U.S. Government Securities, Asset-Backed Securities, hedging
instruments and other securities in which it may invest that the Adviser
believes may assist the Fund in achieving its objective. Shareholders will
receive written notice in advance of a significant investment, i.e., in
excess of 5% of the Fund's net assets, in such newly developed securities.

OTHER INVESTMENT TECHNIQUES

Hedging Transactions. The Fund may enter into certain interest rate, options
and futures transactions and may make investments in Eurodollar instruments
for hedging purposes as described below.

* Interest Rate Transactions. The Fund may purchase or sell interest rate
caps and floors to preserve a return or spread on a particular investment
or portion of its portfolio or for other non-speculative purposes. The
aggregate purchase price of caps and floors held by the Fund may not exceed
5% of the Fund's total assets. The Fund may sell, i.e., write, caps and
floors without limitation, subject to the segregated account requirement
described below. The Fund does not intend to use these transactions for
speculative purposes. The purchase of an interest rate cap entitles the
purchaser, to the extent a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal
amount from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent a specified index
falls below a predetermined interest rate, to receive payments of interest
on a contractually-based principal amount from the party selling such
interest rate floor.

The Fund may enter into interest rate caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging
its assets or its liabilities. To the extent the Fund sells, i.e., writes,
caps and floors, it will maintain in a segregated account cash or high
quality liquid debt securities having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's
obligations with respect to any caps or floors. The Fund will not enter
into any interest rate cap or floor transaction unless the unsecured senior
debt or the claims-paying ability of the other party thereto is rated at
least A by Standard & Poor's or Moody's or is comparably rated by any other
NRSRO. The Adviser will monitor the creditworthiness of contra-parties on
an ongoing basis. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. Interest rate caps and floors are
somewhat recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than many other
investments.

* Options Transactions. The Fund may write, i.e., sell, covered put and call
options with respect to the securities in which it may invest. A put option
is sometimes referred to as a "standby commitment" and a call option is
sometimes referred to as a "reverse standby commitment." By writing a call
option, the Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if
the option is exercised. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised. In
connection with writing put options, the Fund will deposit and maintain in
a segregated account with its custodian cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater
than the exercise price of the option. The Fund may not write puts if, as a
result, more than 50% of its assets would be required to be segregated.

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

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

The Fund also may purchase call options solely for the purpose of
hedging against an increase in prices of securities that the Fund
ultimately wants to buy. Such protection is provided during the life of the
call options because the Fund may buy the underlying security at the call
exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price
of the underlying security must rise sufficiently above the exercise price
to cover the premium and transaction costs. By using call options in this
manner, the Fund will reduce any profit it might have realized had it
bought the underlying security at the time it purchased the call option by
the premium paid for the call option and by transaction costs. The
aggregate premiums paid on all put and call options purchased by the Fund,
including options on futures contracts, may not exceed 20% of the Fund's
net assets.

The Fund will purchase and write only exchange-traded put and call options.
For further information concerning the characteristics and risks of options
transactions, see "Investment Objective, Policies and Restrictions --
Options" in the Statement of Additional Information.

* Futures Contracts and Options on Futures Contracts. The Fund may enter into
contracts for the purchase or sale for future delivery of fixed-income
securities or contracts based on financial indices including any index of
securities in which the Fund may invest ("futures contracts"). A "sale" of
a futures contract means the acquisition of a contractual obligation to
deliver the securities called for by the contract at a specified price on a
specified date. The purchaser of a futures contract on an index agrees to
take or make delivery of an amount of cash equal to the difference between
a specified dollar multiple of the value of the index on the expiration
date of the contract ("current contract value") and the price at which the
contract was originally struck. No physical delivery of the fixed-income
securities underlying the index is made. The futures contracts in which the
Fund may invest have been developed by and are traded on national commodity
exchanges.

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

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

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

The Fund's aggregate margin deposits in connection with futures contracts
and options thereon may not exceed 5% of the Fund's total assets.
Additional information with respect to futures contracts and options on
futures contracts is set forth in Appendix B to the Statement of Additional
Information.

The effective use of futures contracts, options on futures contracts and
the other hedging techniques discussed above is dependent upon the
Adviser's judgment regarding interest rate movements and other economic
factors. To the extent this judgment is incorrect, the Fund will be in a
worse position than if such hedging techniques had not been used.

* Eurodollar Instruments. The Fund may make investments in Eurodollar
instruments for hedging purposes only. Eurodollar instruments are
essentially U.S. dollar denominated futures contracts or options thereon
that are linked to LIBOR. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. The Fund uses Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many short-term
borrowings and floating rate securities are linked. Eurodollar instruments
are subject to the same limitations and risks as other futures contracts
and options thereon.

When-Issued Securities. The Fund may purchase securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" basis.
When such transactions are negotiated, the price is fixed at the time the
commitment is made, but delivery and payment for the securities take place at
a later date. The Fund does not accrue income with respect to when-issued or
forward commitment securities prior to their stated delivery date. Pending
delivery of the securities, the Fund maintains in a segregated account cash
or liquid high-grade debt obligations in an amount sufficient to meet its
purchase commitments. The Fund likewise segregates securities it sells on a
forward commitment basis. The Fund will purchase securities on a when-issued
or forward commitment basis with the intention of acquiring such securities
for its portfolio. The Fund may dispose of a commitment prior to settlement,
however, if the Adviser deems it appropriate to do so.

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

Restricted and Illiquid Securities. The Fund may invest up to 15% of its net
assets, collectively, in restricted securities, other illiquid securities and
securities of issuers which, together with any predecessors, have a record of
less than three years' continuous operation. Illiquid securities may offer a
higher yield than securities which are more readily marketable, but they may
not always be marketable on advantageous terms. The sale of illiquid
securities often requires more time and results in higher brokerage charges
or dealer discounts than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. The Fund
may be restricted in its ability to sell such securities at a time when the
Adviser deems it advisable to do so. In addition, in order to meet redemption
requests, the Fund may have to sell other assets, rather than such illiquid
securities, at a time which is not advantageous.

Lending of Portfolio Securities. In order to generate income, the Fund may
lend portfolio securities representing up to 30% of the value of its total
assets to broker-dealers, banks or other financial borrowers of securities.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. However, the Fund will only enter into loan arrangements
with broker-dealers, banks or other institutions which the Adviser has
determined are creditworthy under guidelines established by the Board of
Directors and will receive collateral in the form of cash, U.S. Government
securities or other high-grade debt obligations equal to at least 100% of the
value of the securities loaned. The value of the collateral and of the
securities loaned is marked to market on a daily basis. During the time
portfolio securities are on loan, the borrower pays the Fund an amount
equivalent to any interest paid on the securities and the Fund may invest the
cash collateral and earn income or may receive an agreed upon amount of
interest income from the borrower. However, the amounts received by the Fund
may be reduced by finders' fees paid to broker-dealers. Collateral (including
any securities purchased with cash collateral) will be maintained by the
Fund's custodian in a segregated account.

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

Borrowing. The Fund may borrow money only for temporary or emergency purposes
in an amount up to 10% of the value of its total assets. The Fund may borrow
from a financial institution unrelated to the Fund or by entering into
reverse repurchase agreements with the same parties with whom it may enter
into repurchase agreements (as discussed above). Interest paid by the Fund on
borrowed funds would decrease the net earnings of the Fund. The Fund will not
purchase portfolio securities while outstanding borrowings exceed 5% of the
value of the Fund's total assets. The Fund may mortgage, pledge or
hypothecate its assets to secure permitted borrowings. The policies set forth
in this paragraph are fundamental and may not be changed without a majority
vote of the Fund's shares.

Under a reverse repurchase agreement, the Fund sells securities and agrees to
repurchase them at a mutually agreed date and price. Reverse repurchase
agreements involve the risk that the market value of the securities sold by
the Fund may decline below the price at which the Fund is obligated to
repurchase such securities. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the
securities, and the Fund's use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decisions. Reverse
repurchase agreements create leverage, a speculative factor, and are
considered borrowings for purposes of the Fund's limitation on borrowing.

DURATION
The Adviser will attempt to maintain an average effective duration for the
Fund's portfolio of one to four years. Effective duration estimates the
interest rate risk (price volatility) of a security, i.e., how much the value
of the security is expected to change with a given change in interest rates.
The longer a security's effective duration, the more sensitive its price is
to changes in interest rates. For example, if interest rates were to increase
by 1%, the market price of a bond with an effective duration of five years
would decrease by about 5%, with all other factors being constant.

It is important to understand that, while a valuable measure, effective
duration is based on certain assumptions and has several limitations. It is
most useful as a measure of interest rate risk when interest rate changes are
small, rapid and occur equally across all the different points of the yield
curve. In addition, effective duration is difficult to calculate precisely
for bonds with prepayment options, such as mortgage-backed securities,
because the calculation requires assumptions about prepayment rates. For
example, when interest rates go down, homeowners may prepay their mortgages
at a higher rate than assumed in the initial effective duration calculation,
thereby shortening the effective duration of the Fund's mortgage-backed
securities. Conversely, if rates increase, prepayments may decrease to a
greater extent than assumed, extending the effective duration of such
securities. For these reasons, the effective durations of funds which invest
a significant portion of their assets in mortgage-backed securities can be
greatly affected by changes in interest rates.

INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions, which are set forth in
detail in the Statement of Additional Information under "Investment
Objective, Policies and Restrictions." Fundamental restrictions which may not
be changed without a majority vote of shareholders include, among others, the
following: (1) The Fund will not invest 25% or more of its total assets in
the securities of issuers conducting their principal business activities in
the same industry, except that, under normal market conditions, the Fund will
invest 25% or more of the value of its total assets in ARMS issued or
guaranteed by the U.S. Government or its agencies or instrumentalities or by
private organizations. Except for the requirement that the Fund invest 25% or
more of its total assets in ARMS, the foregoing restriction does not apply to
securities of the U.S. Government or its agencies or instrumentalities or
repurchase agreements relating thereto. The Fund will determine the industry
classification of Asset-Backed Securities in its portfolio based on the type
of collateral underlying the securities and will consider ARMS issued by the
U.S. Government or its agencies or instrumentalities and ARMS issued by
private organizations to be securities of issuers in the same industry. (2)
With respect to 75% of its total assets, the Fund will not invest more than
5% of the value of its total assets (taken at market value at the time of
purchase) in the outstanding securities of any one issuer, or own more than
10% of the outstanding voting securities of any one issuer, in each case
other than securities issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof. As a nonfundamental investment restriction
which may be changed at any time without shareholder approval, the Fund will
not invest more than 5% of its total assets in the securities of issuers
which, with their predecessors, have a record of less than three years'
continuous operation.

PORTFOLIO TURNOVER
The Fund actively uses trading to benefit from yield disparities among
different issues of securities or otherwise to achieve its investment
objective and policies. This strategy may result in a greater degree of
portfolio turnover and, thus, a higher incidence of short-term capital gain
than might be expected from investment companies that invest substantially
all of their funds on a long-term basis. Such a strategy will also result in
higher transaction costs. It is estimated that the Fund's annual portfolio
turnover rate will not exceed 100%. The method of calculating portfolio
turnover rate is set forth in the Statement of Additional Information under
"Investment Objective, Policies and Restrictions -- Portfolio Turnover."

MANAGEMENT

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

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

In addition to acting as the investment adviser for the Company, the Adviser,
which was incorporated in 1983, also serves as investment adviser to a number
of other open-end and closed-end investment companies and to various other
concerns, including pension and profit sharing funds, corporate funds and
individuals. As of July 31, 1995, the Adviser rendered investment advice
regarding approximately $10 billion of assets. The Adviser is a wholly owned
subsidiary of Piper Jaffray Companies Inc., a publicly held corporation which
is engaged through its subsidiaries in various aspects of the financial
services industry. The address of the Adviser is Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402-3804.

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

Under the Investment Advisory and Management Agreement, the Fund pays the
Adviser a monthly fee at an annual rate of .35% on the first $500 million of
the Fund's average daily net assets and .30% on average daily net assets in
excess of $500 million.

PORTFOLIO MANAGEMENT
Michael P. Jansen and Thomas S. McGlinch are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Jansen has been a Senior
Vice President of the Adviser since October 14, 1993, prior to which he had
been a Managing Director of the Distributor since 1987. He has been an
Executive Vice President and Director of Piper Mortgage Acceptance
Corporation, a wholly owned subsidiary of Piper Jaffray Companies Inc., since
1991 and served as an Executive Vice President and Director of Premier
Acceptance Corporation, a wholly owned subsidiary of Piper Jaffray Companies
Inc. issuing mortgage-backed securities, from 1988 to October 1994. Mr.
McGlinch is a vice president and fixed-income portfolio manager for the
Adviser. Prior to joining the Adviser in 1992, Mr. McGlinch was an
institutional mortgage-backed securities trader for the Distributor during
1992. From 1988 to January 1992, Mr. McGlinch was a specialty products trader
at FBS Investment Services, Inc. He is a Chartered Financial Analyst with an
M.B.A. from the University of St. Thomas.

TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
Investors Fiduciary Trust Company ("IFTC"), 210 West Tenth Street, Kansas
City, Missouri 64105, (800) 874-6205, serves as Custodian for the Fund's
portfolio securities and cash and as Transfer Agent and Dividend Disbursing
Agent for the Fund.

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

DISTRIBUTION OF FUND SHARES

Piper Jaffray acts as the principal distributor of the Fund's shares. The
Company has adopted a Distribution Plan (the "Plan") as required by Rule
12b-1 under the 1940 Act. Pursuant to the provisions of the Plan, the Fund
pays a monthly service fee to the Distributor at an annual rate of .15% of
the Fund's average daily net assets in connection with servicing of the
Fund's shareholder accounts. This fee is intended to compensate the
Distributor for the ongoing servicing and/or maintenance of Fund shareholder
accounts and the costs incurred in connection therewith ("Shareholder
Servicing Costs"). Shareholder Servicing Costs include all expenses of the
Distributor incurred in connection with providing shareholder liaison
services, including, but not limited to, an allocation of the Distributor's
overhead and payments made to persons, including employees of the
Distributor, who respond to inquiries of shareholders regarding their
ownership of shares or their accounts with the Fund, and who provide
information on shareholders' investments.

The Distributor uses all or a portion of its Rule 12b-1 service fee to make
payments to investment executives of the Distributor and broker-dealers which
have entered into sales agreements with the Distributor. If shares of the
Fund are sold by a representative of a broker-dealer other than the
Distributor, the broker-dealer is paid .15% of the average daily net assets
of the Fund attributable to shares sold by the broker-dealer's
representative. If shares of the Fund are sold by an investment executive of
the Distributor, compensation is paid to the investment executive in the
manner set forth in a written agreement, in an amount not to exceed .15% of
the average daily net assets of the Fund attributable to shares sold by the
investment executive. Further information regarding the Plan is contained in
the Statement of Additional Information.

SHAREHOLDER GUIDE TO INVESTING

HOW TO PURCHASE SHARES

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

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

<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AS A PERCENTAGE OF AS A PERCENTAGE OF
AMOUNT OF TRANSACTION AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE
<S> <C> <C>
Less than $100,000 1.50% 1.52%
$100,000 but less than $250,000 1.25% 1.27%
$250,000 but less than $500,000 1.00% 1.01%
$500,000 and over 0.00% 0.00%
</TABLE>

This table sets forth total sales charges or underwriting commissions. The
Distributor may reallow up to the entire sales charge to broker-dealers in
connection with their sales of shares. Broker-dealers who are reallowed 90%
or more of the sales charge may, by virtue of such reallowance, be deemed to
be "underwriters" under the 1933 Act.

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

PURCHASES OF $500,000 OR MORE
If you make a purchase of $500,000 or more (including purchases made under a
Letter of Intent), a .20% contingent deferred sales charge will be assessed
in the event you redeem shares within 24 months following the purchase. This
sales charge will be paid to the Distributor. For more information, please
refer to the Contingent Deferred Sales Charge section of "How to Redeem
Shares." The Distributor will pay its investment executives and other
broker-dealers in connection with these purchases as follows:

<TABLE>
<CAPTION>
FEE AS
A PERCENTAGE
AMOUNT OF TRANSACTION OF OFFERING PRICE
<S> <C>
First $3,000,000 .20%
Next $2,000,000 .15%
Next $5,000,000 .10%
Above $10,000,000 .05%
</TABLE>

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

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

REDUCING YOUR SALES CHARGE

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

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

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

* Your individual account.

* Your spouse's account.

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

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

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

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

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

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

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

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

RIGHT OF ACCUMULATION
Sales charges for purchases of Fund shares into Piper Jaffray accounts will
be automatically calculated taking into account the dollar amount of any new
purchases along with the higher of current value or cost of shares previously
purchased in the Piper funds that were sold with a sales charge. For other
broker-dealer accounts, you should notify your investment executive at the
time of purchase of additional Piper fund shares you may own.

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

SPECIAL PURCHASE PLANS

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

PURCHASES BY PIPER JAFFRAY COMPANIES INC., ITS SUBSIDIARIES AND ASSOCIATED
PERSONS
Piper Jaffray Companies Inc. and its subsidiaries may buy shares of the Fund
without incurring a sales charge. The following persons associated with such
entities also may buy Fund shares without paying a sales charge:

* Officers, directors and partners.

* Employees and retirees.

* Sales representatives.

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

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

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

PURCHASES BY OTHER INDIVIDUALS WITHOUT A SALES CHARGE
The following other individuals and entities may also buy Fund shares without
paying a sales charge:

* Clients of the Adviser may buy shares of the Fund in their advisory
accounts.

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

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

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

PURCHASES BY EMPLOYEE BENEFIT PLANS AND TAX-SHELTERED ANNUITIES

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

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

PURCHASES USING FINAL TERM TRUST DISTRIBUTIONS

* In anticipation of the merger of BDJ, CDJ, DDJ and EDJ into the Fund, the
shareholders of BDJ, CDJ and DDJ received special distributions, which
were payable on August 24, 1995, of all of their respective Trust's
previously undistributed net income and net realized capital gains.
Shareholders who received these distributions may use them to purchase
shares of the Fund at net asset value through December 31, 1995, provided
the shareholder holds his or her shares in a Piper Jaffray account or in
the account of a broker-dealer which has a sales agreement with the
Distributor.

HOW TO REDEEM SHARES

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

Piper Jaffray Inc. Accounts. To redeem your shares, please contact your Piper
Jaffray investment executive with a verbal request to redeem your shares.

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

CONTINGENT DEFERRED SALES CHARGE
If you invest $500,000 or more and, as a result, pay no front-end sales
charge, you may incur a contingent deferred sales charge if you redeem within
24 months. This charge will be equal to .20% of the lesser of the net asset
value of the shares at the time of purchase or at the time of redemption.
This charge does not apply to amounts representing an increase in the value
of Fund shares due to capital appreciation or to shares acquired through
reinvestment of dividend or capital gain distributions. In determining
whether a contingent deferred sales charge is payable, shares that are not
subject to any deferred sales charge will be redeemed first, and other shares
will then be redeemed in the order purchased.

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

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

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

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

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

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

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

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

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

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

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

SHAREHOLDER SERVICES

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

REINSTATEMENT PRIVILEGE
If you have redeemed shares of the Fund, you may be eligible to reinvest in
shares of any fund managed by the Adviser without payment of an additional
sales charge. The reinvestment request must be made within 30 days of the
redemption. This privilege is subject to the eligibility of share purchases
in your state as well as the minimum investment requirements and any other
applicable terms in the prospectus of the fund being acquired. You may
reinvest through a broker-dealer other than the Distributor only if there is
a valid sales agreement between your broker-dealer and the Distributor for
the fund in which you wish to invest.

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

You may exchange your shares for shares of any other mutual fund managed by
the Adviser that is open to new investors. All exchanges are subject to the
eligibility of share purchases in your state as well as the minimum
investment requirements and any other applicable terms in the prospectus of
the fund being acquired. Exchanges are made on the basis of the net asset
values of the funds involved, except that investors exchanging into a fund
which has a higher sales charge generally must pay the difference. However,
exchanges of Fund shares received in the Merger will be permitted without
payment of an additional sales charge. In connection with exchanges into the
Fund from the Institutional Government Adjustable Portfolio series of Piper
Institutional Funds Inc., the Distributor will pay its investment executives
and other broker-dealers a fee equal to .35% of the net asset value of any
such exchange occurring on or before September 30, 1995.

If you hold your Fund shares through a broker-dealer other than the
Distributor, the exchange privilege may not be available. Exchanges will be
permitted only if there is a valid sales agreement between your broker-dealer
and the Distributor for the fund into which you wish to exchange.

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

TELEPHONE TRANSACTION PRIVILEGES

Piper Jaffray Inc. Accounts. If you hold your shares in a Piper Jaffray
account, you may telephone your investment executive to execute any
transaction or to apply for many shareholder services. In some cases, you may
be required to complete a written application.

Other Broker-Dealer Accounts. If you hold your shares in an account with your
broker-dealer or at IFTC, you may authorize telephone privileges by
completing the Account Application and Services Form. Please contact your
broker-dealer or IFTC (800-874-6025) for an application or for more details.
The Fund will employ reasonable procedures to confirm that a telephone
request is genuine, including requiring that payment be made only to the
address of record or the bank account designated on the Account Application
and Services Form and requiring certain means of telephonic identification.
If the Fund follows such procedures, it will not be liable for following
instructions communicated by telephone that it reasonably believes to be
genuine. If the Fund does not employ such procedures, it may be liable for
any losses due to unauthorized or fraudulent telephone instructions. It may
be difficult to reach the Fund by telephone during periods when market or
economic conditions lead to an unusually large volume of telephone requests.
If you cannot reach the Fund by telephone, you should contact your
broker-dealer or issue written instructions to IFTC at the address set forth
herein. See "Management -- Transfer Agent, Dividend Disbursing Agent and
Custodian." The Fund reserves the right to suspend or terminate its telephone
services at any time without notice.

DIRECTED DIVIDENDS
You may direct income dividends and capital gains distributions to be
invested in any other mutual fund managed by the Adviser (other than a money
market fund) that is offered in your state. This investment will be made at
net asset value. It will not be subject to a minimum investment amount except
that you must hold shares in such fund (including the shares being acquired
with the dividend or distribution) with a value at least equal to such fund's
minimum initial investment amount. This privilege may not be available if you
hold your Fund shares through a broker-dealer other than the Distributor.
Distributions may be invested in another mutual fund managed by the Adviser
only if there is a valid sales agreement for that fund between your
broker-dealer and the Distributor.

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

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

You should be aware that additional investments in an account that has an
active Systematic Withdrawal Plan may be inadvisable due to sales charges and
tax liabilities. As a result, you will not be allowed to make additional
investments of less than $5,000 or three times the annual withdrawals while
you have the plan in effect. Please refer to "Redemption of Shares" in the
Statement of Additional Information for additional details.

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

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

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

DIVIDENDS AND DISTRIBUTIONS

The net investment income of the Fund will be declared as dividends daily and
will be paid monthly. Net realized capital gains, if any, will be distributed
at least once annually. Each daily dividend is payable to Fund shareholders
of record at the time of its declaration. The term "shareholders of record"
includes holders of shares purchased for which payment has been received by
the Distributor or IFTC, as appropriate, and excludes holders of shares
redeemed on that day. Shares redeemed will earn dividends through the day
prior to the day of redemption. The Fund will not attempt to stabilize
distributions, and intends to distribute to its shareholders substantially
all of the net investment income earned during any period. Thus, dividends
can be expected to vary from month to month.

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

VALUATION OF SHARES

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

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

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

TAX STATUS

The Fund intends to qualify for treatment as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code") during its
current taxable year. If so qualified, the Fund will not be liable for
federal income taxes to the extent it distributes its taxable income to
shareholders.

Distributions by the Fund are generally taxable to the shareholders, whether
received in cash or additional shares of the Fund (or shares of another
mutual fund managed by the Adviser). Distributions of net capital gains
(designated as "capital gain dividends") are taxable to shareholders as
long-term capital gains, regardless of the length of time the shareholder has
held the shares of the Fund. The Fund will send written notices to
shareholders regarding the tax status of all distributions made during each
year.

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

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

PERFORMANCE COMPARISONS

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

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

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

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

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

GENERAL INFORMATION

The Company is authorized to issue a total of 100 billion shares of common
stock, with a par value of $.01 per share. Ten billion of those shares have
been designated as Series A Common Shares, which are the shares of common
stock of the Fund. Currently, Series A is the only outstanding series of
shares of the Company.

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

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

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

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

PENDING LEGAL PROCEEDINGS
American Adjustable Rate Term Trust Inc. -- 1996 ("BDJ"), American Adjustable
Rate Term Trust Inc. -- 1997 ("CDJ"), American Adjustable Rate Term Trust
Inc. -- 1998 ("DDJ") and American Adjustable Rate Term Trust Inc. -- 1999
("EDJ") (collectively, the "Trusts") are expected to merge into the Company
on or about September 1, 1995. The Company may be deemed to be a successor by
merger to such Trusts and, as such, may succeed to their liabilities,
including damages sought in any litigation.

On October 20, 1994, Herman D. Gordon filed a complaint in the U.S. District
Court for the District of Minnesota against DDJ and EDJ, the Adviser, the
Distributor, Piper Jaffray Companies Inc. ("Piper") and certain associated
individuals (the "Gordon Litigation"). A second complaint was filed by Frank
Donio, I.R.A., and other plaintiffs on April 14, 1995, in the U.S. District
Court for the District of Minnesota against BDJ, CDJ, DDJ and EDJ, the
Adviser, the Distributor, Piper and certain associated individuals (the
"Donio Litigation"). Plaintiffs in both actions filed a Consolidated Amended
Class Action Complaint on May 23, 1995. The consolidated complaint, which
purports to be a class action, alleges that the defendants violated certain
federal and state securities laws by making materially misleading statements
in prospectuses and other disclosures concerning risks associated with
investing in the Trusts, compliance with the Trusts' investment policies, and
the reasons for proposing and the benefits to be obtained by shareholders
from the Merger and by allegedly breaching their fiduciary duties. Damages
are being sought in an unspecified amount.

Piper and the Adviser have agreed, pursuant to an indemnification agreement
between and among Piper, the Adviser and the Company (the "Indemnification
Agreement"), to indemnify the Company against any losses incurred in
connection with the Gordon and Donio Litigations.

In addition to the complaints against the Trusts described above, complaints
also have been brought against the Adviser and the Distributor relating to
certain other investment companies for which the Adviser acts or has acted as
investment adviser or subadviser. These lawsuits do not involve the Trusts or
the Company. A number of complaints have been brought in federal and state
court against the Institutional Government Income Portfolio ("PJIGX") series
of Piper Funds Inc., the Adviser, the Distributor, and certain individuals
affiliated or formerly affiliated with the Adviser and the Distributor. In
addition, complaints have been filed in federal court relating to a number of
other closed-end investment companies managed by the Adviser and two open-end
investment companies for which the Adviser has acted as sub-adviser. The
complaints, which ask for rescission of plaintiff shareholders' purchases or
compensatory damages, plus interest, costs and expenses, generally allege,
among other things, certain violations of federal and/or state securities
laws, including the making of materially misleading statements in propectuses
concerning investment policies and risks. See "Pending Litigation" in the
Statement of Additional Information.

A settlement agreement has been reached with respect to one of the complaints
involving PJIGX. An Amended Consolidated Class Action Complaint, which
represents a consolidation of claims previously brought by 13 persons or
entities, was filed on October 5, 1994 in the United States District Court,
District of Minnesota. The named plaintiffs in this putative class action
(the "PJIGX action") purport to represent a class of individuals and groups
who purchased shares of PJIGX during the period from July 1, 1991 through May
9, 1994. The named plaintiffs and defendants have entered into a settlement
agreement which has received preliminary approval from the Court. If approved
by a sufficiently large percentage of the class, the settlement agreement
would provide up to $70 million to class members in payments scheduled over
approximately three years. Such payments would be made by Piper Jaffray
Companies and the Adviser and would not be an obligation of Piper Funds Inc.
Six additional complaints have been brought and a number of actions have been
commenced in arbitration relating to PJIGX. The complaints generally have
been consolidated with the PJIGX action for pretrial purposes and the
arbitrations have been stayed pending the decision by class members to either
participate in the settlement or opt out of the PJIGX action.

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

NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS (AND/OR IN THE STATEMENT OF ADDITIONAL INFORMATION REFERRED
TO ON THE COVER PAGE OF THIS PROSPECTUS), AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR PIPER JAFFRAY INC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN THE STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.

PIPER FUNDS INC. -- II

INVESTMENT ADVISER
Piper Capital Management Incorporated

DISTRIBUTOR
Piper Jaffray Inc.

CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP

LEGAL COUNSEL
Dorsey & Whitney P.L.L.P.

Table of Contents
Page
Introduction 2
Fund Expenses 4
Investment Objective, Policies and
Risk Factors 5
Management 17
Distribution of Fund Shares 18
SHAREHOLDER GUIDE TO
INVESTING
How to Purchase Shares 19
Reducing Your Sales Charge 20
Special Purchase Plans 21
How to Redeem Shares 22
Shareholder Services 24
Dividends and Distributions 27
Valuation of Shares 28
Tax Status 28
Performance Comparisons 28
General Information 29

PJARX-05

PART B

ADJUSTABLE RATE MORTGAGE SECURITIES FUND

A series of Piper Funds Inc.--II

STATEMENT OF ADDITIONAL INFORMATION

August 31, 1995

Table of Contents
Page

Investment Objective, Policies and Restrictions................. 2
Directors and Executive Officers................................ 10
Investment Advisory and Other Services.......................... 14
Portfolio Transactions and Allocation of Brokerage.............. 18
Capital Stock and Ownership of Shares........................... 20
Net Asset Value and Public Offering Price....................... 21
Performance Comparisons......................................... 21
Purchase of Shares.............................................. 23
Redemption of Shares............................................ 23
Taxation........................................................ 25
General Information............................................. 27
Pending Litigation.............................................. 28
Appendix A - Corporate Bond and Commercial Paper Ratings........ A-1
Appendix B - Interest Rate Futures Contracts and Related Options B-1

This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated August 31,
1995, and should be read in conjunction therewith. A copy of the Prospectus may
be obtained without charge by mailing a written request to the Fund at Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804, or by
calling (800) 866-7778.

INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS

This Statement of Additional Information relates to Adjustable Rate
Mortgage Securities Fund (the "Fund"), the only outstanding series of Piper
Funds Inc.--II (the "Company"). The Fund and the Company have no prior history.
The investment objective and policies of the Fund are set forth in the
Prospectus. Certain additional investment information is set forth below.

Repurchase Agreements

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

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

Mortgage-Backed Securities

GENERAL. Many Mortgage-Backed Securities (principally collateralized
mortgage obligations ("CMOs") secured by GNMA, FNMA and/or FHLMC Certificates)
are issued by entities that operate under orders from the Securities and
Exchange Commission (the "SEC") exempting such issuers from the provisions of
the Investment Company Act of 1940, as amended (the "1940 Act"). Until recently,
the staff of the Division of Investment Management of the SEC had taken the
position that such issuers were investment companies pursuant to Section 3 of
the 1940 Act and that, accordingly, an investment by an investment company (such
as the Fund) in the securities of such issuers was subject to limitations
imposed by Section 12 of the 1940 Act. However, in reliance on a recent SEC
staff interpretation, the Fund may invest in securities issued by certain
"exempted issuers" without regard to the limitations of Section 12 of the 1940
Act. In its interpretation, the SEC staff defined "exempted issuers" as
unmanaged, fixed asset issuers that (a) invest primarily in Mortgage-Backed
Securities, (b) do not issue redeemable securities as defined in Section
2(a)(32) of the Act, (c) operate under general exemptive orders exempting them
from "all provisions of the [1940] Act" and (d) are not registered or regulated
under the 1940 Act as investment companies.

PASS-THROUGH SECURITIES. The investments of the Fund in Mortgage-Backed
Securities include government guaranteed pass-through securities. These
obligations are described below.

(1) GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are Mortgage-Backed Securities which evidence
an ownership interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity.

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

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

Because prepayment rates of individual mortgage pools vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA indicate that the
average life of single-family dwelling mortgages with 25- to 30-year maturities,
the type of mortgages backing the vast majority of GNMA Certificates, is
approximately 12 years. Therefore, it is customary to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.

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

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

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

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

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

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

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

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

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

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

RESTRICTIONS ON INVESTMENTS IN MORTGAGE-BACKED SECURITIES. As set forth in
the Prospectus, the Fund will not invest in any inverse floating, interest-only,
principal-only or Z tranches of CMOs or in stripped Mortgage-Backed Securities.
In addition, the Fund will not invest in any other Mortgage-Backed Securities
that are considered "high risk" under applicable supervisory policies of the
Office of the Comptroller of the Currency (the "OCC"). In OCC Banking Circular
228 (Rev.) (January 10, 1992), the OCC defined a "high-risk mortgage security"
as any mortgage derivative product that at the time of purchase, or at a
subsequent testing date, meets any of the following three tests:

(a) Average Life Test. The mortgage derivative product has an expected
weighted average life greater than 10.0 years.

(b) Average Life Sensitivity Test. The expected weighted average life
of the mortgage derivative product:

(i) extends by more than 4.0 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points;
or

(ii) shortens by more than 6.0 years, assuming an immediate and
sustained parallel shift in the yield curve of minus 300 basis points.

(c) Price Sensitivity Test. The estimated change in the price of the
mortgage derivative product is more than 17%, due to an immediate and
sustained parallel shift in the yield curve of plus or minus 300 basis
points.

Examples of certain "high-risk mortgage securities" include interest-only and
principal-only classes of stripped mortgage-backed securities, inverse floating
CMOs and certain zero coupon Treasury securities.

Options

As set forth in the Prospectus, the Fund may write covered put and call
options with respect to the securities in which it may invest. The principal
reason for writing call or put options is to obtain, through receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. The Fund receives premiums from writing call or put options,
which it retains whether or not the option is exercised. The Fund will write
only covered options. This means that so long as the Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option (or comparable securities satisfying the cover requirements of securities
exchanges). The Fund will be considered covered with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it deposits
and maintains in a segregated account with its custodian cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the exercise price of the option.

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

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

Illiquid Securities

As set forth in the Prospectus, the Fund may invest in Rule 144A securities
and commercial paper issued pursuant to Rule 4(2) under the Securities Act of
1933, and treat such securities as liquid when they have been determined to be
liquid by the Board of Directors or by the Adviser subject to the oversight of
and pursuant to procedures adopted by the Board of Directors. Under these
procedures, factors taken into account in determining the liquidity of a
security include (a) the frequency of trades and quotes for the security; (b)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (c) dealer undertakings to make a market in the
security; and (d) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer).

Portfolio Turnover

Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including securities maturing in less than 12 months. A 100% portfolio
turnover rate would occur, for example, if the lesser of the value of purchases
or sales of portfolio securities for a particular year were equal to the average
monthly value of the portfolio securities owned during such year.

Investment Restrictions

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

As fundamental investment restrictions, the Fund will not:

1. With respect to 75% of its total assets, invest more than 5% of the
value of its total assets (taken at market value at the time of purchase) in the
outstanding securities of any one issuer, or own more than 10% of the
outstanding voting securities of any one issuer, in each case other than
securities issued or guaranteed by the U. S. Government or any agency or
instrumentality thereof.

2. Invest 25% or more of the value of its total assets in the securities of
issuers conducting their principal business activities in any one industry,
except that, under normal market conditions, the Fund will invest 25% or more of
the value of its total assets in ARMS issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or by private organizations.
Except for the requirement that the Fund invest 25% or more of its total assets
in ARMS, the foregoing restriction does not apply to securities of the U.S.
Government or its agencies or instrumentalities or repurchase agreements
relating thereto.

3. Issue any senior securities, as defined in the 1940 Act, other than as
set forth in restriction #4 below and except to the extent that using options
and futures contracts or purchasing or selling securities on a when-issued or
forward commitment basis may be deemed to constitute issuing a senior security.

4. Borrow money, except for temporary or emergency purposes. The amount of
such borrowing (including borrowing through reverse repurchase agreements) may
not exceed 10% of the value of the Fund's total assets. The Fund will not
purchase portfolio securities while outstanding borrowings exceeds 5% of the
value of the Fund's total assets. The Fund will not borrow for leverage
purposes.

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

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

7. Purchase or sell real estate or interests therein (other than securities
backed by mortgages and similar instruments).

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

9. Make loans of money or property to any person, except through loans of
portfolio securities, the purchase of debt obligations in which the Fund may
invest consistent with the Fund's investment objective and policies or the
acquisition of securities subject to repurchase agreements.

For purposes of determining compliance with fundamental investment
restriction number 2, relating to industry concentration, the various types of
utilities companies, such as gas, electric, telephone, telegraph, satellite and
microwave communications companies, are considered separate industries and ARMS
issued by private organizations are considered to be securities of issuers in
the same industry. In addition, the industry classification of Asset-Backed
Securities will be determined based on the type of collateral underlying the
securities. For example, Asset-Backed Securities backed by automobile
receivables will be considered to be in a different industry than Asset-Backed
Securities backed by credit card receivables.

As nonfundamental investment restrictions that may be changed at any time
without shareholder approval, the Fund will not:

1. Invest in warrants.

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

3. Make short sales of securities.

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

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

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

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

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

9. Invest in real estate limited partnerships.

10. Invest in the securities of foreign issuers.

11. Invest more than 15% of its net assets, collectively, in restricted
securities, other illiquid securities and securities of issuers which, together
with any predecessors, have a record of less than three years' continuous
operation.

In addition, as a nonfundamental policy, the Fund's transactions in
options, futures contracts and options on futures contracts will be subject to
the following limitations:

a. The Fund will not write puts if, as a result, more than 50% of its
assets would be required to be segregated.

b. The aggregate premiums paid on all put and call options purchased by the
Fund, including options on futures contracts, may not exceed 20% of the
Fund's net assets.

c. The Fund's aggregate margin deposits in connection with futures
contracts and options thereon will not exceed 5% of the Fund's total
assets.

d. The Fund will not purchase or write over-the-counter put and call
options.

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

DIRECTORS AND EXECUTIVE OFFICERS

The names, addresses and principal occupations during the past five years
of the directors and executive officers of the Funds are given below.

Name, Address and Age Position with the Fund

William H. Ellis* (53) Chairman of the Board
Piper Jaffray Tower of Directors
222 South Ninth Street
Minneapolis, Minnesota 55402

David T. Bennett (54) Director
3400 City Center
33 South Sixth Street
Minneapolis, Minnesota 55402

Jaye F. Dyer (68) Director
4670 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402

Karol D. Emmerich (46) Director
7302 Claredon Drive
Edina, MN 55439

Luella G. Goldberg (58) Director
7019 Tupa Drive
Edina, Minnesota 55439

George Latimer (59) Director
754 Linwood Avenue
St. Paul, Minnesota 55105

Paul A. Dow (44) President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Michael P. Jansen (35) Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Robert H. Nelson (31) Senior Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Amy K. Johnson (29) Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Thomas S. McGlinch (38) Vice President
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

David E. Rosedahl (48) Secretary
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

Charles N. Hayssen (44) Treasurer
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402

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

William H. Ellis has been President of Piper Jaffray Companies Inc. and
Piper Jaffray Inc. (the "Distributor") since September 1982, Chief Operating
Officer of the same two companies since August 1983, Director and Chairman of
the Board of Piper Capital Management Incorporated ("the Adviser") since October
1985 and President of the Adviser since December 1994.

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

Jaye F. Dyer has been President of Dyer Management Company, a private
management company, since January 1, 1991. Prior thereto, he was President and
Chief Executive Officer of Dyco Petroleum Corporation, a Minneapolis based oil
and natural gas development subsidiary of Arkla, Inc. from 1971, when he founded
the company, until March 1, 1989, and Chairman of the Board until December 31,
1990. Mr. Dyer also serves on the board of directors of Northwestern National
Life Insurance Company, The ReliaStar Financial Corp. (the holding company of
Northwestern National Life Insurance Company) and various privately held and
nonprofit corporations.

Karol D. Emmerich has been President of The Paraclete Group, a consultant
to nonprofit and other organizations, since May 1993. Prior thereto, she was
Vice President and Treasurer of Dayton Hudson Corporation from 1980 to May 1993.
Ms. Emmerich also serves on the board of directors of a number of privately held
and nonprofit corporations.

Luella G. Goldberg has served on the board of directors of Northwestern
National Life Insurance Company (since 1976), The ReliaStar Financial Corp.
(since January 1989), TCF Bank Savings fsb (since 1986), TCF Financial
Corporation, the holding company of TCF Bank Savings fsb (since 1988) and Hormel
Foods Corp. (since 1993). Ms. Goldberg also serves as a Trustee of Wellesley
College, and as a director of a number of other organizations, including the
University of Minnesota Foundation and the Minnesota Orchestral Association. Ms.
Goldberg was Chairman of the Board of Trustees of Wellesley College from 1985 to
1993 and acting President from July 1, 1993 to October 1, 1993.

George Latimer has been Director, Special Actions Office, Office of the
Secretary, Department of Housing and Urban Development since 1993. Prior
thereto, he had been Dean of Hamline Law School, Saint Paul, Minnesota since
1990. Mr. Latimer serves on the Board of Directors of Digital Biometrics, Inc.
and Payless Cashways, Inc.

Paul A. Dow has been Chief Investment Officer of the Adviser since December
1989 and Senior Vice President of the Adviser since February 1989.

Michael P. Jansen has been a Senior Vice President of the Adviser since
October 1993, prior to which he had been a Managing Director of Piper Jaffray
since 1987. He has been an Executive Vice President and Director of Piper
Mortgage Acceptance Corporation since 1991 and served as an Executive Vice
President and Director of Premier Acceptance Corporation from 1988 to October
1994.

Robert H. Nelson joined the Adviser in 1988 and has been a Senior Vice
President of the Adviser since November 1993, prior to which he had been a Vice
President of the Adviser since November 1991 and an employee of the Adviser
since 1988.

Amy K. Johnson has been a Vice President of the Adviser since November 1994
and an employee of the Adviser since 1992. Prior to joining the Adviser, she was
an audit senior with KPMG Peat Marwick LLP where she was employed form 1990 to
1992.

Thomas S. McGlinch has been a Vice President of the Adviser since November
1992, prior to which he had been an Assistant Vice President of the Adviser
since January 1992 and a specialty products trader at FBS Investment Services,
Inc. from 1988 to January 1992.

David E. Rosedahl has been Secretary and a Director of the Adviser since
October 1985, a Managing Director of the Distributor since November 1986, a
Managing Director of Piper Jaffray Companies Inc. since November 1987, Secretary
of the Distributor since 1993 and General Counsel for the Distributor and Piper
Jaffray Companies Inc. since 1979.

Charles N. Hayssen has been a Managing Director of the Distributor since
November 1986 and of Piper Jaffray Companies Inc. since November 1987, Chief
Financial Officer of the Distributor since January 1988, Director and Chief
Financial Officer of the Adviser since January 1989 and Chief Operating Officer
of the Adviser since December 1994.

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

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

The directors of the Company who are officers or employees of the Adviser
or any of its affiliates receive no remuneration from the Company. Each of the
other directors receives from the Company a quarterly retainer of $1,000, plus a
fee of $1,000 for each regular quarterly Board of Directors meeting attended.
(The per-meeting fee will increase to $1,500 in the event total Company assets
reach $5 billion or more.) In addition, members of the Audit Committee not
affiliated with the Adviser receive $1,000 for each Audit Committee meeting
attended ($2,000 with respect to the chairperson of the Committee), with such
fee being allocated among the Company and all other publicly-held investment
companies managed by the Adviser on the basis of relative net asset values.
Members of the Committee of the Independent Directors and the Derivatives
Subcommittee currently receive no additional compensation. Directors are also
reimbursed for expenses incurred in connection with attending meetings.

The following table sets forth the total compensation received by each
Director from all open-end and closed-end investment companies managed by the
Adviser or an affiliate of the Adviser during the calendar year ended December
31, 1994. Mr. Ellis, as an officer of the Adviser, did not receive any such
compensation and is not included in the table.

Pension or Estimated Total
Retirement Benefits Annual Benefits Compensation
Accrued as Part of Upon from Fund
Director Fund Expenses Retirement Complex*

David T. Bennett None None $57,500
Jaye F. Dyer None None $68,250
Karol D. Emmerich None None $68,250
Luella G. Goldberg None None $71,250
George Latimer None None $65,250

* Consists of 26 open-end and closed-end investment companies managed by the
Adviser. Each director included in the table, other than Mr. Bennett,
served on the board of each such investment company for all of 1994. Mr.
Bennett served on the board of 24 of such companies during 1994.

INVESTMENT ADVISORY AND OTHER SERVICES

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

Control of the Adviser and the Distributor

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

Investment Advisory and Management Agreement

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

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

Pursuant to the Investment Advisory and Management Agreement, the Fund pays
the Adviser a monthly advisory fee equal on an annual basis to .35% of the first
$500 million of average daily net assets and .30% of average daily net assets in
excess of $500 million.

The Adviser intends, although not required under the Investment Advisory
and Management Agreement, to reimburse the Fund for the amount, if any, by which
the total operating and management expenses of the Fund (including the Adviser's
compensation and amounts paid pursuant to the Fund's Rule 12b-1 plan, but
excluding interest, taxes, brokerage fees and commissions, and extraordinary
expenses) for the fiscal year ending August 31, 1996, exceed .60% of average net
assets. This arrangement is voluntary and may be modified or discontinued at any
time after August 31, 1996, at the Adviser's discretion. In the event of
discontinuance of this arrangement, the Fund will still be subject to the laws
of certain states, which require that if a mutual fund's expenses (including
advisory fees but excluding interest, taxes, brokerage commissions and
extraordinary expenses) exceed certain percentages of average net assets, the
fund must be reimbursed for such excess expenses. The Investment Advisory and
Management Agreement provides that the Adviser must make any expense
reimbursements to the Fund required under state law. The laws of California
provide that aggregate annual expenses of a mutual fund shall not normally
exceed 2-1/2% of the first $30 million of the average net assets, 2% of the next
$70 million of the average net assets and 1-1/2% of the remaining average net
assets. Such expenses include the Adviser's compensation, but exclude interest,
taxes, brokerage fees and commissions, extraordinary expenses and amounts paid
under the Fund's Rule 12b-1 plan. The Adviser does not believe that the laws of
any other state in which the Fund's shares may be offered for sale contain
expense reimbursement requirements.

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

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

Expenses

The expenses of the Fund are deducted from its income before dividends are
paid. These expenses include, but are not limited to, organizational costs, fees
paid to the Adviser, fees and expenses of officers and directors who are not
affiliated with the Adviser, taxes, interest, legal fees, transfer agent,
dividend disbursing agent and custodian fees, audit fees, brokerage fees and
commissions, fees and expenses of registering and qualifying the Fund and its
shares for distribution under federal and state securities laws, expenses of
preparing the prospectus and statement of additional information and of printing
and distributing the prospectus and statement of additional information annually
to existing shareholders, the expenses of reports to shareholders, shareholders'
meetings and proxy solicitations, distribution expenses pursuant to the Rule
12b-1 plan, and other expenses which are not expressly assumed by the Adviser
under the Investment Advisory and Management Agreement.

Distribution Plan

Rule 12b-1(b) under the 1940 Act provides that any payments made by the
Fund in connection with financing the distribution of its shares may only be
made pursuant to a written plan describing all aspects of the proposed financing
of distribution, and also requires that all agreements with any person relating
to the implementation of the plan must be in writing.

Rule 12b-1(b)(1) requires that such plan be approved by a majority of the
Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and of the directors who are not interested persons of the Company and
who have no direct or indirect interest in the operation of the plan or in the
agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreement. The Fund's Distribution Plan has
been approved by the Board of Directors and by the Fund's initial sole
shareholder in accordance with the Rule. Rule 12b-1(b)(3) requires that the plan
or agreement provide, in substance:

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

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

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

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

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

Pursuant to the provisions of the Distribution Plan, the Fund pays the
Distributor a monthly service fee equal, on an annual basis, to .15% of the
Fund's average daily net assets in connection with the servicing of the Fund's
shareholder accounts. This fee is intended to compensate the Distributor for
ongoing servicing and/or maintenance of shareholder accounts and the costs
incurred in connection therewith ("Shareholder Servicing Costs"). Shareholder
Servicing Costs include all expenses of the Distributor incurred in connection
with providing shareholder liaison services, including, but not limited to, an
allocation of the Distributor's overhead and payments made to persons, including
employees of the Distributor, who respond to inquiries of shareholders regarding
their ownership of shares or their accounts with the Fund and who provide
information on shareholders' investments.

Underwriting and Distribution Agreement

Pursuant to the Underwriting and Distribution Agreement, the Distributor
has agreed to act as the principal underwriter for the Fund in the sale and
distribution to the public of shares of the Fund, either through dealers or
otherwise. The Distributor has agreed to offer such shares for sale at all times
when such shares are available for sale and may lawfully be offered for sale and
sold. As compensation for its services, in addition to receiving its service
fees pursuant to the Distribution Plan discussed above, the Distributor receives
the sales load on sales of the Fund shares set forth in the Prospectus.

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE

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

When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research information and statistical and
other services to the Adviser. Such research or services include advice, both
directly and in writing, as to the value of securities; the advisability of
investing in, purchasing or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. This allows the Adviser to
supplement its own investment research activities and enables the Adviser to
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the Fund. To
the extent portfolio transactions are effected with broker-dealers who furnish
research services to the Adviser, the Adviser receives a benefit, not capable of
evaluation in dollar amounts, without providing any direct monetary benefit to
the Fund from these transactions. The Adviser believes that most research
services obtained by it generally benefit several or all of the investment
companies and private accounts which it manages, as opposed to solely benefiting
one specific managed fund or account. Normally, research services obtained
through managed funds or accounts investing in common stocks would primarily
benefit the managed funds or accounts which invest in common stock; similarly,
services obtained from transactions in fixed-income securities would normally be
of greater benefit to the managed funds or accounts which invest in debt
securities.

The Adviser has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Fund's portfolio transactions in exchange
for research services provided the Adviser. However, the Adviser does maintain
an informal list of broker-dealers, which is used from time to time as a general
guide in the placement of the Fund's business, in order to encourage certain
broker-dealers to provide the Adviser with research services which the Adviser
anticipates will be useful to it. Because the list is merely a general guide,
which is to be used only after the primary criterion for the selection of
broker-dealers (discussed above) has been met, substantial deviations from the
list are permissible and may be expected to occur. The Adviser will authorize
the Fund to pay an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker-dealer would have charged
only if the Adviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Adviser's overall responsibilities with respect to the
accounts as to which it exercises investment discretion. Generally, the Fund
pays higher than the lowest commission rates available. The Fund will not
purchase at a higher price or sell at a lower price in connection with
transactions effected with a director, acting as principal, who furnishes
research services to the Adviser than would be the case if no weight were given
by the Adviser to the dealer's furnishing of such services.

Transactions in securities, options on securities, futures contracts and
options on futures contracts, may be effected through the Distributor. In
determining the commissions to be paid to the Distributor in connection with
portfolio transactions on national securities exchanges or commodity exchanges,
it is the policy of the Fund that such commissions will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers in
connection with comparable transactions during a comparable period of time, and
(b) at least as favorable as commissions contemporaneously charged by the
Distributor on comparable transactions for its most favored comparable
unaffiliated customers. While the Fund does not deem it practicable and in its
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given to posted commission rates as
well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.

CAPITAL STOCK AND OWNERSHIP OF SHARES

The Board of Directors is empowered under the Company's Articles of
Incorporation to issue additional series of the Company's common stock without
shareholder approval. On an issue affecting only a particular series, the shares
of the affected series vote separately. An example of such an issue would be a
fundamental investment restriction pertaining to only one series. In voting on
the Investment Advisory and Management Agreement (the "Agreement"), approval of
the Agreement by the shareholders of a particular series would make the
Agreement effective as to that series whether or not it had been approved by the
shareholders of any other series.

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

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

As of August 31, 1995, no shares of the Fund were outstanding.

NET ASSET VALUE AND PUBLIC OFFERING PRICE

The method for determining the public offering price of Fund shares is
summarized in the Prospectus in the text following the headings "How to Purchase
Shares -- Public Offering Price" and "Valuation of Shares." The net asset value
of the Fund's shares is determined on each day on which the New York Stock
Exchange is open, provided that the net asset value need not be determined on
days on which changes in the value of its portfolio securities will not
materially affect the current net asset value of the Fund's shares and days when
no Fund shares are tendered for redemption and no order for Fund shares is
received. The New York Stock Exchange is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day,
Thanksgiving and Christmas.

PERFORMANCE COMPARISONS

Advertisements and other sales literature for the Fund may refer to
"average annual total return," "cumulative total return" and "yield." The
Adviser may waive or pay certain expenses of the Fund, thereby increasing total
return and yield. These expenses may or may not be waived or paid in the future
in the Adviser's discretion. No performance data is provided for the Fund since
no shares were outstanding as of the date of this Statement of Additional
Information.

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

(nth power)
P(1+T) = ERV

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

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

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

CTR = [(ERV-P)/P] 100

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

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

Yield is computed by dividing the net investment income per share (as
defined under Securities and Exchange Commission rules and regulations) earned
during the computation period by the maximum offering price per share on the
last day of the period, according to the following formula:

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

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

In addition to advertising total return and yield, comparative performance
information may be used from time to time in advertising the Fund's shares,
including data from Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
Inc. and other entities or organizations which track the performance of
investment companies. The Fund's performance may be compared to that of the ARM
Fund Average, as reported by Lipper, and to the performance of the Lehman
Brothers ARM Index, an unmanaged index. Unmanaged indices generally do not
reflect deductions for administrative and management costs and expenses.

PURCHASE OF SHARES

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

REDEMPTION OF SHARES

General

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

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

Reinstatement Privilege

A shareholder who has redeemed shares of the Fund may reinvest all or part
of the redemption proceeds in shares of any Fund managed by the Adviser within
30 days without payment of an additional sales charge, provided that a
shareholder may reinvest in a fund through a broker-dealer other than the
Distributor only if there is a valid sales agreement for such fund between such
broker-dealer and the Distributor. The Distributor will refund to the
shareholder a pro rata amount of any contingent deferred sales charge paid by
such shareholder in connection with a redemption of Fund shares if and to the
extent that the redemption proceeds are reinvested within 30 days of such
redemption in any mutual fund managed by the Adviser. Such refund will be based
upon the ratio of the net asset value of shares purchased in the reinvestment to
the net asset value of shares redeemed. Reinvestments will be allowed at net
asset value without the payment of a front-end sales charge, irrespective of the
amounts of the reinvestment, but shall be subject to the same pro rata
contingent deferred sales charge that was applicable to the earlier investment;
however, the period during which the contingent deferred sales charge shall
apply on the newly issued shares shall be the period applicable to the redeemed
shares extended by the number of days between the redemption and the
reinvestment dates (inclusive).

Systematic Withdrawal Plan

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

The maintenance of a Systematic Withdrawal Plan for the Fund concurrent
with purchases of additional shares of the Fund would be disadvantageous because
of the sales commission involved in the additional purchases. Additional
investments of less than $5,000 or three times the annual withdrawals under the
Systematic Withdrawal Plan will ordinarily not be allowed during the time the
plan is in effect. A confirmation of each transaction showing the sources of the
payment and the share and cash balance remaining in the account will be sent.
The plan may be terminated on written notice by the shareholder or the Fund, and
it will terminate automatically if all shares are liquidated or withdrawn from
the account or upon the death or incapacity of the shareholder. The amount and
schedule of withdrawal payments may be changed or suspended by giving written
notice to your Piper Jaffray investment executive or other broker-dealer at
least seven business days prior to the end of the month preceding a scheduled
payment.

TAXATION

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

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

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

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

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

Gain or loss on futures contracts and options is taken into account when
realized by entering into a closing transaction or by exercise. In addition,
with respect to many types of futures contracts and options held at the end of
the Fund's taxable year, unrealized gain or loss on such contracts is taken into
account at the then current fair market value thereof under a special
"marked-to-market, 60/40 system," and such gain or loss is recognized for tax
purposes. The gain or loss from such futures contracts and options (including
premiums on certain options that expire unexercised) is treated as 60% long-term
and 40% short-term capital gain or loss, regardless of their holding period. The
amount of any capital gain or loss actually realized by the Fund in a subsequent
sale or other disposition of such futures contracts will be adjusted to reflect
any capital gain or loss taken into account by the Fund in a prior year as a
result of the constructive sale under the "marked-to-market, 60/40 system."
Notwithstanding the rules described above, with respect to certain futures
contracts, the Fund may make an election that will have the effect of exempting
all or a part of those identified futures contracts from being treated for
federal income tax purposes as sold on the last business day of the Fund's
taxable year. All or part of any loss realized by the Fund on any closing of a
futures contract may be deferred until all of the Fund's offsetting positions
with respect to the futures contract are closed.

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

The Fund may make investments that produce income that is not matched by a
corresponding distribution to the Fund, such as investments in obligations
having original issue discount, such as zero coupon securities, or market
discount (if the Fund elects to accrue the market discount on a current basis
with respect to such instruments). Such income would be treated as income earned
by the Fund and therefore would be subject to the distribution requirements of
the Code. Because such income may not be matched by a corresponding cash
distribution to the Fund, the Fund may be required to borrow money or dispose of
other securities to be able to make distributions to shareholders.

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

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

GENERAL INFORMATION

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

PENDING LITIGATION

Complaints have been brought in federal and state court relating to one
open-end and eight closed-end investment companies managed by the Adviser and to
two open-end funds for which the Adviser has acted as sub-adviser. An Amended
Consolidated Class Action Complaint was filed on October 5, 1994 in the United
States District Court, District of Minnesota, against the Institutional
Government Income Portfolio (a series of Piper Funds Inc.), the Adviser, the
Distributor, William H. Ellis and Edward J. Kohler alleging certain violations
of federal and state securities laws, including the making of materially
misleading statements in the prospectus, common law negligent misrepresentation
and breach of fiduciary duty. This is a consolidated putative class action in
which claims brought by 13 persons or entities have been consolidated under the
title In Re: Piper Funds Inc. Institutional Government Income Portfolio
Litigation. The named plaintiffs in the complaint are Richard J. Rodney, Jr.,
Doug Shonka, Carl Patrick Monahan, Jerry Hoehnen, Rosemary Boris, Thomas W.
Newcome, Delvin D. Junker, Printing Mailing Trade District (affiliated with the
Newspaper Drivers' Division of the International Brotherhood of the Teamsters),
The History Theatre, Inc., Paul Gold, and Bernard Friedman. These named
plaintiffs purport to represent a class of individuals and groups who purchased
shares of Institutional Government Income Portfolio during the putative class
period of July 1, 1991 through May 9, 1994. The named plaintiffs and defendants
have entered into a settlement agreement which has received preliminary approval
from the Court. If approved by a sufficiently large percentage of the class, the
settlement agreement would provide up to $70 million, together with interest
earned, less certain disbursements and attorneys' fees as approved by the Court,
to class members in payments scheduled over approximately three years. Such
payments would be made by Piper Jaffray Companies Inc. and the Adviser and would
not be an obligation of the Institutional Government Income Portfolio or Piper
Funds Inc.

Six additional complaints, which are based on claims similar to those
asserted in the first complaint, have been brought relating to the Institutional
Government Income Portfolio. The first of such complaints was filed in the same
court against the same parties on October 21, 1994, by Eltrax Systems, Inc. A
second additional complaint was filed against the Company, the Adviser, the
Distributor and Piper Jaffray Companies Inc. on September 30, 1994 in the United
States District Court, District of Colorado. Plaintiffs in the complaint are
Gary Pashel and Gregg S. Hayutin, Trustees of the Mae Pashel Trust; Mae Pashel,
individually; Gary Pashel and Michael H. Feinstein, Trustees of the Robert
Hayutin Insurance Trust; and Dennis E. Hayutin, Gregg S. Hayutin and Gary
Pashel, Trustees of the Marie Ellen Hayutin Trust. The third additional
complaint, a putative class action, was filed on November 1, 1994 in the United
States District Court, District of Idaho by the Idaho Association of Realtors,
Inc., a non-profit Idaho corporation. The complaint was filed against the
Institutional Government Income Portfolio, the Adviser, the Distributor, Piper
Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fourth
complaint, also a putative class action, was filed in the United States District
Court for the District of Minnesota, Third Division, on January 25, 1995. The
complaint was brought by Louise S. Maher and John A. Raetz against Piper Funds
Inc., Institutional Government Income Portfolio, the Adviser, the Distributor,
Piper Jaffray Companies Inc., William H. Ellis and Edward J. Kohler. The fifth
complaint was brought on April 11, 1995, and in the future may be filed in the
Minnesota State District Court, Hennepin County. The plaintiff, Frank R. Berman,
Trustee of Frank R. Berman Professional CP Pension Plan Trust, sued individually
and not on behalf of any putative class. Defendants are the Distributor, Piper
Funds Inc., Morton Silverman and Worth Bruntjen. A sixth complaint relating to
the Institutional Government Income Portfolio was filed on June 22, 1995 in the
Montana Thirteenth Judicial District Court, Yellowstone County, by Beverly Muth
against the Distributor and Teresa L. Darnielle. In addition to the above
complaints, a number of actions have been commenced in arbitration by individual
investors in the Institutional Government Income Portfolio. The complaints
discussed in this paragraph generally have been consolidated with the In Re:
Piper Funds Inc. action for pretrial purposes and the arbitrations have been
stayed pending the decision by class members to either participate in the
settlement or opt out of the In Re: Piper Funds Inc. action.

A complaint was filed by Herman D. Gordon on October 20, 1994, in the
United States District Court, District of Minnesota, against American Adjustable
Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust Inc.--1999, the
Adviser, the Distributor, Piper Jaffray Companies Inc., Benjamin Rinkey, Jeffrey
Griffin, Charles N. Hayssen and Edward J. Kohler. A second complaint was filed
by Frank Donio, I.R.A. and other plaintiffs on April 14, 1995, in the United
States District Court, District of Minnesota, against American Adjustable Rate
Term Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997, American
Adjustable Rate Term Trust Inc.--1998, American Adjustable Rate Term Trust
Inc.--1999, the Adviser, the Distributor, Piper Jaffray Companies Inc. and
certain associated individuals. Plaintiffs in both actions filed a Consolidated
Amended Class Action Complaint on May 23, 1995. The consolidated amended
complaint, which purports to be a class action, alleges certain violations of
federal and state securities laws, breach of fiduciary duty and negligent
misrepresentation.

A complaint was filed by Carson H. Bradley on February 3, 1995 in the Sixth
Judicial District of the State of Idaho against American Government Income Fund
Inc., American Government Income Portfolio Inc., the Adviser, the Distributor
and Worth Bruntjen. The complaint alleges negligent misrepresentation, breach of
fiduciary duty and breach of contract.

A complaint was filed by Gary E. Nelson on June 28, 1995 in the United
States District Court for the Western District of Washington at Seattle against
American Strategic Income Portfolio Inc. -- II, the Adviser, the Distributor,
Piper Jaffray Companies Inc., Worth Bruntjen, Charles N. Hayssen, Michael
Jansen, William H. Ellis and Edward J. Kohler. The complaint, which purports to
be a class action, alleges certain violations of federal and state securities
laws and the Washington Consumer Protection Act, breach of fiduciary duty and
negligent misrepresentation.

Another putative class action was filed by the same individual in the same
court on July 12, 1995 against American Opportunity Income Fund Inc., the
Adviser, the Distributor, Piper Jaffray Companies Inc., Worth Bruntjen, Charles
N. Hayssen, Michael Jansen, William H. Ellis and Edward J. Kohler. The complaint
alleges violations of the Racketeer Influenced and Corrupt Organizations Act,
state securities laws and the Washington Consumer Protection Act, breach of
fiduciary duty and negligent misrepresentation.

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

The Adviser and Distributor do not believe that the settlement reached in
connection with the first lawsuit described above, or any other of the above
lawsuits, will have a material adverse effect upon their ability to perform
under their agreements with the Fund, and they intend to defend the remaining
lawsuits vigorously.

APPENDIX A
CORPORATE BOND AND
COMMERCIAL PAPER RATINGS

Commercial Paper Ratings

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

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

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

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

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

Corporate Bond Ratings

Standard & Poor's Corporation. Standard & Poor's ratings for corporate
bonds have the following definitions:

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

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

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

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

Moody's Investors Service, Inc. Moody's ratings for corporate bonds include
the following:

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

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

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

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

APPENDIX B
INTEREST RATE FUTURES CONTRACTS AND RELATED OPTIONS

Interest Rate Futures Contracts

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

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

The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the Adviser and the relevant contract
market, which varies but is generally about 2% of the contract amount, must be
deposited with the custodian in the name of the broker. This amount is known as
"initial margin," and represents a "good faith" deposit assuring the performance
of both the purchaser and the seller under the futures contract. Subsequent
payments to and from the broker, known as "variation margin," are required to be
made on a daily basis as the price of the futures contract fluctuates, making
the long or short positions in the futures contract more or less valuable, a
process known as "marking to the market." Prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a commission is paid on each completed purchase and sale
transaction.

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

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

Options on Interest Rate Futures Contracts

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

Purchase of Put Options on Futures Contracts. The Fund will purchase put
options on interest rate futures contracts if the Adviser anticipates a rise in
interest rates. Because the value of an interest rate futures contract moves
inversely in relation to changes in interest rates, a put option on such a
contract becomes more valuable as interest rates rise. By purchasing put options
on interest rate futures contracts at a time when the Adviser expects interest
rates to rise, the Fund will seek to realize a profit to offset the loss in
value of its portfolio securities.

Purchase of Call Options on Futures Contracts. The Fund will purchase call
options on interest rate futures contracts if the Adviser anticipates a decline
in interest rates. The purchase of a call option on an interest rate futures
contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. Because the value of an interest rate futures
contract moves inversely in relation to changes to interest rates, a call option
on such a contract becomes more valuable as interest rates decline. The Fund
will purchase a call option on an interest rate futures contract to hedge
against a decline in interest rates in a market advance when the Fund is holding
cash. The Fund can take advantage of the anticipated rise in the value of
long-term securities without actually buying them until the market is
stabilized. At that time, the options can be liquidated and the Fund's cash can
be used to buy long-term securities.

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

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

Risks of Transactions in Futures Contracts and Options on Futures Contracts

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

Successful use of futures contracts by the Fund is subject to the ability
of the Adviser to predict correctly movements in the direction of interest
rates. If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of fixed-income securities held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its security which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the decline in interest
rates. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.

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

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

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

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

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

Regulatory Matters

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

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

PART C

PIPER FUNDS INC. -- II

OTHER INFORMATION

Item 24. Financial Statements and Exhibits

(a) Financial statements--None

(b) Exhibits:

1.1 Articles of Incorporation (1)
1.2 Amendment to Articles of Incorporation (1)
2 Bylaws (1)
5 Investment Advisory and Management Agreement (2)
6.1 Underwriting and Distribution Agreement (2)
6.2 Form of Selling Agreement (2)
8 Custody and Investment Accounting Agreement (2)
9 Agency Agreement (2)
10 Opinion and Consent of Dorsey & Whitney P.L.L.P. (2)
15 Plan of Distribution (1)
16 Computation of Performance Quotations (3)
25 Power of Attorney (2)

(1) Incorporated by reference to the Registrant's Registration Statement on
Form N-14, File No. 33-58849.

(2) Previously filed.

(3) To be filed by amendment.

Item 25. Persons Controlled by or Under Common Control with Registrant

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

Item 26. Number of Holders of Securities

As of August 31, 1995, there were no record holders of the common shares of
the Fund.

Item 27. Indemnification

The Articles of Incorporation and Bylaws of the Registrant provide that the
Registrant shall indemnify such persons for such expenses and liabilities, in
such manner and under such circumstances, to the full extent permitted by
Section 302A.521, Minnesota Statutes, as now enacted or hereafter amended,
provided that no such indemnification may be made if it would be in violation of
Section 17(h) of the Investment Company Act of 1940, as now enacted or hereafter
amended. Section 302A.521 of the Minnesota Statutes, as now enacted, provides
that a corporation shall indemnify a person made or threatened to be made a
party to a proceeding of the person against judgments, penalties, fines,
settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding if, with
respect to the acts or omissions of the person complained of in the proceeding,
the person has not been indemnified by another organization for the same
judgments, penalties, fines, settlements, and reasonable expenses incurred by
the person in connection with the proceeding with respect to the same acts or
omissions; acted in good faith, received no improper personal benefit and the
Minnesota Statutes dealing with directors' conflicts of interest, if applicable,
have been satisfied; in the case of a criminal proceeding, had no reasonable
cause to believe that the conduct was unlawful; and reasonably believed that the
conduct was in the best interests of the corporation or, in certain
circumstances, reasonably believed that the conduct was not opposed to the best
interests of the corporation.

Insofar as the indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

The Registrant will comply with the indemnification requirements of
Investment Company Act Releases 7221 (June 9, 1972) and 11330 (September 2,
1980).

Item 28. Business and Other Connections of Investment Adviser

Information on the business of the Adviser is described in the section of
the Prospectus, incorporated by reference in this Registration Statement,
entitled "Management -- Investment Adviser."

The officers and directors of the Adviser and their titles are as follow:

Name Title

William H. Ellis President, Director and Chairman of
the Board
Charles N. Hayssen Director, Senior Vice President, Chief
Financial Officer and Chief
Operating Officer
David E. Rosedahl Director and Secretary
Bruce C. Huber Director
DeLos V. Steenson Director
Momchilo Vucenich Director
Beverly J. Zimmer Director
Paul A. Dow Senior Vice President and Chief
Investment Officer
Worth Bruntjen Senior Vice President
Richard W. Filippone Senior Vice President
John J. Gibas Senior Vice President
Marijo A. Goldstein Senior Vice President
Jeffrey B. Griffin Senior Vice President
Mark R. Grotte Senior Vice President
Michael P. Jansen Senior Vice President
Lisa A. Kenyon Senior Vice President
Steven V. Markusen Senior Vice President
Paula Meyer Senior Vice President
Robert H. Nelson Senior Vice President
Gary Norstrem Senior Vice President
Nancy S. Olsen Senior Vice President
Ronald R. Reuss Senior Vice President
Maxine D. Rossini Senior Vice President
Bruce D. Salvog Senior Vice President
Sandra K. Shrewsbury Senior Vice President
David M. Steele Senior Vice President
Randall J. Sukovich Senior Vice President
Robert H. Weidenhammer Senior Vice President
John G. Wenker Senior Vice President
Douglas J. White Senior Vice President
Richard Daly Vice President
Michael C. Derck Vice President
Joan L. Harrod Vice President
Newby Herrod Vice President
Amy K. Johnson Vice President
Kevin A. Jansen Vice President
Russell Kappenman Vice President
Kimberly F. Kaul Vice President
John D. Kightlinger Vice President
Wan-Chong Kung Vice President
Mark S. Lee Vice President
Thomas S. McGlinch Vice President
Thomas Moore Vice President
Edward P. Nicoski Vice President
Daniel Phillips Vice President
John K. Schonberg Vice President
Eric L. Siedband Vice President
J. Bradley Stone Vice President
Bonnie L. Theis Vice President
Eric H. Wesman Vice President
Marcy K. Winson Vice President

Principal occupations of Messrs. Ellis, Dow, Hayssen, Michael Jansen,
McGlinch, Nelson and Rosedahl and Ms. Johnson are set forth in the Statement of
Additional Information under the heading "Directors and Officers." Mr. Huber has
been a Director of the Adviser since October 1985 and was a Vice President of
the Adviser from October 1985 until April 1992, and a Managing Director of Piper
Jaffray Inc. ("Piper Jaffray") since November 1986. Mr. Steenson has been a
Director of the Adviser since December 1994 and a Managing Director of the
Underwriter since 1982. Mr. Vucenich has been a Director of the Adviser since
December 1994 and a managing director of regional sales for Piper Jaffray
Companies Inc. since February 1993. Ms. Zimmer has been a Director of the
Adviser since December 1994, prior to which she was Chief Operating Officer of
the Adviser from May 1992 to December 1994 and Senior Vice President of the
Adviser from December 1990 to December 1994. Mr. Bruntjen has been a Senior Vice
President of the Adviser since January 1988. Mr. Filippone has been a Senior
Vice President of the Adviser since November 1991, prior to which he had been a
Vice President of the Adviser since May 1987. Mr. Gibas has been a Senior Vice
President of the Adviser since November 1992, prior to which he had been a Vice
President of the Adviser since May 1987. Ms. Goldstein has been a Senior Vice
President of the Adviser since November 1993, prior to which she was a Vice
President of the Adviser since 1991 and a fixed income analyst of the Adviser
since 1988. Mr. Griffin has been a Senior Vice President of the Adviser since
November 1991, prior to which he had been a Vice President of the Adviser since
October 1989. Mr. Grotte has been a Senior Vice President of the Adviser since
November 1992, prior to which he had been a Vice President of the Adviser since
June 1988. Ms. Kenyon has been a Senior Vice President of the Adviser since
January 1992, prior to which she had been a financial adviser for a private
family in Los Angeles. Mr. Markusen has been a Senior Vice President of the
Adviser since December 1993, prior to which had been a senior vice president of
Investment Advisers, Inc., in Minneapolis, Minnesota since 1989. Ms. Meyer has
been a Senior Vice President of the Adviser since December 1994, prior to which
she had been a Vice President of Secura Insurance, Appleton, Wisconsin since
1988. Mr. Norstrem has been a Senior Vice President of the Adviser since 1993,
prior to which he was Treasurer of the City of Saint Paul, Minnesota for
twenty-eight years. Ms. Olsen has been a Senior Vice President of the Adviser
since November 1991, prior to which she had been a Vice President of the Adviser
since May 1987. Mr. Reuss has been a Senior Vice President of the Adviser since
January 1989. Ms. Rossini has been a Senior Vice President of the Adviser since
September 1993, prior to which she had been a managing Director of the
Distributor since November 1989. Mr. Salvog has been a Senior Vice President of
the Adviser since January 1992, prior to which he had been a portfolio manager
at Kennedy & Associates in Seattle, Washington from 1984. Ms. Shrewsbury has
been a Senior Vice President of the Adviser since September 1993, prior to which
she had been a Managing Director of Piper Jaffray since November 1992, a Vice
President of Piper Jaffray since November 1990 and an Assistant Vice President
of Piper Jaffray since November 1989. Mr. Steele has been a Senior Vice
President of the Adviser since January 1992, prior to which he had been a
portfolio manager at Kennedy & Associates in Seattle, Washington from 1987. Mr.
Sukovich has been a Senior Vice President of the Adviser since January 1989. Mr.
Weidenhammer has been a Senior Vice President of the Adviser since November
1991, prior to which he had been a Vice President of the Adviser since July
1987. Mr. Wenker has been a Senior Vice President of the Adviser since October
1993, prior to which he was a Managing Director of Piper Jaffray since 1992, the
Director of Revitalization Resources of the Minneapolis Community Development
Agency from September 1990 to January 1992 and a Vice President of Miller &
Schroeder Financial Inc. from 1986 to 1990. Mr. White has been a Senior Vice
President of the Adviser since November 1991, prior to which he had been a Vice
President of the Adviser since November 1989. Mr. Daly has been a Vice President
of the Adviser since 1992, prior to which he was an Assistant Vice President of
the Piper Jaffray since 1990 and a broker with Piper Jaffray from 1987 to 1992.
Mr. Derck has been a Vice President of the Adviser since November 1992, prior to
which he had been a manager of Advisory Accounts Services with the Adviser since
April 1992 and, before that, an Assistant Vice President at First Trust since
1976. Ms. Harrod has been a Vice President of the Adviser since November 1992
and has been a trader for the Adviser since October 1989. Mr. Herrod has been a
Vice President of the Adviser since 1992, prior to which he was a Vice President
of Capital Markets at Washington Square Capital Management since 1987. Mr. Kevin
Jansen has been a Vice President of the Adviser since November 1993, prior to
which he was an Assistant Vice President of Piper Jaffray since 1992 and an
analyst at Piper Jaffray from 1991 to 1992. Mr. Kappenman has been a Vice
President of the Adviser since 1991. Ms. Kaul has been a Vice President and
Director of Corporate Communications of the Adviser since November 1991, prior
to which she was Copy Director and Assistant Vice President in the advertising
department of Piper Jaffray since 1986. Mr. Kightlinger has been a Vice
President of the Adviser since 1991, prior to which he had been a department
head and portfolio manager for TCF Bank Savings. Ms. Kung has been a Vice
President of the Adviser since May 1993, prior to which she had been a Senior
Consultant at Cytrol Inc. from 1989 to December 1992. Mr. Lee has been a Vice
President of the Adviser since November 1990, prior to which he had been the
National Sales Manager and Regional Vice President of Shurgard Capital Group,
Seattle, Washington, for eight years. Mr. Moore has been a Vice President of the
Adviser since 1992, prior to which he was a Portfolio Manager at Alpine Capital
Management from 1990 to 1992 and a broker at Hanifen Capital Management from
1990 to 1992. Mr. Nicoski has been a Senior Vice President of the Adviser since
October 1985 and a Managing Director of the Distributor since November 1986. Mr.
Phillips has been a Vice President of the Adviser since 1993 and has been an
insurance product manager at Piper Jaffray since 1987. Mr. Schonberg has been a
Vice President of the Adviser since November 1992 and a portfolio manager for
the Adviser since July 1989. Mr. Siedband has been a Vice President of the
Adviser since 1992. Mr. Stone has been a Vice President of the Adviser since
November 1991 and a fixed-income analyst of the Adviser since March 1990. Ms.
Theis has been a Vice President of the Adviser since November 1992, prior to
which she had been an Assistant Vice President of the Adviser since 1989. Mr.
Wesman has been a Vice President of the Adviser since January 1992. During 1991,
Mr. Wesman was self-employed, prior to which he had been the Regional Marketing
Director of Keyport Life Insurance Company (formerly Keystone Provident Life
Insurance Company) since January 1987. Ms. Winson has been a Vice President of
the Adviser since November 1993, prior to which she was an Assistant Vice
President of the Adviser since March 1993. Prior to March 1993, Ms. Winson was
an educator from 1990 to 1992.

Item 29. Principal Underwriters

(a) Piper Jaffray Inc. acts as principal underwriter for the Registrant and
also for three other open-end investment companies, Piper Funds Inc., the shares
of which are currently offered in thirteen series, Piper Institutional Funds
Inc., the shares of which are currently offered in three series and Piper Global
Funds Inc., the shares of which are currently offered in one series. Piper
Jaffray has acted as principal underwriter in connection with the initial public
offering of shares of 22 closed-end investment companies managed by the Adviser.

(b) The name, positions and offices with Piper Jaffray Inc., and positions
and offices with the Registrant of each director and officer of Piper Jaffray
Inc. are as follow:

Positions and Offices Positions and Offices
Name with Underwriter with Registrant

<S> <C> <C>
Addison L. Piper Chairman of the Board of None
Directors and Chief Executive
Officer

William H. Ellis President, Chief Operating Chairman of
Officer and Member of the Board of
Board of Directors Directors

Karen M. Bohn Member of the Board None
of Directors

Ralph W. Burnet Member of the Board None
of Directors

John L. McElroy, Jr. Member of the Board None
of Directors

Kathy Halbreich Member of the Board None
of Directors

Robert S. Slifka Member of the Board None
of Directors

David Stanley Member of the Board None
of Directors

Bruce D. Aamoth Managing Director None

Craig W. Agneberg Managing Director None

Larry E. Bare Managing Director None

James J. Bellus Managing Director None

AnnDrea M. Benson Managing Director None

Lloyd K. Benson Managing Director None

James L. Bergtold Managing Director None

Peter A. Bessette Managing Director None

Gary J. Blauer Managing Director None

Ronald O. Braun Managing Director None

Barney Brenner Managing Director None

Paul E. Brodsky Managing Director None

Edward M. Caillier Managing Director None

Kenneth S. Cameranesi Managing Director None

Stephen M. Carnes Managing Director None

Joseph V. Caruso Managing Director None

Antonio J. Cecin Managing Director None

Linda A. Clark Managing Director None

Stephen B. Clark Managing Director None

David P. Crosby Managing Director None

Thomas S. Cousins Managing Director None

George S. Dahlman Managing Director None

Leslie E. Danford Jr. Managing Director None

Michael D. Deede Managing Director None

Thomas M. Delmoor Managing Director None

Jack C. Dillingham Managing Director None

Mark T. Donahoe Managing Director None

Andrew S. Duff Managing Director None

Michael D. Duffy Managing Director None

Neil Dunn Managing Director None

Jeffrey M. Eggemeyer Managing Director None

Fred R. Eoff, Jr. Managing Director None

Richard D. Estenson Managing Director None

Francis E. Fairman IV Managing Director None

Gordon R. Ferguson Managing Director None

Paul Ferry Managing Director None

Deanne W. Fewel Managing Director None

Mark E. Fisler Managing Director None

Michael W. Follett Managing Director None

Dean A. Frederickson Managing Director None

Marvin P. Geisness Managing Director None

Peter M. Gill Managing Director None

E. Peter Gillette Jr. Managing Director None

Robert S. Gilman Managing Director None

Paul D. Grangaard Managing Director None

R. Hunt Greene Managing Director None

G. Jeffrey Hamilton Managing Director None

James S. Harrington Managing Director None

Lynne M. Harrington Managing Director None

Charles N. Hayssen Managing Director, Chief Treasurer
Financial Officer, & Treasurer

William P. Henderson Managing Director None

Allan F. Hickok Managing Director None

Richard L. Hines Managing Director None

John E. Houlihan Managing Director None

Bruce C. Huber Managing Director None

Elizabeth A. Huey Managing Director None

Richard M. Hufnagel Managing Director None

John R. Jacobs Managing Director None

Nicholas P. Karos Managing Director None

Alan W. Kennebeck Managing Director None

John S. Kennefick Managing Director None

Charles B. Lannin Managing Director None

Eric W. Larson Managing Director None

Dan L. Lastavich Managing Director None

Douglas G. Lingafelter Managing Director None

Brian J. Luedtke Managing Director None

Anthony A. Lusvardi Managing Director None

Robert J. Magnuson Managing Director None

James M. Manire Jr. Managing Director None

Robert E. Mapes Managing Director None

Andrew E. Marks Managing Director None

Peter T. Mavroulis Managing Director None

Michael P. McMahon Managing Director None

Gregory T. McNellis Managing Director None

Thomas A. Medlin Managing Director None

John V. Miller Managing Director None

Dennis V. Mitchell Managing Director None

Susan D. Musselman Managing Director None

Barry J. Nordstrand Managing Director None

Benjamin S. Oehler Managing Director None

Joseph J. Olchefske Managing Director None

Brooks G. O'Neil Managing Director None

John P. O'Neill Managing Director None

John Otterlei Managing Director None

James M. Palmer Managing Director None

John F. Pellicci Managing Director None

Gary M. Petrucci Managing Director None

Robin C. Pfister Managing Director None

Rex W. Ramsay Managing Director None

Savino J. Ranallo Managing Director None

Roger W. Redmond Managing Director None

Ronald N. Reiches Managing Director None

Robert P. Rinek Managing Director None

Jim M. Roane Managing Director None

Bryan C. Roche Managing Director None

Deborah K. Roesler Managing Director None

David E. Rosedahl Managing Director, General Secretary
Counsel and Secretary

James J. Rude Managing Director None

Thomas P. Schnettler Managing Director None

Steven R. Schroll Managing Director None

Joyce Nelson Schuette Managing Director None

Michael A. Schultz Managing Director None

Lawrence M. Schwartz Jr. Managing Director None

Sandra K. Shrewsbury Managing Director None

John C. Siegler Managing Director None

Jay Silver Managing Director None

David P. Sirianni Managing Director None

Arch C. Smith Managing Director None

Robert L. Sonnek Managing Director None

Thomas E. Stanberry Managing Director None

DeLos V. Steenson Managing Director None

John P. Sten Managing Director None

Richard J. Stream Managing Director None

D. Greg Sundberg Managing Director None

William H. Teeter Managing Director None

Ann C. Tillotson Managing Director None

Marie A. Urich Managing Director None

Darrell L. Westby Managing Director None

David R. Westcott Managing Director None

Douglas R. Whitaker Managing Director None

Douglas H. Wilford Managing Director None

Eric P. Wilson Managing Director None

Stephen W. Woodard Managing Director None

Mark Wren Managing Director None

Laura P. Wright Managing Director None

Saul Yaari Managing Director None

Gary L. Zanin Managing Director None

</TABLE>

The principal business address of each of the individuals listed above is Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3804.

Item 30. Location of Accounts and Records

The physical possession of the accounts, books, and other documents
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and Rules 3la-1 to 3la-3 promulgated thereunder is maintained by the Registrant
at Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota
55402-3804, except that the physical possession of certain accounts, books and
other documents related to the custody of the Registrant's securities is
maintained by Investors Fiduciary Trust Company, 210 West Tenth Street, Kansas
City, Missouri 64105.

Item 31. Management Services

Not applicable.

Item 32. Undertakings

(a) Not applicable.

(b) The Registrant, on behalf of Adjustable Rate Mortgage Securities Fund,
a new series of the Registrant, undertakes to file a Post-Effective Amendment,
using financial statements which need not be certified, within four to six
months after the commencement of operations of such series.

(c) Each recipient of a prospectus of any series of the Registrant may
request the latest Annual Report and such Annual Report will be furnished by the
Registrant without charge.

(d) Registrant undertakes that it will not offer any Adjustable Rate
Mortgage Securities Fund shares registered pursuant to this Registration
Statement prior to (i) the effectiveness of the merger of American Adjustable
Rate Term Trust Inc.--1996, American Adjustable Rate Term Trust Inc.--1997,
American Adjustable Rate Term Trust Inc.--1998 and American Adjustable Rate
Term Trust Inc.--1999 into Registrant and (ii) the effectiveness of a
post-effective amendment to this Registration Statement containing financial
statements of American Adjustable Rate Term Trust Inc.--1998 (the surviving
entity for accounting purposes) for the year ended August 31, 1994 and the six
months ended February 28, 1995 and related financial highlights.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
the Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis and State of
Minnesota on the 31st day of August, 1995.

PIPER FUNDS INC.--II
(Registrant)

By /s/ Paul A. Dow
Paul A. Dow
President

Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:

/s/ Paul A. Dow President (principal August 31, 1995
Paul A. Dow executive officer)

/s/ Charles N. Hayssen Treasurer (principal August 31, 1995
Charles N. Hayssen financial and
accounting officer)

David T. Bennett* Director

Jaye F. Dyer* Director

William H. Ellis* Director

Karol D. Emmerich* Director

Luella G. Goldberg* Director

George Latimer* Director

</TABLE>

*By /s/ Paul A. Dow
Paul A. Dow
Attorney-in-Fact

Dated: August 31, 1995