O SHAUGHNESSY FUNDS INC, N-30D, 1998-11-30

O SHAUGHNESSY FUNDS INC
N-30D, 1998-11-30

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O'SHAUGHNESSY

BUILDING
NEW STANDARDS
FOR INVESTMENT
SUCCESS

CORNERSTONE GROWTH FUND
CORNERSTONE VALUE FUND
ANNUAL REPORT
SEPTEMBER 30, 1998

<PAGE>
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND

November 3, 1998

Dear Fellow Shareholders,

Enclosed is the annual report for the O'Shaughnessy Cornerstone Growth and
Cornerstone Value Funds. The report contains financial statements for the Funds
during the year ended September 30, 1998 as well as the Funds' portfolios on
that date.

The best thing that can be said about the past three months is that they are
behind us. The third quarter of 1998 can now take its place of dubious
honor--along with October of 1987 and the third quarter of 1990--in the rogue's
gallery of market environments that make successful long-term investing such a
challenge. From high to low, the average U.S. stock lost 49 percent of its value
in a few short months. To give the swiftness of this decline perspective, in
1973 and 1974 it took investors TWO YEARS to inflict similar damage!

Between September 30, 1997 and September 30, 1998, major indexes like the
Russell 2000--Cornerstone Growth's small-cap benchmark--lost 18.90 percent,
whereas large-cap indexes like the S&P 500 gained 9.05 percent. Over the same
period, the Cornerstone Growth Fund lost 27.63 percent and the Cornerstone Value
Fund 4.32 percent. As I write on November 3rd, both strategies have recovered
significantly from the third quarter swoon. The Cornerstone Growth Fund is up
35.77 percent from its October 8th low and the Cornerstone Value Fund is up 4.25
percent for 1998. Yet to focus on EITHER this short-term swoon or subsequent
short-term recovery would be foolish. Short-term thinking only leads to horrible
despair in downturns and unrealistic optimism in strongly rising markets. To
stay the course, we must always focus on why we're investing in the first
place--usually for our retirement or our children's education. In most
circumstances, these are events that are at least five to ten years away.

Let me pose a question. Do you think the stock market's performance over the
next ten years will be average? Above average? Below average? Let's assume that
market levels will be average and look at the Strategy Index returns set forth
in detail in your prospectus. If you take the Cornerstone Growth Strategy and
examine its returns over the previous ten year periods, the average of those
ten-year period returns would have resulted in an increase in the value of the
Strategy by a factor of 5.51. For the less volatile Cornerstone Value Strategy,
the same analysis would have resulted in a factor of 4.05. Obviously, the past
doesn't equal the future, no strategy is certain to be profitable or successful,
and our Funds face expenses such as trading costs, management fees and taxes
that the pure Strategies do not. But looking at nearly 50 years of data covering
market ups and downs can give you an indication of the value of staying the
course as a long-term investor, and not putting too much stock in short-term
peaks and valleys.

This is a vital exercise, because it helps us reframe our expectations and focus
on the potential value of our investments over a reasonable time horizon. Focus
on semi-annual periods or fiscal quarters, and your chances of staying the
course are slim. Quarters like the third quarter of 1998 would have us dashing
for the exits. Conversely, times like the third quarter of 1997--when the
Cornerstone Growth Fund had a gain of 29.01 percent--would have us reaching for
the stars. In both instances, expecting that short-term trend to continue would
be wrong. Because when we narrow our focus, we look at the CHANGE in our wealth
rather than expected future value of our portfolio.
<PAGE>
2
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND

As strategic investors, we've made a commitment to using strategies that have
established themselves over time. The hard part of the deal is that in order to
take advantage of market upswings we've got to hang on through market storms. We
must stick to our strategies through thick and thin, because as much as we'd
like to hope, market timing based on gut instincts isn't the best course.
Indeed, I'm proud that we have stuck to our discipline in the face of such
volatility. We'll never deviate from our strategies--and you'll never have to
worry about us failing to use the strategy in which you invested.

Everyone at O'Shaughnessy Capital Management--from the company itself, to me, to
every one of our employees--is invested in the O'Shaughnessy Funds. We've
endured this rough patch together, and we hope to reap the rewards of long-term
strategic investing together with you as well.

Sincerely,

/s/ James P. O'Shaughnessy

James P. O'Shaughnessy
<PAGE>
3
O'SHAUGHNESSY CORNERSTONE GROWTH FUND

Comparison of the change in value of a $10,000 investment in the O'Shaughnessy
Cornerstone Growth Fund versus the S&P 500 Composite Stock Price Index, the
Lipper Small Cap Fund Index and the Russell 2000 Index

Average Total Return
Period ended September 30, 1998
1 Year .............................. -27.63%
Since inception (11/1/96) ........... 5.48%

O'Shaughnessy S & P 500
Cornerstone Composite Stock Lipper Small Cap Russell 2000
Growth Fund Price Index Fund Index Index
------------- --------------- ---------------- ------------

01-Nov-96 10,000 10,000 10,000 10,000
31-Dec-96 10,073 10,560 10,218 10,678
31-Mar-97 9,753 10,842 9,255 10,127
30-Jun-97 11,864 12,729 10,829 11,764
30-Sep-97 15,305 13,684 9,177 13,510
31-Dec-97 13,229 14,080 8,642 13,051
31-Mar-98 15,000 16,041 9,533 14,397
30-Jun-98 15,498 16,570 9,165 13,739
30-Sep-98 11,077 14,921 7,204 10,957

Past performance is not predictive of future performance.

O'SHAUGHNESSY CORNERSTONE VALUE FUND

Comparison of the change in value of a $10,000 investment in the O'Shaughnessy
Cornerstone Value Fund versus the S&P 500 Composite Stock Price Index and the
Lipper Growth & Income Fund Index

Average Total Return
Period ended September 30, 1998
1 Year .............................. -4.32%
Since inception (11/1/96) ........... 5.22%

O'Shaughnessy S & P 500
Cornerstone Composite Stock Lipper Growth & Income
Value Fund Price Index Fund Index
------------- --------------- ----------------------

01-Nov-96 10,000 10,000 10,000
31-Dec-96 10,028 10,560 10,540
31-Mar-97 9,818 10,842 10,717
30-Jun-97 10,729 12,729 12,221
30-Sep-97 11,521 13,684 13,244
31-Dec-97 11,562 14,080 13,372
31-Mar-98 12,934 16,041 14,900
30-Jun-98 12,253 16,570 14,929
30-Sep-98 11,023 14,921 13,067

Past performance is not predictive of future performance.
<PAGE>
4
O'SHAUGHNESSY CORNERSTONE GROWTH FUND

TOP TEN PORTFOLIO HOLDINGS AT SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Percent of Net Assets
- --------------------------------------------------------------------------------

1) Best Buy Co., Inc........................................ 5.27%

2) American Eagle Outfitters, Inc........................... 5.23%

3) Cablevision Systems Corporation.......................... 4.23%

4) Musicland Stores Corporation............................. 3.96%

5) Dycom Industries, Inc.................................... 3.38%

6) Trans World Entertainment Corporation.................... 3.31%

7) Linens `n Things, Inc.................................... 2.95%

8) OshKosh B'Gosh, Inc...................................... 2.95%

9) Fidelity National Financial, Inc......................... 2.54%

10) MotivePower Industries, Inc.............................. 2.35%

O'SHAUGHNESSY CORNERSTONE VALUE FUND

1) British Telecommunication PLC............................ 3.60%

2) Tele Danmark A/S......................................... 3.38%

3) Southern New England Telecommunications Corporation...... 3.36%

4) Pharmacia & Upjohn, Inc.................................. 2.95%

5) Chrysler Corporation..................................... 2.93%

6) Amoco Company............................................ 2.73%

7) U S West Communications Group............................ 2.50%

8) Texaco, Inc.............................................. 2.49%

9) Frontier Corporation..................................... 2.46%

10) Chevron Corporation...................................... 2.37%
<PAGE>
5
O'SHAUGHNESSY CORNERSTONE GROWTH FUND

PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 100.08% Market Value
- --------------------------------------------------------------------------------

AIR CONDITIONING & HEATING EQUIPMENT: 2.29%
224,743 International Comfort Products Corporation*........... $1,840,083
----------

AIR COURIER SERVICES: 1.30%
60,554 Airborne Freight Corporation.......................... 1,048,341
----------

AIR TRANSPORTATION: 1.90%
30,112 US Airways Group, Inc.*............................... 1,524,420
----------

APPAREL & OTHER FINISHED PRODUCTS: 2.95%
114,084 OshKosh B'Gosh, Inc................................... 2,367,243
----------

BOOK & MUSIC STORES: 1.89%
56,321 Barnes & Noble, Inc.*................................. 1,520,667
----------

BOTTLED & CANNED SOFT DRINKS: 1.66%
52,836 Coca-Cola Enterprises, Inc............................ 1,334,109
----------

CABLE AND OTHER PAY TV SERVICES: 4.23%
78,636 Cablevision Systems Corporation*...................... 3,396,179
----------

CATALOG MAIL-ORDER HOUSES: 2.34%
627,344 Hanover Direct, Inc.*................................. 1,882,032
----------

COMMERCIAL PRINTING: 0.99%
93,004 Mail-Well, Inc.*...................................... 796,347
----------

COMPUTERS & ACCESSORIES: 2.16%
58,901 CTS Corporation....................................... 1,737,579
----------

CONSUMER ELECTRONIC STORES: 5.27%
102,046 Best Buy Co., Inc.*................................... 4,234,909
----------

ELECTRONIC CONNECTORS: 1.46%
33,761 Amphenol Corporation*................................. 1,177,415
----------

FABRICATED PLATE WORKS: 1.44%
78,405 Aavid Thermal Technologies, Inc.*..................... 1,156,474
----------
<PAGE>
6
O'SHAUGHNESSY CORNERSTONE GROWTH FUND

PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1998, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------

FAMILY CLOTHING STORES: 5.23%
121,305 American Eagle Outfitters, Inc.*...................... $4,200,185
----------

FLAT GLASS: 0.75%
144,110 Vitro, S.A. de C.V.................................... 603,461
----------

GENERAL INDUSTRIAL MACHINERY & EQUIPMENT: 1.31%
74,336 Gardner Denver, Inc.*................................. 1,049,996
----------

GROCERY STORES: 1.93%
36,839 Whole Foods Market, Inc.*............................. 1,551,843
----------

HOBBY, TOY, AND GAME SHOPS: 2.04%
64,381 Michaels Stores, Inc.*................................ 1,641,716
----------

HOME FURNITURE STORE: 2.95%
86,355 Linens `n Things, Inc.*............................... 2,374,762
----------

INDUSTRIAL TRUCKS, TRACTORS, TRAILERS: 1.49%
80,049 Terex Corporation*.................................... 1,195,732
----------

JEWELRY, SILVERWARE, PLATED WARE: 1.49%
70,523 Oneida Ltd............................................ 1,198,891
----------

MEMBERSHIP SPORT & REC CLUBS: 1.86%
86,036 Bally Total Fitness Holding Corporation*.............. 1,494,875
----------

MOTOR HOMES: 2.24%
85,870 National R.V. Holdings, Inc.*......................... 1,803,270
----------

MOTOR VEHICLES: 2.13%
75,825 Navistar International Corporation*................... 1,715,540
----------

OIL & GAS FIELD SERVICES: 1.36%
113,185 Stolt Comex Seaway S.A.*.............................. 1,089,406
----------

OPERATIVE BUILDERS: 3.82%
68,107 Crossmann Communities, Inc.*.......................... 1,370,653
120,459 Standard Pacific Corporation.......................... 1,701,483
----------
3,072,136
----------
<PAGE>
7
O'SHAUGHNESSY CORNERSTONE GROWTH FUND

PAPER & PAPER PRODUCTS - WHOLESALE: 2.33%
78,328 United Stationers Inc.*................................ $1,870,081
----------

PETROLEUM REFINING: 1.92%
237,091 Frontier Oil Corporation*.............................. 1,541,092
----------

PHOTOGRAPHIC EQUIPMENT & SUPPLY: 2.08%
70,345 Avid Technology, Inc.*................................. 1,675,090
----------

PRINTED CIRCUIT BOARDS: 1.04%
69,111 The DII Group, Inc.*................................... 837,971
----------

PUBLIC BUILDING & RELATED FURNITURE: 2.07%
73,923 Virco Mfg. Corporation................................. 1,663,274
----------

RADIO, TV BROADCAST, COMMUNICATION EQUIPMENT: 1.48%
97,822 Spectrian Corporation*................................. 1,186,092
----------

RAILROAD EQUIPMENT: 2.35%
80,975 MotivePower Industries, Inc.*.......................... 1,892,791
----------

REAL ESTATE AGENTS & MANAGERS: 1.50%
137,461 Grubb & Ellis Company*................................. 1,202,784
----------

RECORD AND TAPE STORES: 7.27%
257,335 Musicland Stores Corporation*.......................... 3,184,521
145,677 Trans World Entertainment Corporation*................. 2,658,596
----------
5,843,117
----------
REFRIGERATION & SERVICES INDUSTRIAL MACHINES: 0.82%
91,009 Tokheim Corporation*................................... 659,815
----------

SECURITY BROKERS & DEALERS: 3.44%
47,456 Donaldson, Lufkin & Jenrette, Inc...................... 1,213,094
76,245 The Advest Group, Inc.................................. 1,553,492
----------
2,766,586
----------
<PAGE>
8
O'SHAUGHNESSY CORNERSTONE GROWTH FUND

SHIP & BOAT BUILDING & REPAIR: 1.72%
51,348 McDermott International, Inc.......................... $ 1,383,187
-----------

STEEL PIPE & TUBES: 0.64%
74,336 Maverick Tube Corporation*............................ 511,060
-----------

STEEL WORKS & BLAST FURNACES: 0.84%
109,102 NS Group, Inc.*....................................... 675,069
-----------

TELEPHONE COMMUNICATIONS: 0.53%
86,775 Grupo Iusacell, S.A. de C.V.*......................... 428,451
-----------

TITLE INSURANCE: 2.54%
60,477 Fidelity National Financial, Inc...................... 2,044,879
-----------

TRUCKING: 1.38%
192,955 Arkansas Best Corporation*............................ 1,109,491
-----------

VARIETY STORES: 3.21%
107,513 Ames Department Stores, Inc.*......................... 1,364,071
91,835 Fred's, Inc........................................... 1,216,814
-----------
2,580,885
-----------
WATER, SEWER, PIPELINE CONSTRUCTION: 3.38%
87,360 Dycom Industries, Inc.*............................... 2,719,080
-----------

WIRE & CABLE PRODUCTS: 1.06%
91,999 Encore Wire Corporation*.............................. 850,991
-----------

Total Common Stocks (cost $98,217,604)................ 80,449,397
-----------

See Notes to Financial Statements.
<PAGE>
9
O'SHAUGHNESSY CORNERSTONE GROWTH FUND

PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1998, CONTINUED
- --------------------------------------------------------------------------------
Principal Amount Short-Term Investments: 1.48%
- --------------------------------------------------------------------------------

218,963 American Family Holdings, Inc. Demand Note,
4.9628%, due 10/1/98+.................................... $ 218,963
317,079 Firstar Bank Demand Note, 5.0937%, due 10/1/98+.......... 317,079
319,743 Warner Lambert Demand Note, 4.9630%, due 10/1/98+........ 319,743
330,000 Wisconsin Electric Power Company Demand Note,
4.9628%, due 10/1/98+.................................... 330,000
-----------

Total Short-Term Investments (cost $1,185,785)........... 1,185,785
-----------

Total Investments in Securities (cost
$99,403,389): 101.56%.................................... 81,635,182
Other Liabilities less Assets: (1.56%)................... (1,256,533)
-----------
TOTAL NET ASSETS: 100.0% ................................ $80,378,649
===========
* Non-income producing security.

+ Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rate changes periodically on specified dates. The
rates listed are as of September 30, 1998.

See Notes to Financial Statements.
<PAGE>
10
O'SHAUGHNESSY CORNERSTONE VALUE FUND

PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.41% Market Value
- --------------------------------------------------------------------------------

BOOKS, MAGAZINE PUBLISHING & PRINTING: 1.75%
20,037 The Reader's Digest Association, Inc.................. $ 383,207
----------

CHEMICALS & ALLIED PRODUCTS: 1.06%
7,320 Imperial Chemical Industries ADR...................... 232,410
----------

COMMERCIAL BANKS: 4.65%
4,258 Bankers Trust NY Corp................................. 251,222
6,726 National Australia Bank Limited....................... 403,140
4,710 NatWest Group......................................... 366,202
----------
1,020,564
----------
CONSUMER PACKAGED GOODS: 3.64%
10,454 Philip Morris Companies Inc........................... 481,537
12,584 RJR Nabisco Holdings Corp............................. 316,960
----------
798,497
----------
COPPER REFINING: 1.81%
7,617 Phelps Dodge Corporation.............................. 397,512
----------

DEPARTMENT STORES: 1.61%
7,852 J.C. Penney Company, Inc.............................. 352,849
----------

GRAIN MILL PRODUCTS: 2.12%
6,634 General Mills, Inc.................................... 464,380
----------

INDUSTRIAL INORGANIC CHEMICALS: 1.60%
14,324 BOC Group PLC......................................... 350,938
----------

INDUSTRIAL ORGANIC CHEMICALS: 1.82%
17,886 Lyondell Petrochemical Company........................ 397,963
----------

INSURANCE COMPANY: 1.19%
12,799 Allied Zurich PLC*.................................... 261,580
----------

LUMBER AND WOOD PRODUCTS: 1.86%
9,655 Weyerhaeuser Company.................................. 407,320
----------

METAL MINING: 1.63%
30,050 Freeport-McMoRan Copper & Gold Inc.................... 356,844
----------
<PAGE>
11
O'SHAUGHNESSY CORNERSTONE VALUE FUND

PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1997, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------

MISC NONDURABLE GOODS - WHOLESALE: 1.32%
28,268 Minorco............................................... $ 289,747
----------

MOTION PICTURE SERVICES: 1.65%
42,048 Rank Group ADR........................................ 362,664
----------

MOTOR VEHICLE PARTS & ACCESSORIES: 1.79%
11,949 Tenneco, Inc.......................................... 392,823
----------

MOTOR VEHICLE PARTS SUPPLY: 1.74%
55,616 Pacific Dunlop Ltd.................................... 382,360
----------

MOTOR VEHICLES: 6.96%
13,403 Chrysler Corporation.................................. 641,669
9,747 Ford Motor Company.................................... 457,500
7,811 General Motors Corporation............................ 427,164
----------
1,526,333
----------

NATURAL RESERVE INVESTMENT BANK: 1.48%
11,744 Anglo-American Corp. of South Africa.................. 324,428
----------

OIL COMPANY - INTEGRATED: 1.59%
16,176 Occidental Petroleum Corporation...................... 347,784
----------

PAPER MILLS: 1.59%
8,836 Union Camp Corporation................................ 347,918
----------

PERSONAL CREDIT INSTITUTIONS: 0.77%
2,599 Associates First Capital Corporation.................. 169,585
----------

PETROLEUM REFINING: 13.34%
11,108 Amoco Company......................................... 598,443
5,958 Atlantic Richfield Company............................ 422,646
6,193 Chevron Corporation................................... 520,599
6,593 Mobil Corporation..................................... 500,656
8,723 Texaco, Inc........................................... 546,823
14,785 Ultramar Diamond Shamrock Corporation................. 336,359
----------
2,925,526
----------
<PAGE>
12
O'SHAUGHNESSY CORNERSTONE VALUE FUND

PHARMACEUTICAL PREPARATIONS: 2.95%
12,891 Pharmacia & Upjohn, Inc............................... $ 646,967
----------

PLASTICS, RESINS, ELASTOMERS: 3.63%
7,975 Eastman Chemical Company.............................. 402,239
4,619 The Dow Chemical Company.............................. 394,636
----------
796,875
----------

STEEL WORK, ROLL & FINISH MILL: 1.64%
28,688 Worthington Industries, Inc........................... 358,600
----------

STEEL WORKS & BLAST FURNACES: 5.14%
22,054 British Steel PLC..................................... 401,107
25,526 The Broken Hill Propretary Company Limited............ 365,341
15,093 USX - U.S. Steel Group................................ 360,345
----------
1,126,793
----------
TELECOM SERVICES: 12.86%
19,709 Frontier Corporation.................................. 539,534
22,920 Hong Kong Telecom, Ltd................................ 438,345
11,392 Koninklijke PTT Nederland NV.......................... 341,760
15,398 Tele Danmark A/S...................................... 741,029
12,184 Telecom Corp. of New Zealand Ltd...................... 367,043
13,198 Telecom de Argentina.................................. 391,816
----------
2,819,527
----------
TELEPHONE - INTEGRATED REGIONALS: 2.28%
9,071 GTE Corporation....................................... 498,905
----------

TELEPHONE - REGIONAL: 8.16%
10,402 Bell Atlantic Corporation............................. 503,847
9,419 Southern New England Telecommunications Corporation... 735,859
10,474 U S West Communications Group......................... 549,230
----------
1,788,936
----------
TELEPHONE SERVICE: 3.60%
5,937 British Telecommunication PLC......................... 789,992
----------

TOBACCO: 0.88%
12,799 British American Tobacco*.............................. 193,585
----------

<PAGE>
13
O'SHAUGHNESSY CORNERSTONE VALUE FUND

TRANSPORTATION SERVICES: 1.30%
11,392 TNT Post Group N.V. ADR................................$ 284,088
-----------

Total Common Stocks (cost $23,252,237)................. 21,797,500
-----------

Total Investments in Securities (cost
$23,252,237): 99.41%................................... 21,797,500
Other Assets less Liabilities: 0.59%................... 128,893
-----------
TOTAL NET ASSETS: 100.0%...............................$21,926,393
===========
* Non-income producing security.

See Notes to Financial Statements.
<PAGE>
14
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND

STATEMENT OF ASSETS AND LIABILITIES AT SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
CORNERSTONE CORNERSTONE
GROWTH FUND VALUE FUND
- --------------------------------------------------------------------------------

ASSETS
Investments in securities, at value (identified
cost $99,403,389 and $23,252,237, respectively) .. $ 81,635,182 $21,797,500
Receivables:
Investment sold ................................. -- 214,799
Fund shares sold ................................ 196,339 21,380
Dividends and interest .......................... 13,316 66,610
Other ........................................... 5,909 4,273
Deferred organization costs ....................... 15,570 15,570
Prepaid expenses and other ........................ 46,754 15,920
------------ -----------
Total assets ................................. 81,913,070 22,136,052
------------ -----------

LIABILITIES
Payables:
Portfolio securities purchased .................. 1,198,537 --
Fund shares repurchased ......................... 207,799 --
Funds advanced by custodian ..................... -- 158,116
Advisory fee .................................... 70,223 14,198
Administration fee .............................. 7,252 1,811
Accrued expenses .................................. 50,610 35,534
------------ -----------
Total liabilities ............................ 1,534,421 209,659
------------ -----------

NET ASSETS .......................................... $ 80,378,649 $21,926,393
============ ===========

NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
[$80,378,649/8,398,957 and $21,926,393/2,023,402
shares outstanding, respectively; 25,000,000,000
shares (par value $.0001) authorized] ........... $ 9.57 $ 10.84
============ ===========

SOURCE OF NET ASSETS
Paid-in capital ................................... $107,137,314 $22,459,953
Undistributed net investment income ............... -- 360,751
(Accumulated) Undistributed net realized
(loss) gain on investment transactions .......... (8,990,458) 560,426
Net unrealized depreciation of investments ........ (17,768,207) (1,454,737)
------------ -----------
Net assets ................................... $ 80,378,649 $ 21,926,393
============ ============

See Notes to Financial Statements.
<PAGE>
15
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
CORNERSTONE CORNERSTONE
GROWTH FUND VALUE FUND
- --------------------------------------------------------------------------------

INVESTMENT INCOME
Income:
Dividends (net of foreign witholding tax of
$0 and $28,050, respectively) ............... $ 176,437 $ 726,563
Interest ...................................... 28,540 8,115
Other ......................................... 29,383 1,724
------------ -----------
Total income ............................... 234,360 736,402
------------ -----------
Expenses:
Advisory fees ................................. 573,605 152,188
Custodian and accounting fees ................. 69,278 39,305
Administration fees (Note 3) .................. 77,297 20,567
Professional fees ............................. 18,349 11,974
Registration fees ............................. 47,294 27,397
Reports to shareholders ....................... 24,050 10,547
Transfer agent fees ........................... 65,243 21,303
Directors' fees ............................... 6,004 6,004
Amortization of deferred organization costs ... 5,041 5,041
Other ......................................... 13,993 4,693
------------ -----------
Total expenses ............................. 900,154 299,019
------------ -----------
NET INVESTMENT (LOSS) INCOME ............. (665,794) 437,383
------------ -----------
REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS
Net realized (loss) gain on security
transactions................................... (1,821,292) 561,340
Net change in unrealized depreciation
of investments................................. (27,903,738) (2,626,376)
------------ -----------
Net realized and unrealized loss on
investments................................ (29,725,030) (2,065,036)
------------ -----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS ....................... $(30,390,824) $(1,627,653)
============ ===========

See Notes to Financial Statements.
<PAGE>
16
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND

<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
CORNERSTONE GROWTH FUND CORNERSTONE VALUE FUND
- -----------------------------------------------------------------------------------------------------------------------
Year Nov. 1, 1996* Year Nov. 1, 1996*
Ended through Ended through
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment (loss) income .......................... $ (665,794) $ (143,245) $ 437,383 $ 156,779
Net realized (loss) gain on security transactions ..... (1,821,292) 338,817 561,340 1,556
Net change in unrealized appreciation
(depreciation) on investments ....................... (27,903,738) 10,135,531 (2,626,376) 1,171,639
------------ ----------- ----------- -----------
NET (DECREASE) INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ..................... (30,390,824) 10,331,103 (1,627,653) 1,329,974
------------ ----------- ----------- -----------

DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ............................ -- (346) (231,740) (1,671)
Net realized gains from security transactions ......... (7,364,392) -- (2,470) --
------------ ----------- ----------- -----------
TOTAL DISTRIBUTIONS ............................. (7,364,392) (346) (234,210) (1,671)
------------ ----------- ----------- -----------

CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net assets derived
from capital shares transactions (a) ................ (26,875,315) 80,902,793 10,318,880 12,116,073
------------ ----------- ----------- -----------
TOTAL (DECREASE) INCREASE IN NET ASSETS ......... (10,879,901) 91,233,550 8,457,017 13,444,376

NET ASSETS
Beginning of period ................................... 91,258,550 25,000 13,469,376 25,000
------------ ----------- ----------- -----------
END OF PERIOD (including undistributed
net investment (loss) income of ($772,185),
($143,591), $360,751, and $155,108, respectively) .... $ 80,378,649 $91,258,550 $21,926,393 $13,469,376
============ =========== =========== ===========

(a) A summary of capital shares transactions is as follows:
Year November 1, 1996*
Ended through
September 30, 1998 September 30, 1997
------------------------- ------------------------
CORNERSTONE GROWTH FUND ................................. Shares Value Shares Value
---------- ------------ ---------- -----------
Shares sold ............................................. 9,244,626 $116,802,209 6,334,346 $85,931,562
Shares issued on reinvestment of distributions .......... 631,833 7,164,991 30 297
Shares redeemed ......................................... (7,444,063) (97,091,885) (370,315) (5,029,066)
Net increase ............................................ 2,432,396 $ 26,875,315 5,964,061 $80,902,793

CORNERSTONE VALUE FUND
Shares sold ............................................. 1,691,812 $ 20,010,395 1,309,392 $13,619,016
Shares issued on reinvestment of distributions .......... 19,959 226,714 132 1,322
Shares redeemed ......................................... (859,354) (9,918,229) (141,039) (1,504,265)
Net increase ............................................ 852,417 $ 10,318,880 1,168,485 $12,116,073
</TABLE>
* Commencement of operations

See Notes to Financial Statements
<PAGE>
17
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND

<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
PER SHARE OPERATING PERFORMANCE (FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- ------------------------------------------------------------------------------------------------------------
CORNERSTONE GROWTH FUND CORNERSTONE VALUE FUND
- ------------------------------------------------------------------------------------------------------------
Year Nov. 1, 1996* Year Nov. 1, 1996*
Ended through Ended through
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ... $ 15.30 $10.00 $11.50 $10.00
------- ------ ------ ------
Income from investment operations:
Net investment (loss) income ......... (.07) (.02) .21 .15
Net realized and unrealized (loss)
gain on investments ................ (3.88) 5.32 (0.70) 1.37
------- ------ ------ ------
Total from investment operations ....... (3.95) 5.30 (0.49) 1.52
------- ------ ------ ------

Less distributions:
From net investment income ........... -- -- (0.17) (0.02)
From net capital gains ............... (1.78) -- -- --
------- ------ ------ ------
Total distributions .................... (1.78) -- (0.17) (0.02)
------- ------ ------ ------

Net asset value, end of period ......... $ 9.57 $15.30 $10.84 $11.50
======= ====== ====== ======

TOTAL RETURN ........................... (27.63%) 53.05%** (4.32%) 15.21%**

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) ... $ 80.4 $ 91.3 $ 21.9 $ 13.5

Ratio of expenses to average net assets:
Before expense reimbursement ......... 1.16% 1.63%++ 1.45% 2.66%++
After expense reimbursement .......... 1.16% 1.56%++ 1.45% 1.85%++

Ratio of net investment (loss) income to
average net assets:
Before expense reimbursement ......... (0.86%) (1.19%)++ 2.12% 1.93%++
After expense reimbursement .......... (0.86%) (1.12%)++ 2.12% 2.73%++

Portfolio turnover rate ................ 119.98% 15.52% 51.56% 2.01%
</TABLE>

* Commencement of operations.

** Not Annualized.

++ Annualized.

See Notes to Financial Statements.
<PAGE>
18
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION

The O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Cornerstone
Value Fund (the "Funds") are each a series of shares of O'Shaughnessy Funds,
Inc., which is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The Funds began operations
on November 1, 1996.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Funds. These policies are in conformity with generally accepted
accounting principles.

A. SECURITY VALUATION: The Funds' investments are carried at market
value. Securities listed on an exchange or quoted on a National
Market System are valued at the last sale price. Other securities
are valued at the mean between the last bid and asked prices.
Securities for which market quotations are not readily available, if
any, are valued following procedures approved by the Board of
Directors. Short-term investments are valued at amortized cost,
which approximates market value.

B. FEDERAL INCOME TAXES: It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no federal income tax
provision is required.

C. SECURITY TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS: Security
transactions are accounted for on the trade date. Dividend income
and distributions to shareholders are recorded on the ex-dividend
date. Realized gains and losses on securities sold are determined
under the first-in, first-out cost basis.

D. DEFERRED ORGANIZATION COSTS: The Funds have each incurred expenses
of $25,191 in connection with their organization. These costs have
been deferred and are being amortized on a straight-line basis over
a period of sixty months from the date the Fund commenced investment
operations.

E. USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of increases and
decreases in net assets during the reporting period. Actual results
could differ from those estimates.

NOTE 3 - INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

For the year ended September 30, 1998, O'Shaughnessy Capital Management,
Inc. (the "Advisor") provided the Funds with investment management services
under an Investment Advisory Agreement. The Advisor
<PAGE>
19
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND

NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------

furnished all investment advice, office space, facilities, and provides most of
the personnel needed by the Funds. As compensation for its services, the Advisor
is entitled to a monthly fee at the annual rate of 0.74 % based upon the average
daily net assets of the Funds.

The Funds are responsible for their own operating expenses. The Advisor has
agreed to reduce fees payable to it by the Fund or reimburse the Fund to the
extent necessary to limit the Fund's aggregate annual operating expenses to
2.00% of average net assets (the "expense cap"). Any such reductions made by the
Advisor in its fees or reimbursement of expenses with respect to the Fund are
subject to recapture by the Advisor provided the Fund is able to effect such
recapture while keeping total operating expenses at or below the annual expense
cap, and that no recapture will be made after September 30, 2000. Any amounts
reimbursed will have the effect of increasing fees otherwise paid by the Fund.
For the year ended September 30, 1998, no reimbursements were required.
Cumulative reimbursed expenses subject to recapture by the Advisor for
Cornerstone Growth Fund and Cornerstone Value Fund amounted to $8,879 and
$47,300, respectively, at September 30, 1998.

Investment Company Administration, LLC (the "Administrator") acts as the
Funds' Administrator under an Administration Agreement. The Administrator
prepares various federal and state regulatory filings, reports and returns for
the Funds; prepares reports and materials to be supplied to the trustees;
monitors the activities of the Funds' custodian, transfer agent and accountants;
coordinates the preparation and payment of the Funds' expenses and reviews the
Funds' expense accruals. For its services, the Administrator receives a monthly
fee per portfolio at the following annual rate:

Under $100 million - 0.10% of average daily net assets,
subject to a minimum fee of $40,000 annually
$100 to $200 million - 0.05% of average daily net assets
Over $200 million - 0.03% of average daily net assets

For the year ended September 30, 1998, the Administrator voluntarily
reduced its annual minimum fee to Cornerstone Value Fund to $20,567.

First Fund Distributors, Inc. (the "Distributor") acts as the Funds'
principal underwriter in a continuous public offering of the Funds' shares. The
Distributor is an affiliate of the Administrator.

Certain officers of the Funds are also officers and/or directors of the
Administrator and the Distributor.

NOTE 4 - PURCHASES AND SALES OF SECURITIES

For the year ended September 30, 1998, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, for the
Cornerstone Growth Fund were $111,216,308 and $91,925,795, respectively.

For the year ended September 30, 1998, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, for the
Cornerstone Value Fund were $21,379,901 and $10,345,427, respectively.
<PAGE>
20
O'SHAUGHNESSY CORNERSTONE GROWTH FUND
O'SHAUGHNESSY CORNERSTONE VALUE FUND

NOTE 5 - INCOME TAXES

At September 30, 1998, the Cornerstone Growth Fund has deferred capital
losses occurring subsequent to October 31, 1997 of approximately $7,700,000. For
tax purposes such losses will be reflected in the year ended September 30, 1999.

At September 30, 1998, the cost of securities of Cornerstone Growth fund
for income tax purposes was $100,764,405. Unrealized appreciation and
depreciation of securities were as follows:

Gross unrealized appreciation................. $ 5,999,737
Gross unrealized depreciation................. (25,128,960)
------------
Net unrealized depreciation............. $(19,129,223)
============

At September 30, 1997, the cost of securities of Cornerstone Value Fund for
income tax purposes was $23,551,366. Unrealized appreciation and depreciation of
securities were as follows:

Gross unrealized appreciation................. $ 1,832,046
Gross unrealized depreciation................. (3,585,912)
------------
Net unrealized depreciation............. $ (1,753,866)
============

Net realized capital gains/(losses) differ for financial statement and
tax purposes primarily due to differing treatments of wash sales.
<PAGE>
INDEPENDENT AUDITOR'S REPORT

Board Of Directors and Shareholders
O'Shaughnessy Cornerstone Growth Fund and
O'Shaughnessy Cornerstone Value Fund

We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of O'Shaughnessy Cornerstone Growth Fund and
O'Shaughnessy Cornerstone Value Fund as of September 30, 1998, the related
statements of operations for the year then ended, the statements of changes in
net assets and the financial highlights for the year ended September 30, 1998
and for the period from November 1, 1996 (commencement of operations) to
September 30, 1997. These financial statements and financial highlights are the
responsibility of Funds' management. Our responsibility is to express an opinion
on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
O'Shaughnessy Cornerstone Growth Fund and O'Shaughnessy Cornerstone Value Fund,
as of September 30, 1998, the results of operations, the changes in net assets
and the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

New York, New York
October 23, 1998
<PAGE>
INVESTMENT ADVISOR
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830

ADMINISTRATOR
Investment Company Administration, LLC
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018

DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018

TRANSFER AGENT
Firstar Mutual Fund Services, LLC
615 E. Michigan Street
Milwaukee, Wisconsin 53202

INDEPENDENT AUDITOR
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017

LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022

This report is intended for shareholders of O'Shaughnessy Cornerstone Growth
Fund and O'Shaughnessy Cornerstone Value Fund and may not be used as sales
literature unless preceded or accompanied by a current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Share price and returns will fluctuate so
that shares, when redeemed, may be more or less than their original cost.
Statements and other information herein are dated and are subject to change.
<PAGE>

O'SHAUGHNESSY

35 Madison Street
Greenwich, Connecticut
06830
877-OSFUNDS
www.osfunds.com

<PAGE>

O'SHAUGHNESSY

BUILDING
NEW STANDARDS
FOR INVESTMENT
SUCCESS

AGGRESSIVE GROWTH FUND
ANNUAL REPORT
SEPTEMBER 30, 1998
<PAGE>

O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

November 3, 1998

Dear Fellow Shareholders,

Enclosed is the annual report for the O'Shaughnessy Aggressive Growth Fund. The
report contains financial statements for the Fund during the year ended
September 30, 1998 as well as the Fund's portfolio on that date.

Between September 30, 1997 and September 30, 1998, major indexes like the
Russell 2000, the NASDAQ Composite and the S&P 500, earned -18.90 percent, 0.69
percent and 9.05 percent respectively. For the same period, the O'Shaughnessy
Aggressive Growth Fund lost 23.70 percent. As I write on November 3rd, the fund
has recovered significantly from the third quarter swoon, gaining 31.14 percent
from its October 8th low. Yet to focus on EITHER this short-term swoon or
subsequent short-term recovery would be foolish. Short-term thinking only leads
to horrible despair in downturns and unrealistic optimism in strongly rising
markets. To stay the course, we must always focus on why we're investing in the
first place--usually for our retirement or our children's education. In most
circumstances, these are events that are at least five to ten years away.

Think about your world ten years ago. Did you have money invested in the stock
market? If you did, find an old statement and compare it to the value of your
portfolio today. If your account performed similar to the market averages, your
overall wealth should be significantly higher today than it was ten years ago,
even though the market crashed in 1987 and went into a free fall in the third
quarter of 1990. Over short periods of time, stocks appear quite volatile, and
the past ten years have seen exceptional market performance. Yet look again at
that old account statement, and you'll be reminded that stocks have been an
excellent investment for the patient, long-term investor. To help stay focused
on the long-term, extend your gaze ten years into the future and consider the
potential value of your portfolio if you stay the course with stocks. While past
performance results cannot guarantee future results, even if stock market
performance returns to its historical average, your portfolio could be worth
substantially more than it is today.

This is a vital exercise, because it helps us reframe our expectations and focus
on the potential value of our investments over a reasonable time horizon. Focus
on semi-annual periods or fiscal quarters, and your chances of staying the
course are slim. Quarters like the third quarter of 1998 would have us dashing
for the exits. Conversely, times like the third quarter of 1997--when the
Aggressive Growth Fund gained 24.91 percent--would have us reaching for the
stars. In both instances, expecting that short-term trend to continue would be
wrong. Because when we narrow our focus, we look at the CHANGE in our wealth
rather than expected future value of our portfolio.
<PAGE>
2
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

Sincerely,

/s/ James P. O'Shaughnessy

James P. O'Shaughnessy
<PAGE>
3
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

Comparison of the change in value of a $10,000 investment in the
O'Shaughnessy Aggressive Growth Fund versus the S&P 500
Composite Stock Price Index, the Lipper Capital Appreciation Fund
Index and the NASDAQ Composite Index

Average Annual Total Return
Period ended September 30, 1998
1 Year ......................... -23.70%
Since inception (11/1/96) ...... 4.62%

S&P 500 Lipper
O'Shaughnessy Composite Capital NASDAQ
Aggressive Stock Price Appreciation Composite
Growth Fund Index Fund Index Index
----------- ----- ---------- -----

1-Nov-96 10,000 10,000 10,000 10,000
31-Dec-96 10,410 10,560 10,320 10,569
31-Mar-97 9,860 10,842 9,854 10,002
30-Jun-97 11,440 12,729 11,369 11,806
30-Sep-97 14,290 13,684 12,682 13,800
31-Dec-97 12,732 14,080 12,382 12,856
31-Mar-98 14,409 16,041 13,991 15,028
30-Jun-98 13,840 16,570 14,228 15,512
30-Sep-98 10,903 14,921 12,186 13,867

Past performance is not predictive of future performance.

<PAGE>
4
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

1) Biogen, Inc........................................... 3.79%

2) EMC Corporation....................................... 3.56%

3) Best Buy Co., Inc..................................... 3.38%

4) McKesson Corporation.................................. 3.08%

5) SunAmerica Inc........................................ 3.00%

6) Guidant Corporation................................... 2.94%

7) Gateway 2000, Inc..................................... 2.94%

8) Nokia Corporation - ADR............................... 2.91%

9) Staples, Inc.......................................... 2.75%

10) Maytag Corporation.................................... 2.69%
<PAGE>
5

O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.59% Market Value
- --------------------------------------------------------------------------------

ADVERTISING AGENCIES: 1.91%
3,500 WPP Group PLC ................................ $159,687
--------

AIR TRANSPORT, SCHEDULED: 1.82%
3,000 US Airways Group, Inc.* ...................... 151,875
--------

AMUSEMENT & RECREATION SERVICE: 1.99%
2,900 Anchor Gaming* ............................... 166,025
--------

APPAREL & OTHER FINISHED PRODUCTS: 2.61%
10,500 OshKosh B'Gosh, Inc. ......................... 217,875
--------

BIOLOGICAL PRODUCTS, EXCEPT DIAGNOSTICS: 3.79%
4,800 Biogen, Inc.* ................................ 315,900
--------

CARPETS AND RUGS: 2.59%
13,300 Shaw Industries, Inc. ........................ 216,125
--------

CATALOG, MAIL-ORDER HOUSES: 2.58%
7,200 Standard Pacific Corporation ................. 215,100
--------

COMPUTER PROGRAMMING, DATA PROCESS: 2.29%
8,400 Unisys Corporation* .......................... 191,100
--------

COMPUTER STORAGE DEVICES: 3.56%
5,200 EMC Corporation* ............................. 297,375
--------

CONSUMER ELECTRONIC STORES: 3.38%
6,800 Best Buy Co., Inc. ........................... 282,200
--------

DRUGS AND PROPRIETARY - WHOLESALE: 3.08%
2,800 McKesson Corporation ......................... 256,550
--------

DURABLE GOODS - WHOLESALE: 2.07%
20,300 Handleman Company* ........................... 172,550
--------

ELECTRIC HOUSEWARES AND FANS: 2.53%
10,900 Helen of Troy Limited* ....................... 211,187
--------
<PAGE>
6
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

ELECTROMEDICAL APPARATUS: 2.94%
3,300 Guidant Corporation .............................. $245,025
--------

ELECTRONIC COMPUTERS: 2.94%
4,700 Gateway 2000, Inc.* .............................. 244,987
--------
FAMILY CLOTHING STORES: 2.40%
3,800 The Gap, Inc. .................................... 200,450
--------
FOOTWEAR, EXCEPT RUBBER.: 2.19%
11,900 Brown Group, Inc. ................................ 182,963
--------
HOUSEHOLD APPLIANCES: 2.69%
4,700 Maytag Corporation ............................... 224,425
--------
INDUSTRIAL TRUCKS, TRACTORS, TRAILERS: 2.16%
1,800 NACCO Industries, Inc. ........................... 180,000
--------
INVESTMENT ADVICE: 1.59%
3,200 The Equitable Companies Incorporated ............. 132,400
--------
LIFE INSURANCE: 3.00%
4,100 SunAmerica Inc. .................................. 250,100
--------
LUMBER & BUILDING MATERIAL: 2.14%
5,600 Lowe's Companies, Inc. ........................... 178,150
--------
MOTOR HOMES: 2.45%
18,200 Winnebago Industries, Inc. ....................... 204,750
--------
MOTOR VEHICLE PARTS & ACCESSORY: 2.02%
3,600 Federal - Mogul Corporation ...................... 168,300
--------
NATURAL GAS TRANSMISSION & DISTRIBUTORS: 2.30%
9,400 Southwest Gas Corporation ........................ 192,113
--------
OIL & GAS FIELD SERVICES: 1.93%
13,900 Global Industries, Ltd.* ......................... 160,719
--------
<PAGE>
7
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

OPERATIVE BUILDERS: 1.99%
7,100 Kaufman and Broad Home Corporation ............... $166,406
--------

PERSONAL CREDIT INSTITUTIONS: 2.48%
2,000 Capital One Financial Corporation ................ 207,000
--------

PHARMACEUTICAL PREPARATIONS: 1.03%
4,900 ICN Pharmaceuticals, Inc. ........................ 85,750
--------

POWER PRODUCTION: 1.91%
4,300 The AES Corporation* ............................. 159,369
--------

PREPACKAGED SOFTWARE: 1.97%
8,300 The Learning Company, Inc.* ...................... 164,444
--------

RADIO, TV BROADCAST, COMMUNICATION EQUIPMENT: 2.91%
3,100 Nokia Corporation - ADR .......................... 243,156
--------

RAILROAD EQUIPMENT: 2.06%
6,200 Varlen Corporation ............................... 172,050
--------

RAILROADS, LINE-HAUL OPERATING: 2.06%
4,900 Kansas City Southern Industries, Inc. ............ 171,500
--------

SECURITY BROKERS & DEALERS: 1.02%
3,000 Lehman Brothers Holdings Inc. .................... 84,750
--------

SHOE STORES: 1.25%
8,200 Just for Feet, Inc. .............................. 104,550
--------

SHOPPING GOODS STORES: 2.75%
7,800 Staples, Inc. .................................... 229,125
--------

STEEL WORKS & BLAST FURNACES: 3.22%
18,900 Bethlehem Steel Corporation* ..................... 155,925
4,500 Texas Industries, Inc. ........................... 113,063
--------
268,988
--------
TELEPHONE & TELEGRAPH APPARATUS: 1.16%
5,700 Alcatel Alsthom CGE, SA .......................... 96,900
--------
<PAGE>
8
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

TRUCKING: 1.13%
6,500 J.B. Hunt Transport Services, Inc................. $ 94,250
----------
VARIETY STORES: 1.70%
11,900 Kmart Corporation*................................ 142,056
----------

WATER TRANSPORTATION: 1.76%
6,100 Sea Containers Limited............................ 146,781
----------

WOMEN'S CLOTHING STORES: 2.68%
11,000 AnnTaylor, Inc.*.................................. 223,438
----------

WOOD HOUSEHOLD FURNITURE: 1.56%
7,900 LADD Furniture, Inc.*............................. 130,350
----------

Total Common Stocks (cost $10,296,442)............ 8,308,794
----------

Total Investments in Securities (cost
$10,296,442): 99.59% ............................. 8,308,794
Other Assets less Liabilities: 0.41%.............. 33,988
----------

TOTAL NET ASSETS: 100.0% ......................... $8,342,782
==========

* Non-income producing security.

See Notes to Financial Statements.
<PAGE>
9
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

STATEMENT OF ASSETS AND LIABILITIES AT SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------

ASSETS
Investments in securities, at value (identified cost
$10,296,442)................................................... $ 8,308,794
Receivables:
Portfolio securities sold ..................................... 45,112
Fund shares sold .............................................. 11,195
Dividends and interest ........................................ 1,799
Other ......................................................... 2,257
Deferred organization costs ..................................... 15,570
Prepaid expenses and other ...................................... 20,852
-----------
Total assets ................................................ 8,405,579
-----------

LIABILITIES
Payables:
Fund shares repurchased ....................................... 19,819
Advisory fee .................................................. 6,723
Administration fee ............................................ 822
Accrued expenses ................................................ 35,433
-----------
Total liabilities ........................................... 62,797
-----------

NET ASSETS ........................................................ $ 8,342,782
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
[$8,342,782/777,700 shares outstanding;
25,000,000,000 shares (par value $.0001) authorized] .......... $ 10.73
===========

SOURCE OF NET ASSETS
Paid-in capital ................................................. $ 9,872,485
Accumulated net investment loss ................................. (143,595)
Undistributed net realized gain on investment transactions ...... 601,540
Net unrealized depreciation of investments ...................... (1,987,648)
-----------
Net assets .................................................. $ 8,342,782
===========
See Notes to Financial Statements.
<PAGE>
10
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------

INVESTMENT INCOME
Income:
Dividends ................................................... $ 38,266
Interest .................................................... 3,901
Other ....................................................... 1,425
-----------
Total income .......................................... 43,592
-----------
Expenses:
Advisory fees ............................................... 93,549
Custodian and accounting fees ............................... 34,408
Registration fees ........................................... 15,718
Reports to shareholders ..................................... 14,565
Transfer agent fees ......................................... 13,976
Professional fees ........................................... 12,985
Administration fee .......................................... 10,683
Directors' fees ............................................. 6,504
Amortization of organization costs .......................... 5,041
Other ....................................................... 2,063
-----------
Total expenses .......................................... 209,492
Less: expense reimbursement ............................. (22,305)
-----------
Net expenses ............................................ 187,187
-----------
NET INVESTMENT LOSS ............................... (143,595)
-----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on security transactions .................. 613,829
Net unrealized depreciation on investments .................. (2,932,394)
-----------
Net realized and unrealized loss on investments .......... (2,318,565)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.. $(2,462,160)
===========
See Notes to Financial Statements.
<PAGE>
11

O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------
Year November 1, 1996*
Ended through
September 30, 1998 September 30, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment loss.............................................. $ (143,595) $ (24,106)
Net realized gain on security transactions....................... 613,829 115,860
Net change in unrealized appreciation
(depreciation) on investments................................... (2,932,394) 944,746
---------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............................... (2,462,160) 1,036,500
---------- ---------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net realized gain from security transactions..................... (104,043) --
---------- ---------

CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from capital
share transactions (a).......................................... 5,324,737 4,522,748
---------- ---------
TOTAL INCREASE IN NET ASSETS .............................. 2,758,534 5,559,248

NET ASSETS
Beginning of period.............................................. 5,584,248 25,000
---------- ---------
END OF PERIOD (including accumulated net investment
loss of $167,701 and $24,106, respectively).................... $8,342,782 $5,584,248
========== ==========

(a) A summary of capital shares transactions is as follows:

Year November 1, 1996*
Ended through
September 30, 1998 September 30, 1997
-------------------------------------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold............................ 825,148 $10,967,878 473,170 $5,453,047
Shares issued on reinvestment
of distribution.................. 8,307 102,677 - -
Shares redeemed........................ (446,620) (5,745,818) (84,805) (930,299)
-------- ----------- ------- ----------
Net increase........................... 386,835 $ 5,324,737 388,365 $4,522,748
======== =========== ======= ==========
</TABLE>

* Commencement of operations.

See Notes to Financial Statements.
<PAGE>
12
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

FINANCIAL HIGHLIGHTS

PER SHARE OPERATING PERFORMANCE
(FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

- --------------------------------------------------------------------------------
Year November 1, 1996*
Ended through
September 30, 1998 September 30, 1997
- --------------------------------------------------------------------------------

Net asset value, beginning of period......... $14.29 $10.00
------ ------
Income from investment operations:
Net investment loss........................ (.15) (.06)
Net realized and unrealized gain (loss) on
investments.............................. (3.21) 4.35
------ ------
Total from investment operations............. (3.36) 4.29
------ ------

Less distributions:
From net realized gains.................... (.20) -
------ ------

Net asset value, end of period............... $10.73 $14.29
====== ======

TOTAL RETURN ................................ (23.70%) 42.90%**

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)......... $ 8.3 $ 5.6

Ratio of expenses to average net assets:
Before expense reimbursement............... 2.24% 7.01%++
After expense reimbursement................ 2.00% 1.98%++

Ratio of net investment loss to average
net assets:
Before expense reimbursement............... (1.77%) (6.41%)++
After expense reimbursement................ (1.53%) (1.39%)++

Portfolio turnover rate...................... 206.30% 104.77%

++ Annualized.

* Commencement of operations.

** Not Annualized.

See Notes to Financial Statements.
<PAGE>
13

O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION

The O'Shaughnessy Aggressive Growth Fund (the "Fund") is a series of shares
of O'Shaughnessy Funds, Inc., which is registered under the Investment Company
Act of 1940 as a diversified, open-end management investment company. The Fund
began operations on November 1, 1996.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund. These policies are in conformity with generally accepted
accounting principles.

A. SECURITY VALUATION: The Fund's investments are carried at market
value. Securities listed on an exchange or quoted on a National
Market System are valued at the last sale price. Other securities
are valued at the mean between the last bid and asked prices.
Securities for which market quotations are not readily available, if
any, are valued following procedures approved by the Board of
Directors. Short-term investments are valued at amortized cost,
which approximates market value.

B. FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no federal income tax
provision is required.

D. DEFERRED ORGANIZATION COSTS: The Fund has incurred expenses of
$25,191 in connection with their organization. These costs have been
deferred and are being amortized on a straight-line basis over a
period of sixty months from the date the Fund commenced investment
operations.

NOTE 3 - INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

For the year ended September 30, 1998, O'Shaughnessy Capital Management,
Inc. (the "Advisor") provided the Fund with investment management services under
an Investment Advisory Agreement. The Advisor furnished all investment advice,
office space, facilities, and provides most of the personnel needed by the Fund.
As compensation for its services, the Advisor was entitled during the fiscal
year ended September 30, 1998 to a monthly fee at the annual rate of 1.00 %
based upon the average daily net assets of the Fund. This fee was reduced to
0.74% effective October 5, 1998.
<PAGE>
14
O'SHAUGHNESSY AGGRESSIVE GROWTH FUND

NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------

The Fund is responsible for its own operating expenses. The Advisor has
agreed to reduce fees payable to it by the Fund or reimburse the Fund to the
extent necessary to limit the Fund's aggregate annual operating expenses to
2.00% of average net assets (the "expense cap"). Any such reductions made by the
Advisor in its fees or reimbursement of expenses with respect to the Fund are
subject to recapture by the Advisor provided the Fund is able to effect such
recapture while keeping total operating expenses at or below the annual expense
cap, and that no recapture will be made after September 30, 2000. Any amounts
reimbursed will have the effect of increasing fees otherwise paid by the Fund.
For the year ended September 30, 1998, the Advisor reimbursed the Fund in the
amount of $22,305. Cumulative reimbursed expenses subject to recapture by the
Advisor amounted to $109,614 at September 30, 1998.

Investment Company Administration, LLC (the "Administrator") acts as the
Fund's Administrator under an Administration Agreement. The Administrator
prepares various federal and state regulatory filings, reports and returns for
the Fund; prepares reports and materials to be supplied to the trustees;
monitors the activities of the Fund's custodian, transfer agent and accountants;
coordinates the preparation and payment of Fund's expenses and reviews the
Fund's expense accruals. For its services, the Administrator receives a monthly
fee per portfolio at the following annual rate:

For the year ended September 30, 1998, the Administrator reduced its annual
minimum fee to $10,683.

First Fund Distributors, Inc. (the "Distributor") acts as the Fund's
principal underwriter in a continuous public offering of the Fund's shares. The
Distributor is an affiliate of the Administrator.

Certain officers of the Fund are also officers and/or directors of the
Administrator and the Distributor.

NOTE 4 - PURCHASES AND SALES OF SECURITIES

For the year ended September 30, 1998, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, were
$23,823,505 and $18,639,999, respectively.

NOTE 5 - INCOME TAXES

At September 30, 1998, the cost of securities for income tax purposes was
$10,536,919. Unrealized appreciation and depreciation of securities were as
follows:

Gross unrealized appreciation............. $ 270,511
Gross unrealized depreciation............. (2,498,636)
-----------
Net unrealized depreciation......... $(2,228,125)
===========

<PAGE>
INDEPENDENT AUDITOR'S REPORT

The Board of Directors and Shareholders
O'Shaughnessy Aggressive Growth Fund

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of O'Shaughnessy Aggressive Growth Fund as of
September 30, 1998, the related statement of operations for the year then ended,
and the statement of changes in net assets and the financial highlights for the
year ended September 30, 1998 and for the period from November 1, 1996
(commencement of operations) to September 30, 1997. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
O'Shaughnessy Aggressive Growth Fund, as of September 30, 1998, the results of
operations, the changes in net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

New York, New York
October 23, 1998
<PAGE>
INVESTMENT ADVISOR
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830

ADMINISTRATOR
Investment Company Administration, LLC
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018

DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018

TRANSFER AGENT
Firstar Mutual Fund Services, LLC
615 E. Michigan Street
Milwaukee, Wisconsin 53202

INDEPENDENT AUDITOR
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017

LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022

This report is intended for shareholders of O'Shaughnessy Aggressive Growth Fund
and may not be used as sales literature unless preceded or accompanied by a
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Share price and returns will
fluctuate so that shares, when redeemed, may be more or less than their original
cost. Statements and other information herein are dated and are subject to
change.
<PAGE>

O'SHAUGHNESSY

35 Madison Street
Greenwich, Connecticut
06830
877-OSFUNDS
www.osfunds.com
<PAGE>

O'SHAUGHNESSY

BUILDING
NEW STANDARDS
FOR INVESTMENT
SUCCESS

DOGS OF THE MARKET(TM) FUND
ANNUAL REPORT
SEPTEMBER 30, 1998
<PAGE>

O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND

November 3, 1998

Dear Fellow Shareholders,

Enclosed is the annual report for the O'Shaughnessy Dogs of the Market Fund. The
report contains financial statements for the Fund during the year ended
September 30, 1998 as well as the Fund's portfolio on that date.

The best thing that can be said about the past three months is that they are
behind us. The third quarter of 1998 can now take its place of dubious
honor--along with October of 1987 and the third quarter of 1990--in the rogue's
gallery of market environments that make successful long-term investing such a
challenge. From high to low, the average U.S. stock lost 49 percent of its value
in a few short months. To give the swiftness of this fall perspective, in 1973
and 1974 it took investors TWO YEARS to inflict similar damage!

Between September 30, 1997 and September 30, 1998, the Dow Jones Industrial
Average and the S&P 500 gained 0.46 percent and 9.05 percent respectively. For
the same period, the O'Shaughnessy Dogs of the Market Fund gained 0.74 percent.
As I write on November 3rd the fund has recovered significantly from the third
quarter swoon, showing a gain of 3.94 percent for the year. Yet to focus on
EITHER this short-term swoon or subsequent short-term recovery would be foolish.
Short-term thinking only leads to horrible despair in downturns and unrealistic
optimism in strongly rising markets. To stay the course, we must always focus on
why we're investing in the first place--usually for our retirement or our
children's education. In most circumstances, these are events that are at least
five to ten years away.

This is a vital exercise, because it helps us reframe our expectations and focus
on the potential value of our investments over a reasonable time horizon. Focus
on semi-annual periods or fiscal quarters, and your chances of staying the
course are slim. Quarters like the third quarter of 1998 would have us dashing
for the exits. Conversely, times like the second quarter of 1997--when the Dogs
of the Market Fund gained 11.43 percent--would have us reaching for the stars.
In both instances, expecting that short-term trend to continue would be wrong.
Because when we narrow our focus, we look at the CHANGE in our wealth rather
than expected future value of our portfolios.
<PAGE>
2
O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND

Sincerely,

/s/ James P. O'Shaughnessy
James P. O'Shaughnessy
<PAGE>
3

O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND

Comparison of the change in value of a $10,000 investment in the O'Shaughnessy
Dogs of The Market Fund versus the S&P 500 Composite Stock Price Index,
the Lipper Growth & Income Fund Index and the Dow Jones Industrial Average

Average Annual Total Return
Period ended September 30, 1998
1 Year ......................... 0.74%
Since inception (11/1/96) ...... 10.29%

S&P 500 Lipper
O'Shaughnessy Composite Growth & Dow Jones
Dogs of the Stock Price Income Fund Industrial
Market Fund Index Index Average
------------- ----------- ----------- ----------

01-Nov-96 10,000 10,000 10,000 10,000
31-Dec-96 10,032 10,560 10,540 10,745
31-Mar-97 10,072 10,842 10,717 11,027
30-Jun-97 11,223 12,729 12,221 12,907
30-Sep-97 11,974 13,684 13,244 13,426
31-Dec-97 12,624 14,080 13,372 13,425
31-Mar-98 13,629 16,041 14,900 15,000
30-Jun-98 13,396 16,570 14,929 15,322
30-Sep-98 12,063 14,921 13,067 13,491

Past performance is not predictive of future performance.
<PAGE>
4

O'Shaughnessy Dogs of the Market(TM) Fund

1) American Home Products Corporation............... 4.77%

2) Eastman Kodak Company............................ 4.44%

3) Anheuser-Busch Companies, Inc.................... 4.26%

4) SBC Communications Inc........................... 4.23%

5) ALLTEL Corporation............................... 4.03%

6) Exxon Corporation................................ 3.97%

7) Chevron Corporation.............................. 3.82%

8) Emerson Electric Co.............................. 3.82%

9) Brown-Forman Corporation......................... 3.78%

10) International Paper Company...................... 3.77%
<PAGE>
5
O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND

PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.60% Market Value
- --------------------------------------------------------------------------------

CANNED, FROZEN & PRESERVED FRUIT & VEGETABLES: 3.52%
15,100 H.J. Heinz Company ............................... $797,550
--------

CHEMICAL PRODUCTS: 2.59%
19,892 Nalco Chemical Company ........................... 586,814
--------

COMMERCIAL BANKS: 2.63%
7,031 J.P. Morgan & Company, Inc. ...................... 594,998
--------

CONSUMER PACKAGED GOODS: 3.55%
17,417 Philip Morris Companies, Inc. .................... 802,271
--------

DEPARTMENT STORES: 3.39%
14,885 The May Department Stores Company ................ 766,578
--------

DISTILLED AND BLENDED LIQUOR: 3.78%
14,242 Brown - Forman Corporation ....................... 854,520
--------

ELECTRIC LIGHTING, WIRING EQUIPMENT: 2.23%
15,844 National Service Industries, Inc. ................ 505,028
--------

FAMILY CLOTHING STORES: 0.07%
379 Abercrombie & Fitch Co.* ......................... 16,676
--------

FOOD AND KINDRED PRODUCTS: 2.83%
23,791 ConAgra, Inc. .................................... 640,870
--------

GROCERY STORES: 2.96%
17,975 Winn-Dixie Stores, Inc. .......................... 668,445
--------

HEAVY CONSTRUCTION: 1.77%
29,041 Foster Wheeler Corporation ....................... 399,314
--------

INDUSTRIAL MEASUREMENT INSTRUMENTS: 3.82%
13,884 Emerson Electric Co. ............................. 864,279
--------

INDUSTRIAL ORGANIC CHEMICALS: 2.23%
15,286 International Flavors & Fragrances Inc. .......... 504,438
--------

<PAGE>
6
O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND

MALT BEVERAGES: 4.26%
17,868 Anheuser-Busch Companies, Inc. ................. $ 964,872
----------

MOTOR VEHICLE PARTS WHOLESALE SUPPLY: 3.08%
23,176 Genuine Parts Company .......................... 696,729
----------

MOTOR VEHICLES: 3.14%
12,983 General Motors Corporation ..................... 710,008
----------

PAPER AND ALLIED PRODUCTS: 3.77%
18,290 International Paper Company .................... 852,771
9,614 Minnesota Mining & Manufacturing Company ....... 708,432
----------
1,561,203
----------

PAPER MILLS: 2.85%
15,908 Kimberly - Clark Corporation ................... 644,274
----------

PETROLEUM REFINING: 10.87%
10,293 Chevron Corporation ............................ 865,255
12,797 Exxon Corporation .............................. 898,189
14,599 Royal Dutch Petroleum Company .................. 695,277
----------
2,458,721
----------
PHARMACEUTICAL PREPARATIONS: 4.77%
20,615 American Home Products Corporation ............. 1,079,711
----------

PHONE COMMUNICATIONS: 11.55%
19,227 ALLTEL Corporation ............................. 910,879
12,775 AT&T Corporation ............................... 746,539
21,530 SBC Communications Inc. ........................ 956,739
----------
2,614,157
----------
PHOTOGRAPHIC EQUIPMENT: 4.44%
13,004 Eastman Kodak Company .......................... 1,005,372
----------

PLASTIC & SYNTHENTIC MATERIALS: 6.58%
13,111 E.I. DuPont de Nemours and Company ............. 735,854
31,509 Rubbermaid, Inc. ............................... 754,247
----------
1,490,101
----------
<PAGE>
7
O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND

TOBACCO: 2.79%
21,359 UST, Inc......................................... $ 631,425
-----------

WOMEN'S CLOTHING STORES: 3.00%
30,951 The Limited, Inc................................. 678,988
-----------

Total Common Stocks (cost $24,035,168)........... 22,537,342
-----------

Principal Amount SHORT-TERM INVESTMENTS: 0.60%
- --------------------------------------------------------------------------------

32,000 American Family Holdings, Inc. Demand Note,
4.9628%, due 10/1/1998+.................................. 32,000
34,294 Firstar Bank Demand Note, 5.0937%, due 10/1/1998+........ 34,294
28,985 Warner Lambert Demand Note, 4.9630%, due 10/1/1998+...... 28,985
41,232 Wisconsin Electric Demand Note, 4.9628%, due 10/1/1998+.. 41,232
-----------

Total Short-Term Investments (cost $136,511)............. 136,511
-----------

Total Investments in Securities (cost
$24,171,679): 100.20% .................................. 22,673,853
Other Liabilities less Assets: (.20)%.................... (46,643)
-----------
TOTAL NET ASSETS: 100.0% ................................$22,627,210
===========

* Non-income producing security.

+ Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of September 30, 1998.

See Notes to Financial Statements.
<PAGE>
8
O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND

STATEMENT OF ASSETS AND LIABILITIES AT SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------

ASSETS
Investments in securities, at value (identified
cost $24,171,679).............................................. $22,673,853
Receivables:
Portfolio securities sold ..................................... 164,538
Fund shares sold .............................................. 30,696
Dividends and interest ........................................ 67,790
Other ......................................................... 2,751
Deferred organization costs ..................................... 15,570
Prepaid expenses and other ...................................... 25,700
-----------
Total assets ................................................ 22,980,898
-----------

LIABILITIES
Payables:
Portfolio securities purchased ................................ 274,749
Fund shares repurchased ....................................... 30,630
Advisory fee .................................................. 19,718
Administration fee ............................................ 1,813
Accrued expenses ................................................ 26,778
-----------
Total liabilities ........................................... 353,688
-----------
NET ASSETS ........................................................ $22,627,210
===========

NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
[$22,627,210/1,984,197shares outstanding;
25,000,000,000 shares (par value $.0001) authorized] ........... $ 11.40
===========

SOURCE OF NET ASSETS
Paid-in capital ............................................. $23,522,530
Undistributed net investment income ......................... 193,467
Undistributed net realized gain on investment transactions .. 409,039
Net unrealized depreciation of investments .................. (1,497,826)
-----------
Net assets ............................................ $22,627,210
===========

See Notes to Financial Statements.
<PAGE>
9

O'Shaughnessy Dogs of the Market(TM) Fund

STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------

INVESTMENT INCOME
Income:
Dividends (net of foreign witholding tax of $3,210) ........... $ 450,954
Interest ...................................................... 10,655
-----------
Total income ................................................ 461,609
-----------
Expenses:
Advisory fees ................................................. 126,357
Custodian and accounting fees ................................. 31,141
Administration fees ........................................... 17,512
Registration fees ............................................. 17,442
Transfer agent fees ........................................... 16,749
Reports to shareholders ....................................... 15,370
Professional fees ............................................. 11,385
Directors' fees ............................................... 6,004
Other ......................................................... 5,761
Amortization of organization costs ............................ 5,041
-----------
Total expenses .............................................. 252,762
-----------

NET INVESTMENT INCOME .................................... 208,847
-----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from security transactions .................... 408,727
Net change in unrealized depreciation of investments ............ (1,760,280)
-----------
Net realized and unrealized loss on investments ............. (1,351,553)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $(1,142,706)
===========

See Notes to Financial Statements.
<PAGE>
10
O'Shaughnessy Dogs of the Market(TM) Fund

STATEMENT OF CHANGES IN NET ASSETS

INCREASE IN NET ASSETS FROM
OPERATIONS
Net investment income......................... $ 208,847 $ 55,370
Net realized gain on security transactions.... 408,727 444,294
Net change in unrealized (depreciation)
appreciation of investments................. (1,760,280) 262,454
----------- ----------
NET (DECREASE) INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................ (1,142,706) 762,118
----------- ----------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income......................... (69,959) (791)
Net realized gain from security transactions.. (443,982) -
----------- ----------
TOTAL DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS ............................ (513,941) (791)
----------- ----------

CAPITAL SHARE TRANSACTIONS
Net increase in net assets derived from
capital shares transactions (a).............. 17,035,794 6,461,736
----------- ----------
TOTAL INCREASE IN NET ASSETS ............. 15,379,147 7,223,063

NET ASSETS
Beginning of period........................... 7,248,063 25,000
----------- ----------
END OF PERIOD (including undistributed net
investment income of $193,467and $54,579,
respectively)................................ $22,627,210 $7,248,063
=========== ==========

(a) A summary of capital shares transactions is as follows:

Year November 1, 1996*
Ended through
September 30, 1998 September 30, 1997
-------------------------------------------------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold........... 2,072,680 $25,664,085 695,230 $7,496,135
Shares issued on
reinvestment of
distributions........ 42,247 504,011 66 662
Shares redeemed....... (736,926) (9,132,302) (91,600) (1,035,061)
--------- ----------- ------- ----------
Net increase.......... 1,378,001 $17,035,794 603,696 $6,461,736
========= =========== ======= ==========

* Commencement of operations.

See Notes to Financial Statements.
<PAGE>
11
O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND

FINANCIAL HIGHLIGHTS

PER SHARE OPERATING PERFORMANCE
(FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Net asset value, beginning of period........ $11.96 $10.00
------ ------
Income from investment operations:
Net investment income..................... .10 .10
Net realized and unrealized gain on
investments.............................. .02 1.87
------ ------
Total from investment operations............ .12 1.97
------ ------

Less distributions:
From net investment income................ (.09) (.01)
From net capital gains.................... (.59) (.00)
------ ------
Total distributions......................... (.68) (.01)
------ ------

Net asset value, end of period.............. $11.40 $11.96
====== ======

TOTAL RETURN ............................... 0.74% 19.74%**

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)........ $22.6 $7.2

Ratio of expenses to average net assets:
Before expense reimbursement.............. 1.46% 4.28%++
After expense reimbursement............... 1.46% 1.99%++

Ratio of net investment income (loss) to
average net assets:
Before expense reimbursement.............. 1.24% (0.51%)++
After expense reimbursement............... 1.24% 1.78%++

Portfolio turnover rate..................... 44.35% 118.44%

* Commencement of operations.

** Not Annualized.

++ Annualized.

See Notes to Financial Statements.
<PAGE>
12

O'SHAUGHNESSY DOGS OF THE MARKET(TM) FUND

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION

The O'Shaughnessy Dogs of the Market Fund (the "Fund") is a series of
shares of O'Shaughnessy Funds, Inc., which is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The Fund began operations on November 1, 1996.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund. These policies are in conformity with generally accepted
accounting principles.

NOTE 3 - INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

For the year ended September 30, 1998, O'Shaughnessy Capital Management,
Inc. (the "Advisor") provided the Fund with investment management services under
an Investment Advisory Agreement. The Advisor furnished all investment advice,
office space, facilities, and provides most of the personnel needed by the Fund.
As compensation for its services, the Advisor is entitled to a monthly fee at
the annual rate of 0.74 % based upon the average daily net assets of the Fund.

NOTES TO FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------

expenses to 2.00% of average net assets (the "expense cap"). Any such reductions
made by the Advisor in its fees or reimbursement of expenses with respect to the
Fund are subject to recapture by the Advisor provided the Fund is able to effect
such recapture while keeping total operating expenses at or below the annual
expense cap, and that no recapture will be made after September 30, 2000. Any
amounts reimbursed will have the effect of increasing fees otherwise paid by the
Fund. For the year ended September 30, 1998, no reimbursements were required.
Cumulative reimbursed expenses subject to recapture by the Advisor amounted to
$71,199 at September 30, 1998.

For the year ended September 30, 1998, the Administrator voluntarily
reduced its annual minimum fee to $17,512.

First Fund Distributors, Inc. (the "Distributor") acts as the Fund's
principal underwriter in a continuous public offering of the Fund's shares. The
Distributor is an affiliate of the Administrator.

Certain officers of the Fund are also officers and/or directors of the
Administrator and the Distributor.

NOTE 4 - PURCHASES AND SALES OF SECURITIES

For the year ended September 30, 1998, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities, were
$24,099,676 and $7,406,963, respectively.

NOTE 5 - INCOME TAXES

At September 30, 1998, the cost of securities for income tax purposes was
$24,287,483. Unrealized appreciation and depreciation of securities were as
follows:

Gross unrealized appreciation................... $ 1,022,268
Gross unrealized depreciation................... (2,635,898)
-----------
Net unrealized depreciation............... $(1,613,630)
===========
<PAGE>
INDEPENDENT AUDITOR'S REPORT

The Board of Directors and Shareholders
O'Shaughnessy Dogs of the Market Fund

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of O'Shaughnessy Dogs of the Market Fund as of
September 30, 1998, the related statement of operations for the year then ended,
and the statement of changes in net assets and the financial highlights for the
year ended September 30, 1998 and for the period from November 1, 1996
(commencement of operations) to September 30, 1997. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
O'Shaughnessy Dogs of the Market Fund, as of September 30, 1998, the results of
operations, the changes in net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

New York, New York
October 23, 1998
<PAGE>
INVESTMENT ADVISOR
O'Shaughnessy Capital Management, Inc.
35 Mason Street
Greenwich, Connecticut 06830

ADMINISTRATOR
Investment Company Administration, LLC
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018

DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261 E
Phoenix, Arizona 85018

TRANSFER AGENT
Firstar Mutual Fund Services, LLC
615 E. Michigan Street
Milwaukee, Wisconsin 53202

INDEPENDENT AUDITOR
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017

LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022

This report is intended for shareholders of O'Shaughnessy Dogs of the Market(TM)
Fund and may not be used as sales literature unless preceded or accompanied by a
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Share price and returns will
fluctuate so that shares, when redeemed, may be more or less than their original
cost. Statements and other information herein are dated and are subject to
change.
<PAGE>

O'SHAUGHNESSY

35 Madison Street
Greenwich, Connecticut
06830
877-OSFUNDS
www.osfunds.com