CALIFORNIA MUNI FUND, N-30D, 1998-05-13

CALIFORNIA MUNI FUND
N-30D, 1998-05-13

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Fundamental Family of Funds
March 2, 1998

Dear Fellow Shareholder:

1997 began with financial markets holding to the conventional wisdom that
the U. S. economy was entering the late stage of a typical business expansion.
As such, inflation was believed likely to accelerate from both increased wage
pressure and capacity strained demand strength. As it typically does in such an
environment, conventional thought had it that the Federal Reserve would hike
interest rates through the year, causing bond prices to decline and interest
rates to rise.

Indeed, soon after Federal Reserve Chairman Greenspan warned of irrational
exuberance in financial markets, the Federal Reserve did in fact hike interest
rates in March, and bond prices did in fact decline through much of the year's
first half. Inflation did not accelerate however, and this coupled with the
conclusion of a five year balanced budget deal between Congress and the Clinton
Administration steadied bond prices by late spring.

Financial markets see-sawed through summer as two phenomena began to be
recognized. First, inflation was not accelerating; it actually showed signs of
decelerating. Second, the economy's stellar growth rate was generating so much
tax revenue that the glidepath toward a balanced budget was being shortened
significantly. Rather than reaching balance by 2002, as called for in the budget
deal, balance in 1998 was being forecast by many fiscal experts.

The forces of low inflation and a balanced budget began to shift the odds
away from credit restraint by the Federal Reserve. In fact, expectations of
credit restraint gave way to the possibility of easier credit when financial
strains throughout Asia became evident in the fall. With the hitherto Asian
Tiger economies of Thailand, Malaysia, Indonesia, and Korea experiencing major
currency devaluations, while the Japanese economy remained mired

<PAGE>

in a liquidity crisis, fears of inflation in the United States began to give way
to the prospect of deflation.

Deflation occurs when the general level of prices actually falls. This is
unlikely in our view. But a big increase in low priced imports from Asia will
almost certainly contain upward pressure on prices for the foreseeable future.
With minimal inflation, the return on government, corporate and municipal bonds
began to look very appealing by fall. For the first time in three years, funds
investing in these instruments began to experience net inflows of investment
funds. This worked to boost bond prices and consequently reduce interest rates
as the year drew to a close.

We have been proponents of continuous low inflation and a balanced federal
budget for quite some time. Thus, it is somewhat gratifying to see financial
markets finally begin to accept the possibility of a lengthy period of price
stability. Fixed income markets will undoubtedly continue to fluctuate as we
look ahead. However, inflation-adjusted rates are still high by historical
standards, so we believe the trend toward lower interest rates and higher bond
prices is finally in place.

With this as a backdrop, we are looking forward to 1998, and we thank you
for your continued trust and support.

Sincerely,

Dr. Vincent J. Malanga
President

<PAGE>
NEW YORK MUNI FUND

March 2, 1998

Dear Fellow Shareholder:

The New York economy has lagged the general economy's superb growth rate.
But New York's finances have improved, with the most marked enhancement being in
New York City, thanks to the boom on Wall Street. With the improvement in
finances has come an improvement in the credit status of New York issuers.

New York Muni Fund performed poorly in 1997, as it's total return was only
1.46% for the full year. As a result of regulatory investigations, the Fund's
professional fees were substantially greater than in the past. This factor
affected the Fund's performance during 1997. The Fund paid total distributions
for the year of $.022 per share of which $.003 per share represented return of
capital. During the year the Fund's portfolio was being restructured, such that
by year end bonds rated AAA comprised nearly 60% of the total portfolio of the
Fund. This coupled with other changes that have been made finally began to bear
fruit. In the year's final quarter N.Y. Muni was the top performing single state
bond fund, with a 4.1% total return. We are hopeful and confident that this
improvement will continue in 1998.

Sincerely,

Dr. Vincent J. Malanga
President

1
<PAGE>

(CHART MATERIAL)

New York Muni Fund
Portfolio Composition
December 31, 1997
(unaudited)

BY TYPE

(15.8%) FCSI

(51.4%) FCLT

(20.9%) LRIB

(11.9%) INLT

BY RATING+

(4.6%) Non-income
producing bonds

(1.3%) AA

(59.6%) AAA

(19.2%) BBB

(1.9%) Not Rated

FIXED COUPON BONDS
FCLT -- Long (maturity less than 15 years) (includes long zero coupons)
FCSI -- Short or Intermediate (maturity less than 15 years) (includes zero
coupon bonds)

VARIABLE RATE BONDS
RIB(Residual Interest Bond) type inverse floaters. These are leveraged bonds
whose coupon varies inversely with rates on short term companion issues. The
inverse floater's price will be more volatile than that of a fixed coupon bond.
LRIB -- Long Term (maturity greater than 15 years)

IN (Index) based inverse floaters are bonds whose interest coupons vary
inversely with an index of short term interest rates and then revert to a fixed
rate mode. The inverse floater's price will be more volatile than that of a
fixed coupon bond.
INLT -- Long Term (maturity greater than 15 years)

+If a security has a split rating, the highest applicable rating is used,
including published ratings on identical credits for individual securities not
individually rated.

2
<PAGE>

(CHART MATERIAL)

$22,786
Lehman
Brothers
Municipal
Bond Index*

$15,144
Fundamental
New York
Muni
Fund, Inc.

$13,926
Consumer
Price Index

- --------------------------------------------------------------------------------
New York Muni Fund
- --------------------------------------------------------------------------------
Average Annual Total Return
Ended on 12/31/97
- --------------------------------------------------------------------------------
1 Year 5 Year 10 Year
- --------------------------------------------------------------------------------
1.46% (0.62)% 4.24%
- --------------------------------------------------------------------------------

Thousands ($)

24 22 20 18 16 14 12 10

12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94

12/31/95 12/31/96 12/31/97

Past performance is not predictive of future performance.

The above illustration compares a $10,000 investment made in the New York Muni
Fund on 12/31/87 to a $10,000 investment made in the Lehman Brothers Municipal
Bond Index on that date. All dividends and capital gain distributions are
reinvested.

The Fund invests primarily in New York municipal securities and its performance
takes into account fees and expenses. Unlike the Fund, the Lehman Brothers
Municipal Bond Index is an unmanaged total return performance benchmark for the
long-term, investment-grade tax exempt bond market, calculated by using
municipal bonds selected to be representative of the market. The Index does not
take into account fees and expenses. Further information relating to Fund
performance, including expense reimbursements, if applic able, is contained in
the Fund's Prospectus and elsewhere in this report.

*Source:Lehman Brothers.

The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.

3
<PAGE>

(LEFT COLUMN)

NEW YORK MUNI FUND

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997

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

ASSETS
Investment in securities at value
(Note 4) (cost $127,411,133)..................... $122,737,274
Receivables:
Interest......................................... 1,484,267
Fund shares sold................................. 58,146,118
-----------
Total assets.............................. 182,367,659
-----------
LIABILITIES
Notes payable (Note 6)............................. 38,177,582
Payables:
Fund shares redeemed............................. 347,948
Investment securities purchased.................. 8,826,774
Dividend declared................................ 27,444
Due to advisor................................... 24,366
Accrued expenses................................. 368,138
-----------
Total liabilities................................. 47,772,252
-----------
NET ASSETS consisting of:
Distributions in excess of net
investment income................... $ (27,444)
Accumulated net realized loss ........ (24,284,760)
Unrealized depreciation of securities. (4,673,859)
Paid-in-capital applicable to
156,836,372 shares of $.01
par value capital stock............... 163,581,470
----------
$134,595,407
============
NET ASSET VALUE PER SHARE................ $.86
====

(RIGHT COLUMN)

STATEMENT OF OPERATIONS
Year ended December 31, 1997

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

INVESTMENT INCOME
Interest income............................... $ 7,756,494
EXPENSES (Notes 2 and 3)
Management fee............... $640,975
Custodian and accounting fees 327,214
Transfer agent fees.......... 450,401
Professional fees............ 1,050,450
Directors' fees.............. 102,427
Printing and postage......... 31,395
Interest..................... 1,431,511
Distribution expenses........ 647,839
Operating expenses on
defaulted bonds.............. 72,000
Other........................ 143,176
---------
4,897,388

Expenses reimbursed........ (40,700)
---------
Total expenses........................ 4,856,688
----------
Net investment income................. 2,899,806
----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized loss on investments (2,367,322)

Net unrealized appreciation of
investments.............. 5,608,133
---------
Net gain on investments ...................... 3,240,811
----------
NET INCREASE IN NET ASSETS
FROM OPERATIONS.................................. $6,140,617
==========

(FULL COLUMN)

STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>

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

Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income...................................................... $ 2,899,806 $ 6,229,467
Net realized loss on investments........................................... (2,367,322) (2,404,362)
Unrealized appreciation (depreciation) on investments ..................... 5,608,133 (4,292,643)
----------- -----------
Net (decrease) increase in net assets from operations...................... 6,140,617 (467,538)
DISTRIBUTIONS:
Distributions from investment income....................................... (2,899,806) (6,229,467)
Distributions in excess of net investment income........................... (27,444) --
Return of capital distribution............................................. (551,666) --
Distributions from net realized gain from investments...................... (24,556) --
CAPITAL SHARE TRANSACTIONS (Note 5)........................................ (64,787,531) (23,248,833)
----------- -----------
Total decrease............................................................. (62,150,386) (29,945,838)
NET ASSETS:
Beginning of year.......................................................... 196,745,793 226,691,631
----------- -----------
End of year................................................................ $134,595,407 $196,745,793
=========== ===========

</TABLE>

See Notes to Financial Statements.

4
<PAGE>

NEW YORK MUNI FUND

STATEMENT OF CASH FLOWS
Year Ended December 31, 1997
<TABLE>

- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Increase (Decrease) in Cash
Cash Flows From Operating Activities
Net increase to net assets from operations .................................................. $ 6,140,617
Adjustments to reconcile net increase in net assets from operations
to net cash provided by operating activities:
Purchase of investment securities ......................................................... (1,574,433,817)
Proceeds on sale of securities ............................................................ 1,659,325,144
Decrease in interest receivable ........................................................... 2,324,155
Decrease in accrued expenses .............................................................. (391,142)
Net accretion of discount on securities ................................................... (111,800)
Net realized loss:
Investments ............................................................................. 2,367,322
Unrealized appreciation on securities .................................................... (5,608,133)
-------------
Net cash provided by operating activities ............................................. 89,612,346
-------------
Cash Flows From Financing Activities:*
Increase in notes payable ................................................................. 36,846,239
Proceeds on shares sold ................................................................... 2,222,770,042
Payment on shares repurchased ............................................................. (2,348,578,756)
Cash dividends paid ....................................................................... (649,871)
-------------
Net cash used in financing activities ................................................. (89,612,346)
-------------
Net decrease in cash .................................................................. 0
Cash at beginning of year ..................................................................... 0
-------------
Cash at end of year ........................................................................... $ 0
=============

<FN>
- --------------
*Non-cash financing activities not included herein consist of reinvestment of dividends of $3,233,013.
Cash payments for interest expense totaled $1,672,606.
</FN>
</TABLE>

See Notes to Financial Statements.

5
<PAGE>

NEW YORK MUNI FUND

STATEMENT OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------

Principal
Amount Issue ooo Type o Rating oo Value
-------- ----- ---- ----- -----
<C> <S> <C> <C> <C>
$ 1,000,000## Amherst NY Industrial Development Agency Lease Rev, SurfaceRink Complex,
LOC Keyhawk, 5.65%, 10/01/22............................................ FCLT A $ 1,015,360
1,000,000 Metropolitan Transit Authority NY Commuter Facilities Rev, Series C-1,
FGIC Insured 5.375%, 07/01/27........................................... FCLT AAA 1,011,120
300,000 Metropolitan Transit Authority NY Transportation Facilities Rev SVC Contract
Series 8 5.375%, 07/01/21............................................... FCLT A- 300,000
14,600,000x## New York Inverse Floating Rate Notes*...................................... INLT A- 14,618,104
500,000 New York NY Series B, 5.25%,0 8/01/15...................................... FCLT A- 495,445
5,290,000x## New York City, ECF, MBIA Insured, STEP** 3.75%, 04/01/08................... FCSI Aaa 5,402,042
5,925,000x## New York City, ECF, MBIA Insured, STEP** 3.75%, 10/01/08................... FCSI Aaa 6,046,463
2,200,000x## New York City, IDA, Imclone Systems Inc Project AMT 11.25%, 07/01/04....... FCSI NR 2,296,404
2,000,000 New York City, IDA, Brooklyn Navy Yard Cogen Partners AMT 5.75%, 10/01/36 . FCLT Baa3 2,017,800
6,700,000 New York City, MWFA, Water &Sewer Systems Rev Residual Int Tr Rcpts,
Series 29, FGIC Insured, 6.562%, 06/15/30............................... LRIB Aaa 6,497,258
1,030,000 New York City, IDA, Civic Facilities Rev, Anti-Defamation League Foundation
Ser A, MBIA Insured, 5.375%, 06/01/27.................................. FCLT Aaa 1,042,226
3,500,000## New York City, IDA, Special Facilities Rev, United Airlines Inc. Project,
AMT, 5.65%, 10/01/32.................................................... FCLT Baa3 3,538,605
4,970,000## New York State, DAR, City University Systems Series C 5.00%, 07/01/17 ..... FCLT Baa1 4,784,270
850,000 New York State, DAR, City University Series F, FGIC TCRS Insured,
5.00%, 07/01/20......................................................... FCLT Aaa 827,611
7,550,000## New York State, DAR, Court Facilities Lease Series A 5.25%, 05/15/21 ..... FCLT Baa1 7,419,838
1,000,000 New York State, DAR, Nursing Home FHA, Rosalind &Joseph Gurwin
Jewish Geriatric, AMBAC Insured 5.70%, 02/01/37......................... FCLT Aaa 1,023,890
1,650,000 New York State, DAR, St. Vincent DePaul Residence, LOC Allied Banks PLC,
5.30%, 07/01/18......................................................... FCLT Aa3 1,639,803
4,500,000## New York State, DAR, City University System Residual Int Tr Recpts 27,
MBIA Insured, Liquidity The Bank of New York, 8.22%, 07/01/24........... LRIB Aaa 4,949,055
13,460,000## New York State, DAR, City University System Residual Int Tr Recpts 28,
AMBAC Insured, Liquidity The Bank of New York, 7.63%, 07/01/25.......... LRIB Aaa 14,170,553
2,510,000 New York State, DAR, Vassar Brothers Hospital, FSA Insured 5.375%, 07/01/25 FCLT Aaa 2,525,462
5,000,000 New York State, DAR, Mental Health Services Facilities Improvement
Series D, FSA Insured, 5.125%, 08/15/27................................. FCLT AAA 4,909,950
7,500,000## New York State, DAR, FHA, St Barnabas Hospital AMBAC Insured
5.45%, 08/01/35......................................................... FCLT Aaa 7,565,700
750,000 New York State, DAR, FHA, Sara Neuman Nursing Home AMBAC Insured
5.45%, 08/01/27......................................................... FCLT Aaa 755,730
1,000,000 New York State, DAR, FHA, Sara Neuman Nursing Home AMBAC Insured
5.50%, 08/01/37......................................................... FCLT Aaa 1,009,340
42,000,000 New York State, DAR, FHA, Presbyterian Hospital Series A AMBAC Insured
0.00%, 08/15/36......................................................... FCLT Aaa 5,404,560
2,000,000 New York State, DAR, FHA, Highland Hospital Rochester Series A,
MBIA Insured, 5.45%, 08/01/37........................................... FCLT Aaa 2,008,680
1,000,000 New York State, EFC, Pollution Control Rev, Ref-St Wtr-Sub-Revolving Fund
Series E, MBIA Insd, 5.00%, 06/15/11.................................... FCLT Aaa 1,009,710
2,000,000 New York State, EFC, Pollution Control Rev, Ref-St Wtr-Sub-Revolving Fund
Series E, MBIA Insd, 5.00%, 06/15/12.................................... FCLT Aaa 2,016,160

</TABLE>

6
<PAGE>

NEW YORK MUNI FUND

STATEMENT OF INVESTMENTS (continued)
December 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------

Principal
Amount Issue ooo Type o Rating oo Value
-------- ----- ---- ----- -----
<C> <S> <C> <C> <C>
$ 4,040,000 New York State, HFA, Service Contract Obligation Rev Series C, 5.50%, 03/15/25. FCLT Baa1 $ 4,064,644
5,000,000## New York State, MCFFA, HFA, Rev, Presbyterian Hospital
MBIA-IBC Insured 5.375%, 02/15/25........................................... FCLT Aaa 5,045,500
9,805,000x# ## Niagara County NY, IDA Falls Street Faire Project AMT, 10.00% 09/01/06
(see Note 4 to Financial Statements)........................................ FCSI NR 3,509,700
5,870,000x# ## Niagara Falls NY, URA, Old Falls Street Improvement Project, 11.00% 05/01/09
(see Note 4 to Financial Statements).............................. ......... FCSI NR 2,101,167
1,760,000 Syracuse NY, IDA, Civic Facilities Rev, Crouse Health Hospital Project,
Series A 5.375%, 01/01/23................................................... FCLT BBB 1,715,124
------------
Total Investments (Cost $127,411,133 @)............................. $122,737,274
============

<FN>
* Inverse Floating Rate Notes (IFRN) are instruments whose interest rates bear an inverse relationship to the interest rate on
another security or value of an index. Rates shown are at December 31, 1997.
** Step Bonds (STEP) are instruments whose interest rate is fixed at an initial rate and then increases ("steps up") to another
fixed rate until maturity.
@ Cost for Federal income tax purposes is $127,989,424.
# The value of these non-income producing securities has been estimated by persons designated by the Fund's Board of Directors
using methods the Director's believe reflect fair value. See Note 4 to the financial statements.
## $82,462,761 market value of securities are segregated in whole or in part as collateral securing a line of credit.
x The Fund owns 100% of the security and therefore there is no trading in the security. See Note 4 to the financial
statements.

Legend
oType FCLT --Fixed Coupon Long Term
FCSI --Fixed Coupon Short or Intermediate Term
LRIB --Residual Interest Bond Long Term
INLT --Indexed Inverse Floating Rate Bond Long Term
ooRatings If a security has a split rating the highest applicable rating is used, including published ratings on identical
credits for individual securities not individually rated.
NR--Not Rated
ooolssue AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
CAB Capital Appreciation Bond
CFR Civic Facility Revenue
COP Certificates of Participation
DAR Dormitory Authority Revenue
ECF Educational Construction Fund
EFC Environmental Facilities Corp.
ETM Escrowed to Maturity
FGIC Financial Guaranty Insurance Corporation
FHA Federal Housing Administration
FSA Financial Security Association
GO General Obligation
HDA Housing Development Agency
HFA Housing Financing Agency
HIC Hospital Improvement Corporation
IDA Industrial Development Authority
ITEMECF Industrial, Tourist, Education, Medical and Environmental Control Facilities
LOC Letter of Credit
MBIA Municipal Bond Insurance Assurance Corporation
MCF Medical Care Facilities
MCFFA Medical Care Facilities Finance Agency
MTA Metropolitan Transit Authority
MWFA Municipal Water Finance Authority
NHRB Nursing Home Revenue Bond
RB Revenue Bond
RDA Research and Development Authority
SWMA Solid Waste Management Authority
URA Urban Renewal Authority

See Notes to Financial Statements.
</FN>
</TABLE>

7
<PAGE>

NEW YORK MUNI FUND

NOTES TO FINANCIAL STATEMENTS
December 31, 1997

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

1.Significant Accounting Policies

New York Muni Fund (the Fund) is a series of Fundamental Funds, Inc. (the
"Company"). The Company is an open-end management investment company registered
under the Investment Company Act of 1940. The Fund seeks to provide a high level
of income that is excluded from gross income for Federal income tax purposes and
exempt from New York State and New York City personal income taxes. The Fund
intends to achieve its objective by investing substantially all of its total
assets in municipal obligations of New York State, its political subdivisions
and its duly constituted authorities and corporations. The Fund employs leverage
in attempting to achieve this objective. The following is a summary of
significant accounting policies followed in the preparation of its financial
statements:

Valuation of Securities--The Fund's portfolio securities are valued on
the basis of prices provided by an independent pricing service when, in the
opinion of persons designated by the Fund's directors, such prices are
believed to reflect the fair market value of such securities. Prices of
non-exchange traded portfolio securities provided by independent pricing
services are generally determined without regard to bid or last sale prices
but take into account institutional size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data. Securities traded or dealt in upon a
securities exchange and not subject to restrictions against resale as well
as options and futures contracts listed for trading on a securities
exchange or board of trade are valued at the last quoted sales price, or,
in the absence of a sale, at the mean of the last bid and asked prices.
Options not listed for trading on a securities exchange or board of trade
for which over-the-counter market quotations are readily available are
valued at the mean of the current bid and asked prices. Money market and
short-term debt instruments with a remaining maturity of 60 days or less
will be valued on an amortized cost basis. Municipal daily or weekly
variable rate demand instruments will be priced at par value plus accrued
interest. Securities not priced in a manner described above and other
assets are valued by persons designated by the Fund's directors using
methods which the directors believe reflect fair value.

Futures Contracts and Options Written on Future Contracts--Initial
margin deposits with respect to these contracts are maintained by the
Fund's custodian in segregated asset accounts. Subsequent changes in the
daily valuation of open contracts are recognized as unrealized gains or
losses. Variation margin payments are made or received as daily
appreciation or depreciation in the value of these contracts occurs.
Realized gains or losses are recorded when a contract is closed.

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 all of its taxable and tax exempt
income to its shareholders. Therefore, no provision for federal income tax
is required.

Distributions--The Fund declares dividends daily from its net
investment income and pays such dividends on the last business day of each
month. Distributions of net capital gains, if any, realized on sales of
investments are made annually, as declared by the Fund's Board of
Directors. Dividends are reinvested at the net asset value unless
shareholders request payment in cash.

General--Securities transactions are accounted for on a trade date
basis. Interest income is accrued as earned. Premiums and original issue
discount on securities purchased are amortized over the life of the
respective securities. Realized gains and losses from the sale of
securities are recorded on an identified cost basis. Net operating expenses
incurred on properties collateralizing defaulted bonds are charged to
operating expenses as incurred. Costs incurred to restructure defaulted
bonds are charged to realized loss as incurred.

Accounting 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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of increases and decreases in net assets from operations during the
reporting period. Actual results could differ from those estimates.

8
<PAGE>

NEW YORK MUNI FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997

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

2.Investment Advisory Fees and Other Transactions with Affiliates

Management Agreement
Under a Management Agreement, the Fund pays an investment management fee to
Fundamental Portfolio Advisors, Inc. (the Manager) equal to 0.5% of the Fund's
average daily net asset value up to $100 million and decreasing by .02% of each
$100 million increase in net assets down to 0.4% of net assets in excess of $500
million. The Manager has voluntarily agreed to reimburse the Fund an amount not
exceeding the amount of fees payable to the Manager under the agreement for any
fiscal year, if, and to the extent that the aggregate operating expenses of the
Fund for any fiscal year including the fees payable to the Manager, but
excluding interest expenses, taxes, brokerage fees and commissions, expenses
paid pursuant to the Distribution Plan, and extraordinary expenses exceeds, on
an annual basis, 1.5% of the average daily net assets of the Fund. No such
reimbursement was required for the year ended December 31, 1997 due to the
expense limitation. See Note 8.

SEC Administrative Action Against Manager
On September 30, 1997, the Securities & Exchange Commission announced that
it instituted public administrative and cease-and desist proceedings against the
Manager, the former portfolio manager of the Fund, the president of the Manager
and Fundamental Service Corporation (FSC). The proceeding arises from the
alleged failure of an affiliated mutual fund to disclose the risks of the
affiliated fund, and of the Manager's failure to disclose its soft dollar
arrangements to the Fund's Board of Directors. A hearing has been scheduled with
an admninistrative law judge to determine whether the allegations are true, and,
if so, what remedial action, if any, is appropriate.

Board's Termination of Portfolio Manager
Between April 17, 1997 and July 24, 1997, a representative of the Manager
engaged Tocqueville Securities L.P. ("Tocqueville Securities"), an affiliate of
Tocqueville (see Note 7), as agent, to effect eight separate over-the-counter
purchase transactions of municipal obligations on behalf of the Fund. The Fund's
Board has concluded that the commissions paid to Tocqueville Securities in
connection with these transactions (a portion of which was paid to the
representative) were not justified and that the Fund bore unnecessary expenses
as a result of the sale of its securities to another party and the subsequent
repurchase of them through Tocqueville Securities. Based upon a report initiated
by Tocqueville Securities and prepared by the Fund's independent auditors, and
upon the Board's own analysis, the Board directed that the Manager terminate the
representative's services as a portfolio manager. At the Board's request and in
order to reimburse the affiliated fund for all of its losses, Tocqueville
Securities, on September 15, 1997, voluntarily paid $260,000 to the Fund, an
amount which significantly exceeds the total commissions ($184,920.60) received
by Tocqueville Securities in connection with these transactions. $219,300 of the
proceeds from the reimbursement have been included in the realized gain on
investments and $40,700 have been included as an expense reimbursement in the
accompanying financial statements. The staff of the Securities and Exchange
Commission and the Department of NASD Regulation have been informed of these
events by Tocqueville Securities. See Note 7 regarding contemplated transaction
with the Tocqueville Trust.

Distribution Plan and Service Agreement
Pursuant to a Distribution Plan (the Plan) adopted pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, the Fund may pay certain
promotional and advertising expenses and may compensate certain registered
securities dealers and financial institutions for services provided in
connection with the processing of orders for purchase or redemption of the
Fund's shares and furnishing other shareholder services. Payments by the Fund
shall not in the aggregate, in any fiscal year, exceed 0.5% of the average daily
net assets of the Fund.

Under a Service Agreement with FSC, an affiliate of the Manager, amounts
are paid under the Plan to compensate FSC for the services it provides and the
expenses it bears in distributing the Fund's shares to investors. Any cumulative
distribution expenses related to the Fund incurred by FSC in excess of the
annual maximum amount payable by the Fund under the Plan may be carried forward
for three years in anticipation of reimbursement by the Fund on a "first
in-first out" basis. If the Plan is terminated or discontinued in accordance
with its terms, the obligation of the Fund to make payments to FSC will cease
and the Fund will not be required to make payments past the termination date.
Amounts paid to FSC pursuant to the agreement totaled $307,200 for the year
ended December 31, 1997.

NASD Sanctions and Fines
On February 19, 1998, FSC and two of its executives, without admitting or
denying guilt, entered into an agreement with the National Association of
Securities Dealers, Inc. ("NASD") whereby they accepted fines totaling $125,000
and other stipulated sanctions as a result of the NASD's finding that they had
distributed advertising materials of an affiliated mutual fund which violated
NASD rules governing advertisements.

9
<PAGE>

NEW YORK MUNI FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997

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

The Fund compensated Fundamental Shareholder Services, Inc. (FSSI), an
affiliate of the Manager, for the services it provided under a Transfer Agent
and Service Agreement which was terminated September 11, 1997. Transfer agent
fees paid to FSSI for the year ended December 31, 1997 amounted to $260,717.

3.Directors' Fees

All of the Directors of the Fund are also directors or trustees of two
other affiliated mutual funds for which the Manager acts as investment adviser.
For services and attendance at Board meetings and meetings of committees which
are common to each Fund, each Director who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets. The Directors also received additional
compensation for special services as requested by the Board. Additional
compensation totaled $40,923 pro rated among the funds based on their respective
average net assets.

4.Complex Securities, Concentrations of Credit Risk, and Investment Transactions

Inverse Floating Rate Notes (IFRN):
The Fund invests in variable rate securities commonly called "inverse
floaters". The interest rates on these securities have an inverse relationship
to the interest rate of other securities or the value of an index. Changes in
interest rate on the other security or index inversely affect the rate paid on
the inverse floater, and the inverse floater's price will be more volatile than
that of a fixed-rate bond. Additionally, some of these securities contain a
"leverage factor"whereby the interest rate moves inversely by a "factor" to the
benchmark rate. For example, the rates on the inverse floating rate note may
move inversely at three times the benchmark rate. Certain interest rate
movements and other market factors can substantially affect the liquidity of
IFRN's.

Concentration of Credit Risk and Transactions in Defaulted Bonds:
The Fund owned 100% of two Niagara Falls Industrial Development Agency
bonds ("IDA Bonds") due to mature on September 1, 2006, and 98.3% of a Niagara
Falls New York Urban Renewal Agency 11% bond ("URA Bond") due to mature on May
1, 2009 which are in default. The IDA Bonds are secured by commercial retail and
office buildings known as the Falls Street Faire and Falls Street Station
Projects ("Projects"). The URA Bond is secured by certain rental payments from
the Projects.

The Fund, through its investment banker and manager, negotiated the sale of
the Falls Street Station project. The net proceeds received on the sale of
approximately $2,800,000 were accounted for as a pro rata recovery of principal
of each of the bonds. The remaining principal value of the Fall Street Station
IDA Bond of approximately $3,887,000 was charged to realized loss on
investments.

The remaining two securities are being valued under methods approved by the
Board of Directors. The aggregate value of these securities is $5,610,867 (35.8%
to their aggregate face value of $15,675,000). There is uncertainty as to the
timing of events and the subsequent ability of the Projects to generate cash
flows sufficient to provide repayment of the bonds. No interest income was
accrued on these bonds during the year ended December 31, 1997. Legal,
investment banking, and other restructuring costs charged to realized loss
totaled approximately $153,000 for the year ended December 31, 1997 ($1,640,000
cumulatively from October 6, 1992 to December 31, 1997). The Fund through its
investment banker, engaged a property manager to maintain the Projects on its
behalf, and the Fund is paying the net operating expenses of the Project. Net
operating expenses related to the Projects for the year ended December 31, 1997
are disclosed in the statement of operations, and cumulatively from October 6,
1992 to December 31, 1997 totaled approximately $684,629

Additionally, the Fund owns 100% of several securities as indicated in the
Statement of Investments. As a result of its ownership position there is no
active trading in these securities. Valuations of these securities are provided
by a pricing service and are believed by the Manager to reflect fair value. The
market value of securities owned 100% by the Fund was approximately $33,973,880
(25% of net assets) at December 31, 1997.

Other Investment Transactions:
During the year ended December 31, 1997, purchases and sales of investment
securities, other than short-term obligations, were $554,177,076 and
$647,162,806, respectively.

10
<PAGE>

NEW YORK MUNI FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997

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

As of December 31, 1997 net unrealized depreciation of portfolio securities
on a federal income tax basis amounted to $5,252,150 composed of unrealized
appreciation of $4,320,774 and unrealized depreciation of $9,572,924.

The Fund has capital loss carryforwards available to offset future capital
gains as follows:
Amount Expiration
------ ----------
$18,503,000 December 31, 2002
3,430,000 December 31, 2004
2,214,000 December 31, 2005
-----------
$24,147,000
===========

5.Capital Stock

As of December 31, 1997 there were 500,000,000 shares of $.01 par value
capital stock authorized. Transactions in capital stock were as follows:

Year Ended Year Ended
December 31, 1997 December 31, 1996
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold......................... 2,692,167,470 $2,280,916,160 3,704,110,578 $3,314,430,819
Shares issued on reinvestment
of dividends........................ 3,788,810 3,223,013 5,501,544 4,939,206
Shares redeemed .................... (2,765,077,644) (2,348,926,704) (3,714,943,217) (3,342,618,858)
-------------- -------------- -------------- --------------
Net (decrease) ..................... (69,121,364) $ (64,787,531) (5,331,095) $ (23,248,833)
============== ============== ============== ==============
</TABLE>

6.Line of Credit

The Fund has line of credit agreements with banks collateralized by cash
and portfolio securities. Borrowings under these agreements bear interest linked
to the banks' prime rate. Pursuant to these agreements $38,177,582 was
outstanding at December 31, 1997.

The maximum month end and the average borrowings outstanding during the year
ended December 31, 1997 were $82,500,000 and $20,630,505, respectively.

7. Agreement and Plan of Reorganization

On July 15, 1997 each of Fundamental's mutual funds (consisting of: New
York Muni Fund, The California Muni Fund, Fundamental Fixed Income Fund: Tax
Free Money Market Series, High Yield Municipal Bond Series, and Fundamental U.S.
Government Strategic Income Fund Series) have adopted, subject to shareholder
approval, an Agreement and Plan of Reorganization (the "Plan") under which each
fund (the "Fundamental Fund") will transfer all of its assets and liabilities to
a newly-created corresponding series of The Tocqueville Trust (the "Tocqueville
Fund") in exchange for shares of the Tocqueville Fund. Shareholders of each
Fundamental Fund will receive shares of the corresponding Tocqueville Fund equal
in value to their shares in the Fundamental Fund. Shareholders will not have to
pay a sales load upon receiving shares of the Tocqueville Fund.

The corresponding Tocqueville Fund will have investment objectives, polices
and restrictions substantially identical to those of the Fundamental Fund. The
Board of Trustees of the Tocqueville Funds is comprised of individuals other
than those who currently serve as Directors (Trustees) of the Fundamental Funds.
Tocqueville Asset Management L.P. is the investment adviser to the Tocqueville
Funds.

A majority of Fundamental's Board Members determined that the Plan would be
in the best interests of shareholders of the Fundamental Funds and recommended
that shareholders of each of the Fundamental Funds approve the Plan at a meeting
anticipated to be held in the Spring of 1998.

8. Subsequent Event

At its March 25, 1998 Board of Directors' meeting, the Board of the Fund
approved the continuation of the Management Agreement through May 30, 1998 in
contemplation of the consummation of the reorganization discussed in Note 7.

11
<PAGE>

NEW YORK MUNI FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997

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

The Manager and FSC (on behalf of certain of their directors, officers,
shareholders, employees and control persons) (the "Indemnitees") received
payment during the fiscal year ended December 31, 1997 from the Fund in the
amount of approximately $50,230. Upon learning of the payments, the independent
Board Members of the Funds directed that the Indemnitees return all of the
payments to the Funds or place them in escrow pending their receipt of an
opinion of an inedpendent legal counsel to the effect that the Indemnitees are
entitled to receive them. The Declaration of Trust, Articles of Incorporation
and contracts that call for indemnification specify that no indemnification
shall be provided to a person who shall be found to have engaged in "disabling
conduct" as defined by applicable law. The Indemnities have undertaken to
reimburse the Fund for any indemnification expenses for which it is determined
that they were not entitled to as a result of "disabling conduct" net of any
reimbursements already made to the Fund in the form of fees forgone or other
similar payments.

FSC waived fees in the amount of $51,200 in 1998. The Manager and FSC have
asserted that they elected to forgo these fees because the Fund was paying legal
expenses pursuant to indemnification. The Fund has retained independent legal
counsel to determine whether the Indemnitees engaged in disabling conduct.
Pending clarification of the legal issues involved, the Independent Directors
have instructed the Manager to escrow the full amount incurred by the Fund of
approximately $50,230.

9. Selected Financial Information

Years Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, Beginning of Year ....................... $0.87 $0.98 $0.88 $1.18 $1.21
----- ----- ----- ----- -----
Income from investment operations:
Net investment income .................................... .021 .035 .035 .056 .065
Net realized and unrealized gains (losses)
on investments ........................................... (.009) (.110) .101 (.290) .082
---- ----- ----- ----- -----
Total from investment operations ......................... .012 (.075) .136 (.234) .147
----- ----- ----- ----- -----
Less Distributions:
Dividends from net investment income ..................... (.019) (.035) (.035) (.056) (.065)
Return of capital distributions........................... (.003) -- -- -- --
Dividends from net realized gains ........................ -- -- (.001) (.010) (.112)
----- ----- ----- ----- -----
Total distributions ...................................... (.022) (.035) (.036) (.066) (.177)
----- ----- ----- ----- -----
Net Asset Value, End of Year ............................. $0.86 $0.87 $0.98 $0.88 $1.18
===== ===== ===== ===== =====
Total Return ............................................. 1.46% (7.73%) 15.67% (20.47%) 12.58%

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000) ............................ $134,595 $196,746 $226,692 $212,665 $275,552
Ratios to Average Net Assets:
Interest expense ......................................... 1.10% 2.11% 2.09% 1.59% .61%
Operating expenses ....................................... 2.64% 1.66% 1.55% 1.62% 1.44%
----- ----- ----- ----- -----
Total expenses ........................................... 3.74%+ 3.77% 3.64% 3.21% 2.05%
===== ===== ===== ===== =====
Net investment income .................................... 2.23%+ 3.89% 3.81% 5.34% 5.20%
Portfolio turnover rate .................................. 399.38% 347.44% 347.50% 289.69% 404.05%
</TABLE>

<PAGE>

Years Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BANK LOANS
Amount outstanding at end of year (000 omitted) .......... $38,178 $1,200 $64,575 $20,000 $20,873
Average amount of bank loans outstanding during the year
(000 omitted) ............................................ $20,631 $49,448 $49,603 $54,479 $24,100
Average number of shares outstanding during the year
(000 omitted) ............................................ 153,535 178,456 191,692 206,323 184,664
Average amount of debt per share during the year ......... $ .134 $ .277 $ .259 $ .264 $ .131

<FN>
+These ratios are after expense reimbursement of .03% for the year ended December 31, 1997.
</FN>
</TABLE>

13
<PAGE>

INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------

The Board of Directors and Shareholders
New York Muni Fund

We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of New York Muni Fund as of December 31, 1997, and
the related statements of operations and cash flows for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and selected financial information for each of the five years in the
period then ended. These financial statements and selected financial information
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and selected financial
information 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 selected
financial information 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 December 31, 1997 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 selected financial information
referred to above present fairly, in all material respects, the financial
position of New York Muni Fund as of December 31, 1997 and the results of its
operations, cash flows, changes in net assets, and selected financial
information for the periods indicated, in conformity with generally accepted
accounting principles.

See Notes 2 and 8 for information regarding regulatory proceedings and
transactions with affiliates.

S I G N A T U R E

New York, New York
March 2, 1998, except for Note 8 as to which the date is April 30, 1998.

14
<PAGE>

THE CALIFORNIA MUNI FUND

March 2, 1998

Dear Fellow Shareholder:

California's economy benefited greatly from the general economy's solid
performance, and particularly from strong growth in the high technology sector.
The credit quality problems that plagued California finances just a few years
ago have largely disappeared as we thought likely at the time. And while recent
turmoil in Asia may slow California's growth rate near term, the diversity of
the state's economy will ease any near term strain.

As a result of regulatory investigations, the Fund's professional fees were
substantially greater than in the past. This factor affected the Fund's
performance during 1997. However, California Muni Fund recorded an 11.33% total
return in 1997, recording solid performance through the entire year. The Fund
began 1997 with a relatively high proportion of AAA rated zero coupon bonds, as
these appeared very cheap relative to the zero coupon bonds issued by other
states. This spread narrowed as the year progressed, and we have been reducing
our holdings of zero coupon bonds in favor of coupon bonds.

Sincerely,

Dr. Vincent J. Malanga
President

15
<PAGE>

$22,786
Lehman
Brothers
Municipal
Bond Index*

$18,233
Fundamental
California
Muni
Fund

$13,926
Consumer
Price Index

- --------------------------------------------------------------------------------
The California Muni Fund
- --------------------------------------------------------------------------------
Average Annual Total Return
Ended on 12/31/97
- --------------------------------------------------------------------------------
1 Year 5 Year 10 Year
- --------------------------------------------------------------------------------
11.33% 4.82% 6.19%
- --------------------------------------------------------------------------------

Thousands ($)

12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94

12/31/95 12/31/96 12/31/97

Past performance is not predictive of future performance.

The above illustration compares a $10,000 investment made in The California Muni
Fund on 12/31/87 to a $10,000 investment made in the Lehman Brothers Municipal
Bond Index on that date. All dividends and capital gain distributions are
reinvested.

The Fund invests primarily in California municipal securities and its
performance takes into account fees and expenses. Unlike the Fund, the Lehman
Brothers Municipal Bond Index is an unmanaged total return performance benchmark
for the long-term, investment-grade tax exempt bond market, calculated by using
municipal bonds selected to be representative of the market. The Index does not
take into account fees and expenses. Further information relating to Fund
performance, including expense reimbursements, if applicable, is contained in
the Fund's Prospectus and elsewhere in this report.

*Source:Lehman Brothers.

The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.

16
<PAGE>

The California Muni Fund
Portfolio Composition
December 31, 1997
(unaudited)

BY TYPE

(3.4%) FCSI

(31.0%) FCLT

(59.8%) LRIB

(5.8%) INLT

BY RATING+

(58.6%) AAA

(23.9%) NR

(1.9%) BB

(9.1%) BBB

(3.3%) A

(3.2%) AA

FIXED COUPON BONDS
FCLT - Long (maturity greater than 15 years) (includes long zero coupons)
FCSI - Short or Intermediate (maturity less than 15 years) (includes zero
coupon bonds)

VARIABLE RATE BONDS
RIB (Residual Interest Bond) type inverse floater's. These are leveraged bonds
whose coupon varies inversely with rates on short term companion issues. The
inverse floater's price will be more volatile than that of a fixed coupon
bond.
LRIB - Long Term (maturity greater than 15 years)

IN (Index) based inverse floater's are bonds whose interest coupons vary
inversely with an index of short term interest rates and then revert to a
fixed rate mode. The inverse floater's price will be more volatile than that
of a fixed coupon bond.
INLT - Long Term (maturity greater than 15 years)

+If a security has a split rating, the highest applicable rating is used,
including published ratings on identical credits for individual securities not
individually rated.

17
<PAGE>

THE CALIFORNIA MUNI FUND

(LEFT COLUMN)

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------

ASSETS
Investment in securities
at value (cost $8,917,684) ................. $ 9,183,831
Interest receivable .......................... 252,201
Receivable for fund shares sold .............. 4,962,106
-----------
Total assets ..................... 14,398,138
-----------
LIABILITIES
Loans (Note 6) ............................... 503,018
Dividend Payable ............................. 10,223
Accrued expenses ............................. 52,893
-----------
Total liabilities ................ 566,134
-----------
NET ASSETS consisting of:
Accumulated net realized gain ... $ 220,789
Unrealized appreciation of
securities .................... 266,147
Paid-in-capital applicable to
1,672,917 shares of beneficial
interest (Note 4) ............. 13,345,068
---------- -----------
$13,832,004
===========

NET ASSET VALUE PER SHARE $8.27
=====

(RIGHT COLUMN)

STATEMENT OF OPERATIONS
Year Ended December 31, 1997
- --------------------------------------------------------------------------------

INVESTMENT INCOME
Interest income .................. $1,009,193
EXPENSES (Notes 2 and 3)
Management fee ................... $63,726
Custodian and accounting fees .... 60,460
Transfer agent fees .............. 38,033
Professional fees ................ 144,918
Printing and postage ............. 16,886
Interest ......................... 53,011
Distribution expenses ............ 44,731
Trustees' fees ................... 10,471
-------
Total expenses ...... 432,236
Less: Expenses reim-
bursed by manager . (3,296)
Net expenses ........ ------- 428,940
----------
Net investment income 580,253
----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments . 493,308
Unrealized appreciation of
investments for the year ....... 374,518
----------
Net gain on investments 867,826
----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS ......................... $1,448,079
==========

(FULL COLUMN)

STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>

Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income ................................................ $ 580,253 $ 694,929
Net realized gain on investments ..................................... 493,308 100,733
Unrealized appreciation (depreciation) of investments for the year ... 374,518 (876,013)
----------- -----------
Net increase (decrease) in net assets from operations ............ 1,448,079 (80,351)
DIVIDENDS PAID TO SHAREHOLDERS FROM
Net investment income ................................................ (580,253) (694,929)
CAPITAL SHARE TRANSACTIONS (Note 4) .................................... (3,287,401) 4,404,527
----------- -----------
Total increase (decrease) .................................... (2,419,575) 3,629,247
NET ASSETS:
Beginning of year .................................................... 16,251,579 12,622,332
----------- -----------
End of year .......................................................... $13,832,004 $16,251,579
=========== ===========

</TABLE>

See Notes to Financial Statements.

18
<PAGE>

THE CALIFORNIA MUNI FUND
STATEMENT OF CASH FLOWS

Year Ended December 31, 1997
- --------------------------------------------------------------------------------

Increase (Decrease) in Cash
Cash Flows From Operating Activities
Net increase to net assets from operations ................... $ 1,448,079
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
Purchase of investment securities .......................... (128,371,610)
Proceeds on sale of securities ............................. 136,362,253
Increase in interest receivable ............................ (5,768)
Decrease in accrued expenses ............................... (81,857)
Net accretion of discount on securities .................... (135,229)
Net realized gain:
Investments .............................................. (493,308)
Unrealized appreciation on securities ........................ (374,518)
------------
Net cash provided by operating activities ............. 8,348,042
------------
Cash Flows From Financing Activities:*
Increase in notes payable .................................. 503,018
Proceeds on shares sold .................................... 251,745,912
Payment on shares repurchased .............................. (260,415,184)
Cash dividends paid ........................................ (195,278)
------------
Net cash used in financing activities ................. (8,361,532)
------------
Net decrease in cash .................................. (13,490)
Cash at beginning of year ...................................... 13,490
------------
Cash at end of year ............................................ $ 0
============
- -----------
*Non-cash financing activities not included herein consist of reinvestment of
dividends of $419,765.
Cash payments for interest expense totaled $57,087.

See Notes to Financial Statements.

19
<PAGE>

THE CALIFORNIA MUNI FUND
<TABLE>
<CAPTION>

STATEMENT OF INVESTMENTS
December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------

Principal
Amount Issue ooo Type Rating Value
------ ----- ---- ------ -----
<C> <S> <C> <C> <C>
$ 100,000(DD) Arvin, Development Corporation, COP, RB, 8.75%, 9/01/18 ............. FCLT NR $ 24,505

200,000 Beverly Hills, PFA, RB, IFRN*, MBIA Insured, 7.32%, 6/01/15 ......... LRIB AAA 209,428

100,000 CSAC Finance Corp, COP, Sutter County Health Facilities Project,
7.80%, 1/01/21 .................................................... FCLT Baa1 102,158

70,000 California, HFA, Home Mortgage, RB, Series A, MBIA Insured,
5.70%, 8/01/10 .................................................... FCSI Aaa 74,163
300,000+ California Statewide Communities Development Authority, Cedars
Sinai Medical Project, COP, RB, IFRN*, 6.97%, 11/01/15 ............ LRIB A1 290,166

300,000 East Bay, Wastewater System Project, RB, Refunding, AMBAC
Insured, IFRN*, 6.87%, 6/01/20 .................................... LRIB AAA 312,108

220,000 Hawthorne, CRA, TAR, 6.75%, 9/01/24 ................................. FCLT Baa 240,933

170,000 Lake Elsinore, USD, Refunding, COP, 6.90%, 2/01/20 .................. FCLT BBB 187,299

10,000 Los Angeles, Home Mortgage, RB, 9.00%, 6/15/18 ...................... FCLT A 10,200

1,505,192 Los Angeles, HFA, MFH Project C, CAB, RB, 12.00%, 12/01/29 .......... FCLT NR 1,112,291

35,000 Modesto, Valley Oak Project, RB, 10.60%, 5/01/09 .................... FCSI NR 35,792

250,000 Northern California Power Agency, Multiple Capital Facilities, RB,
MBIA Insured, IFRN*, 8.76%, 8/01/25 ............................... LRIB AAA 293,040

250,000 Northern California Transmission Agency, CA-ORE Transmission
Project, RB, MBIA Insured, IFRN*, 6.81%, 4/29/24 .................. LRIB AAA 254,042

500,000 Orange County Airport, RB, Refunding, MBIA Insured, 5.625%,
7/01/12 ........................................................... FCLT Aaa 526,415

250,000+ Orange County, LTA, RB, IFRN*, 8.01%, 2/14/11 ....................... LRIB AA 297,597

250,000 Orange County, LTA, RB, IFRN*, 7.81%, 2/14/11 ....................... LRIB AAA 289,027

185,000 Panoche, Water District, COP, 7.50%, 12/01/08 ....................... FCSI BBB 199,776

250,000 Rancho, Water District Financing Authority, RB, Prerefunded @
104, AMBAC Insured, IFRN*, 8.82%, 8/17/21 ......................... LRIB AAA 301,443

250,000 Redding, Electric System, COP, Series A, FGIC Insured, IFRN*,
7.20%, 6/01/19 .................................................... LRIB AAA 264,078

175,000 Riverside, HFA, Riverside Apartment Project, RB, 7.87%, 11/01/19 .... FCLT BB- 178,896

500,000 San Bernardino, COP, Series B. MBIA Insured, IFRN*, 6.38%,
7/01/16 ........................................................... INLT AAA 531,045

900,000 San Bernardino, COP, Series PA38, MBIA Insured, IFRN*,
11.92%, 7/01/16, Rule 144A Security (restricted as to resale
except to qualified institutions) ................................. LRIB NR 1,021,995

200,000 San Diego Water Authority, COP, FGIC Insured, IFRN*, 7.09%,
4/22/09 ........................................................... LRIB AAA 240,624

1,440,000x San Jose, CRA, Series PA-38, TAB, MBIA Insured, IFRN*, 5.83%,
8/01/16, Rule 144A Security (restricted as to resale except to
qualified institutions) ........................................... LRIB AAA 1,471,306
</TABLE>

20
<PAGE>

THE CALIFORNIA MUNI FUND
<TABLE>
<CAPTION>

STATEMENT OF INVESTMENTS (continued)
December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------

Principal
Amount Issue ooo Type Rating Value
------ ----- ---- ------ -----
<C> <S> <C> <C> <C>
$ 250,000 Southern California Public Power Authority, FGIC Isured, IFRN*,
6.62%, 7/01/17 .................................................... LRIB AAA $ 248,070

55,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, 6.45%, 12/01/28 ....... FCLT AAA 59,388

30,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series B, 6.30%,
12/01/28 .......................................................... FCLT AAA 32,358

250,000 Tri City, HFA, FNMA/GNMA Collateralized, AMT, Series E, 6.40%,
12/01/28 .......................................................... FCLT AAA 271,518

100,000 Upland, HFA, RB, 7.85%, 7/01/20 ..................................... FCLT BBB 104,170
-----------
Total Investments (Cost $8,917,684#) ........................ $ 9,183,831
===========

<FN>
*Inverse Floating Rate Notes (IFRN) are instruments whose interest rates bear an inverse relationship to the interest
rate on another security or the value of an index. Rates shown are at December 31, 1997.

#Cost is the same for Federal income tax purposes.

xThe Fund owns 100% of the security and therefore there is no trading in the security.

(DD)Denotes non-income producing security: Security is in default.
+Segregated, in whole or part, a collateral securing a line of credit.
</FN>
</TABLE>

Legend
(LEFT COLUMN)

oType FCLT -Fixed Coupon Long Term
FCSI -Fixed Coupon Short or Intermediate Term
LRIB -Residual Interest Bond Long Term
INLT -Indexed Inverse Floating Rate Bond Long Term

ooRatings If a security has a split rating the highest applicable
rating is used, including published ratings on identicial
credits for individual securities not individually rated.
Ratings are unaudited.
NR -Not Rated

oooIssue AMBAC American Municipal Bond Assurance Corporation
AMT Alternative Minimum Tax
CAB Capital Appreciation Bond
CGIC Capital Guaranty Insurance Company

(RIGHT COLUMN)

COP Certificate of Participation
CRA California Redevelopment Agency
FGIC Financial Guaranty Insurance Corporation
FNMA Federal National Mortgage Association
FSA Financial Security Assurance, Inc.
GNMA Government National Mortgage Association
HFA Housing Finance Authority
LTA Local Transportation Authority
MBIA Municipal Bond Insurance Assurance Corporation
MFH Multi Family Housing
PFA Public Financing Authority
RB Revenue Bond
TAB Tax Allocation Bond
TAR Tax Allocation Refunding
USD Unified School District

See Notes to Financial Statements.

21
<PAGE>

THE CALIFORNIA MUNI FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
(LEFT COLUMN)

1. Significant Accounting Policies

The California Muni Fund (the Fund) was organized as a Massachusetts
business trust and is registered as an open end management investment company
under the Investment Company Act of 1940. The Fund's objective is to provide as
high a level of income that is excluded from gross income for Federal income tax
purposes and exempt from California personal income tax as is consistent with
the preservation of capital. The Fund employs leverage in attempting to achieve
its objective. The following is a summary of significant accounting policies
followed in the preparation of its financial statements:

Valuation of Securities-The Fund's portfolio securities are valued on the
basis of prices provided by an independent pricing service when, in the opinion
of persons designated by the Fund's trustees, such prices are believed to
reflect the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are generally
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities traded or dealt in upon a securities exchange and not subject
to restrictions against resale as well as options and futures contracts listed
for trading on a securities exchange or board of trade are valued at the last
quoted sales price, or, in the absence of a sale, at the mean of the last bid
and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Securities not priced in a
manner described above and other assets are valued by persons designated by the
Fund's trustees using methods which the trustees believe accurately reflects
fair value.

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 all of its taxable and tax exempt income to its shareholders.
Therefore, no provision for federal income tax is required.

(RIGHT COLUMN)

Distributions-The Fund declares dividends daily from its net investment
income and pays such dividends on the last business day of each month.
Distributions of net capital gains, if any, realized on sales of investments are
made annually, as declared by the Fund's Board of Trustees. Dividends are
reinvested at the net asset value unless shareholders request payment in cash.

General-Securities transactions are accounted for on a trade date basis.
Interest income is accrued as earned. Premiums and original issue discount on
securities purchased are amortized over the life of the respective securities.
Realized gains and losses from the sale of securities are recorded on an
identified cost basis.

Accounting 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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.

2. Investment Advisory Fees and Other Transactions With Affiliates

SEC Administrative Action Against the Manager
On September 30, 1997, the Securities & Exchange Commission announced that
it instituted public administrative and cease-and desist proceedings against the
Manager, the former portfolio manager of the Fund, the president of the Manager
and Fundamental Service Corporation (FSC). The proceeding arises from the
alleged failure of an affiliated mutual fund to disclose the risks of the
affiliated Fund, and of the Manager's failure to disclose its soft dollar
arrangements to the Fund's Board of Trustees. A hearing has been sched-

22
<PAGE>

THE CALIFORNIA MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------
(LEFT COLUMN)

uled with an administrative law judge to determine whether the allegations are
true, and, if so, what remedial action, if any, is appropriate.

Board's Termination of Portfolio Manager
Between April 17, 1997 and July 24, 1997, a representative of the Manager
engaged Tocqueville Securities L.P. ("Tocqueville Securities"), an affiliate of
Tocqueville (see note 7), as agent, to effect eight separate over-the-counter
purchase transactions of municipal obligations on behalf of an affiliated fund.
The affiliated fund's Board has concluded that the commissions paid to
Tocqueville Securities in connection with these transactions (a portion of which
was paid to the representative) were not justified and that the affiliated fund
bore unnecessary expenses as a result of the sale of its securities to another
party and the subsequent repurchase of them through Tocqueville Securities.
Based upon a report initiated by Tocqueville Securities and prepared by the
Fund's independent auditors, and upon the Board's own analysis, the Board
directed that the Manager terminate its representative's services as a portfolio
manager. At the Board's request and in order to reimburse the affiliated fund
for all of its losses, Tocqueville Securities, on September 15, 1997,
voluntarily paid $260,000 to the affiliated fund, an amount which significantly
exceeds the total commissions ($184,920.60) received by Tocqueville Securities
in connection with these transactions. The staff of the Securities and Exchange
Commission and the Department of NASD Regulation have been informed of these
events by Tocqueville Securities. See Note 7 regarding contemplated transaction
with the Tocqueville Trust.

Distribution Plan and Service Agreement
Pursuant to a Distribution Plan (the Plan) adopted pursuant to Rule 12b-1,
promulgated under the Investment Company Act of 1940, the Fund may pay certain
promotional and advertising expenses and may compensate certain registered
securities dealers and financial institutions for services provided in
connection with the processing of orders for purchase or redemption of the
Fund's shares and furnishing other shareholder services. Payments by the Fund
shall not in the aggregate, in any fiscal year, exceed 0.5% of the average daily
net assets of the Fund.

(RIGHT COLUMN)

Under a Service Agreement with FSC, an affiliate of the Manager, amounts are
paid under the Plan to compensate FSC for the services it provides and the
expenses it bears in distributing the Fund's shares to investors. Distribution
fees for the year ended December 31, 1997 are set forth in the Statement of
Operations of which approximately $39,200 was paid to FSC.

NASD Sanctions and Fines
On February 19, 1998, FSC and two of its executives, without admitting or
denying guilt, entered into an agreement with the National Association of
Securities Dealers Inc. ("NASD") whereby they accepted fines totaling $125,000
and other stipulated sanctions as a result of the NASD's finding that they had
distributed advertising materials of an affiliated mutual fund which violated
NASD rules governing advertisements.

Affiliated Transfer Agent
The Fund compensated Fundamental Shareholder Services, Inc. (FSSI), an
affiliate of the Manager, for the services it provided under a Transfer Agent
and Service Agreement which terminated on September 11, 1997. Transfer agent
fees paid to FSSI for the year ended December 31, 1997 aggregated $28,066.

3. Trustees' Fees

All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at Board meetings and meetings of committees which are
common to each Fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets. The Trustees also received additional
compensation for special services as requested by the Board. Additional
compensation totaled $40,923 pro rated among the funds based on their respective
average net assets.

4. Shares of Beneficial Interest

As of December 31, 1997 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid in amounted to
$13,345,068. Transactions in shares were as follows:

23
<PAGE>

THE CALIFORNIA MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------
(LEFT COLUMN)

Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold 32,632,214 $256,708,018 29,177,580 $234,552,576

Shares issued
on
reinvest-
ment of
dividends 51,101 419,765 58,802 472,727

Shares
redeemed (33,097,092) (260,415,184) (28,566,533) (230,620,776)
----------- ------------ ----------- ------------

Net increase
(decrease) (413,777) (3,287,401) 669,849 $ 4,404,527
======== ========== ======= ============

5. Complex Securities and Investment
Transactions

Inverse Floating Rate Notes:
The Fund invests in variable rate securities commonly called "inverse
floaters". The interest rates on these securities have an inverse relationship
to the interest rate of other securities or the value of an index. Changes in
interest rate on the other security or index inversely affect the rate paid on
the inverse floater, and the inverse floater's price will be more volatile than
that of a fixed rate bond. Certain interest rate movements and other market
factors can substantially affect the liquidity of IFRN's.

Investment Transactions:
During the year ended December 31, 1997, the cost of purchases and proceeds
from sales of investment securities, other than short-term obligations, were
$9,050,450 and $13,516,911, respectively.

As of December 31, 1997 the net unrealized appreciation of portfolio
securities amounted to $266,147 composed of unrealized appreciation of $744,806
and unrealized depreciation of $478,659.

(RIGHT COLUMN)

6. Line of Credit

The Fund has a line of credit agreement with its custodian bank
collateralized by portfolio securities. Borrowings under this agreement bear
interest linked to the bank's prime rate. The maximum month end and the average
borrowings outstanding during the year ended December 1997, were $2,000,000 and
$664,000, respectively.

7. Agreement and Plan of Reorganization

On July 16, 1997 each of Fundamental's mutual funds (consisting of: New York
Muni Fund, The California Muni Fund, Fundamental Fixed Income Fund: Tax Free
Money Market Series, High Yield Municipal Bond Series, and Fundamental U.S.
Government Strategic Income Fund Series) have adopted, subject to shareholder
approval, an Agreement and Plan of Reorganization (the "Plan") under which each
fund (the "Fundamental Fund") will transfer all of its assets and liabilities to
a newly-created corresponding series of The Tocqueville Trust (the "Tocqueville
Fund") in exchange for shares of the Tocqueville Fund. Shareholders of each
Fundamental Fund will receive shares of the corresponding Tocqueville Fund equal
in value to their shares in the Fundamental Fund. Shareholders will not have to
pay a sales load upon receiving shares of the Tocqueville Fund.

24
<PAGE>

THE CALIFORNIA MUNI FUND
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------
8. Subsequent Event

At its March 25, 1998 Board of Trustees' meeting, the Board of the Fund
approved the continuation of the Management Agreement through May 30, 1998 in
contemplation of the consummation of the reorganization discussed in Note 7.

The Manager and FSC (on behalf of certain of their directors, officers,
shareholders, employees and control persons) (the "Indemnitees") received
payment during the fiscal year ended December 31, 1997 from the Fund in the
amount of approximately $4,000. Upon learning of the payments, the independent
Board Members of the Funds directed that the Indemnitees return all of the
payments to the Funds or place them in escrow pending their receipt of an
opinion of an independent legal counsel to the effect that the Indemnitees are
entitled to receive them. The Declaration of Trust, Articles of Incorporation
and contracts that call for indemnification specify that no indemnification
shall be provided to a person who shall be found to have engaged in "disabling
conduct" as defined by applicable law. The Indemnities have undertaken to
reimburse the Fund for any indemnification expenses for which it is determined
that they were not entitled to as a result of "disabling conduct" net of any
reimbursements already made to the Fund in the form of fees forgone or other
similar payments. Pending clarification of the legal issues involved, the
Indemnitees have placed into an escrow account $4,000 as of April 30, 1998.

9. Selected Financial Information
<TABLE>
<CAPTION>

Years Ended December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, Beginning of Year ......................... $ 7.79 $ 8.91 $ 7.10 $ 9.49 $ 8.81
------- ------- ------- ------- -------
Income from investment operations:
Net investment income ...................................... .376 .409 .419 .553 .563

Net realized and unrealized gains (losses)
on investments ........................................... .480 (1.120) 1.810 (2.390) .876
------- ------- ------- ------- -------
Total from investment operations .................... .856 (.711) 2.229 (1.837) 1.439
------- ------- ------- ------- -------
Less Distributions:
Dividends from net investment income ....................... (.376) (.409) (.419) (.553) (.563)

Dividends from net realized gains .......................... - - - - (.196)
------- ------- ------- ------- -------
Total distributions ........................................ (.376) (.409) (.419) (.553) (.759)
------- ------- ------- ------- -------
Net Asset Value, End of Year ............................... $ 8.27 $ 7.79 $ 8.91 $ 7.10 $ 9.49
======= ======= ======= ======= =======
Total Return ............................................... 11.33% (8.01%) 32.02% (19.89%) 16.80%

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000) .............................. 13,832 16,252 12,622 10,558 16,280

Ratios to Average Net Assets:
Interest expense ......................................... .42 .45% .39% .98% .39%
Operating expenses ....................................... 2.95* 2.81% 2.81% 2.50% 1.77%*
------- ------- ------- ------- -------
Total expenses ...................................... 3.37* 3.26% 3.20% 3.48% 2.16%*
======= ======= ======= ======= =======
Net investment income ............................... 4.55%* 4.88% 5.02% 6.80% 6.04%*
Portfolio turnover rate .................................... 70.86% 89.83% 53.27% 15.88% 51.26%

BANK LOANS
Amount outstanding at end of year (000 omitted) ............ $ 503 $ 0 $ 0 $1,292 $3,714

Average amount of bank loans outstanding during the year
(000 omitted) ............................................ $ 664 $ 823 $ 642 $1,620 $ 958

Average number of shares outstanding during the year
(000 omitted) ............................................ 1,609 1,768 1,635 1,711 1,517

Average amount of debt per share during the year ........... $ .41 $ .47 $ .39 $ .95 $ .63

<FN>
*These ratios are after expense reimbursement of .03%, and .50% for the years ended December 31, 1997 and 1993.
</FN>
</TABLE>

25
<PAGE>

INDEPENDENT AUDITOR'S REPORT

The Board of Trustees and Shareholders
The California Muni Fund

We have audited the accompanying statement of assets and liabilities
including the statement of investments of The California Muni Fund as of
December 31, 1997 and the related statements of operations and cash flows for
the year then ended, statements of changes in net assets for each of the two
years in the period then ended, and the selected financial information for each
of the five years in the period then ended. These financial statements and
selected financial information are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
selected financial information based on our audits.

In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of The California Muni Fund as of December 31, 1997, the results of its
operations, cash flows, changes in its net assets, and selected financial
information for the periods indicated, in conformity with generally accepted
accounting principles.

See Notes 2 and 8 for information regarding regulatory proceedings and
transactions with affiliates.

S I G N A T U R E

New York, New York
March 2, 1998, except for Note 8 as to which the date is April 30, 1998.

<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES

(LEFT COLUMN)

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------

ASSETS
Cash ............................................ $ 1,776,944

Investment in securities at value
(cost $75,869,410) ............................ 75,869,410

Receivables:
Fund shares sold .............................. 135,853

Interest ...................................... 270,975
-----------
Total assets .......................... 78,053,182
-----------
LIABILITIES
Payables:
Investment securities purchased ............... 1,103,151
Fund shares redeemed .......................... 63,627,947
Dividends ..................................... 9,321
Due to advisor ................................ 10,866

Accrued expenses ................................ 38,729
-----------
Total liabilities ..................... 64,790,014
-----------
NET ASSETS equivalent to $1.00 per share on
13,270,069 shares of beneficial interest
outstanding (Note 4) ............................. $13,263,168
===========

(RIGHT COLUMN)

STATEMENT OF OPERATIONS
Year Ended December 31, 1997
- --------------------------------------------------------------------------------

INVESTMENT INCOME
Interest income ................... $1,729,572

EXPENSES (Notes 2 and 3)
Investment advisory fees ..........$245,844
Custodian and accounting fees ..... 41,002
Transfer agent fees ............... 84,687
Trustees' fees .................... 10,041
Professional fees ................. 88,996
Distribution fees ................. 245,844
Postage and printing .............. 22,506
Other ............................. 12,291
--------
Total expenses .......... 751,211

Less:
Expenses paid indirectly (Note 6) . (41,002)
Expenses reimbursed by Manager .... (5,982)
--------
Net expenses ............ 704,227
----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS $1,025,345
----------

(FULL COLUMN)

STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income .......................... $ 1,025,345 $ 1,161,235
----------- -----------
Net increase in net assets from operations. 1,025,345 1,161,235

DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income .............................. (1,025,345) (1,161,235)
CAPITAL SHARE TRANSACTIONS (Note 4) .............. 8,642,404 (6,629,783)
----------- -----------
Total (decrease) increase ................. 8,642,404 (6,629,783)

NET ASSETS
Beginning of year .............................. 4,620,764 11,250,547
----------- -----------
End of year .................................... $13,263,168 $ 4,620,764
=========== ===========

See Notes to Financial Statements.

27
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES

<TABLE>
<CAPTION>
STATEMENT OF INVESTMENTS
December 31, 1997
- ------------------------------------------------------------------------------------------------------------

Principal
Amount Issue o Value
------ ----- -----
<C> <S> <C>
$2,700,000 Ascension Parish, LA, PCR, BASF Wyandote Corp, LOC Bank of Tokyo,
VRDN*, 5.10%, 12/01/15 ..................................................... $2,700,000

1,500,000 Burke County, GA, Development Authority, VRDN*, PCR, Georgia Power Co.
Vogtle Project 5th Series, 5.00%, 7/01/24 .................................. 1,500,000

4,000,000 Burke County, GA, Development Authority, VRDN*, PCR, Georgia Power Co.
Vogtle Project 4th Series, 5.00%, 9/01/25 .................................. 4,000,000

2,800,000 Columbia AL, IDB, PCR Alabama Power Co. Project, VRDN*, Series D, 5.00%,
10/01/22 ................................................................... 2,800,000

75,000 Cuyahoga County, OH, IDR, S & R Playhouse Realty, VRDN*, LOC Marine
Midland Bank, 3.85%, 12/01/09 .............................................. 75,000

200,000 Delaware County, PA, SWDF, Scott Paper Project, Kimberly-Clark Corp
Guaranty, VRDN*, 3.65%, 12/01/18 ............................................ 200,000

200,000 Fulton County, GA, PCR, General Motors Project, VRDN*, 3.90%, 4/01/10 ........ 200,000

200,000 Garfield County, OK, PCR, Oklahoma Gas & Electric Co. Project A, VRDN*,
3.75%, 1/01/25 ............................................................. 200,000

125,000 Genesee County, NY, IDR, Orcon Industries, AMT, LOC Fleet Bank, VRDN*,
4.50%,12/01/98 ............................................................. 125,000

300,000 Illinois Educational Facility Authority, RB, Art Institute of Chicago, Northern
Trust Liquidity, VRDN*, 3.85%, 3/01/27 ..................................... 300,000

300,000 Illinois HFAR, Franciscan Sisters Project, LOC Toronto Dominion Bank,
VRDN*, 3.65%, 9/01/15 ...................................................... 300,000

2,000,000 Illinois HFAR, Healthcorp Affiliates Project, LOC Raborbank Nederland,
VRDN*, 4.05%, 11/01/20 ..................................................... 2,000,000

2,855,000 Jackson County, Miss., PCR, Chevron Corp. Project, VRDN*, 5.00%,
12/01/16 ................................................................... 2,855,000

3,700,000 Los Angeles, CA, Regional Airports Improvement Corp, LOC Societe
Generale, VRDN*, 5.00%, 12/01/25 ........................................... 3,700,000

200,000 McIntosh, AL, PCR, Ciba Geigy Project, LOC Swiss Bank Corp. VRDN*,
3.65%, 12/01/03 ............................................................ 200,000

5,000,000 Midland County, MI, Economic Development Corp, Dow Chemical Project B,
AMT, VRDN*, 5.00%, 12/01/15 ................................................ 5,000,000

300,000 Missouri, PCR, Monsanto Project, VRDN*, 3.70%, 2/01/09 ....................... 300,000

200,000 Missouri, Third Street Building Project, SPA First Chicago, VRDN*, 3.90%,
8/01/99 .................................................................... 200,000

300,000 Montgomery, AL, Baptist Medical Center, Special Care Facilities Financing
Authority, Series H, AMBAC Insured, VRDN*, 3.70%, 12/01/30 ................. 300,000

200,000 Nebraska Higher Education Loan Program, SPA, SLMA, MBIA Insured,
VRDN*, 3.65%, 12/01/15 ..................................................... 200,000
</TABLE>

28
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES

<TABLE>
<CAPTION>
STATEMENT OF INVESTMENTS (continued)
December 31, 1997
- ------------------------------------------------------------------------------------------------------------

Principal
Amount Issue o Value
------ ----- -----
<C> <S> <C>

$ 5,100,000 New York City, NY, GO, LOC Chase Manhattan Bank, VRDN*, 5.00%, 8/01/23 ...... $5,100,000

2,500,000 New York City, NY, GO, Landesbank Hessen Liquidity, VRDN*, 3.60%, 2/15/20 ... 2,500,000

4,000,000 New York City, NY, Municipal Water Finance Authority, Water & Sewer System
RB, TR Receipts Series 29, The Bank of New York Liquidity, VRDN*,
3.90%, 6/15/30 ............................................................ 4,000,000

40,000 New York City, NY, New PHA, 3.38%, 01/01/98 ................................. 39,740

10,700,000x New York State, DAR, TRS 27, 3.95%, 7/01/24, City University, Floating Rate
Trust Receipts 27, MBIA Insured, Liquidity The Bank of New York ........... 10,700,000

3,000,000 New York State Energy Research & Development Authority, PCR, New York,
State Electric & Gas Co., Series D, LOC Union Bank of Switzerland,
VRDN*, 5.00%, 10/01/29 .................................................... 3,000,000

2,100,000 New York State, Job Development Authority, St. Gtd., Special Purpose Series
A-1 thru A-25, LOC Sumitomo Bank, VRDN*, 5.25%, 3/01/07 ................... 2,100,000

5,200,000 Newport Beach CA, RB, Hoag Memorial Hospital Series B, SPA Bank of
America, 5.00%, 10/01/06 .................................................. 5,200,000

50,000 North Little Rock, AR, New PHA, FGIC Insured, 3.25%, 6/01/98 ................ 49,670

1,100,000 Orange County, CA, Water District Project B, COP, LOC National
Westminister VRDN*, 4.85%, 8/15/15 ........................................ 1,100,000

4,000,000 Princeton, IN, PCR, PSI Energy, Inc., Proj., LOC Morgan Guaranty, VRDN*,
5.10%, 4/01/22 ............................................................ 4,000,000

125,000 Scioto County, OH, HFR, VHA, Central Capital Project, AMBAC Insured,
VRDN*, 3.70%, 12/01/25 .................................................... 125,000

4,500,000 Sweetwater County, WY, PCR, Idaho Power Co. Project Series C, VRDN*,
5.10%, 7/15/26 ............................................................ 4,500,000

1,600,000 Uinta County, WY, PCR, Chevron Corp Project, VRDN*, 5.00%, 8/15/20 .......... 1,600,000

4,500,000 Valdez, AK, Marine Term Revenue, Exxon Pipeline Co. Project A, VRDN*,
5.00%, 12/01/33 ........................................................... 4,500,000

200,000 Wake County, NC, PCR, Carolina Power & Light Project, LOC Sumitomo
Bank, VRDN*, 4.15%, 10/01/15 .............................................. 200,000
-----------
Total Investments (Cost $75,869,410) ........................................ $75,869,410
===========

<FN>
*Variable Rate Demand Notes (VRDN) are instruments whose interest rate changes on a specific date and/or
whose interest rates vary with changes in a designated base rate.

**Cost is the same for Federal income tax purposes.

xThe Fund owns 100% of the security and therefore there is no trading in the security.
</FN>
</TABLE>

29
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES

STATEMENT OF INVESTMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

Legend

Issue AMBAC American Municipal Bond Assurance Corporation

DAR Dormitory Authority Revenue

AMT Alternative Minimum Tax

GO General Obligation

ETM Escrowed to Maturity

HFAR Health Facilities Authority Revenue

HFR Hospital Facilities Revenue

IDB Industrial Development Board

IDR Industrial Development Revenue

LOC Letter of Credit

MBIA Municipal Bond Insurance Assurance Corporation

PCR Pollution Control Revenue

PHA Public Housing Authority

RB Revenue Bond

SLMA Student Loan Marketing Association

SPA Stand By Bond Purchase Agreement

SWDF Solid Waste Disposal Facility

TRANS Tax Revenue Anticipation Notes

TRS Trust Receipt Series

See Notes to Financial Statements.

30
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES

NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------

1. Significant Accounting Policies

Fundamental Fixed-Income Fund (the Fund) is an open-end management
investment company registered under the Investment Company Act of 1940. The Fund
acts as a series company currently issuing three classes of shares of beneficial
interest, the Tax-Free Money Market Series, the High-Yield Municipal Bond Series
and the Fundamental U.S. Government Strategic Income Fund Series. Each series is
considered a separate entity for financial reporting and tax purposes. The
Tax-Free Money Market Series (the Series) investment objective is to provide as
high a level of current income exempt from federal income tax as is consistent
with the preservaton of capital and liquidity. The following is a summary of
significant accounting policies followed in the preparation of the Series'
financial statements:

Valuation of Securities:

Investments are stated at amortized cost. Under this valuation method, a
portfolio instrument is valued at cost and any premium or discount is amortized
on a constant basis to the maturity of the instrument. Amortization of premium
is charged to income, and accretion of market discount is credited to unrealized
gains. The maturity of investments is deemed to be the longer of the period
required before the Fund is entitled to receive payment of the principal amount
or the period remaining until the next interest adjustment.

Federal Income Taxes:

It is the Series' policy to comply with the requirements of the Internal
Revenue Code applicable to "regulated investment companies" and to distribute
all of its taxable and tax exempt income to its shareholders. Therefore, no
provision for federal income tax is required.

Distributions:

The Series declares dividends daily from its net investment income and
pays such dividends on the last business day of each month. Distributions of net
capital gains are made annually, as declared by the Fund's Board of Trustees.
Dividends are reinvested at the net asset value unless shareholders request
payment in cash.

General:

Securities transactions are accounted for on a trade date basis. Interest
income is accrued as earned. Realized gains and losses from the sale of
securities are recorded on an identified cost basis.

Accounting 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.

31
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

2. Investment Advisory Fees and Other Transactions with Affiliates

Management Agreement
The Fund has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement, the Manager serves as investment
adviser to the Tax-Free Money Market Series and is responsible for the overall
management of the business affairs and assets of the Series subject to the
authority of the Fund's Board of Trustees. In consideration for the services
provided by the Manager, the Series will pay an annual management fee in an
amount equal to 0.5% of the Series' average daily net assets up to $100 million
and decreasing by .02% for each $100 million increase in net assets down to 0.4%
of net assets in excess of $500 million. See Note 8.

SEC Administrative Proceeding Against the Manager

On September 30, 1997, the Securities & Exchange Commission announced that
it instituted public administrative and cease-and desist proceedings against the
Manager, the former portfolio manager of the Fund, the president of the Manager
and Fundamental Service Corporation (FSC), the Fund's Distributor. The
proceeding arises from the alleged failure of an affiliated mutual fund to
disclose the risks of the affiliated series, and of the Manager's failure to
disclose its soft dollar arrangements to the Fund's Board of Trustees. A hearing
has been scheduled with an administrative law judge to determine whether the
allegations are true, and, if so, what remedial action, if any, is appropriate.

Board's Termination of Portfolio Manager
Between April 17, 1997 and July 24, 1997, a representative of the Manager
engaged Tocqueville Securities L.P. ("Tocqueville Securities") an affiliate of
Tocqueville, as agent, to effect eight separate over-the-counter purchase
transactions of municipal obligations on behalf of an affiliated fund. The
Fund's Board has concluded that the commissions paid to Tocqueville Securities
in connection with these transactions (a portion of which was paid to the
representative) were not justified and that the affiliated fund bore unnecessary
expenses as a result of the sale of its securities to another party and the
subsequent repurchase of them through Tocqueville Securities. Based upon a
report initiated by Tocqueville Securities and prepared by the Fund's
independent auditors, and upon the Board's own analysis, the Board directed that
the Manager terminate the representative's services as a portfolio manager. At
the Board's request and in order to reimburse the affiliated fund for all of its
losses, Tocqueville Securities, on September 15, 1997, voluntarily paid $260,000
to the affiliated fund, an amount which significantly exceeds the total
commissions ($184,920.60) received by Tocqueville Securities in connection with
these transactions. The staff of the Securities and Exchange Commission and the
Department of NASD Regulation have been informed of these events by Tocqueville
Securities. See Note 7 regarding contemplated transaction with the Tocqueville
Trust.

Plan of Distribution
The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, under which the Series
pays to FSC, an affiliate of the Manager, a fee, which is accrued daily and paid
monthly, at an annual rate of 0.5% of the Series' average daily net assets. The
amounts paid under the plan compensate FSC for the services it provides and the
expenses it bears in distributing the Series' shares to investors. Distribution
fees for the year ended December 31, 1997 are set forth in the Statement of
Operations.

32
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

totaling $125,000 and other stipulated sanctions as a result of the NASD's
finding that they had distributed advertising materials of an affiliated mutual
fund which violated NASD rules governing advertisements.

Affiliated Transfer Agent
The Fund compensated Fundamental Shareholder Services, Inc., (FSSI) an
affiliate of the Manager, for the services it provided under a Transfer Agent
and Service Agreement which was terminated on September 11, 1997. Transfer agent
fees paid by the Series to FSSI for the year ended December 31, 1997 amounted to
$17,745.

3. Trustees' Fees

4. Shares of Beneficial Interest

As of December 31, 1997 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid in amounted to
$13,270,069. Transactions in shares of beneficial interest, all at $1.00 per
share were as follows:

Year ended Year ended
December 31, December 31,
1997 1996
-------------- --------------
Shares sold ..............................$2,566,332,934 $3,547,580,681

Shares issued on reinvestment of dividends 1,048,578 1,042,865

Shares redeemed ..........................(2,558,739,108) (3,555,253,329)
-------------- ----------
Net (decrease) increase ..................$ 8,642,404 (6,629,783)
============== ==========

5. Line of Credit

The Fund has a line of credit agreement with its custodian bank
collateralized by cash and portfolio securities for $500,000. Borrowings under
this agreement bear interest linked to the bank's prime rate. The Series had no
borrowing under the line of credit agreement as of or during the year ended
December 31, 1997.

6. Expenses Paid Indirectly

The Fund has an arrangement with its custodian whereby credits earned on
cash balances maintained at the custodian are used to offset custody charges.
These credits amounted to approximately $41,000 for the year ended December 31,
1997.

7. Agreement and Plan of Reorganization

33
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
TAX-FREE MONEY MARKET SERIES

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

A majority of Fundamentals' Board Members determined that the Plan would be
in the best interests of shareholders of the Fundamental Funds and recommended
that shareholders of each of the Fundamental Funds approve the Plan at a meeting
anticipated to be held in the Spring of 1998.

8. Subsequent Event

At its March 25, 1998 Board of Trustees' meeting, the Board of the Fund
approved the continuation of the Management Agreement and Distribution Agreement
through May 30, 1998 in contemplation of the consummation of the reorganization
discussed in Note 7.

9. Selected Financial Information

Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE DATA AND RATIOS
(for a share outstanding throughout the period)
Net Asset Value, Beginning of Year ........................ $1.00 $1.00 $1.00 $1.00 $1.00

Income from investment operations:
Net investment income ..................................... 0.022 0.023 0.026 0.017 0.014

Less Distributions:
Dividends from net investment income ...................... (0.022) (0.023) (0.026) (0.017) (0.014)

Net Asset Value, End of Period ............................ $1.00 $1.00 $1.00 $1.00 $1.00

Total Return .............................................. 2.19% 2.28% 2.60% 1.69% 1.62%

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000 omitted) ..................... 13,263 4,621 11,251 9,004 5,830

Ratios to Average Net Assets
Expenses .............................................. 1.52%(D)(D) (D) 1.54% 1.53%(D)(D) 0.91%(D) .95%(D)
Net investment income ................................. 2.10% 2.04% 2.43% 1.55% 1.25%

BANK LOANS
Amount outstanding at end of period
(000 omitted) ........................................... $ - $ 218 $ - $ 451 $ 290

Average amount of bank loans outstanding during the period
(000 omitted) ........................................... $ - $ - $ 41 $ 53 $ 111

Average number of shares outstanding during the period
(000 omitted) ........................................... 48,801 56,876 44,432 56,267 25,786

Average amount of debt per share during the period ........ $ - $ - $ .001 $ .001 $ .004

<FN>
(D)These ratios are after expense reimbursement of .02%, .44% and .67%, for each of the years ended December 31, 1997, 1994 and
1993, respectively.

(D)(D)These ratios would have been 1.44%, 1.40% and 1.35% net of expense offsets of .08%, .14% and .18% for the years ended December
31, 1997, 1996 and 1995, respectively.
</FN>
</TABLE>

34
<PAGE>

INDEPENDENT AUDITOR'S REPORT

The Board of Trustees and Shareholders
Tax-Free Money Market Series of
Fundamental Fixed-lncome Fund

We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of the Tax-Free Money Market Series of
Fundamental Fixed-lncome Fund as of December 31, 1997 and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the selected financial
information for each of the five years in the period then ended. These financial
statements and selected financial information are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and selected financial information 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 selected
financial information 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 December 31, 1997 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 presenation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statement and selected financial information
referred to above present fairly, in all material respects, the financial
position of the Tax-Free Money Market Series of Fundamental Fixed-Income Fund as
of December 31, 1997, and the results of its operations, changes in net assets,
and selected financial information for the periods indicated, in conformity with
generally accepted accounting principles.

See Note 2 for information regarding regulatory proceedings and transactions
with affiliates.

S I G N A T U R E

New York, New York
March 2, 1998, except for Note 8 as to which the date is March 25, 1998.

<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES

March 2, 1998

Dear Fellow Shareholder:

Fundamental's High Yield Muni Fund boasted a 15.71% total return for 1997.
This was the highest for all tax exempt bond funds in 1997, and its 14.81%
return for the past three years was also the highest among all tax free funds.

During periods of strong economic growth, credit spreads typically narrow,
and this occurred in 1997. High yield funds can be expected to perform well in
such periods, but what particularly boosted the Fundamental Fund's return was
its concentration in escrowed zero coupon bonds.

A number of bonds in the fund's portfolio were pre-refunded in 1997, which
means that an issuer will use the proceeds from a new issue to purchase U.S.
Government securities. These securities are then deposited into an escrow
account in such an amount as to meet the coupon and interest payments on the old
existing bond. The result is a big quality enhancement and a consequent boost in
the price of the existing bond. If inflation remains low in 1998 as we expect,
refundings will remain quite popular with issuers.

Sincerely,

Dr. Vincent J. Malanga
President

36
<PAGE>

(CHART MATERIAL)

$22,786
Lehman
Brothers
Municipal
Bond Index

$16,726
Fundamental
Fixed Income
Fund High
Yield Series

$13,926
Consumer
Price Index

- --------------------------------------------------------------------------------
Fundamental Fixed Income Fund
High Yield Municipal Bond Series
- --------------------------------------------------------------------------------
Average Annual Total Return
Ended on 12/31/97
- --------------------------------------------------------------------------------
1 Year 5 Year 10 Year
- --------------------------------------------------------------------------------
15.71% 6.74% 5.28%
- --------------------------------------------------------------------------------

Thousands ($)

12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95

12/31/96 12/31/97

Past performance is not predictive of future performance.

The above illustration compares a $10,000 investment made in the Fund on
12/31/87 to a $10,000 investment made in the Lehman Brothers Municipal Bond
Index on that date. All dividends and capital gain distributions are reinvested.

The Fund invests primarily in New York municipal securities and its performance
takes into account fees and expenses. Unlike the Fund, the Lehman Brothers
Municipal Bond Index is an unmanaged total return performance benchmark for the
long-term, investment-grade tax exempt bond market, calculated by using
municipal bonds selected to be representative of the market. The Index does not
take into account fees and expenses. Further information relating to the Fund
performance, including expense reimbursements, if applic able, is contained in
the Fund's Prospectus and elsewhere in this report.

Lehman Index Source:Lehman Brothers.

The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.

37
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES

(LEFT COLUMN)

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------

ASSETS
Investment in securities at value (Note 5)
(cost $2,739,553) ................................... $2,832,290
Interest receivable ................................... 40,346
Receivable for fund shares sold ....................... 463,520
----------
Total assets ............................. 3,336,156
----------
LIABILITIES
Payable for investments purchased ..................... 615,650
Accrued expenses ...................................... 11,735
Bank overdraft payable ................................ 452,313
Dividend payable ...................................... 1,233
Payable for fund shares redeemed ...................... 240
----------
Total liabilities ........................ 1,081,171
----------
NET ASSETS consisting of:
Accumulated net realized
loss .................................... $ (158,714)
Unrealized appreciation
of securities ........................... 92,737
Paid-in-capital applicable to
299,472 shares of
beneficial interest
(Note 4) ................................ 2,320,962
-----------
$2,254,985
==========
NET ASSET VALUE PER SHARE ............................... $ 7.53
==========

(RIGHT COLUMN)

STATEMENT OF OPERATIONS
Year Ended December 31, 1997
- --------------------------------------------------------------------------------

INVESTMENT INCOME
Interest income .................... $140,428

EXPENSES (Notes 2 and 3)
Investment advisory fees ........... $ 14,600
Custodian and accounting fees ...... 43,046
Transfer agent fees ................ 8,970
Trustee fees ....................... 2,413
Distribution fees .................. 9,125
Professional fees .................. 21,443
Postage and printing ............... 8,077
Other .............................. 3,583
--------
Total expenses .............. 111,257
Less: Expenses waived or reimbursed
by the manager and affiliates .... (64,243)
--------
Net expenses ................ 47,014
--------
Net investment income ....... 93,414

REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on investments ... 17,891
Change in unrealized appreciation of
investments for the year ........... 166,782
--------
Net gain on investments ..... 184,673
--------
NET INCREASE IN NET ASSETS FROM
OPERATIONS ......................... $278,087
========

(FULL COLUMN)

STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------------------------------
1997 1996
INCREASE (DECREASE) IN NET ASSETS FROM: ---- ----
<S> <C> <C>
OPERATIONS
Net investment income ................................................... $ 93,414 $ 108,670
Net realized gain on investments ........................................ 17,891 22,294
Unrealized (depreciation) appreciation of investments for the year ...... 166,782 (22,733)
--------- ---------
Net increase in net assets from operations ....................... 278,087 108,231

DIVIDENDS PAID TO SHAREHOLDERS FROM
Net investment income ................................................... (93,414) (108,670)

CAPITAL SHARE TRANSACTIONS (Note 4) ....................................... 212,100 401,216
--------- ---------
Total increase ................................................... 396,773 400,777

NET ASSETS:
Beginning of year ....................................................... 1,858,212 1,457,435
--------- ---------
End of year ............................................................. $2,254,985 $1,858,212
========== ==========
</TABLE>

See Notes to Financial Statements.

38
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES
<TABLE>
<CAPTION>
STATEMENT OF INVESTMENTS
December 31, 1997
- ------------------------------------------------------------------------------------------------------------

Principal
Amount Issue o Value
------ ----- -----
<C> <S> <C>

$ 40,000 Allegheny County, PA, IDA, AFR, USAir Inc., 8.88%, 3/01/21 ................................$ 40,782

40,000 Brookhaven, NY, IDA, CFR, Dowling College, 6.75%, 3/01/23 ................................. 42,730

250,000 Colorado Health Facilities Authority, RHR, Liberty Heights Project, ETM, CAB, 7/15/24 ..... 60,317

100,000 Corona, CA, COP, Vista Hospital Systems Inc. 8.38%, 7/01/11 ............................... 109,361

100,000 Escambia, FL, Housing Corporation, Royal Arms Project, Series B, 9.00%, 7/01/16 ........... 103,202

70,000 Florence County, SC, IDA, RB, Stone Container Corp., 7.38%, 2/01/07 ....................... 74,070

500,000 Foothill / Eastern TCA, Toll Road Revenue, CAB, 1/01/26 ................................... 106,500

25,000 Hildago County, TX, Health Services, Mission Hospital Inc Project, 6.88%, 8/15/26 ......... 26,567

50,000+ Illinois Development Financial Authority, Solid Waste Disposal, RB, Ford Heights Waste
Tire Project, 7.88%, 4/01/11 ............................................................ 10,582

45,000 Illinois Health Facilities Authority, Midwest Physician Group Ltd Project, RB, 8.13%,
11/15/19 ................................................................................ 48,833

35,000 Indianapolis, IN, RB, Robin Run Village Project, 7.63%, 10/01/22 .......................... 38,463

50,000 Joplin, MO, IDA, Hospital Facilities Revenue, Tri State Osteopathic, 8.25%, 12/15/14 ...... 53,674

50,000 Los Angeles, CA, Regional Airport, Continental Airlines, AMT, 9.25%, 8/01/24 .............. 59,104

630,000 Marengo County, AL, Port Authority Facilities, RB, CAB, Series A, 3/01/19 ................. 141,252

75,000 Maryland Economic Development Corporation, Nursing Facilities Mortgage RB,
Ravenwood Healthcare, Series A, 8.38%, 8/01/26 .......................................... 78,529

85,000 Montgomery County, TX, Health Facilities Development Corp., The Woodlands Medical
Center, 8.85%, 8/15/14 .................................................................. 93,171

100,000 New York City, NY, Municipal Water Finance Authority, Water & Sewer RB, TR Receipts
Series 29, 6.56%, 6/15/30 ............................................................... 96,974

100,000 New York State, DAR, City University System Residual Int Tr Recpts 27, MBIA Insured,
Liquidity The Bank of New York, 8.22%, 7/01/24 .......................................... 109,979

100,000 New York State, DAR, City University System Residual Int Tr Recpts 28, AMBAC Insured,
Liquidity The Bank of New York, 7.63%, 7/01/25 .......................................... 105,279

5,000,000 New York State, DAR, CAB, FHA Presbyterian Hospital Series A, AMBAC Insured,
8/15/36 ................................................................................. 643,400

100,000#x Niagara Falls, NY, URA, Old Falls Street Improvement Project, 11.00%, 5/01/09 ............. 35,795

50,000 Northeast, TX, Hospital Authority Revenue, Northeast Medical Center, 7.25%, 7/01/22 ....... 57,455

75,000 Perdido, FL, Housing Corporation, RB, Series B. 9.25%, 11/01/16 ........................... 75,787

30,000 Philadelphia, PA, HEHA, Graduate Health Systems Project, 7.25%, 7/01/18 ................... 31,468

60,000 Port Chester, NY, IDA, Nadal Industries Inc Project, 7.00%, 2/01/16 ....................... 61,876

75,000 San Antonio, TX, HFC, Multi Family Housing, RB, Agape Metro Housing Project, Series
A, 8.63%, 12/01/26 ...................................................................... 75,989

75,000 San Bernardino, CA, San Bernardino Community Hospital, RB, 7.88%, 12/01/19 ................ 77,531

100,000 San Bernardino County, CA, COP, Series PA-38, MBIA Insured, IFRN*, 11.92%, 7/01/16,
Rule 144A Security (restricted as to resale except to qualified institutions) ........... 113,555
</TABLE>

39
<PAGE>

Principal
Amount Issue o Value
------ ----- -----
<C> <S> <C>
$ 35,000 San Joaquin Hills, CA, TCA, Toll Road Revenue, 7.00%, 1/01/30 ............................$ 40,033

60,000x San Jose, CA, Redevelopment Agency, Tax Allocation Bonds, IFRN*, MBIA Insured,
5.83%, 8/01/16, MBIA Insured, Rule 144A Security (restricted as to resale except to
qualified institutions) ................................................................ 61,304

150,000 Savannah, GA Economic Development Authority Revenue, ETM, CAB, 12/01/21 .................. 39,940

45,000 Schuylkill County, PA, IDA Resouce Recovery, Schuylkill Energy Res Inc. AMT, 6.50%,
1/01/10 ................................................................................ 46,040

15,000(D)# Troy, NY, IDA, Hudson River Project, 11.00%, 12/01/94 .................................... 6,150

75,000(D) (D)(D)Villages at Castle Rock, CO, Metropolitan District #4, 8.50%, 6/01/31 .................... 39,138

25,000 Wayne, MI, AFR, Northwest Airlines Inc. 6.75%, 12/01/15 .................................. 27,460
----------
Total Investments (Cost $2,739,553)** ....................................................$2,832,290
==========

<FN>
** Cost is approximately the same for income tax purposes.

* Inverse Floating Rate Notes (IFRN) are instruments whose interest rates bear an inverse relationship to the interest rate on
another security or the value of an index. Rates shown are at December 31, 1997.

# The value of this non-income producing security has been estimated by persons designated by the Fund's Board of
Trustees using methods the Trustees believe reflect fair value. See note 5 to the financial statements.

+ Non-income producing security.

(D)(D) Security in default. Interest paid on cash flow basis. Rate shown as of December 31, 1997.

x The Fund or its affiliates owns 100% of the security and therefore there is no trading in the security.
</FN>
</TABLE>

Legend

o Issue AFR Airport Facilities Revenue
AMBAC American Municipal Bond Assurance Corporation
AMT Subject to Alternative Minimum Tax
CAB Capital Appreciation Bond
COP Certificate of Participation
CFR Civic Facility Revenue
DAR Dorm Authority Revenue
ETM Escrowed to Maturity
FHA Federal Housing Authority
HEHA Higher Education and Health Authority
HFC Housing Finance Corporation
IDA Industrial Development Authority
MBIA Municipal Bond Insurance Assurance Corporation
RB Revenue Bond
RHR Retirement Housing Revenue
TCA Transportation Corridor Agency
URA Urban Renewal Agency

See Notes to Financial Statements.

40
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES

NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------

1. Significant Accounting Policies

Fundamental Fixed-Income Fund (the Fund) is an open-end management
investment company registered under the Investment Company Act of 1940. The Fund
operates as a series company currently issuing three classes of shares of
beneficial interest, the Tax-Free Money Market Series, the High-Yield Municipal
Bond Series and the Fundamental U.S. Government Strategic Income Fund Series
(the Series). Each series is considered a separate entity for financial
reporting and tax purposes. The High-Yield Municipal Bond Series (the Series)
seeks to provide a high level of current income exempt from federal income tax
through investment in a portfolio of lower quality municipal bonds, generally
referred to as "junk bonds." These bonds are considered speculative because they
involve greater price volatility and risk than higher rated bonds. The following
is a summary of significant accounting policies followed in the preparation of
the Series' financial statements:

Valuation of Securities: The Fund's portfolio securities are valued on the basis
of prices provided by an independent pricing service when, in the opinion of
persons designated by the Fund's trustees, such prices are believed to reflect
the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are generally
determined without regard to bid or last sale prices but take into account
institutional size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Securities traded or dealt in upon a securities exchange and not subject
to restrictions against resale as well as options and futures contracts listed
for trading on a securities exchange or board of trade are valued at the last
quoted sales price, or, in the absence of a sale, at the mean of the last bid
and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Securities not priced in a
manner described above and other assets are valued by persons designated by the
Fund's trustees using methods which the trustees believe accurately reflects
fair value.

Federal Income Taxes: It is the Series' policy to comply with the requirements
of the Internal Revenue Code applicable to "regulated investment companies" and
to distribute all of its taxable and tax exempt income to its shareholders.
Therefore, no provision for federal income tax is required.

Distributions: The Series declares dividends daily from its net investment
income and pays such dividends on the last business day of each month.
Distributions of net capital gain, if any, realized on sales of investments are
anticipated to be made before the close of the Series' fiscal year, as declared
by the Board of Trustees. Dividends are reinvested at the net asset value unless
shareholders request payment in cash.

General: Securities transactions are accounted for on a trade date basis.
Interest income is accrued as earned. Realized gain and loss from the sale of
securities are recorded on an identified cost basis. Original issue discounts
and premiums are amortized over the life of the respective securities. Premiums
are amortized and charged against interest income and original issue discounts
are accreted to interest income.

41
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

Accounting 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.

2. Investment Advisory Fees and Other Transactions with Affiliates

Management Agreement
The Fund has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement, the Manager serves as investment
adviser to the High-Yield Municipal Bond Series and is responsible for the
overall management of the business affairs and assets of the Series subject to
the authority of the Fund's Board of Trustees. In consideration for the services
provided by the Manager, the Series will pay an annual management fee in an
amount equal to 0.8% of the Series' average daily net assets up to $100 million
and decreasing by .02% for each $100 million increase in net assets down to 0.7%
of net assets in excess of $500 million. The Manager voluntarily waived fees and
reimbursed expenses of $49,643 for the year ended December 31, 1997. See Note 7.

SEC Administrative Action Against The Manager
On September 30, 1997, the Securities & Exchange Commission announced that
it instituted public administrative and cease-and desist proceedings against the
Manager, the former portfolio manager of the Fund, the president of the Manager
and Fundamental Service Corporation (FSC) the Funds distributor. The proceeding
arises from the alleged failure of an affiliated mutual fund to disclose the
risks of the Fund, and of the Manager's failure to disclose its soft dollar
arrangements to the Fund's Board of Trustees. A hearing has been scheduled to
determine whether the allegations are true, and, if so, what remedial action, if
any, is appropriate.

Board's Termination of Portfolio Manager
Between April 17, 1997 and July 24, 1997, a representative of the Manager
engaged Tocqueville Securities L.P. ("Tocqueville Securities") an affiliate of
Tocqueville, as agent, to effect eight separate over-the-counter purchase
transactions of municipal obligations on behalf of an affiliated fund. The
Fund's Board has concluded that the commissions paid to Tocqueville Securities
in connection with these transactions (a portion of which was paid to the
representative) were not justified and that the affiliated fund bore unnecessary
expenses as a result of the sale of its securities to another party and the
subsequent repurchase of them through Tocqueville Securities. Based upon a
report initiated by Tocqueville Securities and prepared by the Fund's
independent auditors, and upon the Board's own analysis, the Board directed that
the Manager terminate the representative's services as a portfolio manager. At
the Board's request and in order to reimburse the affiliated fund for all of its
losses, Tocqueville Securities, on September 15, 1997, voluntarily paid $260,000
to the affiliated fund, an amount which significantly exceeds the total
commissions ($184,920.60) received by Tocqueville Securities in connection with
these transactions. The staff of the Securities and Exchange Commission and the
Department of NASD Regulation have been informed of these events by Tocqueville
Securities. See note 7 regarding contemplated transaction with the Tocqueville
Trust.

42
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

Plan of Distribution
The Fund has adopted a Plan of Distribution, pursuant to Rule 12b-1
promulgated under the Investment Company Act of 1940, under which the Series
pays to FSC, an affiliate of the Manager, a fee, which is accrued daily and paid
monthly, at an annual rate of 0.5% of the Series' average daily net assets.
Amounts paid under the plan are to compensate FSC for the services it provides
and the expenses it bears in distributing the Series' shares to investors. FSC
has waived all fees in the amount of $9,125 for the year ended December 31,
1997.

Affiliated Transfer Agent
The Fund compensated Fundamental Shareholder Services, Inc. (FSSI), an
affiliate of the Manager, for the services it provided under a Transfer Agent
and Service Agreement which was terminated on September 11, 1997. Transfer agent
fees paid by the Series to FSSI amounted to $5,012.

3. Trustees' Fees

All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at Board meetings and meetings of committees which are
common to each fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets. The Trustees also received additional
compensation for special services as requested by the Board. Additional
compensation totaled $40,923 pro rated among the funds based on their respective
average net assets.

4. Shares of Beneficial Interest

As of December 31, 1997, there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid in amounted to
$2,320,962. Transactions in shares of beneficial interest were as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------------- --------------------------
Shares Amount Shares Amount
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold .................................... 2,941,324 20,530,136 1,912,593 $12,834,095
Shares issued on reinvestment of dividends ..... 11,426 79,995 11,925 80,347
Shares redeemed ................................ (2,924,097) (20,398,031) (1,859,933) (12,513,226)
---------- ----------- ---------- -----------
Net increase ................................... 28,653 $ 212,100 64,585 $ 401,216
========== =========== ========== ===========
</TABLE>

5. Investment Transactions

The Fund invests in variable rate securities commonly called "inverse
floaters." The interest rates on these securities have an inverse relationship
to the interest rate of other securities or the value of an index. Changes in

43
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

interest rate on the other security or index inversely affect the rate paid on
the inverse floater, and the inverse floater's price will be more volatile than
that of a fixed-rate bond. Certain interest rate movements and other market
factors can substantially affect the liquidity of IFRN's.

The Fund invests in lower rated or unrated ("junk") securities which are
more likely to react to developments affecting market risk and credit risk than
would higher rated securities which react primarily to interest rate
fluctuations. The Fund held securities in default with an aggregate value of
$91,665 at December 31, 1997 (4.1% of net assets). As indicated in the Statement
of Investments, the Troy, NY Industrial Revenue Bond, 11% due December 1, 2014
with a par value of $15,000 and a value of $6,150 at December 31, 1997 has been
estimated in good faith under methods determined by the Board of Trustees.

The Fund owns 1.7% of a Niagara Falls New York Urban Renewal Agency 11% Bond
("URA Bond") due to mature on May 1, 2009 which has missed interest and sinking
fund payments. An affiliated investment company owns 98.3% of this bond issue.
The Fund was party to an agreement whereby certain related bonds owned by an
affiliate were to be subject to repayment under a debt assumption agreement. The
agreement allowed the affiliate to allocate a portion of the debt services it
receives to the URA Bond. In exchange the Fund forfeited certain rights it had
as holder of the URA bond. The debt assumption was not completed and the timing
and amount of debt service payments is uncertain. The value of this bond is
$35,795, and is valued at 35.80% of face value at December 31, 1997 under
methods determined by the Board of Trustees.

During the year ended December 31, 1997, the cost of purchases and proceeds
from sales of investment securities, other than short-term obligations, were
$2,982,245 and $2,610,195, respectively.

As of December 31, 1997 net unrealized appreciation of portfolio securities
amounted to $92,737, composed of unrealized appreciation of $225,341 and
unrealized depreciation of $132,604.
The Fund has capital loss carryforwards to offset future capital gains as
follows:
Amount Expiration
------- ----------
$23,500 12/31/1998
22,200 12/31/1999
20,500 12/31/2000
54,300 12/31/2002
40,000 12/31/2003
--------
$160,500
========

6. Agreement and Plan of Reorganization

44
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

A majority of Fundamental's Board members determined that the Plan would be
in the best interests of shareholders of the Fundamental Funds and recommended
that shareholders of each of the Fundamental Funds approve the Plan at a meeting
anticipated to be held in the Spring of 1998.

7. Subsequent Event

8. Selected Financial Information
<TABLE>
<CAPTION>

Years Ended December 31,
-----------------------------------------
1997 1996 1995 1994 1993
PER SHARE OPERATING PERFORMANCE ---- ---- ---- ---- ----
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $6.86 $7.07 $5.92 $7.27 $7.30
----- ----- ----- ----- -----
Income from investment operations:
Net investment income 0.37 0.47 0.34 0.43 0.39
Net realized and unrealized gains (losses) on investments 0.67 (0.21) 1.15 1.35) (0.03)
----- ----- ----- ----- -----
Total from investment operations 1.04 0.26 1.49 (0.92) 0.36
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (0.37) (0.47) (0.34) (0.43) (0.39)
----- ----- ----- ----- -----
Net asset value, end of period $7.53 $6.86 $7.07 $5.92 $7.27
===== ===== ===== ===== =====

Total Return 15.71% 4.05% 25.70% (12.92%) 5.11%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) 2,255 1,858 1,457 979 1,087
Ratios to average net assets:
Expenses* 2.58% 2.49% 2.50% 2.50% 2.50%
Net investment income* 5.12% 6.85% 5.15% 6.70% 5.40%
Portfolio turnover rate 3.79% 139.26% 43.51% 75.31% 84.89%

BANK LOANS
Amount outstanding at end of period (000 omitted) $ - 228 379 $ - $ -
Average amount of bank loans outstanding during the period
(000 omitted) $ - $ - 61 $ - $ -
Average number of shares outstanding during the period
(000 omitted) 260 237 183 156 145
Average amount of debt per share during the period $ - $ - $0.33 $ - $ -

<FN>
**These ratios are after expense reimbursements of 3.52%, 4.59%, 6.22%, 6.20% and 5.76%, for each of the
years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
</FN>
</TABLE>

45
<PAGE>

FUNDAMENTAL FIXED-INCOME FUND
HIGH-YIELD MUNICIPAL BOND SERIES

INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------

To the Board of Trustees and Shareholders
Fundamental Fixed-Income Fund
High-Yield Municipal Bond Series

We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Fundamental Fixed-Income Fund High-Yield
Municipal Bond Series as of December 31, 1997, and the related statements of
operations for the year then ended, the statement of changes in net assets for
each of the two years then ended and the selected financial information for each
of the five years in the period then ended. These financial statements and
selected financial information are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements 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 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 December 31, 1997 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 selected financial information
referred to above present fairly, in all material respects, the financial
position of Fundamental Fixed-Income Fund High-Yield Municipal Bond Series as of
December 31, 1997, and the results of its operations, changes in net assets, and
selected financial information for the periods indicated, in conformity with
generally accepted accounting principles.

See Note 2 for information regarding regulatory proceedings and transactions
with affiliates.

New York, New York
March 2, 1998, except for Note 7 as to which the date is March 25, 1998.

46
<PAGE>

FUNDAMENTAL FIXED INCOME FUND
U.S. GOVERNMENT STRATEGIC INCOME FUND

March 2, 1998

Dear Fellow Shareholder:

Fundamental's U.S. Government Strategic Income Fund posted a 5.51% total
return for 1997. This was consistent with the Fund's goal of providing
relatively high current income while maintaining relatively small fluctuations
in Net Asset Value. As a result of regulatory investigations, the Fund's
professional fees were substantially greater than in the past. This factor
affected the Fund's performance during 1997.

The proportion of U.S. Treasury bonds and securities issued by U.S.
Government Agencies and Instrumentalities remained very stable over the year.
However, toward the end of the year the portfolio began to be adjusted to
account for the borrowing differential between short and long term interest
rates. This should benefit the Fund's yield in 1998. Importantly, the entire
structure of interest rates declined noticeably in last year's second half. Yet,
we expect that the U.S. Government Fund should still be able to provide a higher
yield than generally available in the marketplace even if yields move further.
As with any mutual fund, there is no assurance that the Fund will achieve its
goal.

Sincerely,

Dr. Vincent J. Malanga
President

<PAGE>

(CHART MATERIAL)

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

$14,016
Lehman Brothers
1-3 Year Government
Bond Index

$11,673
Consumer
Price Index

$13,926
Fundamental U.S.
Government
Strategic Income
Fund

14.5
14.0
13.5
13.0
12.5
12.0
11.5
11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0

2/18/92 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97

- --------------------------------------------------------------------------------
The Fundamental
U.S. Government
Strategic Income Fund
- --------------------------------------------------------------------------------
Average Annual Total Return
Ended on 12/31/97
- --------------------------------------------------------------------------------
Since Inception
1 Year (2/18/92)
- --------------------------------------------------------------------------------
5.51% 1.85%
- --------------------------------------------------------------------------------

Thousands ($)

Past performance is not predictive of future performance.

The above illustration compares a $10,000 investment made in The Fundamental
U.S. Government Strategic Income Fund on 2/18/92 (Inception Date) to a $10,000
investment made in the Lehman Brothers 1-3 Year Government Bond Index on that
date. For comparative purposes the value of the Index on 2/24/92 is used as the
beginning value on 2/18/92. All dividends and capital gain distributions are
reinvested.

The Fund invests in U.S. Government securities and its performance takes into
account fees and expenses. Unlike the Fund, the Lehman Brothers 1-3 Year
Government Bond Index is an unmanaged total return performance benchmark for the
short-term, U.S.Government bond market, calculated by using bonds selected to be
representative of the market. The Index does not take into account fees and
expenses. Further information relating to the Fund performance, including
expense reimbursements, if applicable, is contained in the Fund's Prospectus and
elsewhere in this report.

Source:Lehman Brothers.

The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.

<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

(LEFT COLUMN)

STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------

ASSETS
Investment in securities, at value
(cost $13,023,839) (Notes 5 and 6) $15,023,792
Receivables:
Interest 67,739
Fund shares sold ................ 4,001
-----------
Total assets ................ 15,095,532
-----------
LIABILITIES
Loans ............................. 225,907
Options written at value
(premiums received $18,801)
(Note 5) ........................ 10,625
Securities sold subject to
repurchase (Note 6) ............. 4,744,054
Payables:
Dividends declared .............. 11,104
Shares redeemed ................. 9,353
Variation margin ................ 41,563
Accrued expenses ................ 22,580
-----------
Total liabilities ........... 5,065,186
-----------
NET ASSETS consisting of:
Accumulated net realized loss ..... $(17,833,560)
Unrealized appreciation of
securities ...................... 1,999,953
Unrealized appreciation of
options written ................. 8,176
Unrealized depreciation of open
future contracts ................ (103,270)
Paid-in-capital applicable to
7,116,688 shares of beneficial
interest ........................ 25,959,047
-----------
$10,030,346
===========
NET ASSET VALUE PER SHARE $1.41
=====

(RIGHT COLUMN)

STATEMENT OF OPERATIONS
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income, net of $315,574
of interest expense ...................... $1,812,306

EXPENSES (Notes 2, 3 and 6)
Investment advisory fees ................. $ 88,681
Custodian and accounting fees ............ 61,165
Transfer agent fees ...................... 71,081
Professional fees ........................ 563,154
Trustees' fees ........................... 5,458
Printing and postage ..................... 9,502
Interest on bank borrowing ............... 324,872
Distribution expenses .................... 29,560
Other .................................... 14,012
---------
Total expense ...................... 1,167,485

Less: Expenses waived or
reimbursed by the
manager and affiliates ........... (162,637)
---------
Net expenses ....................... 1,004,848
----------
Net investment income .............. 807,458
----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investments ............................ 1,027,730
Future and options on futures .......... (956,715) 71,015
---------
Change in unrealized appreciation
(depreciation) of investments,
options and futures contracts
for the period:
Investments .......................... 66,558
Open option contracts
written ............................ (312)
Open futures contracts ............... (339,726) (273,480)
--------- ----------
Net loss on investments .................. (202,465)
----------
NET INCREASE IN NET ASSETS
FROM OPERATIONS .......................... $ 604,993
=========

(FULL COLUMN)

<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December December
31, 1997 31, 1996
-------- --------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
<S> <C> <C>
Net investment income ...................................................... $ 807,458 $ 1,254,448
Net realized gain on investments ........................................... 71,015 433,173
Unrealized (depreciation) on investments, options and futures contracts .... (273,480) (1,070,217)
----------- -----------
Net increase in net assets from operations ........................ 604,993 617,404
DIVIDENDS PAID TO SHAREHOLDERS FROM
Investment income .......................................................... (807,458) (1,254,448)
CAPITAL SHARE TRANSACTIONS (Note 4) .......................................... (2,991,556) (1,332,818)
----------- -----------
Total decrease .................................................... (3,194,021) (1,969,862)
NET ASSETS
Beginning of year .......................................................... 13,224,367 15,194,229
----------- -----------
End of year ................................................................ $10,030,346 $13,224,367
=========== ===========

</TABLE>

See Notes to Financial Statements.

<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

STATEMENT OF CASH FLOWS
<TABLE>
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net increase in net assets from operations ................................ $ 604,993
Adjustments to reconcile net increase in net assets from operations to
net cash provided by operating activities:
Purchase of investment securities ......................................... (2,228,044)
Proceeds on sale of securities ............................................ 8,312,593
Premiums received for options written ..................................... 633,904
Premiums paid to close options written .................................... (977,704)
Decrease in interest receivable ........................................... 28,925
Decrease in variation margin receivable ................................... 218,791
Decrease in accrued expenses .............................................. (93,909)
Net accretion of discount on securities ................................... (187,473)
Net realized (gain) loss:
Investments ............................................................. (1,027,730)
Options written ......................................................... 309,113
Unrealized appreciation on securities and options written for the period .. (66,246)
----------
Total adjustments ....................................................... 4,922,220
----------
Net cash provided by operating activities ............................... 5,527,213
----------

CASH FLOWS FROM FINANCING ACTIVITIES:*
Net repayments on sale of securities sold subject to repurchase ............. (1,617,934)
Net borrowings of note payable .............................................. (49,281)
Proceeds on shares sold ..................................................... 728,056
Payment on shares repurchased .............................................. (4,356,318)
Cash dividends paid ......................................................... (231,736)
----------
Net cash used in financing activities ................................... (5,527,213)
----------
Net increase in cash .................................................... 0

CASH AT BEGINNING OF YEAR .................................................. 0
----------
CASH AT END OF YEAR ......................................................... $ 0
==========
</TABLE>

*Non-cash financing activities not included herein consist of reinvestment of
dividends of $642,058. Cash payments for interest expense totaled $333,352 for
the period.

STATEMENT OF OPTIONS WRITTEN
<TABLE>
<CAPTION>
December 31, 1997
- ---------------------------------------------------------------------------------------------
Number of Expiration
Contracts++ Options Written Month Value
----------- --------------- ---------- -----
<C> <S> <C> <C>
40 U.S. Treasury Bonds, Call @ $123 ........... February 1998 $10,625
-------
$10,625
=======
</TABLE>

++Each contract represents $100,000 face value of U.S. Treasury Bond Futures.

See Notes to Financial Statements.

<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

STATEMENT OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------

Principal Interest Maturity
Amount Rate o Date Value
------ ------ ---- -----

United States Treasury Securities-49.03%
United States Treasury Bonds
85,000(2) 0.00% ZCS 11/15/03 $ 60,395
4,300,000(2) 0.00% PS 11/15/06 2,574,333
3,500,000(5) 9.00% 11/15/18 4,731,566
----------
(Cost $6,403,170) 7,366,294
----------
United States Agency Backed Securities-50.97%
Federal Home Loan Mortgage Corporation
843,718(1) 9.25% 08/15/23 928,005
285,124(1) 6.50% Z-Bond 12/15/23 261,907
750,000 13.59% IFRN 05/15/24 858,060
209,406(2) 15.30% IFRN 05/25/24 251,287
180,000 12.00% TTIB 03/15/27 180,079

FNMA-Federal National Mortgage Assoc.

356,450(4)(1) 15.50% TTIB 03/25/23 381,224
3,671,204(4)(1) 15.30% TTIB 03/25/23 4,185,686
490,760(4) 14.49% TTIB 05/25/23 544,900
----------
7,591,148
----------
FICO-Financing Corporation (U.S. Government Agency)

100,000 0.00% ZCS 11/02/12 39,284
100,000 0.00% ZCS 08/03/18 27,066
----------
(Cost $6,620,669) 66,350
----------
Total investments (Cost $13,023,839)(3) $15,023,792
----------

(1) Segregated for securities sold subject to repurchase (Note 6)
(2) Segregated, in whole or part, as initial margin for futures contracts
(Note 5)
(3) Cost is the same for Federal income tax purposes
(4) The Fund owns 100% of the security or tranche. See Note 5 to the financial
statements.
(5) Securities sold subject to repurchase (Note 6).

o Legend-IFRN: Inverse Floating Rate Notes are instruments whose interest rates
bear an inverse relationship to the interest rate on another
security or the value of an index. Rates shown are at December
31, 1997.

TTIB: Two-Tiered Index Floating Rate Bonds are instruments with two
coupon levels. The "first tier" coupon is at a fixed rate,
effective as long as the underlying index is at or below the
strike level. At the strike level, the "second tier" coupon
resets the bond to an inverse floating rate note. See discussion
above. Coupons shown are at December 31, 1997.

ZCS: Zero Coupon Securities are instruments whose interest and
principal are paid at maturity.

Z Bond: A Z Bond is an instrument whose monthly interest coupon is paid
at a fixed rate in additional principal. Principal is paid at
maturity.

PS: Principal Stripped Bonds are instruments whose principle and
coupon have been separated and sold separately.

See Notes to Financial Statements.

51
<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------

1. Significant Accounting Policies

Fundamental Fixed-Income Fund (the Fund) is an open-end management
investment company registered under the Investment Company Act of 1940. The Fund
operates as a series company currently issuing three classes of shares of
beneficial interest, the Tax-Free Money Market Series, the High-Yield Municipal
Bond Series and the Fundamental U.S. Government Strategic Income Fund Series
(the Series). The objective of the Series is to provide high current income with
minimum risk of principal and relative stability of net asset value. The Series
seeks to achieve its objective by investing primarily in U.S. Government
Obligations. U.S. Government Obligations consist of marketable securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities
(hereunder collectively referred to as "Government Securities"). The Series also
uses leverage in seeking to achieve its investment objective. Each series is
considered a separate entity for financial reporting and tax purposes.

Valuation of Securities-The Series portfolio securities are valued on
the basis of prices provided by an independent pricing service when, in the
opinion of persons designated by the Fund's trustees, such prices are believed
to reflect the fair market value of such securities. Prices of non-exchange
traded portfolio securities provided by independent pricing services are
generally determined without regard to bid or last sale prices but take into
account institutional size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and other
market data. Securities traded or dealt in upon a securities exchange and not
subject to restrictions against resale as well as options and futures contracts
listed for trading on a securities exchange or board of trade are valued at the
last quoted sales price, or, in the absence of a sale, at the mean of the last
bid and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Securities not priced in a
manner described above and other assets are valued by persons designated by the
Fund's trustees using methods which the trustees believe reflect fair value.

Futures Contracts-Initial margin deposits with respect to these
contracts are maintained by the Fund's custodian in segregated asset accounts.
Subsequent changes in the daily valuation of open contracts are recognized as
unrealized gains or losses. Variation margin payments are made or received as
daily appreciation or depreciation in the value of these contracts occurs.
Realized gains or losses are recorded when a contract is closed.

Repurchase Agreements-The Series may invest in repurchase agreements, which
are agreements pursuant to which securities are acquired from a third party with
the commitment that they will be repurchased by the seller at a fixed price on
an agreed upon date. The Series may enter into repurchase agreements with banks
or lenders meeting the creditworthiness standards established by the Board of
Trustees. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security. The Series' repurchase agreements will at
all times be fully collateralized in an amount equal to the purchase price
including accrued interest earned on the underlying security.

52
<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

Reverse Repurchase Agreements-The Series may enter into reverse
repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Under a reverse repurchase agreement, the Series sells
securities and agrees to repurchase them at a mutually agreed upon date and
price. Under the Investment Company Act of 1940 reverse repurchase agreements
are generally regarded as a form of borrowing. At the time the Series enters
into a reverse repurchase agreement it will establish and maintain a segregated
account with its custodian containing securities from its portfolio having a
value not less than the repurchase price including accrued interest.

Federal Income Taxes-It is the Series' policy to comply with the
requirements of the Internal Revenue Code applicable to "regulated investment
companies" and to distribute all of its taxable and tax exempt income to its
shareholders. Therefore, no provision for federal income tax is required.

Distributions-The Series declares dividends daily from its net
investment income and pays such dividends on the last business day of each
month. Distributions of net capital gain, if any, realized on sales of
investments are anticipated to be made before the close of the Series' fiscal
year, as declared by the Board of Trustees. Dividends are reinvested at the net
asset value unless shareholders request payment in cash.

General-Securities transactions are accounted for on a trade date basis.
Interest income is accrued as earned. Realized gain and loss from the sale of
securities are recorded on an identified cost basis. Discounts and premiums are
amortized over the life of the respective securities. Premiums are charged
against interest income and discounts are accreted to interest income.

Accounting 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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.

2. Investment Advisory Fees and Other Transactions With Affiliates

Management Agreement
The Series has a Management Agreement with Fundamental Portfolio Advisors,
Inc. (the Manager). Pursuant to the agreement the Manager serves as investment
adviser to the Series and is responsible for the overall management of the
business affairs and assets of the Series subject to the authority of the Fund's
Board of Trustees. In consideration for the services provided by the Manager,
the Series will pay an annual management fee in an amount equal to .75% of the
Series' average daily net assets up to $500 million, .725% on the next $500
million, and .70% per annum on assets over $1 billion. The Manager waived fees
and reimbursed expenses of $133,077 for the year ended December 31, 1997. See
Note 8.

SEC Administrative Proceeding Against the Manager
On September 30, 1997, the Securities & Exchange Commission announced that
it instituted public administrative and cease-and desist proceedings against the
Manager, the former portfolio manager of the Fund, the president of the Manager
and Fundamental Service Corporation (FSC). The proceeding arises from the

53
<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

alleged failure of the Fund to disclose the risks of the Fund, and of the
Manager's failure to disclose its soft dollar arrangements to the Fund's Board
of Trustees. A hearing has been scheduled with an administrative law judge to
determine whether the allegations are true, and, if so, what remedial action, if
any, is appropriate.

Board's Termination of Portfolio Manager
Between April 17, 1997 and July 24, 1997, a representative of the Manager
engaged Tocqueville Securities L.P. ("Tocqueville Securities") an affiliate of
Tocqueville, as agent, to effect eight separate over-the-counter purchase
transactions of municipal obligations on behalf of an affiliated fund. The
Fund's Board has concluded that the commissions paid to Tocqueville Securities
in connection with these transactions (a portion of which was paid to the
representative) were not justified and that the affiliated fund bore unnecessary
expenses as a result of the sale of its securities to another party and the
subsequent repurchase of them through Tocqueville Securities. Based upon a
report initiated by Tocqueville Securities and prepared by the Fund's
independent auditors, and upon the Board's own analysis, the Board directed that
the Manager terminate its representative's services as a portfolio manager. At
the Board's request and in order to reimburse the affiliated fund for all of its
losses, Tocqueville Securities, on September 15, 1997, voluntarily paid $260,000
to the affiliated fund, an amount which significantly exceeds the total
commissions ($184,920.60) received by Tocqueville Securities in connection with
these transactions. The staff of the Securities and Exchange Commission and the
Department of NASD Regulation have been informed of these events by Tocqueville
Securities. See note 7 regarding contemplated transaction with the Tocqueville
Trust.

Plan of Distribution
The Series has adopted a Distribution and Marketing Plan, pursuant to Rule
12b-1, promulgated under the Investment Company Act of 1940, under which the
Series pays to FSC, an affiliate of the Manager, a fee which is accrued daily
and paid monthly at an annual rate of 0.25% of the Series' average daily net
assets. Amounts paid under the plan are to compensate FSC for the services it
provides and the expenses it bears in distributing the Series' shares to
investors. The amount incurred by the Series pursuant to the agreement for the
year ended December 31, 1997 is set forth in the Statement of Operations. FSC
has waived fees in the amount of $29,560.

NASD Sanctions and Fines
On February 19, 1998, FSC and two of its executives, without admitting or
denying guilt, entered into an agreement with the National Association of
Securities Dealers, Inc. ("NASD") whereby they accepted fines totaling $125,000
and other stipulated sanctions as a result of the NASD's finding that they had
distributed advertising materials relating to the Fund which violated NASD rules
governing advertisements.

Affiliated Transfer Agent
The Series compensated Fundamental Shareholders Services, Inc. (FSSI), an
affiliate of the Manager, for services it provided under a Transfer Agent and
Service Agreement which was terminated on September 11, 1997. The amount paid by
the Series to FSSI for the year ended December 31, 1997 amounted to $57,038.

Commissions Paid to Affiliate
The Series effects a significant portion of its futures and options
transactions through LAS Investments, Inc. (LAS), an affiliated broker-dealer.
Commissions paid to LAS amounted to approximately $14,591 for the year ended
December 31, 1997.

54
<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

3. Trustees' Fees

All of the Trustees of the Fund are also directors or trustees of two other
affiliated mutual funds for which the Manager acts as investment adviser. For
services and attendance at Board meetings and meetings of committees which are
common to each fund, each Trustee who is not affiliated with the Manager is
compensated at the rate of $6,500 per quarter pro rated among the funds based on
their respective average net assets. The Trustees also received additional
compensation for special services as requested by the Board. Additional
compensation totaled $40,923 pro rated among the funds based on their respective
average net assets.

4. Shares of Beneficial Interest

As of December 31, 1997 there were an unlimited number of shares of
beneficial interest (no par value) authorized and capital paid-in amounted to
$25,959,047. Transactions in shares of beneficial interest were as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------------- --------------------------
Shares Amount Shares Amount
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold ................................... 521,491 $ 732,057 1,209,491 $1,721,466
Shares issued on reinvestment of dividends .... 457,380 642,058 605,897 860,888
Shares redeemed ............................... (3,119,211) (4,365,671) (2,749,791) (3,915,172)
---------- ----------- --------- -----------
Net decrease .................................. (2,140,340) ($2,991,556) (934,403) ($1,332,818)
========== =========== ========= ===========
</TABLE>

5. Complex Services, Off Balance Sheet Risks and Investment Transactions

Two-Tiered Index Floating Rate Bonds (TTIB):
The Fund invests in Two-Tiered Index Floating Rate Bonds. The term
two-tiered refers to the two coupon levels that the TTIB's coupon can reset to.
The "first tier" is the TTIB's fixed rate coupon, effective as long as the
underlying index is at or below the strike level. Above the strike, the TTIB
coupon resets to a formula similar to an inverse floating rate note. See
discussion of inverse floating rate notes below. Changes in interest rate on the
underlying security or index affect the rate paid on the TTIB, and the TTIB's
price will be more volatile than that of a fixed-rate bond.

Additionally the Fund owns 100% of several securities as indicated in the
Statement of Investments. As a result of its ownership position there is no
active market in these securities. Valuations of these securities are provided
by a pricing service and are believed by the Manager to reflect fair value. The
market value of securities owned 100% by the Fund was approximately $5,111,810
(or 50.96% of net assets) as of December 31, 1997.

55
<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

Futures Contracts and Options on Futures Contracts:
The Fund invests in futures contracts consisting primarily of US Treasury
Bond Futures. A futures contract is an agreement between two parties to buy and
sell a security for a set price on a future date. Futures contracts are traded
on designated "contract markets" which through their clearing corporations,
guarantee performance of the contracts. In addition the fund invests in options
on US Treasury Bond Futures which gives the holder a right to buy or sell
futures contracts in the future. Unlike a futures contract which requires the
parties to the contract to buy and sell a security on a set date, an option on a
futures contract entitles its holder to decide before a future date whether to
enter into such a futures contract. Both types of contracts are marked to market
daily and changes in valuation will affect the net asset value of the Fund.

The Fund's principal objective in holding or issuing derivative financial
instruments is as a hedge against interest-rate fluctuations in its municipal
bond portfolio, and to enhance its total return. The Fund's principal objective
is to maximize the level of interest income while maintaining acceptable levels
of interest-rate and liquidity risk. To achieve this objective, the Fund uses a
combination of derivative financial instruments principally consisting of US
Treasury Bond Futures and Options on US Treasury Bond Futures. Typically the
Fund sells treasury bond futures contracts or writes treasury bond option
contracts. These activities create off balance sheet risk since the Fund may be
unable to enter into an offsetting position and under the terms of the contract
deliver the security at a specified time at a specified price. The cost to the
Fund of acquiring the security to deliver may be in excess of recorded amounts
and result in a loss to the Fund. For the year ended December 31, 1997, the Fund
had daily average notional amounts outstanding of approximately $15,136,000 and
$5,737,561 of short positions on US Treasury Bond Futures and Options Written on
US Treasury Bond Futures respectively. Realized gains and losses from these
transactions are stated separately in the Statement of Operations.

The Fund had the following open futures contracts at December 31, 1997.

Principal Expiration Unrealized
Type Amount Position Month Loss
---- ------ -------- ----- ----
U.S. Treasury Bond ............. $7,000,000 Short 3/98 ($103,270)

Portfolio securities with an aggregate value of approximately $1,389,306
have been segregated as initial margin as of December 31, 1997.

In addition, the following table summarizes option contracts written by the
Series for the year ended December 31, 1997:

Number of Premiums Realized
Contracts Received Cost Loss
--------- -------- ---- ----
Contracts outstanding
December 31, 1996 .............. 40 $53,488

Options written .................. 780 633,904

Contracts closed or expired ...... (780) (668,591) $977,704 ($309,113)
--- -------
Contracts outstanding
December 31, 1997 .............. 40 $ 18,801
=== ========

56
<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

Other Investment Transactions
For the year ended December 31, 1997, the cost of purchases and proceeds
from sales of investment securities, other than short-term obligations, were
$2,228,044 and $7,702,650, respectively.

As of December 31, 1997, the Fund had no unrealized appreciation or
depreciation for tax purposes since it has elected to recognize market value
changes each day for tax purposes.

The Fund has capital loss carryforwards to offset future capital gains as
follows:
Amount Expiration
------ ----------
$15,000,500 12/31/2002
588,100 12/31/2004
202,500 12/31/2005
-----------
$15,791,100
===========

6. Borrowing

The Fund has a line of credit agreement with its custodian bank
collateralized by cash and portfolio securities to the extent of the amounts
borrowed. Borrowings under this agreement bear interest linked to the bank's
prime rate.

The Series enters into reverse repurchase agreements collateralized by
portfolio securities equal in value to the repurchase price. The reverse
repurchase agreement outstanding at December 31, 1997 bears an interest rate of
5.9%. Portfolio securities with an aggregate value of approximately $5,757,000
have been segregated for securities sold subject to repurchase as of December
31, 1997.

The maximum month-end and the average amount of borrowing outstanding under
these arrangements during the year ended December 31, 1997 were approximately
$6,329,000 and $5,967,000.

7. Agreement and Plan of Reorganization

57
<PAGE>

FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND

NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1997
- --------------------------------------------------------------------------------

individuals other than those who currently serve as Directors (Trustees) of the
Fundamental Funds. Tocqueville Asset Management L.P. is the investment adviser
to the Tocqueville Funds.

8. Subsequent Event

The Manager and FSC (on behalf of certain of their directors, officers,
shareholders, employees and control persons) (the "Indemnitees") received
payment during the fiscal year ended December 31, 1997 from the Fund in the
amount of approximately $232,500. Upon learning of the payments, the independent
Board Members of the Funds directed that the Indemnitees return all of the
payments to the Funds or place them in escrow pending their receipt of an
opinion of an inedpendent legal counsel to the effect that the Indemnitees are
entitled to receive them. The Declaration of Trust, Articles of Incorporation
and contracts that call for indemnification specify that no indemnification
shall be provided to a person who shall be found to have engaged in "disabling
conduct" as defined by applicable law. The Indemnities have undertaken to
reimburse the Fund for any indemnification expenses for which it is determined
that they were not entitled to as a result of "disabling conduct" net of any
reimbursements already made to the Fund in the form of fees forgone or other
similar payments.

The Manager and FSC waived fees in the amount of $96,077 and $29,560,
respectively for the year ended December 31, 1997. The Manager and FSC have
asserted that they elected to forgo these fees because the Fund was paying legal
expenses pursuant to indemnification. The Fund has retained independent legal
counsel to determine whether the Indemnitees engaged in disabling conduct.
Pending clarification of the legal issues involved, the Indemnitees have placed
into an escrow account $102,863 as of April 30, 1998. The independent trustees
have instructed the Manager to escrow the full amount incurred by the Fund of
approximately $232,500.

58
<PAGE>

9. Selected Financial Information
<TABLE>
<CAPTION>

Year Year Year Year Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Per share operating performance
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .............. $ 1.43 $ 1.49 $ 1.37 $ 2.01 $ 2.02
------ ------ ------ ------ ------
Income from investment operations
Net investment income ............................. 0.10 0.13 0.08 0.14 0.16
Net realized and unrealized gain/(loss) on
investments ..................................... (0.02) (0.06) 0.12 (0.64) -
------ ------ ------ ------ ------
Total from investment operations ............ 0.08 0.07 0.20 (0.50) 0.16
------ ------ ------ ------ ------
Less distributions
Dividends from net investment income .............. (0.10) (0.13) (0.08) (0.14) (0.16)
Dividends from net realized gains ................. - - - - (0.01)
------ ------ ------ ------ ------
Net asset value, end of period .................... $ 1.41 $ 1.43 $ 1.49 $ 1.37 $ 2.01
====== ====== ====== ====== ======
Total return ...................................... 5.51% 5.02% 15.43% (25.57%) 8.14%

Ratios/supplemental data:
Net assets, end of period (000 omitted) ........... $10,030 13,224 15,194 19,020 63,182
Ratios to average net assets
Interest expense (a) ............................ 2.75% 2.61% 3.00% 2.01% 1.54%
Operating expenses .............................. 5.75% 3.41% 3.05% 2.16% 1.39%
------ ------ ------ ------ ------
Total expenses+ (a) ......................... 8.50% 6.02% 6.05% 4.17% 2.93%
====== ====== ====== ====== ======
Net investment income+ .......................... 6.83% 9.01% 5.91% 8.94% 7.85%
Portfolio turnover rate ........................... 12.55% 12.65% 114.36% 60.66% 90.59%

Borrowings
Amount outstanding at end of period
(000 omitted) ................................... $4,969 $6,610 $ 7,481 $ 9,674 $31,072
Average amount of debt outstanding during the
period (000 omitted) ............................ $5,967 $6,577 $ 7,790 $16,592 $28,756
Average number of shares outstanding during the
period (000 omitted) ............................ 8,433 9,764 11,571 21,436 28,922
Average amount of debt per share during the
period .......................................... $ .71 $ .67 $ .67 $ .77 $ .99

<FN>
+These ratios are after expense reimbursement of 1.37%, 2.02%, 1.0% and .13% for the years ended December 31,
1997, 1996, 1995 and 1993, respectively.
(a)The ratios for each of the years in the four year period ending December 31, 1996 have been reclassified to
conform with the 1997 presentations.
</FN>
</TABLE>

59
<PAGE>

INDEPENDENT AUDITOR'S REPORT

The Board of Trustees and Shareholders
Fundamental Fixed-Income Fund
Fundamental U.S. Government Strategic Income Fund Series

We have audited the accompanying statement of assets and liabilities
including the statement of investments and statement of options written, of the
Fundamental U.S. Government Strategic Income Fund Series of Fundamental
Fixed-lncome Fund as of December 31, 1997 and the related statements of
operations and cash flows for the year then ended, and the statement of changes
in net assets for the two years then ended and selected financial information
for each of the five years in the period then ended. These financial statements
and selected financial information are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and selected financial information based on our audits.

In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of the Fundamental U.S. Government Strategic Income Fund Series of
Fundamental Fixed-lncome Fund as of December 31, 1997, the results of its
operations, changes in its net assets, cash flows, and selected financial
information for the periods indicated, in conformity with generally accepted
accounting principles.

See Notes 2 and 8 for information regarding regulatory proceedings and
transactions with affiliates.

S I G N A T U R E

New York, New York
March 2, 1998, except for Note 8 as to which the date is April 30, 1998.

60
<PAGE>

(LEFT COLUMN)

FUNDAMENTAL
FAMILY OF FUNDS
90 Washington Street
New York NY 10006
1-800-322-6864

Independent Auditors
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017

Legal Counsel
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022

These reports and the financial statements contained
herein are submitted for the general information of
the shareholders of the Fund. These reports are not
authorized for distribution to prospective investors
in the Funds unless preceded or accompanied by an
effective prospectus.

(RIGHT COLUMN)

---------------------------
Annual Report
December 31, 1997

NEW YORK MUNI FUND

THE CALIFORNIA MUNI FUND

FUNDAMENTAL
FIXED-INCOME FUND

TAX-FREE
MONEY MARKET SERIES

HIGH-YIELD
MUNICIPAL MARKET SERIES

FUNDAMENTAL
U.S. GOVERNMENT
STRATEGIC INCOME FUND

F U N D A M E N T A L
Fundamental Family of Funds

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